<PAGE>
As filed with the Securities and Exchange Commission on June 15, 1995
and Resubmitted on July 24, 1995
Securities Act File No. 33-58532
Investment Company Act File No. 811-7528
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM N-2
Registration Statement Under the Securities Act of 1933 /x/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 2 /x/
(Check appropriate box or boxes)
---------------------
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
(Exact name of Registrant as specified in charter)
1285 Avenue of the Americas
New York, New York 10019
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 713-2000
---------------------
DIANNE E. O'DONNELL, ESQ.
Vice President and Secretary
PaineWebber Premier Insured Municipal Income Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
(Name and address of agent for service)
---------------------
Copies to:
ROBERT A. WITTIE, ESQ. JOAN L. COHEN, ESQ.
Kirkpatrick & Lockhart LLP Mitchell Hutchins Asset
1800 M Street, N.W. Management Inc.
Washington, D.C. 20036 1285 Avenue of the Americas
New York, New York 10019
-----------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]
It is proposed that this filing will become effective (check
appropriate box) [ X ] when declared effective pursuant to Section 8(c).
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
==========================================================================
PaineWebber Premier Insured Municipal Income Fund Inc.
Form N-2 Cross Reference Sheet
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Part A
Item Number Caption Prospectus Caption
- - ----------- ------- ------------------
<S> <C> <C>
1 Outside Front Cover. . . . . . . . . . . . Outside Front Cover of Prospectus
2 Inside Front and Outside Back Cover Page . Inside Front and Outside Back Cover Page of
Prospectus
3 Fee Table and Synopsis . . . . . . . . . . Fund Expenses
4 Financial Highlights . . . . . . . . . . . Financial Highlights
5 Plan of Distribution . . . . . . . . . . . Outside Front Cover; The Offering
6 Selling Shareholders . . . . . . . . . . . Not Applicable
7 Use of Proceeds . . . . . . . . . . . . . Use of Proceeds
8 General Description of Registrant . . . . Trading History; The Fund; Investment
Objective and Policies; Insurance; Other
Investment Practices; Special Leverage
Considerations; Description of Capital Stock
9 Management . . . . . . . . . . . . . . . . Management of the Fund; Custodian, Transfer
and Dividend Disbursing Agent and Registrar;
Description of Capital Stock
10 Capital Stock, Long-Term Debt and Other
Securities . . . . . . . . . . . . . . . . Special Leverage Considerations; Dividends
and Other Distributions; Dividend
Reinvestment Plan; Description of Capital
Stock; Taxation
11 Defaults and Arrears on Senior Securities . . Not Applicable
12 Legal Proceedings . . . . . . . . . . . . . Not Applicable
13 Table of Contents of the Statement of
Additional Information . . . . . . . . . . . Further Information
<CAPTION>
Part B
Item Number Caption Statement of
- - ----------- ------- Additional Information
----------------------
<S> <C> <C>
14 Cover Page . . . . . . . . . . . . . . . . Cover Page of Statement of Additional
Information
15 Table of Contents . . . . . . . . . . . . . Outside Back Cover Page of Statement of
Additional Information
16 General Information and History. . . . . . . Not Applicable
17 Investment Objectives and Policies . . . . . Investment Policies and Restrictions; Hedging
and Related Income Strategies; Portfolio
Transactions
18 Management. . . . . . . . . . . . . . . . . Directors and Officers
19 Control Persons and Principal Holders of
Securities . . . . . . . . . . . . . . . . Control Persons and Principal Holders of
Securities
20 Investment Advisory and Other Services . . Investment Advisory Arrangements;
Independent Public Accountants; Management
of the Fund (in Prospectus); Custodian,
Transfer and Dividend Disbursing Agent and
Registrar (in Prospectus)
21 Brokerage Allocation and Other Practices. . Portfolio Transactions
22 Tax Status . . . . . . . . . . . . . . . . Taxes
23 Financial Statements. . . . . . . . . . . . Financial Statements
</TABLE>
<PAGE>
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
COMMON STOCK
------------------------
PaineWebber Premier Insured Municipal Income Fund Inc. ('Fund') is a
diversified, closed-end management investment company. The Fund's investment
objective is to achieve a high level of current income that is exempt from
federal income tax, consistent with the preservation of capital. To achieve this
objective, the Fund normally invests substantially all of its assets in a
diversified portfolio of long-term Municipal Obligations that are insured as to
timely payment of both principal and interest by an entity with claims-paying
ability rated Aaa by Moody's Investors Service, Inc. ('Moody's'), AAA by
Standard & Poor's Ratings Group ('S&P') or an equivalent rating from another
nationally recognized statistical rating organization ('NRSRO') or (with respect
to 20% of the Fund's total assets) that are (i) backed by an escrow or trust
account containing sufficient U.S. government or U.S. government agency
securities to ensure the timely payment of principal and interest, (ii)
guaranteed as to the timely payment of principal and interest by an entity which
has a credit rating of Aaa by Moody's, AAA by S&P or an equivalent rating by
another NRSRO or (iii) rated Aaa by Moody's, AAA by S&P or an equivalent rating
by another NRSRO. No assurance can be given that the Fund will achieve its
investment objective. All or a portion of the Fund's dividends may be
attributable to interest income that is an item of tax preference for purposes
of the federal alternative minimum tax.
The Fund's common stock ('Common Stock') is listed and traded on the New
York Stock Exchange, Inc. ('NYSE') under the symbol 'PIF'. Shares of the Common
Stock may be offered pursuant to this Prospectus from time to time in order to
effect over-the-counter ('OTC') secondary market sales by PaineWebber
Incorporated ('PaineWebber') in its capacity as a dealer and secondary
market-maker at negotiated prices related to the prevailing market prices on the
NYSE at the time of sale. The closing price of the Common Stock on the NYSE on
June 9, 1995 was $11.63 per share. See 'TRADING HISTORY.' The Fund will not
receive any proceeds from the sale of any Common Stock offered pursuant to this
Prospectus.
The Fund has outstanding auction preferred shares ('APS') having a
liquidation preference of $150,000,000. The APS have resulted in financial
leverage for the Fund, which involves special risks. The Fund may utilize
additional leverage through the issuance of additional preferred stock or
through borrowings. See 'SPECIAL LEVERAGE CONSIDERATIONS' and 'DESCRIPTION OF
CAPITAL STOCK.'
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins') serves as
investment adviser and administrator of the Fund. This Prospectus concisely sets
forth certain information an investor should know before investing and should be
retained for future reference. A Statement of Additional Information ('SAI')
dated July , 1995 has been filed with the Securities and Exchange Commission
and is incorporated by reference in its entirety into this Prospectus. A table
of contents for the SAI is set forth as the last section of this Prospectus. A
copy of the SAI can be obtained without charge by writing to the Fund, by
contacting your PaineWebber investment executive or PaineWebber's correspondent
firms or by calling toll-free 1-800-852-4750.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
PAINEWEBBER INCORPORATED
------------------
The date of this Prospectus is July , 1995.
<PAGE>
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, directly or
indirectly.
<TABLE>
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SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering
price)...................................... None(1)
Dividend Reinvestment Fees................... None
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON STOCK)(2)
Investment Advisory and Administration
Fees........................................ 1.42%
Interest Payments on Borrowed Funds(3)....... 0.00%
Other Expenses............................... 0.32%
------
Total Annual Expenses................... 1.74%
</TABLE>
- - ------------------
(1) Prices for the Common Stock traded in the OTC market will reflect ordinary
dealer mark-ups.
(2) The percentages shown reflect the annualization of all expenses expected to
be incurred by the Fund as a percentage of only those net assets
attributable to the Common Stock. If expressed as a percentage of all of the
Fund's net assets (regardless of whether such assets are attributable to the
Common Stock or to the APS), such percentages would be lower. Investment
advisory and administration fees are payable to Mitchell Hutchins at an
annual rate of 0.90% of the Fund's average weekly net assets. See
'Management of the Fund' for additional information. The investment advisory
and administration fees payable to Mitchell Hutchins are higher than that
paid by most funds. 'Other Expenses' have been estimated based upon expenses
actually incurred for the fiscal year ended March 31, 1995.
(3) The Fund may borrow money. See 'Special Leverage
Considerations--Borrowings.' The Fund has no current intention of borrowing
money for investment purposes.
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming (i) a 5% annual return and (ii)
reinvestment of all dividends and other distributions at net asset value:
<TABLE>
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ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
- - -------- ----------- ---------- ---------
<S> <C> <C> <C>
$18 $55 $94 $205
</TABLE>
This Example assumes that the percentage amounts listed under Annual
Expenses remain the same in the years shown (except that Annual Expenses have
been reduced to reflect the completion of organization expense amortization
after five years from the commencement of investment operations). The above
tables and the assumptions in the Example of a 5% annual return and reinvestment
at net asset value are required by regulation of the Securities and Exchange
Commission ('SEC') applicable to all closed-end investment companies; the
assumed 5% annual return is not a prediction of, and does not represent, the
projected or actual performance of the Fund's Common Stock. In addition, while
this Example assumes reinvestment of all dividends and other distributions at
net asset value, participants in the Fund's Dividend Reinvestment Plan ('Plan')
will receive shares of the Fund's Common Stock purchased by the Plan agent at
the market price in effect at that time, which may be at, above, or below net
asset value.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND THE FUND'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus, and in the Statement
of Additional Information ('SAI').
<TABLE>
<S> <C>
The Fund.............................. PaineWebber Premier Insured Municipal
Income Fund Inc. (the 'Fund') is a
diversified, closed-end management
investment company. See 'The Fund.'
The Offering.......................... The shares of the Fund's common stock
('Common Stock') may be offered
pursuant to this Prospectus from time
to time in order to effect
over-the-counter ('OTC') secondary
market sales by PaineWebber
Incorporated ('PaineWebber') in its
capacity as a dealer and secondary
market-maker at negotiated prices
related to prevailing market prices on
the New York Stock Exchange, Inc.
('NYSE') at the time of sale.
PaineWebber is not obligated to
conduct any such market-making
activities and may discontinue such
activities at any time without notice,
at its sole discretion. No assurance
can be given as to the liquidity of,
or the trading market for, the Common
Stock as a result of any market-making
activities undertaken by PaineWebber.
The Common Stock is listed and traded
on the NYSE under the symbol 'PIF.'
See 'The Offering' and 'Trading
History.'
Investment Objective and
Policies............................ The Fund's investment objective is to
achieve a high level of current income
that is exempt from federal income
tax, consistent with the preservation
of capital. To achieve this objective,
the Fund normally invests
substantially all of its assets in a
diversified portfolio of long-term
Municipal Obligations that are insured
as to the timely payment of both
principal and interest by an entity
that, at the time of investment, has a
claims-paying ability rated Aaa by
Moody's Investors Service, Inc.
('Moody's'), AAA by Standard & Poor's
Ratings Group ('S&P') or has an
equivalent rating from another
nationally recognized statistical
rating organization ('NRSRO') or (with
respect to 20% of the Fund's total
assets) that are, at the time of
investment, (1) backed by an escrow or
trust account containing sufficient
U.S. government or U.S. government
agency securities to ensure the timely
payment of principal and interest; (2)
guaranteed as to the timely payment of
principal and interest by an entity
which has a credit rating of Aaa by
Moody's, AAA by S&P or an equivalent
rating by another NRSRO; or (3) not
insured, guaranteed or backed by
escrows but rated Aaa by Moody's, AAA
by S&P or have an equivalent rating by
another NRSRO. All or a portion of the
Fund's assets may be invested in
Municipal Obligations the interest on
which is an item of tax preference
('Tax Preference Item') for purposes
of the federal alternative minimum tax
('AMT'). No assurance can be given
that the Fund will achieve its
investment objective.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
See 'Investment Objective and Policies,'
'Insurance,' 'Other Investment
Practices,' 'Taxes' and Appendix A.
Municipal Obligations................. Municipal Obligations are debt
obligations or similar securities
issued by or on behalf of states
(including the District of Columbia),
territories or possessions of the
United States or their respective
political subdivisions, agencies or
instrumentalities, or by multistate
agencies or authorities, the interest
on which is, in the opinion of bond
counsel, exempt from federal income
tax. Municipal Obligations are issued
for various public purposes, including
construction of public facilities,
refinancing outstanding obligations
and obtaining funds for general
operating expenses and for loans to
other public institutions and
facilities. Municipal Obligations
include 'public purpose' obligations,
which generate interest that is exempt
from federal income tax and is not a
Tax Preference Item and qualified
'private activity' obligations, which
generate interest that is exempt from
federal income tax but that may be a
Tax Preference Item. The Municipal
Obligations in which the Fund may
invest include municipal bonds,
industrial development and private
activity bonds, municipal lease
obligations, zero coupon obligations,
floating and variable rate
obligations, participation interests
and custodial receipts for any of the
foregoing, inverse floaters, put
bonds, tender option bonds and certain
municipal derivatives, such as
detachable call options and Municipal
Obligations with embedded caps. The
market prices of inverse floaters and
zero coupon obligations will be more
volatile than those of other types of
municipal obligations and certain
Municipal Obligations, such as many
forms of municipal lease obligations,
may be illiquid.
See 'Investment Objective and Policies,'
'Other Investment Practices' and
'Appendix A.'
Insurance............................. Insurance for Municipal Obligations in
which the Fund invests will be
obtained from insurance companies
having claims-paying ability ratings
of Aaa from Moody's or AAA from S&P
or having an equivalent rating from
another NRSRO. Such insurance may be
purchased by the issuer of the
Municipal Obligation or by a third
party at the time of issuance of the
Municipal Obligation ('Original Issue
Insurance') or by the Fund or a third
party subsequent to the original
issuance of the Municipal Obligation
('Secondary Market Insurance'). The
Fund also may purchase insurance
covering certain Municipal Obligations
which it intends to purchase for its
portfolio or which it already owns
('Portfolio Insurance'). See
'Insurance.'
Auction Preferred Shares.............. The Fund has outstanding 800 shares of
Auction Preferred Shares ('APS')
Series A, 800 shares of APS Series B,
800 shares of APS Series C and 600
shares of APS Series D, having an
aggregate liquidation value of
$150,000,000. The APS have resulted
in the financial leveraging of
the Common Stock. The APS pay
dividends at rates that are adjusted
over relatively short periods of
time and that
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
reflect prevailing short-term,
tax-exempt interest rates. Through
this leveraging technique, the Fund
seeks to obtain a higher yield for
Common Stockholders than would be
available if the APS had not been
issued. The APS have received ratings
of aaa from Moody's and AAA from S&P.
The Fund may utilize additional
leverage through the issuance of
additional preferred stock or through
borrowings. There are special risks
associated with leveraging, including
the possibility that changes in the
relationship of short- and long-term
interest rates might cause the yield
on, and the net asset value of, the
Common Stock to be lower than would be
the case without leveraging.
See 'Special Leverage Considerations'
and 'Description of Capital Stock.'
Investment Adviser and
Administrator....................... Mitchell Hutchins Asset Management Inc.
('Mitchell Hutchins'), a wholly owned
asset management subsidiary of
PaineWebber, serves as the Fund's
investment adviser and administrator.
Mitchell Hutchins provides investment
advisory and portfolio management
services to investment companies,
pension funds and other institutional,
corporate and individual clients. The
Fund pays Mitchell Hutchins, as
investment adviser and administrator,
a fee, computed weekly and payable
monthly, in an amount equal to an
annual rate of 0.90% of the Fund's
average weekly net assets. This fee is
higher than the advisory and
administrative fees paid by most
funds. See 'Management of the Fund.'
Dividends and Other
Distributions....................... The Fund declares and pays monthly cash
dividends to Common Stockholders at a
level rate that, on an annual basis
and after payment of dividends on any
preferred stock, results in the
distribution of all of the Fund's net
investment income. The dividend rate
on the Common Stock is adjusted by the
Fund's board of directors as necessary
to reflect the performance of the
Fund. The Fund intends to distribute
annually to Common Stockholders
substantially all of the net capital
gains realized by the Fund to the
extent that such net capital gains are
not necessary to satisfy dividend,
redemption or liquidation preferences
of the APS or any other preferred
stock.
For federal tax purposes, the Fund is
required to allocate net realized
capital gains and any taxable income
(along with tax-exempt income) between
Common Stockholders and any preferred
stockholders in proportion to total
distributions paid to each class of
stockholders for the relevant year. If
a portion of the dividends paid on the
preferred stock is taxable because of
such allocations, the Fund may be
required to make an additional
dividend payment to the preferred
stockholders so that the net after-tax
return on the preferred stock is the
same after the additional dividend as
the net after-tax return that would
have been derived if the initial
dividends had qualified in their
entirety as tax-
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
exempt income. Common Stockholders are
not entitled to comparable additional
dividends and any such payments to the
preferred stockholders would reduce
the net investment income, capital
gains or other income available for
distribution to the Common
Stockholders.
Dividends paid to Common Stockholders
are exempt from federal income tax to
the extent such dividends are properly
designated by the Fund as being
derived from interest on tax-exempt
securities. All or a portion of such
dividends may be attributable to
interest income that is a Tax
Preference Item.
See 'Dividends and Other Distributions;
Dividend Reinvestment Plan' and
'Taxes.'
Dividend Reinvestment Plan............ The Fund has established a Dividend
Reinvestment Plan ('Plan') under which
all Common Stockholders whose shares
are registered in their own names, or
in the name of PaineWebber or its
nominee, have all dividends and other
distributions on their shares of
Common Stock automatically reinvested
in additional shares of Common Stock,
unless such Common Stockholders elect
to receive cash. Common Stockholders
who elect to hold their shares in the
name of another broker or nominee
should contact such broker or nominee
to determine whether, or how, they may
participate in the Plan. Additional
shares of Common Stock acquired under
the Plan will be purchased in the open
market, on the NYSE or otherwise, at
prices that may be higher or lower
than the net asset value per share of
the Common Stock at the time of the
purchase. The Fund will not issue any
new shares of Common Stock in
connection with the Plan. See
'Dividends and Other Distributions;
Dividend Reinvestment Plan.'
Special Risk Considerations........... Insurance. There can be no assurance
that the insurers whose policies
insure Municipal Obligations held by
the Fund will be able to maintain
their Aaa, AAA or equivalent
claims-paying ability ratings
or to honor their obligations
under all circumstances. The
loss of such ratings or an
inability to honor such obligations
would be likely to have an adverse
effect on the market value of the
Municipal Obligations covered by
policies issued by such insurers to
the extent the Fund is not able to or
does not obtain alternative insurance.
Mitchell Hutchins will engage in an
orderly disposition of downgraded
Municipal Obligations to the extent
necessary to ensure that the Fund's
holdings of Municipal Obligations
rated below Baa by Moody's, BBB by S&P
or an equivalent rating by another
NRSRO do not exceed 5% of the Fund's
net assets.
Alternative Minimum Tax; State and Local
Taxation. The Fund may invest all or a
portion of its assets in Municipal
Obligations the interest on which is a
Tax Preference Item. Accordingly, the
Fund may not be an appropriate
investment for investors who are
subject to AMT liability or who would
become subject to AMT liability by
reason of
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
an investment in the Fund. All or a
portion of the Fund's dividends also
may be subject to state and local
taxation.
Market Risk of Insured Municipal
Obligations. Although insurance or
guarantees on, or escrows of U.S.
government securities with respect to,
Municipal Obligations reduce financial
or credit risk, such Municipal
Obligations remain subject to market
risk (i.e., the risk of fluctuations
in market value as a result of changes
in prevailing interest rates).
Illiquid Securities. The Fund may invest
up to 20% of its net assets in
illiquid securities. The Fund may not
be able readily to dispose of such
securities at an amount that
approximates that at which the Fund
has valued them and would have to sell
other investments if necessary to
raise cash to meet its obligations.
Illiquid securities include, among
other things, municipal lease
obligations (including certificates of
participation) other than those that
Mitchell Hutchins has determined to be
liquid pursuant to guidelines
established by the Fund's board of
directors.
Rights of Preferred Stockholders. In the
event that dividends payable on any
preferred stock remain unpaid for a
period of two years, the preferred
stockholders will, for so long as the
dividends remain unpaid, be entitled
to elect a majority of the Fund's
board of directors. In the event of
any voluntary or involuntary
liquidation, dissolution or winding up
of the Fund, the preferred
stockholders will be entitled to
receive a preferential liquidating
distribution equal to the purchase
price of the preferred stock plus any
accrued and unpaid dividends before
any distribution of assets is made to
the Common Stockholders.
Anti-Takeover Provisions. The Fund's
Articles of Incorporation contain
provisions limiting (1) the ability of
other entities or persons to acquire
control of the Fund, (2) the Fund's
freedom to engage in certain
transactions and (3) the ability of
the Fund's directors or stockholders
to amend the Articles of
Incorporation. These provisions of the
Articles of Incorporation may be
regarded as 'anti-takeover'
provisions. These provisions could
have the effect of depriving the
Common Stockholders of opportunities
to sell their shares at a premium over
prevailing market prices by
discouraging a third party from
seeking to obtain control of the Fund
in a tender offer or similar
transaction. The overall effect of
these provisions is to render more
difficult the accomplishment of a
merger or the assumption of control by
a stockholder who owns beneficially
more than 5% of the Fund's shares.
They provide, however, the advantage
of potentially requiring persons
seeking control of the Fund to
negotiate with its management
regarding the price to be paid and
facilitating the continuity of the
Fund's management, investment
objective and policies.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
See 'Investment Objective and Policies,'
'Insurance,' 'Other Investment
Practices,' 'Taxes' and 'Description
of Capital Stock.'
Market Price and Net Asset Value of
Shares.............................. Shares of the Fund and of other
closed-end investment companies have
in the past frequently traded at a
discount to their net asset values.
The market value of Municipal
Obligations (and, accordingly, the
Fund's net asset value) generally
increases when interest rates decline
and decreases when interest rates
rise, and these changes are likely to
be greater in the case of a fund
having a leveraged capital structure.
Whether investors will realize gains
or losses upon the sale of Common
Stock will not depend upon the Fund's
net asset value, but will depend
entirely upon whether the market price
of the Common Stock at the time of
sale is above or below the original
purchase price for the shares.
Accordingly, the Common Stock is
designed primarily for long-term
investors, and investors in the Common
Stock should not view the Fund as a
vehicle for trading purposes.
See 'Trading History,' 'Investment
Objective and Policies,' 'Special
Leverage Considerations' and
'Description of Capital Stock.'
Special Leverage Considerations....... The APS have resulted in leverage, which
poses special risks for Common
Stockholders, including the
possibility of higher volatility of
both the net asset value and the
market value of the Common Stock.
Fluctuations in the dividend rates on
the preferred stock will affect the
dividends on the Common Stock. There
can be no assurance that the Fund will
be able to realize a higher return on
its investment portfolio than the then
current dividend rate on any preferred
stock. If the then current dividend
rate on any preferred stock were to
exceed the rate of return on the
Fund's portfolio, the Fund's leveraged
capital structure would result in a
lower yield to Common Stockholders
than if the Fund were not leveraged.
Moreover, any decline in the value of
the Fund's assets will be borne
entirely by Common Stockholders.
Accordingly, the effect of leverage in
a declining market would be a greater
decrease in the net asset value of the
Common Stock than if the Fund were not
leveraged, which may be reflected in a
greater decline in the market price of
the Common Stock.
See 'Special Leverage Considerations,'
'Taxes' and 'Description of Capital
Stock.'
</TABLE>
8
<PAGE>
FINANCIAL HIGHLIGHTS
The table below provides selected per share data and ratios for one share
of Common Stock for each of the periods shown. This information is supplemented
by the financial statements and the accompanying notes appearing in the Fund's
Annual Report to Shareholders for the fiscal year ended March 31, 1995, which
are incorporated by reference into the Fund's SAI, which can be obtained by
shareholders upon request. The financial statements and notes and the financial
information in the table below have been audited by Ernst & Young LLP,
independent auditors, whose report thereon is included in the Annual Report to
Shareholders, which may be obtained without charge.
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE FISCAL JUNE 8, 1993+
YEAR ENDED TO
MARCH 31, 1995 MARCH 31, 1994
-------------- --------------
<S> <C> <C>
Net asset value, beginning of period.... $ 13.42 $ 15.00
-------------- --------------
Net investment income................... 1.02** 0.73
Net realized and unrealized gains
(losses) from investment
transactions.......................... 0.04 (1.44)
-------------- --------------
Net increase (decrease) in net asset
value from operations................. 1.06 (0.71)
-------------- --------------
Dividends and distributions:
From net investment income--common
stockholders....................... (0.79) (0.60)
From net investment income--preferred
stockholders....................... (0.25) (0.13)
In excess of net investment income to
common stockholders................ (0.02) --
-------------- --------------
Total dividends and distributions to
shareholders.......................... (1.06) (0.73)
-------------- --------------
Underwriting and offering costs incurred
with the preferred stock offering
charged to common stock............... -- (0.14)
-------------- --------------
Net asset value, end of period.......... $ 13.42 $ 13.42
-------------- --------------
-------------- --------------
Per share market value, end of period... $ 11.13 $ 13.00
-------------- --------------
-------------- --------------
Total investment return (1)............. (8.17)% (9.74)%
-------------- --------------
-------------- --------------
Ratios to average net assets
attributable to common shares:
Total expenses....................... 1.74% 1.57%*
Net investment income--before
preferred stock dividends.......... 7.94% 5.92%*
Preferred stock dividends............ 2.02% 0.98%*
Net investment income--available to
common stockholders................ 5.92% 4.94%*
Supplemental Data:
Net assets, end of period (000's).... $ 426,795 $ 333,825
-------------- --------------
-------------- --------------
Portfolio turnover rate.............. 4% 8%
Asset coverage per share of preferred
stock, end of period............... $ 142,265 $ 139,094
</TABLE>
- - ------------------
<TABLE>
<S> <C>
+ Commencement of operations
* Annualized
** Calculated using the average share method.
</TABLE>
(Footnotes continued on next page)
9
<PAGE>
(Footnotes continued from previous page)
<TABLE>
<S> <C>
(1) Total investment return is calculated assuming a purchase of one share
of common stock at the current market price on the first day of the
period reported and the sale at the current market price on the last
day of the period reported, and assuming reinvestment of dividends and
other distributions to common shareholders at prices obtained under
the Fund's Dividend Reinvestment Plan. Total investment return for
periods less than a year have not been annualized. Total investment
return does not reflect brokerage commissions.
</TABLE>
The following information relates to the APS outstanding as of the end of
the periods indicated. See 'Special Leverage Considerations.'
<TABLE>
<CAPTION>
ASSET INVOLUNTARY
COVERAGE LIQUIDATING AVERAGE
FISCAL TOTAL AMOUNT PER PERFORMANCE MARKET VALUE
YEAR SENIOR SECURITIES OUTSTANDING* UNIT** PER UNIT*** PER UNIT****
- - ------------------- --------------------------------------------- ------------ -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1994+ APS Series A, B and C........................ $120,000,000 $139,094 $50,000 $ 96,654
1995++ APS Series A, B, C and D..................... $150,000,000 $142,265 $50,000 $ 76,554
</TABLE>
- - ---------------
<TABLE>
<S> <C>
* Based on liquidation value of $50,000 per share. The number of
outstanding shares of each Series of APS has not changed since the
Series was issued and is as follows: Series A, B and C (each issued
August 12, 1993)--800 shares of each Series; APS Series D (issued
November 28, 1994)--600 shares.
** Asset Coverage Per Unit is the same for each APS Series.
*** Plus any accrued but unpaid dividends.
**** Average Market Value Per Unit is the same for each APS Series and is
calculated by multiplying $50,000 by the result obtained by dividing:
(a) the average monthly market value of the Common Stock during the
fiscal year; by (b) the average of the amount of APS outstanding at
the end of such month.
+ Reflects the period from August 12, 1993 (date of issuance of APS
Series A, B and C) to March 31, 1994.
++ Reflects the full fiscal year for APS Series A, B and C and the period
from November 28, 1994 (date of issuance) to March 31, 1995 for APS
Series D.
</TABLE>
10
<PAGE>
THE FUND
The Fund is a diversified, closed-end management investment company and has
registered as such under the Investment Company Act of 1940 ('1940 Act'). The
Fund was incorporated under the laws of the State of Maryland on February 18,
1993. The Fund's principal office is located at 1285 Avenue of the Americas, New
York, New York 10019, and its telephone number is (212) 713-2000.
THE OFFERING
Shares of the Common Stock may be offered pursuant to this Prospectus from
time to time in order to effect OTC secondary market sales by PaineWebber in its
capacity as a dealer and secondary market-maker at negotiated prices related to
prevailing market prices on the NYSE at the time of sale. Costs incurred in
connection with this offering will be paid by PaineWebber. PaineWebber's
principal offices are located at 1285 Avenue of the Americas, New York, New York
10019. Mitchell Hutchins is a wholly owned subsidiary of PaineWebber.
USE OF PROCEEDS
The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by PaineWebber as a
result of its OTC secondary market sales of the Common Stock will be utilized by
PaineWebber in connection with its secondary market operations and for general
corporate purposes.
TRADING HISTORY
Shares of the Common Stock, par value $.001 per share are listed and traded
on the NYSE under the symbol 'PIF.' The following table sets forth for the
Common Stock for each quarterly period since the Fund commenced operations: (a)
the per share high and low sales prices as reported by the NYSE; (b) the per
share net asset values, based on the Fund's computation as of 4:00 p.m. on the
last NYSE business day for the week corresponding to the dates on which the
respective high and low sales prices were recorded; and (c) the discount or
premium to net asset value represented by the high and low sales prices shown.
THE RANGE OF NET ASSET VALUES AND/OR PREMIUMS AND DISCOUNTS FOR THE COMMON STOCK
DURING THE PERIODS SHOWN MAY BE BROADER THAN IS SHOWN ON THIS TABLE. On June 9,
1995, the closing price per share of Common Stock on the NYSE was $11.63, the
Fund's net asset value per share was $14.07 and the discount to net asset value
per share was (17.4)%.
<TABLE>
<CAPTION>
(DISCOUNT) OR
PREMIUM TO NET
SALES PRICES NET ASSET VALUES ASSET VALUE
-------------- ---------------- ----------------
QUARTER ENDED HIGH LOW HIGH LOW HIGH LOW
- - ------------- ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
6/30/93*..... $15 1/4 $14 1/2 $15.00 $15.13 1.67% (4.16)%
9/30/93...... 15 3/8 14 3/8 15.75 15.70 (2.38) (8.44)
12/31/93..... 15 3/8 14 16.00 15.04 (3.91) (6.91)
3/31/94...... 15 1/8 12 3/4 15.78 14.27 (4.15) (10.65)
6/30/94...... 13 3/8 12 13.37 13.37 0.04 (10.25)
9/30/94...... 12 1/8 10 5/8 13.66 12.81 (11.24) (17.06)
12/31/94..... 10 7/8 9 3/8 12.75 11.13 (14.71) (15.77)
3/31/95...... 11 5/8 10 1/8 12.92 11.99 (10.02) (15.55)
6/30/95......
</TABLE>
* For the period June 8, 1993 (commencement of operations) to June 30,
1993.
See 'Description of Capital Stock--Common Stock Repurchases and Tender
Offers' and '--Conversion to Open-End Investment Company' as to methods that may
be undertaken by the Fund to reduce any discount.
11
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a high level of current
income that is exempt from federal income tax, consistent with the preservation
of capital. To achieve this objective, the Fund normally invests substantially
all of its assets in a diversified portfolio of long-term Municipal Obligations
that are insured as to the timely payment of both principal and interest by an
entity that, at the time of investment, has a claims-paying ability rated Aaa by
Moody's, AAA by S&P or an equivalent rating by another NRSRO or (with respect to
20% of the Fund's total assets) that are, at the time of investment, (1) backed
by an escrow or trust account containing sufficient U.S. government or U.S.
government agency securities to ensure the timely payment of principal and
interest; (2) guaranteed as to timely payment of principal and interest by an
entity which has a credit rating of Aaa by Moody's, AAA by S&P or an equivalent
rating by another NRSRO; or (3) not insured, guaranteed or backed by escrows but
rated Aaa by Moody's, AAA by S&P or an equivalent rating by another NRSRO. All
the Municipal Obligations described above will have, at the time of investment,
ratings of Aaa from Moody's, AAA from S&P or equivalent ratings from another
NRSRO or (with respect to the Municipal Obligations described in (1) above), if
unrated, will have been determined by Mitchell Hutchins to be of comparable
quality to Municipal Obligations that have received such ratings. In addition,
the Fund under normal circumstances invests at least 65% of its total assets in
income-producing securities. 'Long-term' as used in this Prospectus means
Municipal Obligations with maturities in excess of 10 years. No assurance can be
given that the Fund will achieve its investment objective.
Municipal Obligations are obligations issued by or on behalf of states
(including the District of Columbia), territories or possessions of the United
States or their respective political subdivisions, agencies or
instrumentalities, or by multistate agencies or authorities, the interest on
which is, in the opinion of bond counsel, exempt from regular federal income
tax. Municipal Obligations are issued for various public purposes, including
construction of public facilities, such as airports, bridges, hospitals,
housing, mass transportation, schools, streets and water and sewer works. Other
public purposes for which Municipal Obligations may be issued include
refinancing outstanding obligations and obtaining funds for general operating
expenses and for loans to other public institutions and facilities. Municipal
Obligations include 'public purpose' obligations, which generate interest that
is exempt from federal income tax and is not a Tax Preference Item, and
qualified 'private activity' obligations, which generate interest that is exempt
from federal income tax but that, if the obligations were issued after August 7,
1986, is a Tax Preference Item. The types of Municipal Obligations in which the
Fund may invest are described in Appendix A to this Prospectus and in the SAI.
The Fund may invest more than 25% of its total assets in a particular
segment of the Municipal Obligations market, such as hospital, housing or
airport revenue bonds, or in securities the interest on which is paid from
revenues on similar types of projects, if Mitchell Hutchins determines that the
yields available from obligations in that market segment justify the potential
increase in risk resulting from a large investment in that market segment.
Although such obligations might be supported by the credit of governmental
entities or by non-governmental entities from a number of different industries,
an economic, business, political or other change affecting one such obligation
might also affect other obligations in the same market segment.
The yield on a Municipal Obligation depends on a variety of factors,
including general municipal and fixed-income security market conditions, the
financial condition of the issuer, the size of the particular offering, the
maturity, credit quality and rating of the issue and expectations regarding
changes in income tax rates. Generally, the longer the maturity of a Municipal
Obligation, the higher the yield and the greater the volatility. The market
value of Municipal Obligations, and accordingly the Fund's net asset value,
normally varies inversely with changes in interest rates. Such changes in the
values of Municipal Obligations held by the Fund will not affect the interest
income derived from them but will affect the net asset value of shares of the
Common Stock.
12
<PAGE>
Certain Municipal Obligations held by the Fund may permit the issuer to
call or redeem the obligations, in whole or in part, at its option. If an issuer
were to redeem Municipal Obligations held by the Fund during a time of declining
interest rates, the Fund might realize capital gains or losses at a time that it
would not otherwise do so, and the Fund might not be able to reinvest the
proceeds of the redemption in Municipal Obligations providing as high a level of
income as the obligations that were redeemed.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from federal income tax (and also, when
applicable, from treatment as a Tax Preference Item) are rendered by bond
counsel to the issuer at the time of issuance. Neither the Fund nor Mitchell
Hutchins will review the proceedings relating to the issuance of Municipal
Obligations or the basis for such opinions. Further, federal, state and local
laws may be enacted that adversely affect the tax-exempt status of interest on
Municipal Obligations or of the exempt-interest dividends received by the Fund's
stockholders or that impose other constraints upon enforcement of such
obligations. It is also possible that, as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of principal of and interest on their Municipal Obligations may be
materially and adversely affected.
The Fund may invest all or a portion of its assets in Municipal Obligations
the interest on which is a Tax Preference Item. Accordingly, stockholders may be
required to include a portion of the Fund's dividends in calculating their AMT
liability. Corporations that hold Common Stock must include the entire amount of
any exempt-interest dividends (including any portion that is not a Tax
Preference Item) in calculating their adjusted current earnings for purposes of
the AMT. The Fund may not be an appropriate investment for investors who are
subject to AMT liability or who would become subject to AMT liability by reason
of an investment in the Fund. All or a portion of the Fund's dividends also may
be subject to state and local taxation. See 'Taxes.'
Generally, Municipal Obligations which are covered by insurance or a
guarantee would not be rated Aaa or AAA, and might not be considered to be of
investment grade credit quality in the absence of such insurance or guarantee.
Although insurance or guarantees on, or escrows of U.S. government securities
with respect to, Municipal Obligations reduce financial or credit risk with
respect to those Municipal Obligations (i.e., the possibility that owners of the
insured Municipal Obligations will not receive timely scheduled payments of
principal or interest), insured, guaranteed and escrow backed Municipal
Obligations remain subject to market risk (i.e., fluctuations in market value as
a result of changes in prevailing interest rates). Accordingly, insurance or
guarantees on, or escrow backing with respect to, Municipal Obligations do not
ensure the market value of the Fund's assets or the net asset value or the
market price for the Common Stock.
The Fund's investment objective and certain investment limitations
described in the SAI are fundamental policies that may not be changed without
shareholder approval. In addition, the Fund's policy of normally investing at
least 80% of its total assets in insured Municipal Obligations may not be
changed without shareholder approval. All other investment policies may be
changed by the Fund's board of directors without shareholder approval. The Fund
does not consider custodial receipts to be Municipal Obligations in connection
with the foregoing 80% policy, unless such custodial receipts are of the type
utilized in order to provide Secondary Market Insurance for Municipal
Obligations.
INSURANCE
Each insured Municipal Obligation in which the Fund invests will be covered
by Original Issue Insurance, Secondary Market Insurance or Portfolio Insurance.
Original Issue Insurance is purchased with respect to a particular issue of
Municipal Obligations by the issuer thereof or a third party in conjunction with
the original issue of such Municipal Obligations. Secondary Market Insurance is
purchased by the Fund or a third party subsequent to the time of original
issuance of a Municipal Obligation. Both Original Issue Insurance and
13
<PAGE>
Secondary Market Insurance remain in effect as long as the Municipal Obligations
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such Municipal
Obligations. Portfolio Insurance may be purchased by the Fund with respect to
Municipal Obligations which the Fund intends to purchase or already owns and
would generally terminate when the Municipal Obligation is sold by the Fund or
redeemed. The Fund currently intends to emphasize investments in Municipal
Obligations with Original Issue Insurance or Secondary Market Insurance. There
is no limitation on the percentage of the Fund's assets that may be invested in
Municipal Obligations insured by any given insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio
Insurance generally do not insure payment on an accelerated basis, the payment
of any redemption premium (except with respect to certain premium payments in
the case of certain small issue industrial development and pollution control
Municipal Obligations), the value of the Common Stock or the market value of
Municipal Obligations, or payments of any tender purchase price upon the tender
of the Municipal Obligations. Such insurance also does not insure against
nonpayment of principal of or interest on Municipal Obligations resulting from
the insolvency, negligence or any other act or omission of the trustee or other
paying agent for such obligations.
The Fund's policy of investing in Municipal Obligations insured by insurers
whose claims-paying ability is rated Aaa by Moody's, AAA by S&P or the
equivalent by another NRSRO applies only at the time of the Fund's investment in
a Municipal Obligation. A subsequent downgrade by Moody's, S&P or another NRSRO
of an insurer's claims-paying ability would result in a downgrade of the rating
assigned to the Municipal Obligations insured by such insurer, although the
Municipal Obligations may have an independent rating that is higher than the new
rating assigned to the insurer's claims-paying ability. The securities could
experience a decrease in market price as a result of such a downgrade. In the
event the ratings assigned to such Municipal Obligations decline to below
investment grade, such Municipal Obligations would probably become less liquid
or even illiquid. Mitchell Hutchins will consider a downgrade by Moody's, S&P or
another NRSRO of the claims-paying ability of an insurer or the credit
characteristics of a particular issuer in determining whether the Fund should
continue to hold a Municipal Obligation. In making such a determination,
Mitchell Hutchins also will consider such factors as the rating assigned to the
Municipal Obligation independent of the insurance, its assessment of the credit
quality of the issuer of the Municipal Obligation and the price at which the
Municipal Obligation could be sold. Mitchell Hutchins will engage in an orderly
disposition of downgraded Municipal Obligations to the extent necessary to
ensure that the Fund's holdings of Municipal Obligations rated below Baa by
Moody's, BBB by S&P or an equivalent rating by another NRSRO do not exceed 5% of
the Fund's net assets. Municipal Obligations rated Baa by Moody's are investment
grade but Moody's considers them to have speculative characteristics. Changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity for Municipal Obligations that are rated Baa or BBB (or equivalent
ratings) to make principal and interest payments than is the case for higher
grade Municipal Obligations.
Although Mitchell Hutchins periodically reviews the financial condition of
each insurer, there can be no assurance that the insurers will be able to honor
their obligations in all circumstances. In the event of a default by an insurer
on its obligations with respect to any Municipal Obligations in the Fund's
portfolio, the Fund would look to the issuer or guarantor of the relevant
Municipal Obligations for payments of principal and interest and such issuer or
any guarantor may not be rated Aaa, AAA or the equivalent. Accordingly, the Fund
could be exposed to greater risk of non-payment in such circumstances which
could adversely affect the Fund's net asset value and the market price per share
of the Common Stock. Alternatively, the Fund could elect to dispose of such
Municipal Obligations; however, the market prices for such Municipal Obligations
may be lower than the Fund's purchase price for them and the Fund could sustain
a capital loss as a result.
14
<PAGE>
OTHER INVESTMENT PRACTICES
Certain of the other investment practices in which the Fund may engage and
that are described below may give rise to federal income tax. Under normal
circumstances, the Fund does not intend to engage in those practices to a
significant extent. The Fund's ability to engage in certain of these investment
practices is also limited by the rating agency guidelines applicable to the APS.
See 'Special Leverage Considerations' below and Appendix B to the SAI.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase Municipal Obligations on a when-issued basis, or may
purchase or sell Municipal Obligations for delayed delivery. In when-issued or
delayed delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but no payment or delivery will be made by the Fund prior to
the actual delivery or payment by the other party to the transaction. The Fund
will not accrue income with respect to a when-issued or delayed delivery
security prior to its stated delivery date. When the Fund purchases securities
on a when-issued or delayed delivery basis, however, it immediately assumes the
risks of ownership, including the risk of price fluctuation. Depending on market
conditions, the Fund's when-issued and delayed delivery purchase commitments
could cause its net asset value per share (and thus its market value per share)
to be more volatile, because such securities may increase the amount by which
the Fund's total assets, including the value of when-issued and delayed delivery
securities held by the Fund, exceed its net assets. Failure by the issuer to
deliver a security purchased on a when-issued or delayed delivery basis may
result in a loss or missed opportunity to make an alternative investment.
SHORT-TERM TAX-EXEMPT AND TAXABLE INVESTMENTS
The Fund normally invests substantially all of its assets in long-term
Municipal Obligations. However, in order to invest cash reserves or when, in the
opinion of Mitchell Hutchins, no suitable long-term Municipal Obligations are
available, the Fund may invest up to 20% of its total assets in high quality
short-term Municipal Obligations that are rated, at the time of investment, no
lower than MIG-2 by Moody's, SP-2 by S&P or the equivalent by another NRSRO or,
if unrated, that are determined by Mitchell Hutchins to be of comparable quality
to Municipal Obligations that are rated at least MIG-2 or SP-2. These short-term
Municipal Obligations may include variable or floating rate demand notes and
similar instruments that trade as short-term obligations. For temporary
defensive purposes, the Fund may invest without limit in such short-term
Municipal Obligations.
In addition, if in the opinion of Mitchell Hutchins no suitable short-term
Municipal Obligations are available, the Fund temporarily may hold cash and,
with respect to up to 20% of its total assets, invest in taxable money market
instruments, including: (1) U.S. government securities; (2) high quality
commercial paper that is rated, at the time of purchase, no lower than Prime-2
by Moody's or A-2 by S&P or, if unrated, that is determined by Mitchell Hutchins
to be of comparable quality to commercial paper that is rated at least Prime-2
or A-2; (3) bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of domestic banks); and (4) repurchase agreements with
respect to any of the foregoing. Interest earned from such taxable investments
will be taxable to stockholders as ordinary income when distributed. If the Fund
were to hold cash, the cash would not earn interest, and the Fund's yield would
be lower than if the cash had been invested. For temporary defensive purposes,
the Fund may invest without limit in such taxable money market instruments.
OTHER PRACTICES
The Fund may invest up to 20% of its net assets in illiquid securities. The
term 'illiquid securities' for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities and
includes, among other things, securities subject to contractual restrictions on
resale, repurchase agreements maturing in more than seven days and municipal
lease obligations (including certificates of participation) other than those
that Mitchell Hutchins has determined are liquid pursuant to guidelines
established by the board of directors. To the extent the Fund invests in
illiquid securities,
15
<PAGE>
the Fund may not be able to readily liquidate such investments, and would have
to sell other investments if necessary to raise cash to meet its obligations.
The lack of a liquid secondary market for illiquid securities may make it more
difficult for the Fund to assign a value to those securities for purposes of
valuing the Fund's portfolio and calculating its net asset value. The Fund also
may invest in stand-by commitments with respect to Municipal Obligations it
purchases or holds. The Fund may engage in short-sales 'against the box.'
Although it has no present intention to do so during the coming year, the Fund
may use options (both exchange-traded and OTC) to attempt to enhance income
(which would be taxable income) and also may attempt to reduce the overall risk
of its investments (hedge) by using options, futures contracts and interest rate
protection transactions.
SPECIAL LEVERAGE CONSIDERATIONS
PREFERRED STOCK
On August 12, 1993, the Fund issued 800 shares of APS Series A, 800 shares
of APS Series B and 800 shares of APS Series C, having an aggregate liquidation
preference of $120,000,000. The net proceeds to the Fund of the sale of the APS,
after deduction of underwriting discounts and offering expenses, was
$117,667,500. On November 28, 1994, in connection with the acquisition by the
Fund of the assets and liabilities of PaineWebber Intermediate Tax-Free Income
Fund Inc., the Fund issued 600 shares of APS Series D, having an aggregate
liquidation preference of $30,000,000. The Fund has the right to issue
addditional APS or other preferred stock to the maximum extent permitted under
the 1940 Act.
The APS have resulted (and any issuance of other preferred stock would
result) in the financial leveraging of the Common Stock. The use of leverage is
a speculative investment technique and involves special risks to the Common
Stockholders. These include the possibility of higher volatility of both the net
asset value and the market value of the Common Stock. Also, fluctuations in the
dividend rate on the APS will affect the dividends on the Common Stock. So long
as the Fund is able to realize a higher net rate of return on its investment
portfolio than the then current dividend rate on the APS (or on any other
preferred stock issued by the Fund) together with other related expenses, the
effect of the leverage will be to cause Common Stockholders to realize higher
current net investment income than if the Fund were not leveraged. There can be
no assurance, however, that the Fund will be able to realize a higher net
return. To the extent that the then current dividend rate on the APS approaches
the net return on the Fund's investment portfolio, the benefit of leverage to
Common Stockholders will be reduced, and if the then current dividend rate on
the APS were to exceed the net return on the Fund's portfolio, the Fund's
leveraged capital structure would result in a lower yield to Common Stockholders
than if the Fund were not leveraged.
Each Series of APS pays dividends at rates that normally are tax-exempt and
that are adjusted to market based on an auction process. Rates normally are
adjusted every 7 days on APS Series A, every 28 days on APS Series B, every
three months on APS Series C and every 7 days on APS Series D. As of March 31,
1995, the dividend rate payable on APS Series A was 4.190%, the dividend rate
payable on APS Series B was 4.124%, the dividend rate payable on APS Series C
was 4.180%, and the dividend rate payable on APS Series D was 4.100%. Based on
those dividend rates, the Fund must experience a net annual return of
approximately % in order to cover the annual dividend payments on the APS.
There can be no assurance that the Fund will continue to realize a higher net
rate of return on its investment portfolio than the dividend rate that must be
paid on the APS. The following table may assist the investor in understanding
the effects of leverage by illustrating the effect of leverage on return to a
Common Stockholder. The figures appearing in the table are hypothetical and
actual returns may be greater or less than those appearing in the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Return on
Portfolio (Net of
Expenses).............. -10% -5% 0% 5% 10%
Corresponding Return to
Common Stockholder..... -17.67% -9.96% -2.25% 5.46% 13.17%
</TABLE>
16
<PAGE>
Any decline in the net asset value of the Fund's investments will be borne
entirely by Common Stockholders. Accordingly, the effect of leverage in a
declining market would be a greater decrease in the net asset value of the
Common Stock than if the Fund were not leveraged and could adversely affect the
Fund's ability to make dividend payments on its Common Stock. Any such decrease
may be reflected in a greater decline in the market price of the Common Stock.
If the Fund's current investment income were not sufficient to meet dividend
requirements on the APS, it could become necessary for the Fund to liquidate
certain of its investments, thereby reducing net assets and, therefore, the net
asset value of the Common Stock. Such liquidations would cause the Fund to incur
transaction costs and might also cause the Fund to realize gains on securities
held for less than three months. Because under current tax laws less than 30% of
the Fund's annual gross income may be derived from the sale or other disposition
of stocks or other securities held for less than three months to maintain the
Fund's status as a regulated investment company ('RIC'), such gains would limit
the ability of the Fund to sell other securities held for less than three months
that the Fund might wish to sell in the ordinary course of its portfolio
management and thus might adversely affect the Fund's yield. Moreover, while
dividends on the APS, which are cumulative, are unpaid, no dividends or other
distributions would be permitted to be paid on Common Stock until the Fund
resumed its payments of dividends on the APS as required.
Under the 1940 Act, the value of the Fund's total assets, less all
liabilities and indebtedness not deemed to be senior securities under the 1940
Act, must be at least equal to 200% of the aggregate liquidation value of the
preferred stock (plus any outstanding indebtedness deemed to be senior
securities) at any time that the Fund pays a dividend or makes any other
distribution on Common Stock (other than a distribution payable in Common Stock)
or any time the Fund repurchases Common Stock, in each case after giving effect
to such dividend, distribution or repurchase. This requirement could impair the
ability of the Fund to maintain its qualification as a RIC for federal tax
purposes. To the extent necessary, the Fund intends to purchase or redeem
preferred stock in order to maintain asset coverage at the required 200% level.
In such circumstances, the Fund may have to liquidate portfolio securities in
order to meet redemption requirements. This could have the effect of reducing
the Fund's future net income. Such liquidations would cause the Fund to incur
related transaction costs. In addition, such liquidations might require the Fund
to realize capital gains or losses at a time that it would not otherwise and
might limit the ability of the Fund to dispose of other securities that it might
wish to sell in the ordinary course of portfolio management, and thus might
adversely affect the Fund's yield. Such redemptions could also require the Fund
to pay redemption premiums, which would adversely affect the Common
Stockholders.
The APS have received ratings of aaa from Moody's and AAA from S&P. The
rating agencies have established guidelines and other requirements with which
the Fund has agreed to comply for so long as the APS are outstanding and are
rated by Moody's and S&P. The rating agencies' portfolio guidelines establish 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 and the Fund's investment policies. These guidelines include asset
coverage requirements which are more restrictive than those under the 1940 Act,
restrictions on certain portfolio investments and investment practices,
requirements that the Fund maintain a portion of its assets in short-term high
quality fixed-income securities and certain mandatory redemption requirements.
The rating agency requirements also impose certain minimum issue size,
geographic diversification and other requirements for determining portfolio
assets that are eligible for computing compliance with their asset coverage
requirements. The ability of the Fund to comply with such asset coverage
maintenance ratios may be subject to circumstances which are beyond the control
of the Fund, such as market conditions for its portfolio securities. The terms
of the APS prohibit the payment of dividends or distributions on the Common
Stock in the event the Fund fails to meet such asset coverage maintenance ratios
and, in such circumstances, also provide for mandatory redemption of the APS,
with the potential adverse effects discussed above. For additional information
concerning rating agency guidelines and restrictions, see Appendix B to the SAI.
17
<PAGE>
In accordance with the 1940 Act, the holders of the APS have special voting
rights, including the right to elect at least two directors at all times. See
'Description of Capital Stock--Auction Preferred Shares--Voting Rights.'
