<PAGE> 1
As filed with the Securities and Exchange Commission on May 20, 1999
1933 Act File No. 33-_____
1940 Act File No. 811-5767
_______________________________________________________________________________
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
[] Pre-Effective Amendment No. ___
[] Post-Effective Amendment No. ___
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[x] Amendment No. 5
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) 781-1121
Registrant's Telephone Number, Including Area Code
Philip J. Collora
Scudder Kemper Investments, Inc.
222 South Riverside Plaza
Chicago, Illinois 60606
Name and Address (Number, Street, State, Zip Code) of Agent for Service
Copies to:
Robert W. Helm, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
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>
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
===== ==================== ==================== ====================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to filing.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE> 2
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
CROSS-REFERENCE SHEET
PART A
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
<S> <C> <C>
1. Outside Front Cover........................ Front Cover Page
2. Inside Front and Outside
Back Cover Page............................ 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 Front Cover Page;
Securities................................. 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 Table of Contents of
Additional Information..................... Statement of Additional
Information
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
PART B LOCATION IN STATEMENT OF
ITEM NO. CAPTION ADDITIONAL INFORMATION
- -------- ------- --------------------------
<S> <C> <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> 4
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted
SUBJECT TO COMPLETION, DATED May 20, 1999
PROSPECTUS
$_______________
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES ("MUNICIPAL PREFERRED")
_____ SHARES, SERIES A
_____ SHARES, SERIES B
LIQUIDATION PREFERENCE $25,000 PER SHARE
Kemper Strategic Municipal Income Trust (the "Fund") is offering _____
Series A and _____ Series B Municipal Auction Rate Cumulative Preferred Shares
("Municipal Preferred") at an offering price of $25,000 per share. 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 Obligations. The Fund invests at least 50%
of its total assets in investment grade Municipal Obligations or unrated
Municipal Obligations of comparable quality and may invest up to 50% of its
total assets in high-yield Municipal Obligations that are rated below
investment grade and involve certain risks. 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 Series A Municipal Preferred shares
for the period between the date of issue and _______ ___, 1999 will be ___% per
year. The dividend rate on the Series B Municipal Preferred shares for the
period between the date of issue and _______ ___, 1999 will be ___% per year.
For each subsequent period, the Auction Agent will determine the dividend rate
for a particular period by an Auction conducted on the Business Day prior to
that period. Investors in shares of Municipal Preferred may participate in
Auctions through their Broker-Dealers in accordance with the procedures
specified herein. The Fund may redeem Municipal Preferred shares 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 ________ ___, 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 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 __ of this Prospectus. The SAI is available along with other
Fund-related materials at the SEC's internet web site (http://www.sec.gov).
INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS. SEE THE
"INVESTMENT OBJECTIVE, POLICIES AND RISKS" SECTION BEGINNING ON PAGE ___ OF
THIS PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION ("SEC") 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 $
Sales Load $ $
Proceeds to Fund (before expenses) $ $
</TABLE>
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Series A and Series
B Municipal Preferred shares are first issued.
The underwriter is offering the Series A and Series B Municipal Preferred
shares subject to various conditions. It is expected that the shares of
Municipal Preferred will be delivered to the underwriter through the facilities
of the Depository Trust Company on or about ________ ___, 1999.
SALOMON SMITH BARNEY
________ ___, 1999
<PAGE> 5
You should rely only on the information contained in or incorporated by
reference in this Prospectus. The 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...........................................................3
FINANCIAL HIGHLIGHTS.........................................................8
THE FUND.....................................................................9
USE OF PROCEEDS..............................................................9
CAPITALIZATION...............................................................9
PORTFOLIO COMPOSITION.......................................................10
INVESTMENT OBJECTIVE, POLICIES AND RISKS....................................11
THE AUCTION.................................................................19
DETERMINATION OF NET ASSET VALUE............................................22
DESCRIPTION OF MUNICIPAL PREFERRED..........................................22
RATING AGENCY GUIDELINES....................................................27
MANAGEMENT OF THE FUND......................................................28
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR..........29
TAXES.......................................................................29
DESCRIPTION OF CAPITAL STRUCTURE............................................32
UNDERWRITING................................................................35
LEGAL MATTERS...............................................................35
EXPERTS.....................................................................36
FURTHER INFORMATION.........................................................36
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION...............37
GLOSSARY....................................................................38
</TABLE>
2
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the
offering of the Municipal Preferred shares fully, you should read this entire
Prospectus carefully, including the risk factors. You should also refer to the
Glossary beginning on page ___, which defines certain capitalized terms used in
this Prospectus. This summary is qualified in its entirety by reference to the
detailed information included in this Prospectus and the SAI.
<TABLE>
<S> <C>
THE OFFERING The Fund is offering an aggregate of _____ shares of Series A
Municipal Preferred shares and _____ Series B Municipal Preferred
shares, each at a purchase price of $25,000 per share plus
accumulated dividends, if any, from the Date of Original Issue.
The Municipal Preferred shares are being offered by Salomon Smith
Barney Inc.
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. An Auction Agent will determine the dividend
rate for a particular period by an Auction conducted on the
Business Day immediately prior to the start of that Dividend
Period.
Investors and potential investors in the Municipal Preferred
shares may participate in Auctions for the Municipal Preferred
shares through their Broker-Dealers.
Generally, investors in Municipal Preferred shares will not
receive certificates representing ownership of their shares. The
Securities Depository (The Depository Trust Company or any
successor) or its nominee for the account of the investor's Agent
Member (generally the investor's Broker-Dealer) will maintain
ownership of the Municipal Preferred shares in book-entry form.
An investor's Agent Member, in turn, will maintain records of
that investor's beneficial ownership of Municipal Preferred
shares.
THE FUND Kemper Strategic Municipal Income Trust (the "Fund") 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 (the "Common
Shares"). As of _________________, 1999, the Fund had net assets
of approximately $____________. The Fund is offering pursuant to
this Prospectus _____ Preferred Shares of beneficial interest,
par value $0.01 per share, designated Series A Municipal Auction
Rate Cumulative Preferred Shares ("Series A Municipal Preferred")
and _____ Preferred Shares of beneficial interest, par value
$0.01 per share, designated Series B Municipal Auction Rate
Cumulative Preferred Shares ("Series B Municipal Preferred" and,
collectively with Series A Municipal Preferred, the "Municipal
Preferred").
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
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
Obligations. The Fund invests at
least 50% of its total assets in
Municipal Obligations rated at the
time of purchase within the four
highest grades by Standard & Poor's
Ratings Group ("S&P") or Moody's
Investors Service, Inc.,
("Moody's") and unrated Municipal
Obligations 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
Obligations rated BB or lower by
S&P or Ba or lower by Moody's or
unrated Municipal Obligations
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 their capacity to pay
interest and repay principal in
accordance with the terms of the
obligation. The Fund will not
purchase Municipal Obligations
rated lower than B- by S&P or B by
Moody's or unrated Municipal
Obligations 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
Obligations rated below investment
grade and unrated Municipal
Obligations 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 Obligations that
Scudder Kemper considers
comparable). Investment in
Municipal Obligations of below
investment grade quality involves
special risks as compared with
investment in higher grade
Municipal Obligations. 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.
("Scudder Kemper" or the "Adviser")
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
________ ___, 1999, total assets
under management by the Adviser
were more than $_____ billion for
investment company, corporate,
pension, profit-sharing and other
accounts. The Adviser receives an
annualized fee, calculated and paid
monthly, in the amount of 0.60% of
the Fund's average weekly net
assets. The Adviser will benefit
from an increase in the Fund's
assets resulting from the Offering.
</TABLE>
4
<PAGE> 8
<TABLE>
<S> <C>
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
Municipal Preferred shares, out of legally
available funds, beginning on ________ ___,
1999 for Series A Municipal Preferred shares
and ________ ___, 1999 for Series B Municipal
Preferred shares.
After the Initial Rate Period, each Dividend
Period for Municipal Preferred shares will
generally consist of seven days; provided,
however, that before any Auction, the Fund may
decide, subject to certain limitations and only
if it gives certain notices, to declare a
Special Rate Period of up to five years.
Accordingly, in the case of Dividend Periods
that are not Special Rate Periods, dividends
generally will be payable on each succeeding
_______ for Series A Municipal Preferred shares
and _______ for Series B Municipal Preferred
shares. The Fund may specify different
Dividend Payment Dates for certain Special Rate
Periods.
The Fund will pay dividends through the
Securities Depository (the Depository Trust
Company) on each Dividend Payment Date.
The dividend rate on the Series A Municipal
Preferred shares for the period between the
date of issue and ________ ___, 1999 will be
___% per year. The dividend rate on the Series
B Municipal Preferred shares for the period
between the date of issue and ________ ___,
1999 will be ___% per year. For each
subsequent Dividend Period, the Auction Agent
will determine the dividend rate on Municipal
Preferred shares through an Auction.
MAXIMUM DIVIDEND RATE Generally, the dividend rate for any Dividend
Period for shares of Municipal Preferred may
not exceed that period's maximum dividend rate.
The maximum dividend rate is a function of the
credit rating assigned to the shares of
Municipal Preferred and an independently
determined reference rate. If Sufficient
Clearing Bids do not exist in an Auction for
shares of Municipal Preferred, the applicable
dividend rate for the subsequent Dividend
Period will be the Maximum Rate. In addition,
if the Fund fails to pay a dividend on, or the
redemption price of, shares of Municipal
Preferred and does not subsequently cure such
failure, then the Maximum Rate will apply for
subsequent Dividend Periods until the Fund
cures the failure to pay.
ASSET MAINTENANCE Under the Fund's Certificate of Designation for
Preferred Shares (the "Certificate"), which
establishes and fixes the rights and
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 _______
__, 1999, the asset coverage of the Municipal
Preferred shares as required by the 1940 Act
would be approximately ___% if the Fund were to
issue all Municipal Preferred shares offered in
this Prospectus, representing approximately
___% of the Fund's capital.
</TABLE>
5
<PAGE> 9
<TABLE>
<S> <C>
MANDATORY REDEMPTION If the Fund does not maintain, or restore as necessary,
the required asset coverage, the Fund must redeem
shares of Municipal Preferred at the price of $25,000
per share plus accumulated but unpaid dividends on such
shares, if any, whether or not earned or declared, 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,
necessary to restore the required asset coverage. 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 certain
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 certain 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 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 certain 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.
</TABLE>
6
<PAGE> 10
<TABLE>
<S> <C>
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 and shares of
Municipal Preferred. The Fund shall, in the case of
a seven-day Dividend Period or a Special Rate Period
of 28 days or fewer for the shares of Municipal
Preferred, and may, in the case of any other Special
Rate 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.
</TABLE>
<PAGE> 11
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share of
beneficial interest of the Fund outstanding throughout each period presented.
The financial highlights for each period presented have been audited by Ernst &
Young LLP, the Fund's independent accountants, 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>
MARCH 22,
1989* TO
YEAR ENDED NOVEMBER 30 NOVEMBER
30
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value,
beginning of
year.....................
............... $ 12.29 $ 12.14 $ 12.19 $ 11.54 $ 12.36 $ 11.86 $ 11.65 $ 11.37 $ 11.55 $11.05
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income.................. $ .77 $ .80 $ .82 $ .83 $ .83 $ .83 $ .84 $ .84 $ .81 $ .52
Net realized and
unrealized gain
(loss)...................
................ $ (.05) $ .17 $ (.05) $ .64 $ (.80) $ .58 $ .30 $ .36 $ (.04) $ .43
Total from investment
operations...... $ .72 $ .97 $ .77 $ 1.47 $ .03 $ 1.41 $ 1.14 $ 1.20 $ .77 $ .95
LESS DIVIDENDS
Distribution from net
investment
income...................
.............. $ .77 $ .82 $ .82 $ .82 $ .82 $ .89 $ .83 $ .81 $ .85 $ .45
Distribution from net
realized
gain.....................
............... ---- ---- ---- ---- $ .03 $ .02 $ .10 $ .11 $ .10 ----
Total
dividends................
........... $ .77 $ .82 $ .82 $ .82 $ .85 $ .91 $ .93 $ .92 $ .95 $ .45
Net asset value, end of
year............ $ 12.24 $ 12.29 $ 12.14 $ 12.19 $ 11.54 $ 12.36 $ 11.86 $ 11.65 $ 11.37 $11.55
Market value, end of
year.....................
................ $ 12.81 $ 13.06 $ 12.38 $ 12.13 $ 11.63 $ 12.38 $ 12.13 $ 12.13 $ 10.75 $11.50
TOTAL RETURN
Based on net asset
value................ 5.99% 8.28% 6.58% 13.09% .12% 12.32% 10.14% 10.99% 7.01% 8.57%
Based on market
value.................. 4.36% 12.87% 9.19% 11.70% .74% 9.51% 7.86% 21.92% 1.66% (.45)%
RATIOS TO AVERAGE NET
ASSETS
Expenses.................
................. .77% .76% .74% .76% .75% .74% .77% .77% .76% .77%
Net investment
income.................. 6.29% 6.62% 6.82% 6.97% 6.92% 6.87% 7.17% 7.31% 7.15% 6.59%
SUPPLEMENTAL DATA
Net assets at end of year
(in
thousands)...............
.......... $131,006 $130,895 $128,234 $127,844 $120,689 $128,564 $122,035 $118,864 $114,929 $115,985
Portfolio turnover
rate................... 22% 13% 31% 8% 11% 8% 10% 20% 57% 22%
</TABLE>
- --------------------------------
* 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.
8
<PAGE> 12
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 __________________, 1999,
the Fund had net assets of approximately $______________. On ____________,
1999, the Fund had outstanding approximately __________ 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 estimated net proceeds of this offering will be $_____________ after
the payment of offering expenses (not expected to exceed $_______ ) and the
sales load. See "Underwriting." 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 _______, 1999 and as adjusted to give effect to the issuance of the shares
of Series A and Series B Municipal Preferred offered hereby.
<TABLE>
<CAPTION>
Actual As Adjusted
------ -----------
<S> <C> <C>
Shareholders' equity:
Preferred Shares, par value $0.01 per share (no shares
issued; _____ Series A Municipal Preferred and _____
Series B Municipal Preferred, as adjusted, at $25,000 per
share liquidation preference)............................ -- $
Common Shares, par value $0.01 per share ( __________
shares issued and outstanding)............................ $ $
Capital in excess of par value attributable to Common
Shares..................................................... $ $
Undistributed investment income -- net..................... $ $
Accumulated realized gain (loss) -- net.................... $ $
Unrealized appreciation on investments -- net.............. $ $
Net assets................................................. $ $
</TABLE>
9
<PAGE> 13
PORTFOLIO COMPOSITION
As of ___________, 1999, approximately ___% of the Fund's portfolio was
invested in long term Municipal Obligations and approximately ____% was
invested in short and intermediate term Municipal Obligations. The following
table sets forth certain information with respect to the composition of the
Fund's investment portfolio (including contracts to purchase such securities
but excluding temporary investments) as of _________, 1999.*
<TABLE>
<CAPTION>
HOLDINGS PERCENT
- -------- -------
<S> <C>
1. Revenue Bonds __%
2. U.S. Government Secured __%
3. General Obligations __%
4. Cash & Equivalents __%
</TABLE>
Average maturity of the Fund: ___ years.
* Portfolio holdings and composition are subject to change.
PORTFOLIO STATISTICS
(S&P / MOODY'S --- AS OF _______ ___, 1999)+
<TABLE>
<CAPTION>
SECURITIES RATINGS
- ------------------
<S> <C>
AAA/Aaa __%
AA/Aa __%
A/A __%
BBB/Baa __%
BB/Ba __%
Not rated* __%
- ----------
</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.
* 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 Obligations. 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.
10
<PAGE> 14
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 Obligations. 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 Obligations 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. The Fund invests at least 50% of its
total assets in tax-exempt Municipal Obligations 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 Obligations
which, in the opinion of Scudder Kemper, have equivalent credit characteristics
and are of comparable quality. Municipal Obligations 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 Obligations 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 Obligations rated BB or lower by S&P
or Ba or lower by Moody's or unrated Municipal Obligations 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 and 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 Obligations in which the Fund may invest are those rated B-
by S&P or B by Moody's or unrated Municipal Obligations 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 Obligations. A general
description of Moody's and S&P's ratings of Municipal Obligations is set forth
in Appendix A to the SAI. The ratio of investment grade Municipal Obligations
to higher yielding, lower quality Municipal Obligations 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 Obligations with longer term maturities, 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. See "--Additional Investment Practices."
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 Obligations are available), the Fund may invest any percentage of its
net 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.
Municipal Obligations. Municipal Obligations 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 Obligations 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
11
<PAGE> 15
activity and pollution control bonds may be included within the term Municipal
Obligations if the interest paid thereon qualifies as exempt from federal
income tax. Municipal Obligations 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 Obligations 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 Obligations, both within a
particular classification and between classifications, depending on numerous
factors.
Also included within the general category of Municipal Obligations 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 portability and/or use that enhance its marketability in the event
foreclosure on the underlying equipment was ever required.
Certain Municipal Obligations 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 Obligations 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 Obligations with longer term
maturities.
The yields on Municipal Obligations are dependent on a variety of factors,
including the condition of the general money market and the Municipal
Obligations 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 Obligations that
they rate. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, Municipal Obligations 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 Obligations 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 Obligations 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 Obligations may be materially affected.
12
<PAGE> 16
High Yield Municipal Obligations. 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 Obligations 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 Obligations through careful investment analysis. It
should be noted, however, that the amount of information about the financial
condition of an issuer of Municipal Obligations may not be as extensive as that
which is made available by corporations whose securities are publicly traded.
Because the Fund may invest up to 50% of its total assets in Municipal
Obligations 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.
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 Obligations 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 not a major consideration. Scudder
Kemper will be free to take full advantage of the entire range of maturities
offered by Municipal Obligations 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.
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.
ADDITIONAL INVESTMENT PRACTICES
In connection with the investment objectives and policies described above,
the Fund may: purchase and sell options on Municipal Obligations and on indices
based on Municipal Obligations; engage in interest rate and other hedging
transactions; purchase and sell Municipal Obligations on a "when issued" or
"forward delivery" basis; and enter into repurchase agreements. 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 Obligations,
which may be listed for trading on a national securities exchange or traded
over-the-counter. The Fund may write (sell) covered call options and secured
put options on up to 25% of its net assets and may purchase put and call
options provided that no more than 5% of its net assets may be invested in
premiums on such options. The SEC requires that obligations of investment
companies such as the Fund, in connection with option sale positions, must
comply with certain segregation or cover
13
<PAGE> 17
requirements mandated by the SEC. There is no limitation on the amount of the
Fund's assets which can be used to comply with such segregation or cover
requirements.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an
amount, known as a premium, to the option writer in exchange for the right
under the option contract.
The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of Municipal Obligations 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 Obligations 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.
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 Obligations. 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.
14
<PAGE> 18
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 contacts.
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.
The Fund will not engage in the foregoing transactions for speculative
purposes, but only as a means to hedge risks associated with management of the
Fund's portfolio. Typically, investment in these contracts requires the Fund
to deposit with the applicable exchange or other specified financial
intermediary as a good faith deposit for its obligations an amount of cash or
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. 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
15
<PAGE> 19
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.
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. No
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specific limitation exists as to the percentage of the Fund's assets which may
be used to participate in repurchase agreements.
ADDITIONAL 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 that there are buyers for those shares. The Fund
believes this event is unlikely. 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 these 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 Obligations 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 Obligations rated below investment grade or unrated Municipal
Obligations which, in the opinion of Scudder Kemper, have equivalent credit
characteristics and are of comparable quality. The Fund will not purchase
Municipal Obligations rated lower than B- by S&P or B by Moody's or unrated
Municipal Obligations, 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 Obligations, 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 Obligations in the higher rating categories. In
evaluating the credit quality of a particular issue, whether rated or unrated,
Scudder Kemper will 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 Obligations 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 Obligations 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
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periods of reduced market liquidity and in the absence of readily available
market quotations for lower grade Municipal Obligations 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 Obligations 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 Obligations 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 Obligations
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 the Fund purchases securities with lower interest coupons. This
risk is magnified when prevailing short-term interest rates increase and the
Fund holds residual interest municipal bonds.
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 an
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 Obligations 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 Obligations with longer maturities or durations and when residual
interest municipal bonds 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 to a significant extent in residual interest municipal
bonds known as 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 residual interest municipal bonds will fluctuate in response to changes in
prevailing short-term interest rates. Thus, when such bonds
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<PAGE> 22
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 your
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. 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 Rate 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.
THE AUCTION
GENERAL
The provisions of the Certificate provide that, except as otherwise
described herein, the Applicable Rate with respect to shares of Municipal
Preferred for each Rate Period after the Initial Rate Period thereof shall be
equal to the rate per annum that the Auction Agent advises has resulted on the
Business Day preceding the first day of such Subsequent Rate Period (an
"Auction Date") from implementation of the auction procedures (the "Auction
Procedures") set forth in the 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."
Certain defined terms used in this section and under "Description of
Municipal Preferred" are defined in the Glossary.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of
Municipal Preferred, each customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder
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of shares of Municipal Preferred (a "Beneficial Owner") may submit orders
("Orders") to that Broker-Dealer as follows:
- Hold Order - indicating its desire to hold shares of Municipal
Preferred without regard to the Applicable Rate for the next Rate
Period.
- Bid - indicating its desire to sell shares of Municipal
Preferred at $25,000 per share if the Applicable Rate for the next
Rate Period is less than the rate specified in such Bid (also known
as a hold-at-a rate order).
- Sell Order - indicating its desire to sell shares of Municipal
Preferred at $25,000 per share without regard to the Applicable Rate
for the next Rate Period.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to shares of Municipal Preferred then held by such Beneficial
Owner. A Beneficial Owner that submits a Bid to its Broker-Dealer having a rate
higher than the Maximum Rate on the Auction Date will be treated as having
submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to
submit an Order to its Broker-Dealer will be deemed to have submitted a Hold
Order to its Broker-Dealer; provided, however, that if a Beneficial Owner fails
to submit an Order to its Broker-Dealer for an Auction relating to a Rate
Period for Municipal Preferred of more than 28 Rate Period Days, such
Beneficial Owner will be deemed to have submitted a Sell Order to its
Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the
shares of Municipal Preferred subject thereto. A Beneficial Owner that offers
to become the Beneficial Owner of additional shares of Municipal Preferred is,
for purposes of such offer, a Potential Beneficial Owner of additional shares
of Municipal Preferred as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of shares of
Municipal Preferred but that wishes to purchase shares, or that is a Beneficial
Owner that wishes to purchase additional shares (in each case, a "Potential
Beneficial Owner"), may submit Bids to its Broker-Dealer in which it offers to
purchase shares of Municipal Preferred at $25,000 per share if the Applicable
Rate for the next Rate Period is not less than the rate specified in such Bid.
A Bid placed by a Potential Beneficial Owner specifying a rate higher than the
Maximum Rate on the Auction Date will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the 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 Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of Municipal Preferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Municipal Preferred held by it. A Broker-Dealer may also submit Orders to the
Auction Agent for its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Fund. 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. See "The Auction--Broker-Dealers" in the SAI.
If Sufficient Clearing Bids exist (that is, the number of shares of
Municipal Preferred subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates
equal to or lower than the Maximum Rate is at least equal to the number of
shares of Municipal Preferred subject to Sell Orders submitted or deemed
submitted to the Auction Agent by Broker-Dealers as or on behalf of Existing
Holders), the Applicable Rate for the next succeeding Rate Period will be the
lowest rate specified in the Submitted Bids which, taking into account such
rate and all lower rates bid by Brokers-Dealers as or on behalf of Existing
Holders and Potential Holders, would result in Existing Holders and Potential
Holders owning all the shares of Municipal Preferred available for purchase in
the Auction. If Sufficient Clearing Bids do not exist, the Applicable Rate for
the next succeeding Rate Period will be the Maximum Rate on the Auction Date.
In such event, Beneficial Owners that have submitted or are deemed to have
submitted Sell Orders may not be able to sell in such
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<PAGE> 24
Auction all shares of Municipal Preferred subject to such Sell Orders. If
Broker-Dealers submit or are deemed to have submitted to the Auction Agent Hold
Orders with respect to all Existing Holders, the Applicable Rate for the next
succeeding Rate Period will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold or
selling, or a Potential Holder purchasing, a number of shares of Municipal
Preferred that is fewer than the number of shares of Municipal Preferred
specified in its Order. To the extent the allocation procedures have that
result, Broker-Dealers that have designated themselves as Existing Holders or
Potential Holders in respect of customer Orders will be required to make
appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales with respect to shares of Municipal
Preferred will be made on the next Business Day (also a Dividend Payment Date)
after the Auction Date through the Securities Depository. Purchasers will make
payment through their Agent Members in same-day funds to the Securities
Depository against delivery to their respective Agent Member. The Securities
Depository will make payment to the Sellers' Agent Members in accordance with
the Securities Depository's normal procedures, which now provide for payment
against delivery by their Agent Members in same-day funds. The settlement
procedures to be used with respect to Auctions for shares of Municipal
Preferred are set forth in Appendix C to the SAI.
The first Auction for shares of Series A Municipal Preferred will be held
on ________, _________ __, 1999, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period thereof. Thereafter, except during
Special Rate Periods, Auctions of Series A Municipal Preferred will normally be
held every ________, and each Subsequent Rate Period will normally begin on the
following ________.
The first Auction for shares of Series B Municipal Preferred will be held
on ________, _________ __, 1999, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period thereof. Thereafter, except during
Special Rate Periods, Auctions of Series B Municipal Preferred will normally be
held every ________, and each Subsequent Rate Period will normally begin on the
following ________.
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.
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 such Rate Period, the value of
such shares may fluctuate in response to the changes in interest rates, and may
be more or less than their original cost if sold on the open market in advance
of the next Auction thereof, depending on market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer, or otherwise
dispose of shares of Municipal Preferred only in whole shares and only (1)
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the Auction Procedures, (2) to a Broker-Dealer or (3) to such other
persons as may be permitted by the 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 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.
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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. New York City time) on the last
Business Day of each week (generally Friday), and at such other times as the
Fund may authorize. The net asset value of the Fund equals the value of the
Fund's assets less the Fund's liabilities. Portfolio securities for which
market quotations are readily available are valued at current market value.
Short-term investments maturing in 60 days or less are valued at amortized cost
when the Adviser determines, pursuant to procedures adopted by the Board of
Trustees, that such cost approximates current market value. All other
securities and assets are valued at their fair value following procedures
adopted by the Board of Trustees.
DESCRIPTION OF MUNICIPAL PREFERRED
GENERAL
Under the Declaration, the Fund is authorized to issue an unlimited number
of Preferred Shares. The Fund's Certificate for Municipal Preferred shares
authorizes the issuance of ______ shares of Series A Municipal Preferred and
______ shares of Series B 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 Initial Rate Period for shares of Municipal Preferred is a
period consisting of 7 days. Any Subsequent Rate Period will be a Minimum Rate
Period (7 Rate Period Days) unless the Fund, subject to certain conditions,
designates such Subsequent Rate Period as a Special Rate Period. See
"--Designation of Special Rate Periods."
Dividends on the shares of Municipal Preferred will be payable, when, as
and if declared by the Board of Trustees out of funds legally available
therefor in accordance with the Declaration, the Certificate and applicable law
on __________, ________ ___, 1999, and thereafter on each __________ for the
Series A Municipal Preferred, and on __________, ________ ___, 1999, and
thereafter on each __________ for the Series B Municipal Preferred; provided,
however, that (1) (a) if the ________ on which dividends would otherwise be
payable for the Series A Municipal Preferred is not a Business Day, then
dividends shall be payable instead on the first Business Day that falls prior
to such _____________ and (b) if the ________ on which dividends would
otherwise be payable for the Series B Municipal Preferred is not a Business
Day, then dividends shall be payable instead on the first Business Day that
falls prior to such _____________ and (2) the Fund may specify different
Dividend Payment Dates in respect of any Special Rate Period of such shares of
more than 28 Rate Period Days.
The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be
computed by multiplying the Applicable Rate in effect for such Dividend Period
or Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall
be 365 if such Dividend Period consists of 7 Rate Period Days and 360 for all
other Dividend Periods, and applying the rate obtained against $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which now provide for it
to distribute dividends in next-day funds to Agent Members, who in turn are
expected to distribute such dividend payments to the persons for whom they are
acting as agents. Each of the initial Broker-Dealers, however, has indicated
to the Fund that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.
Dividends on shares of Municipal Preferred shall accumulate from the Date
of Original Issue. The dividend rate for the Initial Rate Period will be
_____% per annum for the Series A Municipal Preferred and _____% per annum for
the Series B Municipal Preferred. For each Subsequent Rate Period, the
dividend rate will be the Applicable Rate that the Auction Agent advises the
Fund results from an Auction, except as provided below.
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The Applicable Rate that results from an Auction will not be greater than
the Maximum Rate which is:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period,
the product of (1) the Reference Rate on such Auction Date for the next
Rate Period and (2) the Rate Multiple on such Auction Date, unless such
shares have or had a Special Rate Period (other than a Special Rate Period
of 28 Rate Period Days or fewer) and an Auction at which Sufficient
Clearing Bids existed has not yet occurred for a Minimum Rate Period after
such Special Rate Period, in which case the higher of:
(A) the dividend rate on such shares of the then-ending Rate Period;
and
(B) the product of (x) the higher of (I) the Reference Rate on such
Auction Date for a Rate Period equal in length to the then-ending
Rate Period, if such then-ending Rate Period was 364 Rate Period Days
or fewer, or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to the then-ending Rate Period, if such
then-ending Rate Period was more than 364 Rate Period Days, and (II)
the Reference Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was
364 Rate Period Days or fewer, or the Treasury Note Rate on such
Auction Date for a Rate Period equal in length to such Special Rate
Period, if such Special Rate Period was more than 364 Rate Period
Days and (y) the Rate Multiple on such Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period,
the product of (1) the highest of (x) the Reference Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period, if
such then-ending Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in length
to the then-ending Rate Period, if such then-ending Rate Period was more
than 364 Rate Period Days, (y) the Reference Rate on such Auction Date for
the Special Rate Period for which the Auction is being held if such
Special Rate Period is 364 Rate Period Days or fewer or the Treasury Note
Rate on such Auction Date for the Special Rate Period for which the
Auction is being held if such Special Rate Period is more than 364 Rate
Period Days, and (z) the Reference Rate on such Auction Date for Minimum
Rate Periods and (2) the Rate Multiple on such Auction Date.
If any Auction for any Subsequent Rate Period is not held for any reason
other than as described below, the dividend rate for such Subsequent Rate
Period will be the Maximum Rate on the Auction Date for such Subsequent Rate
Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, shares of Municipal
Preferred during any Rate Period thereof (other than any Special Rate Period of
more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured), and, prior to 12:00 Noon (New York City time) on the
third Business Day next succeeding the date such failure occurred, such failure
shall have been cured and the Fund shall have paid a late charge, each as
described more fully in the SAI, no Auction will be held for the Subsequent
Rate Period thereof and the dividend rate for shares of Municipal Preferred for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date for
such Subsequent Rate Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during any Rate Period (other than any Special Rate Period of more
than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period
of more than 364 Rate Period Days during which such a failure occurred that has
not been cured), and, prior to 12:00 Noon (New York City time) on the third
Business Day next succeeding the date on which such failure occurred, such
failure shall not have been cured or the Fund shall not have paid a late
charge, each as described more fully in the SAI, no Auction will be held in
respect of such shares for the first Subsequent Rate Period thereof thereafter
(or for any Rate Period thereof thereafter to and including the Rate Period
during which such failure is so cured and such late charge so paid (such late
charge to be paid only in the event Moody's is rating such shares at the time
the Fund cures such failure)), and the dividend rate for such shares for each
such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate
on the Auction Date for each such Subsequent Rate Period (but with the
prevailing rating for such shares, for purposes of determining such Maximum
Rate, being deemed to be "Below Ba3/BB-").
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any shares of Municipal
Preferred during a Special Rate Period of more than 364 Rate Period
23
<PAGE> 27
Days, or during any Rate Period succeeding any Special Rate Period of more than
364 Rate Period Days during which such a failure occurred that has not been
cured, and such failure shall not have been cured or, in the event Moody's is
then rating such shares, the Fund shall not have paid a late charge, in each
case 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
and as more fully described in the SAI, no Auction will be held for such
Subsequent Rate Period thereof (or for any Rate Period thereof thereafter to
and including the Rate Period during which such failure is so cured and such
late charge is so paid (such late charge to be paid only in the event that
Moody's is rating the shares at the time and the Fund cures such failure)), and
the dividend rate for each such Subsequent Rate Period shall be a rate per
annum equal to the Maximum Rate on the Auction Date for each such Subsequent
Rate Period (but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below Ba3/BB-").
A failure to pay dividends on or the redemption price of shares of
Municipal Preferred shall have been cured with respect to any Rate Period if,
within the respective time periods described above, the 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 by the Fund; 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.
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 Procedures" (a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding shares of Municipal Preferred or the liquidation of the 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 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 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.
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<PAGE> 28
Restrictions on Dividends and Other Distributions. For so long as any
shares of Municipal Preferred are outstanding, 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) 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) full
cumulative dividends on shares of Municipal Preferred through their most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent;
(2) the Fund has redeemed the full number of shares of Municipal Preferred
required to be redeemed by any provision for mandatory redemption pertaining
thereto; and (3) immediately after such transaction the Discounted Value of the
Fund's portfolio would at least equal the Municipal Preferred Basic Maintenance
Amount in accordance with guidelines of the rating agency or agencies then
rating the shares of Municipal Preferred.
Except as set forth in the next sentence, no dividends shall be declared
or paid or set apart for payment on any class or series of shares of beneficial
interest of the 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, at its option, may designate any succeeding Subsequent Rate
Period as a Special Rate Period consisting of a specified number of Rate Period
Days evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to certain adjustments. A designation of a Special Rate Period shall
be effective only if, among other things, (i) the Fund shall give certain
notices to the Auction Agent, (ii) an Auction for such shares shall have been
held on the Auction Date immediately preceding the first day of such proposed
Special Rate Period and Sufficient Clearing Bids for such shares shall have
existed in such Auction and (iii) if the Fund shall have mailed a notice of
redemption with respect to any shares of Municipal Preferred, the redemption
price with respect to such shares shall have been deposited with the Auction
Agent.
VOTING RIGHTS
In addition to voting rights described below under "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, the Fund may not, among
other things, without the approval of the holders of a "majority of the
outstanding" shares (as defined in the SAI under "Investment Restrictions") 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 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
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<PAGE> 29
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 first 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, after giving effect thereto, the
aggregate liquidation preference of all Preferred Shares then outstanding,
exclusive of accumulated and unpaid dividends, would not exceed $__________;
provided, however, that the 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. Further, 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 notwithstanding that, after giving effect thereto, the
aggregate liquidation preference of all Preferred Shares then outstanding would
exceed $__________; provided, however, that either Moody's or S&P is rating the
shares of Municipal Preferred and 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.
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 the time (each such Affected
Series voting as a separate class).
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, 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
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<PAGE> 30
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 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 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) certain 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,
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 _____________, 1999, the 1940 Act Municipal
Preferred Asset Coverage with respect to shares of Municipal Preferred,
assuming the issuance on the date hereof of all shares of Municipal Preferred
offered hereby and after giving effect to the deduction of the sales load and
offering costs relating thereto estimated at $________, would be computed as
follows:
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<PAGE> 31
Value of Fund assets less liabilities
not constituting senior securities $ ___________
------------------------------------------- = ------------------ = ____%
Senior securities representing $ ___________
indebtedness plus liquidation value
of the shares of Municipal Preferred
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 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
certain 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 ________ ___, 1999,
the Adviser had more than $_____ billion in assets under management. The
Adviser's principal office is located at 222 South Riverside Plaza, Chicago,
Illinois 60606.
Philip G. Condon and Rebecca L. Wilson serve as co-portfolio managers of
the Fund and are responsible for the day-to-day management of the Fund. Mr.
Condon is a Managing Director of the Adviser and Director of the
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<PAGE> 32
Municipal Bond Group. He joined the Adviser in 1983. Mr. Condon received a
B.A. and M.B.A. from the University of Massachusetts. Ms. Wilson is a vice
president and joined the Adviser in 1986. She is a co-portfolio manager for
several tax-exempt portfolios and serves 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 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 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.
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 Internal Revenue
Service (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
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<PAGE> 33
applicable to investments in the Fund. There may be other tax considerations
applicable to particular investors. In addition, income earned through an
investment in the Fund may be subject to foreign, state, or local taxes.
Please see the SAI for additional information. You should rely on your own tax
adviser for advice about the tax consequences 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 Obligations, 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.
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.
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<PAGE> 34
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 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 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 a capital asset, 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
31
<PAGE> 35
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 share 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 shares 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 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 May __, 1999.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD BY FUND
AMOUNT HELD BY FUND FOR ITS OWN
TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS OWN ACCOUNT ACCOUNT)
-------------- ----------------- ------------------- -------------------
<S> <C> <C> <C>
Common Shares.............................
Municipal Preferred Shares
Series A...................................
Series B...................................
</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
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<PAGE> 36
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. The likelihood of such circumstances is
remote.
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.
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 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. 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:
33
<PAGE> 37
<TABLE>
<CAPTION>
NET ASSET VALUE PUBLIC OFFERING PRICE VOLUME TRADED
------------------ ------------------------ -------------
QUARTER ENDED HIGH LOW HIGH LOW (IN 000S)
- -------------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
February 28, 1999 $[ ] $[ ] $[ ] $[ ] [ ]
November 30, 1998 $[ ] $[ ] $[ ] $[ ] [ ]
August 31, 1998 $[ ] $[ ] $[ ] $[ ] [ ]
May 31, 1998 $[ ] $[ ] $[ ] $[ ] [ ]
</TABLE>
As of __________, 1999, the net asset value per share of Common Shares was
$_______, and the closing price per share of Common Shares on the NYSE was
$_______.
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.
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. 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.
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.
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<PAGE> 38
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. 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.
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, ____ shares of Series A Municipal Preferred and
____ shares of Series B 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.
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 certain dealers at the public offering price less a concession
not in excess of $ ____ per share. The sales load 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 or one of its affiliates may
from time to time act in Auctions as Broker-Dealers and will receive certain
fees as described under "The Auction--Auction Procedures." 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.
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 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.
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<PAGE> 39
EXPERTS
The financial statements of the Fund at 11/30/98 and the selected per
share data and ratios set forth under the caption "Financial Highlights" for
the period 1989 to 11/30/98 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 this Registration Statement, and are
included in reliance upon that report given upon Ernst & Young's authority as
experts in accounting and auditing. Ernst & Young audits and reports on the
Fund's annual financial statements, reviews certain regulatory reports and the
Fund's Federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
FURTHER INFORMATION
The Fund has filed with the SEC, Washington, DC 20549, a Registration
Statement under the Securities Act with respect to the shares of Municipal
Preferred offered hereby. Further information concerning these securities and
the 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 electronically with the SEC. In addition,
reports, proxy and information statements and other information concerning the
Fund can be inspected at the offices of the NYSE, 20 Broad Street, New York,
New York 10005.
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<PAGE> 40
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
<TABLE>
<S> <C>
General Information .............................................. ____
Additional Information About Investments and Investment Techniques ____
Investment Restrictions .......................................... ____
Trustees and Officers ............................................ ____
Ownership of Fund Shares ......................................... ____
Investment Advisory and Other Services ........................... ____
Portfolio Transactions ........................................... ____
Net Asset Value .................................................. ____
The Auction ...................................................... ____
Description of Municipal Preferred ............................... ____
Repurchase of Common Shares ...................................... ____
Taxes ............................................................ ____
Experts .......................................................... ____
Financial Statements ............................................. ____
Glossary ......................................................... ____
Appendix A: Ratings of Investments ............................... ____
Appendix B: Tax Equivalent Yield Table ........................... ____
Appendix C: Settlement Procedures ................................ ____
Appendix D: Auction Procedures ................................... ____
</TABLE>
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<PAGE> 41
GLOSSARY
"'AA' Composite Commercial Paper Rate," on any date for any Rate Period,
means: (i)(A) in the case of any Minimum Rate Period or any Special Rate Period
of fewer than 49 Rate Period Days, the interest equivalent of the 30-day rate;
provided, however, that if such Rate Period is a Minimum Rate Period and the
"AA" Composite Commercial Paper Rate is being used to determine the Applicable
Rate when all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more
but fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99
Rate Period Days, the interest equivalent of the 90-day rate; (4) 99 or more
but fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper
placed on behalf of issuers whose corporate bonds are rated "AA" by 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 certain commercial paper dealers to the Auction Agent for the
close of business on the Business Day next preceding such date.
"Adviser" means Scudder Kemper Investments, Inc.
"Affected Series" has the meaning specified under "Description of
Municipal Preferred--Voting Rights."
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
"All Hold Order Rate," with respect to a Rate Period for which an Auction
is held, means the lesser of the Kenny Index (if the Rate Period for which the
Auction is held consists of fewer than 183 Rate Period Days) or the product of
(i)(1) the "AA" Composite Commercial Paper Rate on the Auction Date for such
Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days,
(2) the Treasury Bill Rate on such Auction Date for such Rate Period, if such
Rate Period consists of more than 182 but fewer than 365 Rate Period Days or
(3) the Treasury Note Rate on such Auction Date for such Rate Period, if such
Rate Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (i)(1), (2) or (3), as applicable, being referred to herein as
the "Benchmark Rate"), and (ii) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income, whichever is greater; provided, however, that if the Fund has notified
the Auction Agent of its intent to allocate to shares of Municipal Preferred in
such Rate Period any net capital gains or other income taxable for Federal
income tax purposes ("Taxable Income"), the Applicable Rate on shares of
Municipal Preferred for such Rate Period will be (A) if the Taxable Yield Rate
(as defined below) is greater than the Benchmark Rate, then the Benchmark Rate,
or (B) if the Taxable Yield Rate is less than or equal to the Benchmark Rate,
then the rate equal to the sum of (x) the lesser of the Kenny Index (if such
Rate Period consists of fewer than 183 Rate Period Days) or the product of the
Benchmark Rate multiplied by the factor set forth in the preceding clause (ii)
and (y) the product of the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is greater,
multiplied by the Taxable Yield Rate. For purposes of the foregoing, Taxable
Yield Rate means the rate determined by (a) dividing the amount of Taxable
Income available for distribution per share of Municipal Preferred by the
number of days in the Dividend Period in respect of which such Taxable Income
is contemplated to be distributed, (b) multiplying the amount determined in (a)
above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360
(in the case of any other Dividend Period), and (c) dividing the amount
determined in (b) above by $25,000.
"Applicable Rate" means the rate per annum at which dividends are payable
on shares of Municipal Preferred for any Rate Period thereof.
"Auction" means each periodic operation of the Auction Procedures.
"Auction Agency Agreement" means an agreement between the Fund and the
Auction Agent which provides, among other things, that the Auction Agent will
follow the Auction Procedures for purposes of
38
<PAGE> 42
determining the Applicable Rate for shares of Municipal Preferred so long as
the Applicable Rate for such shares is to be based on the results of an
Auction.
"Auction Agent" means 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 under "The Auction--Auction Procedures."
"Beneficial Owner" means a customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or if applicable, the Auction Agent) as a
holder of shares of Municipal Preferred or a Broker-Dealer that holds shares of
Municipal Preferred for its own account.
"Bid" has the meaning specified under "The Auction--Auction Procedures."
"Bidder" means a Beneficial Owner or a Potential Beneficial Owner placing
an Order with its Broker-Dealer or an Existing Holder or Potential Holder
placing an Order with the Auction Agent or on whose behalf an Order is placed
with an Auction Agent.
"Board of Trustees" means the Board of Trustees of the 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" 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.
"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 ____________ ___, 1999 specifying the powers, preferences and
rights of the shares of Municipal Preferred.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Shares" means the common shares of beneficial interest, par value
$0.01 per share, of the Fund.
"Date of Original Issue" means the date on which the Fund initially issued
shares of Municipal Preferred.
"Declaration" means the Amended and Restated Agreement and Declaration of
Trust of the Fund dated February 27, 1989, as amended and supplemented.
"Discounted Value" means, as of any Valuation Date, (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.
39
<PAGE> 43
"Dividend Payment Date" means any date on which dividends on shares of
Municipal Preferred are payable as provided under "Description of Municipal
Preferred--Dividends and Dividend Periods."
"Dividend Period" means the period from and including the Date of Original
Issue of shares of Municipal Preferred to but excluding the initial Dividend
Payment Date for such shares and any period thereafter from and including one
Dividend Payment Date for such shares to but excluding the next succeeding
Dividend Payment Date for such shares.
"DTC" means the Depository Trust Company.
"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 shares of Municipal Preferred.
"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 specified under "Description of
Municipal Preferred--Dividends and Dividend Periods."
"Hold Order" has the meaning specified under "The Auction--Auction
Procedures."
"Initial Rate Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding _________ __,
1999 for Series A Municipal Preferred and _________ __, 1999 for Series B
Municipal Preferred.
"IRS" means the United States Internal Revenue Service.
"Kenny Index" has the meaning specified under "Taxable Equivalent of the
Short-Term Municipal Bond Rate."
"Maximum Rate" has the meaning specified under "Description of Municipal
Preferred--Dividends and Dividend Periods--General."
"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 ___ of the
SAI.
"Moody's Eligible Asset" has the meaning set forth on page ___ of the SAI.
"Municipal Obligations" has the meaning specified under "Investment
Objective, Policies and Risks--Investment Policies--Municipal Obligations."
"Municipal Preferred" means the 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 specified
under "Rating Agency Guidelines."
"1940 Act Municipal Preferred Asset Coverage" has the meaning specified
under "Rating Agency Guidelines."
"NYSE" means the New York Stock Exchange.
"Order" has the meaning specified under "The Auction--Auction Procedures."
40
<PAGE> 44
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of Municipal Preferred
but that wishes to purchase such shares, or that is a Beneficial Owner that
wishes to purchase additional shares of Municipal Preferred.
"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 shares of Municipal
Preferred or that is an Existing Holder of such shares that wishes to become
the Existing Holder of additional shares.
"Preferred Shares" means preferred shares of beneficial interest, par
value $0.01 per share, of the Fund and includes the Municipal Preferred shares.
"Rate Multiple" means a percentage, determined as set forth below, based
on the prevailing rating of shares of Municipal Preferred in effect at the
close of business on the Business Day next preceding the relevant Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
- ----------------- ----------
<S> <C>
Aa3/AA- or higher 110%
A3/A- 125%
Baa3/BBB- 150%
Ba3/BB- 200%
Below Ba3/BB- 250%
</TABLE>
provided, however, that in the event the 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 ratings for shares of Municipal Preferred are split between
two of the foregoing categories, the lower rating will determine the prevailing
rating. If the shares of Municipal Preferred are rated by only one rating
agency, such rating will be the prevailing rating.
"Rate Period" means the Initial Rate Period of shares of Municipal
Preferred and any Subsequent Rate Period of such shares.
"Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but
for either (i) the shortening or lengthening, as the case may be, of such Rate
Period or Dividend Period as set forth under "Description of Municipal
Preferred--Dividends and Dividend Periods" because the day on which dividends
would otherwise be payable is not a Business Day or (ii) the shortening of such
Rate Period pursuant to the provisions relating to the designation of Special
Rate Periods as set forth in the SAI under "Description of Municipal
Preferred--Designation of Special Rate Periods."
"Reference Rate" means (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of
Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate
Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate
Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc., or its successors.
"S&P Discount Factor" has the meaning set forth on page ___ of the SAI.
"S&P Eligible Asset" has the meaning set forth on page ___ of the SAI.
"SEC" means the United States Securities and Exchange Commission.
41
<PAGE> 45
"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 specified under "The Auction--Auction
Procedures."
"Special Rate Period" means any Subsequent Rate Period commencing on the
date designated by the Fund, as set forth under "Description of Municipal
Preferred--Designation of Special Rate Periods," and ending on the last day of
the last Dividend Period thereof.
"Submission Deadline" means 1:30 P.M. New York City time, on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.
"Submitted Bid" means a valid Bid submitted or deemed submitted to the
Auction Agent by a Broker-Dealer by the Submission Deadline.
"Submitted Hold Order" means a valid Hold Order submitted or deemed
submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline.
"Subsequent Rate Period" means any period from and including the first day
following the Initial Rate Period of shares of Municipal Preferred to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to but
excluding the next succeeding Dividend Payment Date for such shares; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.
"Sufficient Clearing Bids" has the meaning specified under "The
Auction--Auction Procedures."
"Taxable Allocation" has the meaning specified under "Description of
Municipal Preferred--Dividends and Dividend Periods--Gross-up Payments."
"Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30-day High Grade Index or any
successor index (the "Kenny Index") (provided, however, that any such
successor index must be approved by Moody's (if Moody's is then rating the
shares of Municipal Preferred) and 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 Kenny S&P Evaluation Services or any successor thereto,
based upon 30-day yield evaluations at par of short-term bonds, the interest on
which is excludable for regular Federal income tax purposes under the Code, of
"high grade" component issuers selected by Kenny S&P Evaluation Services or any
such successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds but
shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57(a)(5) of the Code, or successor provisions, for
purposes of the "alternative minimum tax," divided by (B) 1.00 minus the
maximum marginal regular Federal individual income tax rate applicable to
ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Kenny S&P
Evaluation Services or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal), whichever
is greater.
"Treasury Bill" means a direct obligation of the U.S. government having a
maturity at the time of issuance of 364 days or less.
"Treasury Bill Rate," on any date for any Rate Period, means: (i) the bond
equivalent yield, calculated in accordance with prevailing industry convention,
of the rate on the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, as quoted in The Wall
Street Journal on such date for
42
<PAGE> 46
the Business Day next preceding such date; or (ii) in the event that any such
rate is not published in The Wall Street Journal, then the bond equivalent
yield, calculated in accordance with prevailing industry convention, as
calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury Bill with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from certain U.S. government securities dealers to the Auction Agent.
"Treasury Note" means a direct obligation of the U.S. government having a
maturity at the time of issuance of five years or less but more than 364 days.
"Treasury Note Rate," on any date for any Rate Period, means: (i) the
yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the
event that any such rate is not published in The Wall Street Journal, then the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately
preceding such date obtained from certain U.S. government securities dealers to
the Auction Agent.
"Underwriter" means Salomon Smith Barney Inc.
"Underwriting Agreement" has the meaning specified under "Underwriting."
43
<PAGE> 47
==============================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND OR ANY UNDERWRITER. 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.
____________________________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ..................... ___
Financial Highlights ................... ___
The Fund ............................... ___
Use of Proceeds ........................ ___
Capitalization ......................... ___
Portfolio Composition .................. ___
Investment Objective, Policies and Risks ___
The Auction ............................ ___
Determination of Net Asset Value ___
Description of Municipal Preferred ___
Rating Agency Guidelines ............... ___
Management of the Fund ................. ___
Custodian, Transfer Agent, Dividend
Disbursing Agent and Registrar.......... ___
Taxes .................................. ___
Description of Capital Structure ....... ___
Underwriting ........................... ___
Legal Matters .......................... ___
Experts ................................ ___
Further Information .................... ___
Table of Contents for the Statement
of Additional Information ............. ___
Glossary ............................... ___
</TABLE>
$ ______________
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
MUNICIPAL AUCTION
RATE CUMULATIVE
PREFERRED SHARES
_____ SHARES SERIES A
_____ SHARES SERIES B
__________________________
PROSPECTUS
________ ___, 1999
__________________________
SALOMON SMITH BARNEY
==============================================================================
44
<PAGE> 48
SUBJECT TO COMPLETION, DATED May 20, 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]
Dated ________, 1999
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
____________, 1999
This Statement of Additional Information ("SAI") relating to the offering
of Series A and Series B 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 _______ ___, 1999. This SAI does not include all information that a
prospective investor should consider before purchasing shares of the Fund, and
investors should obtain and read the Prospectus prior to purchasing shares. A
copy of the Prospectus may be obtained without charge, by calling
1-800-621-1048.
The Prospectus and this SAI omit certain of the information contained in
the registration statement filed with the Securities and Exchange Commission,
Washington, D.C. The registration statement may be obtained from the
Commission upon payment of the fee prescribed, or inspected at the Commission's
office at no charge.
45
<PAGE> 49
TABLE OF CONTENTS
<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..............................11
PORTFOLIO TRANSACTIONS..............................................13
NET ASSET VALUE.....................................................14
THE AUCTION.........................................................14
DESCRIPTION OF MUNICIPAL PREFERRED..................................26
REPURCHASE OF COMMON SHARES.........................................42
TAXES...............................................................43
EXPERTS.............................................................44
FINANCIAL STATEMENTS................................................45
GLOSSARY............................................................46
APPENDIX A RATINGS OF INVESTMENTS...................................52
APPENDIX B TAX EQUIVALENT YIELD TABLE..............................60
APPENDIX C SETTLEMENT PROCEDURES....................................61
APPENDIX D AUCTION PROCEDURES.......................................63
</TABLE>
- --------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OF THE FUND DATED ________ ___, 1999 AS
SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED HEREIN BY REFERENCE. THIS
STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH SUCH
PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING YOUR
FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-621-1048.
2
<PAGE> 50
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 Obligations or unrated
Municipal Obligations of comparable quality and may invest up to 50% of its
total assets in high yield Municipal Obligations that are rated below
investment grade.
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 ________ ___,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 OBLIGATIONS. Municipal Obligations are issued to obtain funds
for various public and private purposes. Municipal Obligations 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
Obligations 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 Obligations 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 Obligations 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 Obligations (whenever
issued) is included in "adjusted current earnings" for purposes of the AMT (to
the extent not already included in alternative minimum taxable income as income
attributable to private activity bonds). In assessing the federal income tax
treatment of interest on any such obligation, the Fund will rely on an opinion
of the issuer's counsel (when available) obtained by the issuer or other
reliable authority and will not undertake any independent verification thereof.
The two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects including the
construction or improvement of schools, highways and roads, water and sewer
systems and a variety of other public purposes. The basic security of general
obligation bonds is the issuer's pledge of its faith, credit, and taxing power
for the payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to rate and amount.
Revenue bonds are generally secured by the net revenues derived from a
particular facility or group of facilities or, in some cases, from the proceeds
of a special excise or other specific revenue source. Revenue bonds have been
issued to fund a wide variety of capital projects including: electric, gas,
water, sewer and solid waste
3
<PAGE> 51
disposal systems; highways, bridges and tunnels; port, airport and parking
facilities; transportation systems; housing facilities, colleges and
universities and hospitals. Although the principal security behind these bonds
varies widely, many provide additional security in the form of a debt service
reserve fund whose monies may be used to make principal and interest payments
on the issuer's obligations. Housing finance authorities have a wide range of
security including partially or fully insured, rent subsidized and/or
collateralized mortgages, and/or the net revenues from housing or other public
projects. In addition to a debt service reserve fund, some authorities provide
further security in the form of a state's ability (without legal obligation) to
make up deficiencies in the debt service reserve fund. Lease rental revenue
bonds issued by a state or local authority for capital projects are normally
secured by annual lease rental payments from the state or locality to the
authority sufficient to cover debt service on the authority's obligations.
Such payments are usually subject to annual appropriations by the state or
locality. Industrial development and pollution control bonds, although
nominally issued by municipal authorities, are in most cases revenue bonds and
are generally not secured by the taxing power of the municipality, but are
usually secured by the revenues derived by the authority from payments of the
industrial user or users. The Fund may on occasion acquire revenue bonds which
carry warrants or similar rights covering equity securities. Such warrants or
rights may be held indefinitely, but if exercised, the Fund anticipates that it
would, under normal circumstances, dispose of any equity securities so acquired
within a reasonable period of time.
The obligations of any person or entity to pay the principal of and
interest on a Municipal Obligation 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 Obligation may be materially affected.
There have been recent instances of defaults and bankruptcies involving
Municipal Obligations 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 Obligation 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 Obligations 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".
The yields on Municipal Obligations 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, S&P and Fitch represent their opinions as to the quality of
the Municipal Obligations 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 Obligations 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 Obligations 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
4
<PAGE> 52
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 Obligations 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 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 Obligation 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
Obligations 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
5
<PAGE> 53
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 Obligations 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
Obligations. No established resale market exists for certain of the Municipal
Obligations in which the Fund may invest. The market for obligations rated
below investment grade is also likely to be less liquid than the market for
higher rated obligations. As a result, the Fund may be unable to dispose of
these Municipal Obligations at times when it would otherwise wish to do so at
the prices at which they are valued.
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). To hedge against changes in
rates or as a substitute for the purchase of securities, the Fund may enter
into (i) futures contracts for the purchase or sale of debt securities and (ii)
futures contracts on securities indices. 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 may purchase and write call and put
options on futures contracts which are traded on a U.S. or foreign exchange or
board of trade. The Fund will be required, in connection with transactions in
futures contracts and the writing of options on futures, 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.
6
<PAGE> 54
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 and options on futures 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.
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% 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 (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 by 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 objectives, 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;
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<PAGE> 55
(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 securities as those terms are defined in the Registration
Statement;
(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
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.
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,
2904 Garfield Terrace, N.W. Political and Economic Affairs;
Washington, DC 20008 formerly a career United States
Date of birth: 10/15/26 Foreign Service Officer, Energy
Advisor for the White House, and
United States Ambassador to Saudi
Arabia.
Arthur R. Gottschalk Trustee Retired; formerly, President,
10642 Brookridge Drive Illinois Manufacturers Association;
Frankfort, IL Trustee, Illinois Masonic Medical
Date of birth: 2/13/25 Center; formerly, Illinois State
Senator; formerly, Vice President,
The Reuben H. Donnelly Corporation.
</TABLE>
8
<PAGE> 56
<TABLE>
<CAPTION>
Position with Principal Occupations During
Name, Address and Age the Fund the Past Five Years
- --------------------- ------------- ------------------------------------
<S> <C> <C>
*Daniel Pierce Trustee and Chairman of the Board
Two International Place Chairman of the Board and Managing Director,
Boston, MA 02110 Scudder Kemper
Date of birth: 3/18/34 Investments, Inc.;
Director, Fiduciary Fund
Company; Director,
Fiduciary Company
Incorporated; formerly,
attorney.