The issuance of the APS has entailed certain costs and expenses, such as
underwriting discounts, fees associated with the registration of the APS with
the SEC, filings under state securities laws, rating agency fees, legal and
accounting fees, printing costs, and will entail certain other ongoing expenses,
such as administrative and accounting fees. These costs and expenses have been
or will be borne by the Fund. The initial costs and expenses of the APS have
been reflected as a reduction in the net asset value of the Common Stock.
Ongoing expenses associated with the APS will be reflected as a reduction in the
investment income that otherwise would be available for distribution to Common
Stockholders.
The Fund does not expect to realize significant taxable income. For federal
tax purposes, however, net realized capital gains and other taxable income, if
any, will be allocated (along with tax-exempt income) between Common
Stockholders and the holders of the APS in proportion to total distributions
paid to each class of stockholders for the year in which such capital gains or
other taxable income is realized or earned. The holders of the APS are entitled
to receive dividends on a cumulative basis before any dividend or other
distribution may be paid to Common Stockholders. Moreover, the terms of the APS
require that, if any portion of a dividend or other distribution to the holders
of the APS is taxable, the Fund must pay an additional dividend on the APS in an
amount such that the net after-tax return on the APS will be the same as the net
after-tax return that would have been derived if the initial dividends paid to
the holders of the APS had qualified in their entirety as tax-exempt income. Any
such additional dividends paid to holders of the APS will reduce the net
investment income of the Fund available for distribution to Common Stockholders.
BORROWINGS
The Fund is permitted to borrow money to finance Common Stock repurchases
and tender offers or for investment purposes from banks and other entities or
through reverse repurchase agreements in an amount not in excess of 33 1/3% of
total assets (including the amount of the borrowing and any other senior
securities representing indebtedness issued, but reduced by any liabilities and
indebtedness not constituting senior securities). Borrowing by the Fund would
create leverage and would entail speculative factors similar to those applicable
to the issuance of preferred stock. If borrowings are made on a secured basis,
the custodian will segregate the pledged assets for the benefit of the lender or
arrangements will be made with a suitable subcustodian, which may include the
lender. The Fund has no current intention of borrowing money for investment
purposes during the coming year. See 'Description of Capital Stock--Common Stock
Repurchases and Tender Offers.'
LENDING OF PORTFOLIO SECURITIES
To attempt to enhance income (which would be taxable income), the Fund is
authorized to lend portfolio securities with a value of up to 33 1/3% of its
total assets to broker-dealers or institutional investors that Mitchell Hutchins
deems qualified, but only when the borrower maintains with the Fund's custodian
collateral, either in cash or money market instruments, in an amount at least
equal to the market value of the securities loaned, plus accrued interest and
dividends, determined on a daily basis and adjusted accordingly. In determining
whether to lend securities to a particular broker-dealer or institutional
investor, Mitchell Hutchins will consider, and during the period of the loan
will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower, and the Fund will receive amounts
equivalent to any dividends, interest or other distributions on the securities
loaned. The Fund will regain record ownership of loaned securities to exercise
beneficial rights, such as voting and subscription rights and rights to
dividends, interest and other distributions, when regaining such rights is
considered by Mitchell Hutchins to be in the Fund's interest.
18
<PAGE>
MANAGEMENT OF THE FUND
Subject to the supervision of the Fund's board of directors, investment
advisory and administration services will be provided to the Fund by Mitchell
Hutchins pursuant to an Investment Advisory and Administration Contract dated
May 26, 1993 ('Advisory Contract'). Mitchell Hutchins' principal business
address is 1285 Avenue of the Americas, New York, New York 10019. Mitchell
Hutchins is a wholly owned subsidiary of PaineWebber, which is a wholly owned
subsidiary of Paine Webber Group Inc., a publicly held financial services
holding company. Mitchell Hutchins provides investment advisory and portfolio
management services to investment companies, pension funds and other
institutional, corporate and individual clients. As of June 30, 1995, total
assets under Mitchell Hutchins' management exceeded $ billion. As of that
date, Mitchell Hutchins served as investment adviser or sub-adviser to
registered investment companies with separate portfolios having aggregate
assets of approximately $ billion. Of that amount, more than $ billion
represented assets of registered investment companies investing primarily in
Municipal Obligations.
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and place orders
to buy, sell or hold particular securities; Mitchell Hutchins also supervises
all matters relating to the operation of the Fund and obtains for it corporate
officers, clerical staff, office space, equipment and services. As compensation
for its services, Mitchell Hutchins receives a fee, computed weekly and paid
monthly, in an amount equal to the annual rate of 0.90% of the Fund's average
weekly net assets. This fee is greater than the advisory and administration fees
paid by most funds.
The Fund incurs various other expenses in its operations, such as custody
and transfer agency fees, brokerage commissions, professional fees, expenses of
board and shareholder meetings, fees and expenses relating to registration of
its Common Stock, taxes and governmental fees, fees and expenses of the
directors, costs of obtaining insurance, expenses of printing and distributing
shareholder materials, organizational expenses, including costs or losses to any
litigation. For the fiscal year ended March 31, 1995, and for the fiscal period
June 8, 1993 (commencement of operations) through March 31, 1994, the Fund's
total expenses, stated as a percentage of average net assets, were 1.74% and
1.57%, respectively.
Gregory W. Serbe, a vice president of the Fund and a managing director of
Mitchell Hutchins, has been responsible for the day-to-day management of the
Fund's portfolio since the Fund's inception. Mr. Serbe is the primary portfolio
manager for four municipal bond funds with aggregate assets of over $ million
and he manages or oversees tax-exempt fixed income funds having aggregate assets
of more than $ billion. Mr. Serbe has been with Mitchell Hutchins since 1983.
Other members of Mitchell Hutchins' tax-exempt investments group provide input
on market outlook, interest rate forecasts, and other considerations pertaining
to tax-exempt investments.
DIVIDENDS AND OTHER DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund declares and pays monthly cash dividends to Common Stockholders at
a level rate that, on an annual basis and after the payment of dividends on any
outstanding preferred stock, results in the distribution of all of the Fund's
net investment income. The dividend rate is adjusted by the Fund's board of
directors as necessary to reflect the performance of the Fund. Dividend levels
are determined by the Fund's board of directors after giving consideration to a
number of factors, including the Fund's undistributed net investment income,
historical and projected net investment income, expenses and projected payments
to preferred stockholders. The Fund's policy to pay dividends on the Common
Stock on this basis may be changed by its board of directors without notice to
stockholders.
19
<PAGE>
The Fund intends to distribute annually to Common Stockholders
substantially all of its realized net capital gain (the excess of net long-term
capital gain over net short-term capital loss) and its realized net short-term
capital gain to the extent that such capital gains are not necessary to satisfy
the dividend, redemption or liquidation preferences of the APS or any other
preferred stock. Substantially all of the Fund's net investment income for any
fiscal year will be distributed to stockholders during or after the end of that
year.
To enable the Fund to maintain level monthly dividends, the Fund
anticipates that its monthly dividends may from time to time represent less or
more than the entire amount of net investment income earned by the Fund in the
period to which the dividend relates. Undistributed net investment income would
be available to supplement future distributions which might otherwise have been
reduced by reason of a decrease in the Fund's monthly net income due to
fluctuations or expenses or due to an increase in the dividend rate on the
Fund's outstanding preferred stock. As a result, dividends paid by the Fund for
any particular monthly period may be more or less than the amount of net
investment income earned by the Fund during the related period. Undistributed
net investment income will be reflected in the Fund's net asset value, and
correspondingly, distributions from undistributed net investment income will
reduce the Fund's net asset value.
For federal tax purposes, the Fund is required to allocate tax-exempt
income, net realized capital gains and any other taxable income between shares
of Common Stock and shares of any preferred stock in proportion to the total
dividends and other distributions paid to each class for the year in which such
tax-exempt income, net realized capital gains or other taxable income is earned
or realized. See 'Taxes.'
While any shares of the APS are outstanding, the Fund may not declare any
cash dividend or other distribution on its Common Stock unless at the time of
such declaration: (1) all accrued dividends on the APS have been paid; (2) any
required redemptions of the APS have been made; (3) after giving effect to the
dividend or other distribution, the asset coverage requirements imposed by the
rating agencies then rating the APS would be satisfied; and (4) the Fund's total
assets, less all liabilities and indebtedness not deemed to be senior securities
under the 1940 Act (determined after deducting the amount of such dividend or
other distribution), are at least 200% of the liquidation value of the
outstanding APS (plus any outstanding indebtedness deemed to be senior
securities). Under certain circumstances, these limitations could impair the
ability of the Fund to maintain its qualification for treatment as a RIC. See
'Taxes.' For further information regarding the impact of the issuance of the APS
on the payment of dividends and other distributions on the Common Stock, see
'Special Leverage Considerations.'
DIVIDEND REINVESTMENT PLAN
The Fund has established the Plan, under which all Common Stockholders
whose shares are registered in their own names, or in the name of PaineWebber or
its nominee, have all dividends and other distributions on their shares of
Common Stock automatically reinvested in additional shares, unless such Common
Stockholders elect to receive cash. Common Stockholders may affirmatively elect
to receive all dividends and other distributions in cash paid by check mailed
directly to them by PNC Bank, National Association ('Transfer Agent'), as
dividend disbursing agent. Common Stockholders who elect to hold their shares in
the name of a broker or nominee other than PaineWebber or its nominee should
contact such broker or other nominee to determine whether, or how, they may
participate in the Plan. The ability of such Common Stockholders to participate
in the Plan may change if their shares of the Common Stock are transferred into
the name of another broker or nominee.
The Transfer Agent serves as agent for the Common Stockholders in
administering the Plan. After the Fund declares a dividend or determines to make
a capital gain distribution, the Transfer Agent, as agent for the participants,
receives the cash payment and uses it to buy shares of Common Stock in the open
market, on the
20
<PAGE>
NYSE or otherwise, for the participants' accounts. Such shares may be purchased
at prices that are higher or lower than the net asset value per share of the
Common Stock at the time of purchase. The number of shares purchased with each
dividend or other distribution for a particular Common Stockholder equals the
result obtained by dividing the amount of the dividend or other distribution
payable to that stockholder by the average price per share (including applicable
brokerage commissions) that the Transfer Agent was able to obtain in the open
market. The Fund will not issue any new shares of Common Stock in connection
with the Plan. The Transfer Agent maintains all stockholder accounts in the Plan
and furnishes written confirmations of all transactions in the accounts,
including information needed by stockholders for personal and tax records.
Shares in the account of each Plan participant are held by the Transfer Agent in
non-certificated form in the name of the participant, and each stockholder's
proxy includes those shares of Common Stock purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or other
distributions. The Transfer Agent's fees for the handling of reinvestment of
distributions are paid by the Fund. However, each participant pays a pro rata
share of brokerage commissions incurred with respect to the Transfer Agent's
open market purchases of Fund shares in connection with the reinvestment of
distributions.
The automatic reinvestment of dividends and other distributions in shares
of Common Stock will not relieve participants of any income tax that may be
payable on such distributions. See 'Taxes.'
A holder who has elected to participate in the Plan may terminate
participation in the Plan at any time without penalty, and Common Stockholders
who have previously terminated participation in the Plan may rejoin it at any
time. Changes in elections must be made in writing to the Transfer Agent and
should include the stockholder's name and address as they appear on the share
certificate. An election to terminate participation in the Plan, until such
election is changed, will be deemed to be an election by a Common Stockholder to
take all subsequent distributions in cash. An election will be effective only
for distributions declared and having a record date at least ten days after the
date on which the election is received.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan with
respect to any dividend or other distribution if notice of the change is sent to
Plan participants at least 30 days before the record date for such distribution.
The Plan also may be amended or terminated by the Transfer Agent by at least 30
days' written notice to all Plan participants. All correspondence concerning the
Plan should be directed to the Transfer Agent at PNC Bank, National Association,
c/o PFPC Inc., P.O. Box 8950, Wilmington, Delaware 19899.
TAXES
The Fund intends to continue to qualify for treatment as a RIC under the
Internal Revenue Code. For each taxable year that the Fund so qualifies, it will
be relieved of federal income tax on that part of its investment company taxable
income (consisting generally of taxable net investment income, net short-term
capital gain and net realized gains from certain hedging transactions) and net
capital gain that is distributed to its stockholders.
Distributions by the Fund of the excess of tax-exempt interest income over
certain amounts disallowed as deductions, which the Fund designates as
'exempt-interest dividends,' generally may be excluded from gross income by its
stockholders for federal income tax purposes; those distributions may, however,
be taxable for state and local tax purposes. In order to pay exempt-interest
dividends, the Fund must (and intends to continue to) satisfy the requirement
that, at the close of each quarter of its taxable year, at least 50% of the
value of its total assets consists of obligations the interest on which is
tax-exempt.
If the Fund invests in any instruments that generate taxable income, under
the circumstances described in 'Other Investment Practices--Short-Term
Tax-Exempt and Taxable Investments,' distributions of the interest earned
thereon will be taxable to the Fund's stockholders as ordinary income to the
extent of its earnings and
21
<PAGE>
profits. Moreover, if the Fund realizes capital gains as a result of market
transactions, distributions of those gains also will be taxable to its
stockholders.
Interest on indebtedness incurred or continued by a stockholder to purchase
or carry shares of Common Stock is not deductible to the extent that interest
relates to exempt-interest dividends received from the Fund. If the Fund invests
in certain private activity bonds ('PABs'), the portion of the Fund's
exempt-interest dividends that is attributable to the interest it earns thereon
and that is specified in an annual notice from the Fund must be treated by its
stockholders as a Tax Preference Item in calculating their liability for the
AMT. Corporate stockholders, however, must include all of their exempt-interest
dividends in calculating their adjusted current earnings for purposes of the
AMT.
The Fund notifies its stockholders following the end of each calendar year
of the amounts of exempt-interest dividends, taxable dividends and capital gain
distributions paid (or deemed paid) that year and of any portion thereof that is
a Tax Preference Item. Dividends and other distributions declared by the Fund in
October, November or December of any year and payable to stockholders of record
on a date in any of those months will be deemed to have been paid by the Fund
and received by the stockholders on December 31 of that year if the
distributions are paid by the Fund during the following January. Accordingly,
those distributions will be reported by stockholders for the year in which that
December 31 falls.
Upon a sale or exchange of shares of Common Stock (including a sale
pursuant to a share repurchase or tender offer by the Fund), a Common
Stockholder generally will realize a taxable gain or loss (equal to the
difference between his adjusted basis for the shares and the amount realized),
which will be treated as a capital gain or loss if the shares are capital assets
in the stockholder's hands and will be a long-term capital gain or loss if the
shares have been held for more than one year. Notwithstanding this general rule,
however, any loss realized on a sale or exchange of shares of Common Stock (1)
will be disallowed to the extent of any exempt-interest dividends received on
those shares and will be treated as a long-term, rather than as a short-term,
capital loss to the extent of any capital gain distributions received thereon,
if the shares were held for six months or less, and (2) will be disallowed to
the extent those shares are replaced by other shares of Common Stock within a
period of 61 days beginning 30 days before and ending 30 days after the date of
disposition of the shares (which could occur, for example, as the result of
participation in the Plan), in which event, the replacement shares' basis will
be adjusted to reflect the disallowed loss.
Investors also should be aware that if shares of the Common Stock are
purchased shortly before the record date for any distribution, the investor will
pay full price for the shares and could receive some portion of the price back
as an exempt-interest dividend, a taxable dividend or capital gain distribution.
The foregoing is only a summary of the important federal tax considerations
generally affecting the Fund and the Common Stockholders; see the SAI for a
further discussion. There may be other federal, state or local tax
considerations applicable to a particular investor. Prospective stockholders are
therefore urged to consult their tax advisers.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 200 million shares of capital stock, $.001
par value. Currently, 800 shares of capital stock are classified as APS Series
A, 800 shares of capital stock are classified as APS Series B, 800 shares of
capital stock are classified as APS Series C and 600 shares of capital stock are
classified as APS Series D. All remaining shares of capital stock are classified
as Common Stock. The description set forth below under 'Common Stock' and
'Auction Preferred Shares' is subject to the provisions contained in the Fund's
Articles of Incorporation and By-Laws.
22
<PAGE>
COMMON STOCK
Shares of the Common Stock have no preemptive, conversion, exchange or
redemption rights. Each share has equal voting, dividend, distribution and
liquidation rights. The outstanding shares of Common Stock are, and those
offered hereby, when issued, will be, fully paid and nonassessable. Except as
otherwise indicated in this Prospectus and except as otherwise required by
applicable law, holders of shares of the APS have equal voting rights with
Common Stockholders (one vote per share) and will vote together with Common
Stockholders as a single class. All voting rights for the election of directors
are noncumulative, which means that the holders of more than 50% of the shares
can elect 100% of the directors then nominated for election if they choose to do
so and, in such event, the holders of the remaining shares will not be able to
elect any directors. However, the holders of the APS, voting as a class, are
entitled to elect two directors. The rights of the holders of the Common Stock
to elect directors and to vote on other matters are subject to the voting rights
of the APS, as discussed below under 'Description of Capital Stock--Auction
Preferred Shares.'
Under the rules of the NYSE applicable to listed companies, the Fund is
required to hold an annual meeting of stockholders in each year. If the Fund is
converted to an open-end investment company or if for any other reason the
Fund's shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of stockholders), the Fund
may decide not to hold annual meetings of stockholders. See 'Description of
Capital Stock--Common Stock Repurchases and Tender Offers; Description of
Capital Stock--Conversion to Open-End Investment Company.'
Shares of the Fund and of other closed-end investment companies frequently
trade at a discount to their net asset values. The market value of Municipal
Obligations (and, accordingly, the Fund's net asset value) generally increases
when interest rates decline and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Stock will not depend upon the Fund's net asset value, but will depend
entirely upon whether the market price of the Common Stock at the time of sale
is above or below the original purchase price for the shares. Accordingly, the
Common Stock is designed primarily for long-term investors, and investors in the
Common Stock should not view the Fund as a vehicle for trading purposes.
Any additional offerings of the Fund's Common Stock, if made, will require
approval of its board of directors and will be subject to the requirement of the
1940 Act that shares may not be sold at a price below the then current net asset
value, exclusive of underwriting discounts and commissions, except, among other
things, in connection with an offering to existing stockholders or with the
consent of a majority of the holders of the Fund's outstanding voting
securities.
The following chart indicates the Fund's preferred and common shares
outstanding as of March 31, 1995.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
EXCLUSIVE OF
AMOUNT HELD AMOUNT HELD
BY REGISTRANT BY REGISTRANT
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT OR FOR ITS ACCOUNT
- - ------------------------------------------------ ----------------- --------------------- ------------------------
<S> <C> <C> <C>
Common Stock.................................... 199,997,000 -- 20,628,363
APS Series A.................................... 800 -- 800
APS Series B.................................... 800 -- 800
APS Series C.................................... 800 -- 800
APS Series D.................................... 600 -- 600
</TABLE>
23
<PAGE>
AUCTION PREFERRED SHARES
General. Holders of the APS are entitled to receive cumulative cash
dividends at an adjustable rate determined through an auction process. See
'Special Leverage Considerations--Preferred Stock.' All outstanding shares of
APS are fully paid and non-assessable, have no preemptive or conversion rights
and are not subject to any sinking fund provisions. As long as the APS are
outstanding, the composition of the Fund's investment portfolio will reflect
guidelines established by the rating agencies rating the APS. See 'Appendix B'
to the SAI.
Liquidation Preference. Upon a liquidation of the Fund, whether voluntary
or involuntary, the holders of the APS then outstanding will be entitled to
receive and to be paid out of the assets of the Fund available for distribution
to its stockholders, before any payment or distribution shall be made on the
Common Stock or on any other class of stock of the Fund ranking junior to the
APS upon liquidation, an amount equal to the liquidation preference with respect
to the APS. The liquidation preference for the APS is $50,000 per share, plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to the date of final distribution. After the payment to
the holders of the APS of the full preferential amounts, the holders of APS 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 other
corporation nor the merger or consolidation of any other corporation into or
with the Fund shall be a liquidation, whether voluntary or involuntary, for the
purposes of this paragraph.
Voting Rights. Holders of the APS generally will have equal voting rights
with holders of Common Stock (one vote per share) and generally will vote
together with Common Stockholders as a single class. However, in connection with
the election of the Fund's directors, holders of outstanding shares of preferred
stock, including any APS, voting as a separate class, are entitled to elect two
of the Fund's directors; the remaining directors are elected by Common
Stockholders and preferred stockholders, including any APS, voting as a single
class. In addition, if at any time dividends (whether or not earned or declared)
on any outstanding preferred stock, including the APS, shall be due and unpaid
in an amount equal to two full years' dividends thereon, then the holders of
outstanding shares of preferred stock, including any APS, voting as a separate
class, will be entitled to elect a majority of the total number of directors of
the Fund so long as such dividends remain unpaid.
So long as any of the APS are outstanding, the Fund will not, without the
affirmative vote of a majority of the outstanding APS, determined with reference
to a 'majority of outstanding voting securities' as that term is defined in
Section 2(a)(42) of the 1940 Act (voting separately as one class): (a)
authorize, create or issue any class or series of stock ranking prior to or on a
parity with the APS with respect to the payment of dividends or the distribution
of assets upon liquidation or increase the authorized amount of APS (except that
the Fund may, without the vote of the holders of APS, authorize, create or issue
classes or series of preferred stock ranking on a parity with the APS with
respect to the payment of dividends and the distribution of assets upon
liquidation subject to continuing compliance by the Fund with the asset coverage
requirement of the 1940 Act and APS basic maintenance amount requirements
established by Moody's or S&P; provided that the Fund obtains written
confirmation from Moody's (if Moody's is then rating the APS) and S&P (if S&P is
then rating the APS) that the issuance of any such additional class or series of
preferred stock would not impair the rating then assigned by such rating agency
to the APS), (b) amend, alter or repeal the Fund's Articles of Incorporation
insofar as they relate to the APS ('APS Provisions'), whether by merger,
consolidation or otherwise, so as to affect any preference, right or power of
such APS or the holders thereof; provided 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 stock ranking junior to the APS with respect to payment of dividends and the
distribution of assets upon liquidation will be deemed to affect such
preferences, rights or powers only if
24
<PAGE>
Moody's or S&P is then rating the Fund and such issuance would, at the time
thereof, cause the Fund not to satisfy the asset coverage or APS basic
maintenance amount referred to above, or (c) file a voluntary application for
relief under federal bankruptcy law or any similar application under state law
for so long as the Fund is solvent and does not foresee becoming insolvent.
The Fund's board of directors may, however, without approval of the holders
of APS, amend, alter or repeal any or all of the definitions required to be
contained in the APS Provisions by the rating agencies in the event the Fund
receives written confirmation from the appropriate rating agency that any such
amendment, alteration or repeal would not impair the ratings then assigned to
the APS by such rating agency. Unless a higher percentage is provided for under
'Description of Capital Stock--Certain Anti-Takeover Provisions of the Articles
of Incorporation,' the affirmative vote of the holders of a majority of the
outstanding APS, voting as a separate class, will be required to approve any
plan of reorganization (as such term is defined under the 1940 Act) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
Fund's investment objective or changes in the investment restrictions described
as fundamental policies under 'Investment Limitations' in the SAI. The class
vote of holders of APS described above will in each case be in addition to a
separate vote of the requisite percentage of shares of Common Stock necessary to
authorize the action in question. To the extent permitted by the 1940 Act, each
Series of APS may vote as a separate series in certain circumstances.
The foregoing voting provisions will not apply with respect to the APS if,
at or prior to the time when a vote is required, such APS shall have been (i)
redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption.
Redemption, Purchase and Sale of APS by the Fund. The APS are redeemable by
the Fund in whole or in part at the original purchase price per share plus
accrued dividends per share and any applicable redemption premium. Any
redemption or purchase of shares of the APS or any other preferred stock by the
Fund will reduce the leverage applicable to shares of Common Stock, while any
resale of shares by the Fund will increase such leverage. See 'Special Leverage
Considerations.'
The board of directors, without the approval of the Common Stockholders,
may authorize an additional offering of preferred stock and may fix the terms of
the preferred stock to be offered.
COMMON STOCK REPURCHASES AND TENDER OFFERS
In recognition of the possibility that the Common Stock might trade at a
discount from net asset value and that any such discount may not be in the
interest of Common Stockholders, the Fund's board of directors has determined
that it will from time to time consider taking action to attempt to reduce or
eliminate any discount. To that end, the board may, in consultation with
Mitchell Hutchins, from time to time consider action either to repurchase shares
of the Common Stock in the open market or to make a tender offer for shares of
the Common Stock at their net asset value. The board currently intends at least
annually to consider making such open market repurchases or tender offers and at
such time may consider such factors as the market price of the Common Stock, the
net asset value of the Common Stock, the liquidity of the assets of the Fund,
whether such transactions would impair the Fund's status as a RIC or result in a
failure to comply with applicable asset coverage requirements, general economic
conditions and such other events or conditions that may have a material effect
on the Fund's ability to consummate such transactions. The board may at any
time, however, decide that the Fund should not repurchase shares or make a
tender offer. Common Stock will not be repurchased unless after such repurchase
the Fund would continue to satisfy the asset coverage requirements imposed under
the 1940 Act with respect to the APS and asset coverage requirements that may be
imposed by any rating agency as a condition of its rating of the APS. The Fund
may borrow to finance repurchases and tender offers. Interest on any such
borrowings will reduce the Fund's net income. See 'Special Leverage
Considerations--Borrowings.'
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<PAGE>
There is no assurance that repurchases or tender offers will result in the
Common Stock trading at a price that is equal or close to its net asset value
per share. The market price of shares of the Common Stock will be determined by,
among other things, the relative demand for and supply of such shares in the
market, the Fund's investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an investment as
compared with other investment alternatives. Nevertheless, the fact that the
Common Stock may be the subject of tender offers at net asset value from time to
time may reduce the spread that might otherwise exist between the market price
of the Common Stock and net asset value per share. In the opinion of Mitchell
Hutchins, sellers may be less inclined to accept a significant discount if they
have a reasonable expectation of being able to recover net asset value in
conjunction with a possible tender offer.
Although the board of directors believes that share repurchases and tender
offers generally would have a favorable effect on the market price of the Common
Stock, it should be recognized that the Fund's acquisition of shares of the
Common Stock would decrease the Fund's total assets and therefore have the
effect of increasing the Fund's expense ratio and decreasing the asset coverage
with respect to any outstanding APS. Because of the nature of the Fund's
investment objective, policies and portfolio, under current market conditions
Mitchell Hutchins anticipates that repurchases and tender offers generally
should not have a material, adverse effect on the Fund's investment performance
and that Mitchell Hutchins generally should not have any material difficulty in
disposing of portfolio securities in order to consummate share repurchases and
tender offers; however, this may not always be the case.
Any tender offer made by the Fund for shares of the Common Stock generally
would be at a price equal to the net asset value of the shares on a date
subsequent to the Fund's receipt of all tenders. Each offer would be made, and
the Common Stockholders would be notified, in accordance with the requirements
of the Securities Exchange Act of 1934 and the 1940 Act, either by publication
or mailing or both. Each person tendering shares would pay to the Fund's
Transfer Agent a service charge to help defray certain costs, including the
processing of tender forms, effecting payment, postage and handling. The Fund
expects that the costs of effecting a tender offer would exceed the aggregate of
all service charges received from those who tender their shares. Costs
associated with the tender would be charged against capital.
Tendered shares of Common Stock that have been accepted and purchased by
the Fund will be held in the Fund's treasury until retired by the board. If
tendered shares are not retired, the Fund may hold, sell or otherwise dispose of
the shares for any lawful corporate purpose as determined by the board of
directors.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Fund's board of directors will consider from time to time whether it
would be in the best interests of the Fund and its Common Stockholders to
convert the Fund to an open-end investment company. If the board of directors
determines that such a conversion would be in the best interests of the Fund and
its Common Stockholders and is consistent with the 1940 Act, the board will
submit to the Fund's stockholders, at the next succeeding annual or special
meeting, a proposal to amend the Fund's Articles of Incorporation to so convert
the Fund. Such amendment would provide that, upon its adoption by the holders of
at least a majority of the Fund's outstanding shares entitled to vote thereon,
the Fund will convert from a closed-end to an open-end investment company. If
the Fund converted to an open-end investment company, it would be able to
continuously issue and offer for sale shares of the Common Stock, and each such
share could be presented to the Fund at the option of the holder thereof for
redemption at a price based on the then current net asset value per share. In
such event, the Fund could be required to liquidate portfolio securities to meet
requests for redemption, the Common Stock would no longer be listed on the NYSE
and certain investment policies of the Fund would require amendment. In
addition, conversion to an open-end investment company would require that the
Fund redeem any outstanding
26
<PAGE>
shares of APS. The Fund might have to liquidate portfolio securities to finance
such redemptions. See 'Special Leverage Considerations.'
In considering whether to propose that the Fund convert to an open-end
investment company, the board of directors will consider various factors,
including, without limitation, the potential benefits and detriments to the Fund
and its stockholders of conversion, the potential alternatives and the benefits
and detriments associated therewith, and the feasibility of conversion given,
among other things, the Fund's investment objective and policies. In the event
of a conversion to an open-end investment company, the Fund may charge fees in
connection with the sale or redemption of its shares. As an open-end investment
company, the Fund may reserve the right to honor any request for redemption by
making payment in whole or in part in securities chosen by the Fund and valued
in the same way as they would be valued for purposes of computing the Fund's net
asset value. If payment is made in securities, a shareholder may incur brokerage
expenses in converting these securities into cash.
CERTAIN ANTI-TAKEOVER PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund presently has provisions in its Articles of Incorporation that
have the effect of limiting: (1) the ability of other entities or persons to
acquire control of the Fund; (2) the Fund's freedom to engage in certain
transactions; or (3) the ability of the Fund's directors or stockholders to
amend the Articles of Incorporation. These provisions of the Articles of
Incorporation may be regarded as 'anti-takeover' provisions. Under Maryland law
and the Fund's Articles of Incorporation, the affirmative vote of the holders of
at least a majority of the votes entitled to be cast is required for the
consolidation of the Fund with another corporation, a merger of the Fund with or
into another corporation (except for certain mergers in which the Fund is the
successor), a statutory share exchange in which the Fund is not the successor, a
sale or transfer of all or substantially all of the Fund's assets, the
dissolution of the Fund and any amendment to the Fund's Articles of
Incorporation. In addition, the affirmative vote of the holders of at least
66 2/3% (which is higher than that required under Maryland law or the 1940 Act)
of the outstanding shares of the Fund's capital stock is required generally to
authorize any of the following transactions or to amend the provisions of the
Articles of Incorporation relating to such transactions:
(1) merger, consolidation or statutory share exchange of the Fund with or
into any other corporation;
(2) issuance of any securities of the Fund to any person or entity for cash;
(3) sale, lease or exchange of all or any substantial part of the assets of
the Fund to any entity or person (except assets having an aggregate
market value of less than $1,000,000); or
(4) sale, lease or exchange to the Fund, in exchange for securities of the
Fund, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000)
if such corporation, person or entity is directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a 'Principal Shareholder'). A similar vote also would be required for
any amendment of the Articles of Incorporation to convert the Fund to an
open-end investment company by making any class of the Fund's capital stock a
'redeemable security,' as that term is defined in the 1940 Act. Such vote would
not be required with respect to any of the foregoing transactions, however,
when, under certain conditions, the board of directors approves the transaction,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets or the
conversion of the Fund to an open-end investment company, the affirmative vote
of the holders of a majority of the outstanding shares of the Fund's capital
stock would nevertheless be required. Reference is made to the Articles of
Incorporation of the Fund, on file with the SEC, for the full text of these
provisions. These voting rights are in addition to the rights of the holders of
any preferred stock outstanding to vote as a single class on certain matters.
See 'Description of Capital Stock--Auction Preferred Shares.'
27
<PAGE>
The provisions of the Articles of Incorporation described above and the
Fund's right to repurchase or make a tender offer for its shares could have the
effect of depriving the Common Stockholders of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund in a tender offer or similar
transaction. See 'Description of Capital Stock--Common Stock Repurchases and
Tender Offers; Description of Capital Stock--Conversion to Open-End Investment
Company.' The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a Principal
Shareholder. They provide, however, the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding
the price to be paid and facilitating the continuity of the Fund's management,
investment objective and policies. The board of directors of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are in
the best interests of the Fund and its stockholders.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND REGISTRAR
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as custodian of the Fund's assets. PNC Bank,
National Association, whose principal business address is Broad and Chestnut
Streets, Philadelphia, Pennsylvania 19110, serves as transfer and dividend
disbursing agent and registrar with respect to the Common Stock. Bankers Trust
Company, Four Albany Street, New York, New York 10006 serves as the Auction
Agent with respect to the APS and acts as transfer agent, registrar, dividend
disbursing agent and agent for certain notifications for the Fund in connection
with the APS.
FURTHER INFORMATION
Further information concerning these securities and the Fund may be found
in the Registration Statement, of which this Prospectus and the Fund's SAI
constitute a part, on file with the SEC.
The Table of Contents for the SAI is as follows:
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Policies and Restrictions.................................. 1
Hedging and Related Income Strategies................................. 10
Directors and Officers................................................ 17
Control Persons and Principal Holders of Securities................... 22
Investment Advisory Arrangements...................................... 22
Portfolio Transactions................................................ 23
Valuation of Common Stock............................................. 24
Taxes................................................................. 25
Additional Information................................................ 27
Financial Statements.................................................. 28
Appendix A............................................................ A-1
Appendix B............................................................ B-1
</TABLE>
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APPENDIX A
TYPES OF MUNICIPAL OBLIGATIONS
The Fund may invest in the following types of Municipal Obligations and in
such other types of Municipal Obligations as become available on the market from
time to time.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued to obtain funds for various
public purposes. The two principal classifications of municipal bonds 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 tax or from another specific
source, such as the user of the facility being financed. Certain municipal bonds
are 'moral obligation' issues, which normally are issued by special purpose
public authorities. In the case of such issues, an express or implied 'moral
obligation' of a related government unit is pledged to the payment of the debt
service but is usually subject to annual budget appropriations.
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS
Industrial development bonds ('IDBs') and private activity bonds ('PABs')
are municipal bonds issued by or on behalf of public authorities to finance
various privately operated facilities, such as airports or pollution control
facilities. IDBs and PABs are generally revenue bonds and thus are not payable
from the unrestricted revenue of the issuer. The credit quality of IDBs and PABs
is usually directly related to the credit standing of the user of the facilities
being financed. The Fund may invest more than 25% of its assets in IDBs and
PABs.
IDBs issued after August 15, 1986 generally are considered PABs, and to the
extent the Fund invests in such PABs, stockholders generally will be required to
include a portion of their exempt-interest dividends in calculating their
liability for the AMT. See 'Taxes.'
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are Municipal Obligations that may take the
form of leases, installment purchase contracts or conditional sales contracts,
or certificates of participation with respect to such contracts or leases.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain Municipal Obligations, however, provide that lease payments are subject
to partial or full abatement if, because of material damage or destruction of
the leased property, there is substantial interference with the lessee's use or
occupancy of such property. This 'abatement risk' may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as letters
of credit.
The liquidity of municipal lease obligations varies. See 'Other Investment
Practices.' Certain municipal 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 the case of a 'non-appropriation' lease, the
Fund's ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse
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to the general credit of the lessee, and disposition of the property in the
event of foreclosure might prove difficult. The Fund does not intend to invest a
significant portion of its assets in such 'non-appropriation' municipal lease
obligations. There is no limitation on the Fund's ability to invest in other
municipal lease obligations.
ZERO COUPON OBLIGATIONS
The Fund may invest up to 10% of its total assets in zero coupon Municipal
Obligations. Such obligations include 'pure zero' obligations, which pay no
interest for their entire life (either because they bear no stated rate of
interest or because their stated rate of interest is not payable until
maturity), and 'zero/fixed' obligations, which pay no interest for an initial
period and thereafter pay interest currently. Zero coupon obligations also
include securities representing the principal-only components of Municipal
Obligations from which the interest components have been stripped and sold
separately by the holders of the underlying Municipal Obligations. Zero coupon
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to changing
interest rates than obligations of comparable maturities that make current
distributions of interest. While zero coupon Municipal Obligations will not
contribute to the cash available to the Fund for purposes of paying dividends to
stockholders, Mitchell Hutchins believes that limited investments in such
securities may facilitate the Fund's ability to preserve capital while
generating tax-free income through the accrual of original issue discount. Zero
coupon Municipal Obligations will not be counted as income-producing securities
for purposes of the Fund's policy of normally investing at least 65% of its
total assets in income-producing securities. Zero coupon Municipal Obligations
generally are liquid, although such liquidity may be reduced from time to time
due to interest rate volatility and other factors. See 'Taxes' and 'Other
Investment Practices.'
FLOATING AND VARIABLE RATE OBLIGATIONS
The Fund also may purchase floating and variable rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under the demand feature of such notes and bonds generally
are secured by bank letters of credit or other credit support arrangements.
There frequently will be no secondary market for variable and floating rate
obligations held by the Fund, although the Fund may be able to obtain payment of
principal at face value by exercising the demand feature of the obligation.
PARTICIPATION INTERESTS
The Fund may invest in participation interests in municipal bonds,
including IDBs, PABs and floating and variable rate securities. A participation
interest gives the Fund an undivided interest in a municipal bond owned by a
bank. The Fund has the right to sell the instrument back to the bank. Such right
is generally backed by the bank's irrevocable letter of credit or guarantee and
permits the Fund to draw on the letter of credit on demand, after specified
notice, for all or any part of the principal amount of the Fund's participation
interest plus accrued interest. Generally, the Fund intends to exercise the
demand under the letters of credit or other guarantees only upon a default under
the terms of the underlying bond, or to maintain the Fund's portfolio in
accordance with its investment objective and policies. The ability of a bank to
fulfill its obligations under a letter of credit or guarantee might be affected
by possible financial difficulties of its borrowers, adverse interest rate or
economic conditions, regulatory limitations or other factors. Mitchell Hutchins
will monitor the pricing, quality and liquidity of the participation interests
held by the Fund, and the credit standing of banks issuing letters of credit or
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<PAGE>
guarantees supporting such participation interests on the basis of published
financial information reports of rating services and bank analytical services.
CUSTODIAL RECEIPTS
The Fund may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain Municipal Obligations. The underwriter of
these certificates or receipts typically purchases Municipal Obligations and
deposits the obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Custodial receipts evidencing specific coupon or
principal payments have the same economic attributes as zero coupon Municipal
Obligations described herein. Although under the terms of a custodial receipt
the Fund would be typically authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights that may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
INVERSE FLOATERS
The Fund may invest in Municipal Obligations on which the rate of interest
varies inversely with interest rates on other Municipal Obligations or an index.
Such obligations include components of securities on which interest is paid in
two separate parts--an auction component, which pays interest at a rate that is
set periodically through an auction process or other method, and a residual
component, which pays interest at a rate equal to the difference between the
rate that the issuer would have paid on a fixed-rate obligation at the time of
issuance and the rate paid on the auction component. The market value of an
inverse floater will be more volatile than that of a fixed-rate obligation and,
like most debt obligations, will vary inversely with changes in market interest
rates.
Because the interest rate paid to holders of residual components is
generally determined by subtracting the interest rate paid to the holders of
auction components from a fixed amount, the interest rate paid to residual
component holders will decrease as the auction component's rate increases and
increase as the auction component's rate decreases. Moreover, the extent of the
increases and decreases in market value of residual components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed rate Municipal Obligation having similar credit quality, redemption
provisions and maturity.
PUT BONDS
Put bonds are municipal bonds which give the holder an unconditional right
to sell the bond back to the issuer or a remarketing agent at a specified price
and exercise date, which is typically well in advance of the bond's maturity
date. If the put is a 'one time only' put, the Fund ordinarily will sell the
bond or put the bond, depending on the more favorable price. If the bond has a
series of puts after the first put, the bond will be held as long as, in
Mitchell Hutchins' opinion, it is in the best interests of the Fund to do so.
The obligation to purchase the bond on the exercise date of the put may be
supported by a letter of credit or other credit support agreement from a bank,
insurance company or other financial institution, the credit standing of which
affects the credit standing of the obligation. There is no assurance that an
issuer or remarketing agent for a put bond will be able to
A-3
<PAGE>
repurchase the bond on the put exercise date if the Fund chooses to exercise its
right to put the bond back to the issuer or remarketing agent.
TENDER OPTION BONDS
Tender option bonds are long-term municipal securities sold by a bank
subject to a 'tender option' that gives the purchaser the right to tender them
to the bank at par plus accrued interest at designated times (the 'tender
option'). The tender option may be exercisable at intervals ranging from
bi-weekly to semi-annually, and the interest rate on the bonds is typically
reset at the end of the applicable interval in order to cause the bonds to have
a market value that approximates their par value. The tender option generally
would not be exercisable in the event of a default on, or significant
downgrading of, the underlying municipal securities. Therefore, the Fund's
ability to exercise the tender option will be affected by the credit standing of
both the bank involved and the issuer of the underlying securities. The Fund
does not expect to invest more than 5% of its net assets in tender option bonds
during the coming year.
MUNICIPAL DERIVATIVES
The Fund may invest in derivative securities that are Municipal
Obligations, or components thereof, that have been specially structured to
reflect investment characteristics ordinarily associated with other securities
or to have other special rights desired by investors. Generally, such securities
are designed to allow investors to take advantage of expected interest rate
trends or to hedge interest rate or other risks. The Fund does not expect to
invest more than 5% of its net assets in any particular form of municipal
derivative during the coming year other than detachable call options and
Municipal Obligations with embedded caps. Detachable call options are sold by
issuers of Municipal Obligations separately from the Municipal Obligations to
which the call options relate and permit the purchasers of the call options to
acquire the Municipal Obligations at the call price(s) and call date(s). In the
event that interest rates drop, the purchaser could exercise the call option to
acquire Municipal Obligations that yield above-market rates. The Fund expects
during the coming year only to acquire detachable call options relating to
Municipal Obligations that the Fund already owns or will acquire in the
immediate future and thereby, in effect, make such Municipal Obligations
non-callable so long as the Fund continues to hold the detachable call option.
Municipal Obligations with embedded caps provide for additional tax-free
payments for a stated period (generally a period that is shorter than the bond's
maturity) above the fixed-rated interest payable on the Municipal Obligation to
the extent that the average level of a particular index exceeds a specified base
level. The Fund would use Municipal Obligations with embedded caps to offset the
risk of increases in short-term interest rates while continuing to earn
tax-exempt income. Investments in municipal derivatives may be subject to the
same risks as floating rate Municipal Obligations, risks of adverse tax
determinations or, in the case of municipal derivatives used for hedging
purposes, risks similar to those for other hedging strategies. See 'Hedging and
Related Income Strategies' in the SAI. The Fund will only invest in those
municipal derivatives that Mitchell Hutchins believes will facilitate the Fund's
ability to achieve its investment objective.
A-4
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND
OR PAINEWEBBER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUND OR
BY PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Fund Expenses................................... 2
Prospectus Summary.............................. 3
Financial Highlights............................ 9
The Fund........................................ 11
The Offering.................................... 11
Use of Proceeds................................. 11
Trading History................................. 11
Investment Objective and Policies............... 12
Insurance....................................... 13
Other Investment Practices...................... 15
Special Leverage Considerations................. 16
Management of the Fund.......................... 19
Dividends and Other Distributions; Dividend
Reinvestment Plan............................. 19
Taxes........................................... 21
Description of Capital Stock.................... 22
Custodian, Transfer and Dividend Disbursing
Agent and Registrar........................... 28
Further Information............................. 28
Appendix A...................................... A-1
</TABLE>
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(COPYRIGHT)1995 PAINEWEBBER, INC.
[LOGO] Recycled
Paper
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PAINEWEBBER PREMIER
INSURED MUNICIPAL
INCOME FUND INC.
COMMON STOCK
------------------------
P R O S P E C T U S
------------------------
PAINEWEBBER INCORPORATED
------------------------
JULY , 1995
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<PAGE>
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
STATEMENT OF ADDITIONAL INFORMATION
PaineWebber Premier Insured Municipal Income Fund Inc. ('Fund') is a
diversified closed-end management investment company. The Fund's investment
objective is to achieve a high level of current income that is exempt from
federal income tax, consistent with the preservation of capital. There is no
assurance that the Fund will achieve its investment objective.
Shares of the Fund's common stock ('Common Stock') may be offered from time
to time in order to effect secondary market sales over-the-counter ('OTC') by
PaineWebber Incorporated ('PaineWebber') in its capacity as a dealer and
secondary market-maker. PaineWebber may (but is not obligated to) make such a
secondary market.
Mitchell Hutchins Asset Management Inc. ('Mitchell Hutchins'), a wholly
owned subsidiary of PaineWebber, serves as investment adviser and administrator
of the Fund. This Statement of Additional Information ('SAI') is not a
prospectus and should be read only in conjunction with the Fund's current
Prospectus, dated July , 1995. Capitalized terms not otherwise defined herein
have the same meanings as in the Prospectus. Certain terms relating to the
Fund's Auction Preferred Shares ('APS') are defined in the Fund's Articles
Supplementary, which are on file with the Securities and Exchange Commission
('SEC'), Washington, D.C., as an exhibit to the registration statement of which
this Statement of Additional Information forms a part and may be obtained from
the SEC upon payment of the fee prescribed or inspected at the SEC's office at
no charge. A copy of the Prospectus may be obtained by contacting PaineWebber at
1285 Avenue of the Americas, New York, New York 10019, or calling toll free
1-800-852-4750. This Statement of Additional Information is dated July , 1995.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Fund's investment policies and limitations.
RATINGS AS INVESTMENT CRITERIA
Moody's Investors Service, Inc. ('Moody's'), Standard & Poor's Ratings
Group ('S&P') and the other nationally recognized statistical rating
organizations ('NRSROs') are private services that provide ratings of the credit
quality of debt obligations, including Municipal Obligations. It should be
emphasized that ratings are general and are not absolute standards of quality.
Consequently, Municipal Obligations with the same maturity, interest rate and
rating may have different market prices. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's financial condition may be better or worse than is indicated by its
rating. A description of Moody's and S&P's ratings is included in Appendix A to
this SAI.
<PAGE>
APS RATING AGENCY GUIDELINES
The Fund intends that, so long as the APS are outstanding, the composition
of its portfolio will reflect guidelines established by Moody's and S&P in
connection with their respective ratings of the APS. See Appendix B to this SAI.
MUNICIPAL OBLIGATIONS
Municipal Obligations, like other debt obligations, are subject to the risk
of non-payment. The ability of issuers of Municipal Obligations to make timely
payments of interest and principal may be adversely impacted in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the Municipal Obligation experiencing non-payment and
a potential decrease in the net asset value of the Fund. Issuers of Municipal
Obligations might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, the Fund could experience delays and limitations
with respect to the collection of principal and interest on such Municipal
Obligations and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. 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 securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund.
The Fund may invest up to 20% of its total assets in Municipal Obligations
that are not insured but are backed by an escrow or trust account which contains
securities issued or guaranteed by the U.S. government or U.S. government
agencies sufficient in amount to ensure the payment of interest and principal on
the original interest payment and maturity dates ('collateralized obligations').
Such collateralized obligations may not have received a rating from Moody's, S&P
or another NRSRO. Such collateralized obligations will include, but are not
limited to, Municipal Obligations that have been (i) advance refunded where the
proceeds of the refunding have been used to purchase U.S. government or U.S.
government agency securities that are placed in escrow and whose interest or
maturing principal payments, or both, are sufficient to cover the remaining
scheduled debt service on the Municipal Obligations, or (ii) issued under state
and local housing finance programs which use the issuance proceeds to fund
mortgages that are then exchanged for U.S. government or U.S. government agency
securities and deposited with a trustee as security for the Municipal
Obligations. Such collateralized obligations are normally regarded by market
participants as having the credit characteristics of the underlying U.S.
government or U.S. government agency securities.
Under normal circumstances, the Fund does not invest 25% or more of its
total assets in any one industry. Governmental issuers of Municipal Obligations
are not considered part of any industry and, therefore, are not subject to this
limitation. Municipal Obligations backed only by the assets and revenues of
non-governmental entities, however, are considered to be issued by such
non-governmental entities and would be subject to this limitation. The Fund
reserves the right to invest more than 25% of its assets in issuers located in
the same state, although it has no present intention of doing so during the
coming year. Current rating agency requirements applicable to the rating of the
Fund's APS prohibit such investment. If the Fund were to invest more than 25% of
its total assets in issuers located in the same state, it would be more
susceptible to adverse economic, business or regulatory conditions in that
state.
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INSURANCE FOR MUNICIPAL OBLIGATIONS
Effect of Insurance on Municipal Obligations. Municipal Obligations covered
by Original Issue Insurance or Secondary Market Insurance are themselves
assigned a rating of Aaa by Moody's, AAA by S&P or an equivalent rating from
another NRSRO, as the case may be, by virtue of such Aaa, AAA or equivalent
claims-paying ability of the insurer, and would generally be assigned a lower
rating if the rating were based primarily upon the credit characteristics of the
issuer without regard to the insurance feature. In the event Moody's, S&P or
another NRSRO should downgrade its assessment of the claims-paying ability of a
particular insurer, it could also be expected to downgrade the ratings assigned
to Municipal Obligations insured under Original Issue Insurance or Secondary
Market Insurance issued by such insurer.
The ratings, if any, assigned to Municipal Obligations insured under
Portfolio Insurance will be based primarily upon the credit characteristics of
the issuer without regard to the insurance feature, and will generally carry a
rating that is below Aaa or AAA. While in the portfolio of the Fund, however, a
Municipal Obligation backed by Portfolio Insurance will effectively be of the
same quality as a Municipal Obligation issued by an issuer of comparable credit
characteristics that is backed by Original Issue Insurance or Secondary Market
Insurance. In the event Moody's, S&P or another NRSRO should downgrade the
rating of the issuer of the Portfolio Insurance, the Municipal Obligations
insured under Portfolio Insurance issued by such insurer also would be of
reduced quality in the portfolio of the Fund.
Moody's, S&P and other NRSROs continually assess the claims-paying ability
of insurers and the credit characteristics of insurers and issuers, and there
can be no assurance that they will not downgrade their assessments subsequent to
the time the Fund purchases securities. A description of Moody's and S&P's
ratings of insurance companies' claims-paying ability is included in Appendix A
to this SAI.
Original Issue Insurance. Original Issue Insurance typically is purchased
from insurance companies, through payment of a single premium, with respect to a
particular issue of Municipal Obligations by the issuer thereof or a third party
(such as the underwriter) in conjunction with the original issuance of such
Municipal Obligations. Under such insurance, the insurer unconditionally insures
to the holder of the insured Municipal Obligation the timely payment of
principal and interest on such obligation when and as such payments shall become
due but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default or otherwise, the payments insured may be made in such amounts
and at such times as payments of principal would have been due had there not
been such acceleration. The insurer is responsible for such payments less any
amounts received by the holder from any trustee for the Municipal Obligation
issuers or from any other source.
In the event that interest on or principal of a Municipal Obligation
covered by insurance is due for payment but is unpaid by reason of nonpayment by
the issuer thereof, the applicable insurer will make payments to its fiscal
agent ( 'Fiscal Agent') equal to such unpaid amounts of principal and interest
not later than one business day after the insurer has been notified that such
nonpayment has occurred (but not earlier than the date such payment is due). The
Fiscal Agent will disburse to the Fund the amount of principal and interest
which is then due for payment but is unpaid upon receipt by the Fiscal Agent of
(i) evidence of the Fund's right to receive payment of such principal and
interest and (ii) evidence, including any appropriate instruments of assignment,
that all of the rights of payment of such principal or interest then due for
payment shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any Municipal Obligations, the
insurer will succeed to the rights of the Fund with respect to such payment.