*Thomas W. Littauer Trustee and Managing Director,
Two International Place Vice President Scudder Kemper
Boston, MA 02110 Investments, Inc.;
Date of birth: 4/26/55 formerly, Head of Broker
Dealer Division of an
unaffiliated investment
management firm during
1997; prior thereto,
President of Client
Management Services of
an unaffiliated
investment management
firm from 1991 to 1996.
Frederick T. Kelsey Trustee Retired; formerly,
4010 Arbor Lane consultant to Goldman
Unit 102 Sachs & Co.; formerly,
Northfield, IL 60093 President, Treasurer and
Date of birth: 4/25/27 Trustee of Institutional
Liquid Assets and its
affiliated mutual funds;
Trustee of the Northern
Institutional Funds;
formerly Trustee of the
Pilot Funds.
Fred B. Renwick Trustee Professor of finance,
3 Hanover Square New York University,
Suite 20H Stern School of
New York, NY 10004 Business; Director, the
Date of birth: 2/1/30 Wartburg Home
Foundation; Chairman,
Investment Committee of
Morehouse College Board
of 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,
311 Springlake Chairman of the Board
Hinsdale, IL 60521 and Chief Executive
Date of birth: 8/8/33 Officer, Chicago Stock
Exchange; Director,
Federal Life Insurance
Company; President of
the Members of the
Corporation and Trustee,
DePaul University.
Mark S. Casady President Managing Director,
Two International Place Scudder Kemper
Boston, MA 02110 Investments, Inc.
Date of birth: 9/21/60
Philip J. Collora Vice President and Senior Vice President,
222 South Riverside Plaza Secretary Scudder Kemper
Chicago, IL 60606 Investments, Inc.
Date of birth: 11/15/45
</TABLE>
- --------------
*Messrs. Pierce and Littauer are "interested persons" of the Fund (as that term
is defined in the 1940 Act).
9
<PAGE> 57
<TABLE>
<CAPTION>
Position with Principal Occupations During
Name, Address and Age the Fund the Past Five Years
- --------------------- ------------- ------------------------------------
<S> <C> <C>
John R. Hebble Treasurer Senior Vice President, Scudder
222 South Riverside Plaza, Kemper Investments, Inc.
Chicago, IL 60606
Date of birth: 6/27/58
Ann M. McCreary Vice President Managing Director, Scudder Kemper
345 Park Avenue Investments, Inc.
New York, NY 10154
Date of birth: 11/6/56
Robert C. Peck Vice President Managing Director, Scudder Kemper
222 South Riverside Plaza, Investments, Inc.; formerly,
Chicago, IL 60606 Executive Vice President, Van
Date of birth:10/01/46 Kampen American Capital, Inc.;
Senior Vice President,
Manufacturers Hanover Investment
Corporation
Kathryn L. Quirk Vice President Managing Director, Scudder Kemper
345 Park Avenue Investments, Inc.
New York, NY 10154
Date of birth: 12/03/52
</TABLE>
The Board has an audit and governance committee that is composed of
Messrs. Akins, Gottschalk, Kelsey, Renwick, and Weithers. The Committee makes
recommendations regarding the selection of independent auditors for the Fund,
confers with the independent auditors regarding the Fund's financial
statements, the results of audits and related matters, seeks and reviews
nominees for Board membership and performs 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 from Fund and Fund Complex(2)
Name Fund Paid to Trustees
- ---- ----------------- -----------------------
<S> <C> <C>
James E. Akins.. $___ $130,000
Arthur R.
Gottschalk(1)... $___ $133,200
Frederick T.
Kelsey(1)....... $___ $130,500
Fred B.
Renwick......... $___ $130,500
John G. Weithers $___ $134,800
</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.
10
<PAGE> 58
(2) Includes compensation for service on the Boards of 15 Kemper Funds with
53 fund portfolios. Each Trustee currently serves as Trustee of 15 Kemper
Funds with 53 fund portfolios.
OWNERSHIP OF FUND SHARES
As of ________ ___, 1999, the Trustees and Officers of the Fund as a Group
owned less than 1% of the outstanding shares of the Fund.
As of ________ ___, 1999, the following persons owned, beneficially or of
record, more than 5% of the outstanding shares of the Fund:
<TABLE>
<S> <C> <C>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF OUTSTANDING SHARES
- ---------------- ---------------- --------------------------------
</TABLE>
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 ____ billion in 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.
Headquartered in Zurich, Switzerland, Zurich Financial Services Group is
one of the global leaders in the financial services industry, providing its
customers with the products and solutions in the area of 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 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
11
<PAGE> 59
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 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 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 ________, ________ and
_________ 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
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<PAGE> 60
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, 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 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.
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.
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The Fund paid no brokerage commissions during the fiscal years ended
November 30, 1998, 1997 and 1996, as all portfolio transactions were effected
on a principal basis. The rates of portfolio turnover for each of the fiscal
years ended November 30, 1998, 1997 and 1996 were approximately 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. New York
City time) on the last Business Day of each week (generally Friday), and at
such other times as the Fund may authorize. The net asset value of the Fund
equals the value of the Fund's assets less the Fund's liabilities. Portfolio
securities for which market quotations are readily available are valued at
current market value. Short-term investments maturing in 60 days or less are
valued at amortized cost when the Adviser determines, pursuant to procedures
adopted by the Board of Trustees, that such cost approximates current market
value. All other securities and assets are valued at their fair 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. Securities for which quotations are not
readily available (which will constitute a majority of the securities held by
the Fund) are valued at fair value as determined by the pricing service using
methods which include consideration of the following: yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions.
The pricing service may employ electronic data processing techniques or a
matrix system, or both, to determine valuations. The procedures of the pricing
service and its valuations are reviewed by the officers of the Fund under the
general supervision of the Board of 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 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
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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 ____________________, 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 all of the shares of Municipal Preferred will be
registered in the name of Cede & Co. ("Cede"), as nominee of the Securities
Depository. Such certificate will bear a legend to the effect that such
certificate is issued subject to the provisions restricting transfers of shares
of Municipal Preferred contained in the 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.
AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME
The first Auction for shares of Series A Municipal Preferred will be held
on ________, ________ ___, 1999, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period of Series A Municipal Preferred. The
first Auction for shares of Series B Municipal Preferred will be held on
________, ________ ___, 1999, the Business Day preceding the Dividend Payment
Date for the Initial Rate Period of Series B Municipal Preferred. See
"Description of Municipal Preferred--Dividends." Thereafter, Auctions will
normally be held: (i) every ________, and each Subsequent Rate Period will
normally begin on the following _______ for Series A Municipal Preferred and
(ii) every ________, and each Subsequent Rate Period will normally begin on the
following _______ for Series B 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.
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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 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
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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 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
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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 364 Rate
Period Days, and (z) the Reference Rate on such Auction Date for Minimum
Rate Periods and (2) the Rate Multiple on such Auction Date.
As used herein, "Reference Rate" shall mean (i) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.
As used herein, "Taxable Equivalent of the Short-Term Municipal Bond
Rate," on any date for any Minimum Rate Period or Special Rate Period of 28
Rate Period Days or fewer, shall mean 90% of the quotient of (A) the per annum
rate expressed on an interest equivalent basis equal to the Kenny S&P 30 day
High Grade Index or any successor index (the "Kenny Index") (provided, however,
that any such successor index must be approved by Moody's (if Moody's is then
rating the shares of Municipal Preferred) and 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 Kenny S&P Evaluation Services or any successor thereto,
based upon 30-day yield evaluations at par of short-term bonds, the interest on
which is excludable for regular Federal income tax purposes under the Code, of
"high grade" component issuers selected by Kenny S&P Evaluation Services or any
such successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds but
shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57(a)(5) of the Code, or successor provisions, for
purposes of the "alternative minimum tax," divided by (B) 1.00 minus the
maximum marginal regular Federal individual income tax rate applicable to
ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Kenny S&P
Evaluation Services or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal), whichever
is greater.
As used herein, "'AA' Composite Commercial Paper Rate," on any date for
any Rate Period, means:
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(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 quotient
(rounded upwards to the next higher one-thousandth (0.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360. As used herein, "Commercial Paper Dealers" means
______________________ or, in lieu of any thereof, their respective affiliates
or successors, if such entity is a commercial paper dealer. As used herein,
"Substitute Commercial Paper Dealer" means _____________________ or their
respective affiliates or successors, if such entity is a commercial paper
dealer, provided that none of such entities shall be a Commercial Paper Dealer.
As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:
(i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently auctioned
Treasury Bill with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the Business
Day next preceding such date; or
(ii) in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in accordance
with prevailing industry convention, as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury Bill with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date obtained from
the U.S. Government Securities Dealers to the Auction Agent.
As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:
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<PAGE> 67
(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
____________________ or their respective affiliates or successors, if such
entity is a U.S. government securities dealer. As used herein, "Substitute U.S.
Government Securities Dealer" shall mean ___________________or their respective
affiliates or successors, if such entity is a U.S. government securities
dealer, provided that none of such entities shall be a U.S. Government
Securities Dealer.
The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent
of the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note
Rates will be the rates announced on such Auction Date for the Business Day
immediately prior to such Auction Date.
The "Rate Multiple" will be a percentage, determined as set forth below,
based on the prevailing rating of shares of Municipal Preferred in effect at
the close of business on the Business Day next preceding such Auction Date:
<TABLE>
<CAPTION>
PREVAILING RATING PERCENTAGE
<S> <C>
Aa3/AA- or higher................................................................110%
A3/A-............................................................................125%
Baa3/BBB-........................................................................150%
Ba3/BB-..........................................................................200%
Below Ba3/BB-....................................................................250%
</TABLE>
provided, however, that in the event the 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
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<PAGE> 68
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, ___________________ 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 1:30 P.M., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the 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.
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
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<PAGE> 69
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, the Auction
Agent will assemble all valid Orders submitted or deemed submitted to it by the
Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or deemed
submitted by a Broker-Dealer being herein referred to as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or
as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and will determine the excess of the number of outstanding shares of Municipal
Preferred over the number of outstanding shares of Municipal Preferred subject
to Submitted Hold Orders (such excess being herein referred to as the
"Available Municipal Preferred") and whether Sufficient Clearing Bids have been
made in the Auction. "Sufficient Clearing Bids" will have been made if the
number of outstanding shares of Municipal Preferred that are the subject of
Submitted Bids of Potential Holders specifying rates not higher than the
Maximum Rate equals or exceeds the number of outstanding shares of Municipal
Preferred that are the subject of Submitted Sell Orders (including the number
of shares subject to Bids of Existing Holders specifying rates higher than the
Maximum Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids (the "Winning Bid
Rate") which, taking into account the rates in the Submitted Bids of Existing
Holders, would result in Existing Holders continuing to hold an aggregate
number of outstanding shares of Municipal Preferred which, when added to the
number of outstanding shares of Municipal Preferred to be purchased by
Potential Holders, based on the rates in their Submitted Bids, would equal not
less than the Available Municipal Preferred. In such event, the Winning Bid
Rate will be the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred.
If Sufficient Clearing Bids have not been made (other than because all of
the outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders), the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred will be equal to the Maximum Rate. If Sufficient Clearing
Bids have not been made, Beneficial Owners that have submitted or that are
deemed to have submitted Sell Orders may not be able to sell in the Auction all
shares of Municipal Preferred subject to such Sell Orders but will continue to
own shares of Municipal Preferred for the next Rate Period, dividends for which
may include income taxable to such Beneficial Owners. See "--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
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<PAGE> 70
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
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;
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<PAGE> 71
(b) Each Potential Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate equal to or lower than the Maximum Rate
will purchase the number of outstanding shares of Municipal Preferred
subject to such Submitted Bid; and
(c) Each Existing Holder that placed or on whose behalf was placed a
Submitted Bid specifying a rate higher than the Maximum Rate or a
Submitted Sell Order will sell a number of shares of Municipal Preferred
determined on a pro rata basis based on the number of outstanding shares
of Municipal Preferred subject to all such Submitted Bids and Submitted
Sell Orders.
If, as a result of the pro rata allocation described in clauses (d) or (e)
of the second preceding paragraph or clause (c) of the next preceding
paragraph, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
share of Municipal Preferred, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of shares of Municipal Preferred being sold or purchased on such
Auction Date so that the number of shares sold or purchased by each Existing
Holder or Potential Holder will be whole shares of Municipal Preferred. If as a
result of the pro rata allocation described in clause (e) of the second
preceding paragraph, any Potential Holder would be entitled or required to
purchase less than a whole share of Municipal Preferred, the Auction Agent
will, in such manner as, in its sole discretion, it will determine, allocate
shares of Municipal Preferred for purchase among Potential Holders so that only
whole shares of Municipal Preferred are purchased by any such Potential Holder,
even if such allocation results in one or more of such Potential Holders not
purchasing shares of Municipal Preferred.
NOTIFICATION OF RESULTS; SETTLEMENT
The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 P.M., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an
Order for the account of a customer will then be required to advise such
customer of the Applicable Rate for the next Rate Period and, if such Order was
a Bid or a Sell Order, whether such Bid or Sell Order was accepted or rejected,
in whole or in part, will be required to confirm purchases and sales with each
customer purchasing or selling shares of Municipal Preferred as a result of the
Auction and will be required to advise each customer purchasing or selling
shares of Municipal Preferred as a result of the Auction to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery of such shares or to deliver such shares against payment
therefor, as appropriate. The Auction Agent will be required to record each
transfer of shares of Municipal Preferred on the registry of Existing Holders
to be maintained by the Auction Agent. See "--General" above.
In accordance with the Securities Depository's normal procedures, on the
Business Day after the Auction Date, the transactions described above will be
executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales of shares of
Municipal Preferred as determined in the Auction. Purchasers will make payment
through their Agent Members in same-day funds to the Securities Depository
against delivery through their Agent Members; the Securities Depository will
make payment in accordance with its normal procedures, which now provide for
payment against delivery by their Agent Members in same-day funds. The
settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix C hereto.
If any Existing Holder selling shares of Municipal Preferred in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Municipal Preferred in such Auction may deliver to such
person a number of whole shares of Municipal Preferred that is less than the
number of shares that otherwise was to be purchased by 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
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<PAGE> 72
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., New York City time, on the
Business Day preceding such Auction.
The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of Municipal Preferred. The
registrar for shares of Municipal Preferred will send notices to holders of
shares of Municipal Preferred of any special meetings at which holders of
Municipal Preferred have the right to elect Trustees of the 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 45 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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<PAGE> 73
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 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 liquidation.
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 ________, ________ __, 1999, and thereafter on each ______ for the
Series A Municipal Preferred, and on ________, ________ __, 1999, and
thereafter on each ______ for the Series B Municipal Preferred; provided,
however, that (1)(a)if the ________ on which dividends would otherwise be
payable as set forth above for the Series A Municipal Preferred is not a
Business Day, then dividends shall be payable instead on the first Business Day
that falls prior to such _________ and (b) if the ________ on which dividends
would otherwise be payable as set forth above for the Series B Municipal
Preferred is not a Business Day, then dividends shall be payable instead on the
first Business Day that falls prior to such _________ 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
________, would be the following ________ if it is a Business Day.
DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of Municipal
Preferred offered pursuant to the Prospectus during the period from and after
the Date of Original Issue thereof to and including the last day of the Initial
Rate Period therefor will be equal to the rate per annum set forth with respect
to such shares on the cover page of the Prospectus. For each Subsequent Rate
Period thereafter, the dividend rate on such shares will be equal to the rate
per annum that results from an Auction on the Auction Date next preceding such
Subsequent Rate Period; provided, however, if:
(i) an Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on such shares for
such Subsequent Rate Period will be the Maximum Rate on the Auction Date
therefor;
(ii) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period
Days during which a Failure to Deposit occurred that has not been cured),
but, prior to 12:00 Noon, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall have been cured in accordance with the next
succeeding paragraph and the 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;
(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, New York City time, on the third Business Day
next succeeding the date on which such Failure to Deposit occurred, such
Failure to Deposit shall not have been cured in accordance with the next
succeeding paragraph or the Fund shall not
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<PAGE> 75
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, New York City time, on the fourth Business Day
prior to the end of such Rate Period), and the dividend rate for shares of
Municipal Preferred for each such Subsequent Rate Period will be a rate
per annum equal to the Maximum Rate on the Auction Date for such
Subsequent Rate Period (but with the prevailing rating for such shares,
for purposes of determining such Maximum Rate, being deemed to be Below
Ba3/BB-); or
(iv) any Failure to Deposit shall have occurred with respect to
shares of Municipal Preferred during a Special Rate Period thereof of more
than 364 Rate Period Days, or during any Rate Period thereof succeeding
any Special Rate Period of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured, and, prior to 12:00
Noon, New York City time, on the fourth Business Day preceding the Auction
Date for the Rate Period subsequent to such Rate Period, such Failure to
Deposit shall not have been cured in accordance with the next succeeding
paragraph or, in the event Moody's is then rating such shares, the 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, New York
City time, on the fourth Business Day prior to the end of such Rate
Period), and the dividend rate for shares of Municipal Preferred for each
such Subsequent Rate Period shall be a rate per annum equal to the Maximum
Rate on the Auction Date for such Subsequent Rate Period (but with the
prevailing rating for such shares, for purposes of determining such
Maximum Rate, being deemed to be Below Ba3/BB-) (the rate per annum at
which dividends are payable on shares of Municipal Preferred for any Rate
Period being herein referred to as the "Applicable Rate" for such shares).
A Failure to Deposit with respect to shares of Municipal Preferred shall
have been cured (if such Failure to Deposit is not solely due to the willful
failure of the 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.
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
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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 gain 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
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 after giving effect thereto), an asset coverage
(as defined in and determined pursuant to the 1940 Act) of at least 200% (or
such other percentage as may in the future be required by law).
In addition, for so long as any shares of Municipal Preferred are
outstanding, except as set forth in the following paragraph or otherwise
described herein, (A) the 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 liquidation) 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 liquidation, 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
liquidation), 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 liquidation), unless (1) full cumulative dividends on shares of Municipal
Preferred through their most recently ended Dividend Period shall have been
paid or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent 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 liquidation) 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 liquidation, or
call for
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<PAGE> 77
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 liquidation),
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).
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 request.
In the event the Fund wishes to designate a Subsequent Rate Period of
shares of Municipal Preferred as a Special Rate Period, but the day following
what would otherwise be the last day of such Special Rate Period is not a
_______ that is a Business Day, then the 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 ________ that is followed by a ________ that is a Business Day
preceding what would otherwise be such last day.
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
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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., 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 Fund shall specify the Special Rate Period designated, or (y) its
determination not to exercise such option.
No later than 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of any proposed Special Rate Period as to which
notice has been given as set forth in the preceding paragraph (or such later
time or date, or both, as may be agreed to by the Auction Agent), the 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 Auction for such shares shall not be held on such
Auction Date for any reason or (2) an Auction for such shares shall be
held on such Auction Date but Sufficient Clearing Bids for such shares
shall not exist in such Action, (D) the scheduled Dividend Payment Dates
for such shares during such Special Rate Period and (E) the Special
Redemption Provisions, if any, applicable to such shares in respect of
such Special Rate Period; such notice to be accompanied by an 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., 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 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
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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 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.
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 liquidation (except that (i)
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, after giving
effect thereto, the aggregate liquidation preference of all Preferred
Shares then outstanding, exclusive of accumulated and unpaid dividends,
would not exceed $__________; provided, however, that the 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, 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 shares of
Municipal Preferred, authorize, create or issue additional shares of
Municipal Preferred or classes or series of Preferred Shares ranking on a
parity with the shares of Municipal Preferred with respect to the payment
of dividends and the distribution of assets upon liquidation
notwithstanding that, after giving effect thereto, the aggregate
liquidation preference of all Preferred Shares then outstanding would
exceed $__________; provided, however, that 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) or
(b) amend, alter or repeal the provisions of the Certificate or
Declaration, whether by merger, consolidation or otherwise, so as to
affect any preference, right or power of the shares of Municipal Preferred
or the holders thereof (provided, however, that a division of a share of
Municipal Preferred shall be deemed to affect any such preference, right
or power only if the terms of such division adversely affect the holders
of any shares of Municipal Preferred); provided, however, that (i) none of
the actions permitted by the exception to (a) above will be deemed to
affect such preferences, rights or powers and (ii) the authorization,
creation and issuance of classes or series of shares ranking junior to the
Municipal Preferred with respect to the payment of dividends and the
distribution of assets upon liquidation will be deemed to affect such
preferences, rights or powers only if at least one of 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
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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, 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 the time (each such
Affected Series voting as a separate class).
Voting provisions will not apply with respect to shares of Municipal
Preferred if, at or prior to the time when a vote is required, such shares
shall have been (i) redeemed or (ii) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
The Board of Trustees may, without shareholder approval, amend, alter or
repeal any or all of the definitions and related provisions required to be
contained in the 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 and S&P 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 at least one of 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 asset-backed and similar securities, including debt obligations
and adjustable rate preferred shares, generally on a case-by-case basis through
discussions with the issuers of those securities. The guidelines are designed
to ensure that assets underlying outstanding debt or preferred shares will be
sufficiently varied and will be of sufficient quality and amount to justify
investment grade ratings. The guidelines do not have the force of law, but have
been adopted by the 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 and S&P to shares of Municipal Preferred.
So long as either S&P or Moody's, or both, are rating the shares of
Municipal Preferred, the Fund may not, among other things, (1) engage in
futures or options transactions, except in accordance with the then-current
guidelines of such rating agencies, (2) borrow money, except that the Fund may,
without obtaining the written confirmation described below, borrow money for
the purpose of clearing securities transactions if the Municipal Preferred
Basic Maintenance Amount would continue to be satisfied after giving effect to
such borrowing and certain other conditions are met, (3) issue additional
shares of Municipal Preferred or any class or series of shares ranking on a
parity with the shares of Municipal Preferred with respect to the payment of
dividends or the distribution of assets upon liquidation of the Fund, (4)
engage in any short sales of securities, (5) lend any securities, (6) merge or
consolidate into or with any corporation or (7) enter into reverse repurchase
agreements, unless in each case (except as described above) it has received
written confirmation from S&P or Moody's, or both, as appropriate, that any
such action would not impair the rating then assigned by such rating agency to
shares of Municipal Preferred. While the 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
33
<PAGE> 81
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.
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 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 any redemption
premium applicable to shares of Municipal Preferred then subject to
redemption;
(ii) the aggregate amount of dividends that will have
accumulated at the Applicable Rate (whether or not earned or
declared) to (but not including) the first Dividend Payment Date for
each share of Municipal Preferred outstanding that follows such
Valuation Date;
(iii) subject to certain exceptions, the aggregate amount of
dividends that would accumulate on shares of Municipal Preferred
outstanding from such first Dividend Payment Date through the 49th
day after such Valuation Date, at the Maximum Rate (calculated as if
such Valuation Date were the Auction Date for the Rate Period
commencing on such Dividend Payment Date) for a Minimum Rate Period
thereof to commence on such Dividend Payment Date, assuming, solely
for purposes of the foregoing, that if on such Valuation Date the
Fund shall have delivered a Notice of Special Rate Period to the
Auction Agent with respect to such shares, such Maximum Rate shall be
the higher of (a) the Maximum Rate for the Special Rate Period of
such shares to commence on such Dividend Payment Date and (b) the
Maximum Rate for a Minimum Rate Period of such shares to commence on
such Dividend Payment Date, multiplied by the Volatility Factor
applicable to a Minimum Rate Period, or, in the event the Fund shall
have delivered a Notice of Special Rate Period to the Auction Agent
with respect to such shares
34
<PAGE> 82
designating a Special Rate Period consisting of 49 Rate Period Days
or more, the Volatility Factor applicable to a Special Rate Period of
that length;
(iv) the amount of anticipated 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 Obligations 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 immediately
preceding Valuation Date, less than the Municipal Preferred Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that, as
of the immediately preceding Valuation Date, the aggregate Discounted Value of
the 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 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 the third Business Day after a Valuation Date on which the
Fund fails to meet the Municipal Preferred Basic Maintenance Amount, and on the
third Business Day after the Municipal Preferred Basic Maintenance Cure Date
with respect to such Valuation Date, the Fund is required to deliver to the
Auction Agent (so long as either Moody's or S&P is rating the shares of
Municipal Preferred) a report with respect to the calculation of the Municipal
Preferred Basic Maintenance Amount and the value of its portfolio holdings as
of the date of such failure or such cure date, as the case may be (a "Municipal
Preferred Basic Maintenance Report"). The Fund will also deliver, as required,
a Municipal Preferred Basic Maintenance Report as of (i) the fifteenth day of
each month (or, if such day is not a Business Day, the next succeeding Business
Day) and (ii) the last Business Day of each month, in each case on or before
the third Business Day after such day. Within ten Business Days after delivery
of such report relating to the last Business Day of each of February, May,
August and November of each year, commencing _________ ___, 1999, the 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.
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<PAGE> 83
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 Obligations 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 Obligation 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 Obligation will be determined by reference to the "S&P
Exposure Period" (currently, three Business Days) and the S&P rating on such
Municipal Obligation. 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
- --------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
45 Business Days.......................... 190% 195% 210% 250%
22 Business Days.......................... 170 175 190 230
10 Business Days.......................... 155 160 175 215
7 Business Days........................... 150 155 170 210
3 Business Days........................... 130 135 150 190
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is three
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 "3 Business Days." Notwithstanding the foregoing, (i) the S&P
Discount Factor for short-term Municipal Obligations will be 115%, so long as
such Municipal Obligations are rated A-1+ or SP-1+ by S&P and mature or have a
demand feature exercisable within 30 days or less, or 125% if such Municipal
Obligations are not rated by S&P but are rated VMIG-1, P-1 or MIG-1 by Moody's;
provided, however, that any such Moody's-rated short-term Municipal Obligations
which have demand features exercisable within 30 days or less must be backed by
a letter of credit, liquidity facility or guarantee from a bank or other
financial institution with a short-term rating of at least A-1+ from S&P; and
further provided that such Moody's-rated short-term Municipal Obligations may
comprise no more than 50% of short-term Municipal Obligations that qualify as
S&P Eligible Assets; (ii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold; and (iii) except as set forth in
clause (i) above, in the case of any Municipal Obligation that is not rated by
S&P but qualifies as a S&P Eligible Asset pursuant to clause (1)(c) of the
following paragraph, such Municipal Obligation 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 Obligation is placed
by Moody's. 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 Obligations.
"Receivables for Municipal Obligations Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date.
The 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, Municipal
Obligations owned by the Fund must:
(a) be interest bearing and pay interest at least semi-annually;
36
<PAGE> 84
(b) be payable in U.S. dollars;
(c) be publicly rated BBB or higher by S&P or, 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 private placements; and
(e) be part of an issue with an original issue size of at least
$20 million or, if of an issue with an original issue size below $20
million (but in no event lower than $10 million), be issued by an
issuer with a total of at least $50 million of securities
outstanding.
(2) Municipal Obligations (excluding Escrowed Bonds) of any one
issuer or guarantor (excluding bond insurers) will be considered S&P
Eligible Assets only to the extent the fair market value of such Municipal
Obligations does not exceed 10% of the aggregate fair market value of 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
Obligations exceeds 5% of the aggregate fair market value of S&P Eligible
Assets.
(3) Municipal Obligations rated by another nationally recognized
credit rating agency but not rated by S&P will be considered S&P Eligible
Assets only to the extent the fair market value of such Municipal
Obligations does not exceed 50% of the aggregate fair market value of S&P
Eligible Assets.
(4) Long-term Municipal Obligations (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
Obligations does not exceed 20% of the aggregate fair market value of S&P
Eligible Assets.
MOODY'S AAA RATING GUIDELINES. For purposes of calculating the Discounted
Value of the Fund's portfolio under current Moody's guidelines, Municipal
Obligations eligible for consideration under such guidelines ("Moody's Eligible
Assets") must be discounted by certain discount factors set forth in the table
below ("Moody's Discount Factors"). The Discounted Value of a Municipal
Obligation under Moody's guidelines is, as of any Valuation Date, (i) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the market
value thereof divided by the applicable Moody's Discount Factor, or (ii) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (a) the
lesser of the market value or call price thereof, including any call premium,
divided by (b) the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Moody's Exposure Period" (currently, the period commencing on
a given Valuation Date and ending 49 days thereafter) and the Moody's rating on
such Municipal Obligation. Moody's Discount Factors for a range of exposure
periods for bonds with 10 years to maturity are set forth below:
<TABLE>
Moody's Discount Factors
Rating Category
----------------------------------------------------------
Exposure Period AAA Aa A Baa Other* (V)MIG-1** SP-1+ Unrated
- --------------- ---- ---- ---- ---- ------ ---------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but
greater than 7
weeks 154 161 168 176 190 137 149 231
9 weeks or less but
greater than 8
weeks 156 163 170 177 192 138 150 240
</TABLE>
- --------------
* Municipal Obligations not rated by Moody's but rated BBB by S&P.
** Municipal Obligations 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.
37
<PAGE> 85
*** Municipal Obligations 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 Obligations will be 115%, so long as
such Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's
and mature or have a demand feature at par exercisable in 30 days or less or
125% so long as such Municipal Obligations are rated at least A-1+/AA or
SP-1+/AA by S&P and mature or have a demand feature at par exercisable in 30
days or less and (ii) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets as of
any Valuation Date, means no more than the aggregate of the following: (i) the
book value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the 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 Obligations sold as of or prior to such Valuation
Date which generated receivables, if such receivables are due within five
business days of such Valuation Date but do not comply with either of
conditions (x) or (y).