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Original Issue Insurance remains in effect as long as the Municipal
Obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such Municipal
Obligations. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the Municipal Obligations
so insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of
a Municipal Obligation, the Fund or a third party may, upon the payment of a
single premium, purchase insurance on such Municipal Obligation. Secondary
Market Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the Municipal
Obligations covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such Municipal
Obligations. All premiums respecting Municipal Obligations covered by Original
Issue Insurance or Secondary Market Insurance are paid in advance by the issuer
or other party obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular Municipal Obligation would be to enable the Fund to enhance the
value of such Municipal Obligation. The Fund, for example, might seek to
purchase a particular Municipal Obligation and obtain Secondary Market Insurance
with respect thereto if, in the opinion of Mitchell Hutchins, the market value
of such municipal security, as insured, would exceed the current value of the
Municipal Obligation without insurance plus the cost of the Secondary Market
Insurance. Similarly, if the Fund owns but wishes to sell a Municipal Obligation
that is then covered by Portfolio Insurance, the Fund might seek to obtain
Secondary Market Insurance with respect thereto if, in the opinion of Mitchell
Hutchins, the net proceeds of a sale by the Fund of such obligation, as insured,
would exceed the current value of such obligation plus the cost of the Secondary
Market Insurance.
Portfolio Insurance. The Fund currently intends to emphasize investments in
Municipal Obligations that have Original Issue Insurance or Secondary Market
Insurance. However, the Fund may purchase one or more policies of Portfolio
Insurance, each of which would insure the payment of principal and interest on
specified eligible Municipal Obligations purchased by the Fund. Except as
described below, Portfolio Insurance generally provides the same type of
coverage as is provided by Original Issue Insurance or Secondary Market
Insurance. Municipal Obligations insured under one Portfolio Insurance policy
generally would not be insured under any other policy purchased by the Fund
unless the Fund intended to purchase Secondary Market Insurance to facilitate
sale of particular Municipal Obligations. A Municipal Obligation is eligible for
coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to Common Stockholders of the Fund.
Portfolio Insurance policies are effective only as to Municipal Obligations
owned and held by the Fund, and do not cover Municipal Obligations for which the
contract for purchase of such Municipal Obligation fails. A 'when-issued'
Municipal Obligation will be covered under a Portfolio Insurance policy upon the
settlement date of the issue of such 'when-issued' Municipal Obligation.
In determining whether to insure Municipal Obligations held by the Fund, an
insurer will apply its own standards, which would be expected to correspond
generally to the standards it has established for determining the insurability
of new issues of Municipal Obligations. See 'Original Issue Insurance' above.
Any Portfolio Insurance policy purchased by the Fund will be
non-cancellable and will remain in effect so long as the Fund is in existence,
the Municipal Obligations covered by the policy continue to be held by the Fund,
and the Fund pays the premiums for the policy. Each insurer generally will
reserve the right at any time
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upon 90 days' written notice to the Fund to refuse to insure any additional
securities purchased by the Fund after the effective date of such notice. The
board of directors of the Fund generally will reserve the right to terminate
each policy upon seven days' written notice to an insurer if it determines that
the cost of such policy is not reasonable in relation to the value of the
insurance to the Fund.
Each Portfolio Insurance policy will terminate as to any Municipal
Obligation that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer will not have any
liability thereafter under a policy as to any such Municipal Obligation, except
that if the date of such redemption or the settlement date of such sale occurs
after a record date and before the related payment date with respect to any such
Municipal Obligation, the policy will terminate as to such Municipal Obligation
on the business day immediately following such payment date. Each policy will
terminate as to all Municipal Obligations covered thereby on the date on which
the last of the covered Municipal Obligations mature, are redeemed or are sold
by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ('Permanent Insurance') (which would be
Secondary Market Insurance) with respect to a Municipal Obligation that is to be
sold by the Fund. The Fund would exercise the right to obtain Permanent
Insurance upon payment of a single, predetermined insurance premium payable from
the proceeds of the sale of such Municipal Obligation. It is expected that the
Fund would exercise the right to obtain Permanent Insurance for a Municipal
Obligation, only if, in the opinion of Mitchell Hutchins, upon such exercise the
net proceeds from the sale by the Fund of such obligation, as insured, would
exceed the proceeds from the sale of such obligation without insurance. The
Permanent Insurance premium with respect to each such obligation is determined
based upon the insurability of each such obligation as of the date of purchase
by the Fund and will not be increased or decreased for any change in the
creditworthiness of such obligation unless such obligation is in default as to
payment of principal or interest, or both. In such event, the Permanent
Insurance premium shall be subject to an increase predetermined at the date of
purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to Municipal
Obligations sold by the Fund on the date of sale, in which event the insurer
will be liable only for those payments of principal and interest that are then
due and owing (unless Permanent Insurance is obtained by the Fund), the
provision for this insurance will not enhance the marketability of securities
held by the Fund. The Fund generally intends to retain any insured securities
covered by Portfolio Insurance that are in default or in significant risk of
default. To the extent that the Fund holds such defaulted securities, it may be
limited in its ability to manage its investment portfolio and to purchase other
Municipal Obligations. On the other hand, since Original Issue Insurance and
Secondary Market Insurance will remain in effect as long as Municipal
Obligations covered thereby are outstanding, such insurance may enhance the
marketability of such securities even when such securities are in default or in
significant risk of default, but the exact effect, if any, on the marketability
cannot be estimated. Accordingly, the Fund may determine to retain or,
alternatively, to sell Municipal Obligations covered by Original Issue Insurance
or Secondary Market Insurance that are in default or in significant risk of
default.
It is anticipated that certain of the Municipal Obligations to be purchased
by the Fund will be insured under policies obtained by persons other than the
Fund. In instances in which the Fund purchases Municipal Obligations insured
under policies obtained by persons other than the Fund, the Fund does not pay
the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such Municipal Obligations.
Accordingly, the yield on such Municipal Obligations may be lower than that on
similar uninsured Municipal Obligations. Premiums for a Portfolio Insurance
policy generally would be paid by the Fund monthly, and adjusted for purchases
and sales of Municipal Obligations covered by the policy during the month. The
yield
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on the Fund's portfolio is reduced to the extent of the insurance premiums paid
by the Fund which, in turn, will depend upon the characteristics of the covered
Municipal Obligations held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any Municipal Obligations then
covered by a Portfolio Insurance policy, the coverage and the obligation of the
Fund to pay monthly premiums under such policy would cease with such purchase.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
As stated in the Prospectus, the Fund may purchase Municipal Obligations on
a when-issued basis, or may purchase or sell Municipal Obligations for delayed
delivery. A security purchased on a when-issued or delayed delivery basis is
recorded as an asset on the commitment date and is subject to changes in market
value, generally based upon changes in the level of interest rates. Thus,
fluctuations in the value of the security from the time of the commitment date
will affect the Fund's net asset value. When the Fund commits to purchase
securities on a when-issued or delayed delivery basis, its custodian will set
aside in a segregated account cash, U.S. government securities or other liquid,
high-grade debt securities with a market value equal to the amount of the
commitment. If necessary, additional assets will be placed in the account daily
so that the value of the account will equal or exceed the amount of the Fund's
purchase commitment.
STAND-BY COMMITMENTS
The Fund may acquire 'stand-by commitments' with respect to Municipal
Obligations it purchases or holds. Under a stand-by commitment, which resembles
a put option, a broker, dealer or bank is obligated to repurchase at the Fund's
option specified securities at a specified price. The Fund's ability to exercise
a stand-by commitment is subject to the ability of the seller to make payment on
demand. The Fund will acquire stand-by commitments solely to facilitate
liquidity and does not intend to exercise the rights afforded by the commitments
for trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers, and banks without the payment of any direct or
indirect consideration. The Fund may pay for stand-by commitments if payment is
deemed necessary, thus increasing to a degree the cost of the underlying
Municipal Obligation and similarly decreasing the obligation's yield.
The Fund would enter into stand-by commitments only with those brokers,
banks or dealers that, in the opinion of Mitchell Hutchins, present minimal
credit risks. The Fund's right to exercise stand-by commitments would be
unconditional and unqualified. A stand-by commitment would not be transferable
by the Fund, although the Fund could sell the underlying securities to a third
party at any time. The acquisition of a stand-by commitment would not ordinarily
affect the valuation or maturity of the underlying Municipal Obligations.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
The Fund is authorized to enter into repurchase agreements with respect to
any obligation issued or guaranteed by the U.S. government, its agencies or
instrumentalities and also with respect to commercial paper, bank certificates
of deposit and bankers' acceptances. Repurchase agreements are transactions in
which the Fund would purchase securities from a bank or recognized securities
dealer and simultaneously commit to resell those securities to the bank or
dealer at an agreed-upon date and price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the purchased securities. The Fund
would maintain custody of the underlying securities prior to their repurchase;
thus, the obligation of the bank or securities dealer to pay the repurchase
price on the date agreed to would, in effect, be secured by such securities. If
the value of such securities were less than the repurchase price, plus any
agreed-upon additional amount, the other party to the agreement would be
required to provide additional collateral so that at all times the collateral is
at least equal to the repurchase price, plus any
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agreed-upon additional amount. The difference between the total amount to be
received upon repurchase of the securities and the price which was paid by the
Fund upon acquisition would be accrued as interest and included in the Fund's
net investment income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
the repurchase agreement becomes insolvent. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Mitchell Hutchins to present minimal credit risks in accordance with guidelines
established by the Fund's board of directors. Mitchell Hutchins will review and
monitor the creditworthiness of such institutions under the board's general
supervision.
The Fund may also enter into reverse repurchase agreements with the same
parties with whom it may enter into repurchase agreements. Under a reverse
repurchase agreement, the Fund would sell securities and agree to repurchase
(and the buyer would be required to resell) them at a mutually agreed date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
establish and maintain a segregated account with an approved custodian
containing cash or liquid high-grade debt securities having a value not less
than the repurchase price (including accrued interest). The market value of
securities sold under reverse repurchase agreements typically is greater than
the proceeds of the sale, and accordingly, the market value of the securities
sold is likely to be greater than the value of the securities in which the Fund
invests those proceeds. Thus, reverse repurchase agreements involve the risk
that the buyer of the securities sold by the Fund might be unable to deliver
them when the Fund seeks to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes insolvent,
such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce the Fund's obligation to repurchase the securities,
and the Fund's use of the proceeds of the reverse repurchase agreement may
effectively be restricted pending such decision.
Reverse repurchase agreements will be treated as borrowings for purposes of
calculating the Fund's borrowing limitation. In addition to the foregoing
borrowings, the Fund may borrow money for emergency or temporary purposes (e.g.,
clearance of transactions, share repurchases or tender offers) in an amount not
exceeding 5% of the value of the Fund's total assets (not including the amount
borrowed). See 'Investment Limitations.'
ILLIQUID SECURITIES
As noted in the Prospectus, the Fund may invest up to 20% of its net assets
in illiquid securities. The board of directors has delegated the function of
making day-to-day determinations of liquidity to Mitchell Hutchins, pursuant to
guidelines approved by the board. Mitchell Hutchins takes into account a number
of factors in reaching liquidity decisions, including: (1) the frequency of
trades for the security; (2) the number of dealers that make quotes for the
security; (3) the number of dealers that have undertaken to make a market in the
security; (4) the number of other potential purchasers; and (5) the nature of
the security and how trading is effected (e.g., the time needed to sell the
security, how offers are solicited and the mechanics of transfer). Mitchell
Hutchins monitors the liquidity of securities in the Fund's portfolio and
reports periodically on liquidity decisions to the board of directors.
In making determinations as to the liquidity of municipal lease
obligations, Mitchell Hutchins will distinguish between direct investments in
municipal lease obligations (or participations therein) and investments in
securities that may be supported by municipal lease obligations or certificates
of participation therein. Since these municipal lease obligation-backed
securities are based on a well-established means of securitization,
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Mitchell Hutchins does not believe that investing in such securities presents
the same liquidity issues as direct investments in municipal lease obligations.
The assets used as cover for any OTC options written by the Fund would be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure will be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
SHORT SALES 'AGAINST THE BOX'
The Fund may engage in short sales of securities it owns or has the right
to acquire at no added cost through conversion or exchange of other securities
it owns (short sales 'against the box'). A short sale is effected by selling a
security and having the executing broker borrow the securities being sold on
behalf of the Fund. The Fund is obligated to replace the borrowed securities at
a date in the future. When the Fund sells short, it will establish a margin
account with the broker effecting the short sale and will deposit collateral
with the broker. In addition, the Fund will maintain with its custodian, in a
segregated account, the securities that could be used to cover the short sale.
The Fund will incur transaction costs, including interest expense, in connection
with opening, maintaining and closing short sales against the box. The Fund
currently does not intend to have obligations under short sales that at any time
during the coming year exceed 5% of the Fund's net assets.
The Fund might make a short sale 'against the box' in order to hedge
against market risks when Mitchell Hutchins believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the Fund or a security convertible into or exchangeable for a security owned
by the Fund, or when Mitchell Hutchins wants to sell a security that the Fund
owns at a current price, but also wishes to defer recognition of gain or loss
for federal income tax purposes. In such case, any loss in the Fund's long
position after the short sale should be reduced by a gain in the short position.
Conversely, any gain in the long position should be reduced by a loss in the
short position. The extent to which gains or losses in the long position are
reduced will depend upon the amount of the securities sold short relative to the
amount of the securities the Fund owns, either directly or indirectly, and in
the case where the Fund owns convertible securities, changes in the investment
values or conversion premiums of such securities.
INVESTMENT LIMITATIONS
The following fundamental investment limitations cannot be changed without
the affirmative vote of the lesser of (a) more than 50% of the outstanding
shares of the Fund or (b) 67% or more of such shares present at a stockholders'
meeting if more than 50% of the outstanding shares are represented at the
meeting in person or by proxy. If a percentage restriction is adhered to at the
time of an investment or transaction, a later increase or decrease in percentage
resulting from a change in values of portfolio securities or the amount of total
assets will not be considered a violation of any of the following limitations or
of any of the Fund's investment policies. The Fund may not:
(1) issue senior securities (including borrowing money from banks and
other entities and through reverse repurchase agreements), except (a) the
Fund may borrow in an amount not in excess of 33 1/3% of total assets
(including the amount of senior securities issued, but reduced by any
liabilities and indebtedness not constituting senior securities), (b) the
Fund may issue preferred stock having a liquidation preference in an amount
which, combined with the amount of any liabilities or indebtedness
constituting senior securities, is not in excess of 50% of its total assets
(computed as provided in clause (a) above) and (c) the Fund may borrow up
to an additional 5% of its total assets (not including the amount borrowed)
for temporary or emergency purposes;
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(2) purchase the securities of any one issuer if as a result more than
5% of its total assets would be invested in the securities of that issuer,
provided that securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities are not subject to this limitation and
further provided that up to 25% of the value of the Fund's total assets may
be invested without regard to this 5% limitation;
(3) make an investment in any one industry if the investment would
cause the aggregate value of all the Fund's investments in such industry to
equal 25% or more of the Fund's total assets; provided that this limitation
shall not apply to investments in securities issued or guaranteed by the
U.S. government, its agencies or instrumentalities, and provided further
that this limitation does not apply to Municipal Obligations other than
those backed only by the assets and revenues of a non-governmental entity;
(4) purchase securities on margin, except for short-term credits
necessary for clearance of portfolio transactions, and except that the Fund
may make margin deposits in connection with its use of options, futures
contracts and options on futures contracts;
(5) engage in the business of underwriting securities of other
issuers, except to the extent that, in connection with the disposition of
portfolio securities, the Fund may be deemed an underwriter under federal
securities laws and except that the Fund may write options;
(6) make short sales of securities or maintain a short position,
except that the Fund may maintain short positions in connection with its
use of options, futures contracts and options on futures contracts and sell
short 'against the box;'
(7) purchase or sell real estate (including real estate limited
partnership interests), provided that the Fund may invest in securities
secured by real estate or interests therein or issued by entities that
invest in real estate or interests therein, and provided further that the
Fund may exercise rights under agreements relating to such securities,
including the right to enforce security interests and liquidate real estate
acquired as a result of such enforcement;
(8) purchase or sell commodities or commodity contracts, except that
the Fund may purchase or sell financial futures contracts and options
thereon;
(9) invest in oil, gas or mineral-related programs or leases; or
(10) make loans, except through loans of portfolio instruments and
repurchase agreements, provided that for purposes of this restriction the
acquisition of bonds, debentures or other debt instruments or interests
therein and investment in government obligations, short-term commercial
paper, certificates of deposit and bankers' acceptances shall not be deemed
to be the making of a loan.
For purposes of limitation (2), each state (including the District of
Columbia), territory and possession of the United States, each public
subdivision, agency, instrumentality and authority thereof, and each multi-state
agency of which a state is a member is a separate 'issuer.' When the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from the government creating the subdivision and the security is
backed only by the assets and revenues of the subdivision, such subdivision
would be deemed to be the sole issuer. Similarly, in the case of an industrial
development bond ('IDB') or private activity bond ('PAB'), if that bond is
backed only by the assets and revenues of the non-governmental user, then such
non-governmental user would be deemed to be the sole issuer. However, if the
creating government or another entity guarantees a security, then to the extent
that the value of all securities issued or guaranteed by such government or
entity and owned by the Fund exceeds 10% of the Fund's total assets, such a
guarantee would be considered a separate security and would be treated as issued
by such government or entity. The foregoing restrictions do not limit the
percentage of the Fund's assets that may be invested in Municipal Obligations
insured by any given insurer.
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HEDGING AND RELATED INCOME STRATEGIES
As discussed in the Prospectus, Mitchell Hutchins may use a variety of
financial instruments ('Hedging Instruments'), including certain options,
futures contracts (sometimes referred to as 'futures'), options on futures
contracts and interest rate protection transactions, to attempt to hedge the
Fund's portfolio and may use options to attempt to enhance the Fund's income.
Because the Fund intends to use these instruments for hedging purposes, the Fund
may enter into options, futures and interest rate protection transactions that
approximate (but do not exceed) the full value of its portfolio. However, since
any income realized from the use of options and futures would be taxable to
stockholders, the Fund currently does not intend to engage during the coming
year in hedging or related income strategies and would do so only under unusual
market conditions.
Hedging strategies can be broadly categorized as 'short hedges' and 'long
hedges.' A short hedge is a purchase or sale of a Hedging Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument the price of which is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended partially or fully to offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument the price of which
is expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase in order to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad fixed income market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded and
the Commodity Futures Trading Commission ('CFTC') and may become subject to
regulation by various state regulatory authorities. In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
'Taxes.'
In addition to the products, strategies and risks described below, Mitchell
Hutchins expects additional opportunities to develop in connection with options,
futures contracts and other hedging techniques. These new opportunities may
become available as Mitchell Hutchins develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts or other techniques are developed. Mitchell Hutchins may
utilize these opportunities to the extent that they are consistent with the
Fund's investment objective and permitted by the Fund's investment limitations
and applicable regulatory authorities.
10
<PAGE>
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special considerations and risks,
as described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon Mitchell
Hutchins' ability to predict movements of the overall securities and interest
rate markets, which requires different skills than predicting changes in the
prices of individual securities. While Mitchell Hutchins is experienced in the
use of Hedging Instruments, there can be no assurance that any particular
hedging strategy adopted will succeed.
(2) There might be imperfect correlation, or even no correlation, between
price movements of a Hedging Instrument and price movements of the investments
being hedged. For example, if the value of a Hedging Instrument used in a short
hedge increased by less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation might occur due
to factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which Hedging Instruments are
traded. The effectiveness of hedges using Hedging Instruments on indexes will
depend on the degree of correlation between price movements in the index and
price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because Mitchell Hutchins projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the Hedging Instrument. Moreover, if the price of the
Hedging Instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
'cover,' maintain segregated accounts or make margin payments when it takes
positions in Hedging Instruments involving obligations to third parties (i.e.,
Hedging Instruments other than purchased options). If the Fund were unable to
close out its positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in a Hedging Instrument prior to expiration or maturity depends on the existence
of a liquid secondary market or, in the absence of such a market, the ability
and willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
COVER FOR HEDGING STRATEGIES
Transactions using Hedging Instruments, other than purchased options,
expose the Fund to an obligation to another party. The Fund will not enter into
any such transactions unless it owns either (1) an offsetting ('covered')
position in securities or other options or futures contracts or (2) cash and
liquid, short-term debt securities, with a value sufficient at all times to
cover its potential obligations to the extent not covered as provided in (1)
above. The Fund will comply with SEC guidelines regarding cover for hedging
transactions and will, if the guidelines so require, set aside cash, U.S.
government securities or other liquid, high-grade debt securities in a
segregated account with its custodian in the prescribed amount.
11
<PAGE>
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding Hedging Instrument is open, unless they are
replaced with similar assets. As a result, the commitment of a large portion of
the Fund's assets to cover or segregated accounts could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered call
options and covered put options, on debt securities. The purchase of call
options serves as a long hedge, and the purchase of put options serves as a
short hedge. Writing covered put or call options can enable the Fund to enhance
income by reason of the premiums paid by the purchasers of such options.
However, if the market price of the security underlying a covered put option
declines to less than the exercise price on the option, minus the premium
received, the Fund would expect to suffer a loss. Writing covered call options
serves as a limited short hedge, because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing the
option. However, if the security appreciates to a price higher than the exercise
price of the call option, it can be expected that the option will be exercised
and the Fund will be obligated to sell the security at less than its market
value. If the covered call option is an OTC option, the securities or other
assets used as cover would be considered illiquid to the extent described under
'Investment Policies and Restrictions--Illiquid Securities.'
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options that expire unexercised have no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call option that it had written by purchasing an identical
call option; this is known as a closing purchase transaction. Conversely, the
Fund may terminate a position in a put or call option it had purchased by
writing an identical put or call option; this is known as a closing sale
transaction. Closing transactions permit the Fund to realize profits or limit
losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
However, exchange-traded or liquid OTC options on Municipal Obligations are not
currently available. Exchange-traded options in the United States are issued by
a clearing organization affiliated with the exchange on which the option is
listed which, in effect, guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts between the Fund and its
contra party (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC option,
it relies on the contra party to make or take delivery of the underlying
investment upon exercise of the option. Failure by the contra party to do so
would result in the loss of any premium paid by the Fund as well as the loss of
any expected benefit of the transaction.
Generally, OTC options on debt securities are European style options. This
means that the option is only exercisable immediately prior to its expiration.
This is in contrast to American-style options, which are exercisable at any time
prior to the expiration date of the option.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into
12
<PAGE>
OTC options only with contra parties that are expected to be capable of entering
into closing transactions with the Fund, there is no assurance that the Fund
will in fact be able to close out an OTC option position at a favorable price
prior to expiration. In the event of insolvency of the contra party, the Fund
might be unable to close out an OTC option position at any time prior to its
expiration.
If the Fund were unable to effect a closing transaction for an option it
had purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by the Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
In the event that options on indexes of municipal and non-municipal debt
securities become available, the Fund may purchase and write put and call
options on such indexes in much the same manner as the more traditional options
discussed above, except that index options may serve as a hedge against overall
fluctuations in the debt securities market (or market sectors) rather than
anticipated increases or decreases in the value of a particular security.
FUTURES
The Fund may purchase and sell municipal bond index futures, other interest
rate futures and options thereon. The purchase of futures or call options
thereon can serve as a long hedge, and the sale of futures or the purchase of
put options thereon can serve as a short hedge. Writing covered call options on
futures contracts can serve as a limited short hedge, using a strategy similar
to that used for writing covered call options on securities or indexes.
Similarly, writing covered put options on futures contracts can serve as a
limited long hedge.
Futures strategies also can be used to manage the average duration of the
Fund's portfolio. If Mitchell Hutchins wishes to shorten the average duration of
the Fund, the Fund may sell a futures contract or a call option thereon, or
purchase a put option on that futures contract. If Mitchell Hutchins wishes to
lengthen the average duration of the Fund, the Fund may buy a futures contract
or a call option thereon, or sell a put option thereon.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, 'initial margin' consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call option on a futures contract, in accordance with applicable
exchange rules. Unlike margin in securities transactions, initial margin on
futures contracts does not represent a borrowing, but rather is in the nature of
a performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent 'variation margin' payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
'marking to market.' Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations with respect to an open
futures position. When the Fund purchases an option on a future, the premium
paid plus transaction costs is all that is at risk. In contrast, when the Fund
purchases or sells a futures contract or writes a call option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund has insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
13
<PAGE>
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions only on exchanges or boards
of trade where there appears to be a liquid secondary market. However, there can
be no assurance that such a market will exist for a particular contract at a
particular time. Secondary markets for options on futures are currently in the
development stage, and the Fund will not trade options on futures on any
exchange or board of trade unless, in Mitchell Hutchins' opinion, the markets
for such options have developed sufficiently that the liquidity risks for such
options are not greater than the corresponding risks for futures.
Under certain circumstances, futures exchanges may establish daily limits
on the amount that the price of a future or related option can vary from the
previous day's settlement price; once that limit is reached, no trades may be
made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition of price
limits, it could incur substantial losses. The Fund would continue to be subject
to market risk with respect to the position. In addition, except in the case of
purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to maintain cash or securities in a segregated
account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, 'program trading' and
other investment strategies might result in temporary price distortions.
GUIDELINE FOR FUTURES AND RELATED OPTIONS
To the extent that the Fund enters into futures contracts and options on
futures positions that are not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on these positions (excluding
the amount by which options are 'in-the-money') may not exceed 5% of the Fund's
net assets.
14
<PAGE>
The Fund may use the following hedging instruments:
OPTIONS ON DEBT SECURITIES--A call option is a contract pursuant to which
the purchaser of the option, in return for a premium, has the right to buy the
security underlying the option at a specified price at any time during the term,
or upon the expiration, of the option. The writer of the call option, who
receives the premium, has the obligation, upon exercise of the option, to
deliver the underlying security against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term or upon expiration. The writer of the put option, who receives the premium,
has the obligation, upon exercise, to buy the underlying security at the
exercise price. Options on debt securities are traded primarily in the OTC
market rather than on any of the several options exchanges. At present, only
options on U.S. Treasury securities are listed for trading on any recognized
exchange.
OPTIONS ON INDEXES OF DEBT SECURITIES--An index assigns relative values to
the securities included in the index and fluctuates with changes in the market
values of such securities. Index options operate in the same way as more
traditional options except that exercises of index options are effected with
cash payments and do not involve delivery of securities. Thus, upon exercise of
an index option, the purchaser will realize and the writer will pay, an amount
based on the difference between the exercise price and the closing price of the
index. Currently, options on indexes of debt securities do not exist.
MUNICIPAL BOND INDEX FUTURES CONTRACTS--A municipal bond index futures
contract is a bilateral agreement pursuant to which one party agrees to accept
and the other party agrees to make delivery of an amount of cash equal to a
specified dollar amount times the difference between the index value at the
close of trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the bonds comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.
MUNICIPAL DEBT FUTURES CONTRACTS--A municipal debt futures contract is a
bilateral agreement pursuant to which one party agrees to accept and the other
party agrees to make delivery of the specific type of municipal debt security
called for in the contract at a specified future time and at a specified price.
Currently, municipal debt futures contracts do not exist.
OPTIONS ON FUTURES CONTRACTS--Options on futures contracts are similar to
options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated balance, which represents the amount
by which the market price of the futures contract exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the future. The writer of an option, upon exercise, will assume a short position
in the case of a call, and a long position in the case of put.
INTEREST RATE PROTECTION TRANSACTIONS--The Fund may enter into interest
rate protection transactions, including interest rate swaps and interest rate
caps, collars and floors. Interest rate swap transactions involve an agreement
between two parties to exchange payments that are based, for example, on
variable and fixed rates of interest and that are calculated on the basis of a
specified amount of principal (the 'notional principal amount') for a specified
period of time. Interest rate cap and floor transactions involve an agreement
between two parties in which the first party agrees to make payments to the
counterparty when a designated market interest rate goes above (in the case of a
cap) or below (in the case of a floor) a designated level on predetermined dates
or during a specified time period. Interest rate collar transactions involve an
agreement between two parties in which
15
<PAGE>
payments are made when a designated market interest rate either goes above a
designated level or goes below a designated floor level on predetermined dates
or during a specified time period.
The Fund would enter into interest rate protection transactions to preserve
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 to effectively fix the rate of interest that it
pays on one or more borrowings or series of borrowings. The Fund would use these
transactions as a hedge and not as a speculative investment. Interest rate
protection transactions are subject to risks comparable to those described above
with respect to other hedging strategies.
The Fund may enter into interest rate swaps, caps, collars and floors on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis (i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments). Inasmuch as these interest rate protection transactions are entered
into for good faith hedging purposes, and inasmuch as segregated accounts will
be established with respect to such transactions, Mitchell Hutchins and the Fund
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. The net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and an
amount of cash, U.S. government securities or other liquid high grade debt
obligations having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act of 1940 ('1940 Act'). The Fund
also will establish and maintain such segregated accounts with respect to its
total obligations under any interest rate swaps that are not entered into on a
net basis and with respect to any interest rate caps, collars and floors that
are written by the Fund.
The Fund will enter into interest rate protection transactions only with
banks and recognized securities dealers determined by Mitchell Hutchins to
present minimal credit risks in accordance with guidelines established by the
Fund's board of directors. If there is a default by the other party to such a
transaction, the Fund will have to rely on its contractual remedies (which may
be limited by bankruptcy, insolvency or similar laws) pursuant to the agreements
related to the transaction.
The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. Caps, collars and floors are more
recent innovations for which documentation is less standardized, and
accordingly, they are less liquid than swaps.
DIRECTORS AND OFFICERS
The overall management of the business and affairs of the Fund is vested
with its board of directors. The board of directors approves all significant
agreements between the Fund and persons or companies furnishing services to it,
including the Fund's agreements with its investment adviser and administrator,
custodian and transfer and dividend disbursing agent and registrar. The
day-to-day operations of the Fund are delegated to its officers and to Mitchell
Hutchins, subject always to the investment objective and policies of the Fund
and to general supervision by the board of directors.
16
<PAGE>
The business addresses, ages and principal occupations during the past five
years of the directors and executive officers of the Fund are:
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, ADDRESS AND AGE* WITH THE FUND OTHER DIRECTORSHIPS
- - ------------------------------ --------------- ------------------------------
<S> <C> <C>
Richard Q. Armstrong; 59 Director Mr. Armstrong is chairman and
78 West Brother Drive principal of RQA Enterprises
Greenwich, CT 06830 (management consulting firm)
(since April 1991 and
principal occupation since
March 1995). Mr. Armstrong
is also director of Hi Lo
Automotive, Inc. He was
chairman of the board, chief
executive officer and
co-owner of Adirondack
Beverages (producer and
distributor of soft drinks
and sparkling/still waters)
(October 1993-March 1995).
He was a partner of The New
England Consulting Group
(management consulting firm)
(December 1992-September
1993). He was managing
director of LVMH U.S.
Corporation (U.S. subsidiary
of the French luxury goods
conglomerate, Luis Vuitton
Moet Hennessey Corporation)
(1987-1991) and chairman of
its wine and spirits
subsidiary, Schieffelin &
Somerset Company
(1987-1991). Mr. Armstrong
is also a director of five
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment advisor.
E. Garrett Bewkes, Jr.; 68** Director and Mr. Bewkes is a director of
Chairman of the Paine Webber Group Inc. ('PW
Board of Group') (holding company of
Directors Mitchell Hutchins and
PaineWebber) and a
consultant to PW Group.
Prior to 1988, he was
chairman of the board,
president and chief
executive officer of the
American Bakeries Company.
Mr. Bewkes is also a
director of Interstate
Bakeries Corporation and
NaPro BioTherapeutics, Inc.
and a director or trustee of
26 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
Richard R. Burt; 47 Mr. Burt is chairman of
1101 Connecticut Avenue, N.W. Director International Equity
Washington, D.C. 20036 Partners (international
investments and consulting
firm) (since March 1994) and
a partner of McKinsey &
Company (management
consulting firm) (since
1991). He is also a director
of American Publishing
Company. He was the chief
negotiator in the Strategic
Arms Reduction Talks with
the former Soviet Union
(1989-1991) and the U.S.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, ADDRESS AND AGE* WITH THE FUND OTHER DIRECTORSHIPS
- - ------------------------------ --------------- ------------------------------
<S> <C> <C>
Ambassador to the Federal
Republic of Germany
(1985-1989). Mr. Burt is
also a director of five
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment advisor.
Meyer Feldberg; 52 Director Mr. Feldberg is Dean and
Columbia University Professor of Management of
101 Uris Hall the Graduate School of
New York, NY 10027 Business, Columbia
University. Prior to 1989,
he was president of the
Illinois Institute of
Technology. Dean Feldberg is
also a director of AMSCO
International Inc.,
Federated Department Stores
Inc., Inco Homes Corporation
and New World Communications
Group Incorporated and a
director or trustee of 18
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
John R. Torell III; 55 Director Mr. Torell is chairman of
767 Fifth Avenue Torell Management Inc.
Suite 4605 (financial advisory firm)
New York, NY 10153 (since 1989). He is the
former chairman and chief
executive officer of Fortune
Bancorp (1990-1994 and
1991-1994, respectively). He
is the former chairman,
president and chief
executive officer of CalFed,
Inc. (savings association)
(1988 to 1989) and former
president of Manufacturers
Hanover Corp. (bank) (prior
to 1988). Mr. Torell is also
a director of American Home
Products Corp. and Volt
Information Services Inc.
and a director or trustee of
nine other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
William D. White; 60 Director Mr. White is retired. From
P.O. Box 199 February 1989 through March
Upper Black Eddy, PA 18972 1994, he was president of
the National League of
Professional Baseball Clubs.
Prior to 1989, he was a
television sportscaster for
WPIX-TV, New York. Mr. White
is also a director or
trustee of nine other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Margo N. Alexander; 48 President Ms. Alexander is president,
chief executive officer and
a director of Mitchell
Hutchins. Prior to January
1995, Ms. Alexander was an
executive vice president of
PaineWebber. Ms. Alexander
is also president of 26
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, ADDRESS AND AGE* WITH THE FUND OTHER DIRECTORSHIPS
- - ------------------------------ --------------- ------------------------------
<S> <C> <C>
Teresa M. Boyle; 36 Vice President Ms. Boyle is a first vice
president and manager--
advisory administration of
Mitchell Hutchins. Prior to
November 1993, she was
compliance manager of
Hyperion Capital Management,
Inc., an investment advisory
firm. Prior to April 1993,
Ms. Boyle was a vice
president and manager--legal
administration of Mitchell
Hutchins. Ms. Boyle is also
a vice president of 39 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Joan L. Cohen; 30 Vice President Ms. Cohen is a vice president
and Assistant and attorney of Mitchell
Secretary Hutchins. Prior to December
1993, she was an associate
at the law firm of Seward &
Kissel. Ms. Cohen is also a
vice president and assistant
secretary of 26 other
investment companies for
which Mitchell Hutchins or
Paine Webber serves as
investment adviser.
Ellen R. Harris; 48 Vice President Ms. Harris is chief domestic
equity strategist and a
managing director of
Mitchell Hutchins. Ms.
Harris is also a vice
president of 19 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Ann E. Moran; 37 Vice President Ms. Moran is a vice president
and Assistant of Mitchell Hutchins. Ms.
Treasurer Moran is also a vice
president and assistant
treasurer of 39 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Dianne E. O'Donnell; 42 Vice President Ms. O'Donnell is a senior vice
and Secretary president and senior
associate general counsel of
Mitchell Hutchins. Ms.
O'Donnell is also a vice
president and secretary of
39 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, ADDRESS AND AGE* WITH THE FUND OTHER DIRECTORSHIPS
- - ------------------------------ --------------- ------------------------------
<S> <C> <C>
Victoria E. Schonfeld; 44 Vice President Ms. Schonfeld is a managing
director and general counsel
of Mitchell Hutchins. From
April 1990 to May 1994, she
was a partner in the New
York office of the law firm
of Arnold & Porter. Prior to
April 1990, she was a
partner in the law firm of
Shereff, Friedman, Hoffman &
Goodman. Ms. Schonfeld is
also a vice president of 39
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Paul H. Schubert; 32 Vice President Mr. Schubert is a vice
and Assistant president of Mitchell
Treasurer Hutchins. From August 1992
to August 1994, he was a
vice president at BlackRock
Financial Management, L.P.
Prior to August 1992, he was
an audit manager with Ernst
& Young LLP. Mr. Schubert is
also a vice president and
assistant treasurer of 39
other investment companies
for which Mitchell Hutchins
or PaineWebber serves as
investment adviser.
Gregory W. Serbe; 50 Vice President Mr. Serbe is a managing
director of Mitchell
Hutchins responsible for
tax-exempt investments. Mr.
Serbe is also a vice
president of 15 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Martha J. Slezak; 32 Vice President Ms. Slezak is a vice president
and Assistant of Mitchell Hutchins. From
Treasurer September 1991 to April
1992, she was a fund-raising
director for a U.S. Senate
campaign. Prior to September
1991, she was a tax manager
with Arthur Andersen & Co.
LLP. Ms. Slezak is also a
vice president and assistant
treasurer of 39 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
Julian F. Sluyters; 34 Vice President Mr. Sluyters is a senior vice
and Treasurer president and the director
of the mutual fund finance
division of Mitchell
Hutchins. Prior to December
1991, he was an audit senior
manager with Ernst & Young
LLP. Mr. Sluyters is also a
vice president and treasurer
of 39 other investment
companies for which Mitchell
Hutchins or PaineWebber
serves as investment
adviser.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
POSITION BUSINESS EXPERIENCE;
NAME, ADDRESS AND AGE* WITH THE FUND OTHER DIRECTORSHIPS
- - ------------------------------ --------------- ------------------------------
<S> <C> <C>
Gregory K. Todd; 38 Vice President Mr. Todd is a first vice
and Assistant president and associate
Secretary general counsel of Mitchell
Hutchins. Prior to 1993, he
was a partner in the firm of
Shereff, Friedman, Hoffman &
Goodman. Mr. Todd is also a
vice president and assistant
secretary of 39 other
investment companies for
which Mitchell Hutchins or
PaineWebber serves as
investment adviser.
</TABLE>
- - ------------------
* Unless otherwise indicated, the business address of each listed person is
1285 Avenue of the Americas, New York, New York 10019.
** Mr. Bewkes is an 'interested person' of the Fund, as defined in the 1940 Act
by reason of his position with Mitchell Hutchins, PaineWebber and/or PW
Group.
The Fund pays directors who are not 'interested persons' of the Fund $1,500
annually and $250 per meeting of the board of directors or any committee
thereof. Directors also are reimbursed for any expenses incurred in attending
meetings. Because Mitchell Hutchins performs substantially all of the services
necessary for the operation of the Fund, the Fund requires no employees. No
officer, director or employee presently receives any compensation from the Fund
for acting as a director or officer. The 1940 Act requires that the holders of
the outstanding shares of the preferred stock, including the APS, voting as a
separate class, have the right to select at least two of the Fund's directors at
all times. The table below includes certain information relating to the
compensation of the Fund's directors for the fiscal period ended March 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ACCRUED ESTIMATED FROM THE FUND
AGGREGATE AS PART OF THE ANNUAL AND THE FUND
NAME OF COMPENSATION FUND'S BENEFITS UPON COMPLEX PAID
PERSON, POSITION FROM THE FUND* EXPENSES RETIREMENT TO DIRECTORS+
- - ------------------------------------ --------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Richard Q. Armstrong,
Director** ....................... $ -- $ -- $ -- $ --
E. Garrett Bewkes, Jr.,
Director and Chairman of the
Board of Directors ............... -- -- -- --
Richard R. Burt,
Director** ....................... -- -- -- --
Meyer Feldberg,
Director ......................... 2,875 -- -- 86,050
John R. Torell III,
Director ......................... 3,125 -- -- 39,750
William D. White,
Director ......................... 2,625 -- -- 33,250
</TABLE>
- - ------------------
* Represents fees paid to each director during the fiscal year ended March 31,
1995.
** Appointed as a director on February 15, 1995.
+ Represents total compensation paid to each director by the Fund and the Fund
Complex during the twelve months ended December 31, 1994.
21
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of , 1995, Cede & Co. (the nominee for The Depository Trust
Company) owned of record shares of the Fund's Common Stock or % of
the outstanding shares of the Fund's Common Stock. To the knowledge of the Fund,
no person is the beneficial owner of 5% or more of its Common Stock.
As of , 1995, the directors and officers of the Fund
beneficially owned less than 1% of the outstanding shares of the Fund's Common
Stock.
INVESTMENT ADVISORY ARRANGEMENTS
Mitchell Hutchins is the Fund's investment adviser and administrator
pursuant to a contract dated May 26, 1993 with the Fund ('Advisory Contract').
Pursuant to the Advisory Contract, Mitchell Hutchins provides a continuous
investment program for the Fund and makes investment decisions and places orders
to buy, sell or hold particular securities. As administrator, Mitchell Hutchins
supervises all matters relating to the operation of the Fund and obtains for it
corporate, administrative and clerical personnel, office space, equipment and
services, including arranging for the periodic preparation, updating, filing and
dissemination of proxy materials, tax returns and reports to the Fund's board of
directors, shareholders and regulatory authorities.
In addition to the payments to Mitchell Hutchins under the Advisory
Contract described above, the Fund pays certain other costs including: (1) the
costs (including brokerage commissions) of securities purchased or sold by the
Fund and any losses incurred in connection therewith; (2) expenses incurred on
behalf of the Fund by Mitchell Hutchins; (3) organizational expenses of the
Fund, whether or not advanced by Mitchell Hutchins; (4) filing fees and expenses
relating to the registration and qualification of the Common Stock under federal
and state securities laws; (5) fees and salaries payable to directors who are
not interested persons of the Fund or Mitchell Hutchins; (6) all expenses
incurred in connection with the directors' services, including travel expenses;
(7) taxes (including any income or franchise taxes) and governmental fees; (8)
costs of any liability, uncollectible items of deposit and any other insurance
or fidelity bonds; (9) any costs, expenses or losses arising out of a liability
of or claims for damages or other relief asserted against the Fund for violation
of any law; (10) legal, accounting and auditing expenses, including legal fees
of special counsel for the independent directors; (11) charges of custodians,
transfer agents and other agents; (12) costs of preparing share certificates;
(13) expenses of printing and distributing reports to stockholders; (14) any
extraordinary expenses (including fees and disbursements of counsel) incurred by
the Fund; (15) fees, voluntary assessments and other expenses incurred in
connection with membership in investment company organizations; (16) costs of
mailing and tabulating proxies and costs of meetings of stockholders, the board
and any committees thereof; (17) the costs of investment company literature and
other publications provided to directors and officers; (18) costs of mailing,
stationery and communications equipment; (19) interest charges on borrowings;
(20) fees and expenses of listing and maintaining any listing of the Fund's
shares on the New York Stock Exchange ('NYSE') or any other national securities
exchange; and (21) costs and expenses (including rating agency fees) associated
with the issuance of any preferred stock.
The Advisory Contract was approved by the Fund's board of directors and by
a majority of the directors who neither are interested persons of the Fund nor
have any direct or indirect financial interest in the Advisory Contract
('Independent Directors'), on February 23, 1993 and by its initial stockholder
on May 26, 1993. Unless sooner terminated, the Advisory Contract will remain in
effect for two years from its execution. Thereafter, if not terminated, the
Advisory Contract will continue automatically for successive annual periods,
provided that such continuance is specifically approved at least annually: (1)
by a majority vote of the Independent Directors cast in person at a meeting
called for the purpose of voting on such approval; and (2) by the board of
directors or by vote of a majority of the outstanding voting securities (i.e.,
the Common Stockholders and any preferred stockholders, voting as a single
class) of the Fund.
22
<PAGE>
Under the Advisory Contract, Mitchell Hutchins will not be liable for any
error of judgment or mistake of law or for any loss suffered by the Fund in
connection with the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of Mitchell Hutchins in
the performance of its duties or from reckless disregard of its duties and
obligations under the Advisory Contract. The Advisory Contract is terminable by
vote of the board of directors or by the holders of a majority of the
outstanding voting securities of the Fund, at any time without penalty, on 60
days' written notice to Mitchell Hutchins. The Advisory Contract may also be
terminated by Mitchell Hutchins on 60 days' written notice to the Fund. The
Advisory Contract terminates automatically upon its assignment.
For the fiscal year ended March 31, 1995 and for the fiscal period June 8,
1993 (commencement of operations) through March 31, 1994, the Fund paid or
accrued to Mitchell Hutchins $3,195,714 and $2,447,841, respectively, in
investment advisory and administration fees.
PORTFOLIO TRANSACTIONS
Subject to policies established by the board of directors, Mitchell
Hutchins is responsible for the execution of the Fund's portfolio transactions
and the allocation of brokerage transactions. In executing portfolio
transactions, Mitchell Hutchins seeks to obtain the best net results for the
Fund, taking into account such factors as the price (including the applicable
dealer spread or brokerage commission), size of order, difficulty of execution
and operational facilities of the firm involved. Municipal Obligations in which
the Fund invests generally are traded on the OTC market on a 'net' basis without
a stated commission through dealers acting for their own account and not as
brokers. Prices paid to dealers in principal transactions generally include a
'spread,' which is the difference between the prices at which the dealer is
willing to purchase and sell a specific security at that time. For the fiscal
year ended March 31, 1995 and for the fiscal period June 8, 1993 (commencement
of operations) to March 31, 1994, the Fund paid no brokerage commissions.
In placing orders with dealers, Mitchell Hutchins attempts to obtain the
best net price and the most favorable execution of its orders. Mitchell Hutchins
may purchase and sell portfolio securities from and to dealers who provide the
Fund with research, analysis, statistical or pricing advice or similar services.
Portfolio transactions will not be directed by the Fund to dealers solely on the
basis of research and advice provided. The Fund will not purchase portfolio
securities at a higher price or sell such securities at a lower price in
connection with transactions effected with a dealer, acting as principal, who
furnishes research services to Mitchell Hutchins than would be the case if no
weight were given by Mitchell Hutchins to the dealer's furnishing of such
services. Moreover, Mitchell Hutchins will not enter into any explicit soft
dollar arrangements relating to principal transactions and will not receive in
principal transactions the types of services which could be purchased for hard
dollars. Mitchell Hutchins may engage in agency transactions in OTC equity and
debt securities in return for research and execution services. These
transactions are entered into only in compliance with procedures ensuring that
the transaction (including commissions) is at least as favorable as it would
have been if effected directly with a market-maker that did not provide research
for execution services. These procedures include Mitchell Hutchins receiving
multiple quotes from dealers before executing the transaction on an agency
basis. Research services furnished by the dealers through which or with which
the Fund effects securities transactions may be used by Mitchell Hutchins in
advising other funds or accounts they advise and, conversely, research services
furnished to Mitchell Hutchins in connection with other funds or accounts that
Mitchell Hutchins advises may be used in advising the Fund. Although it is not
possible to place a dollar value on those services, it is the opinion of
Mitchell Hutchins that the receipt of such services should not reduce its
overall research expenses. Information and research received from brokers and
dealers is in addition to, and not in lieu of, the services required to be
performed by Mitchell Hutchins under the Advisory Contract.
23
<PAGE>
Investment decisions for the Fund and for other investment accounts managed
by Mitchell Hutchins will be made independently of each other in light of
differing considerations for the various accounts. However, the same investment
decision may occasionally be made for the Fund and one or more such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales then
will be averaged as to price and allocated between the Fund and such other
account(s) as to amount according to a formula deemed equitable to the Fund and
such account(s). While in some cases this practice could have a detrimental
effect upon the price or value of the security as far as the Fund is concerned,
or upon its ability to complete its entire order, in other cases it is believed
that coordination and the ability to participate in volume transactions will be
beneficial to the Fund.
The Fund will not purchase securities that are offered in underwritings in
which PaineWebber, Mitchell Hutchins or any of their affiliates is a member of
the underwriting or selling group, except pursuant to procedures adopted by the
board of directors pursuant to Rule 10f-3 under the 1940 Act. Among other
things, these procedures require that the commission or spread paid in
connection with such a purchase be reasonable and fair, that the purchase be at
not more than the public offering price prior to the end of the first business
day after the date of the public offering and that PaineWebber, Mitchell
Hutchins and their affiliates not participate in or benefit from the sale to the
Fund.
PORTFOLIO TURNOVER
For the fiscal year ended March 31, 1995 and for the fiscal period June 8,
1993 (commencement of operations) to March 31, 1994, the Fund's portfolio
turnover rate was 4% and 8%, respectively. Portfolio turnover may vary from year
to year and will not be a limiting factor when Mitchell Hutchins deems portfolio
changes appropriate. The portfolio turnover rate is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the long-term
securities in the portfolio during the year.
VALUATION OF COMMON STOCK
The net asset value of the Common Stock is determined weekly, as directed
by the Fund's board of directors, and also is determined monthly as of the close
of regular trading on the NYSE on the last day of the month on which the NYSE is
open for trading. The net asset value per share of Common Stock is computed by
dividing the value of the securities held by the Fund plus any cash or other
assets (including interest and dividends accrued but not yet received and earned
discount) minus all liabilities (including accrued expenses) and the liquidation
preference of any outstanding preferred stock by the total number of shares of
Common Stock outstanding at such time.
When market quotations are readily available, the Fund's debt securities
are valued based upon those quotations. When market quotations for options and
futures positions held by the Fund are readily available, those positions are
valued based upon such quotations. Market quotations generally are not available
for options traded in the OTC market. When market quotations for options and
futures positions or any other securities and assets of the Fund are not readily
available, they are valued at fair value as determined in good faith by or under
the direction of the board of directors, generally based upon appraisals
received from a pricing service using a computerized matrix system or derived
from information concerning the security or similar securities received from
recognized dealers in those securities. Notwithstanding the above, debt
securities with maturities of 60 days or less generally are valued at amortized
cost if their original term to maturity was 60 days or less, or by amortizing
the difference between their fair value as of the 61st day prior to maturity and
their maturity value if their original term to maturity exceeded 60 days, unless
in either case the board of directors or its delegate determines that this does
not represent fair value.
24
<PAGE>
TAXES
TAXATION OF THE FUND
General. In order to continue to qualify for treatment as a regulated
investment company ('RIC') under the Internal Revenue Code, the Fund must
distribute to its stockholders for each taxable year at least 90% of the sum of
its net interest income excludable from gross income under section 103(a) of the
Internal Revenue Code ('tax-exempt income') plus its investment company taxable
income (consisting generally of taxable net investment income, net short-term
capital gain and net realized gains from certain hedging transactions)
('Distribution Requirement') and must meet several additional requirements.
Among these requirements are the following: (1) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
securities, or other income (including gains from options or futures contracts)
derived with respect to its business of investing in securities ('Income
Requirement'); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of securities, options or
futures contracts held for less than three months ('Short-Short Limitation');
(3) at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with those
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets; and (4) at the close of
each quarter of the Fund's taxable year, not more than 25% of the value of its
total assets may be invested in securities (other than U.S. government
securities or the securities of other RICs) of any one issuer. If the Fund
failed to qualify for treatment as a RIC for any taxable year, it would be taxed
as an ordinary corporation on its taxable income for that year (even if that
income was distributed to its stockholders) and all distributions out of its
earnings and profits would be taxable to its stockholders as dividends (that is,
ordinary income).
The Fund will be subject to a nondeductible 4% excise tax ('Excise Tax') to
the extent it fails to distribute by the end of any calendar year at least 98%
of the sum of its ordinary income (not including tax-exempt income) for that
year and its capital gain net income for the one-year period ending on October
31 of that year, plus certain other amounts. For these purposes, any such
taxable income retained by the Fund, and on which it pays federal income tax,
will be treated as having been distributed.
While any shares of preferred stock are outstanding, the Fund may not
declare any cash dividend or other distribution on the Common Stock unless, at
the time of the declaration, the Fund satisfies certain dividend payment and
asset coverage requirements. See 'Special Leverage Considerations' in the
Prospectus. Any such suspension of distributions on the Common Stock could
prevent the Fund from satisfying the Distribution Requirement and avoiding
imposition of the Excise Tax. For so long as the Fund has outstanding preferred
stock, it will be required to allocate each particular type of its income for
each taxable year (such as tax-exempt income, net realized capital gains, and
other taxable income) between the two classes of shares, Common Stock and
preferred stock, in proportion to the total distributions paid to each such
class for that year. It is not expected that any portion of the Fund's
distributions will be eligible for the dividends-received deduction available
for corporations.
Pursuant to a published ruling of the Internal Revenue Service, insurance
proceeds received by the Fund from an insurer with whom the Fund maintains a
policy described in the Prospectus will be treated as tax-exempt interest income
to the same extent as if such payments were made by the issuer of the insured
Municipal Obligations and will be eligible for distribution as part of the
Fund's exempt-interest dividends. In the case of a failure by a municipality to
appropriate funds sufficient to satisfy a Municipal Obligation, it is unclear
whether
25
<PAGE>
payments made by an insurer in place of interest on such non-appropriated
obligation will be excludable from gross income for federal income tax purposes.
The Fund may acquire zero coupon Municipal Obligations issued with original
issue discount. As the holder of such a security, the Fund would have to include
in gross income for purposes of the Distribution and Income Requirements and the
Short-Short limitation the original issue discount that accrues on the security
for the taxable year, even if the Fund receives no payment on the security
during the year. Because the Fund annually must distribute at least 90% of its
tax-exempt income, including any accrued original issue discount, to satisfy the
Distribution Requirement, it may be required in a particular year to distribute
as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from the Fund's cash assets
or from the proceeds of sales of portfolio securities or from borrowings, if
necessary. The Fund may realize taxable capital gains or losses from those
sales, which would increase or decrease its investment company taxable income or
net capital gain (the excess of net long-term capital gain over net short-term
capital loss). Because of the Short-Short Limitation, any such gains realized on
the disposition of securities held for less than three months would reduce the
Fund's ability to sell other securities, or options or futures, held for
less than three months that it might wish to sell in the ordinary course of its
portfolio management.
Hedging Strategies. The use of hedging strategies, such as writing
(selling) and purchasing options and futures, involves complex rules that will
determine for income tax purposes the character and timing of recognition of the
gains and losses the Fund realizes in connection therewith. These rules also may
require the Fund to 'mark to market' (that is, treat as sold for their fair
market value) at the end of each taxable year certain positions in its
portfolio, which may cause the Fund to recognize income without receiving cash
with which to make distributions necessary to satisfy the Distribution
Requirement and to avoid imposition of the Excise Tax. In that event, the Fund
might have to liquidate securities to enable it to make the required
distributions, which would cause it to recognize gains or losses and might
affect its ability to satisfy the Short-Short Limitation.
Income from transactions in options and futures derived by the Fund with
respect to its business of investing in securities will qualify as permissible
income under the Income Requirement. However, income from the disposition of
options and futures will be subject to the Short-Short Limitation if they are
held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a 'designated hedge' will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options and
futures beyond the time when it otherwise would be advantageous to do so, in
order for the Fund to continue to qualify as a RIC.
TAXATION OF STOCKHOLDERS
Entities or other persons who are 'substantial users' (or persons related
to 'substantial users') of facilities financed by IDBs or PABs should consult
their tax advisers before purchasing shares of Common Stock because, for users
of certain of these facilities, the interest on such bonds is not exempt from
federal income tax. For these purposes, the term 'substantial user' is defined
generally to include a 'non-exempt person' who regularly uses in trade or
business a part of a facility financed from the proceeds of IDBs or PABs.
26
<PAGE>
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose modified adjusted gross income
(including income from tax-exempt sources such as the Fund) plus 50% of their
net benefits exceeds certain base amounts. Exempt-interest dividends are still
tax-exempt to the extent described in the Prospectus; they are only included in
the calculation of whether a recipient's income exceeds the established amounts.
Distributions of the Fund's net capital gain, if any, will be taxable to
its stockholders as long-term capital gains, regardless of the length of time
they held their Fund shares.
A participant in the Fund's Dividend Reinvestment Plan will be treated as
having received a distribution in the amount of the cash used to purchase shares
of Common Stock on his behalf, including a pro rata portion of the brokerage
fees incurred by the Transfer Agent. See 'Dividends and Other Distributions;
Dividend Reinvestment Plan' in the Prospectus.
The Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other noncorporate stockholders who do not provide the Fund with a correct
taxpayer identification number. Withholding at that rate from taxable dividends
and capital gain distributions also is required for stockholders who otherwise
are subject to backup withholding.
ADDITIONAL INFORMATION
SHARE REPURCHASES AND TENDERS
As discussed in the Prospectus, the Fund's board of directors may tender
for its shares to reduce or eliminate the discount to net asset value at which
the Fund's shares might trade. Even if a tender offer has been made, it will be
the board's announced policy, which may be changed by the board, not to accept
tenders or effect repurchases (or, if a tender offer has not been made, not to
initiate a tender offer) if: (1) such transactions, if consummated, would (a)
result in the delisting of the Common Stock from the NYSE (the NYSE having
advised the Fund that it would consider delisting if the aggregate market value
of the outstanding shares is less than $5,000,000, the number of publicly held
shares falls below 600,000 or the number of round-lot holders falls below
1,200), (b) impair the Fund's status as a RIC under the Internal Revenue Code
(which would eliminate the Fund's eligibility to deduct dividends paid to its
stockholders, thus causing the Fund's income to be fully taxed at the corporate
level in addition to the taxation of stockholders upon dividends received from
the Fund) or (c) cause the Fund to violate applicable asset coverage or similar
requirements on outstanding preferred stock or borrowings; (2) the Fund would
not be able to liquidate portfolio securities in an orderly manner and
consistent with the Fund's investment objective and policies in order to
repurchase its 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)
suspension of trading or limitation on prices of securities generally on the
NYSE or any other exchange on which portfolio securities of the Fund are traded,
(c) declaration of a banking moratorium by federal or state authorities or any
suspension of payment by banks in the United States, New York State or any state
in which the Fund invests, (d) limitation affecting the Fund or the issuers of
its portfolio securities imposed by federal or state authorities on the
extension of credit by lending institutions, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States or (f) other event or condition that would have a
material adverse effect on the Fund or its stockholders if shares were
repurchased. The board of directors may modify these conditions in light of
experience.
27
<PAGE>
COUNSEL
The law firm of Kirkpatrick & Lockhart LLP, 1800 M Street, N.W.,
Washington, D.C. 20036-5891 counsel to the Fund, has passed upon the legality of
the Common Stock offered by the Fund's Prospectus. Kirkpatrick & Lockhart LLP
also acts as counsel to Mitchell Hutchins and PaineWebber in connection with
other matters.
INDEPENDENT AUDITORS
Ernst & Young LLP, 787 Seventh Avenue, New York, New York 10019, serves as
the independent auditors for the Fund.
FINANCIAL INFORMATION
The Fund's Annual Report to Shareholders for the fiscal year ended March
31, 1995 is a separate document supplied with this Statement of Additional
Information and the financial statements, accompanying notes and report of
independent auditors appearing therein are incorporated by reference in this
Statement of Additional Information.
28
<PAGE>
APPENDIX A
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by Moody's and
S&P. Descriptions of these ratings are set forth below:
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
Aaa. Insurance companies rated Aaa offer exceptional financial security.
While the financial strength of these companies is likely to change, such
changes as can be visualized are most unlikely to impair their fundamentally
strong position.
Aa. Insurance companies rated Aa offer excellent financial security.
Together with the Aaa group they constitute what are generally known as high
grade companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
Baa. Insurance companies rated Baa offer adequate financial security.
However, certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group--one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis.
Capacity to meet policyholder obligations is overwhelming under a variety of
economic and underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations
is somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
RATINGS OF MUNICIPAL BONDS AND COMMERCIAL PAPER
Municipal bonds are rated by Moody's and S&P. Moody's also publishes
separate ratings for municipal notes. Descriptions of these ratings, together
with the ratings assigned by Moody's and S&P to commercial paper, are set forth
below.
A-1
<PAGE>
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. 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. They are rated lower than the Aaa 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 considered to be upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Note: Those bonds in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa1, A1 and Baa1.
DESCRIPTION OF S&P'S MUNICIPAL BOND RATINGS
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 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.
Note: Plus (+) or Minus (-): The ratings from 'AA' to 'BBB' may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
DESCRIPTION OF MOODY'S HIGHEST RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER
SHORT-TERM LOANS
Moody's ratings for state and municipal notes and other short-term loans
are designated 'Moody's Investment Grade' ('MIG' or, for variable or floating
rate obligations, 'VMIG'). Such ratings recognize the differences between
short-term credit risk and long-term risk. Factors affecting the liquidity of
the borrower and short-term cyclical elements are critical in short-term
ratings. Symbols used will be as follows:
A-2
<PAGE>
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing or both.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
DESCRIPTION OF S&P'S RATINGS OF STATE AND MUNICIPAL NOTES AND OTHER SHORT-TERM
LOANS
S&P's tax exempt note ratings are generally given to such notes that mature
in three years or less. The two higher rating categories 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.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Issuers assigned Prime-1 by Moody's have a superior capacity for repayment
of short-term promissory obligations. Prime-1 repayment capacity will normally
be evidenced by the following characteristics: leading market positions in
well-established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; well established access to a range of
financial markets and assured sources of alternate liquidity. Issuers assigned
Prime-2 have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issues assigned A by S&P, the highest rating category, are regarded as
having the greatest capacity for timely repayment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree of
safety. The A-1 designation 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. The A-2
designation indicates that the capacity for timely payment is satisfactory.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3
<PAGE>
APPENDIX B
RATING AGENCY GUIDELINES
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 Factors. The S&P Discount Factor used to discount a particular
Municipal Obligation will be determined by reference to (i)(A) in the event such
Municipal Obligation is not covered by insurance or is covered by an Original
Issuance Insurance policy or a Portfolio Insurance policy which does not provide
the Fund with the option to obtain permanent insurance equivalent to Original
Issue or Secondary Market Insurance ('Permanent Insurance') with respect to such
Municipal Obligation, or which is not escrow backed, the S&P or Moody's rating
on such Municipal Obligation, (B) in the event such Municipal Obligation is
covered by a Secondary Market Insurance policy, the S&P insurance claims-paying
ability rating of the issuer of the policy or (C) in the event such Municipal
Obligation is guaranteed or is covered by a Portfolio Insurance policy which
provides the Fund with the option to obtain Permanent Insurance with respect to
such Municipal Obligation, at the Fund's option the S&P or Moody's rating on
such Municipal Obligation or the S&P insurance claims-paying ability rating of
the guarantor or issuer of the Portfolio Insurance policy, and (ii) the 'S&P
Exposure Period' (currently, 3 Business Days). S&P Discount Factors for a range
of exposure periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS
RATING CATEGORY
------------------------
S&P EXPOSURE PERIOD AAA AA A BBB
- - ---------------------------------------- --- --- --- ---
<S> <C> <C> <C> <C>
40 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, MIG-1 or Prime-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 and (ii) no S&P Discount Factor will be applied to cash
or to Receivables for Municipal Obligations Sold. 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
B-1
<PAGE>
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;
(b) Be payable with respect to principal and interest in U.S.
dollars;
(c) Be publicly rated BBB or higher by S&P or, if not rated by S&P
but rated by Moody's, be rated at least A by Moody's; provided that such
Moody's-rated Municipal Obligations will be included in 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. For purposes of determining the S&P Discount
Factors applicable to such Moody's-rated Municipal Obligations, any such
Municipal Obligation will be deemed to have an S&P rating which is one
full rating category lower than its Moody's rating;
(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 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 issued by issuers in any one state
(including the District of Columbia), territory or possession of the United
States 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.
For purposes of determining as of any Valuation Date whether the Fund has
S&P Eligible Assets with an aggregate Discounted Value at least equal to the APS
Basic Maintenance Amount, the Fund will include as a liability in the
calculation of the APS Basic Maintenance Amount an amount calculated
semi-annually equal to 150% of the estimated cost of obtaining Permanent
Insurance with respect to S&P Eligible Assets that (i) are covered by Portfolio
Insurance policies which provide the Fund with the option to obtain such
Permanent Insurance and (ii) are discounted by an S&P Discount Factor determined
by reference to the insurance claims-paying ability of the issuer of such
Portfolio Insurance policy.
For so long as shares of any series of APS are Outstanding and S&P is
rating such APS, the Fund will not, unless the Fund has received written
confirmation from S&P that any such action would not impair the rating then
assigned by S&P to the APS, engage in any one or more of the following
transactions: engage in reverse repurchase agreement transactions; borrow money,
except that the Fund may, without obtaining the written confirmation described
above, borrow money for the purposes of clearing securities transactions if the
APS Basic Maintenance Amount would continue to be satisfied after giving effect
to such borrowing; issue any class or
B-2
<PAGE>
series of shares ranking prior to or on a parity with the APS with respect to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, or reissue any APS previously purchased
or redeemed by the Fund; lend portfolio securities; merge or consolidate with
any corporation; engage in repurchase agreement transactions in which the term
of such repurchase obligation is longer than 90 days, in which the underlying
security is a security other than United States Treasury securities (not
inclusive of zero-coupon securities), demand deposits, certificates of deposit,
or bankers acceptances in which the counter-party or its affiliates have
securities rated A-1+ by S&P with respect to such underlying security; or engage
in short sale transactions. In addition, as long as shares of APS are so rated
or unless such confirmation has been received, the Fund will not enter into
interest rate caps, collars or floors, purchase or sell futures contracts or
options thereon or write uncovered put or uncovered call options on portfolio
securities except that (i) the Fund may engage in any S&P Hedging Transactions
based on the Municipal Index, provided that the Fund shall not engage in any S&P
Hedging Transaction based on the Municipal Index (other than Closing
Transactions) which would cause the Fund at the time of such transaction to own
or have sold the least of (1) more than 1,000 outstanding futures contracts
based on the Municipal Index, (2) outstanding futures contracts based on the
Municipal Index and on the Treasury Bonds exceeding in number 25% of the
quotient of the fair market value of the Fund's total assets divided by 100,000
or (3) outstanding futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures contracts based on the
Municipal Index, in the month prior to the time of effecting such transaction as
reported by The Wall Street Journal and (ii) the Fund may engage in S&P Hedging
Transactions based on Treasury Bonds, provided that the Fund shall not engage in
any S&P Hedging Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Fund at the time of such transaction to own
or have sold the lesser of (1) outstanding futures contracts based on Treasury
Bonds and on the Municipal Index exceeding in number 25% of the quotient of the
fair market value of the Fund's total assets divided by 100,000 or (2)
outstanding futures contracts based on Treasury Bonds exceeding in number 10% of
the average number of daily traded futures contracts based on the Treasury
Bonds, in the month prior to the time of effecting such transaction as reported
by The Wall Street Journal.
For so long as shares of any series of APS are rated by S&P, the Fund will
engage in Closing Transactions to close out any outstanding futures contract
which the Fund owns or has sold or any outstanding option thereon owned by the
Fund in the event (i) the Fund does not have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount on two consecutive Valuation Dates and (ii) the Fund is required to pay
Variation Margin on the second such Valuation Date. For so long as shares of any
series of APS are rated by S&P, the Fund will engage in a Closing Transaction to
close out any outstanding futures contract or option thereon in the month prior
to the delivery month under the terms of such futures contract or option thereon
unless the Fund holds securities deliverable under such terms. For purposes of
determining S&P Eligible Assets to determine compliance with the APS Basic
Maintenance Amount, no amounts on deposit with the Fund's custodian or broker
representing Initial Margin or Variation Margin shall constitute S&P Eligible
Assets. For so long as shares of any series of APS are rated by S&P, when the
Fund writes a futures contract or option thereon, it will maintain an amount of
cash, cash equivalents or short-term, money market securities in a segregated
account with the Fund's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the account of the Fund's
broker equals the fair market value of the futures contract, except that in the
event the Fund writes a futures contract or option thereon which requires
delivery of an underlying security, the Fund shall hold such underlying
security.
Moody's 'aaa' Rating Guidelines. For purposes of calculating the Discounted
Value of the Fund's portfolio under current Moody's guidelines, the fair market
value of 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
B-3
<PAGE>
under Moody's guidelines is the fair market value thereof divided by the Moody's
Discount Factor. The Moody's Discount Factor used to discount a particular
Municipal Obligation will be determined by reference to (i)(A) in the event such
Municipal Obligation is not covered by insurance or is covered by an Original
Issue Insurance policy or a Portfolio Insurance policy which does not provide
the Fund with the option to obtain Permanent Insurance with respect to such
Municipal Obligation, or which is not escrow backed, the Moody's or S&P rating
on such Municipal Obligation, (B) in the event such Municipal Obligation is
covered by a Secondary Insurance policy, the Moody's insurance financial
strength rating of the issuer of the policy or (C) in the event such Municipal
Obligation is guaranteed or is covered by a Portfolio Insurance Policy which
provides the Fund with the option to obtain Permanent Insurance with respect to
such Municipal Obligation, at the Fund's option the Moody's or S&P rating on
such Municipal Obligation or the Moody's insurance financial strength rating of
the guarantor or issuer of the Portfolio Insurance policy, and (ii) the 'Moody's
Exposure Period' currently, the 47-day period commencing on a given Valuation
Date). Moody's Discount Factors for a range of exposure periods are set forth
below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS
RATING CATEGORY
-----------------------------------------------------------------------
VMIG-1 SP-1+
MOODY'S EXPOSURE PERIOD Aaa(1) Aa(1) A(1) Baa(1) OTHER(2) (1) (3) (4) (3) (4)
- - ---------------------------------------------------- ------ ----- ---- ------ -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
7 weeks or less..................................... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater than 7 weeks............ 154 164 173 205 235 137 149
9 weeks or less but greater than 8 weeks............ 158 169 179 209 242 138 150
</TABLE>
- - ------------------
(1) Moody's rating.
(2) Municipal Obligations not rated by Moody's but rated BBB-, BBB or BBB+ by
S&P.
(3) Municipal Obligations rated MIG-1, VMIG-1 or Prime-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 within the Moody's Exposure Period and which do not have a
long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets, these
securities will have an assumed rating of 'A' by Moody's.
The Fund will not obtain any Portfolio Insurance policies without prior
written confirmation from Moody's that the use of such policies will not
adversely affect the Moody's rating of the APS.
Since the Moody's Exposure Period currently applicable to the Fund is 47
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 or less.' However, if the Moody's Discount Factor used to
discount a particular Municipal Obligation is determined by reference to the
insurance financial strength rating of the insurer of such Municipal Obligation,
such Moody's Discount Factor will be increased by an amount equal to 50% of the
difference between (i) the percentage set forth in the above table under the
applicable rating category, and (ii) the percentage set forth in the above table
under the rating category that is one rating category below the applicable
rating category.
Notwithstanding the foregoing, (i) no Moody's Discount Factor will be
applied to short-term Municipal Obligations so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or Prime-1 by Moody's and mature or
have a demand feature at par exercisable within the Moody's Exposure Period, and
the Moody's Discount Factor for such Municipal Obligations will be 125% as long
as such Municipal Obligations are rated
B-4
<PAGE>
A-1-/AA or SP-1+/AA by S&P and mature or have a demand feature at par
exercisable within the Moody's Exposure Period and (ii) no Moody's Discount
Factor will be applied to cash or to the 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 that 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 clearinghouse 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 the Moody's Exposure Period 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 ISSUE MAXIMUM MAXIMUM STATE OR
SIZE UNDERLYING 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 at least BBB- by S&P.
** The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
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 Obligations (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
calculation of Minimum Issue Size, Maximum Underlying Obligor and Maximum State
or Territory Concentration, Moody's Eligible Assets shall be calculated without
including cash and Municipal Obligations rated MIG-1, VMIG-1 or Prime-1 or, if
not rated by Moody's, rated SP-1+ by S&P, which either mature or have a demand
feature at par exercisable within the Moody's Exposure Period. Where the Fund
sells an asset and agrees to repurchase such asset in the future, the Discounted
Value of such asset will constitute a Moody's Eligible Asset and the amount the
Fund is required to pay upon repurchase of such asset will count as a liability
for the purposes of the APS Basic Maintenance Amount. Where the Fund purchases
an asset and agrees to sell it to a third party in the future, cash receivable
by the Fund thereby will constitute a Moody's Eligible Asset if the long-term
debt of such other party is rated at least A2 by Moody's and such agreement has
a term of 30 days or less; otherwise the Discounted Value of such asset will
constitute a Moody's Eligible Asset.
B-5
<PAGE>
For purposes of determining as of any Valuation Date whether the Fund has
Moody's Eligible Assets with an aggregate Discounted Value at least equal to the
APS Basic Maintenance Amount, the Fund shall include as a liability in the
calculation of the APS Basic Maintenance Amount an amount calculated
semi-annually equal to 150% of the estimated cost of obtaining Permanent
Insurance with respect to Moody's Eligible Assets that (i) are covered by
Portfolio Insurance policies which provide the Fund with the option to obtain
such Permanent Insurance and (ii) are discounted by a Moody's Discount Factor
determined by reference to the insurance claims-paying ability rating of the
issuer of such Portfolio Insurance policy.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent that it has been irrevocably deposited for the
payment of (A)(i) through (A)(vii) under the definition of APS Basic Maintenance
Amount or it is subject to any material lien, mortgage, pledge, security
interest or security agreement of any kind (collectively, 'Liens'), except for
(a) Liens which are being contested in good faith by appropriate proceedings and
which Moody's has indicated to the Fund will not affect the status of such asset
as a Moody's Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens to secure
payment for services rendered or cash advanced to the Fund by Mitchell Hutchins,
State Street Bank and Trust Company or the Auction Agent and (d) Liens by virtue
of any repurchase agreement.
For so long as the shares of any series of APS are Outstanding and the APS
are rated by Moody's, the Fund will not, unless it has received written
confirmation from Moody's that any such action would not impair the ratings then
assigned by Moody's to the APS, engage in any one or more of the following
transactions: (1) incur any indebtedness, except that the Fund may, without
obtaining the prior written approval described above, incur indebtedness for the
purpose of clearing securities transactions if the Discounted Value of Moody's
Eligible Assets would equal or exceed the APS Basic Maintenance Amount after
giving effect to such indebtedness; (2) issue any class or series of shares
ranking prior to or on a parity with the APS with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or winding
up of the Fund, or reissue any APS previously purchased or redeemed by the Fund;
(3) engage in short sale transactions; or (4) except as necessary to effect
Closing Transactions, engage in transactions in options on securities, futures
contracts or options on futures contracts, except that in connection with
Moody's Hedging Transactions: (A) the Fund may buy call or put options on
securities; (B) the Fund may write covered call options on securities; (C) the
Fund may write put options on securities; (D) the Fund may enter into positions
in futures contracts based on the Municipal Index provided that the Fund shall
not engage in any such transaction which would cause the Fund at the time of
such transaction to own or have sold (1) outstanding futures contracts based on
the Municipal Index exceeding in number 10% of the rolling average number of
daily traded futures contracts based on the Municipal Index in the 30 calendar
days prior to the time of effecting such transaction as reported by The Wall
Street Journal or (2) outstanding futures contracts based on the Muncipal Index
and options on such futures contracts having an aggregate fair market value
(taking into account the fair market value of futures contracts based on
Treasury Bonds) exceeding the fair market value of Moody's Eligible Assets owned
by the Fund; (E) the Fund may enter into futures contracts on Treasury Bonds
provided that the Fund shall not engage in any such transaction which would
cause the Fund at the time of such transaction to own or have sold (1)
outstanding futures contracts based on Treasury Bonds and options on such
futures contracts having an aggregate fair market value (taking into account the
fair market value of futures contracts based on the Municipal Index) exceeding
40% of the aggregate fair market value of Moody's Eligible Assets owned by the
Fund and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P,
rated AAA by S&P) or (2) outstanding futures contracts based on Treasury Bonds
and options on such futures contracts having an aggregate fair market value
(taking into account the fair market value of futures contracts based on the
Municipal Index) exceeding 80% of the aggregate fair market value of Moody's
Eligible Assets owned by the Fund and rated Baa or A by Moody's (or, if not
rated by Moody's but
B-6
<PAGE>
rated by S&P, rated A or AA by S&P); for purposes of the foregoing clauses (D)
and (E), the Fund shall be deemed to own the number of futures contracts that
underlie any outstanding option written by the Fund; and (F) the Fund may buy
call or put options on futures contracts on the Municipal Index or Treasury
Bonds, may write put options on such futures contracts (provided, that if the
contract would require delivery of a security, that security must be held by the
Fund) and may write call options on such futures if it owns the futures contract
subject to the option.
For so long as shares of any series of APS are rated by Moody's, the Fund
will engage in Closing Transactions to close out any outstanding futures
contract based on the Municipal Index if the open interest with respect to such
futures contracts based on the Municipal Index as reported by The Wall Street
Journal is less than 5,000. For so long as shares of APS are rated by Moody's,
the Fund will engage in a Closing Transaction to close out any outstanding
futures contract by no later than the fifth Business Day of the month in which
such contract expires and will engage in a Closing Transaction to close out any
outstanding option on a futures contract by no later than the first Business Day
of the month in which such option expires. For so long as shares of APS are
rated by Moody's, the Fund will engage in transactions with respect to futures
contracts or options thereon having only the next settlement date or the
settlement date immediately thereafter.
For purposes of valuation of Moody's Eligible Assets (i) if the Fund writes
a call option, the underlying asset will be valued as follows: (A) if the option
is exchanged-traded and may be offset readily or if the option expires before
the earliest possible redemption of the APS, at the lower of the Discounted
Value of the underlying security of the option and the exercise price of the
option or (B) otherwise, it has no value; (ii) if the Fund writes a put option,
the underlying asset will be valued as follows: the lesser of (A) exercise price
and (B) the Discounted Value of the underlying security; (iii) if the Fund is a
seller under a futures contract, the underlying security will be valued at the
lower of (A) settlement price and (B) Discounted Value of the underlying
security; provided that, if a contract matures within the Moody's Exposure
Period, the security may be valued at the settlement price; (iv) if the Fund is
the buyer under a futures contract, the underlying security will be valued at
the lower of (A) the settlement price and (B) the Discounted Value of the
underlying security; provided that, if the contract matures within the Moody's
Exposure Period, the security may be valued at Discounted Value of the
underlying security; and (v) call or put option contracts which the Fund buys
have no value. For so long as shares of any series of APS are rated by Moody's:
(1) the Fund will not engage in options and futures transactions for leveraging
or speculative purposes; (2) the Fund will not write any anticipatory call
options or sell any anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such purchase; (3) the
Fund will not enter into an option or futures transaction unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the APS Basic Maintenance
Amount; (4) for purposes of the APS Basic Maintenance Amount (i) assets in
margin accounts are not Moody's Eligible Assets, (ii) 10% of the settlement
price of assets sold under a futures contract, the settlement price of assets
purchased under a futures contract and the settlement price of an underlying
futures contract if the Fund writes put options on futures contracts will
constitute liabilities of the Fund and (iii) if the Fund writes call options on
futures contracts and does not own the underlying futures contract, 105% of the
fair market value of the underlying futures contract will constitute a liability
of the Fund; (5) the Fund shall enter into only exchange-traded futures and
shall write only exchange-traded options on exchanges approved by Moody's; (6)
where delivery may be made to the Fund with any of a class of securities, the
Fund shall assume for purposes of the APS Basic Maintenance Amount that it takes
delivery of that security which yields it the least value; (7) the Fund will not
engage in forward contracts; (8) the Fund will enter into futures contracts as
seller only if it owns the underlying security; and (9) there shall be a
quarterly audit made of the Fund's futures and options transactions by the
Fund's independent accountants to confirm that the Fund is in compliance with
these standards.
B-7
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THE PROSPECTUS OR IN THIS STATEMENT OF
ADDITIONAL INFORMATION IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR PAINEWEBBER. THE PROSPECTUS AND
THIS STATEMENT OF ADDITIONAL INFORMATION DO NOT CONSTITUTE AN OFFERING BY THE
FUND OR BY PAINEWEBBER IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Policies and Restrictions........... 1
Hedging and Related Income Strategies.......... 10
Directors and Officers......................... 16
Control Persons and Principal Holders of
Securities................................... 22
Investment Advisory Arrangements............... 22
Portfolio Transactions......................... 23
Valuation of Common Stock...................... 24
Taxes.......................................... 25
Additional Information......................... 27
Financial Information.......................... 28
Appendix A..................................... A-1
Appendix B..................................... B-1
</TABLE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Copyright)1995 PaineWebber Incorporated
[LOGO] Recycled
Paper
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PAINEWEBBER PREMIER
INSURED MUNICIPAL
INCOME FUND INC.
COMMON STOCK
------------------------
STATEMENT OF ADDITIONAL
INFORMATION
------------------------
PAINEWEBBER INCORPORATED
------------------------
JULY , 1995
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
PART C -- OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial Statements:
Included in Part A of the Registration Statement:
a. Financial Highlights for the fiscal
year ended March 31, 1995
Included through incorporation by reference in Part B
of the Registration Statement and filed with the Annual
Report to Shareholders with the Securities and Exchange
Commission on May 30, 1995 [File No. 811-7528]
[Accession No. 0000897802-95-000001]:
a. Report of Ernst & Young LLP, Independent Auditors
b. Portfolio of Investments as of March 31, 1995
c. Statement of Assets and Liabilities as of
March 31, 1995
d. Statement of Operations for the fiscal year
ended March 31, 1995
e. Statement of Cash Flows for the fiscal year
ended March 31, 1995
f. Statement of Changes in Net Assets
g. Notes to Financial Statements
h. Financial Highlights
2. Exhibits:
a. (i) Articles of Incorporation (filed herewith)
(ii) Articles Supplementary dated
August 5, 1993 (filed herewith)
(iii) Articles Supplementary dated
November 28, 1994 (filed herewith)
b. Bylaws1/
c. None
d. See Exhibit a. to this Registration Statement
e. Dividend Reinvestment Plan2/
f. None
- - ------------
1/ Incorporated herein by reference to exhibit 2 to the Registration
Statement on Form N-2 filed February 19, 1993 (File No. 33-58532).
2/ Incorporated herein by reference to exhibit 5 to Pro-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed May 27,
1993 (File No. 33-58532).
II-1
g. Investment Advisory and Administration
Contract3/
h. (i) Underwriting Agreement4/
(ii) Master Selected Dealer Agreement4/
i. None
j. (i) Custodian Agreement3/
(ii) Letter Agreement between the Fund
and The Depository Trust Company
dated 8/12/93
(filed herewith)
(iii) Letter Agreement between the Fund and The
Depository Trust Company dated 11/28/94
(filed herewith)
k. (i) Transfer Agency Agreement5/
(ii) Broker-Dealer Agreement between
Bankers Trust Company and Goldman,
Sachs & Co.
dated 8/12/93 (filed herewith)
(iii) Broker-Dealer Agreement between
Bankers Trust Company and PaineWebber
Incorporated dated 8/12/93 (filed herewith)
(iv) Auction Agency Agreement between the
Fund and Bankers Trust Company dated 8/12/93
(filed herewith)
(v) Broker-Dealer Agreement between
Bankers Trust Company and
Goldman, Sachs & Co.
dated 11/28/94 (filed herewith)
(vi) Broker-Dealer Agreement between
Bankers Trust Company and PaineWebber
Incorporated dated 11/28/94 (filed herewith)
(vii) Auction Agency Agreement between the
Fund and Bankers Trust Company
dated 8/12/93
(filed herewith)
l. Opinion and Consent of Counsel7/
_______________
3/ Incorporated by reference to exhibit g. to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-2 filed July 25, 1994
(File No. 33-58532).
4/ The shares of the common stock offered by the Prospectus will be
offered in order to effect over-the-counter secondary market
transactions by PaineWebber in its capacity as a dealer and secondary
market maker and not pursuant to any agreement with the Fund. Shares of
the common stock were originally issued in a public offering pursuant to
an Underwriting Agreement incorporated herein by reference to exhibit
h.(i) to Post-Effective Amendment No. 1 to the Registration Statement
on Form N-2 filed July 25, 1994 (File No. 33-58532), and a related
document, incorporated herein by reference to exhibit 8(b) to
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2
filed May 27, 1993 (File No. 33-58532.)
5/ Incorporated by reference to exhibit j. to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-2 filed July 25, 1994
(File No. 33-58532).
6/ Incorporated by reference to exhibit k. to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-2 filed July 25, 1994
(File No. 33-58532).
7/ Incorporated herein by reference to exhibit 12 to Post-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed May 27, 1993
(File No. 33-58532).
II-2
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent8/
q. None
Item 25. Marketing Arrangements
Inapplicable.
Item 26. Other Expenses of Issuance and Distribution
Not applicable to current Post-Effective Amendment; for
expenses incurred in connection with this Registration Statement,
see Pre-Effective Amendment No. 2 to the Fund's Registration
Statement on Form N-2, SEC File No. 33-58532, filed May 27, 1993.
Item 27. Persons Controlled by or Under Common Control
None.
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record
Stockholders as of
Title of Class 5/26/95
- - -------------- ------------------
<S> <C>
Shares of Common Stock, par value
$0.001 per share . . . . . . . . . . . . . . . . . . . . . . 973
Auction Preferred Shares, Series A . . . . . . . . . . . . . 3
Auction Preferred Shares, Series B . . . . . . . . . . . . . 4
Auction Preferred Shares, Series C . . . . . . . . . . . . . 5
Auction Preferred Shares, Series D . . . . . . . . . . . . . 4
</TABLE>
Item 29. Indemnification
Incorporated by reference to Item 29 of Part C to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-2 filed May 27, 1993
(File No. 33-58532).
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus.
Mitchell Hutchins, a Delaware corporation, is a registered investment
adviser and is wholly owned by PaineWebber, which in turn is wholly owned
by Paine Webber Group Inc. Mitchell Hutchins is primarily engaged in the
investment advisory business. Information as to executive officers and
directors of Mitchell Hutchins is included in its Form ADV filed on 2/28/95,
with the SEC (Registration number 801-13219) and is incorporated herein by
reference.
______________
8/ Incorporated herein by reference to exhibit 16 to Pre-Effective
Amendment No. 2 to the Registration Statement on Form N-2 filed May 27,
1933 (File No. 33-58532).
II-3
Item 31. Location of Accounts and Records
The accounts and records of the Fund are maintained at the offices of
Mitchell Hutchins at 1285 Avenue of the Americas, New York, New York 10019 and
at the office of the Fund's custodian State Street Bank and Trust Company, at
1776 Heritage Drive, North Quincy, Massachusetts 02171 and at the office of
the Trust's transfer agent, PNC Bank, National Association, c/o PFPC Inc.,
103 Bellevue Parkway, Wilmington, Delaware 19809.
Item 32. Management Services
None.
Item 33. Undertakings
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any
facts or events arising after the
effective date of the registration
statement (or the most recent
post-effective amendment thereof)
which, individually or in the
aggregate, represent a fundamental
change in the information set forth
in the registration statement; and
(iii) To include any material information
with respect to the plan of
distribution not previously disclosed
in the registration statement or any
material change to such information
in the registration statement.
(2) 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 pursuant to Rule
424(b)(1) or (4) or 497 under the Securities Act shall be deemed
to be part of this registration statement as of the time it was
declared effective.
(3) That for the purpose of determining any
liability under the Securities Act of 1933, each post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(4) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(5) 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.
II-4
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
EXHIBIT INDEX
Sequential
Page
Exhibit Document Description Number
- - ------- -------------------- ------
a. (i) Articles of Incorporation (filed herewith)
(ii) Articles Supplementary dated August 5, 1993
(filed herewith)
(iii) Articles Supplementary dated November 28, 1994
(filed herewith)
b. Bylaws [previously filed as exhibit 2 to the
Registration Statement on Form N-2 filed February 19,
1993 (File No. 33-58532)]
c. None
d. See Exhibit a. to this Registration Statement
e. Dividend Reinvestment Plan [previously filed as exhibit 5
to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-2 filed May 27, 1993 (file No. 33-58532)]
f. None
g. Investment Advisory and Administration Contract [previously
filed as exhibit g. to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed July 25, 1994
(file No. 33-58532)]
h. (i) Underwriting Agreement [previously filed as exhibit h.(i)
to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 filed July 25, 1994 (file
No. 33-58532)]. The shares of the common stock offered
by the Prospectus will be offered in order to effect
over-the-counter secondary market transactions by
PaineWebber in its capacity as a dealer and secondary
market-maker and not pursuant to any agreement with the
Fund. Shares of the common stock were originally issued
in a public offering pursuant to the Underwriting Agreement
as filed herewith.
(ii) Master Selected Dealer Agreement [previously filed as
exhibit 8(b) to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2 filed May 27, 1993
(File No. 33-58532)]
i. None
j. (i) Custodian Agreement [previously filed as exhibit j. to
Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 filed July 25, 1994
(filed No. 33-58532)]
(ii) Letter Agreement between the Fund and The Depository
Trust Company dated 8/12/93 (filed herewith)
(iii) Letter Agreement between the Fund and The Depository Trust
Company dated 11/28/94 (filed herewith)
k. (i) Transfer Agency Agreement [previously filed as exhibit k.
to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 filed July 25, 1994
(File No. 33-58532)]
II-5
(ii) Broker-Dealer Agreement between Bankers Trust Company
and Goldman, Sachs & Co. dated 8/12/93 (filed herewith)
(iii) Broker-Dealer Agreement between Bankers Trust Company
and PaineWebber Incorporated dated 8/12/93
(filed herewith)
(iv) Auction Agency Agreement between the Fund and Bankers
Trust Company dated 8/12/93 (filed herewith)
(v) Broker-Dealer Agreement between Bankers Trust Company
and Goldman, Sachs & Co. dated 11/28/94 (filed herewith)
(vi) Broker-Dealer Agreement between Bankers Trust Company
and PaineWebber Incorporated dated 11/28/94
(filed herewith)
(vii) Auction Agency Agreement between the Fund and Bankers
Trust Company dated 11/28/94 (filed herewith)
l. Opinion and consent of counsel [previously filed as exhibit 12
to the Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-2 filed May 27, 1993 (File No. 33-58532)]
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent [previously filed as exhibit 16
to Pre-Effective Amendment No. 2 to the Registration Statement
on Form N-2 filed May 27, 1993 (file No. 33-58532)]
q. None
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the registrant has duly caused this
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and the
State of New York, on the 31st day of May, 1995.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
By: /s/ Gregory K. Todd
------------------------------
Gregory K. Todd
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed below by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Richard Q. Armstrong
- - -------------------------- Director May 31, 1995
Richard Q. Armstrong
/s/ E. Garrett Bewkes, Jr. Director and Chairman of May 31, 1995
- - -------------------------- the Board of Directors
E. Garrett Bewkes, Jr.
/s/ Richard R. Burt
- - -------------------------- Director May 31, 1995
Richard R. Burt
/s/ Meyer Feldberg
- - -------------------------- Director May 31, 1995
Meyer Feldberg*
/s/ John R. Torell, III
- - -------------------------- Director May 31, 1995
John R. Torell, III*
/s/ William D. White
- - -------------------------- Director May 31, 1995
William D. White*
/s/ Margo N. Alexander
- - -------------------------- President May 31, 1995
Margo N. Alexander** (Chief Executive
Officer)
/s/ Julian F. Sluyters Vice President and May 31, 1995
- - -------------------------- Treasurer (Principal
Julian F. Sluyters Financial and
Accounting Officer)
* Signatures affixed by Robert A. Wittie pursuant to powers of attorney dated
July 22, 1994, and incorporated by reference from Post-Effective Amendment No.
1 to the Registration Statement of PaineWebber Premier Insured Municipal
Income Fund Inc., SEC No. 33-58532, filed July 25, 1994.
** Signature affixed by Robert A. Wittie pursuant to power of attorney dated
May 8, 1995, and incorporated by reference from Post-Effective Amendment
No. 34 to the Registration Statement of PaineWebber America Fund, SEC No.
2-78626, filed May 10, 1995.
II-7
<PAGE>
EXHIBIT INDEX
Sequential
Page
Exhibit Document Description Number
- - ------- -------------------- ------
a. (i) Articles of Incorporation (filed herewith)
(ii) Articles Supplementary dated August 5, 1993
(filed herewith)
(iii) Articles Supplementary dated November 28, 1994
(filed herewith)
b. Bylaws [previously filed as exhibit 2 to the
Registration Statement on Form N-2 filed February 19,
1993 (File No. 33-58532)]
c. None
d. See Exhibit a. to this Registration Statement
e. Dividend Reinvestment Plan [previously filed as exhibit 5
to Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-2 filed May 27, 1993 (file No. 33-58532)]
f. None
g. Investment Advisory and Administration Contract [previously
filed as exhibit g. to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-2 filed July 25, 1994
(file No. 33-58532)]
h. (i) Underwriting Agreement [previously filed as exhibit h.(i)
to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 filed July 25, 1994 (file
No. 33-58532)]. The shares of the common stock offered
by the Prospectus will be offered in order to effect
over-the-counter secondary market transactions by
PaineWebber in its capacity as a dealer and secondary
market-maker and not pursuant to any agreement with the
Fund. Shares of the common stock were originally issued
in a public offering pursuant to the Underwriting Agreement
as filed herewith.
(ii) Master Selected Dealer Agreement [previously filed as
exhibit 8(b) to Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-2 filed May 27, 1993
(File No. 33-58532)]
i. None
j. (i) Custodian Agreement [previously filed as exhibit j. to
Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 filed July 25, 1994
(filed No. 33-58532)]
(ii) Letter Agreement between the Fund and The Depository
Trust Company dated 8/12/93 (filed herewith)
(iii) Letter Agreement between the Fund and The Depository Trust
Company dated 11/28/94 (filed herewith)
k. (i) Transfer Agency Agreement [previously filed as exhibit k.
to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-2 filed July 25, 1994
(File No. 33-58532)]
(ii) Broker-Dealer Agreement between Bankers Trust Company
and Goldman, Sachs & Co. dated 8/12/93 (filed herewith)
(iii) Broker-Dealer Agreement between Bankers Trust Company
and PaineWebber Incorporated dated 8/12/93
(filed herewith)
(iv) Auction Agency Agreement between the Fund and Bankers
Trust Company dated 8/12/93 (filed herewith)
(v) Broker-Dealer Agreement between Bankers Trust Company
and Goldman, Sachs & Co. dated 11/28/94 (filed herewith)
(vi) Broker-Dealer Agreement between Bankers Trust Company
and PaineWebber Incorporated dated 11/28/94
(filed herewith)
(vii) Auction Agency Agreement between the Fund and Bankers
Trust Company dated 11/28/94 (filed herewith)
l. Opinion and consent of counsel [previously filed as exhibit 12
to the Pre-Effective Amendment No. 2 to the Registration
Statement on Form N-2 filed May 27, 1993 (File No. 33-58532)]
m. None
n. Consent of Independent Auditors (filed herewith)
o. None
p. Letter of Investment Intent [previously filed as exhibit 16
to Pre-Effective Amendment No. 2 to the Registration Statement
on Form N-2 filed May 27, 1993 (file No. 33-58532)]
q. None
ARTICLES OF INCORPORATION
OF
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
FIRST: INCORPORATION: The undersigned, Nancy L. Hansbrough, whose address is
1800 M Street, N.W., Washington, D.C. 20036, being at least eighteen years of
age, does hereby form a corporation under the general laws of the State of
Maryland.
SECOND: NAME OF CORPORATION: The name of the corporation is PaineWebber
Premier Insured Municipal Income Fund Inc. ("Corporation").
THIRD: CORPORATE PURPOSES: The Corporation is formed for the following purpose
or purposes:
A. To conduct, operate and carry on the business of a closed-end,
management investment company, registered as such with the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940, as amended
("1940 Act"); and
B. To exercise and enjoy all powers, rights, and privileges granted to and
conferred upon corporations by the Maryland General Corporation Law now or
hereafter in force, including, without limitation:
1. To hold, invest, and reinvest the funds of the Corporation, and to
purchase, subscribe for or otherwise acquire, hold for investment,
trade and deal in, sell, assign, negotiate, transfer, exchange,
lend, pledge or otherwise dispose of, or turn to account or realize
upon securities of any corporation, company, association, trust,
firm, partnership, or other organization however or whenever
established or organized, as well as securities issued by the United
States Government, the government of any state, municipality, or
other political subdivision, foreign governments, supra-national
entities, or any other governmental or quasi-governmental agency,
instrumentality, or entity. For the purposes of these Articles of
Incorporation, as the same may be supplemented or amended
("Articles"), without limiting the generality thereof, the term
"securities" includes: stocks, shares, units of beneficial interest,
<PAGE>
partnership interests, leases, bonds, debentures, time notes and
deposits, notes, mortgages, and any other obligations or evidence of
indebtedness; any certificates, receipts, warrants, options, futures
or forward contracts, or other instruments representing rights or
obligations to receive, purchase, subscribe for or sell the same, or
evidencing or representing any other direct or indirect right or
interest, including all rights of equitable ownership, in any
property or assets; and any negotiable or non-negotiable instruments
including money market instruments, bank certificates of deposit,
finance paper, commercial paper, bankers' acceptances, and all types
of repurchase and reverse repurchase agreements; interest rate
protection instruments; and derivative or synthetic securities;
2. To enjoy all rights, powers, and privileges of ownership or interest
in all securites held by the Corporation, including the right to
vote and otherwise act with respect to the preservation, protection,
improvement, and enhancement in value of all such securities;
3. To issue and sell shares of its own capital stock, including shares
in fractional denominations, and securities which are convertible or
exchangeable, with or without the payment of additional
consideration, into such capital stock in such amounts and on such
terms and for such amount or kind of consideration (including
securities) now or hereafter permitted by the laws of the State of
Maryland and by these Articles as its Board of Directors may, and is
hereby authorized to, determine;
4. To purchase, repurchase or otherwise acquire, hold, dispose of,
resell, transfer, reissue, or cancel shares of its own capital stock
in any manner and to the extent now or hereafter permitted by the
laws of the State of Maryland and by these Articles;
5. To transact its business, carry on its operations, have one or more
offices, and exercise all of its corporate powers and rights in any
state, territory, district, and possession of the United States, and
in any foreign country;
6. To aid by further investment any issuer of which the Corporation
holds any obligation or in which it
-2-
<PAGE>
has a direct or indirect interest, to perform any act designed to
protect, preserve, improve, or enhance the value of such obligation
or interest, and to guarantee or become a surety on any or all of
the contracts, stocks, bonds, notes, debentures, and obligations of
any corporation, company, trust, association, partnership or firm;
and
7. To generally transact any business in connection with or incidental
to its corporate purposes, and to do everything necessary, suitable,
or proper for the accomplishment of such purposes or for the
attainment of any object or furtherance of any purpose set forth in
these Articles, either alone or in association with others.
C. The foregoing clauses shall be construed both as purposes and powers,
and the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the purposes and powers of the Corporation.
D. Incident to meeting the purposes specified above, the Corporation shall
also have the power, without limitation:
1. To make contracts and guarantees, incur liabilities and borrow
money;
2. To sell, lease, exchange, transfer, convey, mortgage, pledge, and
otherwise dispose of any or all of its assets;
3. To acquire by purchase, lease or otherwise, and take, receive, own,
hold, use, employ, improve, dispose of and otherwise deal with any
interest in real or personal property, wherever located; and
4. To buy, sell, and otherwise deal in and with commodities, indices of
commodities or securities, and foreign exchange, including the
purchase and sale of forward contracts, futures contracts and
options on futures contracts related thereto, subject to any
applicable provisions of law.
FOURTH: ADDRESS OF PRINCIPAL OFFICE. The post office address of the principal
office of the Corporation in the State of Maryland is The Corporation Trust
Incorporated, 32 South Street, Baltimore, Maryland 21202-3242.
FIFTH: NAME AND ADDRESS OF RESIDENT AGENT. The name and address of the
resident agent of the Corporation in the State of Maryland is The Corporation
Trust Incorporated, 32 South Street, Baltimore, Maryland 21202-3242.
-3-
<PAGE>
SIXTH: CAPITAL STOCK.
A. The total number of shares of all classes of stock which the Corporation
has authority to issue is 200,000,000 shares of capital stock, $.001 par value,
having an aggregate par value of $200,000.
B. Stockholders shall not have preemptive or preferential rights to acquire
any shares of the capital stock of the Corporation, and any or all of such
shares, whenever authorized, may be issued, or may be reissued and transferred
if such shares have been reacquired and have treasury status, to any person,
firm, corporation, trust, partnership, association or other entity for such
lawful consideration and on such terms as the Board of Directors determines in
its discretion without first offering the shares to any such holder.
C. All shares of the Corporation's authorized capital stock, when issued
for such consideration as the Board of Directors may determine, shall be fully
paid and nonassessable.
D. The Board of Directors of the Corporation may, by articles supplementary
to these Articles adopted pursuant to Section 2-208 of the Maryland General
Corporation Law or a successor provision thereto, classify or reclassify any
unissued capital stock from time to time by setting or changing any
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or (subject to the purposes of the
Corporation) terms or conditions for the redemption of the stock by the
Corporation. Unless and until the Board of Directors shall provide otherwise
pursuant to the authority granted in this paragraph, all of the authorized
shares of the Corporation's capital stock are designated as Common Stock.
E. No shares of the Corporation's Common Stock shall have any conversion or
exchange rights or privileges or have cumulative voting rights.
F. The dividends and distributions or other payments with respect to the
capital stock of the Corporation, including any class that hereafter may be
created, shall be in such amounts as may be declared from time to time by the
Board of Directors, and such dividends and distributions may vary from class to
class to such extent and for such purposes as the Board of Directors may deem
appropriate, including, but not limited to, the purpose of complying with
requirements of regulatory or legislative authorities.
G. Unless otherwise provided in these Articles, on each matter that is
submitted to a vote of the stockholders, each holder of a share of capital stock
of the Corporation shall be entitled to one vote for each such share registered
in such holder's name on
-4-
<PAGE>
the books of the Corporation, irrespective of the class of such share, and all
shares of all classes of capital stock shall vote together as a single class;
provided, however, that, except as otherwise expressly provided in these
Articles, as to any matter with respect to which a separate vote of any class is
required by the 1940 Act (including the rules or regulations thereunder) or by
the Maryland General Corporation Law, voting in accordance with such requirement
shall apply in lieu of a vote of all classes voting together as a single class.
H. In the event of the liquidation or dissolution of the Corporation, the
holders of the Corporation's Common Stock shall be entitled to receive all the
net assets of the Corporation not attributable to other classes of capital stock
through any preference. The assets so distributed to the stockholders shall be
distributed among such stockholders in proportion to the number of shares of the
class held by them and recorded on the books of the Corporation.
SEVENTH: BOARD OF DIRECTORS: The corporation shall have at least three
directors; provided that if there is no stock outstanding, the number of
directors may be less than three but not less than one. Mary Joan Hoene shall
act as sole director of the Corporation until the first annual meeting or until
her successor is duly chosen and qualified.
EIGHTH: MANAGEMENT OF THE AFFAIRS OF THE CORPORATION.
A. All corporate powers and authority of the Corporation shall be vested in
and exercised by the Board of Directors except as otherwise provided by statute,
these Articles or the Bylaws of the Corporation.
B. The Board of Directors shall have the power to adopt, alter, or repeal
the Bylaws of the Corporation, unless the Bylaws otherwise provide.
C. The Board of Directors shall have the power to determine whether and to
what extent, and at what times and places, and under what conditions and
regulations the accounts and books of the Corporation (other than the stock
ledger) shall be open to inspection by stockholders. No stockholder shall have
any right to inspect any account, book, or document of the Corporation except to
the extent permitted by statute or the Bylaws.
D. The Board of Directors shall have the power to determine, in accordance
with generally accepted accounting principles, the Corporation's net income,
its total assets and liabilities, and the net asset value of the shares of
capital stock of the Corporation. The Board of Directors may delegate such power
to any one or more of the directors or officers of the Corporation, its
investment adviser, administrator, custodian, or depositary of the Corporation's
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<PAGE>
assets, or another agent of the Corporation appointed for such purposes.
E. The Board of Directors shall have the power to make distributions,
including dividends, from any legally available funds in such amounts, and in a
manner and to the stockholders of record of such a date, as the Board of
Directors may determine.
NINTH: STOCKHOLDER LIABILITY. The stockholders shall not be liable to any
extent for the payment of any debt of the Corporation.
TENTH: MAJORITY OF VOTES. Except as otherwise provided in these Articles, and
notwithstanding any provision of Maryland law requiring approval by a greater
proportion than a majority of the votes entitled to be cast in order to take or
authorize any action, any action may be taken or authorized by the Corporation
upon the affirmative vote of a majority of the votes entitled to be cast thereon
(or by a majority of the votes entitled to be cast thereon as a separate class).
ELEVENTH: CERTAIN TRANSACTIONS.