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:
<TABLE>
<CAPTION>
Minimum Maximum Maximum
Issue Size Underlying State or Territory
Rating ($ Millions) Obligor (%) Concentration (%)
- ------ ------------ ----------- ------------------
<S> <C> <C> <C>
Aaa...................... 10 100 100
Aa....................... 10 20 60
A........................ 10 10 40
Baa...................... 10 6 20
Other*................... 10 4 12
</TABLE>
- ----------------
*Municipal Obligations not rated by Moody's but rated BBB by S&P.
The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. Current Moody's guidelines also
require that Municipal Obligations constituting Moody's Eligible Assets pay
interest in cash, be publicly rated Baa or higher by Moody's or, if not rated
by Moody's but rated by S&P, that they be rated at least BBB by S&P, and that
they not have suspended ratings. For purposes of determining the Moody's
Discount Factors applicable to such S&P-rated Municipal Obligations, any such
Municipal Obligation (excluding short-term Municipal Obligations) will be
deemed to have a Moody's rating which is one full rating category lower than
its S&P rating. For purposes of applying the foregoing requirements, Municipal
Obligations rated MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated
A-1+/AA or SP-1+/AA by S&P, will be considered to have a long-term rating of A.
The Fund will enter into futures and options transactions only for bona
fide hedging purposes and not for leveraging or speculative purposes. So long
as either S&P or Moody's is rating the Municipal Preferred, the Fund will only
engage in futures or options transactions in accordance with the then-current
guidelines of such ratings agencies, and only after it has received written
confirmation from S&P or Moody's, as appropriate, that such transactions would
not impair the ratings then assigned by such rating agency to shares of
Municipal Preferred.
REDEMPTION
OPTIONAL REDEMPTION. Except as described below,
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<PAGE> 86
(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, shares 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 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 of more than 364 Rate
Period Days if, on the date of determination of the Applicable Rate for such
shares for such Rate Period, such Applicable Rate equaled or exceeded on such
date of determination the Treasury Note Rate for such Rate Period, at a
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
A Notice of Special Rate Period relating to shares of Municipal Preferred
for a Special Rate Period may contain Special Redemption Provisions only if the
Board of Trustees, after consultation with the Broker-Dealer or Broker-Dealers
for such Special Rate Period of such shares, determines that such Special
Redemption Provisions are in the best interest of the 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 certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of
shares of Municipal Preferred by reason of the redemption of such shares on
such redemption date and (b) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the shares of Municipal Preferred) and the
Discounted Value of 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
39
<PAGE> 87
law, if the Fund fails to maintain the Municipal Preferred Basic Maintenance
Amount or the 1940 Act Municipal Preferred Asset Coverage in accordance with
the requirements of the rating agency or rating agencies then rating the shares
of Municipal Preferred and such failure is not cured on or before the Municipal
Preferred Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
respectively referred to as a "Cure Date"), as the case may be. The number of
shares of Municipal Preferred to be redeemed will be equal to the lesser of (a)
the minimum number of shares of Municipal Preferred, together with all other
Preferred Shares subject to redemption or retirement, the redemption of which,
if deemed to have occurred immediately prior to the opening of business on the
Cure Date, would have resulted in the satisfaction of the Municipal Preferred
Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as
the case may be, on such Cure Date (provided, however, that, if there is no
such minimum number of shares of Municipal Preferred and other Preferred Shares
the redemption or retirement of which would have had such result, all shares of
Municipal Preferred and Preferred Shares then outstanding will be redeemed),
and (b) the maximum number of shares of Municipal Preferred, together with all
other Preferred Shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor. In determining
the shares of Municipal Preferred required to be redeemed in accordance with
the foregoing, the 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 not earlier
than 20 days and not later than 40 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 40 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 to be redeemed shall be redeemed pro rata from the holders of
such shares in proportion to the number of such shares held by such holders, in
the same manner as described above in respect of optional redemptions of fewer
than all outstanding shares of Municipal Preferred.
NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing the
same to each holder of the shares to be redeemed (initially Cede & Co. as
nominee of the Securities Depository), not less than 20 nor more than 45 days
prior to the date fixed for redemption thereof, to the respective addresses of
such holders as the same shall appear on the record books of the Fund ("Notice
of Redemption"). Each such notice shall state (i) the redemption date; (ii) the
number of shares of Municipal Preferred to be redeemed; (iii) the CUSIP number
for such shares; (iv) the Redemption Price; (v) the place or places where
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Trustees shall so require and the notice shall so state) are to be
surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date; and
(vii) the provisions of the 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 mailed to such holder shall also specify the number of
shares 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, 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 with the Auction Agent the
Redemption Price with respect to any shares for which such Notice of Redemption
has been mailed. Notwithstanding the fact that the 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.
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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 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.
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 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 or on any other class of shares of the Fund ranking junior to the
Municipal Preferred upon liquidation, an amount equal to the liquidation
preference with respect to such shares. The liquidation preference for shares
of Municipal Preferred shall be $25,000 per share, plus an amount equal to all
dividends thereon (whether or not earned or declared) accumulated but unpaid to
(but not including) the date of final distribution in same-day funds, together
with any applicable Gross-up Payments in connection with the 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
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
liquidation 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
upon such liquidation 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 liquidation. 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 liquidation of the Fund, after payment shall have been made in full to the
holders of the
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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 liquidation
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 liquidation, 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 has currently determined that, at
least quarterly, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the 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. The staff of the SEC currently requires that any tender offer
made by a closed-end investment company for its shares must be at a price equal
to the net asset value of such shares on the close of business on the last day
of the tender offer. Any service fees incurred in connection with any tender
offer made by the Fund will be borne by the Fund and will not reduce the stated
consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the Board of Trustees at the time it considers such
issue, it is the Board's present policy, which may be changed by the Board, not
to authorize repurchases of the 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 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 or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, or (f) other event
or condition which would have a material adverse effect (including any adverse
tax effect) on the 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, including 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,
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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 (including tax- exempt income)
and net capital gain in accordance with the timing requirements imposed by the
Code, so as to maintain its RIC status. By doing so, the Fund will avoid any
federal income tax on any income and gain it distributes to its shareholders.
If the Fund failed to qualify for treatment as a RIC for any taxable year, it
would be taxed on the full 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 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 investment company taxable income 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 gains and other taxable income).
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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
Obligations 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 Obligations 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
Obligations 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 Obligations 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 Obligations 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.
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 Obligations, and similar proposals may be introduced in
the future. If such a proposal were enacted, the availability of Municipal
Obligations 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
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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 are the
independent accountants for the Fund, providing audit services, tax return
preparation, and assistance and consultation with respect to the preparation of
filings with the SEC.
FINANCIAL STATEMENTS
The audited financial statements included in the Annual Report of the Fund
for the fiscal year ended November 30, 1998, 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
___ of this SAI.
"Adviser" means Scudder Kemper Investments, Inc.
"Affected Series" has the meaning set forth on page ___ 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) that are rated by S&P.
"Applicable Rate" has the meaning set forth on page ___ of this SAI.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agency Agreement" has the meaning set forth on page ___ 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 pages ___ of
this SAI.
"Benchmark Rate" has the meaning set forth on page ___ of this SAI.
"Beneficial Owner" has the meaning set forth on page ___ of this SAI.
"Bid" has the meaning set forth on page ___ of this SAI.
"Bidder" and "Bidders" have the respective meanings set forth on page ___
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.
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"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 procedures specified in the Auction Procedures.
"Business Day" has the meaning set forth on page ___ of this SAI.
"Cede" means Cede & Co., the nominee of DTC in whose name the shares of
APS initially will be registered.
"Certificate" means the Certificate of Designation for Preferred Shares of
the Fund, dated _________ _____, 1999, specifying the powers, preferences and
rights of the APS.
"CFTC" has the meaning set forth on page ___ of this SAI.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page ___ 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 ___ 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" has the meaning set forth on page ___ of this SAI.
"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 ___ of this SAI.
"Dividend Period" has the meaning set forth on pages ___ 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 Obligations 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
economic defeasance criteria and assigned a rating of AAA by S&P, (iii) are not
rated by S&P but have been determined to be legally defeased by Moody's, or
(iv) have been determined to be economically defeased by Moody's and assigned a
rating no lower than the rating that is Moody's equivalent of S&P's AAA rating.
"Existing Holder" has the meaning set forth on page ___ of this SAI.
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<PAGE> 95
"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,
New York City time, (A) on the Business Day next preceding any Dividend Payment
Date for such shares, in funds available on such Dividend Payment Date in The
City of New York, New York, the full amount of any dividend (whether or not
earned or declared) to be paid on such Dividend Payment Date on any share or
(B) on the Business Day next preceding any redemption date in funds available
on such redemption date for such shares in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any share after notice
of redemption is mailed as set forth in the 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, which is the issuer of the shares of Municipal Preferred.
"Gross-up Payment" has the meaning set forth on pages ___ of this SAI.
"Hold Order" has the meaning set forth on page ___ 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 Rate Period" has the meaning set forth on page ___ of this SAI.
"IRS" means the United States Internal Revenue Service.
"Kenny Index" has the meaning set forth on page ___ of this SAI.
"Late Charge" has the meaning set forth on page ___ 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 ___ of this SAI.
"Maximum Rate" has the meaning set forth on page ___ 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 Factors" has the meaning set forth on page ___ of this
SAI.
"Moody's Eligible Assets" has the meaning set forth on pages ___ of this
SAI.
"Moody's Exposure Period" has the meaning set forth on page ___ 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
48
<PAGE> 96
changes to the Code, the greater of the maximum marginal Federal individual
income tax rate applicable to ordinary income and the maximum marginal Federal
corporate income tax rate applicable to ordinary income will increase, such
increase being rounded up to the next five percentage points, until the
effective date of such increase, the Moody's Volatility Factor in the case of
any Rate Period described in (i) above in this definition instead shall be
determined by reference to the following table:
<TABLE>
<CAPTION>
Federal Volatility
Tax Rate Increase Factor
----------------- ----------
<S> <C>
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
</TABLE>
"Municipal Obligations" has the meaning set forth on page ___ of this SAI.
"Municipal Preferred" means the 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 pages ___ of this SAI.
"Municipal Preferred Basic Maintenance Cure Date" has the meaning set
forth on page ___ of this SAI.
"Municipal Preferred Basic Maintenance Report" has the meaning set forth
on pages ___ 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 ___ of this SAI.
"1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on
page ___ of this SAI.
"Notice of Redemption" has the meaning set forth on page ___ of this SAI.
"Notice of Special Rate Period" has the meaning set forth on page ___ of
this SAI.
"NYSE" means the New York Stock Exchange.
"Order" and "Orders" have the respective meanings set forth on page ___ 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.
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<PAGE> 97
"Potential Beneficial Owner" has the meaning set forth on page ___ of this
SAI.
"Potential Holder" has the meaning set forth on page ___ of this SAI.
"Preferred Shares" means the preferred shares of beneficial interest,
$0.01 per share par value, of the Fund, and includes the Municipal Preferred
shares.
"Rate Multiple" has the meaning set forth on page ___ of this SAI.
"Rate Period" has the meaning set forth on page ___ 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 second paragraph under "Description of Municipal
Preferred--Dividends--General" or the second paragraph under "Description of
Municipal Preferred--Dividends--Designation of Special Rate Periods."
"Receivables for Municipal Obligations Sold," for purposes of calculating
Moody's Eligible Assets or S&P Eligible Assets, as the case may be, has the
meaning set forth on pages ___ of this SAI, respectively.
"Redemption Price" has the meaning set forth on page ___ of this SAI.
"Reference Rate" has the meaning set forth on page ___ 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 ___ of this SAI.
"Special Rate Period" has the meaning set forth on page ___ of this SAI.
"Special Redemption Provisions" has the meaning set forth on page ___ of
this SAI.
"S&P" means Standard & Poor's Ratings Group, a division of the McGraw-Hill
Companies, Inc. or its successors.
"S&P Discount Factors" has the meaning set forth on pages ___ of this SAI.
"S&P Eligible Assets" has the meaning set forth on page ___ of this SAI.
"S&P Exposure Period" has the meaning set forth on page ___ of this SAI.
"S&P Volatility Factor" means, as of any Valuation Date, a multiplicative
factor equal to (i) 305% in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the case of any
Special Rate Period of more than 28 Rate Period Days but fewer than 183 Rate
Period Days, and (iii) 204% in the case of any Special Rate Period of more than
182 Rate Period Days.
"Submission Deadline" means 1:30 P.M., New York City time, on any Auction
Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.
"Submitted Bid" has the meaning set forth on page ___ of this SAI.
50
<PAGE> 98
"Submitted Hold Order" has the meaning set forth on page ___ of this SAI.
"Submitted Order" has the meaning set forth on page ___ of this SAI.
"Submitted Sell Order" has the meaning set forth on page ___ of this SAI.
"Subsequent Rate Period" has the meaning set forth on page ___ of this
SAI.
"Substitute Commercial Paper Dealer" has the meaning set forth on page ___
of this SAI.
"Substitute U.S. Government Securities Dealer" has the meaning set forth
on page ___ of this SAI.
"Sufficient Clearing Bids" has the meaning set forth on page ___ of this
SAI.
"Taxable Allocation" has the meaning set forth on page ___ of this SAI.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning
set forth on page ___ of this SAI.
"Taxable Income" has the meaning set forth on page ___ of this SAI.
"Taxable Yield Rate" has the meaning set forth on page ___ of this SAI.
"Treasury Bill" has the meaning set forth on page ___ of this SAI.
"Treasury Bill Rate" has the meaning set forth on page ___ of this SAI.
"Treasury Note" has the meaning set forth on page ___ of this SAI.
"Treasury Note Rate" has the meaning set forth on page ___ of this SAI.
"U.S. Government Securities Dealer" has the meaning set forth on page ___
of this SAI.
"Valuation Date" has the meaning set forth on page ___ of this SAI.
"Volatility Factor" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the S&P Volatility Factor.
"Winning Bid Rate" has the meaning set forth on pages ___ of this SAI.
51
<PAGE> 99
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
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<PAGE> 100
uncertainties or major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The 'B'
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied 'BB' or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to pay interest and
repay principal.
The 'CCC' rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' debt rating.
C The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C'
rating may be used to cover a situation where a bankruptcy petition has
been filed, but debt service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The
'D' rating also will be used upon the filing of a bankruptcy petition
if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise judgment
with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is federally insured and interest is adequately
collateralized.* In the case of certificates of deposit the letter 'L'
indicates that the deposit, combined with other deposits being held in
the same right and capacity, will be honored for principal and accrued
pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon maturity.
* 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.
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<PAGE> 101
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
MUNICIPAL NOTES
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity
relative to other maturities, the more likely it will be treated as a
note).
-- Source of payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be treated as a
note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Very strong or strong capacity to pay principal and interest. Those
issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-l."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
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> 102
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
completed, or (d) payments
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<PAGE> 103
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.
DESCRIPTION OF FITCH IBCA, INC. ("FITCH") INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guarantees unless otherwise
indicated.
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
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<PAGE> 104
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt nature
or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A -- Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB -- Bonds considered to be investment grade and of
satisfactory-credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) or Minus (-) -- Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "AAA" category.
NR -- Indicates that Fitch does not rate the specific issue.
Conditional -- A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended -- A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating purposes.
Withdrawn -- A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an issuer fails to furnish
proper and timely information.
FitchAlert -- Ratings are placed on FitchAlert to notify investors of
an occurrence that is likely to result in a rating change and the likely
direction of such change. These are designated as "Positive," indicating a
potential upgrade, "Negative," for potential downgrade, or "Evolving," where
ratings may be raised or lowered. FitchAlert is relatively short-term, and
should be resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely
direction of any rating change over the intermediate term. It is described as
"Positive" or "Negative." The absence of a designation indicates a stable
outlook.
DESCRIPTION OF FITCH'S SPECULATIVE GRADE BOND RATINGS
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely
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<PAGE> 105
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the rating are of similar but not necessarily identical
credit quality since rating categories cannot fully reflect the differences in
degrees of credit risk.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity throughout
the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD and D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on these bonds, and
"D" represents the lowest potential for recovery.
Plus (+) or Minus (-) -- Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating category.
Plus and minus signs, however, are not used in the "DDD," "DD," or "D"
categories.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short-term ratings are as follows:
F-1+ -- Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for timely
payment.
F-1 -- Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues rated
"F-1+."
F-2 -- Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned "F-1+" and "F-1" ratings.
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<PAGE> 106
F-3 -- Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely payment is
adequate; however, near-term adverse changes could cause these securities to be
rated below in investment grade.
F-S -- Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely payment and
are vulnerable to near-term adverse changes in financial and economic
conditions.
D -- Default. Issues assigned this rating are in actual or imminent
payment default.
LOC -- The symbol "LOC" indicates that the rating is based on a letter
of credit issued by a commercial bank.
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<PAGE> 107
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*) Marginal A FEDERAL TAX EXEMPT YIELD OF:
- --------------------------------------------- Income 4% 4.5% 5% 5.5% 6%
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.
60
<PAGE> 108
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 APS, 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 APS 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 APS to be purchased by such Potential Holder;
(v) if the aggregate number of shares of APS 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 APS 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 APS 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 APS.
(b) On each Auction Date for shares of APS, 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 APS 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;
(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
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<PAGE> 109
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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<PAGE> 110
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 a series of Municipal Preferred:
(i) each Beneficial Owner of shares of such series may
submit to its Broker-Dealer by telephone or otherwise
information as to:
(A) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner
which such Beneficial owners desires to
continue to hold without regard to the
Applicable Rate for shares of such series
for the next succeeding Rate Period of such
shares;
(B) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner
offers to sell if the Applicable Rate for
shares of such series for the next
succeeding Rate Period of shares of such
series shall be less than the rate per annum
specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of
such series held by such Beneficial owners
which such Beneficial Owner offers to sell
without regard to the Applicable Rate for
shares of such series for the next Rate
Period of shares of such series; and
(ii) one or more Broker-Dealers, using lists of Potential
Beneficial Owners, shall in good faith for the
purpose of conducting a competitive Auction in a
commercially reasonable manner, contact Potential
Beneficial Owners (by telephone or otherwise),
including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial
Owner offers to purchase if the Applicable Rate for
shares of such series for the next succeeding Rate
Period of shares of such series shall not be less
than the rate per annum specified by such Potential
Beneficial Owner.
For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent,
of information referred to in clause (i)(A), (i)(B), (i)(C), or (ii) of this
paragraph (a) is hereinafter referred to as an "Order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial Owner placing
an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the
Auction Agent, is hereinafter referred to as a "Bidder" and collectively as
"Bidders"; an Order containing the information referred to in clause (i)(A) of
this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively
as "Hold Orders"; an Order containing the information referred to in clause
(i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and
collectively as "Bids"; and an Order containing the information referred to in
clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order"
and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of
shares of a series of Municipal Preferred subject to
an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such
series specified in such Bid if the
63
<PAGE> 111
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
(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 a series of Municipal Preferred
subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such
series specified in such Sell Order; or
(B) such number or a lesser number of
Outstanding shares of such series as set
forth in clause (iii) of paragraph (b) of
Section 4 of this 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 a series of Municipal Preferred shall not be liable to any Person
for failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph (c) of Section 2 of this 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 a series of Municipal Preferred
subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such
series specified in such Bid if the
Applicable Rate for shares of such series
determined on such Auction Date shall be
higher than the rate specified therein; or
(B) such number or a lesser number of
Outstanding shares of such series as set
forth in clause (v) of paragraph (a) of
Section 4 of this 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 a 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
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<PAGE> 112
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
(C) the number of shares, if any, of such series
subject to any Sell Order of such Existing
Holder; and
(iv) to the extent such Bidder is a Potential Holder of
shares of such series, the rate and number of shares
of such series specified in such Potential Holder's
Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent
shall round such rate up to the next highest one-thousandth
(.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding shares
of Municipal Preferred of a series held by any Existing Holder
is not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order to have
been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held
by such Existing Holder and not subject to Orders submitted to
the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series
held by any Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline for an Auction relating
to a Special Rate Period consisting of more than 28 Rate
Period Days, the Auction Agent shall deem a Sell Order to have
been submitted by or on behalf of such Existing Holder
covering the number of outstanding shares of such series held
by such Existing Holder and not subject to Orders submitted to
the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to
the Auction Agent covering in the aggregate more than the
number of Outstanding shares of Municipal Preferred of a
series subject to an Auction held by such Existing Holder,
such Orders shall be considered valid in the following order
of priority:
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the
aggregate the number of Outstanding shares of such
series held by such Existing Holder, and if the
number of shares of such series subject to such Hold
Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number
of shares subject to each such Hold Order shall be
reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be
considered valid up to and including the
excess of the number of Outstanding shares
of such series held by such Existing Holder
over the number of shares of such series
subject to any Hold Orders referred to in
clause (i) above;
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<PAGE> 113
(B) subject to subclause (A), if more than one
Bid of an Existing Holder for shares of such
series is submitted to the Auction Agent
with the same rate and the number of
Outstanding shares of such series subject to
such Bids is greater than such excess, such
Bids shall be considered valid up to and
including the amount of such excess, and the
number of shares of such series subject to
each Bid with the same rate shall be reduced
pro rata to cover the number of shares of
such series equal to such excess;
(C) subject to subclauses (A) and (B), if more
than one Bid of an Existing Holder for
shares of such series is submitted to the
Auction Agent with different rates, such
Bids shall be considered valid in the
ascending order of their respective rates up
to and including the amount of such excess;
and
(D) in any such event, the number, if any, of
such Outstanding shares of such series
subject to any portion of Bids considered
not valid in whole or in part under this
clause (ii) shall be treated as the subject
of a Bid for shares of such series by or on
behalf of a Potential Holder at the rate
therein specified; and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of
the number of Outstanding shares of such series held
by such Existing Holder over the sum of shares of
such series subject to valid Hold Orders referred to
in clause (i) above and valid Bids referred to in
clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on
behalf of any Potential Holder, each such Bid submitted shall
be a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer
to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date
for shares of a series of Municipal Preferred, the Auction
Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers in respect of shares of
such series (each such Order as submitted or deemed submitted
by a Broker-Dealer being hereinafter referred to individually
as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted
Sell Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or
"Submitted Sell Orders," as the case may be, or as "Submitted
Orders") and shall determine for such series:
(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
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<PAGE> 114
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 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
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<PAGE> 115
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 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;
(iv) each Existing Holders' Submitted Bid for shares of
such series specifying a rate that is equal to the
Winning Bid Rate for shares of such series shall be
rejected, thus entitling such Existing Holder to
continue to hold the share of Municipal Preferred
subject to such Submitted Bid, unless the number of
Outstanding shares of Municipal Preferred subject to
all such Submitted Bids shall be greater than the
number of shares of Municipal Preferred ("remaining
shares") in the excess of the Available Municipal
Preferred of such series over the number of shares of
Municipal Preferred subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph
(a), in which event such Submitted Bid of such
Existing Holder shall be rejected in part, and such
Existing Holder shall be entitled to continue to hold
shares of Municipal Preferred subject to such
Submitted Bid, but only in an amount equal to the
number of shares of Municipal Preferred of such
series
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<PAGE> 116
obtained by multiplying the number of remaining
shares by a fraction, the numerator of which shall be
the number of Outstanding shares of Municipal
Preferred held by such Existing Holder subject to
such Submitted Bid and the denominator of which shall
be the aggregate number of Outstanding shares of
Municipal Preferred subject to such Submitted Bids
may be all such Existing Holders that specified a
rate equal to the Winning Bid Rate for shares of such
series; and
(v) each Potential Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the
Winning Bid Rate of shares of such series shall be
accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the
number of shares in the excess of the Available
Municipal Preferred of such series over the number of
shares of Municipal Preferred subject to Submitted
Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which
shall be the number of Outstanding shares Municipal
Preferred subject to such Submitted Bids made by all
such Potential Holders that specified a rate equal to
the Winning Bid Rate for shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of
Municipal Preferred have not been made (other than because all
of the Outstanding shares of such series are subject to
Submitted Hold Orders), subject to the provisions of paragraph
(d) of this Section 4, Submitted Orders for shares of such
series shall be accepted or rejected as follows in the
following orders of priority and all other Submitted Bids for
shares of such series shall be rejected:
(i) Existing Holder's Submitted Bids for shares of such
series specifying any rate that is equal to or lower
than the Maximum Rate for shares of such series shall
be rejected, thus entitling such Existing Holders to
continue to hold the shares of Municipal Preferred
subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower
than the Maximum Rate for shares of such series shall
be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of
such series specifying any rate that is higher than
the Maximum Rate for shares of such series and the
Submitted Sell Orders for shares of such series of
each Existing Holder shall be accepted, thus
entitling each Existing Holder that submitted or on
whose behalf was submitted any such Submitted Bid or
Submitted Sell Order to sell the shares of such
series subject to such Submitted Bid or Submitted
Sell Order, but in both cases only in an amount equal
to the number of shares of such series obtained by
multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of
this paragraph (b) by a fraction, the numerator of
which shall be the number of Outstanding shares of
such series held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of
Outstanding shares of such series subject to all such
Submitted Bids and Submitted Sell Orders.
(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 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 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.
69
<PAGE> 117
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 4, any Potential Holder would be
entitled or required to purchase less than a whole share of
series of Municipal Preferred on any Auction Date, the Auction
Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of Municipal Preferred of such
series for purchase among Potential Holders so that only whole
shares of Municipal Preferred of such series are purchased on
such Auction Date as a result of such procedures by any
Potential Holder, even if such allocation results in one or
more Potential Holders not purchasing shares of Municipal
Preferred of such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the
aggregate of shares of such series to be purchased and the
aggregate number of shares of such series to be sold by
Potential Holders and Existing Holders and, with respect to
each Potential Holder and Existing Holder, to the extent that
such aggregate number of shares to be purchased and such
aggregate number of shares to be sold differ, determine to
which other Potential Holder(s) or Existing Holder(s) they
shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be,
shares of Municipal Preferred of such series. Notwithstanding
any provision of the Auction procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of shares of a series of Municipal Preferred
with respect to whom a Broker-Dealer submitted a Bid to the
Auction Agent for such shares that was accepted in whole or in
part, or submitted or is deemed to have submitted a Sell Order
for such shares that was accepted in whole or in part, fails
to instruct its Agent Member to deliver such shares against
payment therefor, partial deliveries of shares of Municipal
Preferred that have been made in respect of Potential Holders'
or Potential Beneficial Owners' Submitted Bids for shares of
such series that have been accepted in whole or in part shall
constitute good delivery to such Potential Holders and
Potential Beneficial Owners.
(g) Neither the 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 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 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
70
<PAGE> 118
Holder of fewer shares of such series than specified by the Auction
Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer
may so inform the Auction Agent of that believe. Such Broker-Dealer
shall not, in its capacity as Existing Holder of shares of such series,
submit Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such series
specified by the Auction Agent in response to such Broker-Dealer's
inquiry.
7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED. Unless otherwise permitted
by the 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, all
of the shares of a series of Municipal Preferred outstanding from time
to time shall be represented by (i) a global certificate registered in
the name of the Securities Depository or its nominee and (ii) books of
the Fund to any Person other than the Securities Depository or its
nominee.
71
<PAGE> 119
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
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
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
233 South Wacker Drive
Chicago, Illinois 60606
<PAGE> 120
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 filed
herewith.
(2) Certificate of Designation for Preferred
Shares to be filed by amendment.
(b) By-Laws of the Registrant filed herewith.
(c) Not Applicable.
(d) Specimen Certificate representing the Registrant's
Municipal Auction Rate Cumulative Preferred Shares of
beneficial interest ("Municipal Preferred") to be
filed by amendment.
(e) Dividend Reinvestment Plan of the Registrant is filed
herewith.
(f) Not Applicable.
(g) Investment Management Agreement between the
Registrant and Scudder Kemper Investments, Inc. filed
herewith.
(h) Form of Underwriting Agreement between the Registrant
and Salomon Smith Barney to be filed by amendment.
(i) Not Applicable.
(j) Custody Agreement between the Registrant and State
Street Bank and Trust Company filed herewith.
<PAGE> 121
(k) (1) Form of Auction Agency Agreement between the
Registrant and Bankers Trust Company as to
the Registrant's Municipal Preferred shares
to be filed by amendment.
(2) Form of Broker-Dealer Agreement as to the
Registrant's Municipal Preferred shares to
be filed by amendment.
(3) DTC Representations Letter as to the
Registrant's Municipal Preferred shares to
be filed by amendment.
(4) Agency Agreement between the Registrant and
IFTC, appointing IFTC as Transfer Agent and
Dividend Disbursing Agent, filed herewith.
(l) Opinion and Consent of Dechert Price & Rhoads to be
filed by amendment.
(m) Not Applicable.
(n) Consent of Ernst & Young LLP to be filed by
amendment.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Financial Data Schedule to be filed by amendment.
- ----------
ITEM 25. MARKETING AGREEMENTS
See Form of Underwriting Agreement to be filed as Exhibit (h) of Item
24 to this Registration Statement.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION*
<TABLE>
<CAPTION>
<S> <C>
Registration Fees......................................................................._____________
Printing and Engraving Expenses........................................................._____________
Rating Agency Fees and Expenses........................................................._____________
</TABLE>
-2-
<PAGE> 122
<TABLE>
<CAPTION>
<S> <C>
Legal Fees and Expenses................................................................._____________
National Association of Securities Dealers, Inc. Fees..................................._____________
Accounting Fees and Expenses............................................................_____________
Distributor Expense Reimbursement......................................................._____________
Miscellaneous Expenses.................................................................._____________
Total.........................................................................._____________
</TABLE>
- ----------
* To be filed by amendment.