A. Notwithstanding any other provision of these Articles, and subject to
the exception provided in Paragraph D of this Article, the transactions
described in Paragraph C of this Article shall require the affirmative vote or
consent of the holders of sixty-six and two-thirds percent (66-2/3%) of the
outstanding shares of the capital stock of the Corporation. Notwithstanding any
other provision in these Articles, such affirmative vote shall be in addition
to, and not in lieu of, the vote or consent of the holders of the stock of the
Corporation otherwise required by law (including without limitation, any
separate vote by class of capital stock that may be required by the 1940 Act or
by the Maryland General Corporation Law), by the terms of any class or series of
stock that is now or hereafter authorized, or by any agreement between the
Corporation and any national securities exchange.
B. For purposes of this Article, the term "Principal Stockholder" shall
mean any corporation, person, or group (within the meaning of Rule 13d-5 under
the Securities Exchange Act of 1934), which is the beneficial owner, directly or
indirectly, of more than five percent of the outstanding shares of the stock of
the Corporation and shall include any affiliate or associate, as such terms are
defined in clause (2) below, of a Principal Stockholder. For the purposes of
this Article, in addition to the shares of stock which a corporation, person,
entity, or group beneficially owns directly, any corporation, person, entity, or
group shall be deemed to be the beneficial owner of any shares of stock of the
Corporation (1) which it has the right to acquire pursuant to any agreement or
upon exercise of conversion rights or
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<PAGE>
warrants, or otherwise or (2) which are beneficially owned, directly or
indirectly (including shares deemed owned through application of clause (1)
above), by any other corporation, person, entity, or group with which it or its
"affiliate" or "associate," as those terms are defined in Rule 12b-2 under the
Securities Exchange Act of 1934, has any agreement, arrangement, or
understanding for the purpose of acquiring, holding, voting, or disposing of
stock of the Corporation, or which is its "affiliate" or "associate" as so
defined. For purposes of this Article, calculation of the outstanding shares of
stock of the Corporation shall not include shares deemed owned through
application of clause (1) above.
C. This Article shall apply to the following transactions:
1. Merger, consolidation or share exchange of the Corporation with or
into any Principal Stockholder;
2. Issuance of any securities of the Corporation to any Principal
Stockholder for cash;
3. Sale, lease, or exchange of all or any substantial part of the
assets of the Corporation to any Principal Stockholder (except
assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purposes of such computation all
assets sold, leased, or exchanged in any series of similar
transactions within a twelve-month period);
4. Sale, lease, or exchange to the Corporation, in exchange for
securities of the Corporation, of any assets of any Principal
Stockholder (except assets having an aggregate fair market value of
less than $1,000,000, aggregating for the purposes of such
computation all assets sold, leased, or exchanged in any series of
similar transactions within a twelve-month period); or
5. Any amendment to these Articles that makes the Common Stock or any
other class of capital stock a "redeemable security" as that term is
defined in the 1940 Act.
D. The provisions of this Article shall not apply to any transaction
described in Paragraph C of the Article if the Board of Directors authorizes
such transaction by an affirmative vote of a majority of the directors,
including a majority of the directors who are not "interested persons" of the
Corporation, as that term is defined in the 1940 Act.
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<PAGE>
TWELFTH: LIMITATION ON LIABILITY.
A. To the maximum extent permitted by applicable law (including Maryland
law and the 1940 Act) as currently in effect or as may hereafter be amended:
1. No director or officer of the Corporation shall be liable to the
Corporation or its stockholders for money damages; and
2. The Corporation shall indemnify and advance expenses as provided in
the Bylaws of the Corporation to its present and past directors,
officers, employees and agents, and persons who are serving or have
served at the request of the Corporation in similar capacities for
other entities.
B. No amendment, alteration or repeal of this Article or the adoption,
alteration or amendment of any other provision of these Articles or the
Bylaws
of the Corporation inconsistent with this Article, shall adversely affect any
limitation on liability or indemnification of any person under this Article with
respect to any act or failure to act which occurred prior to such amendment,
alteration, repeal or adoption.
THIRTEENTH: RIGHT OF AMENDMENT. Except as set forth below and subject to the
authority granted to the Board of Directors to adopt articles supplementary
pursuant to Article SIXTH hereof, any provision of these Articles may be
amended, altered or repealed only upon the affirmative vote of the holders of a
majority of the outstanding shares of the Corporation. Any amendment, alteration
or repeal of Article ELEVENTH, TWELFTH or THIRTEENTH shall require the
affirmative vote or consent of the holders of sixty-six and two-thirds percent
(66-2/3%) of the outstanding shares of the capital stock of the Corporation.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation and
acknowledge the same to be my act on this 18th day of February, 1993.
/s/ Nancy L. Hansbrough
-----------------------
Nancy L. Hansbrough
<PAGE>
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ARTICLES SUPPLEMENTARY
OF
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
August 5, 1993
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<PAGE>
TABLE OF CONTENTS
Page
------
DESIGNATION
APS Series A........................................ 1
APS Series B........................................ 2
APS Series C........................................ 2
PART I
1. Number of Shares; Ranking....................... 2
2. Dividends....................................... 3
3. Redemption...................................... 7
4. Designation of Special Dividend Periods......... 11
5. Voting Rights................................... 13
6. Liquidation Rights.............................. 18
7. Auction Agent................................... 19
8. 1940 Act APS Asset Coverage..................... 19
9. APS Basic Maintenance Amount.................... 19
10. Minimum Liquidity Level......................... 22
11. Restrictions on Certain Distributions........... 22
12. Additional Dividends............................ 23
13. Certain Other Restrictions...................... 23
14. Notice.......................................... 28
15. Definitions..................................... 28
PART II
1. Certain Definitions............................. 45
2. Orders by Existing Holders and Potential
Holders....................................... 51
3. Submission of Orders by Broker-Dealers to
Auction Agent................................. 53
4. Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate.......... 55
5. Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation
of Shares..................................... 57
6. Notification of Allocations..................... 60
7. Miscellaneous................................... 60
<PAGE>
ARTICLES SUPPLEMENTARY
OF
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC., a
Maryland corporation having its principal Maryland office in the
City of Baltimore (the "Fund"), certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in the
Board of Directors of the Fund by Article Sixth of its Articles of
Incorporation, the Board of Directors has reclassified 2,400
authorized and unissued shares of common stock of the Fund as
preferred stock of the Fund and has given general authorization for
the issuance of three series of 800 shares each of preferred stock,
par value $.001 per share, liquidation preference $50,000 per share
plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared) thereon, designated Auction Preferred
Shares, Series A ("APS Series A"), Auction Preferred Shares, Series
B ("APS Series B") and Auction Preferred Shares, Series C ("APS
Series C") (collectively, the APS Series A, APS Series B and APS
Series C are referred to herein as "APS").
SECOND: The Board of Directors of the Fund, acting in accord-
ance with Section 2-208 of the Maryland General Corporation Law,
has fixed the preferences, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemp-
tion of the shares of such class of preferred stock as follows:
DESIGNATION
APS SERIES A: A series of 800 shares of preferred stock, par
value $.001 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series A" (herein-
after, "APS Series A"). Each share of APS Series A shall be issued
on August 12, 1993; have an Applicable Rate for its Initial
Dividend Period (which period shall continue to and including
Monday, August 23, 1993) equal to 2.50% per annum; have an initial
Dividend Payment Date of Tuesday, August 24, l993; and have such
other preferences, limitations and relative voting rights, in
addition to those required by applicable law or set forth in the
Fund's Articles of Incorporation applicable to preferred stock of
the Fund, as are set forth in Part I and Part II of these Articles
Supplementary. The APS Series A shall constitute a separate series
of preferred stock of the Fund, and each share of APS Series A
shall be identical except as provided in Section 3 of Part I of
these Articles Supplementary.
APS SERIES B: A series of 800 shares of preferred stock, par
value $.001 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series B" (herein-
after, "APS Series B"). Each share of APS Series B shall be issued
<PAGE>
on August 12, 1993; have an Applicable Rate for its Initial
Dividend Period (which period shall continue to and including
Thursday, September 9, 1993) equal to 2.55% per annum; have an
initial Dividend Payment Date of Friday, September 10, 1993; and
have such other preferences, limitations and relative voting
rights, in addition to those required by applicable law or set
forth in the Fund's Articles of Incorporation applicable to
preferred stock of the Fund, as are set forth in Part I and Part II
of these Articles Supplementary. The APS Series B shall constitute
a separate series of preferred stock of the Fund, and each share of
APS Series B shall be identical except as provided in Section 3 of
Part I of these Articles Supplementary.
APS SERIES C: A series of 800 shares of preferred stock, par
value $.001 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series C" (herein-
after, "APS Series C"). Each share of APS Series C shall be issued
on August 12, 1993; have an Applicable Rate for its Initial
Dividend Period (which period shall continue to and including
Monday, November 8, 1993) equal to 2.65% per annum; have an initial
Dividend Payment Date of Wednesday, September 1, 1993; and have
such other preferences, limitations and relative voting rights, in
addition to those required by applicable law or set forth in the
Fund's Articles of Incorporation applicable to preferred stock of
the Fund, as are set forth in Part I and Part II of these Articles
Supplementary. The APS Series C shall constitute a separate series
of preferred stock of the Fund, and each share of APS Series C
shall be identical except as provided in Section 3 of Part I of
these Articles Supplementary.
No holder of any series of APS shall have, solely by reason of
being such a holder of any series of APS, any right to acquire,
purchase or subscribe for any common stock, par value $.001 per
share, of the Fund or other securities of the Fund which it may
hereafter issue or sell (whether out of the number of shares
authorized by the Articles of Incorporation, or out of any shares
acquired by the Fund after the issuance thereof, or otherwise).
PART I
1. Number of Shares: Ranking.
(a) No fractional APS shall be issued.
(b) Any APS which at any time have been redeemed or
purchased by the Fund shall, after such redemption or purchase,
have the status of authorized but unissued preferred stock, without
designation as to series.
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<PAGE>
(c) The shares of each series of APS shall rank on a
parity with shares of any other series of preferred stock (inclu-
ding any other series of APS) as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund.
2. Dividends.
(a) The Holder of shares of any series of APS shall be
entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefor, cumulative cash
dividends at the Applicable Rate per annum thereof, determined as
set forth in paragraph (c) of this Section 2, and no more (except
to the extent set forth in Section 12 of this Part I), payable on
the respective dates (each a "Dividend Payment Date") determined as
set forth in paragraph (b) of this Section 2. Dividends on shares
of any series of APS shall accumulate at the Applicable Rate per
annum from the Date of Original Issue thereof.
(b) (i) Dividends shall be payable, subject to
subparagraph (b) (ii) of this Section 2, on shares of:
(A) APS Series A, on Tuesday, August 24, 1993,
and each Tuesday thereafter,
(B) APS Series B, on Friday, September 10,
1993 and each fourth Friday thereafter, and
(C) APS Series C, on Wednesday, September 1,
1993 and the first Business Day of each calendar month thereafter,
provided that in any calendar month in which an Auction Date is
scheduled to occur, dividends shall be payable on the first
Business Day next succeeding such Auction Date, provided that if the
Fund, subject to the conditions set forth in Section 4 of this Part I,
designates any Subsequent Dividend Period as a Special Dividend Period,
dividends will be payable: (1) with respect to a Special Dividend
Period of less than 35 days, the day after the last day thereof and (2)
with respect to a Special Dividend Period of 35 days or more, the
first Business Day of each calendar month thereafter, provided that, in
any calendar month in which an Auction Date is scheduled to occur,
dividends shall be payable on the first Business Day next succeeding
such Auction Date.
With respect to any Rate Period following a Special Dividend
Period with respect to a series of APS, dividends on shares of such
series of APS shall be payable, subject to subparagraph (b)(ii) of
this Section 2, in accordance with clause (A), (B) or (C), as
appropriate, of this subparagraph (b)(i), subject in each case to
the option of the Fund to further designate from time to time any
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<PAGE>
Subsequent Dividend Period of such series as a Special Dividend
Period.
(ii) In the case of dividends that would otherwise
be payable on a day that is not a Business Day, as determined by
subparagraph (b) (i) of this Section 2, including clause (1) or (2)
of the proviso thereto, if such day that would otherwise be the
Dividend Payment Date (A) is a Sunday, Monday or Tuesday, then
dividends shall be payable on the first Business Day that falls
after such Sunday, Monday or Tuesday, or (B) is a Wednesday, Thurs-
day, Friday or Saturday, then dividends shall be payable on the
first Business Day that falls prior to such Wednesday, Thursday,
Friday or Saturday.
(iii) The Fund shall pay to the Auction Agent not
later than 12:00 noon, New York City time, on the Business Day next
preceding each Dividend Payment Date for shares of such series, an
aggregate amount of funds available on the next Business Day in The
City of New York, New York, equal to the dividends to be paid to
all Holders of shares of such series on such Dividend Payment Date.
(iv) All moneys paid to the Auction Agent for the
payment of dividends (or for the payment of any late charges
pursuant to subparagraph (c)(i) of this Section 2) shall be held in
trust for the payment of such dividends (and any such late charge)
by the Auction Agent for the benefit of the Holders specified in
subparagraph (b)(v) of this Section 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by
the Auction Agent to the payment of dividends (and any late charge)
will, to the extent permitted by law, be repaid to the Fund at the
end of 90 days from the date on which such moneys were so to have
been applied.
(v) Each dividend on the APS shall be paid on the
Dividend Payment Date therefor to the Holders as their names appear
on the share 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 as
their names appear on the share books of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Directors.
(c) (i) The dividend rate on shares of any series of APS
during the period from and after the Date of Original Issue thereof
to and including the last day of the Initial Dividend Period there-
for shall be equal to the rate per annum set forth with respect to
such series under "Designation," above. For each Subsequent
Dividend Period of any series of APS Outstanding thereafter, the
dividend rate on shares of such series shall be equal to the rate
per annum that results from an Auction for such series on the
Auction Date next preceding such Subsequent Dividend Period;
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<PAGE>
provided, however, that if an Auction for any Subsequent Dividend
Period of any series of APS is not held for any reason or if a
Failure to Deposit occurs and such Failure to Deposit has not been
cured as set forth below prior to any succeeding Subsequent
Dividend Period thereof, then, subject to the next succeeding
proviso, the dividend rate on the shares of such series for any
such Subsequent Dividend Period shall be the Maximum Rate for such
series on the Auction Date for such Subsequent Dividend Period;
provided, further, however, that if any Failure to Deposit shall
have occurred with respect to shares of any series of APS during
any Rate Period thereof, 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 sentence or
the Fund shall not have paid to the Auction Agent a late charge
equal to the sum of (1) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the full amount of
dividends with respect to any Dividend Period on the shares of such
series, an amount computed by multiplying (x) 200% of the Reference
Rate (or Treasury Rate, if applicable) 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 sentence
(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 365, and applying the rate obtained against the aggregate
liquidation preference of the Outstanding shares of such series of
APS and (2) if such Failure to Deposit consisted of the failure
timely to pay to the Auction Agent the Redemption Price of the
shares of such series of APS, if any, for which Notice of
Redemption has been given by the Fund pursuant to paragraph (b) of
Section 3 of this Part I, an amount computed by multiplying (x)
200% of the Reference Rate (or Treasury Rate, if applicable) 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 has not been
cured in accordance with the next succeeding sentence (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
365, and applying the rate obtained against the aggregate
liquidation preference of the Outstanding shares of such series of
APS, then Auctions for such series shall be suspended until such
Failure to Deposit shall have been so cured and the dividend rate
for shares of such series of APS for each Subsequent Dividend
Period thereof commencing after such Failure to Deposit to and
including the Subsequent Dividend Period, if any, during which such
Failure to Deposit is so cured shall be a rate per annum equal to
the Maximum Rate on the Auction Date for each such Subsequent
Dividend 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
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<PAGE>
payable on the APS for any Dividend Period for such shares being
herein referred to as the "Applicable Rate" for such shares). A
Failure to Deposit with respect to shares of any series of APS
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, not later
than 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, the Fund shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends on the shares of such series of
APS and (B) without duplication, the Redemption Price for the
shares of such series of APS, if any, for which Notice of
Redemption has been given by the Fund pursuant to paragraph (b) of
Section 3 of this Part I.
(ii) The amount of dividends per share payable on
shares of any series of APS on any date on which dividends shall be
payable on shares of such series shall be computed by multiplying
the respective Applicable Rates for such series in effect for such
Dividend Period or Dividend Periods or parts 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 parts thereof and the denominator of which shall be 365
if such Dividend Period is a Rate Period of less than one year and
360 for all other Rate Periods, and applying the rate obtained
against $50,000.
(d) Any dividend payment made on the APS shall first be
credited against the earliest accumulated but unpaid dividends due
with respect to such APS.
(e) Except as set forth in the next sentence, no
dividends shall be declared or paid or set apart for payment on the
shares of any class or series of shares of the Fund's capital stock
ranking, as to the payment of dividends, on a parity with the APS
for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the shares of each
series of APS through the most recent Dividend Payment Date for
each such series. When dividends are not paid in full upon the APS
through their most recent respective Dividend Payment Dates or upon
the shares of any other class or series of shares ranking on a
parity as to the payment of dividends with the APS through their
most recent respective dividend payment dates, all dividends
declared upon the APS and any other such class or series of shares
ranking on a parity as to the payment of dividends with the APS
shall be declared pro rata so that the amount of dividends declared
per share on the APS 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 APS and such other class or series of
shares bear to each other (for purposes of this sentence, the
amount of dividends declared per share shall be based on the
Applicable Rate for such shares for the Dividend Periods during
- 6 -
<PAGE>
which dividends were not paid in full). Holders of the APS shall
not be entitled to any dividend, whether payable in cash, property
or shares, in excess of full cumulative dividends, as herein
provided, on the APS. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or
payments on the APS which may be in arrears, and, except to the
extent set forth in subparagraph (c)(i) of this Section 2, no
additional sum of money shall be payable in respect of any such
arrearage.
(f) Dividends on the APS shall be designated as exempt-
interest dividends up to the amount of tax-exempt income of the
Fund, to the extent permitted by, and for purposes of, Section 852
of the Code.
(g) The Board of Directors shall not declare any
dividend (except a dividend payable in Common Stock), or declare
any other distribution, upon the Common Stock, or purchase Common
Stock, unless in every such case the APS have, at the time of any
such declaration or purchase, 1940 Act APS Asset Coverage after
deducting the amount of such dividend, distribution or purchase
price, as the case may be.
3. Redemption.
(a) (i) Upon giving a Notice of Redemption, as provided
below, the Fund at its option may redeem shares of any series of
APS, in whole or in part, on the second Business Day next preceding
any Dividend Payment Date applicable to those shares of APS called
for redemption, out of funds legally available therefor, at the
Optional Redemption Price; provided that, during a Special Dividend
Period of 365 days or more, no share of APS will be subject to
optional redemption during any Non-Call Period; provided, further,
that shares of any series of APS may not be redeemed in part if
after such partial redemption fewer than 250 shares of such series
remain Outstanding; and provided, further, that no shares of a
series of APS shall be redeemed pursuant to this subparagraph
during the Initial Dividend Period for such series.
(ii) If fewer than all of the Outstanding shares of
any series of APS are to be redeemed pursuant to subparagraph
(a)(i) of this Section 3, the number of shares of such series to be
redeemed shall be determined by the Board of Directors, and such
shares shall be redeemed pro rata from the Holders of such series
in proportion to the number of such shares held by such Holders.
(iii) No APS shall be redeemed pursuant to
subparagraphs (a)(i) or (a)(ii) of this Section 3 unless, on the
date on which the Fund intends to give notice of such redemption
pursuant to paragraph (b) of this Section 3, (A) the Fund has
available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and
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<PAGE>
having a value not less than the amount (including the applicable
premium, if any) due to Holders of the APS 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 APS) and S&P Eligible Assets (if S&P is then rating the
APS) each would at least equal the APS Basic Maintenance Amount
immediately subsequent to such redemption, if such redemption were
to occur on such date, and on the date of redemption.
(iv) Subject to paragraph (g) of this Section 3,
the Fund shall redeem at the Mandatory Redemption Price certain of
the APS if the Fund fails to maintain a Discounted Value of Moody's
Eligible Assets or S&P Eligible Assets in an amount greater than or
equal to the APS Basic Maintenance Amount or fails to maintain 1940
Act APS Asset Coverage and such failure is not cured on or before
the APS Basic Maintenance Cure Date or the 1940 Act Cure Date, as
the case may be. The number of APS to be redeemed shall be equal
to the lesser of (A) the minimum number of APS the redemption of
which, if deemed to have occurred immediately prior to the opening
of business on the Cure Date, together with all other preferred
stock subject to redemption or retirement, would result in the
satisfaction of the APS Basic Maintenance Amount or the 1940 Act
APS Asset Coverage, as the case may be, on such Cure Date (provided
that, if there is no such minimum number of APS and other preferred
stock the redemption of which would have such result, all the APS
and preferred stock then outstanding shall be redeemed), and
(B) the maximum number of APS, together with all other preferred
stock subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor. In determining
the APS required to be redeemed in accordance with the foregoing,
the Fund shall allocate the number required to be redeemed to
satisfy the APS Basic Maintenance Amount or the 1940 Act APS Asset
Coverage, as the case may be, pro rata among each series of APS and
other preferred stock subject to redemption provisions similar to
those contained in this Section 3(a)(iv). The Fund shall effect
such 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 for the redemption of all of the required number
of APS and other preferred stock which are subject to redemption
provisions similar to those contained in this Section 3(a)(iv) or
the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund shall redeem those APS
and other preferred stock 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 any
series of APS are to be redeemed pursuant to this Section 3(a)(iv),
the number of shares of such series to be redeemed shall be
redeemed pro rata from the Holders of such shares in proportion to
the number of shares held by such Holders.
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<PAGE>
(b) The Fund is required to give 30 days' Notice of
Redemption. In the event the Fund obtains appropriate exemptive or
no-action relief from the Securities and Exchange Commission, the
number of days' notice required for a mandatory redemption may be
reduced by the Board of Directors of the Fund to as few as two
Business Days if Moody's and S&P each has agreed in writing that
the revised notice provision would not adversely affect its then-
current ratings of the APS. The Auction Agent will use its
reasonable efforts to provide telephonic notice to each Holder of
APS called for redemption not later than the close of business on
the Business Day on which the Auction Agent determines the shares
to be redeemed (as described above) (or, during the occurrence of
a Failure to Deposit with respect to such shares, not later than
the close of business on the Business Day immediately following the
day on which the Auction Agent receives Notice of Redemption from
the Fund). Such telephonic notice will be confirmed promptly in
writing not later than the close of business on the third Business
Day preceding the redemption date by notice sent by the Auction
Agent to each Holder of record of APS called for redemption, the
Broker-Dealers and the Securities Depository. Every Notice of
Redemption and other redemption notice with respect to APS will
state: (1) the redemption date, (2) the number of APS of each
series to be redeemed, (3) the redemption price, (4) that dividends
on the APS to be redeemed will cease to accumulate as of such
redemption date and (5) the provision of the APS Provisions
pursuant to which such shares are being redeemed. No defect in the
Notice of Redemption or other redemption notice or in the
transmittal or the mailing thereof will affect the validity of the
redemption proceedings, except as required by applicable law. If
fewer than all shares of any series held by any Holder are to be
redeemed, the Notice of Redemption mailed to such Holder shall also
specify the number of shares of such series to be redeemed from
such Holder.
(c) Notwithstanding the provisions of paragraph (a) of
this Section 3, if any dividends on shares of any series of APS are
in arrears, no shares of such series of APS shall be redeemed
unless all Outstanding shares of such series of APS are
simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of such series of APS; provided,
however, that the foregoing shall not prevent the purchase or
acquisition of all Outstanding shares of such series of APS
pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted
by, Holders of all Outstanding shares of such series of APS.
(d) Upon the deposit of funds sufficient to redeem the
APS with the Auction Agent and the giving of Notice of Redemption
under paragraph (b) of this Section 3, dividends on such APS shares
shall cease to accumulate and such shares shall no longer be deemed
to be Outstanding for any purpose, and all rights of the Holders of
the shares so called for redemption shall cease and terminate,
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<PAGE>
except the right of such Holders to receive the Optional Redemption
Price or Mandatory Redemption Price, as the case may be, but
without any interest or other additional amount, except as provided
in Sections 2(c)(i) and 12 of this Part I. 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 Directors shall so require and the Notice of
Redemption shall so state), the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, shall be paid by
the Auction Agent to the Holders of the APS 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 shall be entitled to receive from the Auction
Agent, promptly after the date fixed for redemption, any cash
deposited with the Auction Agent in excess of (i) the aggregate
Optional Redemption Price or Mandatory Redemption Price, as the
case may be, of the APS called for redemption on such date and (ii)
all other amounts to which Holders of the APS called for redemption
may be entitled. Any funds so deposited that are unclaimed at the
end of 90 days from such redemption date shall, to the extent
permitted by law, be repaid to the Fund, after which time the
Holders of the APS so called for redemption may look only to the
Fund for payment of the Optional Redemption Price or Mandatory
Redemption Price, as the case may be, and all other amounts to
which they may be entitled. The Fund shall be entitled to receive,
from time to time after the date fixed for redemption, any interest
on the funds so deposited.
(e) To the extent that any redemption for which Notice
of Redemption has been given is not made by reason of the absence
of legally available funds therefor, such redemption shall be made
as soon as practicable to the extent such funds become available.
Failure to redeem the APS shall be deemed to exist at any time
after the date specified for redemption in a Notice of Redemption
when the Fund shall have failed, for any reason whatsoever, to
deposit in trust with the Auction Agent the Optional Redemption
Price or Mandatory Redemption Price, as the case may be, with
respect to any shares for which such Notice of Redemption has been
given. Notwithstanding the fact that the Fund may not have
redeemed the APS for which a Notice of Redemption has been given,
dividends may be declared and paid on the APS and shall include
those APS for which a Notice of Redemption has been given.
(f) All moneys paid to the Auction Agent for payment of
the Optional Redemption Price or Mandatory Redemption Price, as the
case may be, of the APS called for redemption shall be held in
trust by the Auction Agent for the benefit of Holders of shares so
to be redeemed.
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<PAGE>
(g) In effecting any redemption pursuant to this Section
3, the Fund shall use its best efforts to comply with all
applicable procedural conditions precedent to effecting such
redemption under the 1940 Act and Maryland law, but shall effect no
redemption except to the extent permitted by the 1940 Act and
Maryland law.
(h) In the case of any redemption pursuant to this
Section 3, only whole APS shall be redeemed, and in the event that
any provision of the Articles of Incorporation would require
redemption of a fractional share, the Auction Agent shall be
authorized to round up so that only whole shares are redeemed.
4. Designation of Special Dividend Periods.
(a) The Fund, at its option, may designate any
succeeding Subsequent Dividend Period of any series of APS as a
Special Dividend Period which shall consist of such number of days,
whole months or whole years as the Board of Directors shall spec-
ify; provided, however, that such designation shall be effective
only if (i) notice thereof shall have been given in accordance with
paragraph (b) and clause (i) of paragraph (c) of this Section 4,
(ii) any Failure to Deposit that shall have occurred with respect
to shares of such series during any Dividend Period shall have been
cured in accordance with the provisions of the third sentence of
subparagraph (c)(i) of Section 2 of this Part I, (iii) Sufficient
Clearing Bids (as defined in Section 1 of Part II hereof) for such
series shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special
Dividend Period, (iv) if any Notice of Redemption shall have been
mailed by the Fund pursuant to paragraph (b) of Section 3 of this
Part I with respect to any shares of such series of APS, the
Redemption Price with respect to such shares shall have been
deposited with the Auction Agent and (v) in the event the Fund
wishes to designate any succeeding Subsequent Dividend Period for
such series as a Special Dividend Period consisting of more than 28
Rate Period Days, the Fund has received written confirmation from
S&P (if S&P is then rating the APS) and Moody's (if Moody's is then
rating the APS) that such designation would not affect the rating
then assigned by S&P and Moody's, respectively, to such series.
(b) If the Fund proposes to designate any succeeding
Subsequent Dividend Period of any series of APS as a Special
Dividend Period of more than 28 Rate Period Days pursuant to
paragraph (a) of this Section 4, not less than 20 nor more than 30
days prior to the date the Fund proposes to designate as the first
day of such Special Dividend Period (which shall be such day that
would otherwise be the first day of a Minimum Dividend 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) communicated by the Fund by telephonic or other means to the
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<PAGE>
Auction Agent and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Fund may exercise its option
to designate a succeeding Subsequent Dividend Period of such series
of APS as a Special Dividend 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 notify
the Auction Agent, who shall promptly notify the Broker-Dealers, of
either (x) its determination, subject to certain conditions, to
exercise such option, in which case the Fund shall specify the
Special Dividend Period designated and the terms of the Specific
Redemption Provisions, if any, or (y) its determination not to
exercise such option.
(c) 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 Dividend Period the Fund shall deliver to the Auction
Agent, who shall promptly notify the Broker-Dealers, either:
(i) a notice stating (A) that the Fund has
determined to designate the next succeeding Rate Period of such
series as a Special Dividend Period, specifying the same and the
first day thereof, (B) the Auction Date immediately prior to the
first day of such Special Dividend Period, (C) the terms of the
Specific Redemption Provisions, if any, for such series, (D) that
such Special Dividend Period shall not commence if (1) on such
Auction Date Sufficient Clearing Bids for such series shall not
exist (in which case the succeeding Rate Period shall be a Minimum
Dividend Period) or (2) a Failure to Deposit shall have occurred
prior to the first day of such Special Dividend Period with respect
to shares of such series and (E) the scheduled Dividend Payment
Dates for such series of APS during such Special Dividend Period;
provided that, if such Special Dividend Period consists of more
than 28 Rate Period Days, such notice will be accompanied by an APS
Basic Maintenance Report showing, as of the third Business Day next
preceding such proposed Special Dividend Period, (1) a Discounted
Value of Moody's Eligible Assets, assuming, for the purposes of
calculating such Discounted Value in connection with an APS Basic
Maintenance Report required to be prepared pursuant to this Section
4(c)(i), a Moody's Exposure Period of "eight weeks or less but
greater than seven weeks" (if Moody's is then rating such series)
and (2) a Discounted Value of S&P Eligible Assets (if S&P is then
rating such series) each at least equal the APS Basic Maintenance
Amount as of such Business Day (assuming for purposes of the
foregoing calculation that the Maximum Rate is the Maximum Rate on
such Business Day as if such Business Day were the Auction Date for
the proposed Special Dividend Period); or
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<PAGE>
(ii) a notice stating that the Fund has determined
not to exercise its option to designate a Special Dividend Period
for such series of APS and that the next succeeding Dividend Period
of such series shall be a Minimum Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend 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 Dividend
Period, the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Dividend Period to the
effect set forth in clause (ii) of the preceding sentence.
5. Voting Rights.
(a) Except as otherwise provided in the Articles of
Incorporation or as otherwise required by law, (i) each Holder of
APS shall be entitled to one vote for each of the APS held on each
matter submitted to a vote of stockholders of the Fund, and
(ii) the holders of outstanding preferred stock, including APS, and
of Common Stock shall vote together as a single class; provided
that, at a meeting of the stockholders of the Fund held for the
election of the directors, the holders of outstanding preferred
stock, including APS, represented in person or by proxy at said
meeting, voting as a separate class, shall elect two directors of
the Fund, each Preferred Share, including each of the APS,
entitling the holder thereof to one vote. Subject to paragraph (b)
of this Section 5, the holders of outstanding Common Stock and
preferred stock, including APS, voting as a single class, shall
elect the balance of the directors.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred
to herein as a "Voting Period"), the number of directors
constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two
directors elected exclusively by the holders of preferred stock,
including APS, would constitute a majority of the Board of
Directors as so increased by such smallest number, and the holders
of preferred stock, including APS, shall be entitled, voting as a
class on a one-vote-per-share basis (to the exclusion of the
holders of all other securities and classes of capital stock of the
Fund), to elect such smallest number of additional directors,
together with the two directors that such holders are in any event
entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or
declared) on any Outstanding APS equal to at least two full years'
dividends shall be due and unpaid and sufficient cagh or specified
securities shall not have been deposited with the Auction Agent for
the payment of such accumulated dividends; or
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<PAGE>
(ii) if at any time holders of any other preferred
stock are entitled under the 1940 Act to elect a majority of the
directors of the Fund.
A Voting Period shall terminate when the Fund pays, or declares and
sets apart for payment, in full all dividends payable on all
outstanding shares of preferred stock, including APS for all past
Dividend Periods. Upon the termination of a Voting Period, the
voting rights described in this paragraph (b) of Section 5 shall
cease, subject always, however, to the revesting of such voting
rights in the Holders upon the further occurrence of any of the
events described in this paragraph (b) of Section 5.
(c) (i) As soon as practicable after the accrual of any
right of the holders of preferred stock to elect additional
directors as described in paragraph (b) of this Section 5, the Fund
shall notify the Auction Agent thereof and the Auction Agent shall
call a special meeting of such holders, by mailing a notice of such
special meeting to such holders, such meeting to be held not less
than 10 nor more than 20 days after the date of mailing of such
notice. If the Fund fails to send such notice to the Auction Agent
or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date
for determining the holders entitled to notice of and to vote at
such special meeting shall be the close of business on the fifth
Business Day preceding the day on which such notice is mailed. At
any such special meeting and at each meeting of holders of
preferred stock held during a Voting Period at which directors are
to be elected, such holders, voting together as a class (to the
exclusion of the holders of all other securities and classes of
capital stock of the Fund), shall be entitled to elect the number
of directors prescribed in paragraph (b) of this Section 5 on a
one-vote-per-share basis.
(ii) For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by
these Articles Supplementary, by the other provisions of the
Articles of Incorporation, by statute or otherwise, no Holder shall
be entitled to vote and no APS shall be deemed to be "outstanding"
for the purpose of voting or determining the number of shares
required to constitute a quorum if, prior to or concurrently with
the time of determination of shares entitled to vote or shares
deemed outstanding for quorum purposes, as the case may be, the
Redemption Price for the redemption of such shares has been
deposited in trust with the Auction Agent for that purpose and the
requisite Notice of Redemption with respect to such shares shall
have been given as provided in Section 3 of this Part I. None of
the APS held by the Fund or any affiliate of the Fund shall have
any voting rights or be deemed to be outstanding for voting or
other purposes.
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<PAGE>
(iii) The terms of office of all persons who are
directors of the Fund at the time of a special meeting of Holders
and holders of other preferred stock to elect directors shall
continue, notwithstanding the election at such meeting by the
Holders and such other holders of the number of directors that they
are entitled to elect, and the persons so elected by the Holders
and such other holders, together with the two incumbent directors
elected by the Holders and such other holders of preferred stock
and the remaining incumbent directors elected by the holders of the
Common Stock, shall constitute the duly elected directors of the
Fund.
(iv) Simultaneously with the termination of a
Voting Period, the terms of office of the additional directors
elected by the Holders and holders of other preferred stock
pursuant to paragraph (b) of this Section 5 shall terminate, the
remaining directors shall constitute the directors of the Fund and
the voting rights of the Holders and such other holders to elect
additional directors pursuant to paragraph (b) of this Section 5
shall cease, subject to the provisions of the last sentence of
paragraph (b) of this Section 5.
(d) (i) So long as any of the APS are Outstanding, the
Fund shall not, without the affirmative vote of the Holders of a
majority of the Outstanding APS, determined with reference to a
"majority of outstanding voting securities" as that term is defined
in Section 2(a)(42) of the 1940 Act (voting separately as one
class): (A) authorize, create or issue any class or series of
stock ranking prior to or on a parity with the APS with respect to
the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund
or increase the authorized amount of any series of APS (except
that, notwithstanding the foregoing, but subject to the provisions
of Section 13 of this Part I, the Board of Directors, without the
vote or consent of the Holders of APS, may from time to time
authorize and create, and the Fund may from time to time issue,
classes or series of preferred stock, including APS, ranking on a
parity with the APS with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, subject to continuing compliance by
the Fund with 1940 Act APS Asset Coverage and APS Basic Maintenance
Amount requirements; provided that the Fund obtains written
confirmation from Moody's (if Moody's is then rating APS) and S&P
(if S&P is then rating APS) that the issuance of such additional
class or series would not impair the rating then assigned by such
rating agency to the APS); (B) amend, alter or repeal the
provisions of the Articles of Incorporation, including these
Articles Supplementary, whether by merger, consolidation or
otherwise, so as to affect any preference, right or power of such
APS or the Holders thereof; provided 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,
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<PAGE>
creation and issuance of classes or series of stock ranking junior
to the APS with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up
of the affairs of the Fund will be deemed to affect such
preferences, rights or powers only if Moody's or S&P is then rating
the APS and such issuance would, at the time thereof, cause the
Fund not to satisfy the 1940 Act APS Asset Coverage or the APS
Basic Maintenance Amount; or (C) 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.
(ii) The Board of Directors, without the vote or
consent of the Holders of APS, may from time to time amend, alter
or repeal any or all of the definitions of the terms listed below,
and any such amendment, alteration or repeal will not be deemed to
affect the preferences, rights or powers of the APS or the Holders
thereof, provided the Fund receives written confirmation from
Moody's (such confirmation being required to be obtained only in
the event Moody's is rating the APS and in no event being required
to be obtained in the case of the definitions of Deposit
Securities, Discounted Value and Receivables for Municipal
Obligations Sold as such terms apply to Dividend Coverage Amount,
Dividend Coverage Assets, Minimum Liquidity Level, S&P Discount
Factor, S&P Eligible Asset and S&P Exposure Period and in the case
of the definition of Valuation Date as such term applies to the
definitions of Dividend Coverage Amount, Dividend Coverage Assets
and Minimum Liquidity Level) and S&P (such confirmation being
required to be obtained only in the event S&P is rating the APS and
in no event being required to be obtained in the case of the
definitions of Discounted Value and Receivables for Municipal
Obligations Sold as such terms apply to Moody's Discount Factor,
Moody's Eligible Asset and Moody's Exposure Period) that any such
amendment, alteration or repeal would not impair the ratings then
assigned by Moody's or S&P, as the case may be, to the APS:
APS Basic Maintenance Amount
APS Basic Maintenance Cure Date
APS Basic Maintenance Report
Deposit Securities
Discounted Value
Dividend Coverage Amount
Dividend Coverage Assets
Market Value
Maximum Potential Additional Dividends
Liability
Minimum Liquidity Level
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
1940 Act Cure Date
1940 Act APS Asset Coverage
- 16 -
<PAGE>
Quarterly Valuation Date
Receivables for Municipal Obligations Sold
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
Valuation Date
(e) Unless otherwise required by law, the Holders of the
APS shall not have any relative rights or preferences or other
special rights other than those specifically set forth herein. The
Holders of the APS shall have no preemptive rights or rights to
cumulative voting. In the event that the Fund fails to pay any
dividends on the APS, the exclusive remedy of the Holders shall be
the right to vote for directors pursuant to the provisions of this
Section 5.
(f) Unless a higher percentage is provided for in the
Articles of Incorporation, the affirmative vote of the Holders of
a majority of the Outstanding APS, voting as a separate class,
shall be required to approve any plan of reorganization (as such
term is used in the 1940 Act) adversely affecting such shares or
any action requiring a vote of security holders of the Fund under
Section 13(a) of the 1940 Act. In the event a vote of Holders of
APS is required pursuant to the provisions of Section 13(a) of the
1940 Act, the Fund shall, not later than ten Business Days prior to
the date on which such vote is to be taken, notify Moody's (if
Moody's is then rating the APS) and S&P (if S&P is then rating the
APS) that such vote is to be taken and the nature of the action
with respect to which such vote is to be taken. In addition, the
Fund shall notify Moody's (if Moody's is then rating the APS) and
S&P (if S&P is then rating the APS) of the results of any vote
described in the preceding sentence.
(g) Right to Vote with Respect to Certain Other Matters.
The affirmative vote of the holders of a majority (unless a higher
percentage vote is required under the Articles of Incorporation or
under these Articles Supplementary) of the Outstanding shares of
each series of APS, each voting as a separate class, is required
with respect to any matter that materially affects the series in a
manner different from that of other series or classes of the Fund's
stock, including without limitation any proposal to do the
following: (1) increase or decrease the aggregate number of
authorized shares of the series; (2) effect an exchange,
reclassification or cancellation of all or part of the shares of
the series; (3) effect an exchange, or create a right of exchange,
of all or any part of the shares of the series; (4) change the
rights or preferences of the shares of the series; (5) change the
shares of the series, whether with or without par value, into the
same or a different number of shares, either with or without par
value, of the same or another class or series; (6) create a new
class or series of shares having rights and preferences prior and
superior to the shares of the series, or increase the rights and
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<PAGE>
preferences or the number of authorized shares of a series having
rights and preferences prior or superior to the shares of the
series; or (7) cancel or otherwise affect distributions on the
shares of the series that have accrued but have not been declared.
To the extent that the interests of a series of APS affected by a
matter are substantially identical to the interests of another
series of APS affected by such matter (e.g., a vote of stockholders
required under Section 13(a) of the 1940 Act), both such series
shall vote together collectively as one class. The vote of holders
of APS described above will in each case be in addition to a
separate vote of the requisite percentage of Common Stock and APS
necessary to authorize the action in question.
6. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, the
Holders of the APS then Outstanding shall be entitled to receive
and to be paid out of the assets of the Fund available for
distribution to its stockholders, before any payment or
distribution shall be made on the Common Stock or on any other
class of stock of the Fund ranking junior to the APS upon
dissolution, liquidation or winding up, an amount equal to the
liquidation preference with respect to such shares. The
liquidation preference for the APS shall be $50,000 per share, plus
an amount equal to all dividends thereon (whether or not earned or
declared) accumulated but unpaid to the date of final distribution
in same-day funds, together with any payments required to be made
pursuant to Section 12 of this Part I in connection with the
liquidation of the Fund.
(b) 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 other corporation nor the merger or
consolidation of any other corporation into or with the Fund shall
be a dissolution, liquidation or winding up, whether voluntary or
involuntary, for the purposes of this Section 6.
(c) After the payment to the Holders of the APS of the
full preferential amounts provided for in this Section 6, the
Holders of the APS as such shall have no right or claim to any of
the remaining assets of the Fund.
(d) In the event the assets of the Fund available for
distribution to the Holders of the APS upon any dissolution,
liquidation or winding up of the affairs of the Fund, whether
voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such Holders are entitled pursuant to paragraph
(a) of this Section 6, no such distribution shall be made on
account of any shares of any other class or series of preferred
stock ranking on a parity with the APS with respect to the
distribution of assets upon such dissolution, liquidation or
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<PAGE>
winding up unless proportionate distributive amounts shall be paid
on account of the APS, ratably, in proportion to the full
distributable amounts for which holders of all such parity shares
are respectively entitled upon such dissolution, liquidation or
winding up.
(e) Subject to the rights of the holders of shares of
any series or class or classes of shares ranking on a parity with
the APS with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund,
after payment shall have been made in full to the Holders of the
APS as provided in paragraph (a) of this Section 6, but not prior
thereto, any other series or class or classes of shares ranking
junior to the APS with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund
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 APS
shall not be entitled to share therein
7. Auction Agent. For so long as any of the APS is
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 of the APS is Outstanding, the Board of Directors
shall use its best efforts promptly thereafter to appoint another
qualified commercial bank, trust company or financial institution
to act as the Auction Agent.
8. 1940 Act Aps Asset Coverage. The Fund shall maintain, as
of the last Business Day of each month in which any of the APS is
Outstanding, the 1940 Act APS Asset Coverage.
9. APS Basic Maintenance Amount.
(a) So long as any APS are Outstanding, the Fund shall
maintain, on each Valuation Date, and shall verify to its
satisfaction that it is maintaining on such Valuation Date, (i) S&P
Eligible Assets having an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount (if S&P is then
rating the APS) and (ii) Moody's Eligible Assets having an
aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount (if Moody's is then rating the APS). 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
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<PAGE>
Value, as of the immediately preceding Valuation Date, less than
the APS 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 APS Basic Maintenance Amount by
five percent 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 APS Basic Maintenance Amount.
(b) On or before 5:00 p.m., New York City time, on the
third Business Day after a Valuation Date on which the Fund fails
to maintain a Discounted Value of Moody's Eligible Assets or S&P
Eligible Assets in an amount greater than or equal to the APS Basic
Maintenance Amount, and on the third Business Day after the APS
Basic Maintenance Cure Date with respect to such Valuation Date,
the Fund shall complete and deliver to S&P (if S&P is then rating
the APS), Moody's (if Moody's is then rating the APS) and the
Auction Agent (if either S&P or Moody's is then rating the APS) an
APS Basic Maintenance Report as of the date of such failure or such
APS Basic Maintenance Cure Date, as the case may be, which will be
deemed to have been delivered to the Auction Agent if the Auction
Agent receives a copy or telecopy, telex or other electronic
transcription thereof and on the same day the Fund mails to the
Auction Agent for delivery on the next Business Day the full APS
Basic Maintenance Report. The Fund will also deliver an APS Basic
Maintenance Report: (i) to S&P (if S&P is then rating the APS) for
each Valuation Date for which S&P may request such report in
writing or that is (A) the fifteenth day of a month (or if in any
month such day is not a Business Day, the next succeeding Business
Day) or the last Business Day of a month or (B) a Quarterly Valu-
ation Date, in each case on the third Business Day after such day,
or at such less frequent intervals as may be required by S&P; and
(ii) to Moody's (if Moody's is then rating the APS) and S&P (if S&P
is then rating the APS) (A) on any Valuation Date on which the
Discounted Value of Moody's Eligible Assets or S&P Eligible Assets,
as the case may be, is greater than the APS Basic Maintenance
Amount by 5% or less or (B) on any date which the Fund redeems
Common Stock. A failure by the Fund to deliver an APS Basic
Maintenance Report required under this paragraph (b) of this
Section 9 shall be deemed to be delivery of an APS Basic
Maintenance Report indicating the Discounted Value for all assets
of the Fund is less than the APS Basic Maintenance Amount, as of
the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery
of an APS Basic Maintenance Report in accordance with paragraph (b)
of this Section 9 relating to a Quarterly Valuation Date, the Fund
shall cause the Independent Accountant to confirm in writing to S&P
(if S&P is then rating the APS), Moody's (if Moody's is then rating
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<PAGE>
the APS) and the Auction Agent (if either S&P or Moody's is then
rating the APS) (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance
Report, randomly selected by the Independent Accountant, that was
prepared by the Fund during the quarter ending on such Quarterly
Valuation Date) and (ii) that, in such Report (and in such randomly
selected Report), the Fund determined in accordance with these
Articles Supplementary whether the Fund had, at such Quarterly
Valuation Date (and at the Valuation Date addressed in such
randomly selected Report), S&P Eligible Assets (if S&P is then
rating the APS) of an aggregate Discounted Value at least equal to
the APS Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the APS) of an aggregate Discounted Value at
least equal to the APS Basic Maintenance Amount (such confirmation
being herein called the "Accountant's Confirmation"). There shall
be appended to each Accountant's Confirmation that is delivered to
S&P and Moody's pursuant to this paragraph a copy of the APS Basic
Maintenance Report to which such Accountant's Confirmation relates.
(d) Within ten Business Days after the date of delivery
of an APS Basic Maintenance Report in accordance with paragraph (b)
of this Section 9 relating to any Valuation Date on which the Fund
failed to maintain a Discounted Value of Moody's Eligible Assets or
S&P Eligible Assets in an amount greater than or equal to the APS
Basic Maintenance Amount, and relating to the APS Basic Maintenance
Cure Date with respect to such failure to exceed or equal the APS
Basic Maintenance Amount, the Fund shall cause the Independent
Accountant to provide to S&P (if S&P is then rating the APS),
Moody's (if Moody's is then rating the APS) and the Auction Agent
(if either S&P or Moody's is then rating the APS) an Accountant's
Confirmation as to such APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant
to paragraph (c) or (d) of this Section 9 shows that an error was
made in the APS Basic Maintenance Report for a particular Valuation
Date for which such Accountant's Confirmation was required to be
delivered, or shows that a lower aggregate Discounted Value for the
aggregate of all S&P Eligible Assets (if S&P is then rating the
APS) or Moody's Eligible Assets (if Moody's is then rating the
APS), as the case may be, of the Fund was determined by the
Independent Accountant, the calculation or determination made by
such Independent Accountant shall be final and conclusive and shall
be binding on the Fund, and the Fund shall accordingly amend and
deliver the APS Basic Maintenance Report to S&P (if S&P is then
rating the APS), Moody's (if Moody's is then rating the APS) and
the Auction Agent (if either S&P or Moody's is then rating the APS)
promptly following receipt by the Fund of such Accountant's
Confirmation.
(f) On or before 5:00 p.m., New York City time, on the
first Business Day after the Date of Original Issue of the APS, the
Fund shall complete and deliver to S&P (if S&P is then rating the
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<PAGE>
APS) and to Moody's (if Moody's is then rating the APS), an APS
Basic Maintenance Report as of the close of business on such Date
of Original Issue. Within five Business Days of such Date of
Original Issue, the Fund shall cause the Independent Accountant to
confirm in writing to S&P (if S&P is then rating the APS) and to
Moody's (if Moody's is then rating the APS) (i) the mathematical
accuracy of the calculations reflected in such Report and (ii) that
the Discounted Value of S&P Eligible Assets or Moody's Eligible
Assets, as the case may be, reflected thereon equals or exceeds the
APS Basic Maintenance Amount reflected thereon.
10. Minimum Liquidity Level. So long as S&P is rating the
APS, the Fund shall have, as of each Valuation Date and with
respect to each series of APS, Dividend Coverage Assets, with
respect to each then Outstanding share of each series of APS,
having a value not less than the Dividend Coverage Amount with
respect to such share (the "Minimum Liquidity Level"). If, as of
each Valuation Date, the Fund does not have the required Dividend
Coverage Assets, the Fund shall, as soon as practicable, adjust its
portfolio in order to meet the Minimum Liquidity Level, but only so
long as S&P is rating the APS. So long as S&P is rating the APS,
the Fund shall notify S&P on any Valuation Date on which the Fund
does not have the required Dividend Coverage Assets and does not
adjust its portfolio as described in the immediately preceding
sentence.
11. Restrictions on Certain Distributions. For so long as
any of the APS is Outstanding, and except as set forth in Sections
2(e) and 6(d) of this Part I, (a) the Fund shall not declare, pay
or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options,
warrants or rights to subscribe for or purchase, Common Stock or
other shares, if any, ranking junior to the APS as to the payment
of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of the Common Stock or any
other stock of the Fund ranking junior to or on a parity with the
APS as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for
redemption, redeem, purchase or otherwise acquire for consideration
any Common Stock or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior
to the APS as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), or any such
parity shares (except by conversion into or exchange for shares of
the Fund ranking junior to or on a parity with APS as to the
payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative
dividends on shares of each series of APS through its most recently
ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited
with the Auction Agent and (ii) the Fund has redeemed the full
number of shares of each series of APS required to be redeemed by
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<PAGE>
any provision for mandatory redemption pertaining thereto, and
(b) if either Moody's or S&P is rating the APS, the Fund shall not
declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares
of, or options, warrants or rights to subscribe for or purchase,
Common Stock or other shares, if any, ranking junior to the APS as
to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of Common Stock
or any other shares of the Fund ranking junior to the APS as to the
payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption,
redeem, purchase or otherwise acquire for consideration any shares
of Common Stock or any other such junior shares (except by
conversion into or exchange for shares of the Fund ranking junior
to the APS as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless
immediately after such transaction the Discounted Value of Moody's
Eligible Assets and S&P Eligible Assets would each at least equal
the APS Basic Maintenance Amount.
12. Additional Dividends. If the Fund retroactively allo-
cates any net capital gains or other income taxable for federal
income tax purposes to the APS by reason of the fact that such
allocation is made as a result of (i) the realization of net cap-
ital gains or other income taxable for federal income tax purposes,
(ii) the redemption of all or a portion of the Outstanding APS or
(iii) the liquidation of the Fund (such allocation being referred
to herein as a "Retroactive Taxable Allocation"), the Fund will
simultaneously, if practicable, with such allocation but in no
event later than 270 days after the end of the Fund's taxable year
in which a Retroactive Taxable Allocation is made, provide notice
thereof to the Auction Agent and to each Holder of such shares
during such taxable year at such Holder's address as the same
appears or last appeared on the share books of the Fund. Such
Holders of such shares shall be entitled to receive, when, as and
if declared by the Board of Directors, out of funds legally
available therefor, dividends in an amount equal to the aggregate
Additional Dividends with respect to all Retroactive Taxable
Allocations made to such Holders for the taxable year in question,
such dividends to be payable by the Fund to the Auction Agent, for
distribution to such Holders, within 30 days after the notice
described above is given to the Auction Agent.
13. Certain Other Restrictions.
(a) For so long as any of the APS is Outstanding and
Moody's is then rating such shares, the Fund will not, unless it
has received written confirmation from Moody's that any such action
would not impair the ratings then assigned by Moody's to the APS,
engage in any one or more of the following transactions:
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<PAGE>
(i) except as necessary to effect Closing
Transactions, engage in transactions in options on securities,
futures contracts or options on futures contracts, except that in
connection with Moody's Hedging Transactions: (A) the Fund may buy
call or put options on securities; (B) the Fund may write covered
call options on securities; (C) the Fund may write put options on
securities; (D) the Fund may enter into positions in futures
contracts based on the Municipal Index provided that the Fund shall
not engage in any such transaction which would cause the Fund at
the time of such transaction to own or have sold (1) outstanding
futures contracts based on the Municipal Index exceeding in number
10% of the rolling average number of daily traded futures contracts
based on the Municipal Index in the 30 calendar days prior to the
time of effecting such transaction as reported by The Wall Street
Journal or (2) outstanding futures contracts based on the Municipal
Index and options on such futures contracts having an aggregate
fair market value (taking into account the fair market value of
futures contracts based on Treasury Bonds) exceeding the fair
market value of Moody's Eligible Assets owned by the Fund; (E) the
Fund may enter into futures contracts on Treasury Bonds provided
that the Fund shall not engage in any such transaction which would
cause the Fund at the time of such transaction to own or have sold
(1) outstanding futures contracts based on Treasury Bonds and
options on such futures contracts having an aggregate fair market
value (taking into account the fair market value of futures
contracts based on the Municipal Index) exceeding 40% of the
aggregate fair market value of Moody's Eligible Assets owned by the
Fund and rated Aa by Moody's (or, if not rated by Moody's but rated
by S&P, rated AAA by S&P) or (2) outstanding futures contracts
based on Treasury Bonds and options on such futures contracts
having an aggregate fair market value (taking into account the fair
market value of futures contracts based on the Municipal Index)
exceeding 80% of the aggregate fair market value of Moody's
Eligible Assets owned by the Fund and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P, rated A or AA by
S&P); for purposes of the foregoing clauses (D) and (E), the Fund
shall be deemed to own the number of futures contracts that
underlie any outstanding option written by the Fund; and (F) the
Fund may buy call or put options on futures contracts on the
Municipal Index or Treasury Bonds, may write put options on such
futures contracts (provided, that if the contract would require
delivery of a security, that security must be held by the Fund) and
may write call options on such futures if it owns the futures
contract subject to the option. For so long as the APS are rated
by Moody's, the Fund will engage in Closing Transactions to close
out any outstanding futures contract based on the Municipal Index
if the open interest with respect to such futures contracts based
on the Municipal Index as reported by The Wall Street Journal is
less than 5,000. For so long as the APS are rated by Moody's, the
Fund will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business
Day of the month in which such contract expires and will engage in
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<PAGE>
a Closing Transaction to close out any outstanding option on a
futures contract by no later than the first Business Day of the
month in which such option expires. For so long as the APS are
rated by Moody's, the Fund will engage in transactions with respect
to futures contracts or options thereon having only the next
settlement date or the settlement date immediately thereafter. For
purposes of valuation of Moody's Eligible Assets: (A) if the Fund
writes a call option, the underlying asset will be valued as
follows: (1) if the option is exchange-traded and may be offset
readily or if the option expires before the earliest possible
redemption of the APS, at the lower of the Discounted Value of the
underlying security of the option and the exercise price of the
option or (2) otherwise, it has no value; (B) if the Fund writes a
put option, the underlying asset will be valued as follows: the
lesser of (1) exercise price and (2) the Discounted Value of the
underlying security; (C) if the Fund is a seller under a futures
contract, the underlying security will be valued at the lower of
(1) settlement price and (2) the Discounted Value of the underlying
security; provided that, if a contract matures within the Moody's
Exposure Period, the security may be valued at the settlement
price; (D) if the Fund is the buyer under a futures contract, the
underlying security will be valued at the lower of (1) the
settlement price and (2) the Discounted Value of the underlying
security; provided that, if the contract matures within the Moody's
Exposure Period, the security may be valued at its Discounted
Value; and (E) call or put option contracts which the Fund buys
have no value. For so long as APS are rated by Moody's: (A) the
Fund will not engage in options and futures transactions for
leveraging or speculative purposes; (B) the Fund will not write any
anticipatory call options or sell any anticipatory contracts
pursuant to which the Fund hedges the anticipated purchase of an
asset prior to completion of such purchase; (C) the Fund will not
enter into an option or futures transaction unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than
the APS Basic Maintenance Amount; (D) for purposes of the APS Basic
Maintenance Amount (1) assets in margin accounts are not Moody's
Eligible Assets, (2) 10% of the settlement price of assets sold
under a futures contract, the settlement price of assets purchased
under a futures contract and the settlement price of an underlying
futures contract if the Fund writes put options on futures
contracts will constitute liabilities of the Fund and (3) if the
Fund writes call options on futures contracts and does not own the
underlying futures contract, 105% of the Market Value of the
underlying futures contract will constitute a liability of the
Fund; (E) the Fund shall enter into only exchange-traded futures
and shall write only exchange-traded options on exchanges approved
by Moody's; (F) where delivery may be made to the Fund with any of
a class of securities, the Fund shall assume for purposes of the
APS Basic Maintenance Amount that it takes delivery of that
security which yields it the least value; (G) the Fund will not
engage in forward contracts; (H) the Fund will enter into futures
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<PAGE>
contracts as seller only if it owns the underlying security; and
(I) there shall be a quarterly audit made of the Fund's futures and
options transactions by the Fund's Independent Accountant to
confirm that the Fund is in compliance with these standards; or
(ii) incur any indebtedness, without prior written
approval of Moody's that such indebtedness would not adversely
affect the then current rating by Moody's of the APS except that
the Fund may, without obtaining the written confirmation described
above, incur indebtedness for the purpose of clearing securities
transactions if the Discounted Value of Moody's Eligible Assets
would equal or exceed the APS Basic Maintenance Amount after giving
effect to such indebtedness; provided, however, that any such
indebtedness shall be repaid within 60 days and will not be
extended or renewed; or
(iii) issue any class or series of shares ranking
prior to or on a parity with the APS with respect to the payment of
dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, or reissue any APS
previously purchased or redeemed by the Fund; or
(iv) engage in short sale transactions; or
(b) For so long as any of the APS is Outstanding and S&P
is rating such shares, the Fund will not, unless the Fund has
received written confirmation from S&P that any such action would
not impair the rating then assigned by such rating agency to the
APS, engage in any one or more of the following transactions:
(i) engage in any reverse repurchase agreement
transactions; or
(ii) lend portfolio securities; or
(iii) borrow money, except that the Fund may,
without obtaining the written confirmation described above, borrow
money for the purposes of clearing securities transactions if the
Discounted Value of the S&P Eligible Assets would equal or exceed
the APS Basic Maintenance Amount after giving effect to such
borrowing; or
(iv) issue any class or series of shares ranking
prior to or on a parity with the APS with respect to the payment of
dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, or reissue any APS
previously purchased or redeemed by the Fund, or merge or
consolidate with any corporation; or
(v) engage in repurchase agreement transactions in
which the term of such repurchase obligation is longer than 90
days, in which the underlying security is a security other than
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<PAGE>
United States Treasury securities (not inclusive of zero-coupon
securities), demand deposits, certificates of deposits or bankers'
acceptances in which the counter-party or its affiliates have
securities rated A-1+ by S&P with respect to such underlying
security; or
(vi) engage in short sale transactions; or
(vii) enter into interest rate caps, collars or
floors, purchase or sell futures contracts or options thereon or
write uncovered put or uncovered call options on portfolio
securities except that (A) the Fund may engage in any S&P Hedging
Transactions based on the Municipal Index, provided that the Fund
shall not engage in any S&P Hedging Transaction based on the
Municipal Index (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold the
least of (1) more than 1,000 outstanding futures contracts based on
the Municipal Index, (2) outstanding futures contracts based on the
Municipal Index and on Treasury Bonds exceeding in number 25% of
the quotient of the fair market value of the Fund's total assets
divided by 100,000 or (3) outstanding futures contracts based on
the Municipal Index exceeding in number 10% of the average number
of daily traded futures contracts based on the Municipal Index in
the month prior to the time of effecting such transaction as
reported by The Wall Street Journal and (B) the Fund may engage in
S&P Hedging Transactions based on Treasury Bonds, provided that the
Fund shall not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold the
lesser of (1) outstanding futures contracts based on Treasury Bonds
and on the Municipal Index exceeding in number 25% of the quotient
of the fair market value of the Fund's total assets divided by
100,000 or (2) outstanding futures contracts based on Treasury
Bonds exceeding in number 10% of the average number of daily traded
futures contracts based on Treasury Bonds in the month prior to the
time of effecting such transaction as reported by The Wall Street
Journal. For so long as the APS are rated by S&P, the Fund will
engage in Closing Transactions to close out any outstanding futures
contracts which the Fund owns or has sold or any outstanding option
thereon owned by the Fund in the event (A) the Fund does not have
S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Fund is required to pay Variation
Margin on the second such Valuation Date. For so long as the APS
are rated by S&P, the Fund will engage in a Closing Transaction to
close out any outstanding futures contract or option thereon in the
month prior to the delivery month under the terms of such futures
contract or option thereon unless the Fund holds securities
deliverable under such terms. For purposes of determining S&P
Eligible Assets to determine compliance with the APS Basic
Maintenance Amount, no amounts on deposit with the Fund's custodian
or broker representing Initial Margin or Variation Margin shall
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<PAGE>
constitute S&P Eligible Assets. For so long as the APS are rated
by S&P, when the Fund writes a futures contract or option thereon,
it will maintain an amount of cash, cash equivalents or short-term,
money market securities in a segregated account with the Fund's
custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of the
Fund's broker equals the fair market value of the futures contract,
except that in the event the Fund writes a futures contract or
option thereon which requires delivery of an underlying security,
the Fund shall hold such underlying security.
14. Notice. All notices or communications, unless otherwise
specified in the By-Laws of the Fund or these Articles
Supplementary, shall be sufficiently given if in writing and
delivered in person or mailed by first-class mail, postage prepaid.
Notice shall be deemed given on the earlier of the date received or
the date seven days after which such notice is mailed.
15. Definitions. As used in Parts I and II hereof, the
following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the
plural and vice versa), unless the context otherwise requires:
" `AA' Composite Commercial Paper Rate," on any date for any Rate
Period, shall mean (i) (A) in the case of any Minimum Dividend
Period or any Rate Period of between 7 and 35 Rate Period Days, the
interest equivalent of the 30-day rate; provided, however, in the
case of any Minimum Dividend Period of 7 days or any Rate Period
with 7 Rate Period Days, and if the "AA" Composite Commercial Paper
Rate is being used to determine the Applicable Rate when all of the
Outstanding APS of a series are subject to Submitted Hold Orders,
then the interest equivalent of the 7-day rate, and (B) in the case
of any Rate Period with more than 35 Rate Period Days, the interest
equivalent of the 180-day rate, 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
- 28 -
Commercial Paper Dealer or Substitute Commercial Paper Dealers, by
the remaining Commercial Paper Dealer or Commercial Paper Dealers.
For purposes of this definition, the "interest equivalent" of a
rate stated on a discount basis (a "discount rate") for commercial
paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1%) of
(A) the discount rate divided by (B) the difference between (x)
1.00 and (y) a fraction the numerator of which shall be the product
of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
"Accountant's Confirmation" shall have the meaning set forth in
paragraph (c) of Section 9 of this Part I.
"Additional Dividends" means payment to a Holder of APS of an
amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such Holder with respect to
the taxable year in question, would cause such Holder's dividends
in dollars (after federal income tax consequences) from the
aggregate of both the Retroactive Taxable Allocations and the
Additional Dividends to be equal to the dollar amount of the
dividends which would have been received by such Holder if the
amount of the aggregate Retroactive Taxable Allocations would have
been excludable from the gross income of such Holder. Such
Additional Dividends shall be calculated (i) without consideration
being given to the time value of money; (ii) assuming that no
Holder of APS is subject to the federal alternative minimum tax
with respect to dividends received from the Fund; and
(iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each Holder of APS 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, whichever is greater, in
effect during the taxable year in question.
"Adviser" means the investment adviser of the Fund, initially
Mitchell Hutchins Asset Management Inc.
"Anticipation Notes" means the following Municipal Obligations:
bond anticipation notes that are rated by S&P, tax anticipation
notes, revenue anticipation notes and tax and revenue anticipation
notes.
"Applicable Rate" shall have the meaning specified in subparagraph
(c)(i) of Section 2 of this Part I.
"APS" shall mean Auction Preferred Shares, par value $.001 per
share, liquidation preference $50,000 per share, of the Fund.
"APS Basic Maintenance Amount," as of any Valuation Date, shall
mean the dollar amount equal to the sum of (i)(A) the product of
the number of APS outstanding on such date multiplied by $50,000;
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<PAGE>
(B) the aggregate amount of dividends for each of the APS out-
standing that will have accumulated at the Applicable Rate (whether
or not earned or declared) to and including the respective first
scheduled Auction Dates for each series of APS that follow such
Valuation Date (or to the 47th day after such Valuation Date, if
such 47th day is earlier than such first following scheduled
Auction Date); (C) the amount equal to the Projected Dividend
Amount (based on the number of APS outstanding on such date); (D)
the amount of anticipated expenses of the Fund for the 90 days
subsequent to such Valuation Date; (E) the amount of the Fund's
Maximum Potential Additional Dividend Liability as of such
Valuation Date; (F) the amount of any premium payable pursuant to
a Premium Call Period; and (G) any current liabilities as of such
Valuation Date to the extent not reflected in any of (i)(A) through
(i)(F) (including, without limitation, any amounts described in
Section 13 of this Part I as required to be treated as liabilities
in connection with the Fund's transactions in futures and options
and including any payables for Municipal Obligations purchased as
of such Valuation Date) less (ii) either (A) the face value of any
of the Fund's assets irrevocably deposited by the Fund for the
payment of any of (i)(A) through (i)(G) if such assets mature prior
to or on the date of payment of the liability for which such assets
are deposited and are either securities issued or guaranteed by the
United States Government or have a rating assigned by Moody's of P-
1, VMIG-1 or MIG-1 (or, with respect to S&P, SP-1+ or A-1+) or (B)
the Discounted Value of such assets.
For purposes of the APS Basic Maintenance Amount in connection
with S&P's ratings of the APS, (i) the Fund will include as a liab-
ility an amount calculated semi-annually equal to 150% of the esti-
mated cost of obtaining Permanent Insurance with respect to S&P
Eligible Assets that (A) are covered by Portfolio Insurance
policies which provide the Fund with the option to obtain such
Permanent Insurance and (B) are discounted by an S&P Discount
Factor determined by reference to the insurance claims-paying
ability rating of the issuer of such Portfolio Insurance policy,
and (ii) with respect to any transactions by the Fund in futures
contracts, the Fund shall include as liabilities (A) 30% of the
aggregate settlement value, as marked to market, of any outstanding
futures contracts based on the Municipal Index which are owned by
the Fund plus (B) 25% of the aggregate settlement value, as marked
to market, of any outstanding futures contracts based on Treasury
Bonds which contracts are owned by the Fund.
For purposes of the APS Basic Maintenance Amount in connection
with Moody's rating of the APS, (i) the Fund shall include as a
liability an amount calculated semi-annually equal to 150% of the
estimated cost of obtaining Permanent Insurance with respect to
Moody's Eligible Assets that (A) are covered by Portfolio Insurance
policies which provide the Fund with the option to obtain such
Permanent Insurance and (B) are discounted by a Moody's Discount
Factor determined by reference to the insurance financial strength
- 30 -
<PAGE>
rating of the issuer of such Portfolio Insurance policy, and (ii)
with respect to any transactions by the Fund in securities options,
the Fund shall include as liabilities (A) 10% of the exercise price
of a call option written by the Fund and (B) the exercise price of
any written put option.
"APS Basic Maintenance Cure Date," with respect to the failure by
the Fund to satisfy the APS Basic Maintenance Amount (as required
by paragraph (a) of Section 9 of this Part I) as of a given
Valuation Date, shall mean the third Business Day following such
Valuation Date.
"APS Basic Maintenance Report" shall mean a report signed by the
President, Treasurer or any Senior Vice President or Vice President
of the Fund which sets forth, as of the related Valuation Date, the
assets of the Fund, the Market Value and the Discounted Value
thereof (seriatim and in the aggregate), and the calculation of the
APS Basic Maintenance Amount.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the
Fund and the Auction Agent which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes
of determining the Applicable Rate for each series of APS so long
as the Applicable Rate for such series is to be based on the
results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a
resolution of the Board of Directors in accordance with Section 7
of this Part I.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period;
initially Monday, August 23, 1993, for APS Series A, Thursday,
September 9, 1993, for APS Series B and Monday, November 8, 1993,
for APS Series C, and thereafter each Monday for APS Series A, each
fourth Thursday for APS Series B, and each February 8, May 8,
August 8 and November 8 for APS Series C, and each subject to
change as set forth herein.
"Auction Procedures" shall mean the procedures for conducting
Auctions set forth in Part II hereof.
"Board of Directors" shall mean the Board of Directors of the Fund
or any duly authorized committee thereof.
"Broker-Dealer" shall have the meaning specified in Section 1 of
Part II hereof.
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<PAGE>
"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.
"Closing Transactions" shall mean the termination of a futures
contract or option position by taking an equal position opposite
thereto in the same delivery month as such initial position being
terminated.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Commercial Paper Dealers" shall mean Goldman, Sachs Money Markets,
L.P., Lehman Commercial Paper Incorporated, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Smith Barney, Harris Upham & Co.
Incorporated or, in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper
dealer.
"Common Stock" shall mean the common stock, par value $.001 per
share, of the Fund.
"Cure Date" shall mean the APS Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be.
"Date of Original Issue," with respect to any series of APS, shall
mean the date on which the Fund initially issued shares of such
series of APS.
"Deposit Securities" shall mean cash and Municipal Obligations
rated at least A-l+ or SP-1+ by S&P, except that, for purposes of
Section 3 (a) (iii) of this Part I, such Municipal Obligations shall
be considered "Deposit Securities" only if they are also rated P-1,
MIG-1 or VMIG-1 by Moody's.
"Discounted Value" shall mean (i) with respect to an S&P Eligible
Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor, and (ii) with respect to a Moody's
Eligible Asset, the quotient of the Market Value thereof divided by
the applicable Moody's Discount Factor, provided that with respect
to a Moody's Eligible Asset, Discounted Value shall not exceed the
par value of such asset at any time.
"Dividend Coverage Amount," as of any Valuation Date, shall mean,
with respect to each series of the APS, (i) the aggregate amount of
dividends that will accumulate on each share of APS to (but not
including) the first Dividend Payment Date for each share of APS
Outstanding that follows such Valuation Date plus any liabilities
that will become payable prior to or on such payment date, less
(ii) the combined value of Deposit Securities irrevocably deposited
for the payment of dividends on the APS and Receivables for
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<PAGE>
Municipal Obligations Sold which become due prior to the Dividend
Payment Date and interest with respect to Municipal Obligations
which is payable to the Fund prior to the Dividend Payment Date.
"Dividend Coverage Assets," as of any Valuation Date and with
respect to shares of each series of APS, shall mean Deposit
Securities with maturity or tender dates not later than the day
preceding the first Dividend Payment Date for such series that
follows such Valuation Date.
"Dividend Payment Date," with respect to any series of APS, shall
mean any date on which dividends on shares of such series of APS
are payable pursuant to the provisions of paragraph (b) of Section
2 of this Part I.
"Dividend Period," with respect to any series of APS, shall mean
the period from and including the Date of Original Issue of such
series to but excluding the initial Dividend Payment Date for such
series and any period thereafter from and including one Dividend
Payment Date for such series to but excluding the next succeeding
Dividend Payment Date for such series.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible
Assets, as the case may be.
"Failure to Deposit," with respect to any series of APS, shall mean
a failure by the Fund to pay to the Auction Agent, not later than
12:00 noon, New York City time, (i) on the Business Day next
preceding any Dividend Payment Date for such series, in funds
available on such Dividend Payment Date in The City of New York,
New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share of
such series or (ii) on the Business Day next preceding any
redemption date in funds available on such redemption date for such
series in The City of New York, New York, the Redemption Price to
be paid on such redemption date for any share of such series after
Notice of Redemption is given pursuant to paragraph (b) of Section
3 of this Part I.
"Fund" shall mean PaineWebber Premier Insured Municipal Income Fund
Inc., a Maryland corporation, which is the issuer of the APS.
"Holder" or "holder," with respect to any series of APS, shall mean
the registered holder of shares of such series of APS as the same
appears on the share books of the Fund.
"Independent Accountant" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the
Fund an independent public accountant or firm of independent public
accountants under the Securities Act of 1933, as amended from time
to time.
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<PAGE>
"Initial Dividend Period," with respect to any series of APS, shall
mean the period from and including the Date of Original Issue of
such series to but excluding the first Dividend Payment Date which
occurs in a month which contains the first scheduled Auction Date
with respect to shares of such series of APS.
"Initial Margin" shall mean the amount of cash or securities
deposited with a custodian for the benefit of a futures commission
merchant as a good-faith deposit at the time of the initiation of
a purchase or sale position with respect to a futures contract or
a sale position with respect to an option position thereon.
"Interest Equivalent" shall mean a yield on a 360-day basis of a
discount basis security which is equal to the yield on an
equivalent interest-bearing security.
"Mandatory Redemption Price" means $50,000 per share of APS plus an
amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption (whether or not earned or declared).
"Market Value" of any asset of the Fund shall mean the market value
thereof determined by the Pricing Service designated from time to
time by the Board of Directors. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service values
portfolio securities at the mean between the quoted bid and asked
price or the yield equivalent when quotations are readily
available. Securities for which quotations are not readily
available are valued at fair value as determined by the Pricing
Service using methods which include consideration of yields or
prices of Municipal Obligations 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 and/or a matrix system
to determine valuations. In the event that a security is not
valued by the Pricing Service, such security shall be valued at the
lower of two dealer bids obtained by the Fund from dealers that are
members of the National Association of Securities Dealers and make
a market in the security, at least one of which bids shall be in
writing.
"Master Purchaser's Letter" shall have the meaning specified in
Section 1 of Part II hereof.
"Maximum Potential Additional Dividends Liability," as of any
Valuation Date, shall mean the aggregate amount of Additional
Dividends that would be due if the Fund were to make Retroactive
Taxable Allocations, with respect to any taxable year, estimated
based upon dividends paid and the amount of undistributed realized
net capital gains and other taxable income earned by the Fund, as
of the end of the calendar month immediately preceding such
Valuation Date, and assuming such Additional Dividends are fully
taxable.
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<PAGE>
"Minimum Dividend Period" shall mean, with respect to each series
of APS, any Rate Period consisting of 28 Rate Period Days, subject
to certain exceptions.
"Minimum Liquidity Level" shall have meaning set forth in Section
10 of this Part I.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage
determined by reference to (i)(A) in the event such asset is a
Municipal Obligation that is not covered by insurance or is covered
by an Original Issue Insurance policy or a Portfolio Insurance
policy which does not provide the Fund with the option to obtain
Permanent Insurance with respect to such Municipal Obligation, or
which is not escrow backed, the Moody's or S&P rating on such
Municipal Obligation, (B) in the event such asset is a Municipal
Obligation that is covered by a Secondary Market Insurance policy,
the Moody's insurance financial strength rating of the issuer of
the policy or (C) in the event such asset is a Municipal Obligation
is guaranteed or is covered by a Portfolio Insurance Policy which
provides the Fund with the option to obtain Permanent Insurance
with respect to such Municipal Obligation, at the Fund's option the
Moody's or S&P rating on such Municipal Obligation or the Moody's
insurance financial strength rating of the guarantor or issuer of
the Portfolio Insurance policy, and (ii) the shortest Exposure
Period set forth opposite such rating that is the same length as or
is longer than the Moody's Exposure Period, in accordance with the
table set forth below:
Rating Category
Moody's Exposure Period Aaa Aa A Baa Other VMIG-1 SP-l+
(1) (1) (1) (1) (2) (1)(3)(4) (3)(4)
- - ----------------------- ---- ---- ---- ---- ----- --------- -----
7 weeks or less............... 151% 159% 168% 202% 229% 136% 148%
8 weeks or less but greater
than 7 weeks................ 154 164 173 205 235 137 149
9 weeks or less but greater
than 8 weeks................ 158 169 179 209 242 138 150
- - -----------
(1) Moody's rating.
(2) Municipal Obligations not rated by Moody's but rated BBB-, BBB
or BBB+ by S&P.
(3) 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 within the Moody's Exposure Period and
which do not have a long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets,
these securities will have an assumed rating of "A" by Moody's.
- 35 -
<PAGE>
Notwithstanding the foregoing, (i) No Moody's Discount Factor will
be applied to short-term Municipal Obligations so long as such
Municipal Obligations are rated at least MIG-1, VMIG-1, P-1 or
Prime-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period and the Moody's
Discount Factor for such Municipal Obligations will be 125% as long
as such Municipal Obligations are rated at least A-1-/AA or SP-
l+/AA by S&P and mature or have a demand feature at par exercisable
within the Moody's Exposure Period, (ii) no Moody's Discount Factor
will be applied to cash or to Receivables for Municipal Obligations
Sold and (iii) if the Moody's Discount Factor used to discount a
particular Municipal Obligation is determined by reference to the
insurance financial strength rating of the insurer of such
Municipal Obligation, such Moody's Discount Factor will be
increased by an amount equal to 50% of the difference between (A)
the percentage set forth in the above table under the applicable
rating category, and (B) the percentage set forth in the above
table under the rating category that is one rating category below
the applicable rating category.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest
in cash, (ii) is publicly rated Baa or higher by Moody's or, if not
rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount
Factor applicable to any such S&P-rated Municipal Obligation, such
Municipal Obligation (excluding any short-term Municipal
Obligation) shall be deemed to have a Moody's rating which is one
full rating category lower than its S&P rating), (iii) does not
have its Moody's rating suspended by Moody's; and (iv) is part of
an issue of Municipal Obligations of at least $10,000,000.
Municipal Obligations issued by any one issuer and rated BBB by S&P
may comprise no more than 4% of total Moody's Eligible Assets; such
BBB-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated Baa by
Moody's or A by S&P, may comprise no more than 6% of total Moody's
Eligible Assets; such BBB, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more
than 10% of total Moody's Eligible Assets; and such BBB, Baa, A and
AA-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by the same issuer and rated Aa by Moody's or
AAA by S&P, may comprise no more than 20% of total Moody's Eligible
Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance
issued by a third party shall be deemed to be issued by such third
party if the issuance of such third party credit is the sole
determinant of the rating on such Municipal Obligation. Municipal
Obligations issued by issuers located within a single state or
territory and rated BBB by S&P may comprise no more than 12% of
total Moody's Eligible Assets; such BBB-rated Municipal
- 36 -
<PAGE>
Obligations, if any, together with any Municipal Obligations issued
by issuers located within the same state or territory and rated Baa
by Moody's or A by S&P may comprise no more than 20% of total
Moody's Eligible Assets; such BBB, Baa and A-rated Municipal
Obligations, if any, together with any Municipal.Obligations issued
by issuers located within the same state or territory and rated A
by Moody's or AA by S&P, may comprise no more than 40% of total
Moody's Eligible Assets; and such BBB, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located within the same state or
territory and rated Aa by Moody's or AAA by S&P, may comprise no
more than 60% of total Moody's Eligible Assets. For purposes of
applying the foregoing requirements, a Municipal Obligation shall
be deemed to be rated BBB by S&P if rated BBB, BBB- or BBB+ by S&P.
For purposes of Minimum Issue Size, Maximum Underlying Obligor and
Maximum State or Territory Concentration, Moody's Eligible Assets
shall be calculated without including cash and Municipal
Obligations rated MIG-1, VMIG-1 or Prime-l, or if not rated by
Moody's, rated SP-1+ by S&P, which either mature or have a demand
feature at par exercisable within the Moody's Exposure Period.
Where the Fund sells an asset and agrees to repurchase such asset
in the future, the Discounted Value of such asset will constitute
a Moody's Eligible Asset and the amount the Fund is required to pay
upon repurchase of such asset will count as a liability for the
purposes of the APS Basic Maintenance Amount. Where the Fund
purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30
days or less; otherwise the Discounted Value of such asset will
constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably
deposited for the payment of (i)(A) through (i)(G) under the
definition of APS Basic Maintenance Amount or it is subject to any
material lien, mortgage, pledge, security interest or security
agreement of any kind (collectively, "Liens"), except for (a) Liens
which are being contested in good faith by appropriate proceedings
and which Moody's has indicated to the Fund will not affect the
status of such asset as a Moody's Eligible Asset, (b) Liens for
taxes that are not then due and payable or that can be paid
thereafter without penalty, (c) Liens to secure payment for
services rendered or cash advanced to the Fund by the Adviser, the
Fund's administrator or custodian, the transfer agent, registrar or
dividend disbursing agent for the Common Stock or the Auction Agent
and (d) Liens by virtue of any repurchase agreement.
"Moody's Exposure Period" shall mean the period commencing on a
given Valuation Date and ending 47 days thereafter.
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<PAGE>
"Moody's Hedging Transactions" shall mean transactions in options
on securities, futures contracts based on the Municipal Index or
Treasury Bonds and options on such futures contracts.
"Municipal Index" shall mean The Bond Buyer Municipal Bond Index.
"Municipal Obligations" shall mean debt obligations or similar
securities issued by or on behalf of states (including the District
of Columbia), territories or possessions of the United States or
their respective political subdivisions, agencies or instrument-
alities, or by multistate agencies or authorities, the interest on
which is, in the opinion of bond counsel, exempt from regular
federal income tax.
"1940 Act" shall mean the Investment Company Act of 1940, as
amended from time to time.
"1940 Act APS Asset Coverage" shall mean asset coverage, of at
least 200% with respect to senior securities which are stock,
including APS (or such other asset coverage as may in the future be
specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are stock of a closed-end investment
company as a condition of declaring dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Fund to
maintain the 1940 Act APS Asset Coverage (as required by Section 8
of this Part I) as of the last Business Day of each month, shall
mean the last Business Day of the following month.
"Non-Call Period" shall have the meaning set forth below in the
definition of "Specific Redemption Provisions."
"Notice of Redemption" shall mean any notice with respect to the
redemption of the APS pursuant to Section 3 of this Part I.
"Optional Redemption Price" shall mean (i) $50,000 per share of APS
in the case of a Rate Period of less than one year, including any
Special Dividend Period of less than 365 days, or (ii) with respect
to a Special Dividend Period of 365 days or more the Optional
Redemption Price set forth in the Specific Redemption Provisions in
connection therewith; in each case plus an amount equal to
accumulated but unpaid dividends thereon to the date of redemption
(whether or not earned or declared).
"Original Issue Insurance" means a policy of insurance, purchased
in connection with the original issuance of a Municipal Obligation,
insuring the payment of principal and interest on such Municipal
Obligation.
"Outstanding" shall mean, as of any Auction Date with respect to
shares of any series of APS, the number of shares of such series
theretofore issued by the Fund except, without duplication, (i) any
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<PAGE>
shares of such series of APS theretofore cancelled or delivered to
the Auction Agent for cancellation, or redeemed by the Fund, or as
to which (A) a Notice of Redemption shall have been given by the
Fund and (B) the Fund shall have deposited the Redemption Price
with the Auction Agent, (ii) any shares of such series of APS as to
which the Fund or any Affiliate thereof shall be an Existing Holder
and (iii) any shares of such series of APS represented by any
certificate in lieu of which a new certificate has been executed
and delivered by the Fund.
"Permanent Insurance" means a permanent policy of insurance
equivalent to Original Issue Insurance or Secondary Market
Insurance.
"Portfolio Insurance" means a policy of insurance purchased by the
Fund insuring the payment of principal and interest on specified,
eligible Municipal Obligations purchased by the Fund.
"Premium Call Period" shall have the meaning set forth below in the
definition of "Specific Redemption Provisions."
"Pricing Service" means Kenny Information Systems Inc. and any
successor pricing service approved in writing by Moody's (if
Moody's is then rating the APS) and S&P (if S&P is then rating the
APS).
"Projected Dividend Amount" shall mean, with respect to the shares
of any series of APS, on any Valuation Date, an amount equal to (i)
the number of days, if any, greater than zero from and after the
last day of the then current Rate Period until 48 calendar days
from such Valuation Date, multiplied by (ii) a rate equal to the
Maximum Rate for Minimum Dividend Period multiplied by the larger
of (A) the applicable Moody's Volatility Factor and (B) the
applicable S&P Volatility Factor.
"Quarterly Valuation Date" shall mean the last Business Day of each
fiscal quarter of the Fund in each fiscal year of the Fund,
commencing September 30, 1993.
"Rate Period" shall mean, with respect to any series of APS, the
Initial Dividend Period of such series and any Subsequent Dividend
Period of such series.
"Rate Period Days," for any Rate Period consisting of less than one
year, shall mean the number of days (without giving effect to
subparagraph (b)(ii) of Section 2 of this Part I) in such Rate
Period.
"Receivables for Municipal Obligations Sold" shall mean (i) for
purposes of calculating Moody's Eligible Assets as of any Valuation
Date, no more than the aggregate of the following: (A) the book
value of receivables for Municipal Obligations sold as of or prior
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<PAGE>
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 clearinghouse
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 (B) the Moody's
Discounted Value of Municipal Obligations sold as of or prior to
such Valuation Date which generated receivables, if such receiv-
ables are due within the Moody's Exposure Period but do not comply
with either of the conditions specified in (x) or (y) above; and
(ii) for purposes of calculating S&P Eligible Assets as of any
Valuation Date, the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation
Date.
"Redemption Price" shall mean the Optional Redemption Price or the
Mandatory Redemption Price, as applicable.
"Retroactive Taxable Allocation" shall have the meaning set forth
in Section 12 of this Part I.
"S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
"S&P Discount Factor" shall mean, for purposes of calculating the
Discounted Value of any S&P Eligible Asset, the percentage
determined by reference to (i)(A) in the event such asset is a
Municipal Obligation that is not covered by insurance or is covered
by an Original Issuance Insurance policy or a Portfolio Insurance
policy which does not provide the Fund with the option to obtain
Permanent Insurance with respect to such Municipal Obligation, or
which is not escrow backed, the S&P or Moody's rating on such
Municipal Obligation, (B) in the event such asset is a Municipal
Obligation that is covered by a Secondary Market Insurance policy,
the S&P insurance claims-paying ability rating of the issuer of the
policy or (C) in the event such asset is a Municipal Obligation
that is guaranteed or is covered by a Portfolio Insurance policy
which provides the Fund with the option to obtain Permanent
Insurance with respect to such Municipal Obligation, at the Fund's
option the S&P or Moody's rating on such Municipal Obligation or
the S&P insurance claims-paying ability rating of the guarantor or
issuer of the Portfolio Insurance policy, and (ii) the shortest
Exposure Period set forth opposite such rating that is the same
length as or is longer than the S&P Exposure Period, in accordance
with the table set forth below:
- 40 -
<PAGE>
Rating Category
S&P Exposure PeriodAAA* AA*A*BBB*
- - ------------------- ---- --- ---- ---
40 Business Days...... 190%195%210%250%
22 Business Days...... 170175190230
10 Business Days...... 155160175215
7 Business Days...... 150155170210
3 Business Days...... 130135150190
________________
* S&P rating.
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 and
(ii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. For purposes of the
foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P,
rated MIG-1 or VMIG-1 by Moody's, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have
a long-term rating, shall be considered to be short-term Municipal
Obligations.
"S&P Eligible Asset" shall mean cash (excluding any cash
irrevocably deposited by the Fund for the payment of any
liabilities within the meaning of APS Basic Maintenance Amount),
Receivables for Municipal Obligations Sold or a Municipal
Obligation owned by the Fund that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to
principal and interest in U.S. dollars; (iii) is publicly rated BBB
or higher by S&P or, if not rated by S&P but rated by Moody's, is
rated at least A by Moody's (provided that such Moody's-rated
municipal securities will be included in S&P Eligible Assets only
to the extent the Market Value of such municipal securities does
not exceed 50% of the aggregate Market Value of S&P Eligible
Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated Municipal
Obligation, such Municipal Obligation will be deemed to have an S&P
rating which is one full rating category lower than its Moody's
rating); (iv) is not part of a private placement of municipal
securities; and (v) is part of an issue of municipal securities
with an original issue size of at least $20 million or. if an issue
- 41 -
<PAGE>
with an original issue size below $20 million (but in no event
below $10 million), is issued by an issuer with a total of at least
$50 million of securities outstanding. Solely for purposes of this
definition, the term "municipal securities" means any obligation
the interest on which is exempt from regular federal income
taxation and which is issued by any of the fifty United States, the
District of Columbia or any of the territories of the United
States, their subdivisions, counties, cities, towns, villages,
school districts and agencies ( including authorities and special
districts created by the states), and federally sponsored agencies
such as local housing authorities. Notwithstanding the foregoing
limitations:
(a) Municipal securities of any one issuer or guarantor
(excluding bond insurers) shall be considered S&P Eligible
Assets only to the extent the Market Value of such municipal
securities does not exceed 10% of the aggregate Market Value
of S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the
Market Value of such municipal securities exceeds 5% of the
aggregate Market Value of S&P Eligible Assets; and
(b) Municipal securities issued by issuers in any one state
or territory shall be considered S&P Eligible Assets only to
the extent the Market Value of such municipal securities does
not exceed 20% of the aggregate Market Value of S&P Eligible
Assets.
"S&P Exposure Period" shall mean the maximum period of time
following a Valuation Date that the Fund has under these Articles
Supplementary to cure any failure to maintain, as of such Valuation
Date, the Discounted Value for its portfolio at least equal to the
APS Basic Maintenance Amount (ag described in paragraph (a) of
Section 9 of this Part I).
"S&P Hedging Transactions shall mean futures contracts based on
the Municipal Index or Treasury Bonds purchased or sold by the
Fund, put and call options on guch contracts purchased by the Fund
and covered call options and secured put options on portfolio
securities written by the Fund.
"Secondary Market Insurance" means a policy of insurance, purchased
subsequent to the time of the original issuance of a Municipal
Obligation, insuring the payment of principal and interest on such
Municipal Obligation.
"Special Dividend Period" shall mean, with respect to any series of
APS, any Subsequent Dividend Period commencing on the date
designated by the Fund in accordance with Section 4 of this Part I
and ending on the last day of the last Dividend Period thereof.
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<PAGE>
"Specific Redemption Provisions" shall mean, with respect to any
Special Dividend Period of 365 or more days, either, or any
combination of, (i) a period (a "Non-Call Period") determined by
the Board of Directors, after consultation with the Broker-Dealers,
during which the shares subject to such Special Dividend Period are
not subject to redemption at the option of the Fund and (ii) a
period (a "Premium Call Period"), consisting of a number of whole
years and determined by the Board of Directors, after consultation
with the Broker-Dealers, during each year of which the shares
subject to such Special Dividend Period shall be redeemable at the
Fund's option at a price per share equal to $50,000 plus
accumulated but unpaid dividends plus a premium expressed as a
percentage of $50,000 as determined by the Board of Directors after
consultation with the Broker-Dealers; provided, that during any
Special Dividend Period of 365 or more days if, on the date of
determination of the Applicable Rate for such series, such
Applicable Rate equaled or exceeded the Treasury Rate, the Fund may
redeem APS without regard to any Non-Call Period or Premium Call
Period at the Mandatory Redemption Price.
"Subsequent Dividend Period" shall mean, with respect to any series
of APS, any period from and including the first day following the
Initial Dividend Period for such series to but excluding the next
Dividend Payment Date for such series which follows a scheduled
Auction and any period thereafter from and including one Dividend
Payment Date which follows a scheduled Auction for such series to
but excluding the next succeeding Dividend Payment Date which
follows a scheduled Auction for such series; provided, however,
that if any Subsequent Dividend Period is also a Special Dividend
Period, such term shall mean the period commencing on the first day
of such Special Dividend Period and ending on the last day of the
last Dividend Period thereof.
"Substitute Commercial Paper Dealer" shall mean The First Boston
Company or Morgan Stanley & Co. Incorporated or their respective
affiliates or successors, if such entity is a commercial paper
dealer, provided that none of such entities shall be a Commercial
Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean The First
Boston Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated or their respective affiliateg 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.
"Treasury Bonds" shall mean United States Treasury Bonds backed by
the full faith and credit of the United States government with
remaining maturities of ten years or more.
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<PAGE>
"Treasury Rate, on any date for any Rate Period, shall mean
(i) the yield on the most recently auctioned non-callable direct
obligations of the U.S. Government (excluding "flower" bonds) with
a remaining maturity within three months of the duration 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 by The Wall Street Journal,
then the arithmetic average of the yields (expressed as an interest
equivalent in the case of a Rate Period which is one year or less
and expressed as a bond equivalent in the case of any longer Rate
Period) on the most recently auctioned non-callable direct
obligations of the U.S. Government (excluding "flower" bonds) with
a remaining maturity within three months of the duration of such
Rate Period as quoted on a discount basis or otherwise by the U.S.
Government Securities Dealers to the Auction Agent for the close of
business on the Business Day immediately preceding such date. If
any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Rate, the Treasury 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.
"U.S. Government Securities Dealer" shall mean Goldman, Sachs &
Co., Smith Barney, Harris Upham & Co. Incorporated or Morgan
Guaranty Trust Company of New York or their respective affiliates
or successors, if such entity is a U.S. Government securities
dealer.
"Valuation Date" shall mean, for purposes of determining whether
the Fund is maintaining the APS Basic Maintenance Amount, each
Business Day.
"Variation Margin" shall mean, in connection with outstanding
purchase or sale positions in futures contracts and outstanding
sales positions with respect to options thereon, the amount of cash
and securities paid to and received from a futures commission
merchant (subsequent to the Initial Margin deposit) from time to
time as the value of such position fluctuates.
"Voting Period" shall have the meaning get forth in paragraph (b)
of Section 5 of this Part I.
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<PAGE>
PART II
1. Certain Definitions. Capitalized terms not defined in
this Section 1 shall have the respective meaning specified in Part
I hereof. As used in this Part II, the following terms shall have
the following meanings, unless the context otherwise requires:
"Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Fund;
provided that no Broker-Dealer controlled by, in control of or
under common control with the Fund shall be deemed to be an
Affiliate, nor shall any corporation or any Person controlled by,
in control of or under common control with such corporation one of
the directors or executive officers of which is also a director of
the Fund be deemed to be an Affiliate solely because such director
or executive officer is also a director of the Fund.
"Agent Member" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder and is
identified as such in such Bidder's Master Purchaser's Letter.
"Applicable Percentage" for any series of APS on any Auction Date
shall mean the percentage, determined as set forth below, based on
the prevailing rating of such series in effect at the close of
business on the Business Day next preceding such Auction Date:
Prevailing Rating Applicable Percentage
----------------- ---------------------
"aa3"/AA- or higher......... 110%
"a3"/A-..................... 125%
"baa3"/BBB-................. 150%
"ba3"/BB-................... 200%
Below "ba3"/BB-............. 250%
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 the APS 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
Marginal Tax Rate; provided further, however, that the Applicable
Percentage shall be divided in the foregoing manner only to the
extent of the portion of the dividend on the APS for such Rate
Period that represents the allocation of taxable income to the APS.
If the APS are rated by only one rating agency, such rating shall
be the prevailing rating.
For purposes of this definition, the "prevailing rating" of shares
of a series of APS shall be (i) "aa3"/AA- or higher if shares of
such series of APS 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
- 45 -
<PAGE>
agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if the shares of such series of APS 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
the shares of such series of APS 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 the
shares of such series of APS have a rating of "ba3" or better by
Moody's and BB- or better by S&P or the equivalent of such ratings
by such agencies or 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 the APS are rated by only one rating
agency, the prevailing rating will be determined without reference
to the rating of any other rating agency. The Fund shall take all
reasonable action necessary to enable either S&P or Moody's to
provide a rating for each series of APS. If neither S&P nor
Moody's shall make such a rating available, Goldman, Sachs & Co. or
PaineWebber Incorporated or their successors as Broker-Dealers
shall select at least one nationally recognized statistical rating
organization (as that term is used in the rules and regulations of
the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a
substitute rating agency in respect of the APS, and the Fund shall
take all reasonable action to enable such rating agency or agencies
to provide a rating for shares of such series.
"Available APS" shall have the meaning specified in paragraph (a)
of Section 4 of this Part II.
"Bid" and "Bids" shall have the respective meanings specified in
paraqraph (a) of Section 2 of this Part II.
"Bidder" and "Bidders" shall have the respective meanings specified
in paragraph (a) of Section 2 of this Part II.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of
a Broker-Dealer in this Part II 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" shall mean an agreement between the
Auction Agent and a Broker-Dealer purguant to which such Broker-
Dealer agrees to follow the procedures specified in this Part II.
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<PAGE>
"Existing Holder," when used with respect to shares of any series
of APS, shall mean a Person who has signed, or on whose behalf a
Broker-Dealer has signed, a Master Purchaser's Letter and is listed
as the beneficial owner of such APS in the records of the Auction
Agent.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Marginal Tax Rate" shall mean the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the
maximum marginal regular federal corporate income tax rate,
whichever is greater.
"Master Purchaser's Letter" shall mean a letter, addressed to the
Fund, the Auction Agent, a Broker-Dealer and an Agent Member in
which a Person agrees, among other things, to offer to purchase, to
purchase, to offer to sell and/or to sell APS as set forth in this
Part II.
"Maximum Rate," for any series of APS on any Auction Date, shall
mean:
(i) in the case of any Auction Date which is not
the Auction Date immediately prior to the first day of any proposed
Special Dividend Period of more than 28 Rate Period Days designated
by the Fund pursuant to Section 4 of Part I hereof, the product of
(a) the Reference Rate on such Auction Date for the next Rate
Period of such series and (b) the Applicable Percentage on such
Auction Date, unless such series has or had a Special Dividend
Period (other than a Special Dividend Period of 28 Rate Period Days
or less) and an Auction at which Sufficient Clearing Bids existed
has not yet occurred for a Minimum Dividend Period of such series
after such Special Dividend Period, in which case the higher of:
(A) the dividend rate on shares of such series
for the then-ending Rate Period, and
(B) the product of (1) the higher of (x) the
"AA" Composite Commercial Paper Rate on such Auction Date for the
then-ending Rate Period of such series, if such Rate Period is less
than one year, or the Treasury Rate on such Auction Date for such
Rate Period, if such Rate Period is one year or greater, and (y)
the "AA" Composite Commercial Paper Rate on such Auction Date for
such Special Dividend Period of such series, if such Special
Dividend Period is less than one year, or the Treasury Rate on such
Auction Date for such Special Dividend Period, if such Special
Dividend Period is one year or greater and (2) the Applicable
Percentage on such Auction Date; or
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<PAGE>
(ii) in the case of any Auction Date which is the
Auction Date immediately prior to the first day of any proposed
Special Dividend Period of more than 28 Rate Period Days designated
by the Fund pursuant to Section 4 of Part I hereof, the product of
(A) the highest of (1) the Reference Rate on such Auction Date for
the then-ending Rate Period of such series, if such Rate Period is
less than one year, or the Treasury Rate on such Auction Date for
such Rate Period, if such Rate Period is one year or greater,
(2) the Reference Rate on such Auction Date for the Special
Dividend Period for which the Auction is being held, if such
Special Dividend Period is less than one year, or the Treasury Rate
on such Auction Date for the Special Dividend Period for which the
Auction is being held, if such Special Dividend Period is one year
or greater, and (3) the Reference Rate on such Auction Date for the
Minimum Dividend Period of such series and (B) the Applicable
Percentage on such Auction Date.
"Moody's Volatility Factor" shall mean 272% (or 302% where notice
of a Special Dividend Period of greater than 28 days but less than
50 days has been given but not yet exercised), as long as there has
been no increase enacted to the Marginal Tax Rate. If such an
increase is enacted but not yet implemented, the Moody's Volatility
Factor shall he as follows:
% Change in Moody's Moody's
Marginal Volatility Volatility
Tax Rate Factor Factor
----------- ---------- ----------
Less than or
equal to 5% . . . . . . . . . . 292% 323%
Greater than 5% but
less than 10% . . . . . . . . . 313 347
Greater than 10% but
less than 15% . . . . . . . . . 338 373
Greater than 15% but
less than 20% . . . . . . . . . 364 402
Greater than 20% but
less than 25% . . . . . . . . . 396 436
Greater than 25% but
less than 30% . . . . . . . . . 432 474
Greater than 30% but
less than 35% . . . . . . . . . 472 518
Greater than 35% but
less than 40% . . . . . . . . . 520 570
____________________
* Applicable where a notice of Special Dividend Period of
greater than 28 days but less than 50 days has been given but
not yet exercised.
"Order" and "Orders" shall have the respective meanings specified
in paragraph (a) of Section 2 of this Part II.
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<PAGE>
"Person" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint
venture or other entity or a government or any agency or political
subdivision thereof.
"Potential Holder," when used with respect to shares of any series
of APS, shall mean any Person, including any Existing Holder of
shares of such series of APS, (i) who shall have executed a Master
Purchaser's Letter and (ii) who may be interested in acquiring
shares of such series of APS (or, in the case of an Existing Holder
of shares of such series of APS, additional shares of such series
of APS).
"Reference Rate" shall mean, with respect to any Rate Period of
less than one year, the higher of (i) the applicable AA Composite
Commercial Paper Rate and (ii) the Taxable Equivalent of the Short-
Term Municipal Bond Rate.
"S&P Volatility Factor" shall mean, for each series of APS, (i)
during the Initial Dividend Period, 277% for APS Series A and for
APS Series B and 217% for Series C; and (ii) thereafter, depending
on the applicable Reference Rate or Treasury Rate, the following
percentages:
Rate Percentage
- - ---- ----------
Taxable Equivalent of the Short-
Term Municipal Bond Rate .........................277%
30 day "AA" Composite Commercial
Paper Rate .......................................228%
60 day "AA" Composite Commercial
Paper Rate .......................................228%
90 day "AA" Composite Commercial
Paper Rate .......................................222%
180 day "AA" Composite Commercial
Paper Rate ............................... 217%
1 year U.S. Treasury Bill Rate ...................198%
2 year U.S. Treasury Note Rate ...................185%
3 year U.S. Treasury Note Rate ...................178%
4 year U.S. Treasury Note Rate ...................171%
5 year U.S. Treasury Note Rate ...................169%
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<PAGE>
Notwithstanding the foregoing, the S&P Volatility Factor may mean
such other potential dividend rate increase factor as S&P advises
the Fund in writing is applicable.
"Securities Depository" shall mean 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 the
APS.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Submission Deadline" shall mean 1:30 p.m., New York City time, on
any Auction Date or such other time on any Auction Date by which
Brokers-Dealers are required to submit Orders to the Auction Agent
as specified by the Auction Agent from time to time.
"Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this
Part II.
"Submitted Order" and "Submitted Order8s" shall have the respective
meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this
Part II.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 4 of this Part II.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any
date shall mean 90% of the quotient of (i) 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"),
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 Information Systems Inc. or any successor
thereto (provided that the use of such successor will not result in
a reduction or withdrawal of the rating of the APS by Moody's, if
Moody's is then rating the APS, or by S&P, if S&P is then rating
the APS), based on 30-day yield evaluations at par of bonds, the
interest on which is excludable for regular federal income tax
purposes under the Code, of "high grade" component issuers selected
by Kenny Information Systems Inc. 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
- 50 -
<PAGE>
preference under Section 57(a)(5) of the Code or successor
provisions, for purposes of the "alternative minimum tax," divided
by (ii) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available
by 8:30 a.m., New York City time, on such date by Kenny Information
Systems Inc. or any successor, the Taxable Equivalent of the Short-
Term Municipal Bond Rate shall mean the quotient of (x) 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 (y) 1.00 minus the Marginal Tax Rate
(expressed as a decimal).