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>
Auction Preferred Shares of beneficial interest, 0
par value $.01 per share as of
May 19, 1999
Common Shares of beneficial interest 1,528
par value $.01 per share as of
May 19, 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
-3-
<PAGE> 123
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 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, maintains all the required records in its capacity as sub-transfer
agent of the Registrant.
-4-
<PAGE> 124
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.
-5-
<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 19th day of May, 1999.
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
By: /s/ Mark S. Casady
------------------
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>
<CAPTION>
<S> <C> <C>
/s/ Mark S. Casady President and Trustee (Principal May 19, 1999
- ------------------------- Executive Officer)
Mark S. Casady
/s/ John R. Hebble Treasurer (Principal Financial May 19, 1999
- ------------------------- and Accounting Officer)
John R. Hebble
/s/ James E. Akins Trustee May 19, 1999
- -------------------------
James E. Akins
/s/ Arthur R. Gottschalk Trustee May 19, 1999
- -------------------------
Arthur R. Gottschalk
/s/ Daniel Pierce Trustee May 19, 1999
- -------------------------
Daniel Pierce
/s/ Thomas W. Littauer Trustee May 19, 1999
- -------------------------
Thomas W. Littauer
</TABLE>
<PAGE> 126
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Frederick T. Kelsey Trustee May 19, 1999
- -------------------------
Frederick T. Kelsey
/s/ Fred B. Renwick Trustee May 19, 1999
- -------------------------
Fred B. Renwick
/s/ John G. Weithers Trustee May 19, 1999
- -------------------------
John G. Weithers
</TABLE>
<PAGE> 1
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
(FORMERLY KEMPER TRUST #9)
AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST
FEBRUARY 27, 1989
AGREEMENT AND DECLARATION OF TRUST made, amended and restated at
Boston, Massachusetts this 27th day of February, 1989, by the Trustee hereunder,
and by the holders of various classes of shares of beneficial interest to be
issued hereunder as hereinafter provided.
WITNESSETH
WHEREAS, the Trustee hereunder is desirous of forming a trust for the
purposes of carrying on the business of a management investment company; and
WHEREAS, in furtherance of such purposes, the Trustee and any successor
Trustees elected in accordance with Article IV hereof are acquiring and may
hereafter acquire assets and properties, to hold and manage as trustees of a
Massachusetts voluntary association with transferable shares in accordance with
the provisions hereinafter set forth.
NOW, THEREFORE, the Trustee and any successor Trustees elected in
accordance with Article IV hereof hereby declare that they will hold all cash,
securities and other assets and properties, which they may from time to time
acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of
the same upon the following terms and conditions for the pro rata benefit of the
holders from time to time of shares in this Trust as hereinafter set forth.
ARTICLE I
NAME AND DEFINITIONS
NAME AND REGISTERED AGENT
SECTION 1. This Trust, which has heretofore been known as Kemper Trust
#9, shall hereafter be known as Kemper Strategic Municipal Income Trust and the
Trustees shall conduct the business of the Trust under that name or any other
name as they may from time to time determine. The registered agent for the Trust
in Massachusetts shall be CT Corporation System whose address is 2 Oliver
Street, Boston, Massachusetts or such other person as the Trustees may from time
to time designate.
<PAGE> 2
DEFINITIONS
SECTION 2. Whenever used herein, unless otherwise required by the
context or specifically provided:
(a) The "Trust" refers to the Massachusetts voluntary association
established by this Agreement and Declaration of Trust, as amended from time to
time, pursuant to Massachusetts General Laws, Chapter 182;
(b) "Trustees" refers to the Trustees of the Trust named herein or
elected in accordance with Article IV hereof and then in office;
(c) "Shares" mean the various units authorized by Article III hereof
into which the beneficial interest in the Trust shall be divided from time to
time and include fractions of Shares as well as whole Shares;
(d) "Shareholder" means a record owner of Shares;
(e) The "1940 Act" refers to the Investment Company Act of 1940 (and
any successor statute) and the Rules and Regulations thereunder, all as amended
from time to time;
(f) The terms "Affiliated Person", "Assignment", "Commission",
"Interested Person", "Principal Underwriter" and "vote of a majority of the
outstanding voting securities" shall have the meanings given them in the 1940
Act;
(g) "Declaration of Trust" shall mean this Agreement and Declaration of
Trust as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended from time
to time; and
(i) "Net asset value per Common Share" shall mean the meaning set forth
in Section 2 of Article VI hereof.
(j) "Common Shares" shall mean the common shares of beneficial interest
authorized by Section 1 of Article III hereof.
ARTICLE II
NATURE AND PURPOSE
The Trust is a voluntary association (commonly known as a business
trust) of the type referred to in Chapter 182 of the General Laws of the
Commonwealth of Massachusetts. The Trust is not intended to be, shall not be
deemed to be, and shall not be treated as, a general or limited partnership,
joint venture, corporation or joint stock company, nor shall the Trustees or
Shareholders or any of them for any purpose be deemed to be, or be treated in
any way
2
<PAGE> 3
whatsoever as though they were, liable or responsible hereunder as partners or
joint venturers. The purpose of the Trust is to engage in, operate and carry on
the business of a closed-end management investment company; and to do any and
all acts or things as are necessary, convenient, appropriate, incidental or
customary in connection therewith.
ARTICLE III
SHARES
DIVISION OF BENEFICIAL INTEREST
SECTION 1. A class of common shares of beneficial interest, $.01 par
value, is hereby authorized, and each Common Share shall represent an equal
proportionate interest with each other Common Share, no such Common Share having
a preference or priority over any other Common Share. In addition to the Common
Shares authorized by this Section 1 of Article III, the Trustees may authorize
additional separate classes of shares of beneficial interest, $.01 par value,
together with such preferences, voting powers, qualifications and special or
relative rights or privileges as may be determined from time to time by
resolution of the Trustees. The number of Shares of each class authorized shall
be unlimited, and the Shares so authorized may be represented in part by
fractional Shares. The Trustees may from time to time divide or combine the
Shares into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust represented by such shares. The
Trustees may authorize that the Shares of a particular class be issued in as
many series with such preferences, voting powers, qualifications and special or
relative rights or privileges as may be determined from time to time by
resolution of the Trustees. Each series of a class shall have a distinguishing
designation. All Shares issued hereunder including, without limitation, Shares
issued in connection with a dividend in Shares or a split of Shares, shall be
fully paid and nonassessable.
OWNERSHIP OF SHARES
SECTION 2. The ownership and transfer of Shares shall be recorded on
the books of the Trust or its transfer or similar agent or agents. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the issuance of Share certificates, the
transfer of Shares and similar matters. The record books of the Trust as kept by
the Trust or any transfer or similar agent or agents of the Trust, as the case
may be, shall be conclusive as to who are the Shareholders of the Trust and as
to the number of Shares held from time to time by each Shareholder.
INVESTMENTS IN TRUST
Section 3. The Trustees may issue Shares of the Trust to such persons
and on such terms and, subject to any requirements of law, for such
consideration, which may consist of cash or tangible or intangible property or a
combination thereof, as they may from time to time authorize.
3
<PAGE> 4
All consideration received by the Trust for the issue or sale of
Shares, together with all income, earnings, profits, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation thereof,
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall irrevocably belong to the Trust for all
purposes, subject only to the rights of creditors, and shall be so handled upon
the books of account of the Trust.
MERGER OR CONSOLIDATION
SECTION 4. In connection with the acquisition of all, or substantially
all, of the assets or stock of another investment company, investment trust, or
of a company classified as a personal holding company under the Internal Revenue
Code of 1986, the Trustees may issue or cause to be issued Shares and accept in
payment therefor, in lieu of cash, such assets at their market value, or such
stock at the market value of the assets held by such investment company or
investment trust, either with or without adjustment for contingent costs or
liabilities.
NO PREEMPTIVE RIGHTS, ETC.
SECTION 5. Shareholders shall have no preemptive or other right to
receive, purchase or subscribe for any additional Shares or other securities
issued by the Trust. The Shareholders shall have no appraisal rights with
respect to their Shares and, except as otherwise determined by resolution of the
Trustees in their sole discretion, shall have no exchange or conversion rights
with respect to their Shares.
STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY
SECTION 6. Shares shall be deemed to be personal property giving only
the rights provided in this instrument. Every Shareholder by virtue of having
become a Shareholder shall be held to have expressly assented and agreed to the
terms of the Declaration of Trust and to have become a party thereto. The death
of a Shareholder during the continuance of the Trust shall not operate to
terminate the same nor entitle the representative of any deceased Shareholder to
an accounting or to take any action in court or elsewhere against the Trust or
the Trustees, but only to the rights of said decedent under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholder, nor except as specifically provided herein to call
upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
SHAREHOLDER INSPECTION RIGHTS
SECTION 7. Any Shareholder or his agent may inspect and copy during
normal business hours any of the following documents of the Trust: By-Laws,
minutes of the proceedings of the Shareholders and annual financial statements
of the Trust, including a
4
<PAGE> 5
statement of net assets and a statement of operations. The foregoing rights of
inspection of Shareholders of the Trust are the exclusive and sole rights of the
Shareholders with respect thereto and no Shareholder of the Trust shall have, as
a Shareholder, the right to inspect or copy any of the books, records or other
documents of the Trust except as specifically provided in this Section 7 of this
Article III or except as otherwise determined by the Trustees.
ARTICLE IV
THE TRUSTEES
NUMBER, DESIGNATION, ELECTION, TERM, ETC.
SECTION 1. (a) INITIAL TRUSTEE. Upon his execution of this Declaration
of Trust or a counterpart hereof or some other writing in which he accepts such
Trusteeship and agrees to the provisions hereof, Robert J. Engling shall
continue as sole Trustee hereof.
(b) NUMBER. The Trustees serving as such, whether named above or
hereafter becoming Trustees, may increase or decrease the number of Trustees to
a number other than the number theretofore determined which number shall not be
less than three nor more than 15 except during the period that the initial
Trustee named above is sole Trustee. Except as determined from time to time by
resolution of the Trustees, no decrease in the number of Trustee shall have the
effect of removing any Trustee from office prior to the expiration of his term,
but the number of Trustees may be decreased in conjunction with the removal of a
Trustee pursuant to subsection (e) of this Section 1 of Article IV.
(c) TERM AND ELECTION. Each Trustee, whether named above or hereafter
becoming a Trustee, shall serve as a Trustee until the next meeting of
Shareholders, if any, called for the purpose of considering the election or
re-election of such Trustee or of a successor to such Trustee, and until the
election and qualification of his successor, if any, elected at such meeting, or
until such Trustee sooner dies, resigns, retires or is removed. Upon the
election and qualification of a new Trustee, the Trust estate shall vest in the
new Trustee (together with the continuing or other new Trustees) without any
further act or conveyance. Prior to any sale of Shares pursuant to any public
offering, the initial Trustee named above shall have the right to appoint other
persons as Trustees each to serve with such initial Trustee as aforesaid until
the first meeting of Shareholders called for the purpose of the election or
re-election of such Trustee or of a successor to such Trustee.
(d) RESIGNATION AND RETIREMENT. Any Trustee may resign his trust or
retire as a Trustee, by written instrument signed by him and delivered to the
other Trustees or the Chairman of the Board, if any, the President or the
Secretary of the Trust, and such resignation or retirement shall take effect
upon such delivery or upon such later date as is specified in such instrument.
(e) REMOVAL. Any Trustee may be removed for cause at any time by
written instrument, signed by at least a majority of the number of the Trustees
prior to such removal, specifying the date upon which such removal shall become
effective. Any Trustee may be
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removed with or without cause (i) by the vote of the Shareholders entitled to
vote more than fifty percent (50%) of the votes entitled to be cast on the
matter voting at any meeting called for such purpose, or (ii) by a written
consent filed with the Secretary of the Trust and executed by the Shareholders
entitled to vote more than fifty percent (50%) of the votes entitled to be cast
on the matter.
Whenever ten or more Shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate Shares constituting at least one percent of the outstanding Shares of
the Trust entitled to vote on the matter, shall apply to the Trustees in writing
stating that they wish to communicate with other Shareholders entitled to vote
on the matter with a view to obtaining signatures to a request for a meeting to
consider removal of a Trustee and accompanied by a form of communication and
request that they wish to transmit, the Trustees shall within five business days
after receipt of such application inform such applicants as to the approximate
cost of mailing to the Shareholders of record entitled to vote on the matter the
proposed communication and form of request. Upon the written request of such
applicants, accompanied by a tender of the material to be mailed and of the
reasonable expenses of mailing, the Trustees shall, with reasonable promptness,
mail such material to all Shareholders of record entitled to vote on the matter
at their addresses as recorded on the books of the Trust. Notwithstanding the
foregoing, the Trustees may refuse to mail such material on the basis and in
accordance with the procedures set forth in the last two paragraphs of Section
16(c) of the 1940 Act.
(f) VACANCIES. Any vacancy or anticipated vacancy resulting from any
reason, including without limitation the death, resignation, retirement, removal
or incapacity of any of the Trustees, or resulting from an increase in the
number of Trustees by the other Trustees, may (but so long as there are at least
three remaining Trustees, need not unless required by the 1940 Act) be filled
either by a majority of the remaining Trustees, even if less than a quorum,
through the appointment in writing of such person as such remaining Trustees in
their discretion shall determine or, whenever deemed appropriate by the
remaining Trustees, by the election by the Shareholders entitled to vote on the
matter, at a meeting called for such purpose, or a person to fill such vacancy.
Upon the appointment or election and qualification of a new Trustee as aforesaid
the Trust estate shall vest in new Trustee, together with the continuing
Trustees, without any further act or conveyance, except that any such
appointment or election in anticipation of a vacancy to occur by a sign of
retirement, resignation, or increase in number of Trustees to be effective at a
later date shall become effective only at or after the effective date of said
retirement, resignation, or increase in number of Trustees.
(g) MANDATORY ELECTION BY SHAREHOLDERS. Notwithstanding the foregoing
provisions (a) through (f) of this Section 1 of Article IV, the Trustees shall
call a meeting of the Shareholders entitled to vote on the matter for the
election of one or more Trustees at such time or times as may be required in
order that the provisions of the 1940 Act or any resolution of the Trustees
which authorizes the issuance of a class of shares of beneficial interest other
than Common Shares may be complied with, and the authority hereinabove provided
for the Trustees to appoint any successor Trustee or Trustees shall be
restricted if such appointment would result in failure of the Trust to comply
with any provision of the 1940 Act or any resolution of the
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Trustees which authorizes the issuance of a class of shares of beneficial
interest other than Common Shares.
(h) EFFECT OF DEATH, RESIGNATION, Etc. The death, resignation,
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul or terminate the Trust or to revoke or terminate any existing
agency or contract created or entered into pursuant to the terms of this
Declaration of Trust.
(i) NO ACCOUNTING. Except under circumstances which would justify his
removal for cause, no person ceasing to be a Trustee as a result of his death,
resignation, retirement, removal or incapacity (nor the estate of any such
person) shall be required to make an accounting to the Shareholders or remaining
Trustees under such cessation.
POWERS
SECTION 2. The Trustees, subject only to the specific limitations
contained in this Declaration of Trust, limitations otherwise imposed by the
1940 Act, limitations imposed by any other applicable law or limitations imposed
by any resolution of the Trustees which authorizes the issuance of a class of
shares of beneficial interest other than Common Shares, shall have, without
further or other authorization and free from any power or control of the
Shareholders, full, absolute and exclusive power, control and authority over the
Trust assets and the business and affairs of the Trust to the same extent as if
the Trustees were the sole and absolute owners thereof in their own right and to
do all such acts and things as in their sole judgment and discretion are
necessary and incidental to, or desirable for the carrying out of any of the
purposes of the Trust or conducting the business of the Trust. Any determination
made in good faith by the Trustees of the purposes of the Trust or the existence
of any power or authority hereunder shall be conclusive. In construing the
provisions of this Declaration of Trust, there shall be a presumption in favor
of the grant of power and authority to the Trustees. Without limiting the
foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration
of Trust containing provisions relating to the business of the Trust, the
conduct of its affairs, its rights or powers and the rights or powers of its
Shareholders, Trustees, officers, employees and other agents and may amend and
repeal such By-Laws to the extent that such By-laws do not reserve that right to
the Shareholders; fill vacancies in their number, including vacancies resulting
from increase in their number, unless a vote of the Trust's Shareholders is
required to fill such vacancies pursuant to the 1940 Act or any resolution of
the Trustees which authorizes the issuance of a class of shares of beneficial
interest other than Common Shares; elect and remove such officers and appoint
and terminate such agents as they consider appropriate; appoint from their own
number, and terminate, any one or more committees consisting of two or more
Trustees, including an executive committee which may, when the Trustees are not
in session, exercise some or all of the powers and authority of the Trustees as
the Trustees may determine; appoint an advisory board, the members of which
shall not be Trustees and need not be Shareholders; employ one or more
investment advisers or managers as provided in Section 6 of this Article IV;
employ one or more subcustodians of the assets of the Trust and authorize such
custodians to employ administrators as provided in Section 6 of this Article IV;
employ one or more subcustodians and to deposit all or any part of such assets
in a system or systems for the
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central handling of securities; retain transfer agents or a Shareholder services
agents, or both; provide for the distribution of Shares by the Trust, through
one or more principal underwriters or otherwise; set record dates for the
determination of Shareholders with respect to various matters; and in general
delegate such authority as they consider desirable to any officer of the Trust,
to any committee of the Trustees and to any agent or employee of the Trust or
any such custodian or underwriter.
In furtherance of and not in limitation of the foregoing, the Trustees
shall have power and authority:
(a) To invest and reinvest in, to buy or otherwise acquire, to hold,
for investment or otherwise, to sell or otherwise dispose of, to lend or to
pledge, to trade in or deal in securities or interests of all kinds, however
evidenced, or obligations of all kinds, however evidenced, or rights, warrants,
or contracts to acquire such securities, interests, or obligations, or any
private or public company, corporation, association, general or limited
partnership, trust or other enterprise or organization, foreign or domestic, or
issued or guaranteed by any national or state government, foreign or domestic,
or their agencies, instrumentalities or subdivisions (including but not limited
to, bond, debentures, bills, time notes and all other evidences of
indebtedness); negotiable or non-negotiable instruments; any and all futures
contracts; government securities and money market instruments (including but not
limited to, bank certificates of deposit, finance paper, commercial paper,
bankers acceptances and all kinds of repurchase agreements);
(b) To invest and reinvest in, to buy or otherwise acquire, to hold,
for investment or otherwise, to sell or otherwise dispose of foreign currencies
and funds and exchanges, and make deposits in banks, savings banks, trust
companies, and savings and loan association, foreign or domestic;
(c) To acquire (by purchase, lease or otherwise) and to hold, use,
maintain, develop, and dispose of (by sale or otherwise) any property, real or
personal, and any interest therein:
(d) To sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the assets of the Trust;
(e) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property; and to execute and deliver
proxies or power of attorney to such person or persons as the Trustees shall
deem proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(f) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;
(g) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in the name
of the Trustees or of the Trust or in the same of a custodian, subcustodian or
other depositary or a nominee or nominees or otherwise;
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(h) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or issuer, any security or property
of which is or was held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer, and to pay
calls or subscriptions with respect to any security held in the Trust;
(i) To join with other security holders in acting through a committee,
depositary, voting trustee or otherwise, and in that connection to deposit any
security with, or transfer any security to, any such committee, depositary or
trustee, and to delegate to them such power and authority with relation to any
security (whether or not so deposited or transferred) as the Trustees shall deem
proper, and to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depositary or trustee as the Trustees shall deem
proper;
(j) To compromise, arbitrate or otherwise adjust claims in favor of or
against the Trust or any matter in controversy, including but not limited to
claims for taxes;
(k) To enter into joint ventures, general or limited partnerships or
any other combinations or associations;
(l) To borrow funds;
(m) To endorse or guarantee the payment of any notes or other
obligations of any person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge the
Trust property or any part thereof to secure any of or all such obligations;
(n) To purchase and pay for entirely out of Trust property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers or managers, principal
underwriters, or independent contractors of the Trust individually against all
claims and liabilities of every nature arising by reason of holding, being or
having held any such office or position, or by reason of any action alleged to
have been taken or omitted by any such person as Shareholder, Trustee, officer,
employee, agent, investment adviser or manager, principal underwriter, or
independent contractor, including any action taken or omitted that may be
determined to constitute negligence, whether or not the Trust would have the
power to indemnify such person against such liability; and
(o) To pay pensions for faithful service, as deemed appropriate by the
Trustees, and to adopt, establish, and carry out pension, profit-sharing, share
bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
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The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by trustees of common law trusts.
Except as otherwise provided herein or from time to time in the By-Laws, any
action to be taken by the Trustees may be taken by a majority of the Trustees
present at a meeting of Trustees (if a quorum be present), within or without
Massachusetts, including any meeting held by means of a conference telephone or
other communications equipment by means of which all persons participating in
the meeting can communicate with each other simultaneously and participation by
such means shall constitute presence in person at a meeting, or by written
consents of a majority of the Trustees then in office.
PAYMENT OF EXPENSES, ALLOCATION OF LIABILITIES
SECTION 3. The Trustees are authorized to pay or to cause to be paid
out of the principal or income of the Trust, or partly out of principal and
partly out of income, as they deem fair, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the Trust, or in connection
with the management thereof, including, but not limited to, the Trustees'
compensation and such expenses and charges for the service of the Trust's
officers, employees, investment adviser or manager, principal underwriter,
auditor, counsel, custodian, transfer agent, shareholder servicing agent, and
such other agents or independent contractors and such other expenses and charges
as the Trustees may deem necessary or proper to incur.
SECTION 4. The Trustees shall have the power, as frequently as they may
determine, to cause each Shareholder to pay directly, in advance or arrears, for
charges for the Trust's custodian or transfer or Shareholder service or similar
agent, an amount fixed from time to time by the Trustees, by setting off such
charges due from such Shareholder from declared but unpaid dividends owed such
Shareholder and/or by reducing the number of Shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.
OWNERSHIP OF ASSETS OF THE TRUST
SECTION 5. Title to all of the assets of the Trust shall at all times
be considered as vested in the Trustees.
ADVISORY AND/OR MANAGEMENT AGREEMENT, DISTRIBUTION AGREEMENT, ADMINISTRATION
AGREEMENT, SERVICES
SECTION 6. Subject to a favorable vote of a majority of the outstanding
voting securities of the Trust, the Trustees may, at any time and from time to
time, contract for exclusive or nonexclusive advisory, and/or management
services with a corporation, trust, association or other organization, every
such contract to comply with such requirements and restrictions as may be set
forth in the By-Laws; and any such contract may contain such other terms
interpretive of or in addition to said requirements and restrictions as the
Trustees may determine, including, without limitation, authority to determine
from time to time what investments shall be purchased, held, sold or exchanged
and what portion, if any, of the assets of the Trust shall be held uninvested
and to make changes in the Trust's investments.
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The Trustees may also, at any time and from time to time, contract with
a corporation, trust, association or other organization, appointing it exclusive
or nonexclusive distributor or principal underwriter for the Shares and/or
Administrator for the Fund in connection with such services as the Trustees deem
appropriate, every such contract to comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms interpretive of or in addition to said requirements and
restrictions as the Trustees may determine.
The fact that:
(a) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter, or distributor or agent of or for any corporation, trust,
association, or other organization, or of or for any parent or affiliate of any
organization, with which an advisory management or administrative or principal
underwriter's or distributor's contract, or transfer, shareholder services or
other agency contract may have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a Shareholder or has an
interest in the Trust, or that
(b) any corporation, trust, association or other organization with
which an advisory, management or administrative or principal underwriter's or
distributor's contract, or transfer, shareholder services or other agency
contract may have been or may hereafter be made also has an advisory, management
or administrative contract, or principal underwriter's or distributor's
contract, or transfer, shareholder services or other agency contract with one or
more other corporations, trusts, associations, or other organizations, or has
other business or interests shall not affect the validity of any such contract
or disqualify any Shareholder, Trustee or officer of the Trust from voting upon
or executing the same or create any liability or accountability to the Trust or
its Shareholders.
ARTICLE V
SHAREHOLDERS VOTING POWERS AND MEETINGS
VOTING POWERS
SECTION 1. The Shareholders shall have power to vote only: (a) for the
election or removal of Trustees as provided in Article IV, Section 1; (b) with
respect to any investment adviser or manager as provided in Article IV, Section
6; (c) with respect to any termination or reorganization of the Trust to the
extent and as provided in Article IX, Section 1; (d) with respect to any
amendment of this Declaration of Trust to the extent and as provided in Article
IX, Section 4; (e) with respect to any conversion of the Trust as provided in
Article IX, Section 5; (f) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders; and (g) with
respect to such additional matters relating to the Trust as may be required by
law, the 1940 Act, this Declaration of Trust, the By-Laws, any resolution of the
Trustees which authorizes the issuance of a class of shares of beneficial
interest other than Common Shares, any registration of the Trust
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with the Securities and Exchange Commission (or any successor agency) or any
state, or as the Trustees may consider necessary or desirable.
Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy.
A proxy with respect to Shares held in the name of two or more persons
shall be valid if executed by any one of them unless at or prior to the exercise
of the proxy the Trust receives a specific written notice to the contrary from
any one of them. A proxy purporting to be executed by or on behalf of a
Shareholder shall be declared valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the challenger.
Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this Declaration of Trust
or by the By-Laws to be taken by Shareholders.
SHAREHOLDERS' MEETINGS
SECTION 2. Meetings of Shareholders Notes may be called and held from
time to time for the purpose of taking action upon any matter requiring the vote
of authority of the Shareholders as herein provided or upon any other matter
deemed by the Trustees to be necessary or desirable. Such meetings shall be held
at the principal office of the Trust as set forth in the By-Laws of the Trust,
or at any such other place within the United States as may be designated in the
call thereof, which call shall be made by the Trustees or the President of the
Trust. Meetings of Shareholders may be called by the Trustees or such other
person or persons as may be specified in the By-Laws upon written application by
Shareholders holding at least twenty-five percent (25%) (or ten percent (10%) of
the Shares if the purpose of the meeting is to determine if a Trustee is to be
removed from office) of the Shares then outstanding and entitled to vote on the
matter requesting a meeting be called for a purpose requiring action by the
Shareholders or the holders of Notes as provided herein, in any resolution of
the Trustees which authorizes the issuance of a class of shares of beneficial
interest other than Common Shares or in the By-Laws, which purpose shall be
specified in any such written application.
Shareholders shall be entitled to least seven days written notice of
any meeting of the Shareholders.
QUORUM AND REQUIRED VOTE
SECTION 3. The presence at a meeting of Shareholders in person or by
proxy of Shareholders entitled to vote at least thirty percent (30%) of all
votes entitled to be cast at the meeting shall be a quorum for the transaction
of business at a meeting of Shareholders. Any lesser number, however, shall be
sufficient for adjournments. Any adjourned sessions or sessions may be held
within a reasonable time after the date set for the original meeting without the
necessity of further notice.
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Except when a larger vote is required by any provisions of the 1940
Act, this Declaration of Trust, any resolution of the Trustees which authorizes
the issuance of a class of shares of beneficial interest other than Common
Shares or the By-Laws, the vote of a majority of the Shares entitled to vote on
a matter shall decide such matter and the vote of a plurality of the Shares
entitled to vote shall elect a Trustee.
ACTION OF WRITTEN CONSENT
SECTION 4. Any action taken by Shareholders may be taken without a
meeting if Shareholders entitled to vote more than fifty percent (50%) of the
votes entitled to be cast on the matter consent to the action in writing and
such written consents are filed with the records of the meetings of
Shareholders. Such consent shall be treated for all purposes as a vote taken at
a meeting of Shareholders.
ADDITIONAL PROVISIONS
SECTION 5. The By-Laws and any resolution of the Trustees which
authorizes the issuance of a class of shares of beneficial interest other than
Common Shares may include and the Trustees may determine further provisions for
votes and meetings of Shareholders and related matters not inconsistent with the
provisions hereof.
ARTICLE VI
DISTRIBUTIONS, REPURCHASES, TENDERS AND OTHER SHARE ACQUISITIONS
DISTRIBUTIONS
SECTION 1. The Trustees may in their sole discretion from time to time
distribute to the Shareholders such income and gains accrued or realized, as the
Trustees may determine, after providing for actual and accrued expenses and
liabilities (including such reserves as the Trustees may establish) determined
in accordance with this Declaration of Trust and good accounting practices. The
Trustees shall have full discretion to determine which items shall be treated as
income and which items as capital and their determination shall be binding upon
the Shareholders. Distributions, if any be made, shall be in Shares, in cash or
otherwise and on a date or dates determined by the Trustees. At any time and
from time to time in their discretion, the Trustees may distribute to the
Shareholders as of a record date or dates determined by the Trustees, in Shares,
in cash or otherwise all or part of any gains realized on the sale or
disposition of property of the Trust or otherwise, or all or part of any other
principal of the Trust. Each distribution of Common Shares pursuant to this
Section 1 shall be made ratably according to the number of Common Shares held by
the several Common Shareholders on the applicable record date. Any distribution
to Common Shareholders paid in Common Shares will be paid at the net asset value
thereof as determined in accordance with this Declaration of Trust or at such
other value as may be specified by the By-Laws or as the Trustees may from time
to time determine, subject to applicable laws and regulations then in effect.
The Trustees have the power, in their discretion, to distribute for any year an
amount sufficient to enable the Trust to qualify as a
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"regulated investment company" under the Internal Revenue Code of 1986 as
amended (or any successor thereto) to avoid any liability for federal income tax
in respect of that year.
DETERMINATION OF NET ASSET VALUE
SECTION 2. The term "net asset value" of each Common Share as of any
particular time shall be the quotient obtained by dividing the value, as of such
time, of the net assets of the Trust (i.e., the value of the assets of the Trust
less the liabilities of the Trust, exclusive of liabilities represented by the
Common Shares of the Trust, less the liquidation value of all shares outstanding
which were issued pursuant to a resolution of the Trustees which authorizes the
issuance of a class of shares of beneficial interest other than Common Shares)
by the total number of Common Shares outstanding at such time, all determined
and computed in accordance with the Trust's current prospectus with respect to
the Common Shares.
The Trustees, or any officer, of officers or agent of the Trust
designated for the purpose by the Trustees shall determine the net asset value
of the Common Shares and the Trustees shall fix the time or times as of which
the net asset value of the Shares shall be determined and shall fix the periods
during which any such net asset value shall be effective as to sales, and other
transactions in the Common Shares, except as such times and periods for any such
transaction may be fixed by other provisions of this Declaration of Trust or by
the By-Laws.
Determinations in accordance with this Section 2 made in good faith
shall be binding on all parties concerned.
REPURCHASES, TENDERS AND OTHER SHARE ACQUISITIONS
SECTION 3. Shares of the Trust may be reacquired by the Trust through
repurchases in the open market, through tender offers to Shareholders under such
conditions as the Trustees deem appropriate, or by other acquisitions of any
nature deemed desirable or in the best interest of the Trust.
ARTICLE VII
COMPENSATION AND LIMITATION OF LIABILITY OF COMPENSATION
SECTION 1. The Trustees as such shall be entitled to reasonable
compensation from the Trust if the rate thereof is prescribed by such Trustees.
Nothing herein shall in any way prevent the employment of any Trustee for
advisory, management, legal, accounting, investment banking or other services
and payment for the same by the Trust, it being recognized that such employment
may result in such Trustee being considered an Affiliated Person or an
Interested Person.
LIMITATION OF LIABILITY
SECTION 2. The Trustees shall not be responsible or liable in any event
for any neglect or wrongdoing of any officer, agent, employee, investment
advisor or manager, principal
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underwriter or custodian, nor shall any Trustee be responsible for the act or
omission of any other Trustee. Nothing in this Declaration of Trust shall
protect any Trustee against any liability to which such Trustee would otherwise
by subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of
Trustee.
Every note, bond, contract, instrument, certificate, Share or
undertaking and every other act or thing whatsoever executed or done by or on
behalf of the Trust or the Trustees or any of them in connection with the
Trustee shall be conclusively deemed to have been executed or done only in or
with respect to their or his capacity as Trustees or Trustee and neither such
Trustees or Trustee nor the Shareholders shall be personally liable thereon.
Every note, bond, contract, instrument, certificate or undertaking made
or issued by the Trustees or by any officers or officer shall give notice that
this Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts and shall recite that the same was executed or
made by or on behalf of the Trust by them as Trustees or Trustee or as officers
or officer and not individually and that the obligations of such instrument are
not binding upon any of them or the Shareholders individually but are binding
only upon the assets and property of the Trust and may contain such further
recital as he or they may deem appropriate, but the omission thereof shall not
operate to bind any Trustees or Trustee or officers or officer or Shareholders
or Shareholder individually.
All persons extending credit to, contracting with or having any claim
against the Trust shall look only to the assets of the Trust for payment under
such credit, contract or claim; and neither the Shareholders nor the Trustees,
nor any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor.
TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR SURETY
SECTION 3. The exercise by the Trustees of their powers and discretions
hereunder shall be binding upon everyone interested. A Trustee shall be liable
only for his own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee, and
for nothing else, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust and their
duties as Trustees hereunder, and shall not be under liability for any act or
omission in accordance with such advice or for failing to follow such advice. In
discharging their duties, the Trustees, when acting in good faith, shall be
entitled to rely upon the books of account of the Trust and upon written reports
made to the Trustees by any officer appointed by them, any independent public
accountant and (with respect to the subject matter of the contract involved) any
officer, partner or responsible employee of any other party to any contract
entered into pursuant to Section 2 or Section 6 of Article IV. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
required.
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LIABILITY OF THIRD PERSONS DEALING WITH TRUSTEES
SECTION 4. No person dealing with the Trustees shall be bound to make
any inquiry concerning the validity of any transaction made or to be made by the
Trustees or to see to the application of any payments made or property
transferred to the Trust or upon its order.
ARTICLE VIII
INDEMNIFICATION
Subject to the exceptions and limitations contained in this Article,
every person who is, or has been, a Trustee or officer of the Trust (including
persons who serve at the request of the Trust as directors, officers or trustees
of another organization in which the Trust has an interest as a shareholder,
creditor or otherwise) hereinafter referred to as a "Covered Person", shall be
indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been such a
Trustee, director or officer and against amounts paid or incurred by him in
settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of
a final adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interests of the Trust; or
(c) in the event of a settlement or other disposition not involving a
final adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination that
such Covered Person did not engage in willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office by the court or other body approving the settlement or other disposition
or a reasonable determination, based on a review of readily available facts (as
opposed to a full trial-type inquiry) that he did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the Disinterested
Trustees then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any
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Covered Person may now or thereafter be entitled, shall continue as to a person
who has ceased to be such a Covered Person and shall insure to the benefit of
the heirs, executors and administrators of such a person. Nothing contained
herein shall affect any rights to indemnification to which Trust personnel other
than Covered Persons may be entitled by contract or otherwise under law.
Expenses of preparation and presentation of a defense to any claim,
action, suit or proceeding subject to a claim for indemnification under this
Article VIII shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to indemnification
under this Article VIII, provided that either:
(a) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising out of
any such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act on
the matter) or independent legal counsel in a written opinion shall determine,
based upon a review of the readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
As used in this Article VIII, a "Disinterested Trustee" is one (a) who
is not an Interested Person of the Trust (including anyone who has been exempted
from being an Interested Person by any rule, regulation or order of the
Commission), and (b) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending.
As used in this Article VIII, the words "claim", "action", "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal or other, including appeals), actual or threatened; and the words
"liability" and "expenses" shall include without limitation, attorneys fees,
costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
In case any Shareholders or former Shareholder shall be held to be
personally liable solely by reason of his or her being or having been a
Shareholder and not because of his or her acts or omissions or for some other
reason, the Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other entity, its corporate or other general successor) shall
be entitled to be held harmless from and indemnified against all loss or expense
arising from such liability but only out of the assets of the Trust; provided,
however, there shall be no liability or obligation of the Trust arising
hereunder to reimburse any Shareholder for taxes paid by reason of such
Shareholder's ownership of Shares or for losses suffered by reason of any
changes in value of any Trust assets.
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ARTICLE IX
MISCELLANEOUS
DURATION, TERMINATION AND REORGANIZATION OF TRUST
SECTION 1. Unless terminated as provided herein, the Trust shall
continue without limitation of time. The Trust may be terminated at any time by
the Trustees by written notice to the Shareholders without a vote of the
shareholders of the Trust or by the vote of the Shareholders entitled to vote
more than fifty percent (50%) of the votes entitled to be cast.
Subject to any requirements of the 1940 Act, upon termination of the
Trust after paying or otherwise providing for all charges, taxes, expenses and
liabilities, whether due or accrued or anticipated, the Trust shall in
accordance with such procedures as the Trustees consider appropriate reduce the
remaining assets of the Trust to distributable form in cash or other securities,
or any combination thereof, and distribute the proceeds to the holders of
classes of shares of beneficial interest in the Trust, other than Common Shares,
which have been authorized by resolution of the Trustees, in the manner set
forth by such resolution, and to the Common Shareholders, ratably according to
the number of Common Shares of the Trust held by the several Common Shareholders
of the Trust on the date of termination.
At any time by the affirmative vote of the Shareholders of the Trust
entitled to vote more than fifty percent (50%) of the votes entitled to be cast,
the Trustees may sell, convey and transfer the assets of the Trust, to another
trust, partnership, association or corporation organized under the laws of any
state of the United States in exchange for cash, shares or other securities with
such transfer being made subject to, or with the assumption by the transferee
of, the liabilities belonging to the Trust. Following such transfer, the
Trustees shall distribute such cash, shares or other securities among the
Shareholders of the Trust, and if all of the assets of the Trust have been so
distributed, the Trust shall be terminated.
FILING OF COPIES, REFERENCES, HEADINGS
SECTION 2. The original or a copy of this instrument and of each
amendment hereto shall be kept at the off ice of the Trust where it may be
inspected by any Shareholder. A copy of this instrument and of each amendment
hereto shall be filled by the Trust with the Secretary of State of The
Commonwealth of Massachusetts and with the Boston City Clerk, as well as any
other governmental office where such filing may from time to time be required.
Anyone dealing with the Trust may rely on a certificate by an officer of the
Trust as to whether or not any such amendments have been made and as to any
matters in connection with the Trust hereunder; and, with the same effect as if
it were the original, may rely on a copy certified by an officer of the Trust to
be a copy of this instrument or of any such amendments. In this instrument and
in any such amendment, references to this instrument, and all expressions like
"herein", and "hereof", and "hereunder", shall be deemed to refer to this
instrument as amended from time to time. Headings are placed herein for
convenience of reference only and shall not be taken as a part hereof or control
or affect the meaning, construction or effect of this instrument.
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The instrument may be executed in any number of counterparts each of which shall
be deemed an original.
APPLICABLE LAWS
SECTION 3. This Declaration of Trust is made in The Commonwealth of
Massachusetts and it is created under and is to be governed by and construed and
administered according to the laws of said Commonwealth. The Trust shall be of
the type commonly called a Massachusetts business trust, and without limiting
the provisions hereof, the Trust may exercise all powers which are ordinarily
exercised by such a trust.
AMENDMENTS
SECTION 4. This Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees when authorized
so to do by vote of Shareholders holding more than fifty percent (50%) of the
Shares entitled to vote. Amendments having the purpose of changing the name of
the Trust or of supplying any omission, curing any ambiguity or curing,
correcting or supplementing any provision which is defective or inconsistent
with the 1940 Act or with the requirements of Internal Revenue Code of 1986 and
the regulations thereunder for the Trust's obtaining the most favorable
treatment thereunder available to regulated investment companies shall not
require authorization by Shareholder vote.
CONVERSION
SECTION 5. If any class of Shares of the Trust which are listed on one
or more securities exchanges have traded on the principal securities exchange
where listed at an average discount from net asset value of more than ten
percent (10%), determined on the basis of the discount as of the end of the last
trading day in each week during the period of twelve (12) calendar weeks
preceding January 1, 1994, the Trustees will submit to the Shareholders at the
next succeeding meeting, a proposal to convert the Trust from a closed-end
company" to an "open-end company" as those terms are defined in Sections 5(a)(2)
and 5(a)(1), respectively, of the 1940 Act as in effect on January 9, 1989,
together with the necessary amendments to this Declaration of Trust to permit
such a conversion. The Trustees may at any time propose conversion of the Trust
to an open-end company depending on their judgement as to the advisability of
such action in light of circumstances then prevailing. Upon the adoption of such
proposal and related amendments by a vote of a majority of the outstanding
voting securities of the Trust, the Trust shall, upon complying with any
requirements of the 1940 Act, any applicable state law and any resolution of the
Trustees which authorizes the issuance of a class of shares of beneficial
interest other than Common Shares, become an "open-end" investment company. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the Shares otherwise required by law, or any agreement between the
Trust and any national securities exchange.
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IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
for himself and his assigns, as of the day and year first above written.
--------------------------------------
Robert J. Engling, Sole Trustee
STATE OF ILLINOIS
County of Cook, ss.
Then personally appeared the above-named Robert J. Engling who
acknowledged the foregoing instrument to be his free act and deed, before me
this 27th day of February, 1989.
--------------------------------------
Notary Public
My Commission Expires: _______________
"OFFICIAL SEAL"
CHRISTINE M. DONATO
Notary Public, State of Illinois
My Commission Expires Aug. 18, 1992
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<PAGE> 1
BY-LAWS OF
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
SECTION 1.
AGREEMENT AND DECLARATION OF TRUST AND PRINCIPAL OFFICE
1.1. AGREEMENT AND DECLARATION OF TRUST. These By-Laws shall be subject
to the Amended and Restated Agreement and Declaration of Trust, as from time to
time in effect (the "Declaration of Trust"), of Kemper Strategic Municipal
Income Trust (formerly Kemper Trust #9), the Massachusetts business trust
established by the Declaration of Trust (the "Trust").
1.2. PRINCIPAL OFFICE OF THE TRUST; RESIDENT AGENT. The principal
office of the Trust shall be located in Chicago, Illinois. Its resident agent in
Massachusetts shall be CT Corporation System, 2 Oliver Street, Boston,
Massachusetts or such other person as the Trustees may from time to time select.
SECTION 2.
SHAREHOLDERS AND NOTEHOLDERS
2.1. SHAREHOLDER MEETINGS. Meetings of the shareholders may be called
at any time by the Trustees, by the President or, if the Trustees and the
President shall fail to call any meeting of shareholders for a period of 30 days
after written application of one or more shareholders who hold at least 25% of
all shares issued and outstanding and entitled to vote on a particular matter at
the meeting (or 10% if the purpose of the meeting is to determine if a Trustee
shall be removed from office), then such shareholders may call such meeting.
Each call of a meeting shall state the place, date, hour and purposes of the
meeting.
2.2. PLACE OF MEETINGS. All meetings of the shareholders shall be held
at the principal office of the Trust, or, to the extent permitted by the
Declaration of Trust, at such other place within the United States as shall be
designated by the Trustees or the President of the Trust.
2.3. NOTICE OF MEETINGS. A written notice of each meeting of
shareholders, stating the place, date and hour and the purposes of the meeting,
shall be given at least seven days before the meeting to each shareholder
entitled to vote thereat by leaving such notice with him or at his residence or
usual place of business or by mailing it, postage prepaid, and addressed to such
shareholder or holder of notes at his address as it appears in the records of
the Trust. Such notice shall be given by the Secretary or an Assistant Secretary
or by an officer designated by the Trustees. No notice of any meeting of
shareholders need be given to a shareholder if a written waiver of notice,
executed before or after the meeting by such shareholder, or his attorney
thereunto duly authorized, is filed with the records of the meeting.
<PAGE> 2
2.4. BALLOTS. No ballot shall be required for any election unless
requested by a shareholder present or represented at the meeting and entitled to
vote in the election.
2.5. PROXIES AND VOTING. Shareholders entitled to vote may vote either
in person or by proxy in writing dated not more than six months before the
meeting named therein, which proxies shall be filed with the Secretary or other
person responsible to record the proceedings of the meeting before being voted.
Unless otherwise specifically limited by their terms, such proxies shall entitle
the holders thereof to vote at any adjournment of such meeting but shall not be
valid after the final adjournment of such meeting. At all meetings of
shareholders, unless the voting is conducted by inspectors, all questions
relating to the qualification of voters, the validity of proxies and the
acceptance or rejection of votes shall be decided by the chairman of the
meeting.
SECTION 3.
TRUSTEES
3.1. COMMITTEES AND ADVISORY BOARD. The Trustees may appoint from their
number an executive committee and other committees. Any such committee may be
abolished and reconstituted at any time and from time to time by the Trustees.
Except as the Trustees may otherwise determine, any such committee may make
rules for the conduct of its business. The Trustees may appoint an advisory
board to consist of not less than two nor more than five members. The members of
the advisory board shall be compensated in such manner as the Trustees may
determine and shall confer with and advise the Trustees regarding the
investments and other affairs of the Trust. Each member of the advisory board
shall hold office until the first meeting of the Trustees following the meeting
of the shareholders, if any, next following his appointment and until his
successor is appointed and qualified, or until he sooner does, resigns, is
removed, or becomes disqualified, or until the advisory board is sooner
abolished by the Trustees.
3.2. REGULAR MEETINGS. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
3.3. SPECIAL MEETINGS. Special meetings of the Trustees may be held at
any time and at any place designated in the call of the meeting, when called by
the Chairman of the Board or by two or more Trustees, sufficient notice thereof
being given to each Trustee by the Secretary or an Assistant Secretary or by
the officer or one of the Trustees calling the meeting.
3.4. NOTICE. It shall be sufficient notice to a Trustee to send notice
by mail at least three days, or by telegram at least twenty-four hours, before
the meeting, addressed to the Trustee at his or her usual or last known business
or residence address or to give notice to him or her in person or by telephone
at least twenty-four hours before the meeting. Notice of a meeting
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need not be given to any Trustee if a written waiver of notice, executed by him
or her before or after the meeting, is filed with the records of the meeting, or
to any Trustee who attends the meeting without protesting prior thereto or at
its commencement the lack of notice to him or her. Neither notice of a meeting
nor a waiver of a notice need specify the purposes of the meeting.
3.5. QUORUM. At any meeting of the Trustees, one-third of the Trustees
then in office shall constitute a quorum; provided, however, a quorum (unless
the Board of Trustees consists of two or fewer persons) shall not be a less than
two. Any meeting may be adjourned from time to time by a majority of the votes
cast upon the question, whether or not a quorum is present, and the meeting may
be held as adjourned without further notice.
SECTION 4.
OFFICERS AND AGENTS
4.1. ENUMERATION; QUALIFICATION. The officers of the Trust shall be a
President, a Treasurer, a Secretary and such other officers, if any, as the
Trustees from time to time may in their discretion elect or appoint. The Trust
may also have such agents, if any, as the Trustees from time to time may in
their discretion appoint. Any officer may be but none need be a Trustee or
shareholder. Any two or more offices may be held by the same person.
4.2. POWERS. Subject to the other provisions of these By-Laws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to his or her office as if the Trust were organized as a Massachusetts business
corporation and such other duties and powers as the Trustees may from time to
time designate.
4.3. ELECTION. The President, the Treasurer and the Secretary shall be
elected annually by the Trustees at their first meeting in each calendar year or
at such later meeting in such year as the Trustees shall determine. Other
officers or agents, if any, may be elected or appointed by the Trustees at said
meeting or at any other time.
4.4. TENURE. The President, Treasurer and Secretary shall hold office
until the first meeting of Trustees in each calendar year and until their
respective successors are chosen and qualified, or in each case until he or she
sooner dies, resigns, is removed or becomes disqualified. Each other officer
shall hold office and each agent shall retain his or her authority at the
pleasure of the Trustees.
4.5. CHAIRMAN OF THE BOARD. The Chairman of the Board of Trustees, if
one is so appointed, shall be chosen from among the Trustees and may hold office
only so long as he continues to be a Trustee. The Chairman of the Board, if any
is so appointed, shall preside at all meetings of the shareholders and of the
Trustees at which he is present; and shall have such other duties and powers as
specified herein and as may be assigned to him by the Trustees.
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4.6. PRESIDENT AND VICE PRESIDENTS. The President shall be the chief
executive officer of the Trust. The President shall, subject to the control of
the Trustees, have general charge and supervision of the Trust and shall perform
such other duties and have such other powers as the Trustees shall prescribe
from time to time. Any Vice President shall at the request or in the absence or
disability of the President exercise the powers of the President and perform
such other duties and have such other powers as shall be designated from time to
time by the Trustees.
4.7. TREASURER AND CONTROLLER. The Treasurer shall be the chief
financial officer of the Trust and, subject to any arrangement made by the
Trustees with a bank or trust company or other organization as custodian or
transfer or shareholder services agent, shall be in charge of its valuable
papers and shall have such other duties and powers as may be designated from
time to time by the Trustees or by the President. If at any time there shall be
no Controller, the Treasurer shall also be the chief accounting officer of the
Trust and shall have the duties and power prescribed herein for the Controller.
Any Assistant Treasurer shall have such duties and powers as shall be designated
from time to time by the Trustees.
4.8. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall record
all proceedings of the shareholders, holders of notes and the Trustees in books
to be kept therefor, which books shall be kept at the principal office of the
Trust. In the absence of the Secretary from any meeting of shareholders, holders
of notes or Trustees, an Assistant Secretary, or if there be none or if he or
she is absent, a temporary clerk chosen at the meeting shall record the
proceeding thereof in the aforesaid books.
SECTION 5.
RESIGNATIONS AND REMOVALS
Any Trustee may resign his trust or retire as a Trustee in accordance
with procedures set forth in the Declaration of Trust. Any officer or advisory
board member may resign at any time by delivering his or her resignation in
writing to the Chairman of the Board, the President or the Secretary or to a
meeting of the Trustees. The Trustees may remove any officer or advisory board
member elected or appointed by them with or without cause by the note of a
majority of the Trustees then in office. Except to the extent expressly provided
in a written agreement with the Trust, no Trustee, officer, or advisory board
member resigning, and no officer or advisory board member removed shall have any
right to any compensation for any period following his or her resignation or
removal, or any right to damages on account of such removal.
SECTION 6.
VACANCIES
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A vacancy in the office of Trustee shall be filled in accordance with
the Declaration of Trust. Vacancies resulting from the death, resignation,
incapacity or removal of any officer may be filled by the Trustees. Each
successor of any such officer shall hold office for the unexpired term, and in
the case of the President, the Treasurer and the Secretary, until his or her
successor is chosen and qualified, or in each case until he or she sooner dies,
resigns, is removed or becomes disqualified.
SECTION 7.
SHARES OF BENEFICIAL INTEREST
7.1. SHARE CERTIFICATES. No certificates certifying the ownership of
shares shall be issued except as the Trustees may otherwise authorize. In the
event that the Section 7.3, each shareholder shall be entitled to a certificate
stating the number of shares owned by him or her, in such form as shall be
prescribed from time to time by the Trustees. Such certificate shall be signed
by the President or a Vice President and by the Treasurer, Assistant treasurer,
Secretary or Assistant Secretary. Such signatures may be facsimiles if the
certificate is signed by a transfer or shareholder services agent or by a
registrar, other than a Trustee, officer or employee of the Trust. In case any
officer who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Trust with the same effect as if he or she were
such officer at the time of its issue.
In lieu of issuing certificates for shares, the trustees or the
transfer or shareholder services agent may either issue receipts therefor or may
keep accounts upon the books of the Trust for the record holders of such shares,
who shall in either case be deemed, for all purposes hereunder, to be the
holders of certificates for such shares as if they had accepted such
certificates and shall be held to have expressly assented and agreed to the
terms hereof.
7.2. LOSS OF CERTIFICATES. In the case of the alleged loss or
destruction or the mutilation of a share certificate, a duplicate certificate
may, be issued in place thereof, upon such terms as the Trustee may prescribe.
7.3. DISCONTINUANCE OF ISSUANCE OF CERTIFICATES. The Trustees may at
any time discontinue the issuance of share certificates and may, by written
notice to each shareholder, require the surrender of share certificates to the
trust for cancellation. Such surrender and cancellation shall not affect the
ownership of shares in the Trust.
SECTION 8.
RECORD DATE
The Trustees may fix in advance a time, which shall not be more than 90
days before the date of any meeting of shareholders or the date for the payment
of any dividend or
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making of any other distributions to shareholders, as the record date for
determining the shareholders having the right to notice and to vote at such
meeting and any adjournment thereof or the right to receive such dividend or
distribution, and in such case only shareholders of record on such record date
shall have such right, notwithstanding any transfer of shares on the books of
the Trust after the record date.
SECTION 9.
SEAL
The seal of the Trust shall, subject to alteration by the Trustees,
consist of a flat-faced circular die with the word "Massachusetts" together with
the name of the Trust, cut or engraved thereon; but, unless otherwise required
by the Trustees, the seal shall not be necessary to be placed on, and its
absence shall not impair the validity of, any document, instrument, or other
paper executed and delivered by or on behalf of the Trust.
SECTION 10.
EXECUTION OF PAPERS
Except as the Trustees may generally or in particular cases authorize
the execution thereof in some other manner, all deeds, leases, transfers,
contracts, bonds, notes, checks, drafts and other obligations made, accepted or
endorsed by the Trust shall be signed, and any transfers of securities standing
in the name of the Trust shall be executed, by the President or by one of the
Vice Presidents or by the Treasurer or by whomever else shall be designated for
that purpose by the vote of the Trustees and need not bear the seal of the
Trust.
SECTION 11.
FISCAL YEAR
The fiscal year of the Trust shall end on such date in each year as the
Trustees shall from time to time determine.
SECTION 12.
AMENDMENTS
These By-Laws may be amended or repealed, in whole or in part, by a
majority of the Trustees then in office at any meeting of the Trustees, or by
one or more writings signed by such majority.
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<PAGE> 1
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
DIVIDEND REINVESTMENT PLAN
February 28, 1989
1. PARTICIPATION. Shareholders of record of Kemper Strategic Municipal
Income Trust (the "Fund") other than brokers or nominees may elect to be
included in the Dividend Reinvestment Plan (the "Plan") and shareholders who so
elect will be deemed to have appointed United Missouri Bank of Kansas City, N.A.
("UMB") as their agent and as agent for the Fund under the Plan.
2. DIVIDEND INVESTMENT ACCOUNT. The transfer agent and dividend
disbursing agent for the Fund's common shares of beneficial interest (the
"Shares"), Investors Fiduciary Trust Company ("IFTC"), will establish a Dividend
Investment Account (the "Account") for each shareholder participating in the
Plan. IFTC will credit to the Account of each participant funds it receives from
the following sources: (a) cash dividends and capital gains distributions paid
on Shares registered in the participant's name on the books of the Fund; and (b)
cash dividends and capital gains distributions paid on Shares registered in the
name of IFTC but credited to the participant's Account. Such sources are
hereinafter called "Distributions."
3. INVESTMENT OF DISTRIBUTION FUNDS HELD IN EACH ACCOUNT. If, on the
record date for a Distribution (the "Record Date"), Shares are trading at a
discount from net asset value per Share (according to the evaluation most
recently made on Shares of the Fund), funds credited to a participant's Account
will be used to purchase Shares (the "Purchase"). UMB will attempt, commencing
on the Record Date and ending at the close of business on the Payment Date
("Payment Date" as used herein shall mean the last business day of the month in
which such Record Date occurs), to acquire Shares in the open market. If and to
the extent that UMB is unable to acquire sufficient Shares to satisfy the
Distribution by the close of business on the Payment Date, the Fund will issue
to UMB Shares valued at net asset value per Share (according to the evaluation
most recently made on Shares of the Fund) in the aggregate amount of the
remaining value of the Distribution. If, on the Record Date, Shares are trading
at a premium over net asset value per Share, the Fund will issue on the Payment
Date, Shares valued at net asset value per Share (according to the evaluation
most recently made on Shares of the Fund), to IFTC in the aggregate amount of
the Funds credited to the participants' accounts.
4. ADJUSTMENT OF PURCHASE PRICE. The Fund will increase the price at
which Shares may be issued under the Plan to 95% of the fair market value of the
Shares on the date the Shares are to be issued if the net asset value per Share
of the Shares on the date they are to be issued (according to the evaluation
most recently made on Shares of the Fund) is less than 95% of the fair market
value of the Shares on the date the Shares are to be issued.
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5. DETERMINATION OF PURCHASE PRICE. The cost of Shares and fractional
Shares acquired for each participant's Account in connection with a Purchase
shall be determined by the average cost per Share, including brokerage
commissions as described in Paragraph 6 hereof, of the Shares acquired by UMB in
connection with that Purchase. Shareholders will receive a conformation showing
the average cost and number of Shares acquired as soon as practicable after IFTC
has received or UMB has purchased Shares. IFTC may mingle the cash in a
participant" account with similar funds of other participants of the Fund for
whom UMB acts as agent under the Plan.
6. BROKERAGE CHARGES. There will be no brokerage charges with respect
to Shares issued directly by the Fund as a result of Distributions. However,
each participant will pay a pro rata share of brokerage commissions incurred
with respect to UMB's open market purchases in connection with the reinvestment
of Distributions. Brokerage charges for purchasing small amounts of Shares for
individual Accounts through the Plan can be expected to be less than the usual
brokerage charges for such transactions, as UMB will be purchasing Shares for
all participants in blocks and prorating the lower commission thus attainable.
7. SERVICE CHARGES. There is no service charge by IFTC or UMB to
shareholders who participate in the Plan. However, the Fund reserves the right
to amend the Plan in the future to include a service charge.
8. TRANSFER OF SHARES HELD BY IFTC. IFTC will maintain the
participant's Account, hold the additional Shares acquired through the Plan in
safekeeping and furnish the participant with written confirmation of all
transactions in the Account. Shares in the Account are transferable upon
transfer written instructions to IFTC. Upon request to IFTC, a certificate for
any or all full Shares in a participant's Account will be sent to the
participant.
9. SHARES NOT HELD IN SHAREHOLDER'S NAME. Beneficial owners of Shares
which are held in the name of a broker or nominee will not be automatically
included in the Plan and will receive all distributions in cash. Such
shareholders should contact the broker or nominee in whose name their Shares are
held to determine whether and how they may participate in the Plan.