"Winning Bid Rate" shall have the meaning specified in paragraph
(a) of Section 4 of this Part II.
2. Orders by Existing Holders and Potential Holders.
(a) Prior to the Submission Deadline on each Auction
Date:
(i) each Existing Holder of shares of any series of
APS subject to an Auction on such Auction Date may submit to a
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any,
of such series of APS held by such Existing Holder which such
Existing Holder desires to continue to hold without regard to the
Applicable Rate for such series for the next succeeding Rate Period
of such series;
(B) the number of Outstanding shares, if any,
of such series of APS which such Existing Holder offers to sell if
the Applicable Rate for such series for the next succeeding Rate
Period of such series shall be less than the rate per annum
specified by such Existing Holder; and/or
(C) the number of Outstanding shares, if any,
of such series of APS held by such Existing Holder which such
Existing Holder offers to sell without regard to the Applicable
Rate for such series for the next succeeding Rate Period of such
series:
and
(ii) one or more Broker-Dealers, using lists of
Potential Holders, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable
manner, contact Potential Holders (by telephone or otherwise),
including Persons that are not Existing Holders, on such lists to
detenmine the number of shares, if any, of such series of APS which
each such Potential Holder offers to purchase if the Applicable
Rate for such series for the next succeeding Rate Period of such
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<PAGE>
series shall not be less than the rate per annum specified by such
Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer 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 Existing Holder and each
Potential Holder placing an Order 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 an Existing Holder of shares of any
series of APS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such
series of APS specified in such Bid if the Applicable Rate for 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 of APS to be determined as set
forth in clause (iv) of paragraph (a) of Section 5 of this Part II
if the Applicable Rate for 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 of APS specified in such Bid if the rate specified therein
shall be higher than the Maximum Rate for such series, or such
number or a lesser number of Outstanding shares of such series of
APS to be determined as set forth in clause (iii) of paragraph (b)
of Section 5 of this Part II if the rate specified therein shall be
higher than the Maximum Rate for such series and Sufficient
Clearing Bids for such series do not exist.
(ii) A Sell Order by an Existing Holder of shares
of any series of APS subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such
series of APS specified in such Sell Order; or
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<PAGE>
(B) such number or a lesser number of
Outstanding shares of such series of APS as set forth in clause
(iii) of paragraph (b) of Section 5 of this Part II if Sufficient
Clearing Bids for such series do not exist.
(iii) A Bid by a Potential Holder of shares of any
series of APS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such
series of APS specified in such Bid if the Applicable Rate for 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 of APS as set forth in clause (v)
of paragraph (a) of Section 5 of this Part II if the Applicable
Rate for such series determined on such Auction Date shall be equal
to the rate specified therein.
(c) No Order for any number of shares of any series of
APS other than whole shares shall be valid.
3. 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 any series of APS subject to an Auction on
such Auction Date obtained by such Broker-Dealer and shall specify
with respect to each Order for such shares:
(i) the name of the Bidder placing such Order;
(ii) the aggregate number of shares of such series
of APS that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing
Holder of shares of such series of APS:
(A) the number of shares, if any, of such
series of APS subject to any Hold Order placed by such Existing
Holder;
(B) the number of shares, if any, of such
series of APS subject to any Bid placed by such Existing Holder and
the rate specified in such Bid; and
(C) the number of shares, if any, of such
series of APS subject to any Sell Order placed by such Existing
Holder; and
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<PAGE>
(iv) to the extent such Bidder is a Potential
Holder of shares of such series of APS, the rate and number of
shares of such series of APS 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) With respect to an Auction preceding a Rate Period
of less than 90 days, if an Order or Orders covering all of the
Outstanding shares of any series of APS held by any Existing Holder
are not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of
Outstanding shares of such series of APS held by such Existing
Holder and not subject to Orders submitted to the Auction Agent.
With respect to an Auction preceding a Rate Period of 90 days or
greater, if an Order or Orders covering all of the Outstanding
shares of any series of APS held by any Existing Holder is not
submitted to the Auction Agent prior to the Submission Deadline,
the Auction Agent shall deem a Sell Order to have been submitted on
behalf of such Existing Holder covering the number of Outstanding
shares of such series of APS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If any Existing Holder submits through a Broker-
Dealer to the Auction Agent one or more Orders covering in the
aggregate more than the number of Outstanding shares of any series
of APS 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 of
APS shall be considered valid, but only up to and including in the
aggregate the number of Outstanding shares of such series of APS
held by such Existing Holder, and if the number of shares of such
series of APS subject to such Hold Orders exceeds the number of
Outstanding shares of such series of APS 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 of APS held by such Existing Holder;
(ii) (A) any Bid for shares of such series of APS
shall be considered valid up to and including the excess of the
number of Outstanding shares of such series of APS held by such
Existing Holder over the number of shares of such series of APS
subject to any Hold Orders referred to in clause (i) above;
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<PAGE>
(B) subject to subclause (A), if more than one
Bid for shares of such series of APS with the same rate is
submitted on behalf of such Existing Holder and the number of
Outstanding shares of such series of APS 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 of APS subject to each Bid with the same rate shall
be reduced pro rata to cover the number of shares of such series of
APS equal to such excess;
(C) subject to subclauses (A) and (B), if more
than one Bid for shares of such series of APS with different rates
is submitted on behalf of such Existing Holder, 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 of APS 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 of APS by a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for shares of such series of
APS shall be considered valid up to and including the excess of the
number of Outstanding shares of such series of APS held by such
Existing Holder over the sum of the APS subject to valid Hold
Orders referred to in clause (i) above and valid Bids by such
Existing Holder referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of any
series of APS is submitted 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) An Order submitted by a Broker-Dealer to the Auction
Agent prior to the Submission Deadline on any Auction Date shall be
irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid
Rate and Applicable Rate.
(a) Not earlier than the Submission Deadline on each
Auction Date, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers (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 for each series of
APS for which an Auction is being held determine:
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<PAGE>
(i) the excess of the number of Outstanding shares
of such series of APS over the number of Outstanding shares of such
series of APS subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available APS");
(ii) from the Submitted Orders for such series
whether:
(A) the number of Outstanding shares of such
series of APS subject to Submitted Bids by Potential Holders
specifying one or more rates equal to or lower than the Maximum
Rate for such series exceeds or is equal to the sum of
(B) the number of Outstanding shares of such
series of APS subject to Submitted Bids by Existing Holders
specifying one or more rates higher than the Maximum Rate for such
series; and
(C) the number of Outstanding shares of such
series of APS subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series of APS in subclauses
(B) and (C) above is zero because all of the Outstanding shares of
such series of APS are subject to Submitted Hold Orders), such
Submitted Bids in subclause (A) above being hereinafter referred to
collectively as "Sufficient Clearing Bids" for such series); and
(iii) if Sufficient Clearing Bids for such series
exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for such series) which if:
(A) (I) each such Submitted Bid from Existing
Holders specifying such lowest rate and (II) all other such
Submitted Bids from Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to hold
the shares of such series of APS that are subject to such Submitted
Bids; and
(B) (I) each such Submitted Bid from Potential
Holders specifying such lowest rate and (II) all other such
Submitted Bids from 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 of APS which, when added to the number of
Outstanding shares of such series of APS to be purchased by such
Potential Holders described in subclause (B) above, would equal not
less than the Available APS of such series.
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<PAGE>
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 4, the
Auction Agent shall advise the Fund of the Maximum Rate for each
series of APS for which an Auction is being held on the Auction
Date and, based on such determination, the Applicable Rate for each
such series for the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for such series
exist, that the Applicable Rate for such series for the next
succeeding Rate Period thereof shall be equal to the Winning Bid
Rate for such series to determined;
(ii) if Sufficient Clearing Bids for such series do
not exist (other than because all of the Outstanding shares of such
series of APS are subject to Submitted Hold Orders), that the
Applicable Rate for such series for the next succeeding Rate
Period, which shall be a Minimum Dividend Period, thereof shall be
equal to the Maximum Rate for such series; or
(iii) if all of the Outstanding shares of such
series of APS are subject to Submitted Hold Orders, that the
Applicable Rate for such series for the next succeeding Rate Period
thereof shall be equal to the product of (A) (I) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Rate Period, if
such Rate Period is less than one year or (II) the Treasury Rate on
such Auction Date for such Rate Period, if such Rate Period is one
year or greater 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,
whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to the APS in
such Rate Period any net capital gaing or other income taxable for
Federal income tax purposes, the Applicable Rate in respect of that
portion of the dividend on the APS for such Rate Period that
represents the allocation of net capital gains or other income
taxable for Federal income tax purposes shall be the rate described
in the preceding clause (A)(I) or (II), as applicable, without
being multiplied by the factor set forth in the preceding clause
(B).
5. Acceptance and Rejection of Submitted Bids and Submitted
Sell Orders and Allocation of Shares. Existing Holders shall
continue to hold the APS that are subject to Submitted Hold Orders,
and, based on the determinations made pursuant to paragraph (a) of
Section 4 of this Part II, the Submitted Bids and Submitted Sell
Orders shall be accepted or rejected and the Auction Agent shall
take such other action as set forth below:
(a) If Sufficient Clearing Bids for any series of APS
have been made, all Submitted Sell Orders shall be accepted and,
subject to the provisions of paragraphs (d) and (e) of this Section
5, Submitted Bids shall be accepted or rejected as follows in the
- 57 -
<PAGE>
following order of priority and all other Submitted Bids for such
series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
such series of APS specifying any rate that is higher than the
Winning Bid Rate for such series shall be accepted, thus requiring
each such Existing Holder to sell the APS subject to such Submitted
Bids;
(ii) Existing Holders' Submitted Bids for shares of
such series of APS specifying any rate that is lower than the
Winning Bid Rate for such series shall be rejected, thus entitling
each such Existing Holder to continue to hold the APS subject to
such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares
of such series of APS specifying any rate that is lower than the
Winning Bid Rate shall be accepted;
(iv) each Existing Holder's Submitted Bid for
shares of such series of APS specifying a rate that is equal to the
Winning Bid Rate for such series shall be rejected, thus entitling
such Existing Holder to continue to hold shares of such series of
APS subject to such Submitted Bid, unless the number of Outstanding
shares of such series of APS subject to all such Submitted Bids
shall be greater than the number of shares of such series of APS
("remaining shares") in the excess of the Available APS of such
series over the number of APS 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 the APS subject to such Submitted Bid, but only in an amount
equal to the number of shares of such series of APS obtained by
multiplying the number of remaining shares by a fraction, the
numerator of which shall be the number of Outstanding shares of
such series of APS held by guch Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of such series of APS subject to such
Submitted Bids made by all such Existing Holders that specified a
rate equal to the Winning Bid Rate for such series; and
(v) each Potential Holder's Submitted Bid for
shares of such series of APS specifying a rate that is equal to the
Winning Bid Rate for such series shall be accepted but only in an
amount equal to the number of shares of such series of APS obtained
by multiplying the number of shares in the excess of the Available
APS of such series over the number of APS subject to Submitted Bids
described in clauses (ii) through (iv) of thig paragraph (a) by a
fraction, the numerator of which shall be the number of Outstanding
shares of such series of APS subject to such Submitted Bids and the
denominator of which shall be the aggregate number of Outstanding
shares of such series of APS subject to such Submitted Bids made by
- 58 -
<PAGE>
all such Potential Holders that specified a rate equal to the
Winning Bid Rate for such series; and
(b) If Sufficient Clearing Bids for any series of APS
have not been made (other than because all of the Outstanding
shares of such series of APS are subject to Submitted Hold Orders),
subject to the provisions of paragraph (d) of this Section 5,
Submitted Orders for such series shall be accepted or rejected as
follows in the following order of priority and all other Submitted
Bids for such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
such series of APS specifying any rate that is equal to or lower
than the Maximum Rate for such series shall be rejected, thus
entitling such Existing Holders to continue to hold the APS subject
to such Submitted Bids:
(ii) Potential Holders' Submitted Bids for shares
of such series of APS specifying any rate that is equal to or lower
than the Maximum Rate for such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for
shares of such series of APS specifying any rate that is higher
than the Maximum Rate of such series and the Submitted Sell Orders
for shares of such series of APS of each Existing Holder shall be
accepted, thus entitling each Existing Holder that submitted any
such Submitted Bid or Submitted Sell Order to sell the shares of
such series of APS 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 of APS obtained by multiplying the number of
shares of such series of APS 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 of
APS 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 of APS
subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of any series of
APS are subject to Submitted Hold Orders, all Submitted Bids for
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 5, 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 any series of APS 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 such series of APS 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 of such
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<PAGE>
series so purchased or sold by each Existing Holder or Potential
Holder on such Auction Date shall be whole shares of APS.
(e) If, as a result of the procedures described in
clause (v) of paragraph (a) of this Section 5, any Potential Holder
would be entitled or required to purchase less than a whole share
of any series of APS on any Auction Date, the Auction Agent shall,
in such manner as it shall determine in its sole discretion,
allocate shares of such series of APS for purchase among Potential
Holders so that only whole shares of such series of APS 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 APS on such Auction Date.
(f) Based on the results of each Auction for a series of
APS, the Auction Agent shall determine the aggregate number of
shares of such series of APS to be purchased and the aggregate
number of shares of such series of APS to be sold by Potential
Holders and Existing Holders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-
Dealer, 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 Broker-Dealer or Broker-Dealers acting for
one or more purchasers of shares of such series of APS such Broker-
Dealer shall deliver, or from which other Broker-Dealer or Broker-
Dealers acting for one or more sellers of shares of such series of
APS such Broker-Dealer shall receive, as the case may be, shares of
such series of APS.
6. Notification of Allocations. In normal circumstances,
whenever the Fund intends to include any net capital gains or other
income taxable for Federal income tax purposes in any dividend on
the APS, the Fund may notify the Auction Agent of the amount to be
50 included 15 days prior to 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 in
turn notify each Broker-Dealer, who, on or prior to such Auction
Date, in accordance with its Broker-Dealer Agreement, will notify
its Existing Holders and Potential Holders believed by it to be
interested in submitting an Order in the Auction to be held on such
Auction Date.
7. Miscellaneous.
(a) To the extent permitted by applicable law, the Board
of Directors may interpret or adjust the provisions of these
Articles Supplementary to resolve any inconsistency or ambiguity or
to remedy any formal defect, and may amend these Articles
Supplementary with respect to any series of APS prior to the
issuance of such series.
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<PAGE>
(b) An Existing Holder may sell, transfer or otherwise
dispose of APS only in whole shares and only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Part
II or to or through a Broker-Dealer or to a Person that has
delivered a signed copy of a Master Purchaser's Letter to the
Auction Agent; provided that, in the case of all transfers other
than pursuant to Auctions, such Existing Holder, its Broker-Dealer
or its Agent Member advises the Auction Aqent of such transfer.
(c) All of the shares of any series of APS Outstanding
from time to time shall be represented by one global certificate
registered in the name of the Securities Depository or its nominee.
(d) Neither the Fund nor any affiliate thereof 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.
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<PAGE>
IN WITNESS WHEREOF, PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. has caused these presents to be signed in its name and
on its behalf by its Vice President, and its corporate seal to be
hereunto affixed and attested by its Secretary, and the said
officers of the Fund further acknowledged said instrument to be
the corporate act of the Fund, and stated under the penalties of
perjury that to the best of their knowledge, information and
belief the matters and facts therein set forth with respect to
approval are true in all material respects, all on August 5,
1993.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
By: /s/ Jack W. Murphy
------------------
Jack W. Murphy
Vice President
ATTEST:
/s/ Dianne E. O'Donnell
- - -----------------------
Dianne E. O'Donnell
Secretary
<PAGE>
- - ----------------------------------------------------------------------
ARTICLES SUPPLEMENTARY
OF
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
November 28, 1994
- - ----------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
DESIGNATION............................................... 1
APS SERIES D......................................... 1
PART I.................................................... 2
1. Number of Shares; Ranking......................... 2
2. Dividends......................................... 2
3. Redemption........................................ 2
4. Designation of Special Dividend Periods........... 10
5. Voting Rights..................................... 12
6. Liquidation Rights................................ 17
7. Auction Agent..................................... 18
8. 1940 Act APS Asset Coverage....................... 19
9. APS Basic Maintenance Amount...................... 19
10. Minimum Liquidity Level........................... 21
11. Restrictions on Certain Distributions............. 21
12. Additional Dividends.............................. 22
13. Certain Other Restrictions........................ 23
14. Notice............................................ 27
15. Definitions....................................... 27
PART II................................................... 45
1. Certain Definitions............................... 45
2. Orders by Existing Holders and Potential Holders.. 51
3. Submission of Orders by Broker-Dealers to Auction
Agent........................................... 53
4. Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate.................... 55
5. Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares.. 57
6. Notification of Allocations....................... 60
7. Miscellaneous..................................... 60
<PAGE>
ARTICLES SUPPLEMENTARY
OF
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC., a
Maryland corporation having its principal Maryland office in the
City of Baltimore (the "Fund"), certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority expressly vested in the
Board of Directors of the Fund by Article Sixth of its Articles of
Incorporation, the Board of Directors has reclassified 600
authorized and unissued shares of common stock of the Fund as
preferred stock of the Fund and has given general authorization for
the issuance of a series of 600 shares of preferred stock, par
value $.001 per share, liquidation preference $50,000 per share
plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared) thereon, designated Auction Preferred
Shares, Series D ("APS Series D").
SECOND: The Board of Directors of the Fund, acting in accord-
ance with Section 2-208 of the Maryland General Corporation Law,
has fixed the preferences, voting powers, restrictions, limitations
as to dividends, qualifications and terms and conditions of redemp-
tion of the shares of such class of preferred stock as follows:
DESIGNATION
APS SERIES D: A series of 600 shares of preferred stock, par
value $.001 per share, liquidation preference $50,000 per share, is
hereby designated "Auction Preferred Shares, Series D" (herein-
after, "APS Series D"). Each share of APS Series D shall be issued
on the date on which the Effective Time occurs.
The Initial Dividend Period of the APS Series D will be a
period consisting of the number of days following the day on which
the Effective Time occurs that would have remained in the then-
current Dividend Period of the Intermediate Fund Auction Preferred
Shares with respect to which such shares of APS Series D are
issued. The Applicable Rate for the shares of APS Series D for the
Initial Dividend Period will be the Applicable Rate in effect at
the Effective Time for the Intermediate Fund Auction Preferred
Shares with respect to which such shares of APS Series D are
issued. The Initial Dividend Payment Date of the APS Series D
shall be the Dividend Payment Date next scheduled to occur with
respect to the Intermediate Fund Auction Preferred Shares with
respect to which such shares of APS Series D are issued after the
Effective Time. The initial Auction for the shares of APS Series
D will be held on the day on which the Auction next succeeding the
Effective Time would have been held for the Intermediate Fund
Auction Preferred Shares with respect to which such shares of APS
Series D are issued. Each share of APS Series D shall have such
<PAGE>
other preferences, limitations and relative voting rights, in
addition to those required by applicable law or set forth in the
Fund's Articles of Incorporation applicable to preferred stock of
the Fund, as are set forth in Part I and Part II of these Articles
Supplementary. The APS Series D shall constitute a separate series
of preferred stock of the Fund, and each share of APS Series D
shall be identical except as provided in Section 3 of Part I of
these Articles Supplementary.
No holder of any shares of APS Series D shall have, solely by
reason of being such a holder of any shares of APS Series D, any
right to acquire, purchase or subscribe for any common stock, par
value $.001 per share, of the Fund or other securities of the Fund
which it may hereafter issue or sell (whether out of the number of
shares authorized by the Articles of Incorporation, or out of any
shares acquired by the Fund after the issuance thereof, or
otherwise).
PART I
1. Number of Shares: Ranking.
(a) No fractional shares of APS Series D shall be
issued.
(b) Any shares of APS Series D which at any time have
been redeemed or purchased by the Fund shall, after such redemption
or purchase, have the status of authorized but unissued preferred
stock, without designation as to series.
(c) The shares of APS Series D shall rank on a parity
with shares of any other series of preferred stock as to the
payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund.
2. Dividends.
(a) The Holder of shares of APS Series D shall be
entitled to receive, when, as and if declared by the Board of
Directors, out of funds legally available therefor, cumulative cash
dividends at the Applicable Rate per annum thereof, determined as
set forth in paragraph (c) of this Section 2, and no more (except
to the extent set forth in Section 12 of this Part I), payable on
the respective dates (each a "Dividend Payment Date") determined as
set forth in paragraph (b) of this Section 2. Dividends on shares
of APS Series D shall accumulate at the Applicable Rate per annum
from the Date of Original Issue thereof.
(b) (i) Dividends shall be payable, subject to
subparagraph (b) (ii) of this Section 2, on shares of APS Series D,
- 2 -
<PAGE>
on Friday, December 2, 1994, and each Friday thereafter, provided
that if the Fund, subject to the conditions set forth in Section 4
of this Part I, designates any Subsequent Dividend Period as a
Special Dividend Period, dividends will be payable: (1) with
respect to a Special Dividend Period of less than 35 days, the day
after the last day thereof and (2) with respect to a Special Div-
idend Period of 35 days or more, the first Business Day of each
calendar month thereafter, provided that, in any calendar month in
which an Auction Date is scheduled to occur, dividends shall be
payable on the first Business Day next succeeding such Auction
Date.
With respect to any Rate Period following a Special Dividend
Period with respect to APS Series D, dividends on shares of such
series shall be payable, subject to subparagraph (b)(ii) of this
Section 2, in accordance with this subparagraph (b)(i), subject in
each case to the option of the Fund to further designate from time
to time any Subsequent Dividend Period of such series as a Special
Dividend Period.
(ii) In the case of dividends that would otherwise
be payable on a day that is not a Business Day, as determined by
subparagraph (b) (i) of this Section 2, including clause (1) or (2)
of the proviso thereto, if such day that would otherwise be the
Dividend Payment Date (A) is a Sunday, Monday or Tuesday, then
dividends shall be payable on the first Business Day that falls
after such Sunday, Monday or Tuesday, or (B) is a Wednesday, Thurs-
day, Friday or Saturday, then dividends shall be payable on the
first Business Day that falls prior to such Wednesday, Thursday,
Friday or Saturday.
(iii) The Fund shall pay to the Auction Agent
not later than 12:00 noon, New York City time, on the Business Day
next preceding each Dividend Payment Date for shares of APS Series
D, an aggregate amount of funds available on the next Business Day
in The City of New York, New York, equal to the dividends to be
paid to all Holders of shares of such series on such Dividend
Payment Date.
(iv) All moneys paid to the Auction Agent for the
payment of dividends (or for the payment of any late charges
pursuant to subparagraph (c)(i) of this Section 2) shall be held in
trust for the payment of such dividends (and any such late charge)
by the Auction Agent for the benefit of the Holders specified in
subparagraph (b)(v) of this Section 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by
the Auction Agent to the payment of dividends (and any late charge)
will, to the extent permitted by law, be repaid to the Fund at the
end of 90 days from the date on which such moneys were so to have
been applied.
- 3 -
<PAGE>
(v) Each dividend on the APS Series D shall be paid
on the Dividend Payment Date therefor to the Holders as their names
appear on the share 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 as
their names appear on the share books of the Fund on such date, not
exceeding 15 days preceding the payment date thereof, as may be
fixed by the Board of Directors.
(c) (i) The dividend rate on shares of APS Series D
during the period from and after the Date of Original Issue thereof
to and including the last day of the Initial Dividend Period there-
for shall be equal to the rate per annum set forth under
"Designation," above. For each Subsequent Dividend Period of APS
Series D Outstanding thereafter, the dividend rate on shares of
such series shall be equal to the rate per annum that results from
an Auction for such series on the Auction Date next preceding such
Subsequent Dividend Period; provided, however, that if an Auction
for any Subsequent Dividend Period of APS Series D is not held for
any reason or if a Failure to Deposit occurs and such Failure to
Deposit has not been cured as set forth below prior to any
succeeding Subsequent Dividend Period thereof, then, subject to the
next succeeding proviso, the dividend rate on the shares of such
series for any such Subsequent Dividend Period shall be the Maximum
Rate for such series on the Auction Date for such Subsequent
Dividend Period; provided, further, however, that if any Failure to
Deposit shall have occurred with respect to shares of APS Series D
during any Rate Period thereof, 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
sentence or the Fund shall not have paid to the Auction Agent a
late charge equal to the sum of (1) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the
full amount of dividends with respect to any Dividend Period on the
shares of such series, an amount computed by multiplying (x) 200%
of the Reference Rate (or Treasury Rate, if applicable) 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 sentence (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 365, and applying the rate
obtained against the aggregate liquidation preference of the
Outstanding shares of APS Series D 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 APS Series D, if any, for
which Notice of Redemption has been given by the Fund pursuant to
paragraph (b) of Section 3 of this Part I, an amount computed by
multiplying (x) 200% of the Reference Rate (or Treasury Rate, if
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<PAGE>
applicable) 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 has not been cured in accordance with the next
succeeding sentence (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 365, and applying the rate
obtained against the aggregate liquidation preference of the
Outstanding shares of APS Series D, then Auctions for such series
shall be suspended until such Failure to Deposit shall have been so
cured and the dividend rate for shares of APS Series D for each
Subsequent Dividend Period thereof commencing after such Failure to
Deposit to and including the Subsequent Dividend Period, if any,
during which such Failure to Deposit is so cured shall be a rate
per annum equal to the Maximum Rate on the Auction Date for each
such Subsequent Dividend 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 APS Series D for any Dividend Period for
such shares being herein referred to as the "Applicable Rate" for
such shares). A Failure to Deposit with respect to shares of APS
Series D 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,
not later than 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, the Fund shall have paid to the
Auction Agent (A) all accumulated and unpaid dividends on the
shares of APS Series D and (B) without duplication, the Redemption
Price for the shares of APS Series D, if any, for which Notice of
Redemption has been given by the Fund pursuant to paragraph (b) of
Section 3 of this Part I.
(ii) The amount of dividends per share payable on
shares of APS Series D on any date on which dividends shall be
payable on shares of such series shall be computed by multiplying
the Applicable Rate for such series in effect for such Dividend
Period or Dividend Periods or parts 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
parts thereof and the denominator of which shall be 365 if such
Dividend Period is a Rate Period of less than one year and 360 for
all other Rate Periods, and applying the rate obtained against
$50,000.
(d) Any dividend payment made on the APS Series D shall
first be credited against the earliest accumulated but unpaid
dividends due with respect to such APS Series D.
(e) Except as set forth in the next sentence, no
dividends shall be declared or paid or set apart for payment on the
shares of any class or series of shares of the Fund's capital stock
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<PAGE>
ranking, as to the payment of dividends, on a parity with APS
Series D for any period unless full cumulative dividends have been
or contemporaneously are declared and paid on the shares of APS
Series D through the most recent Dividend Payment Date for such
series. When dividends are not paid in full upon APS Series D
through its most recent Dividend Payment Date or upon the shares of
any other class or series of shares ranking on a parity as to the
payment of dividends with the APS Series D through their most
recent respective dividend payment dates, all dividends declared
upon the APS Series D and any other such class or series of shares
ranking on a parity as to the payment of dividends with the APS
Series D shall be declared pro rata so that the amount of dividends
declared per share on the APS Series D 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 APS Series D and
such other class or series of shares bear to each other (for
purposes of this sentence, the amount of dividends declared per
share shall be based on the Applicable Rate for such shares for the
Dividend Periods during which dividends were not paid in full).
Holders of the APS Series D shall not be entitled to any dividend,
whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on the APS Series D. No
interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the APS Series D
which may be in arrears, and, except to the extent set forth in
subparagraph (c)(i) of this Section 2, no additional sum of money
shall be payable in respect of any such arrearage.
(f) Dividends on the APS Series D shall be designated as
exempt-interest dividends up to the amount of tax-exempt income of
the Fund, to the extent permitted by, and for purposes of, Section
852 of the Code.
(g) The Board of Directors shall not declare any
dividend (except a dividend payable in Common Stock), or declare
any other distribution, upon the Common Stock, or purchase Common
Stock, unless in every such case the APS Series D has, at the time
of any such declaration or purchase, 1940 Act APS Asset Coverage
after deducting the amount of such dividend, distribution or
purchase price, as the case may be.
3. Redemption.
(a) (i) Upon giving a Notice of Redemption, as provided
below, the Fund at its option may redeem shares of APS Series D, in
whole or in part, on the second Business Day next preceding any
Dividend Payment Date applicable to those shares of such series
called for redemption, out of funds legally available therefor, at
the Optional Redemption Price; provided that, during a Special
Dividend Period of 365 days or more, no share of APS Series D will
be subject to optional redemption during any Non-Call Period;
provided, further, that shares of APS Series D may not be redeemed
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<PAGE>
in part if after such partial redemption fewer than 250 shares of
such series remain Outstanding; and provided, further, that no
shares of APS Series D shall be redeemed pursuant to this
subparagraph during the Initial Dividend Period for such series.
(ii) If fewer than all of the Outstanding shares of
APS Series D are to be redeemed pursuant to subparagraph (a)(i) of
this Section 3, the number of shares of such series to be redeemed
shall be determined by the Board of Directors, and such shares
shall be redeemed pro rata from the Holders of such series in
proportion to the number of such shares held by such Holders.
(iii) No shares of APS Series D shall be redeemed
pursuant to subparagraphs (a)(i) or (a)(ii) of this Section 3
unless, on the date on which the Fund intends to give notice of
such redemption pursuant to paragraph (b) of this Section 3, (A)
the Fund has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption
date and having a value not less than the amount (including the
applicable premium, if any) due to Holders of the APS Series D 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 APS Series D) and S&P Eligible Assets (if S&P is
then rating the APS Series D) each would at least equal the APS
Basic Maintenance Amount immediately subsequent to such redemption,
if such redemption were to occur on such date, and on the date of
redemption.
(iv) Subject to paragraph (g) of this Section 3,
the Fund shall redeem at the Mandatory Redemption Price certain
shares of APS Series D if the Fund fails to maintain a Discounted
Value of Moody's Eligible Assets or S&P Eligible Assets in an
amount greater than or equal to the APS Basic Maintenance Amount or
fails to maintain 1940 Act APS Asset Coverage and such failure is
not cured on or before the APS Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be. The number of shares of
APS Series D to be redeemed shall be equal to the lesser of (A) the
minimum number of shares of APS Series D the redemption of which, if
deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other preferred stock
subject to redemption or retirement, would result in the
satisfaction of the APS Basic Maintenance Amount or the 1940 Act
APS Asset Coverage, as the case may be, on such Cure Date (provided
that, if there is no such minimum number of shares of APS Series D
and other preferred stock the redemption of which would have such
result, all the shares of APS Series D and preferred stock then
outstanding shall be redeemed), and (B) the maximum number of
shares of APS Series D, together with all other preferred stock
subject to redemption or retirement, that can be redeemed out of
funds expected to be legally available therefor. In determining
the shares of APS Series D required to be redeemed in accordance
with the foregoing, the Fund shall allocate the number required to
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<PAGE>
be redeemed to satisfy the APS Basic Maintenance Amount or the 1940
Act APS Asset Coverage, as the case may be, pro rata among the APS
Series D and each other series of preferred stock subject to
redemption provisions similar to those contained in this Section
3(a)(iv). The Fund shall effect such 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 for the
redemption of all of the required number of shares of APS Series D
and other preferred stock which are subject to redemption
provisions similar to those contained in this Section 3(a)(iv) or
the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund shall redeem those shares
of APS Series D and other preferred stock 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 APS Series D are to be redeemed pursuant to this Section
3(a)(iv), the number of shares of such series to be redeemed shall
be redeemed pro rata from the Holders of such shares in proportion
to the number of shares held by such Holders.
(b) The Fund is required to give 30 days' Notice of
Redemption. In the event the Fund obtains appropriate exemptive or
no-action relief from the Securities and Exchange Commission, the
number of days' notice required for a mandatory redemption may be
reduced by the Board of Directors of the Fund to as few as two
Business Days if Moody's and S&P each has agreed in writing that
the revised notice provision would not adversely affect its then-
current ratings of the APS Series D. The Auction Agent will use
its reasonable efforts to provide telephonic notice to each Holder
of APS Series D called for redemption not later than the close of
business on the Business Day on which the Auction Agent determines
the shares to be redeemed (as described above) (or, during the
occurrence of a Failure to Deposit with respect to such shares, not
later than the close of business on the Business Day immediately
following the day on which the Auction Agent receives Notice of
Redemption from the Fund). Such telephonic notice will be
confirmed promptly in writing not later than the close of business
on the third Business Day preceding the redemption date by notice
sent by the Auction Agent to each Holder of record of APS Series D
called for redemption, the Broker-Dealers and the Securities
Depository. Every Notice of Redemption and other redemption notice
with respect to APS Series D will state: (1) the redemption date,
(2) the number of shares of APS Series D to be redeemed, (3) the
redemption price, (4) that dividends on the shares of APS Series D
to be redeemed will cease to accumulate as of such redemption date
and (5) the provision of the APS Provisions pursuant to which such
shares are being redeemed. No defect in the Notice of Redemption
or other redemption notice or in the transmittal or the mailing
thereof will affect the validity of the redemption proceedings,
except as required by applicable law. If fewer than all shares of
APS Series D held by any Holder are to be redeemed, the Notice of
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<PAGE>
Redemption mailed to such Holder shall also specify the number of
shares of such series to be redeemed from such Holder.
(c) Notwithstanding the provisions of paragraph (a) of
this Section 3, if any dividends on shares of APS Series D are in
arrears, no shares of such series shall be redeemed unless all
Outstanding shares of such series are simultaneously redeemed, and
the Fund shall not purchase or otherwise acquire any shares of such
series; provided, however, that the foregoing shall not prevent the
purchase or acquisition of all Outstanding shares of APS Series D
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 APS Series D.
(d) Upon the deposit of funds sufficient to redeem APS
Series D with the Auction Agent and the giving of Notice of
Redemption under paragraph (b) of this Section 3, dividends on such
shares of APS Series D shall cease to accumulate and such shares
shall no longer be deemed to be Outstanding for any purpose, and
all rights of the Holders of the shares so called for redemption
shall cease and terminate, except the right of such Holders to
receive the Optional Redemption Price or Mandatory Redemption
Price, as the case may be, but without any interest or other
additional amount, except as provided in Sections 2(c)(i) and 12 of
this Part I. 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 Directors shall
so require and the Notice of Redemption shall so state), the
Optional Redemption Price or Mandatory Redemption Price, as the
case may be, shall be paid by the Auction Agent to the Holders of
the shares of APS Series D 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
shall be entitled to receive from the Auction Agent, promptly after
the date fixed for redemption, any cash deposited with the Auction
Agent in excess of (i) the aggregate Optional Redemption Price or
Mandatory Redemption Price, as the case may be, of the APS Series
D called for redemption on such date and (ii) all other amounts to
which Holders of the APS Series D called for redemption may be
entitled. Any funds so deposited that are unclaimed at the end of
90 days from such redemption date shall, to the extent permitted by
law, be repaid to the Fund, after which time the Holders of the APS
Series D so called for redemption may look only to the Fund for
payment of the Optional Redemption Price or Mandatory Redemption
Price, as the case may be, and all other amounts to which they may
be entitled. The Fund shall be entitled to receive, from time to
time after the date fixed for redemption, any interest on the funds
so deposited.
(e) To the extent that any redemption for which Notice
of Redemption has been given is not made by reason of the absence
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<PAGE>
of legally available funds therefor, such redemption shall be made
as soon as practicable to the extent such funds become available.
Failure to redeem the APS Series D shall be deemed to exist at any
time after the date specified for redemption in a Notice of
Redemption when the Fund shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Optional
Redemption Price or Mandatory Redemption Price, as the case may be,
with respect to any shares for which such Notice of Redemption has
been given. Notwithstanding the fact that the Fund may not have
redeemed the APS Series D for which a Notice of Redemption has been
given, dividends may be declared and paid on the APS Series D and
shall include those shares of APS Series D for which a Notice of
Redemption has been qiven.
(f) All moneys paid to the Auction Agent for payment of
the Optional Redemption Price or Mandatory Redemption Price, as the
case may be, of the APS Series D called for redemption shall be
held in trust by the Auction Agent for the benefit of Holders of
shares so to be redeemed.
(g) In effecting any redemption pursuant to this Section
3, the Fund shall use its best efforts to comply with all
applicable procedural conditions precedent to effecting such
redemption under the 1940 Act and Maryland law, but shall effect no
redemption except to the extent permitted by the 1940 Act and
Maryland law.
(h) In the case of any redemption pursuant to this
Section 3, only whole shares of APS Series D shall be redeemed, and
in the event that any provision of the Articles of Incorporation
would require redemption of a fractional share, the Auction Agent
shall be authorized to round up so that only whole shares are
redeemed.
4. Designation of Special Dividend Periods.
(a) The Fund, at its option, may designate any
succeeding Subsequent Dividend Period of APS Series D as a Special
Dividend Period which shall consist of such number of days, whole
months or whole years as the Board of Directors shall specify;
provided, however, that such designation shall be effective only if
(i) notice thereof shall have been given in accordance with
paragraph (b) and clause (i) of paragraph (c) of this Section 4,
(ii) any Failure to Deposit that shall have occurred with respect
to shares of such series during any Dividend Period shall have been
cured in accordance with the provisions of the third sentence of
subparagraph (c)(i) of Section 2 of this Part I, (iii) Sufficient
Clearing Bids (as defined in Section 1 of Part II hereof) for such
series shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special
Dividend Period, (iv) if any Notice of Redemption shall have been
mailed by the Fund pursuant to paragraph (b) of Section 3 of this
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<PAGE>
Part I with respect to any shares of such series, the Redemption
Price with respect to such shares shall have been deposited with
the Auction Agent and (v) in the event the Fund wishes to designate
any succeeding Subsequent Dividend Period for such series as a
Special Dividend Period consisting of more than 28 Rate Period
Days, the Fund has received written confirmation from S&P (if S&P
is then rating the APS Series D) and Moody's (if Moody's is then
rating the APS Series D) that such designation would not affect the
rating then assigned by S&P and Moody's, respectively, to such
series.
(b) If the Fund proposes to designate any succeeding
Subsequent Dividend Period of APS Series D as a Special Dividend
Period of more than 28 Rate Period Days pursuant to paragraph (a)
of this Section 4, not less than 20 nor more than 30 days prior to
the date the Fund proposes to designate as the first day of such
Special Dividend Period (which shall be such day that would
otherwise be the first day of a Minimum Dividend 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) communicated by the Fund by telephonic or other means to the
Auction Agent and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Fund may exercise its option
to designate a succeeding Subsequent Dividend Period of APS Series
D as a Special Dividend 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 notify the Auction
Agent, who shall promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to exercise
such option, in which case the Fund shall specify the Special
Dividend Period designated and the terms of the Specific Redemption
Provisions, if any, or (y) its determination not to exercise such
option.
(c) 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 Dividend Period the Fund shall deliver to the Auction
Agent, who shall promptly notify the Broker-Dealers, either:
(i) a notice stating (A) that the Fund has
determined to designate the next succeeding Rate Period of such
series as a Special Dividend Period, specifying the same and the
first day thereof, (B) the Auction Date immediately prior to the
first day of such Special Dividend Period, (C) the terms of the
Specific Redemption Provisions, if any, for the APS Series D, (D)
that such Special Dividend Period shall not commence if (1) on such
Auction Date Sufficient Clearing Bids for such series shall not
exist (in which case the succeeding Rate Period shall be a Minimum
Dividend Period) or (2) a Failure to Deposit shall have occurred
prior to the first day of such Special Dividend Period with respect
to shares of such series and (E) the scheduled Dividend Payment
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<PAGE>
Date for such series during such Special Dividend Period; provided
that, if such Special Dividend Period consists of more than 28 Rate
Period Days, such notice will be accompanied by an APS Basic
Maintenance Report showing, as of the third Business Day next
preceding such proposed Special Dividend Period, (1) a Discounted
Value of Moody's Eligible Assets, assuming, for the purposes of
calculating such Discounted Value in connection with an APS Basic
Maintenance Report required to be prepared pursuant to this Section
4(c)(i), a Moody's Exposure Period of "eight weeks or less but
greater than seven weeks" (if Moody's is then rating such series)
and (2) a Discounted Value of S&P Eligible Assets (if S&P is then
rating such series) at least equal the APS Basic Maintenance Amount
as of such Business Day (assuming for purposes of the foregoing
calculation that the Maximum Rate is the Maximum Rate on such
Business Day as if such Business Day were the Auction Date for the
proposed Special Dividend Period); or
(ii) a notice stating that the Fund has determined
not to exercise its option to designate a Special Dividend Period
for APS Series D and that the next succeeding Dividend Period of
such series shall be a Minimum Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend 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 Dividend
Period, the Fund shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Dividend Period to the
effect set forth in clause (ii) of the preceding sentence.
5. Voting Rights.
(a) Except as otherwise provided in the Articles of
Incorporation or as otherwise required by law, (i) each Holder of
shares of APS Series D shall be entitled to one vote for each share
held on each matter submitted to a vote of stockholders of the
Fund, and (ii) the holders of outstanding preferred stock,
including APS Series D, and of Common Stock shall vote together as
a single class; provided that, at a meeting of the stockholders of
the Fund held for the election of the directors, the holders of
outstanding preferred stock, including APS Series D, represented in
person or by proxy at said meeting, voting as a separate class,
shall elect two directors of the Fund, each share of preferred
stock, including each share of APS Series D, entitling the holder
thereof to one vote. Subject to paragraph (b) of this Section 5,
the holders of outstanding Common Stock and preferred stock,
including APS Series D, voting as a single class, shall elect the
balance of the directors.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred
to herein as a "Voting Period"), the number of directors
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constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two
directors elected exclusively by the holders of preferred stock,
including APS Series D, would constitute a majority of the Board of
Directors as so increased by such smallest number, and the holders
of preferred stock, including APS Series D, shall be entitled,
voting as a class on a one-vote-per-share basis (to the exclusion
of the holders of all other securities and classes of capital stock
of the Fund), to elect such smallest number of additional
directors, together with the two directors that such holders are in
any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or
declared) on any Outstanding shares of APS Series D equal to at
least two full years' dividends shall be due and unpaid and
sufficient cash or specified securities shall not have been
deposited with the Auction Agent for the payment of such
accumulated dividends; or
(ii) if at any time holders of any other preferred
stock are entitled under the 1940 Act to elect a majority of the
directors of the Fund.
A Voting Period shall terminate when the Fund pays, or declares and
sets apart for payment, in full all dividends payable on all
outstanding shares of preferred stock, including shares of APS
Series D for all past Dividend Periods. Upon the termination of a
Voting Period, the voting rights described in this paragraph (b) of
Section 5 shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of
any of the events described in this paragraph (b) of Section 5.
(c) (i) As soon as practicable after the accrual of any
right of the holders of preferred stock to elect additional
directors as described in paragraph (b) of this Section 5, the Fund
shall notify the Auction Agent thereof and the Auction Agent shall
call a special meeting of such holders, by mailing a notice of such
special meeting to such holders, such meeting to be held not less
than 10 nor more than 20 days after the date of mailing of such
notice. If the Fund fails to send such notice to the Auction Agent
or if the Auction Agent does not call such a special meeting, it
may be called by any such holder on like notice. The record date
for determining the holders entitled to notice of and to vote at
such special meeting shall be the close of business on the fifth
Business Day preceding the day on which such notice is mailed. At
any such special meeting and at each meeting of holders of
preferred stock held during a Voting Period at which directors are
to be elected, such holders, voting together as a class (to the
exclusion of the holders of all other securities and classes of
capital stock of the Fund), shall be entitled to elect the number
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of directors prescribed in paragraph (b) of this Section 5 on a
one-vote-per-share basis.
(ii) For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by
these Articles Supplementary, by the other provisions of the
Articles of Incorporation, by statute or otherwise, no Holder shall
be entitled to vote and no share of APS Series D shall be deemed to
be "outstanding" for the purpose of voting or determining the
number of shares required to constitute a quorum if, prior to or
concurrently with the time of determination of shares entitled to
vote or shares deemed outstanding for quorum purposes, as the case
may be, the Redemption Price for the redemption of such shares has
been deposited in trust with the Auction Agent for that purpose and
the requisite Notice of Redemption with respect to such shares
shall have been given as provided in Section 3 of this Part I.
None of the shares of APS Series D held by the Fund or any
affiliate of the Fund shall have any voting rights or be deemed to
be outstanding for voting or other purposes.
(iii) The terms of office of all persons who are
directors of the Fund at the time of a special meeting of Holders
and holders of other preferred stock to elect directors shall
continue, notwithstanding the election at such meeting by the
Holders and such other holders of the number of directors that they
are entitled to elect, and the persons so elected by the Holders
and such other holders, together with the two incumbent directors
elected by the Holders and such other holders of preferred stock
and the remaining incumbent directors elected by the holders of the
Common Stock, shall constitute the duly elected directors of the
Fund.
(iv) Simultaneously with the termination of a
Voting Period, the terms of office of the additional directors
elected by the Holders and holders of other preferred stock
pursuant to paragraph (b) of this Section 5 shall terminate, the
remaining directors shall constitute the directors of the Fund and
the voting rights of the Holders and such other holders to elect
additional directors pursuant to paragraph (b) of this Section 5
shall cease, subject to the provisions of the last sentence of
paragraph (b) of this Section 5.
(d) (i) So long as any of the shares of APS Series D are
Outstanding, the Fund shall not, without the affirmative vote of
the Holders of a majority of the Outstanding shares of APS Series
D, determined with reference to a "majority of outstanding voting
securities" as that term is defined in Section 2(a)(42) of the 1940
Act (voting separately as one class): (A) authorize, create or
issue any class or series of stock ranking prior to or on a parity
with the APS Series D with respect to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund or increase the authorized amount of
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<PAGE>
shares of APS Series D (except that, notwithstanding the foregoing,
but subject to the provisions of Section 13 of this Part I, the
Board of Directors, without the vote or consent of the Holders of
APS Series D, may from time to time authorize and create, and the
Fund may from time to time issue, classes or series of preferred
stock, including APS Series D, ranking on a parity with the APS
Series D with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up
of the affairs of the Fund, subject to continuing compliance by the
Fund with 1940 Act APS Asset Coverage and APS Basic Maintenance
Amount requirements; provided that the Fund obtains written
confirmation from Moody's (if Moody's is then rating APS Series D)
and S&P (if S&P is then rating APS Series D) that the issuance of
such additional class or series would not impair the rating then
assigned by such rating agency to the APS Series D); (B) amend,
alter or repeal the provisions of the Articles of Incorporation,
including these Articles Supplementary, whether by merger,
consolidation or otherwise, so as to affect any preference, right
or power of APS Series D or the Holders thereof; provided 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 stock ranking junior to the APS Series D with respect to the
payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund
will be deemed to affect such preferences, rights or powers only if
Moody's or S&P is then rating the APS Series D and such issuance
would, at the time thereof, cause the Fund not to satisfy the 1940
Act APS Asset Coverage or the APS Basic Maintenance Amount; or
(C) 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.
(ii) The Board of Directors, without the vote or
consent of the Holders of APS Series D, may from time to time
amend, alter or repeal any or all of the definitions of the terms
listed below, and any such amendment, alteration or repeal will not
be deemed to affect the preferences, rights or powers of the APS
Series D or the Holders thereof, provided the Fund receives written
confirmation from Moody's (such confirmation being required to be
obtained only in the event Moody's is rating the APS Series D and
in no event being required to be obtained in the case of the
definitions of Deposit Securities, Discounted Value and Receivables
for Municipal Obligations Sold as such terms apply to Dividend
Coverage Amount, Dividend Coverage Assets, Minimum Liquidity Level,
S&P Discount Factor, S&P Eligible Asset and S&P Exposure Period and
in the case of the definition of Valuation Date as such term
applies to the definitions of Dividend Coverage Amount, Dividend
Coverage Assets and Minimum Liquidity Level) and S&P (such
confirmation being required to be obtained only in the event S&P is
rating the APS Series D and in no event being required to be
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<PAGE>
obtained in the case of the definitions of Discounted Value and
Receivables for Municipal Obligations Sold as such terms apply to
Moody's Discount Factor, Moody's Eligible Asset and Moody's
Exposure Period) that any such amendment, alteration or repeal
would not impair the ratings then assigned by Moody's or S&P, as
the case may be to the APS Series D:
APS Basic Maintenance Amount
APS Basic Maintenance Cure Date
APS Basic Maintenance Report
Deposit Securities
Discounted Value
Dividend Coverage Amount
Dividend Coverage Assets
Market Value
Maximum Potential Additional Dividends
Liability
Minimum Liquidity Level
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
1940 Act Cure Date
1940 Act APS Asset Coverage
Quarterly Valuation Date
Receivables for Municipal Obligations Sold
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
Valuation Date
(e) Unless otherwise required by law, the Holders of the
APS Series D shall not have any relative rights or preferences or
other special rights other than those specifically set forth
herein. The Holders of the APS Series D shall have no preemptive
rights or rights to cumulative voting. In the event that the Fund
fails to pay any dividends on the APS Series D, the exclusive
remedy of the Holders shall be the right to vote for directors
pursuant to the provisions of this Section 5.
(f) Unless a higher percentage is provided for in the
Articles of Incorporation, the affirmative vote of the Holders of
a majority of the Outstanding APS Series D, voting as a separate
class, shall be required to approve any plan of reorganization (as
such term is used in the 1940 Act) adversely affecting such shares
or any action requiring a vote of security holders of the Fund
under Section 13(a) of the 1940 Act. In the event a vote of
Holders of APS Series D is required pursuant to the provisions of
Section 13(a) of the 1940 Act, the Fund shall, not later than ten
Business Days prior to the date on which such vote is to be taken,
notify Moody's (if Moody's is then rating the APS Series D) and S&P
(if S&P is then rating the APS Series D) that such vote is to be
taken and the nature of the action with respect to which such vote
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<PAGE>
is to be taken. In addition, the Fund shall notify Moody's (if
Moody's is then rating the APS Series D) and S&P (if S&P is then
rating the APS Series D) of the results of any vote described in
the preceding sentence.
(g) Riqht to Vote with Respect to Certain Other Matters.
The affirmative vote of the holders of a majority (unless a higher
percentage vote is required under the Articles of Incorporation or
under these Articles Supplementary) of the Outstanding shares of
APS Series D, voting as a separate class, is required with respect
to any matter that materially affects the series in a manner
different from that of other series or classes of the Fund's stock,
including without limitation any proposal to do the following: (1)
increase or decrease the aggregate number of authorized shares of
the series; (2) effect an exchange, reclassification or
cancellation of all or part of the shares of the series; (3) effect
an exchange, or create a right of exchange, of all or any part of
the shares of the series; (4) change the rights or preferences of
the shares of the series; (5) change the shares of the series,
whether with or without par value, into the same or a different
number of shares, either with or without par value, of the same or
another class or series; (6) create a new class or series of shares
having rights and preferences prior and superior to the shares of
the series, or increase the rights and preferences or the number of
authorized shares of a series having rights and preferences prior
or superior to the shares of the series; or (7) cancel or otherwise
affect distributions on the shares of the series that have accrued
but have not been declared. To the extent that the interests of
APS Series D affected by a matter are substantially identical to
the interests of another series of preferred stock affected by such
matter (e.g., a vote of stockholders required under Section 13(a)
of the 1940 Act), both such series shall vote together collectively
as one class. The vote of holders of APS Series D described above
will in each case be in addition to a separate vote of the
requisite percentage of Common Stock and APS Series D necessary to
authorize the action in question.