10. AMENDMENTS. Experience under the Plan may indicate that changes are
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan, including provisions with respect to any Distribution paid subsequent to
notice thereof sent to participants in the Plan at least ninety days before the
record date for such Distribution.
11. WITHDRAWAL FROM PLAN. Shareholders may withdraw from the Plan at
any time by giving IFTC written notice. If the certificate or proceeds are to be
sent to anyone other than the registered owner(s) at the address of record, a
signature guarantee will be required on the request. When a participant
withdraws from the Plan, or when the Plan is terminated in accordance with
Paragraph 10 hereof, the participant will receive a certificate for full Shares
in the Account, plus a check for any fractional Shares based on market price; or
if a Participant so
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desires, IFTC will notify UMB to sell his Shares in the Plan and send the
proceeds to the participant, less brokerage commissions and a $2.50 service fee.
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INVESTMENT MANAGEMENT AGREEMENT
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
222 SOUTH RIVERSIDE PLAZA
CHICAGO, ILLINOIS 60606
SEPTEMBER 7, 1998
Scudder Kemper Investments, Inc.
345 Park Avenue
New York, New York 10154
INVESTMENT MANAGEMENT AGREEMENT
Ladies and Gentlemen:
KEMPER STRATEGIC MUNICIPAL INCOME TRUST (the "Fund") has been established as a
Massachusetts business trust to engage in the business of an investment company.
The Fund has issued shares of beneficial interest (the "Shares").
The Fund has selected you to act as the investment manager of the Fund and to
provide certain other services, as more fully set forth below, and you have
indicated that you are willing to act as such investment manager and to perform
such services under the terms and conditions hereinafter set forth. Accordingly,
the Fund agrees with you as follows:
1. Delivery of Documents. The Fund engages in the business of investing and
reinvesting its assets in the manner and in accordance with its investment
objectives, policies and restrictions. The Fund has furnished you with copies
properly certified or authenticated of each of the following documents related
to the Fund:
(a) The Declaration of Trust ("Declaration"), as amended to date.
(b) By-Laws of the Fund as in effect on the date hereof (the
"By-Laws").
(c) Resolutions of the Trustees of the Fund and the shareholders of
the Fund selecting you as investment manager and approving the
form of this Agreement.
The Fund will furnish you from time to time with copies, properly certified or
authenticated, of all amendments of or supplements, if any, to the foregoing.
2. Portfolio Management Services. As manager of the assets of the Fund, you
shall provide continuing investment management of the assets of the Fund in
accordance with its investment objectives, policies and restrictions; the
applicable provisions of the Investment Company Act of 1940 (the "1940 Act") and
the Internal Revenue Code of 1986, as amended, (the "Code") relating to
regulated investment companies and all rules and regulations thereunder; and all
other applicable federal and state laws and regulations of which you have
knowledge; subject always to policies and instructions adopted by the Fund's
Board of Trustees. In connection therewith, you shall use reasonable efforts to
manage the Fund so that it will qualify as a regulated investment company under
Subchapter M of the Code and regulations issued thereunder. The Fund shall have
the benefit of the investment analysis and research, the review of current
economic conditions and trends and the consideration of long-range investment
policy generally available to your investment advisory clients. In managing the
Fund in accordance with the requirements set forth in this section 2, you shall
be entitled to receive and act upon advice of counsel to the Fund. You shall
also make available to the Fund promptly upon request all of the Fund's
investment records and ledgers
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as are necessary to assist the Fund in complying with the requirements of the
1940 Act and other applicable laws. To the extent required by law, you shall
furnish to regulatory authorities having the requisite authority any information
or reports in connection with the services provided pursuant to this Agreement
which may be requested in order to ascertain whether the operations of the Fund
are being conducted in a manner consistent with applicable laws and regulations.
You shall determine the securities, instruments, investments, currencies,
repurchase agreements, futures, options and other contracts relating to
investments to be purchased, sold or entered into by the Fund and place orders
with broker-dealers, foreign currency dealers, futures commission merchants or
others pursuant to your determinations and all in accordance with Fund policies.
You shall determine what portion of the Fund's portfolio shall be invested in
securities and other assets and what portion, if any, should be held uninvested.
You shall furnish to the Fund's Board of Trustees periodic reports on the
investment performance of the Fund and on the performance of your obligations
pursuant to this Agreement, and you shall supply such additional reports and
information as the Fund's officers or Board of Trustees shall reasonably
request.
3. Administrative Services. In addition to the portfolio management services
specified above in section 2, you shall furnish at your expense for the use of
the Fund such office space and facilities in the United States as the Fund may
require for its reasonable needs, and you (or one or more of your affiliates
designated by you) shall render to the Fund administrative services on behalf of
the Fund necessary for operating as a closed-end investment company and not
provided by persons not parties to this Agreement including, but not limited to,
preparing reports to and meeting materials for the Fund's Board of Trustees and
reports and notices to Fund shareholders; supervising, negotiating contractual
arrangements with, to the extent appropriate, and monitoring the performance of,
accounting agents, custodians, depositories, transfer agents and pricing agents,
accountants, attorneys, printers, underwriters, brokers and dealers, insurers
and other persons in any capacity deemed to be necessary or desirable to Fund
operations; preparing and making filings with the Securities and Exchange
Commission (the "SEC") and other regulatory and self-regulatory organizations,
including, but not limited to, preliminary and definitive proxy materials,
post-effective amendments to the Fund's Registration Statement, and semi-annual
reports on Form N-SAR; overseeing the tabulation of proxies by the Fund's
transfer agent; assisting in the preparation and filing of the Fund's federal,
state and local tax returns; preparing and filing the Fund's federal excise tax
return pursuant to Section 4982 of the Code; providing assistance with investor
and public relations matters; monitoring the valuation of portfolio securities
and the calculation of net asset value; monitoring the registration of Shares of
the Fund under applicable federal and state securities laws; maintaining or
causing to be maintained for the Fund all books, records and reports and any
other information required under the 1940 Act, to the extent that such books,
records and reports and other information are not maintained by the Fund's
custodian or other agents of the Fund; assisting in establishing the accounting
policies of the Fund; assisting in the resolution of accounting issues that may
arise with respect to the Fund's operations and consulting with the Fund's
independent accountants, legal counsel and the Fund's other agents as necessary
in connection therewith; establishing and monitoring the Fund's operating
expense budgets; reviewing the Fund's bills; processing the payment of bills
that have been approved by an authorized person; assisting the Fund in
determining the amount of dividends and distributions available to be paid by
the Fund to its shareholders, preparing and arranging for the printing of
dividend notices to shareholders, and providing the transfer and dividend paying
agent, the custodian, and the accounting agent with such information as is
required for such parties to effect the payment of dividends and distributions;
and otherwise assisting the Fund as it may reasonably request in the conduct of
the Fund's business, subject to the direction and control of the Fund's Board of
Trustees. Nothing in this Agreement shall be deemed to shift to you or to
diminish the obligations of any agent of the Fund or any other person not a
party to this Agreement which is obligated to provide services to the Fund.
4. Allocation of Charges and Expenses. Except as otherwise specifically provided
in this section 4, you shall pay the compensation and expenses of all Trustees,
officers and executive employees of the Fund (including the Fund's share of
payroll taxes) who are affiliated persons of you, and you shall make available,
without expense to the Fund,
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the services of such of your directors, officers and employees as may duly be
elected officers of the Fund, subject to their individual consent to serve and
to any limitations imposed by law. You shall provide at your expense the
portfolio management services described in section 2 hereof and the
administrative services described in section 3 hereof.
You shall not be required to pay any expenses of the Fund other than those
specifically allocated to you in this section 4. In particular, but without
limiting the generality of the foregoing, you shall not be responsible, except
to the extent of the reasonable compensation of such of the Fund's Trustees and
officers as are directors, officers or employees of you whose services may be
involved, for the following expenses of the Fund: organization expenses of the
Fund (including out of-pocket expenses, but not including your overhead or
employee costs); fees payable to you and to any other Fund advisors or
consultants; legal expenses; auditing and accounting expenses; maintenance of
books and records which are required to be maintained by the Fund's custodian or
other agents of the Fund; telephone, telex, facsimile, postage and other
communications expenses; taxes and governmental fees; fees, dues and expenses
incurred by the Fund in connection with membership in investment company trade
organizations; fees and expenses of the Fund's accounting agent for which the
Fund is responsible pursuant to the terms of the Fund Accounting Services
Agreement, custodians, subcustodians, transfer agents, dividend disbursing
agents and registrars; payment for portfolio pricing or valuation services to
pricing agents, accountants, bankers and other specialists, if any; expenses of
preparing share certificates and, except as provided below in this section 4,
other expenses in connection with the issuance, offering, distribution, sale,
redemption or repurchase of securities issued by the Fund; expenses relating to
investor and public relations; expenses and fees of registering or qualifying
Shares of the Fund for sale; interest charges, bond premiums and other insurance
expense; freight, insurance and other charges in connection with the shipment of
the Fund's portfolio securities; the compensation and all expenses (specifically
including travel expenses relating to Fund business) of Trustees, officers and
employees of the Fund who are not affiliated persons of you; brokerage
commissions or other costs of acquiring or disposing of any portfolio securities
of the Fund; expenses of printing and distributing reports, notices and
dividends to shareholders; expenses of printing and mailing Prospectuses and
statements of additional information of the Fund and supplements thereto; costs
of stationery; any litigation expenses; indemnification of Trustees and officers
of the Fund; and costs of shareholders' and other meetings.
5. Management Fee. For all services to be rendered, payments to be made and
costs to be assumed by you as provided in sections 2, 3, and 4 hereof, the Fund
shall pay you in United States Dollars on the last day of each month the unpaid
balance of a fee equal to the excess of (a) 1/12 of .60 of 1 percent of the
average weekly net assets of the Fund for such month; over (b) any compensation
waived by you from time to time (as more fully described below). You shall be
entitled to receive during any month such interim payments of your fee hereunder
as you shall request, provided that no such payment shall exceed 75 percent of
the amount of your fee then accrued on the books of the Fund and unpaid.
The net asset value of the Fund shall be calculated at such time or times as the
Trustees may determine in accordance with the provisions of the 1940 Act. On
each day when net asset value is not calculated, the net asset value shall be
deemed to be the net asset value as of the close of business on the last day on
which such calculation was made for the purpose of the foregoing computations.
You may waive all or a portion of your fees provided for hereunder and such
waiver shall be treated as a reduction in purchase price of your services. You
shall be contractually bound hereunder by the terms of any publicly announced
waiver of your fee, or any limitation of the Fund's expenses, as if such waiver
or limitation were fully set forth herein.
6. Avoidance of Inconsistent Position; Services Not Exclusive. In connection
with purchases or sales of portfolio securities and other investments for the
account of the Fund, neither you nor any of your directors, officers or
employees shall act as a principal or agent or receive any commission. You or
your agent shall arrange for the
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placing of all orders for the purchase and sale of portfolio securities and
other investments for the Fund's account with brokers or dealers selected by you
in accordance with Fund policies. If any occasion should arise in which you give
any advice to clients of yours concerning the Shares of the Fund, you shall act
solely as investment counsel for such clients and not in any way on behalf of
the Fund.
Your services to the Fund pursuant to this Agreement are not to be deemed to be
exclusive and it is understood that you may render investment advice, management
and services to others. In acting under this Agreement, you shall be an
independent contractor and not an agent of the Fund. Whenever the Fund and one
or more other accounts or investment companies advised by you have available
funds for investment, investments suitable and appropriate for each shall be
allocated in accordance with procedures believed by you to be equitable to each
entity. Similarly, opportunities to sell securities shall be allocated in a
manner believed by you to be equitable. The Fund recognizes that in some cases
this procedure may adversely affect the size of the position that may be
acquired or disposed of for the Fund.
7. Limitation of Liability of Manager. As an inducement to your undertaking to
render services pursuant to this Agreement, the Fund agrees that you shall not
be liable under this Agreement for any error of judgment or mistake of law or
for any loss suffered by the Fund in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed to
protect or purport to protect you against any liability to the Fund or its
shareholders to which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of your duties, or
by reason of your reckless disregard of your obligations and duties hereunder.
8. Duration and Termination of This Agreement. This Agreement shall remain in
force until April 1, 1998, and continue in force from year to year thereafter,
but only so long as such continuance is specifically approved at least annually
(a) by the vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of any party to this Agreement, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Trustees of the Fund, or by the vote of a majority of the outstanding voting
securities of the Fund. The aforesaid requirement that continuance of this
Agreement be "specifically approved at least annually" shall be construed in a
manner consistent with the 1940 Act and the rules and regulations thereunder and
any applicable SEC exemptive order therefrom.
This Agreement may be terminated with respect to the Fund at any time, without
the payment of any penalty, by the vote of a majority of the outstanding voting
securities of the Fund or by the Fund's Board of Trustees on 60 days' written
notice to you, or by you on 60 days' written notice to the Fund. This Agreement
shall terminate automatically in the event of its assignment.
This Agreement may be terminated with respect to the Fund at any time without
the payment of any penalty by the Board of Trustees or by vote of a majority of
the outstanding voting securities of the Fund in the event that it shall have
been established by a court of competent jurisdiction that you or any of your
officers or directors has taken any action which results in a breach of your
covenants set forth herein.
9. Amendment of this Agreement. No provision of this Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement of the change, waiver, discharge or
termination is sought, and no amendment of this Agreement shall be effective
until approved in a manner consistent with the 1940 Act and rules and
regulations thereunder and any applicable SEC exemptive order therefrom.
10. Limitation of Liability for Claims. The Declaration, a copy of which,
together with all amendments thereto, is on file in the Office of the Secretary
of the Commonwealth of Massachusetts, provides that the name "Kemper Strategic
Municipal Income Trust" refers to the Trustees under the Declaration
collectively as Trustees and not as individuals or personally, and that no
shareholder of the Fund, or Trustee, officer, employee or agent of the Fund,
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shall be subject to claims against or obligations of the Fund to any extent
whatsoever, but that the Fund estate only shall be liable.
You are hereby expressly put on notice of the limitation of liability as set
forth in the Declaration and you agree that the obligations assumed by the Fund
pursuant to this Agreement shall be limited in all cases to the Fund and its
assets, and you shall not seek satisfaction of any such obligation from the
shareholders or any shareholder of the Fund, or from any Trustee, officer,
employee or agent of the Fund.
11. Miscellaneous. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
In interpreting the provisions of this Agreement, the definitions contained in
Section 2(a) of the 1940 Act (particularly the definitions of "affiliated
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the SEC by any rule, regulation or order.
This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts, provided that nothing herein shall be construed
in a manner inconsistent with the 1940 Act, or in a manner which would cause the
Fund to fail to comply with the requirements of Subchapter M of the Code.
This Agreement shall supersede all prior investment advisory or management
agreements entered into between you and the Fund.
If you are in agreement with the foregoing, please execute the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Fund, whereupon this letter shall become a binding contract
effective as of the date of this Agreement.
Yours very truly,
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
By:
--------------------------------------
President
The foregoing Agreement is hereby accepted as of the date hereof.
SCUDDER KEMPER INVESTMENTS, INC.
By:
--------------------------------------
Treasurer
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CUSTODIAN CONTRACT
between
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Employment of Custodian and Property to be Held By It...........................................1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States.............................................2
2.1 Holding Securities.....................................................................2
2.2 Delivery of Securities.................................................................2
2.3 Registration of Securities.............................................................4
2.4 Bank Accounts..........................................................................4
2.5 Availability of Federal Funds..........................................................5
2.6 Collection of Income...................................................................5
2.7 Payment of Fund Monies.................................................................5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased...................................................................7
2.9 Appointment of Agents..................................................................7
2.10 Deposit of Securities in U.S. Securities System........................................7
2.11 Fund Assets Held in the Custodian's
Direct Paper System....................................................................8
2.12 Segregated Account.....................................................................9
2.13 Ownership Certificates for Tax Purposes ...............................................9
2.14 Proxies................................................................................9
2.15 Communications Relating to Fund Securities............................................10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside the United States........................................................10
3.1 Appointment of Foreign Sub-Custodians.................................................10
3.2 Assets to be Held.....................................................................10
3.3 Foreign Securities Depositories.......................................................10
3.4 Agreements with Foreign Banking Institutions..........................................11
3.5 Access of Independent Accountants of the Fund.........................................11
3.6 Reports by Custodian..................................................................11
3.7 Transactions in Foreign Custody Account...............................................11
3.8 Liability of Foreign Sub-Custodians...................................................12
3.9 Liability of Custodian................................................................12
3.10 Reimbursement for Advances............................................................12
3.11 Monitoring Responsibilities...........................................................13
3.12 Branches of U.S. Banks................................................................13
3.13 Tax Law...............................................................................13
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
4. Payments for Sales or Repurchases or Redemptions
of Shares .....................................................................................13
5. Proper Instructions............................................................................14
6. Actions Permitted without Express Authority....................................................14
7. Evidence of Authority..........................................................................15
8. Duties of Custodian with Respect to the Books of Account
and Calculations of Net Asset Value and Net Income.............................................15
9. Records........................................................................................15
10. Opinion of Fund's Independent Accountants......................................................16
11. Reports to Fund by Independent Public Accountants..............................................16
12. Compensation of Custodian......................................................................16
13. Responsibility of Custodian....................................................................16
14. Effective Period, Termination and Amendment....................................................17
15. Successor Custodian............................................................................18
16. Interpretive and Additional Provisions........................................................ 19
17. Massachusetts Law to Apply.....................................................................19
18. Prior Contracts................................................................................19
19. Shareholder Communications Election............................................................19
</TABLE>
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CUSTODIAN CONTRACT
This Contract between Kemper Strategic Municipal Income Trust, a
business trust organized and existing under the laws of The Commonwealth of
Massachusetts and having its principal place of business at 222 South Riverside
Plaza, Chicago, Illinois 60606 (the "Fund"), and State Street Bank and Trust
Company, a Massachusetts trust company having its principal place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Custodian"),
WITNESSETH:
THAT, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto do hereby agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities which it desires to be held in places within the United
States of America ("domestic securities") and securities it desires to be held
outside the United States of America ("foreign securities") pursuant to the
provisions of the Fund's declaration of trust (the "Declaration of Trust"). The
Fund agrees to deliver to the Custodian all securities and cash owned by it and
all payments of income, payments of principal or capital distributions received
by it with respect to all securities owned by the Fund from time to time, and
the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of the Fund held
or received by the Fund and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (as such term is defined in
Article 5 of this Contract), the Custodian shall from time to time employ one or
more sub-custodians located in the United States of America, including any state
or political subdivision thereof and any territory over which its political
sovereignty extends (the "United States" or "U.S."), but only in accordance with
an applicable vote by the board of trustees of the Fund (the "Board of
Trustees") and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodians for the Fund's foreign
securities the foreign banking institutions and foreign securities depositories
designated in Schedule A hereto but only in accordance with the provisions of
Article 3.
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2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of the Fund all non-cash property to be held by it in
the United States including all domestic securities owned by the Fund
other than (a) securities which are maintained in a "U.S. Securities
System" (as such term is defined in Section 2.10 of this Contract) and
(b) commercial paper of an issuer for which State Street Bank and Trust
Company acts as issuing and paying agent ("Direct Paper") which is
deposited and/or maintained in the Custodian's Direct Paper System
pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by the Fund and held by the Custodian or in a
U.S. Securities System account of the Custodian, which account shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for its customers ("U.S. Securities
System Account") or in the Custodian's Direct Paper book-entry system
account, which account shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise for its
customers ("Direct Paper System Account") only upon receipt of Proper
Instructions from the Fund, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.10
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same
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aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that, in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's U.S.
Securities System Account, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the
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Commodity Exchange Act, relating to compliance with the rules
of the Commodity Futures Trading Commission and/or any
Contract Market, or any similar organization or organizations,
regarding account deposits in connection with transactions by
the Fund;
14) Upon receipt of instructions from the transfer agent for the
Fund (the "Transfer Agent"), for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information (the "Prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board of Trustees or of
the executive committee thereof signed by an officer of the
Fund and certified by the Fund's Secretary or Assistant
Secretary specifying the securities of the Fund to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee name
of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to Article 1. All
securities accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize reasonable
efforts only to (i) timely collect income due the Fund on such
securities and (ii) notify the Fund of relevant corporate actions
including, without limitation, pendency of calls, maturities, tender or
exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940, as amended. Funds held by the
Custodian for the Fund may be deposited by it to its credit as
Custodian in the banking department of the Custodian or in such other
banks or trust companies as it may in its discretion deem necessary or
desirable; provided, however, that every such bank
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<PAGE> 8
or trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940, as amended (the "Investment Company
Act") and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall on behalf of the
Fund be approved by vote of a majority of the Board of Trustees. Such
funds shall be deposited by the Custodian in its capacity as Custodian
and shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon agreement between the Fund and the
Custodian, the Custodian shall, upon the receipt of Proper Instructions
from the Fund, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the Fund which
are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States-registered securities held hereunder to
which the Fund shall be entitled either by law or pursuant to custom in
the securities business, and shall collect on a timely basis all income
and other payments with respect to domestic bearer securities if, on
the date of payment by the issuer, such securities are held by the
Custodian or its agent thereof and shall credit such income, as
collected, to the Fund's account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for payment all
coupons and other income items requiring presentation as and when they
become due and shall collect interest when due on securities held
hereunder. Collection of income due the Fund on domestic securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund; the Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data in its possession as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian
of the income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act to act as a custodian and has been designated by
the Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of a nominee of the Custodian
referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a
U.S. Securities System, in accordance with the conditions set
forth in Section 2.10 hereof; (c) in the case of a
5
<PAGE> 9
purchase involving the Direct Paper System, in accordance with
the conditions set forth in Section 2.11; (d) in the case of
repurchase agreements entered into between the Fund and the
Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management fees,
accounting fees, transfer agent fees, legal fees and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified
copy of a resolution of the Board of Trustees or of the
executive committee thereof signed by an officer of the Fund
and certified by the Fund's Secretary or an Assistant
Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the
person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of the Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the
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<PAGE> 10
Fund to so pay in advance, the Custodian shall be absolutely liable to
the Fund for such securities to the same extent as if the securities
had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act to
act as a custodian, as its agent to carry out such of the provisions of
this Article 2 as the Custodian may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in U.S. Securities Systems. The Custodian may
deposit and/or maintain domestic securities owned by the Fund in a
clearing agency registered with the Securities and Exchange Commission
(the "SEC") under Section 17A of the Exchange Act, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies (a "U.S.
Securities System") in accordance with applicable Federal Reserve Board
and SEC rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep domestic securities of the Fund in a
U.S. Securities System provided that such securities are
represented in a U.S. Securities System Account;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
U.S. Securities System that such securities have been
transferred to the U.S. Securities System Account and (ii) the
making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund; the
Custodian shall transfer securities sold for the account of
the Fund upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred
to the U.S. Securities System Account and (ii) the making of
an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund. Copies of
all advices from the U.S. Securities System of transfers of
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund;
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<PAGE> 11
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the U.S. Securities System
by reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from failure of the Custodian or any such agent
to enforce effectively such rights as it may have against the
U.S. Securities System; at the election of the Fund, it shall
be entitled to be subrogated to the rights of the Custodian
with respect to any claim against the U.S. Securities System
or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian
may deposit and/or maintain securities owned by the Fund in the Direct
Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in the
Direct Paper System Account which shall not include any assets
of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on
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<PAGE> 12
the next business day following such transfer and shall
furnish to the Fund copies of daily transaction sheets
reflecting each day's transaction in the Direct Paper System
for the account of the Fund; and
6) Upon the reasonable request of the Fund, the Custodian shall
provide the Fund with any report on the Direct Paper System's
system of internal accounting controls which had been prepared
as of the time of such request.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of the Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in a U.S. Securities System Account by the
Custodian pursuant to Section 2.10 hereof (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the
NASD (or any futures commission merchant registered under the Commodity
Exchange Act), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities exchange
(or the Commodity Futures Trading Commission or any registered Contract
Market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by the
Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the SEC relating to the maintenance
of segregated accounts by registered investment companies and (iv) for
other proper corporate purposes, but only, in the case of this clause
(iv), upon receipt of, in addition to Proper Instructions from the
Fund, a certified copy of a resolution of the Board of Trustees or of
the executive committee thereof signed by an officer of the Fund and
certified by the Fund's Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of the Fund held by it and
in connection with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.
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<PAGE> 13
2.15 Communications Relating to Fund Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or
sold by the Fund) received by the Custodian from issuers of the
securities being held for the Fund. With respect to tender or exchange
offers, the Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents)
making the tender or exchange offer. If the Fund desires to take action
with respect to any tender offer, exchange offer or any other similar
transaction, the Fund shall notify the Custodian at least three (3)
business days prior to the date on which the Custodian is to take such
action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto (the "foreign sub-custodians"). Upon
receipt of Proper Instructions, together with a certified resolution of
the Board of Trustees, the Custodian and the Fund may agree to amend
Schedule A hereto from time to time to designate additional foreign
banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such
foreign sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, and (b) cash and cash
equivalents in such amounts as the Custodian or the Fund may determine
to be reasonably necessary to effect the Fund's foreign securities
transactions. The Custodian shall identify on its books as belonging to
the Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon
in writing by the Custodian and the Fund, assets of the Funds shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
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<PAGE> 14
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall provide that (a) the assets of the
Fund will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership of the assets of the Fund will
be freely transferable without the payment of money or value other than
for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to the Custodian on behalf of its
customers; (d) officers of or auditors employed by, or other
representatives of the Custodian, including to the extent permitted
under applicable law the independent public accountants for the Fund,
will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its
agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign sub-custodians,
including but not limited to an identification of entities having
possession of Fund securities and other assets and advices or
notifications of any transfers of securities to or from each custodial
account maintained by a foreign banking institution for the Custodian
on behalf of its customers indicating, as to securities acquired for
the Fund the identity of the entity having physical possession of such
securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the
Fund and delivery of securities maintained for the account of the Fund
may be effected in accordance with the customary established securities
trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including,
without limitation, delivering securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer) against
a receipt with the expectation of receiving later payment for such
securities from such purchaser or dealer.
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<PAGE> 15
(c) Securities maintained in the custody of a foreign sub-custodian may
be maintained in the name of such entity's nominee to the same extent
as set forth in Section 2.3 of this Contract, and the Fund agrees to
hold any such nominee harmless from any liability as a holder of record
of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable care
in the performance of its duties and to indemnify, and hold harmless,
the Custodian and the Fund from and against any loss, damage, cost,
expense, liability or claim arising out of or in connection with the
institution's performance of such obligations. At the election of the
Fund, it shall be entitled to be subrogated to the rights of the
Custodian with respect to any claims against a foreign banking
institution as a consequence of any such loss, damage, cost, expense,
liability or claim if and to the extent that the Fund has not been made
whole for any such loss, damage, cost, expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a
U.S. bank as contemplated by Section 3.12 hereof, the Custodian shall
not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism or any loss where the sub-custodian has
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this Section 3.9, in delegating custody duties to State
Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except
such loss as may result from (a) political risk (including, but not
limited to, exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of the Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of
the Fund's assets to the extent necessary to obtain reimbursement.
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<PAGE> 16
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund (during the month of June) information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the Custodian
will promptly inform the Fund in the event that the Custodian learns of
a material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the SEC is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the local currency
equivalent thereof) or that its shareholders' equity has declined below
$200 million (in each case computed in accordance with generally
accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
Fund assets are maintained in a foreign branch of a banking institution
which is a "bank" as defined by Section 2(a)(5) of the Investment
Company Act meeting the qualification set forth in Section 26(a) of
said Act. The appointment of any such branch as a sub-custodian shall
be governed by Article 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in
an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the
direction of the Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States. It shall
be the responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in the
above sentence, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist the
Fund with respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent and deposit into the account of the Fund such payments as are
received for Shares of the Fund issued or sold from time to time by the Fund.
The Custodian will provide timely notification to the Fund and the Transfer
Agent of any receipt by it of payments for Shares of the Fund.
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<PAGE> 17
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares, the
Custodian is authorized upon receipt of instructions from the Transfer Agent to
wire funds to or through a commercial bank designated by the redeeming
shareholders. In connection with the redemption or repurchase of Shares, the
Custodian shall honor checks drawn on the Custodian by a holder of Shares, which
checks have been furnished by the Fund to the holder of Shares, when presented
to the Custodian in accordance with such procedures and controls as are mutually
agreed upon from time to time between the Fund and the Custodian.
5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. If given pursuant to procedures to be agreed upon by the
Custodian and the Fund, Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three - party agreement which requires a segregated
asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
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<PAGE> 18
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Trustees.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the Fund.
The Custodian may receive and accept a certified copy of a vote of the Board of
Trustees as conclusive evidence (a) of the authority of any person to act in
accordance with such vote or (b) of any determination or of any action by the
Board of Trustees pursuant to the Declaration of Trust as described in such
vote, and such vote may be considered as in full force and effect until receipt
by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of Trustees to keep the books of
account of the Fund and/or compute the net asset value per share of the
outstanding Shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Prospectus and shall advise the Fund and the
Transfer Agent daily of the total amount of such net income and, if instructed
in writing by an officer of the Fund to do so, shall advise the Transfer Agent
periodically of the division of such net income among its various components.
The calculations of the net asset value per share and the daily income of the
Fund shall be made at the time or times described from time to time in the
Prospectus.
9. Records
The Custodian shall with respect to the Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act, with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the SEC. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
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10. Opinion of Fund's Independent Accountants
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A and N-SAR or other
annual reports to the SEC and with respect to any other SEC requirements.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports shall be of
sufficient scope and in sufficient detail, as may reasonably be required by the
Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian as agreed upon from time to time between the
Fund and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract, but
shall be kept indemnified by and shall be without liability to the Fund for any
action taken or omitted by it in good faith without negligence. It shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
16
<PAGE> 20
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Section 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by Section 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to the Custodian.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, the purchase or sale of foreign exchange or of
contracts for foreign exchange, and assumed settlement), or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the performance
of this Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any property
at any time held for the account of the applicable Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund's assets
to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of the date of its execution,
shall continue in full force and effect until terminated as hereinafter
provided, may be amended at any time by mutual agreement of the parties hereto
and may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not with respect to the Fund act
under Section 2.10 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Trustees has approved
the initial use of a particular Securities System by the Fund, as required by
Rule 17f-4 under the Investment Company Act and that the Custodian shall not
with respect to the Fund act under Section 2.11 hereof in the absence of receipt
of an initial certificate of the Secretary or an Assistant Secretary that the
Board of Trustees has approved the initial use of the Direct Paper System by the
Fund; provided further, however, that the Fund shall not amend or terminate this
17
<PAGE> 21
Contract in contravention of any applicable federal or state regulations, or any
provision of the Declaration of Trust, and further provided, that the Fund may
at any time by action of the Board of Trustees (i) substitute another bank or
trust company for the Custodian by giving notice as described above to the
Custodian or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian shall be appointed by the Board of Trustees,
the Custodian shall, upon termination, deliver to such successor custodian at
the offices of the Custodian, duly endorsed and in the form for transfer, all
securities of the Fund then held by it hereunder and shall transfer to an
account of the successor custodian all of the securities of the Fund held in a
Securities System. If no such successor custodian shall be appointed, the
Custodian shall, in like manner, upon receipt of a certified copy of a vote of
the Board of Trustees, deliver at the offices of the Custodian and transfer such
securities, funds and other properties in accordance with such vote. In the
event that no written order designating a successor custodian or certified copy
of a vote of the Board of Trustees shall have been delivered to the Custodian on
or before the date when such termination shall become effective, then the
Custodian shall have the right to deliver to a bank or trust company, which is a
"bank" as defined in the Investment Company Act, doing business in Boston,
Massachusetts, or New York, New York, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian and all instruments held by the Custodian relative thereto and all
other property held by it under this Contract on behalf of the Fund and to
transfer to an account of such successor custodian all of the securities of the
Fund held in any Securities System. Thereafter, such bank or trust company shall
be the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
18
<PAGE> 22
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust. No interpretive or additional provisions made as
provided in the preceding sentence shall be deemed to be an amendment of this
Contract.
17. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
18. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Fund and the Custodian relating to the custody of
the assets of the Fund.
19. Shareholder Communications Election
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the Fund
to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate
19
<PAGE> 23
communications. Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
20
<PAGE> 24
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of March 15, 1999.
ATTEST KEMPER STRATEGIC MUNICIPAL INCOME
TRUST
By:
- ------------------------ ---------------------------------
Name: Name:
Title:
ATTEST STATE STREET BANK AND TRUST COMPANY
By:
- ------------------------ ---------------------------------
Marc L. Parsons Ronald E. Logue
Associate Counsel Executive Vice President
21
<PAGE> 1
AGENCY AGREEMENT
THIS AGREEMENT made as of the 15th day of March, 1989, by and between KEMPER
STRATEGIC MUNICIPAL INCOME TRUST, a Massachusetts business trust having its
principal place of business at 120 South LaSalle Street, Chicago, IL 60603
("Fund"), and INVESTORS FIDUCIARY TRUST COMPANY a state chartered trust company
organized and existing under the laws of the State of Missouri, having its
principal place of business at 127 West 10th Street, Kansas City, Missouri 64105
("IFTC"):
WITNESSETH:
WHEREAS, Fund desires to appoint IFTC as Transfer Agent and Dividend
Disbursing Agent for its Shares of beneficial interest, and IFTC desires to
accept such appointment:
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Documents to Filed with Appointment
In connection with the appointment of IFTC as Transfer Agent
and Dividend Disbursing Agent for Fund, there will be filed
with IFTC the following documents:
A. A certified copy of the resolutions of the Board of
Trustees of fund appointing IFTC as Transfer Agent
and Dividend Disbursing Agent, approving the form of
this Agreement, and designating certain persons to
sign share certificates, if any, and give written
instructions and requests on behalf of Fund;
B. A certified copy of the Agreement and Declaration of
Trust of Fund and any amendments thereto;
C. A certified copy of the Bylaws of Fund;
D. Copies of Registration Statements filed with the
Securities and Exchange Commission.
<PAGE> 2
E. Specimens of all forms of outstanding share
certificates, in the forms approved by the Board of
Trustees of Fund, with a certificate of the Secretary
of Fund, as to such approval;
F. Specimens of the signatures of the officers of the
Fund authorized to sign share certificates and
individuals authorized to sign written instructions
and requests;
G. An opinion of counsel for Fund with respect to:
(1) Fund's organization an existence under the
laws of the Commonwealth of Massachusetts,
(2) Status of all shares of Fund covered by the
appointment under the Securities Act of
1933, as amended, and any other applicable
federal or state statute and
(3) That all issued shares are, and all unissued
shares will be, when issued, validly issued,
fully paid and non-assessable.
2. Certain Representations and Warranties of IFTC. IFTC
represents and warrants to Fund that:
A. It is a trust company duly organized and existing and
in good standing under the laws of Missouri.
B. It is duly qualified to carry on its business in the
State of Missouri.
C. It is empowered under applicable laws and by its
Articles of Incorporation and bylaws to enter into
and perform the services contemplated in this
Agreement.
D. All requisite corporate proceedings have been taken
to authorize it to enter into and perform this
Agreement.
2
<PAGE> 3
E. It has and will continue to have and maintain the
necessary facilities, equipment and personnel to
perform its duties and obligations under this
Agreement.
3. Certain Representations and Warranties of Fund. Fund
represents and warrants to IFTC that:
A. It is a business trust duly organized and existing
and in good standing under the laws of The
Commonwealth of Massachusetts.
B. It is an closed-end diversified management investment
company registered under the Investment Company Act
of 1940, as amended.
C. A registration statement under the Securities Act of
1933 has been filed and will be effective with
respect to all shares of Fund being offered for sale.
D. All requisite steps have been r will be taken to
register Fund's shares for sale in all applicable
states, including the District of Columbia.
E. Fund is empowered under applicable laws and by its
Agreement and Declaration of Trust and bylaws to
enter into and perform this Agreement.
4. Scope of Appointment.
A. Subject to the conditions set forth in this
Agreement, Fund hereby employs and appoints IFTC as
Transfer Agent and Dividend Disbursing Agent
effective the date hereof.
B. IFTC hereby accepts such employment and appointment
and agrees that it will act as Fund's Transfer Agent
and Dividend Disbursing Agent.
C. IFTC agrees to provide the necessary facilities,
equipment and personnel to perform its duties and
obligations hereunder in accordance with industry
practice.
3
<PAGE> 4
D. Fund agrees to use its best efforts to deliver to
IFTC in Kansas City, Missouri, as soon as they are
available, all of its shareholder account records.
E. Subject to the provisions of Section 19 and 20
hereof, IFTC agrees that it will perform all of the
usual and ordinary services of Transfer Agent and
Dividend Disbursing Agent and as agent for the
various shareholder accounts, including, without
limitation, the following: issuing, transferring and
cancelling share certificates, maintaining all
shareholder accounts, preparing shareholder meeting
lists, mailing proxies, receiving and tabulating
proxies, mailing shareholder reports and
prospectuses, withholding federal income taxes,
preparing and mailing checks for disbursement of
income dividends and capital gains distributions,
preparing and filing all required U.S. Treasury
Department information returns for all shareholders,
preparing and mailing confirmation forms to
shareholders and dealers with respect to all
purchases of Fund shares and other transactions in
shareholder accounts for which confirmations are
required, recording reinvestments of dividends and
distributions in Fund shares.
5. Compensation and Expenses.
A. In consideration for its services hereunder as
Transfer Agent and Dividend Disbursing Agent, Fund
will pay to IFTC from time to time a reasonable
compensation for all services rendered as Agent, and
also, all its reasonable out-of-pocket expenses,
charges, counsel fees, and other disbursements
incurred in connection with the agency. Such
compensation will be set forth in a separate schedule
to be agreed to by Fund and IFTC.
B. Fund agrees to promptly reimburse IFTC for all
reasonable out-of-pocket expenses or advances
incurred by IFTC in connection with the performance
of services under this Agreement, for postage (and
first class
4
<PAGE> 5
mail insurance in connection with mailing share
certificate), envelopes, check forms, continuous
forms, forms for reports and statements, stationary,
and other similar items, telephone and telegraph
charges incurred in answering inquiries from dealers
or shareholders, microfilm used each year to record
the previous year's transaction in shareholder
accounts and computer tapes used for permanent
storage of records and cost of insertion of materials
in mailing envelopes by outside firms.
6. Efficient Operation of IFTC System.
A. In connection with the performance of its services
under this Agreement, IFTC is responsible for the
accurate and efficient functioning of its system at
all times, including:
(1) The accuracy of the entries in IFTC's
records reflecting orders and instructions
received by IFTC from dealers, shareholders,
Fund or its principal underwriter;
(2) The timely availability and the accuracy of
shareholder lists, shareholder account
verification, confirmations and other
shareholder account information to be
produced from its records or data;
(3) The accurate and timely issuance of dividend
and distribution checks in accordance with
instructions received from Fund;
(4) The requiring of proper forms of
instructions signatures and signature
guarantees and any necessary documents
supporting the legality of transfers, all in
conformance with IFTC's present procedures
with such changes as may be required or
approved by Fund; and
(5) The maintenance of a current duplicate set
of Fund's essential records at a secure
distant location, in form available and
usable
5
<PAGE> 6
forthwith in the event of any breakdown or
disaster disrupting its main operation.
7. Indemnification.
A. IFTC shall not be responsible for, and the Fund shall
indemnify and hold IFTC harmless from against, any
and all claims, actions, suits, losses, damages,
costs, charges, counsel fees, payments, expenses and
liabilities arising out of or attributable to any
action or omission by IFTC pursuant to this Agreement
or in connection with the agency relationship created
by this Agreement, provided that IFTC has acted in
good faith and without negligence or willful
misconduct.
B. The Fund shall not be responsible for, and IFTC shall
indemnify and hold the Fund harmless from and
against, any and all claims, actions, suits, losses,
damages, costs, charges, counsel fees, payments,
expenses and liabilities arising out of or
attributable to any action or omission by IFTC
pursuant to this Agreement or in connection with the
agency relationship created by this Agreement,
provided that IFTC has not acted in good faith and
without negligence or willful misconduct.
C. In order that the indemnification provisions
contained in this Section 7 shall apply, upon the
assertion of a claim for which either party may be
required to indemnify the other, the party seeking
indemnification shall promptly notify the other party
of such assertion, and shall keep the other advised
with respect to all developments concerning such
claim. The party that may be required to indemnify
shall have the option to participate with the party
seeking indemnification in the defense of such claim.
The party seeking indemnification shall in no event
confess, admit to, compromise, or settle any claim
for which the other party may be required to
indemnify it except with the other party's prior
written consent.
6
<PAGE> 7
8. Certain Covenants of IFTC and Fund.
A. All requisite steps will be taken by Fund from time
to time when and as necessary to register the Fund's
shares for sale in all states in which Fund's shares
shall at the time be offered for sale and require
registration. If at any time Fund will receive notice
of any stop order or other proceeding in any such
state affecting such registration or the sale of
Fund's shares or of any stop order or other
proceeding under the Federal securities laws
affecting the sale of Fund's shares, Fund will give
prompt notice thereof to IFTC.
B. IFTC hereby agrees to establish and maintain
facilities and procedures reasonably acceptable to
Fund for safekeeping of share certificates, check
forms, and facsimile signature imprinting devices, if
any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices, and
to carry insurance, as specified in Exhibit B hereto,
with insurers reasonably acceptable to Fund and in
minimum amounts which are reasonably acceptable to
the Fund, which will not be changed without the
consent of Fund and which will be expanded in
coverage or increased in amounts from time to time if
and when reasonably requested by Fund. If IFTC
determines that it is unable to obtain any such
insurance upon commercially reasonable terms, it
shall promptly so advise the Fund in writing. In such
event, the Fund shall have the right to terminate
this Agreement upon 30 days notice.
C. To the extent required by Section 31 of the
Investment Company Act of 1940 as amended and Rules
thereunder, IFTC agrees that all records maintained
by IFTC relating to the services to be performed by
IFTC under this agreement are the property of Fund
and will be preserved and will be surrendered
promptly to Fund on request.
D. IFTC agrees to furnish Fund semi-annual reports of
its financial condition, consisting of a balance
sheet, earnings statement and any other financial
7
<PAGE> 8
information reasonably requested by Fund. The annual
financial statements will be certified by IFTC's
certified public accountants.
E. IFTC represents and agrees that it will use its best
efforts to keep current on the trends of the
investment company industry relating to shareholder
services and will use its best efforts to continue to
modernize and improve is system without additional
cost to Fund.
F. IFTC will permit Fund and its authorized
representatives to make periodic inspections of its
operations at reasonable times during business hours.
9. Adjustment.
In case of any recapitalization, readjustment or other change
in the structure of Fund requiring a change in the form of
share certificates, IFTC will issue or register certificates
in the new form in exchange for, or in transfer of, the
outstanding certificates in the old form, upon receiving:
A. Written instructions from an officer of Fund;
B. Certified copy of the amendment to the Agreement and
Declaration of Trust or other document effecting the
change;
C. Certified copy of the order or consent of each
governmental or regulatory authority, required by law
to the issuance of the shares in the new form, and an
opinion of counsel that the order or consent of no
other government or regulatory authority is require;
D. Specimens of the new certificates in the form
approved by the Board of Trustees of Fund, with a
certificate of the Secretary of Fund as to such
approval;
E. Opinion of counsel for Fund stating:
8
<PAGE> 9
(1) The status of the shares of Fund in the new
form under the Securities Act of 1933, as
amended and any other applicable federal or
state statue; and
(2) That the issued shares in the new form are,
and all unissued shares will be, when issued
validly issued, fully paid and
non-assessable.
10. Share of Certificates.
Fund will furnish IFTC with a sufficient supply of blank share
certificates and from time to time will renew such supply upon
the request of IFTC. Such certificates will be signed manually
or by facsimile signatures of the officers of Fund authorized
by law and by bylaws to sign share certificates, and if
required, will bear the trust seal or facsimile thereof.
11. Death, Resignation or Removal of Signing Officer.
Fund will file promptly with IFTC written notice of any change
in the officers authorized to sign share certificates, written
instructions or requests, together with two signature cards
bearing the specimen signature of each newly authorized
officer. In case any officer of Fund who will have signed
manually or whose facsimile signature will have been affixed
to blank share certificates will die, resign, or be removed
prior to the issuance of such certificate, IFTC may issue or
register such share certificates as the share certificates of
Fund notwithstanding such death, resignation, or removal,
until specifically directed to the contrary by Fund in
writing. In the absence of such direction, Fund will file
promptly with IFTC such approval, adoption, or ratification as
may be required by law.
12. Future Amendments of Agreement and Declaration of Trust and
Bylaws.
Fund will promptly file with IFTC copies of all material
amendments to its Agreement and Declaration of Trust and
bylaws made after the date of this Agreement.
9
<PAGE> 10
13. Instructions, Opinion of Counsel and Signatures.
At any time IFTC may apply to any officer of Fund for
instructions, and may consult with legal counsel for Fund or
its own legal counsel at the expense of Fund, with respect to
any matter arising in connection with the agency and it will
not be liable for any action taken or omitted by it in good
faith in reliance upon such instructions or upon the opinion
of such counsel. IFTC will be protected in acting upon any
paper or document reasonably believed by it to be genuine and
to have been signed by the proper person or persons and will
not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from Fund. It
will also be protected in recognizing share certificates which
it reasonably believes to bear the proper manual or facsimile
signatures of the officers of Fund, and the proper
countersignature of any former Transfer Agent or Registrar, of
a Co-Transfer Agent or Co-Registrar.
14. Papers Subject to Approval of Counsel.
The acceptance by IFTC, of its appointment as Transfer Agent
and Dividend Disbursing Agent and all documents filed in
connection with such appointment and thereafter in connection
with the agencies, will be subject to the approval of legal
counsel for IFTC (which approval will not be unreasonably
withheld).
15. Certification of Documents.
The required copy of the Agreement and Declaration of Trust of
Fund and copies of all amendments thereto will be certified by
the appropriate official of The Commonwealth of Massachusetts,
and if such Agreement and Declaration of Trust and amendments
are required by law to be also filed with a county, city or
other officer of official body, a certificate of such filing
will appear on the certified copy submitted to IFTC. A copy of
the order to consent of each governmental or regulatory
authority required by law to the issuance of the shares will
be certified by the Secretary or Clerk of such governmental or
regulatory authority, under proper seal of such authority. The
copy of the bylaws and copies
10
<PAGE> 11
of all amendments thereto, and copies of resolutions of the
Board of Trustees of Fund, will be certified by the Secretary
or an Assistant Secretary of Fund.
16. Records.
IFTC will maintain customary records in connection with its
agency, and particularly will particularly will maintain those
records required to be maintained pursuant to sub-paragraph
(2)(iv) of paragraph (b) of Rule 31a-1 under the Investment
Company Act of 1940, if any.
17. Disposition of Books, Records and Cancelled Certificates.
IFTC will send periodically to Fund, or to where designated by
the Secretary or an Assistant Secretary of Fund, all books,
documents, and all records no longer deemed needed for current
purposes and share certificates which have been cancelled in
transfer or in exchange, upon the understanding that such
books, documents, records, share certificates will not
destroyed by Fund without the consent of IFTC (which consent
will not be unreasonably withheld), but will be safely stored
for possible future reference.
18. Provisions Relating to IFTC as Transfer Agent.
A. IFTC will make original issues of shares certificates
upon written request of an officer of Fund and upon
being furnished with a certified copy of a resolution
of the Board of Trustees authorizing such original
issue, an opinion of counsel as outlined in
paragraphs 1.D and G of this Agreement, any documents
required by paragraphs 5 or 9 of this Agreement, and
necessary funds for the payment of any original issue
tax.
B. Before making any original issue of certificates Fund
will furnished IFTC with sufficient funds to pay all
required taxes on the original issue of the share, if
any. Fund will furnish IFTC such evidence as may be
required by IFTC to show the actual value of the
shares. If no taxes are payable, IFTC will be
furnished with an opinion of outside counsel to that
effect.
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<PAGE> 12
C. Shares will be transferred and new certificates
issued in transfer upon surrender of the old
certificates in form deemed by IFTC properly endorsed
for transfer accompanied by such documents as IFTC
may deem necessary to evidence that authority of the
person making the transfer and bearing satisfactory
evidence of the payment of any applicable share
transfer taxes. IFTC reserves the right to refuse to
transfer shares until it is satisfied that the
endorsement or signature on the certificate or any
other document is valid and genuine, and for that
purpose it may require a guaranty of signature by a
firm having membership in the New York Stock
Exchange, Midwest Stock Exchange, American Stock
Exchange Securities Corporation, Pacific Coast Stock
Exchange, or any other exchange acceptable to IFTC or
by a bank or trust company approved by it. IFTC also
reserves the right to refuse to transfer shares until
it is satisfied that the requested transfer is
legally authorized, and it will incur no liability
for the refusal in good faith to make transfers
which, in its judgment, are improper or unauthorized.
IFTC may, in effecting transfers rely upon
Simplification Acts or other statues which protect it
and Fund in not requiring complete fiduciary
documentation. In cases in which IFTC is not directed
or otherwise required to maintain the consolidated
records of shareholder's accounts, IFTC will not be
liable for any loss which may arise by reason of not
having such records, provided that such loss could
not have been prevented by the exercise of ordinary
diligence. IFTC will be under no duty to use a
greater degree of diligence by reason of not having
such records.
D. When mail is used for delivery of share certificates
IFTC will forward share certificates in
"nonnegotiable" form by registered mail, all such
mail deliveries to be covered while in transit to the
addressee by insurance arranged for by IFTC.
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<PAGE> 13
E. IFTC will issue and mail subscription warrants,
certificates upon receiving written instructions from
any officer of Fund and such other documents as IFTC
deems necessary.
F. IFTC will issue, transfer, and split up certificates
upon receiving written instructions from an officer
of Fund and such other documents as IFTC may deem
necessary.
G. IFTC may new certificates in place of certificates
represented to have been lost, destroyed, stolen or
otherwise wrongfully taken upon receiving
instructions from Fund and indemnity satisfactory to
IFTC and Fund, and may issue new certificates in
exchange for, and upon surrender of, mutilated
certificates. Such instructions from Fund will be in
such form as will be approved by the Board of
Trustees of Fund and will be in accordance with the
provisions of law and the bylaws of Fund governing
such matter.
H. IFTC will supply a shareholder's list to Fund for any
shareholder meeting upon receiving a request from an
officer of Fund. It will also supply lists at such
other times as may be requested by an officer of
Fund.
I. Upon receipt of written instructions of an officer of
Fund, IFTC will address and mail notices to
shareholders.
J. In case of any request or demand for the inspection
of the share books of Fund or any other books in the
possession of IFTC, IFTC will endeavor to notify Fund
and to secure instructions as to permitting or
refusing such inspection. IFTC reserves the right,
however, to exhibit the share books or other books to
any person in case it is advised by its counsel that
it may be held responsible for the failure to exhibit
the share books or other books to such person.
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19. Provisions Relating to Dividend Disbursing Agency.
A. IFTC will, at the expense of Fund, provide a special
form of check containing the imprint of any device or
other matter desired by Fund. Said checks must,
however, be of a form and size convenient for use by
IFTC.
B. If Fund desires to include additional printed matter,
financial statements, etc., with the dividend checks,
the same will be furnished IFTC within a reasonable
time prior to the date of mailing of the dividend
checks, at the expense of Fund.
C. If Fund desires its distributions mailed in any
special form of envelopes, sufficient supply of the
same will be furnished to IFTC but the size and form
of said envelopes will be subject to the approval of
IFTC. If stamped envelopes are used, they must be
furnished by Fund; or if postage stamps are to be
affixed to the envelopes, the stamps or the cash
necessary for such stamps must be furnished by Fund.
D. IFTC will maintain one or more deposit accounts as
Agent for Fund, into which the funds for payment of
dividends, distributions, or other disbursements
provided for hereunder will be deposited, and against
which checks will be drawn.
E. IFTC is authorized and directed to stop payment of
checks theretofore issued hereunder, but not
presented for payment, when the payees thereof allege
either that they have not received the checks or that
such checks have been mislaid, lost, stolen,
destroyed or through no fault of theirs, are
otherwise beyond their control, and cannot be
produced by them for presentation and collection,
and, to issue and deliver duplicate checks in
replacement thereof.
20. Termination of Agreement.
A. This Agreement may be terminated by either party upon
receipt of sixty (60) days written notice from the
other party.
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<PAGE> 15
B. Fund, in addition to any other rights and remedies,
shall have the right to terminate this Agreement
forthwith upon the occurrence at any time of any of
the following events:
(1) Any interruption or cessation of operations
by IFTC or its assigns which materially
interferes with the business operation of
Fund;
(2) The bankruptcy of IFTC or its assigns or the
appointment of a receiver for IFTC or its
assigns;
(3) Any merger, consolidation or sale of
substantially all the assets of IFTC or its
assigns;
(4) The acquisition of a controlling interest in
IFTC or its assigns, by any broker, dealer,
investment adviser or investment company
except as may presently exist; or
(5) Failure by IFTC or its assigns to perform
its duties in accordance with the Agreement,
which failure materially adversely affects
the business operations of Fund and which
failure continues for thirty (30) days after
receipt of written notice from Fund.
C. In the event of termination, Fund will promptly pay
IFTC all amounts due to IFTC hereunder.
21. Assignment.
A. Neither this Agreement nor any rights or obligations
hereunder may be assigned by IFTC without the written
consent of Fund. No assignment will relieve IFTC of
any of its obligations hereunder.
B. This Agreement will inure to the benefit of and be
binding upon the parties and their respective
successors and assigns.
C. IFTC is authorized to use the system services of DST
Systems, Inc.
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<PAGE> 16
22. Confidentiality.
A. IFTC agrees that, except as provided in the last
sentence of Section 18.J hereof, or as otherwise
required by law, IFTC will keep confidential all
records of and information in its possession relating
to Fund or its shareholders or shareholder accounts
and will not disclose the same to any person except
at the request or with the consent of Fund.
B. Fund agrees that, except as otherwise required by
law, Fund will keep confidential all financial
statements and other financial records (other than
statements and records relating solely to Fund's
business dealings with IFTC) and all manuals, systems
and other technical information and data, not
publicly disclosed, relating to IFTC's operations and
programs furnished to it by IFTC pursuant to this
Agreement and will not disclose the same to any
person except at the request or with the consent of
IFTC. Notwithstanding anything to the contrary in
this Section 22.B, if an attempt is made pursuant to
subpoena or other legal process to require the Fund
to disclose or produce any of the aforementioned
manuals, systems or other technical information and
data, the Fund shall give IFTC prompt notice thereof
prior to disclosure or production so that IFTC may,
at its expense, resist such attempt.
23. Survival of Representations and Warranties.
A. All representations and warranties by either party
herein contained will survive the execution an
delivery of this Agreement.
24. Miscellaneous.
A. This Agreement is executed and delivered in the State
of Missouri and shall be governed by the laws of said
state (except as to paragraph 24.I hereof which shall
be governed by the laws of The Commonwealth of
Massachusetts).
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<PAGE> 17
B. All the terms and provisions of this Agreement shall
binding upon, inure to the benefit of, and be
enforceable by the respective successor and assigns
of the parties hereto.
C. No provisions of the Agreement may be amended or
modified, in any manner except by a written agreement
properly authorized and executed by both parties
hereto.
D. The captions in this Agreement are included for
convenience of reference only, and in no way define
or delimit any of the provisions hereof or otherwise
affect their construction or effect.
E. This Agreement shall become effective at the close of
business as of the date of execution.
F. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed
an original but all of which together shall
constitute one and the same instrument.
G. If any part, term or provision of this Agreement is
by the courts held to be illegal, in conflict with
any law or otherwise invalid, the remaining portion
or portions shall be considered severable and not be
affected, and the rights and obligations of the
parties shall be construed and enforced as if the
Agreement did not contain the particular part, term
or provision held to be illegal or invalid.
H. This Agreement may not be assigned by either party
without prior written consent of the other party.
I. All parties hereto are expressly put on notice of the
Fund's Agreement and Declaration of Trust which is on
file with the Secretary of The Commonwealth of
Massachusetts, and the limitation of shareholder and
trustee liability contained therein. This Agreement
has been executed by and on behalf of the Fund by its
representatives as such representatives
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<PAGE> 18
and not individually, and the obligations of the Fund
hereunder are not binding upon any of the Trustees,
officers or shareholders of the Fund individually but
are binding upon only the assets and property of the
Fund. With respect to any claim by IFTC for recovery
of that portion of the compensation and expenses (or
any other liability of the Fund arising hereunder)
allocated to a particular Portfolio, whether in
accordance with the express terms hereof or
otherwise, IFTC shall have resource solely against
the assets of that Portfolio to satisfy such claim
and shall have no recourse against the assets of any
other Portfolio for such purpose.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized officer.
KEMPER STRATEGIC MUNICIPAL INCOME TRUST
By: /s/ Charles M. Kierscht
-------------------------------------
Title: President
----------------------------------
ATTEST:
/s/ Robert J. Engling
- -----------------------------------------
Title: Vice President and Secretary
-----------------------------------
INVESTORS FIDUCIARY TRUST COMPANY
By: /s/ Larry W. Rinne
-------------------------------------
Title: President
----------------------------------
ATTEST:
/s/ Cheryl Nagler
- -----------------------------------------
Title: Assistant Secretary
-----------------------------------
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EXHIBIT A
IFTC INSURANCE COVERAGE
DESCRIPTION OF POLICY:
Brokers Blanket Bond, Standard Form 14
Covering losses caused by dishonesty of employees, physical
loss of securities on or outside of premises while in
possession of authorized person, loss caused by forgery or
alteration of checks or similar instruments.
Errors and Omissions Insurance
Covering replacement of destroyed records and computer errors
and omissions.
Special Forgery Bond
Covering losses through forgery or alteration of checks or
drafts of customers processed by insured but drawn on or
against them.
Mail Insurance (applies to all full service operations)
Provides indemnity for the following types of securities lost
in the mails:
Non-negotiable securities mailed to domestic locations
via registered mail.
Non-negotiable securities mailed to domestic locations
via first-class or certified mail.
Non-negotiable securities mailed to foreign locations
via registered mail.
Negotiable securities mailed to all locations via
registered mail.
20