6. Liquidation Riqhts.
(a) Upon the dissolution, liquidation or winding up of
the affairs of the Fund, whether voluntary or involuntary, the
Holders of APS Series D then Outstanding shall be entitled to
receive and to be paid out of the assets of the Fund available for
distribution to its stockholders, before any payment or
distribution shall be made on the Common Stock or on any other
class of stock of the Fund ranking junior to the APS Series D upon
dissolution, liquidation or winding up, an amount equal to the
liquidation preference with respect to such shares. The
liquidation preference for the APS Series D shall be $50,000 per
share, plus an amount equal to all dividends thereon (whether or
not earned or declared) accumulated but unpaid to the date of final
distribution in same-day funds, together with any payments required
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<PAGE>
to be made pursuant to Section 12 of this Part I in connection with
the liquidation of the Fund.
(b) 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 other corporation nor the merger or
consolidation of any other corporation into or with the Fund shall
be a dissolution, liquidation or winding up, whether voluntary or
involuntary, for the purposes of this Section 6.
(c) After the payment to the Holders of the APS Series
D of the full preferential amounts provided for in this Section 6,
the Holders of the APS Series D as such shall have no right or
claim to any of the remaining assets of the Fund.
(d) In the event the assets of the Fund available for
distribution to the Holders of the APS Series D upon any
dissolution, liquidation or winding up of the affairs of the Fund,
whether voluntary or involuntary, shall be insufficient to pay in
full all amounts to which such Holders are entitled pursuant to
paragraph (a) of this Section 6, no such distribution shall be made
on account of any shares of any other class or series of preferred
stock ranking on a parity with the APS Series D with respect to the
distribution of assets upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid
on account of the APS Series D, ratably, in proportion to the full
distributable amounts for which holders of all such parity shares
are respectively entitled upon such dissolution, liquidation or
winding up.
(e) Subject to the rights of the holders of shares of
any series or class or classes of shares ranking on a parity with
the APS Series D with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund,
after payment shall have been made in full to the Holders of the
APS Series D as provided in paragraph (a) of this Section 6, but
not prior thereto, any other series or class or classes of shares
ranking junior to the APS Series D with respect to the distribution
of assets upon dissolution, liquidation or winding up of the
affairs of the Fund 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 APS Series D shall not be entitled to share therein.
7. Auction Agent. For so long as any of the shares of APS
Series D 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
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<PAGE>
Agent resigns or for any reason its appointment is terminated
during any period that any of the APS Series D is Outstanding, the
Board of Directors shall use its best efforts promptly thereafter
to appoint another qualified commercial bank, trust company or
financial institution to act as the Auction Aqent.
8. 1940 Act APS Asset Coveraqe. The Fund shall maintain, as
of the last Business Day of each month in which any of the APS
Series D is Outstanding, the 1940 Act APS Asset Coverage.
9. APS Basic Maintenance Amount.
(a) So long as any APS Series D are Outstanding, the
Fund shall maintain, on each Valuation Date, and shall verify to
its satisfaction that it is maintaining on such Valuation Date, (i)
S&P Eligible Assets having an aggregate Discounted Value equal to
or greater than the APS Basic Maintenance Amount (if S&P is then
rating the APS Series D) and (ii) Moody's Eligible Assets having an
aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount (if Moody's is then rating the APS Series D).
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 APS 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 APS Basic Maintenance Amount by
five percent 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 APS Basic Maintenance Amount.
(b) On or before 5:00 p.m., New York City time, on the
third Business Day after a Valuation Date on which the Fund fails
to maintain a Discounted Value of Moody's Eligible Assets or S&P
Eligible Assets in an amount greater than or equal to the APS Basic
Maintenance Amount, and on the third Business Day after the APS
Basic Maintenance Cure Date with respect to such Valuation Date,
the Fund shall complete and deliver to S&P (if S&P is then rating
the APS Series D), Moody's (if Moody's is then rating the APS
Series D) and the Auction Agent (if either S&P or Moody's is then
rating the APS Series D) an APS Basic Maintenance Report as of the
date of such failure or such APS Basic Maintenance Cure Date, as
the case may be, which will be deemed to have been delivered to the
Auction Agent if the Auction Agent receives a copy or telecopy,
telex or other electronic transcription thereof and on the same day
the Fund mails to the Auction Agent for delivery on the next
Business Day the full APS Basic Maintenance Report. The Fund will
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<PAGE>
also deliver an APS Basic Maintenance Report: (i) to S&P (if S&P is
then rating the APS Series D) for each Valuation Date for which S&P
may request such report in writing or that is (A) the fifteenth day
of a month (or if in any month such day is not a Business Day, the
next succeeding Business Day) or the last Business Day of a month
or (B) a Quarterly Valuation Date, in each case on the third
Business Day after such day, or at such less frequent intervals as
may be required by S&P; and (ii) to Moody's (if Moody's is then
rating the APS Series D) and S&P (if S&P is then rating the APS
Series D) (A) on any Valuation Date on which the Discounted Value
of Moody's Eligible Assets or S&P Eligible Assets, as the case may
be, is greater than the APS Basic Maintenance Amount by 5% or less
or (B) on any date which the Fund redeems Common Stock. A failure
by the Fund to deliver an APS Basic Maintenance Report required
under this paragraph (b) of this Section 9 shall be deemed to be
delivery of an APS Basic Maintenance Report indicating the
Discounted Value for all assets of the Fund is less than the APS
Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery
of an APS Basic Maintenance Report in accordance with paragraph (b)
of this Section 9 relating to a Quarterly Valuation Date, the Fund
shall cause the Independent Accountant to confirm in writing to S&P
(if S&P is then rating the APS Series D), Moody's (if Moody's is
then rating the APS Series D) and the Auction Agent (if either S&P
or Moody's is then rating the APS Series D) (i) the mathematical
accuracy of the calculations reflected in such Report (and in any
other APS Basic Maintenance Report, randomly selected by the
Independent Accountant, that was prepared by the Fund during the
quarter ending on such Quarterly Valuation Date) and (ii) that, in
such Report (and in such randomly selected Report), the Fund
determined in accordance with these Articles Supplementary whether
the Fund had, at such Quarterly Valuation Date (and at the
Valuation Date addressed in such randomly selected Report), S&P
Eligible Assets (if S&P is then rating the APS Series D) of an
aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount and Moody's Eligible Assets (if Moody's is then
rating the APS Series D) of an aggregate Discounted Value at least
equal to the APS Basic Maintenance Amount (such confirmation being
herein called the "Accountant's Confirmation"). There shall be
appended to each Accountant's Confirmation that is delivered to S&P
and Moody's pursuant to this paragraph a copy of the APS Basic
Maintenance Report to which such Accountant's Confirmation relates.
(d) Within ten Business Days after the date of delivery
of an APS Basic Maintenance Report in accordance with paragraph (b)
of this Section 9 relating to any Valuation Date on which the Fund
failed to maintain a Discounted Value of Moody's Eligible Assets or
S&P Eligible Assets in an amount greater than or equal to the APS
Basic Maintenance Amount, and relating to the APS Basic Maintenance
Cure Date with respect to such failure to exceed or equal the APS
Basic Maintenance Amount, the Fund shall cause the Independent
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<PAGE>
Accountant to provide to S&P (if S&P is then rating the APS Series
D), Moody's (if Moody's is then rating the APS Series D) and the
Auction Agent (if either S&P or Moody's is then rating the APS
Series D) an Accountant's Confirmation as to such APS Basic
Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant
to paragraph (c) or (d) of this Section 9 shows that an error was
made in the APS Basic Maintenance Report for a particular Valuation
Date for which such Accountant's Confirmation was required to be
delivered, or shows that a lower aggregate Discounted Value for the
aggregate of all S&P Eligible Assets (if S&P is then rating the APS
Series D) or Moody's Eligible Assets (if Moody's is then rating the
APS Series D), as the case may be, of the Fund was determined by
the Independent Accountant, the calculation or determination made
by such Independent Accountant shall be final and conclusive and
shall be binding on the Fund, and the Fund shall accordingly amend
and deliver the APS Basic Maintenance Report to S&P (if S&P is then
rating the APS Series D), Moody's (if Moody's is then rating the
APS Series D) and the Auction Agent (if either S&P or Moody's is
then rating the APS Series D) promptly following receipt by the
Fund of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the
first Business Day after the Date of Original Issue of the APS
Series D, the Fund shall complete and deliver to S&P (if S&P is
then rating the APS Series D) and to Moody's (if Moody's is then
rating the APS Series D), an APS Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five
Business Days of such Date of Original Issue, the Fund shall cause
the Independent Accountant to confirm in writing to S&P (if S&P is
then rating the APS Series D) and to Moody's (if Moody's is then
rating the APS Series D) (i) the mathematical accuracy of the
calculations reflected in such Report and (ii) that the Discounted
Value of S&P Eligible Assets or Moody's Eligible Assets, as the
case may be, reflected thereon equals or exceeds the APS Basic
Maintenance Amount reflected thereon.
10. Minimum Liquidity Level.
[THIS SECTION INTENTIONALLY LEFT BLANK]
11. Restrictions on Certain Distributions. For so long as
any of the APS Series D is Outstanding, and except as set forth in
Sections 2(e) and 6(d) of this Part I, (a) the Fund shall not
declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares
of, or options, warrants or rights to subscribe for or purchase,
Common Stock or other shares, if any, ranking junior to the APS
Series D as to the payment of dividends and the distribution of
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<PAGE>
assets upon dissolution, liquidation or winding up) in respect of
the Common Stock or any other stock of the Fund ranking junior to
or on a parity with the APS Series D as to the payment of dividends
or the distribution of assets upon dissolution, liquidation or
winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Stock or any other such junior
shares (except by conversion into or exchange for shares of the
Fund ranking junior to the APS Series D as to the payment of
dividends and the distribution of assets upon dissolution,
liquidation or winding up), or any such parity shares (except by
conversion into or exchange for shares of the Fund ranking junior
to or on a parity with APS Series D as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or
winding up), unless (i) full cumulative dividends on shares of APS
Series D through its most recently ended Dividend Period shall have
been paid or shall have been declared and sufficient funds for the
payment thereof deposited with the Auction Agent and (ii) the Fund
has redeemed the full number of shares of APS Series D required to
be redeemed by any provision for mandatory redemption pertaining
thereto, and (b) if either Moody's or S&P is rating the APS Series
D, the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to
subscribe for or purchase, Common Stock or other shares, if any,
ranking junior to the APS Series D as to the payment of dividends
and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Stock or any other shares of the
Fund ranking junior to the APS Series D as to the payment of
dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase
or otherwise acquire for consideration any shares of Common Stock
or any other such junior shares (except by conversion into or
exchange for shares of the Fund ranking junior to the APS Series D
as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets
and S&P Eligible Assets would each at least equal the APS Basic
Maintenance Amount.
12. Additional Dividends. If the Fund retroactively allo-
cates any net capital gains or other income taxable for federal
income tax purposes to the APS Series D by reason of the fact that
such allocation is made as a result of (i) the realization of net
capital gains or other income taxable for federal income tax
purposes, (ii) the redemption of all or a portion of the Out-
standing APS Series D or (iii) the liquidation of the Fund (such
allocation being referred to herein as a "Retroactive Taxable
Allocation"), the Fund will simultaneously, if practicable, with
such allocation but in no event later than 270 days after the end
of the Fund's taxable year in which a Retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and
to each Holder of such shares during such taxable year at such
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<PAGE>
Holder's address as the same appears or last appeared on the share
books of the Fund. Such Holders of such shares shall be entitled
to receive, when, as and if declared by the Board of Directors, out
of funds legally available therefor, dividends in an amount equal
to the aggregate Additional Dividends with respect to all
Retroactive Taxable Allocations made to such Holders for the
taxable year in question, such dividends to be payable by the Fund
to the Auction Agent, for distribution to such Holders, within 30
days after the notice described above is given to the Auction
Agent.
13. Certain Other Restrictions.
(a) For so long as any of the APS Series D is
Outstanding and Moody's is then rating such shares, the Fund will
not, unless it has received written confirmation from Moody's that
any such action would not impair the ratings then assigned by
Moody's to the APS Series D, engage in any one or more of the
following transactions:
(i) except as necessary to effect Closing
Transactions, engage in transactions in options on securities,
futures contracts or options on futures contracts, except that in
connection with Moody's Hedging Transactions: (A) the Fund may buy
call or put options on securities; (B) the Fund may write covered
call options on securities; (C) the Fund may write put options on
securities; (D) the Fund may enter into positions in futures
contracts based on the Municipal Index provided that the Fund shall
not engage in any such transaction which would cause the Fund at
the time of such transaction to own or have sold (1) outstanding
futures contracts based on the Municipal Index exceeding in number
10% of the rolling average number of daily traded futures contracts
based on the Municipal Index in the 30 calendar days prior to the
time of effecting such transaction as reported by The Wall Street
Journal or (2) outstanding futures contracts based on the Municipal
Index and options on such futures contracts having an aggregate
fair market value (taking into account the fair market value of
futures contracts based on Treasury Bonds) exceeding the fair
market value of Moody's Eligible Assets owned by the Fund; (E) the
Fund may enter into futures contracts on Treasury Bonds provided
that the Fund shall not engage in any such transaction which would
cause the Fund at the time of such transaction to own or have sold
(1) outstanding futures contracts based on Treasury Bonds and
options on such futures contracts having an aggregate fair market
value (taking into account the fair market value of futures
contracts based on the Municipal Index) exceeding 40% of the
aggregate fair market value of Moody's Eligible Assets owned by the
Fund and rated Aa by Moody's (or, if not rated by Moody's but rated
by S&P, rated AAA by S&P) or (2) outstanding futures contracts
based on Treasury Bonds and options on such futures contracts
having an aggregate fair market value (taking into account the fair
market value of futures contracts based on the Municipal Index)
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<PAGE>
exceeding 80% of the aggregate fair market value of Moody's
Eligible Assets owned by the Fund and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P, rated A or AA by
S&P); for purposes of the foregoing clauses (D) and (E), the Fund
shall be deemed to own the number of futures contracts that
underlie any outstanding option written by the Fund; and (F) the
Fund may buy call or put options on futures contracts on the
Municipal Index or Treasury Bonds, may write put options on such
futures contracts (provided, that if the contract would require
delivery of a security, that security must be held by the Fund) and
may write call options on such futures if it owns the futures
contract subject to the option. For so long as the APS Series D is
rated by Moody's, the Fund will engage in Closing Transactions to
close out any outstanding futures contract based on the Municipal
Index if the open interest with respect to such futures contracts
based on the Municipal Index as reported by The Wall Street Journal
is less than 5,000. For so long as the APS Series D is rated by
Moody's, the Fund will engage in a Closing Transaction to close out
any outstanding futures contract by no later than the fifth
Business Day of the month in which such contract expires and will
engage in a Closing Transaction to close out any outstanding option
on a futures contract by no later than the first Business Day of
the month in which such option expires. For so long as the APS
Series D is rated by Moody's, the Fund will engage in transactions
with respect to futures contracts or options thereon having only
the next settlement date or the settlement date immediately
thereafter. For purposes of valuation of Moody's Eligible Assets:
(A) if the Fund writes a call option, the underlying asset will be
valued as follows: (1) if the option is exchange-traded and may be
offset readily or if the option expires before the earliest
possible redemption of the APS Series D, at the lower of the
Discounted Value of the underlying security of the option and the
exercise price of the option or (2) otherwise, it has no value; (B)
if the Fund writes a put option, the underlying asset will be
valued as follows: the lesser of (1) exercise price and (2) the
Discounted Value of the underlying security; (C) if the Fund is a
seller under a futures contract, the underlying security will be
valued at the lower of (1) settlement price and (2) the Discounted
Value of the underlying security; provided that, if a contract
matures within the Moody's Exposure Period, the security may be
valued at the settlement price; (D) if the Fund is the buyer under
a futures contract, the underlying security will be valued at the
lower of (1) the settlement price and (2) the Discounted Value of
the underlying security; provided that, if the contract matures
within the Moody's Exposure Period, the security may be valued at
its Discounted Value; and (E) call or put option contracts which
the Fund buys have no value. For so long as the APS Series D is
rated by Moody's: (A) the Fund will not engage in options and
futures transactions for leveraging or speculative purposes; (B)
the Fund will not write any anticipatory call options or sell any
anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such
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<PAGE>
purchase; (C) the Fund will not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance
Amount; (D) for purposes of the APS Basic Maintenance Amount (1)
assets in margin accounts are not Moody's Eligible Assets, (2) 10%
of the settlement price of assets sold under a futures contract,
the settlement price of assets purchased under a futures contract
and the settlement price of an underlying futures contract if the
Fund writes put options on futures contracts will constitute
liabilities of the Fund and (3) if the Fund writes call options on
futures contracts and does not own the underlying futures contract,
105% of the Market Value of the underlying futures contract will
constitute a liability of the Fund; (E) the Fund shall enter into
only exchange-traded futures and shall write only exchange-traded
options on exchanges approved by Moody's; (F) where delivery may be
made to the Fund with any of a class of securities, the Fund shall
assume for purposes of the APS Basic Maintenance Amount that it
takes delivery of that security which yields it the least value;
(G) the Fund will not engage in forward contracts; (H) the Fund
will enter into futures contracts as seller only if it owns the
underlying security; and (I) there shall be a quarterly audit made
of the Fund's futures and options transactions by the Fund's
Independent Accountant to confirm that the Fund is in compliance
with these standards: or
(ii) incur any indebtedness, without prior written
approval of Moody's that such indebtedness would not adversely
affect the then current rating by Moody's of the APS Series D
except that the Fund may, without obtaining the written
confirmation described above, incur indebtedness for the purpose of
clearing securities transactions if the Discounted Value of Moody's
Eligible Assets would equal or exceed the APS Basic Maintenance
Amount after giving effect to such indebtedness; provided, however,
that any such indebtedness shall be repaid within 60 days and will
not be extended or renewed; or
(iii) issue any class or series of shares ranking
prior to or on a parity with the APS Series D with respect to the
payment of dividends or the distribution of assets upon
dissolution, liguidation or winding up of the Fund, or reissue any
shares of APS Series D previously purchased or redeemed by the
Fund; or
(iv) engage in short sale transactions; or
(b) For so long as any shares of APS Series D are
Outstanding and S&P is rating such shares, the Fund will not,
unless the Fund has received written confirmation from S&P that any
such action would not impair the rating then assigned by such
rating agency to the APS Series D, engage in any one or more of the
followinq transactions:
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<PAGE>
(i) engage in any reverse repurchase agreement
transactions; or
(ii) lend portfolio securities; or
(iii) borrow money, except that the Fund may,
without obtaining the written confirmation described above, borrow
money for the purposes of clearing securities transactions if the
Discounted Value of the S&P Eligible Assets would equal or exceed
the APS Basic Maintenance Amount after giving effect to such
borrowing; or
(iv) issue any class or series of shares ranking
prior to or on a parity with the APS Series D with respect to the
payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the Fund, or reissue any
shares of APS Series D previously purchased or redeemed by the
Fund, or merge or consolidate with any corporation; or
(v) engage in repurchase agreement transactions in
which the term of such repurchase obligation is longer than 90
days, in which the underlying security is a security other than
United States Treasury securities (not inclusive of zero-coupon
securities), demand deposits, certificates of deposits or bankers'
acceptances in which the counter-party or its affiliates have
securities rated A-1+ by S&P with respect to such underlying
security; or
(vi) engage in short sale transactions; or
(vii) enter into interest rate caps, collars or
floors, purchase or sell futures contracts or options thereon or
write uncovered put or uncovered call options on portfolio
securities except that (A) the Fund may engage in any S&P Hedging
Transactions based on the Municipal Index, provided that the Fund
shall not engage in any S&P Hedging Transaction based on the
Municipal Index (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold the
least of (1) more than 1,000 outstanding futures contracts based on
the Municipal Index, (2) outstanding futures contracts based on the
Municipal Index and on Treasury Bonds exceeding in number 25% of
the quotient of the fair market value of the Fund's total assets
divided by 100,000 or (3) outstanding futures contracts based on
the Municipal Index exceeding in number 10% of the average number
of daily traded futures contracts based on the Municipal Index in
the month prior to the time of effecting such transaction as
reported by The Wall Street Journal and (B) the Fund may engage in
S&P Hedging Transactions based on Treasury Bonds, provided that the
Fund shall not engage in any S&P Hedging Transaction based on
Treasury Bonds (other than Closing Transactions) which would cause
the Fund at the time of such transaction to own or have sold the
lesser of (1) outstanding futures contracts based on Treasury Bonds
- 26 -
<PAGE>
and on the Municipal Index exceeding in number 25% of the quotient
of the fair market value of the Fund's total assets divided by
100,000 or (2) outstanding futures contracts based on Treasury
Bonds exceeding in number 10% of the average number of daily traded
futures contracts based on Treasury Bonds in the month prior to the
time of effecting such transaction as reported by The Wall Street
Journal. For so long as the APS Series D is rated by S&P, the Fund
will engage in Closing Transactions to close out any outstanding
futures contracts which the Fund owns or has sold or any
outstanding option thereon owned by the Fund in the event (A) the
Fund does not have S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the APS Basic Maintenance Amount on
two consecutive Valuation Dates and (B) the Fund is required to pay
Variation Margin on the second such Valuation Date. For so long as
the APS Series D is rated by S&P, the Fund will engage in a Closing
Transaction to close out any outstanding futures contract or option
thereon in the month prior to the delivery month under the terms of
such futures contract or option thereon unless the Fund holds
securities deliverable under such terms. For purposes of
determining S&P Eligible Assets to determine compliance with the
APS Basic Maintenance Amount, no amounts on deposit with the Fund's
custodian or broker representing Initial Margin or Variation Margin
shall constitute S&P Eligible Assets. For so long as the APS
Series D is rated by S&P, when the Fund writes a futures contract
or option thereon, it will maintain an amount of cash, cash
equivalents or short-term, money market securities in a segregated
account with the Fund's custodian, so that the amount so segregated
plus the amount of Initial Margin and Variation Margin held in the
account of the Fund's broker equals the fair market value of the
futures contract, except that in the event the Fund writes a
futures contract or option thereon which requires delivery of an
underlying security, the Fund shall hold such underlying security.
14. Notice. All notices or communications, unless otherwise
specified in the By-Laws of the Fund or these Articles
Supplementary, shall be sufficiently given if in writing and
delivered in person or mailed by first-class mail, postage prepaid.
Notice shall be deemed given on the earlier of the date received or
the date seven days after which such notice is mailed.
15. Definitions. As used in Parts I and II hereof, the
following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the
plural and vice versa), unless the context otherwise requires:
"'AA' Composite Commercial Paper Rate," on any date for any Rate
Period, shall mean (i) (A) in the case of any Minimum Dividend
Period or any Rate Period of between 7 and 35 Rate Period Days, the
interest equivalent of the 30-day rate; provided, however, in the
case of any Minimum Dividend Period of 7 days or any Rate Period
with 7 Rate Period Days, and if the "AA" Composite Commercial Paper
Rate is being used to determine the Applicable Rate when all of the
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<PAGE>
Outstanding APS Series D are subject to Submitted Hold Orders, then
the interest equivalent of the 7-day rate, and (B) in the case of
any Rate Period with more than 35 Rate Period Days, the interest
equivalent of the 180-day rate, 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 (.001) of 1%) of
(A) the discount rate divided by (B) the difference between (x)
1.00 and (y) a fraction the numerator of which shall be the product
of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
"Accountant's Confirmation" shall have the meaning set forth in
paragraph (c) of Section 9 of this Part I.
"Additional Dividends" means payment to a Holder of APS Series D of
an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such Holder with respect to
the taxable year in question, would cause such Holder's dividends
in dollars (after federal income tax consequences) from the
aggregate of both the Retroactive Taxable Allocations and the
Additional Dividends to be equal to the dollar amount of the
dividends which would have been received by such Holder if the
amount of the aggregate Retroactive Taxable Allocations would have
been excludable from the gross income of such Holder. Such
Additional Dividends shall be calculated (i) without consideration
being given to the time value of money; (ii) assuming that no
Holder of APS Series D is subject to the federal alternative
minimum tax with respect to dividends received from the Fund; and
(iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each Holder of APS Series D at the maximum
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<PAGE>
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, whichever is
greater, in effect during the taxable year in question.
"Adviser" means the investment adviser of the Fund, initially
Mitchell Hutchins Asset Management Inc.
"Anticipation Notes" means the following Municipal Obligations:
bond anticipation notes that are rated by S&P, tax anticipation
notes, revenue anticipation notes and tax and revenue anticipation
notes.
"Applicable Rate" shall have the meaning specified in subparagraph
(c)(i) of Section 2 of this Part I.
"APS Basic Maintenance Amount," as of any Valuation Date, shall
mean the dollar amount equal to the sum of (i)(A) the product of
the number of shares of APS Series D outstanding on such date
multiplied by $50,000; (B) the aggregate amount of dividends for
each share of APS Series D outstanding that will have accumulated
at the Applicable Rate (whether or not earned or declared) to and
including the first scheduled Auction Date for APS Series D that
follows such Valuation Date (or to the 47th day after such
Valuation Date, if such 47th day is earlier than such first
following scheduled Auction Date); (C) the amount equal to the
Projected Dividend Amount (based on the number of shares of APS
Series D outstanding on such date); (D) the amount of anticipated
expenses of the Fund for the 90 days subsequent to such Valuation
Date; (E) the amount of the Fund's Maximum Potential Additional
Dividend Liability as of such Valuation Date; (F) the amount of any
premium payable pursuant to a Premium Call Period; and (G) any
current liabilities as of such Valuation Date to the extent not
reflected in any of (i)(A) through (i)(F) (including, without
limitation, any amounts described in Section 13 of this Part I as
required to be treated as liabilities in connection with the Fund's
transactions in futures and options and including any payables for
Municipal Obligations purchased as of such Valuation Date) less
(ii) either (A) the face value of any of the Fund's assets
irrevocably deposited by the Fund for the payment of any of (i)(A)
through (i)(G) if such assets mature prior to or on the date of
payment of the liability for which such assets are deposited and
are either securities issued or guaranteed by the United States
Government or have a rating assigned by Moody's of P-l, VMIG-l or
MIG-1 (or, with respect to S&P, SP-1+ or A-1+) or (B) the
Discounted Value of such assets.
For purposes of the APS Basic Maintenance Amount in connection
with S&P's ratings of the APS Series D, (i) the Fund will include
as a liability an amount calculated semi-annually equal to 150% of
the estimated cost of obtaining Permanent Insurance with respect to
S&P Eligible Assets that (A) are covered by Portfolio Insurance
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<PAGE>
policies which provide the Fund with the option to obtain such
Permanent Insurance and (B) are discounted by an S&P Discount
Factor determined by reference to the insurance claims-paying
ability rating of the issuer of such Portfolio Insurance policy,
and (ii) with respect to any transactions by the Fund in futures
contracts, the Fund shall include as liabilities (A) 30% of the
aggregate settlement value, as marked to market, of any outstanding
futures contracts based on the Municipal Index which are owned by
the Fund plus (B) 25% of the aggregate settlement value, as marked
to market, of any outstanding futures contracts based on Treasury
Bonds which contracts are owned by the Fund.
For purposes of the APS Basic Maintenance Amount in connection
with Moody's rating of the APS Series D, (i) the Fund shall include
as a liability an amount calculated semi-annually equal to 150% of
the estimated cost of obtaining Permanent Insurance with respect to
Moody's Eligible Assets that (A) are covered by Portfolio Insurance
policies which provide the Fund with the option to obtain such
Permanent Insurance and (B) are discounted by a Moody's Discount
Factor determined by reference to the insurance financial strength
rating of the issuer of such Portfolio Insurance policy, and (ii)
with respect to any transactions by the Fund in securities options,
the Fund shall include as liabilities (A) 10% of the exercise price
of a call option written by the Fund and (B) the exercise price of
any written put option.
"APS Basic Maintenance Cure Date," with respect to the failure by
the Fund to satisfy the APS Basic Maintenance Amount (as required
by paragraph (a) of Section 9 of this Part I) as of a given
Valuation Date, shall mean the third Business Day following such
Valuation Date.
"APS Basic Maintenance Report" shall mean a report signed by the
President, Treasurer or any Senior Vice President or Vice President
of the Fund which sets forth, as of the related Valuation Date, the
assets of the Fund, the Market Value and the Discounted Value
thereof (seriatim and in the aggregate), and the calculation of the
APS Basic Maintenance Amount.
"APS Series D" shall mean Auction Preferred Shares, par value $.001
per share, liquidation preference $50,000 per share, of the Fund.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the
Fund and the Auction Agent which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes
of determining the Applicable Rate for APS Series D so long as the
Applicable Rate for such series is to be based on the results of an
Auction.
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<PAGE>
"Auction Agent" shall mean the entity appointed as such by a
resolution of the Board of Directors in accordance with Section 7
of this Part I.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period;
initially Thursday, December 1, 1994, and thereafter each such day
of the week subject to change as set forth herein.
"Auction Procedures" shall mean the procedures for conducting
Auctions set forth in Part II hereof.
"Board of Directors" shall mean the Board of Directors of the Fund
or any duly authorized committee thereof.
"Broker-Dealer" shall have the meaning specified in Section 1 of
Part II hereof.
"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.
"Closing Transactions" shall mean the termination of a futures
contract or option position by taking an equal position opposite
thereto in the same delivery month as such initial position being
terminated.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Commercial Paper Dealers" shall mean Goldman, Sachs Money Markets,
L.P., Lehman Commercial Paper Incorporated, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Smith Barney, Harris Upham & Co.
Incorporated or, in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper
dealer.
"Common Stock" shall mean the common stock, par value $.001 per
share, of the Fund.
"Cure Date" shall mean the APS Basic Maintenance Cure Date or the
1940 Act Cure Date, as the case may be.
"Date of Original Issue," with respect to APS Series D shall mean
the date on which the Fund initially issued shares of such series.
"Deposit Securities" shall mean cash and Municipal Obligations
rated at least A-1+ or SP-1+ by S&P, except that, for purposes of
Section 3(a)(iii) of this Part I, such Municipal Obligations shall
be considered "Deposit Securities" only if they are also rated P-1,
MIG-l or VMIG-1 by Moody's.
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<PAGE>
"Discounted Value" shall mean (i) with respect to an S&P Eligible
Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor, and (ii) with respect to a Moody's
Eligible Asset, the quotient of the Market Value thereof divided by
the applicable Moody's Discount Factor, provided that with respect
to a Moody's Eligible Asset, Discounted Value shall not exceed the
par value of such asset at any time.
"Dividend Coverage Amount," as of any Valuation Date, shall mean
(i) the aggregate amount of dividends that will accumulate on each
share of APS Series D to (but not including) the first Dividend
Payment Date for each share of APS Series D Outstanding that
follows such Valuation Date plus any liabilities that will become
payable prior to or on such payment date, less (ii) the combined
value of Deposit Securities irrevocably deposited for the payment
of dividends on the APS Series D and Receivables for Municipal
Obligations Sold which become due prior to the Dividend Payment
Date and interest with respect to Municipal Obligations which is
payable to the Fund prior to the Dividend Payment Date.
"Dividend Coverage Assets," as of any Valuation Date and with
respect to shares of APS Series D, shall mean Deposit Securities
with maturity or tender dates not later than the day preceding the
first Dividend Payment Date for such series that follows such
Valuation Date.
"Dividend Payment Date," with respect to APS Series D, shall mean
any date on which dividends on shares of such series are payable
pursuant to the provisions of paragraph (b) of Section 2 of this
Part I.
"Dividend Period," with respect to APS Series D, shall mean the
period from and including the Date of Original Issue of such series
to but excluding the initial Dividend Payment Date for such series
and any period thereafter from and including one Dividend Payment
Date for such series to but excluding the next succeeding Dividend
Payment Date for such series.
"Effective Time" means the date upon which the Merger of Intermedi-
ate Fund with and into the Fund occurs.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible
Assets, as the case may be.
"Failure to Deposit," with respect to APS Series D, shall mean a
failure by the Fund to pay to the Auction Agent, not later than
12:00 noon, New York City time, (i) on the Business Day next
preceding any Dividend Payment Date for such series, in funds
available on such Dividend Payment Date in The City of New York,
New York, the full amount of any dividend (whether or not earned or
declared) to be paid on such Dividend Payment Date on any share of
such series or (ii) on the Business Day next preceding any
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<PAGE>
redemption date in funds available on such redemption date for such
series in The City of New York, New York, the Redemption Price to
be paid on such redemption date for any share of such series after
Notice of Redemption is given pursuant to paragraph (b) of Section
3 of this Part I.
"Fund" shall mean PaineWebber Premier Insured Municipal Income Fund
Inc., a Maryland corporation, which is the issuer of the APS Series
D.
"Holder" or "holder," with respect to APS Series D, shall mean the
registered holder of shares of such series as the same appears on
the share books of the Fund.
"Independent Accountant" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the
Fund an independent public accountant or firm of independent public
accountants under the Securities Act of 1933, as amended from time
to time.
"Initial Dividend Period," with respect to APS Series D, shall mean
the period from and including the Date of Original Issue of such
series to but excluding the first Dividend Payment Date which
occurs in a month which contains the first scheduled Auction Date
with respect to shares of such series.
"Initial Margin" shall mean the amount of cash or securities
deposited with a custodian for the benefit of a futures commission
merchant as a good-faith deposit at the time of the initiation of
a purchase or sale position with respect to a futures contract or
a sale position with respect to an option position thereon.
"Interest Equivalent" shall mean a yield on a 360-day basis of a
discount basis security which is equal to the yield on an
equivalent interest-bearing security.
"Intermediate Fund" means PaineWebber Premier Intermediate Tax-Free
Income Fund Inc.
"Intermediate Fund Auction Preferred Shares" means the shares of
auction rate preferred stock of Intermediate Fund to be exchanged
for APS Series D in the Merger.
"Mandatory Redemption Price" means $50,000 per share of APS Series
D plus an amount equal to accumulated but unpaid dividends thereon
to the date fixed for redemption (whether or not earned or
declared).
"Market Value" of any asset of the Fund shall mean the market value
thereof determined by the Pricing Service designated from time to
time by the Board of Directors. Market Value of any asset shall
include any interest accrued thereon. The Pricing Service values
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<PAGE>
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 are valued at fair value as determined by the Pricing
Service using methods which include consideration of yields or
prices of Municipal Obligations 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 and/or a matrix system
to determine valuations. In the event that a security is not
valued by the Pricing Service, such security shall be valued at the
lower of two dealer bids obtained by the Fund from dealers that are
members of the National Association of Securities Dealers and make
a market in the security, at least one of which bids shall be in
writinq.
"Master Purchaser's Letter" shall have the meaning specified in
Section 1 of Part II hereof.
"Maximum Potential Additional Dividends Liability," as of any
Valuation Date, shall mean the aggregate amount of Additional
Dividends that would be due if the Fund were to make Retroactive
Taxable Allocations, with respect to any taxable year, estimated
based upon dividends paid and the amount of undistributed realized
net capital gains and other taxable income earned by the Fund, as
of the end of the calendar month immediately preceding such
Valuation Date, and assuming such Additional Dividends are fully
taxable.
"Merger" means the tax-free reorganization involving the merger of
Intermediate Fund with and into the Fund.
"Minimum Dividend Period" shall mean, with respect to APS Series D,
any Rate Period consisting of 28 Rate Period Days, subject to
certain exceptions.
"Minimum Liquidity Level" shall have the meaning set forth in Section
10 of this Part I.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
"Moody's Discount Factor" shall mean, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage
determined by reference to (i)(A) in the event such asset is a
Municipal Obligation that is not covered by insurance or is covered
by an Original Issue Insurance policy or a Portfolio Insurance
policy which does not provide the Fund with the option to obtain
Permanent Insurance with respect to such Municipal Obligation, or
which is not escrow backed, the Moody's or S&P rating on such
Municipal Obligation, (B) in the event such asset is a Municipal
Obligation that is covered by a Secondary Market Insurance policy,
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<PAGE>
the Moody's insurance financial strength rating of the issuer of
the policy or (C) in the event such asset is a Municipal Obligation
is guaranteed or is covered by a Portfolio Insurance Policy which
provides the Fund with the option to obtain Permanent Insurance
with respect to such Municipal Obligation, at the Fund's option the
Moody's or S&P rating on such Municipal Obligation or the Moody's
insurance financial strength rating of the guarantor or issuer of
the Portfolio Insurance policy, and (ii) the shortest Exposure
Period set forth opposite such rating that is the same length as or
is longer than the Moody's Exposure Period, in accordance with the
table set forth below:
RATING CATEGORY
Aaa Aa A Baa Other VMIG-l SP-l+
MOODY'S EXPOSURE PERIOD (1) (1) (1) (1)(2) (1)(3)(4) (3)(4)
7 weeks or less..............151% 159% 168% 202%229% 136% 148%
8 weeks or less but greater
than 7 weeks...............154 164 173 205 235 137 149
9 weeks or less but greater
than 8 weeks...............158 169 179 209 242 138 150
- - -----------------
(1) Moody's rating.
(2) Municipal Obligations not rated by Moody's but rated BBB-, BBB
or BBB+ by S&P.
(3) Municipal Obligations rated MIG-1 or VMIG-l or, if not rated
by Moody's, rated SP-l+ by S&P which do not mature or have a demand
feature at par exercisable within the Moody's Exposure Period and
which do not have a long-term rating.
(4) For the purposes of the definition of Moody's Eligible Assets,
these securities will have an assumed rating of "A" by Moody's.
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<PAGE>
Notwithstanding the foregoing, (i) No Moody's Discount Factor will
be applied to short-term Municipal Obligations so long as such
Municipal Obligations are rated at least MIG-l, VMIG-l, P-l or
Prime-l by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period and the Moody's
Discount Factor for such Municipal Obligations will be 125% as long
as such Municipal Obligations are rated at least A-l-/AA or SP-
l+/AA by S&P and mature or have a demand feature at par exercisable
within the Moody's Exposure Period, (ii) no Moody's Discount Factor
will be applied to cash or to Receivables for Municipal Obligations
Sold and (iii) if the Moody's Discount Factor used to discount a
particular Municipal Obligation is determined by reference to the
insurance financial strength rating of the insurer of such
Municipal Obligation, such Moody's Discount Factor will be
increased by an amount equal to 50% of the difference between (A)
the percentage set forth in the above table under the applicable
rating category, and (B) the percentage set forth in the above
table under the rating category that is one rating category below
the applicable rating category.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest
in cash, (ii) is publicly rated Baa or higher by Moody's or, if not
rated by Moody's but rated by S&P, is rated at least BBB by S&P
(provided that, for purposes of determining the Moody's Discount
Factor applicable to any such S&P-rated Municipal Obligation, such
Municipal Obligation (excluding any short-term Municipal
Obligation) shall be deemed to have a Moody's rating which is one
full rating category lower than its S&P rating), (iii) does not
have its Moody's rating suspended by Moody's; and (iv) is part of
an issue of Municipal Obligations of at least $10,000,000.
Municipal Obligations issued by any one issuer and rated BBB by S&P
may comprise no more than 4% of total Moody's Eligible Assets; such
BBB-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated Baa by
Moody's or A by S&P, may comprise no more than 6% of total Moody's
Eligible Assets; such BBB, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by the same
issuer and rated A by Moody's or AA by S&P, may comprise no more
than 10% of total Moody's Eligible Assets; and such BBB, Baa, A and
AA-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by the same issuer and rated Aa by Moody's or
AAA by S&P, may comprise no more than 20% of total Moody's Eligible
Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance
issued by a third party shall be deemed to be issued by such third
party if the issuance of such third party credit is the sole
determinant of the rating on such Municipal Obligation. Municipal
Obligations issued by issuers located within a single state or
territory and rated BBB by S&P may comprise no more than 12% of
total Moody's Eligible Assets; such BBB-rated Municipal
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<PAGE>
Obligations, if any, together with any Municipal Obligations issued
by issuers located within the same state or territory and rated Baa
by Moody's or A by S&P may comprise no more than 20% of total
Moody's Eligible Assets; such BBB, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued
by issuers located within the same state or territory and rated A
by Moody's or AA by S&P, may comprise no more than 40% of total
Moody's Eligible Assets; and such BBB, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located within the same state or
territory and rated Aa by Moody's or AAA by S&P, may comprise no
more than 60% of total Moody's Eligible Assets. For purposes of
applying the foregoing requirements, a Municipal Obligation shall
be deemed to be rated BBB by S&P if rated BBB, BBB- or BBB+ by S&P.
For purposes of Minimum Issue Size, Maximum Underlying Obligor and
Maximum State or Territory Concentration, Moody's Eligible Assets
shall be calculated without including cash and Municipal
Obligations rated MIG-l, VMIG-l or Prime-l, or if not rated by
Moody's, rated SP-l+ by S&P, which either mature or have a demand
feature at par exercisable within the Moody's Exposure Period.
Where the Fund sells an asset and agrees to repurchase such asset
in the future, the Discounted Value of such asset will constitute
a Moody's Eligible Asset and the amount the Fund is required to pay
upon repurchase of such asset will count as a liability for the
purposes of the APS Basic Maintenance Amount. Where the Fund
purchases an asset and agrees to sell it to a third party in the
future, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is
rated at least A2 by Moody's and such agreement has a term of 30
days or less; otherwise the Discounted Value of such asset will
constitute a Moody's Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably
deposited for the payment of (i)(A) through (i)(G) under the
definition of APS Basic Maintenance Amount or it is subject to any
material lien, mortgage, pledge, security interest or security
agreement of any kind (collectively, "Liens"), except for (a) Liens
which are being contested in good faith by appropriate proceedings
and which Moody's has indicated to the Fund will not affect the
status of such asset as a Moody's Eligible Asset, (b) Liens for
taxes that are not then due and payable or that can be paid
thereafter without penalty, (c) Liens to secure payment for
services rendered or cash advanced to the Fund by the Adviser, the
Fund's administrator or custodian, the transfer agent, registrar or
dividend disbursing agent for the Common Stock or the Auction Agent
and (d) Liens by virtue of any repurchase agreement.
"Moody's Exposure Period" shall mean the period commencing on a
given Valuation Date and ending 47 days thereafter.
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<PAGE>
"Moody's Hedging Transactions" shall mean transactions in options
on securities, futures contracts based on the Municipal Index or
Treasury Bonds and options on such futures contracts.
"Municipal Index" shall mean The Bond Buyer Municipal Bond Index.
"Municipal Obligations" shall mean debt obligations or similar
securities issued by or on behalf of states (including the District
of Columbia), territories or possessions of the United States or
their respective political subdivisions, agencies or instrument-
alities, or by multistate agencies or authorities, the interest on
which is, in the opinion of bond counsel, exempt from regular
federal income tax.
"1940 Act" shall mean the Investment Company Act of 1940, as
amended from time to time.
"1940 Act APS Asset Coverage" shall mean asset coverage, of at
least 200% with respect to senior securities which are stock,
including APS Series D (or such other asset coverage as may in the
future be specified in or under the 1940 Act as the minimum asset
coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its
common stock).
"1940 Act Cure Date," with respect to the failure by the Fund to
maintain the 1940 Act APS Asset Coverage (as required by Section 8
of this Part I) as of the last Business Day of each month, shall
mean the last Business Day of the following month.
"Non-Call Period" shall have the meaning set forth below in the
definition of "Specific Redemption Provisions."
"Notice of Redemption" shall mean any notice with respect to the
redemption of the APS Series D pursuant to Section 3 of this Part
I.
"Optional Redemption Price" shall mean (i) $50,000 per share of APS
Series D in the case of a Rate Period of less than one year,
including any Special Dividend Period of less than 365 days, or
(ii) with respect to a Special Dividend Period of 365 days or more
the Optional Redemption Price set forth in the Specific Redemption
Provisions in connection therewith; in each case plus an amount
equal to accumulated but unpaid dividends thereon to the date of
redemption (whether or not earned or declared).
"Original Issue Insurance" means a policy of insurance, purchased
in connection with the original issuance of a Municipal Obligation,
insuring the payment of principal and interest on such Municipal
Obligation.
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<PAGE>
"Outstanding" shall mean, as of any Auction Date with respect to
shares of APS Series D, the number of shares of such series
theretofore issued by the Fund except, without duplication, (i) any
shares of such series theretofore canceled or delivered to the
Auction Agent for cancellation, or redeemed by the Fund, or as to
which (A) a Notice of Redemption shall have been given by the Fund
and (B) the Fund shall have deposited the Redemption Price with the
Auction Agent, (ii) any shares of such series as to which the Fund
or any Affiliate thereof shall be an Existing Holder and (iii) any
shares of such series represented by any certificate in lieu of
which a new certificate has been executed and delivered by the
Fund.
"Permanent Insurance" means a permanent policy of insurance
equivalent to Original Issue Insurance or Secondary Market
Insurance.
"Portfolio Insurance" means a policy of insurance purchased by the
Fund insuring the payment of principal and interest on specified,
eligible Municipal Obligations purchased by the Fund.
"Premium Call Period" shall have the meaning set forth below in the
definition of "Specific Redemption Provisions."
"Pricing Service" means Kenny Information Systems Inc. and any
successor pricing service approved in writing by Moody's (if
Moody's is then rating the APS Series D) and S&P (if S&P is then
rating the APS Series D).
"Projected Dividend Amount" shall mean, with respect to the shares
of APS Series D, on any Valuation Date, an amount equal to (i) the
number of days, if any, greater than zero from and after the last
day of the then current Rate Period until 48 calendar days from
such Valuation Date, multiplied by (ii) a rate equal to the Maximum
Rate for Minimum Dividend Period multiplied by the larger of (A)
the applicable Moody's Volatility Factor and (B) the applicable S&P
Volatility Factor.
"Quarterly Valuation Date" shall mean the last Business Day of each
fiscal quarter of the Fund in each fiscal year of the Fund,
commencing December 31, 1994.
"Rate Period" shall mean, with respect to APS Series D, the Initial
Dividend Period of such series and any Subsequent Dividend Period
of such series.
"Rate Period Days," for any Rate Period consisting of less than one
year, shall mean the number of days (without giving effect to
subparagraph (b)(ii) of Section 2 of this Part I) in such Rate
Period.
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<PAGE>
"Receivables for Municipal Obligations Sold" shall mean (i) for
purposes of calculating Moody's Eligible Assets as of any Valuation
Date, no more than the aggregate of the following: (A) 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 clearinghouse
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 (B) the Moody's
Discounted Value of Municipal Obligations sold as of or prior to
such Valuation Date which generated receivables, if such receiv-
ables are due within the Moody's Exposure Period but do not comply
with either of the conditions specified in (x) or (y) above; and
(ii) for purposes of calculating S&P Eligible Assets as of any
Valuation Date, the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation
Date.
"Redemption Price" shall mean the Optional Redemption Price or the
Mandatory Redemption Price, as applicable.
"Retroactive Taxable Allocation" shall have the meaning set forth
in Section 12 of this Part I.
"S&P" shall mean Standard & Poor's Ratings Group, a New York
corporation, and its successors
"S&P Discount Factor" shall mean, for purposes of calculating the
Discounted Value of any S&P Eligible Asset, the percentage
determined by reference to (i)(A) in the event such asset is a
Municipal Obligation that is not covered by insurance or is covered
by an Original Issuance Insurance policy or a Portfolio Insurance
policy which does not provide the Fund with the option to obtain
Permanent Insurance with respect to such Municipal Obligation, or
which is not escrow backed, the S&P or Moody's rating on such
Municipal Obligation, (B) in the event such asset is a Municipal
Obligation that is covered by a Secondary Market Insurance policy,
the S&P insurance claims-paying ability rating of the issuer of the
policy or (C) in the event such asset is a Municipal Obligation
that is guaranteed or is covered by a Portfolio Insurance policy
which provides the Fund with the option to obtain Permanent
Insurance with respect to such Municipal Obligation, at the Fund's
option the S&P or Moody's rating on such Municipal Obligation or
the S&P insurance claims-paying ability rating of the guarantor or
issuer of the Portfolio Insurance policy, and (ii) the shortest
Exposure Period set forth opposite such rating that is the same
length as or is longer than the S&P Exposure Period, in accordance
with the table set forth below:
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<PAGE>
RATING CATEGORY
--------------------------
S&P EXPOSURE PERIOD AAA* AA* A* BBB*
--- --- --- ---
40 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
- - -----------------
* S&P rating.
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-l+ or SP-l+ 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-l, P-l or MIG-l 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-
l+ 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 and
(ii) no S&P Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold. For purposes of the
foregoing, Anticipation Notes rated SP-l+ or, if not rated by S&P,
rated MIG-l or VMIG-l by Moody's, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have
a long-term rating, shall be considered to be short-term Municipal
Obligations.
"S&P Eligible Asset" shall mean cash (excluding any cash
irrevocably deposited by the Fund for the payment of any
liabilities within the meaning of APS Basic Maintenance Amount),
Receivables for Municipal Obligations Sold or a Municipal
Obligation owned by the Fund that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to
principal and interest in U.S. dollars; (iii) is publicly rated BBB
or higher by S&P or, if not rated by S&P but rated by Moody's, is
rated at least A by Moody's (provided that such Moody's-rated
municipal securities will be included in S&P Eligible Assets only
to the extent the Market Value of such municipal securities does
not exceed 50% of the aggregate Market Value of S&P Eligible
Assets; and further provided that, for purposes of determining the
S&P Discount Factor applicable to any such Moody's-rated Municipal
Obligation, such Municipal Obligation will be deemed to have an S&P
rating which is one full rating category lower than its Moody's
rating); (iv) is not part of a private placement of municipal
securities; and (v) is part of an issue of municipal securities
with an original issue size of at least $20 million or, if an issue
- 41 -
<PAGE>
with an original issue size below $20 million (but in no event
below $10 million), is issued by an issuer with a total of at least
$50 million of securities outstanding. Solely for purposes of this
definition, the term "municipal securities" means any obligation
the interest on which is exempt from regular federal income
taxation and which is issued by any of the fifty United States, the
District of Columbia or any of the territories of the United
States, their subdivisions, counties, cities, towns, villages,
school districts and agencies (including authorities and special
districts created by the states), and federally sponsored agencies
such as local housing authorities. Notwithstanding the foregoing
limitations:
(a) Municipal securities of any one issuer or guarantor
(excluding bond insurers) shall be considered S&P Eligible
Assets only to the extent the Market Value of such municipal
securities does not exceed 10% of the aggregate Market Value
of S&P Eligible Assets, provided that 2% is added to the
applicable S&P Discount Factor for every 1% by which the
Market Value of such municipal securities exceeds 5% of the
aggregate Market Value of S&P Eligible Assets; and
(b) Municipal securities issued by issuers in any one state
or territory shall be considered S&P Eligible Assets only to
the extent the Market Value of such municipal securities does
not exceed 20% of the aggregate Market Value of S&P Eligible
Assets.
"S&P Exposure Period" shall mean the maximum period of time
following a Valuation Date that the Fund has under these Articles
Supplementary to cure any failure to maintain, as of such Valuation
Date, the Discounted Value for its portfolio at least equal to the
APS Basic Maintenance Amount (as described in paragraph (a) of
Section 9 of this Part I).
"S&P Hedging Transactions" shall mean futures contracts based on
the Municipal Index or Treasury Bonds purchased or sold by the
Fund, put and call options on such contracts purchased by the Fund
and covered call options and secured put options on portfolio
securities written by the Fund.
"Secondary Market Insurance" means a policy of insurance, purchased
subsequent to the time of the original issuance of a Municipal
Obligation, insuring the payment of principal and interest on such
Municipal Obliqation.
"Special Dividend Period" shall mean, with respect to APS Series D,
any Subsequent Dividend Period commencing on the date designated by
the Fund in accordance with Section 4 of this Part I and ending on
the last day of the last Dividend Period thereof.
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<PAGE>
"Specific Redemption Provisions" shall mean, with respect to any
Special Dividend Period of 365 or more days, either, or any
combination of, (i) a period (a "Non-Call Period") determined by
the Board of Directors, after consultation with the Broker-Dealers,
during which the shares subject to such Special Dividend Period are
not subject to redemption at the option of the Fund and (ii) a
period (a "Premium Call Period"), consisting of a number of whole
years and determined by the Board of Directors, after consultation
with the Broker-Dealers, during each year of which the shares
subject to such Special Dividend Period shall be redeemable at the
Fund's option at a price per share equal to $50,000 plus
accumulated but unpaid dividends plus a premium expressed as a
percentage of $50,000 as determined by the Board of Directors after
consultation with the Broker-Dealers; provided, that during any
Special Dividend Period of 365 or more days if, on the date of
determination of the Applicable Rate for such series, such
Applicable Rate equaled or exceeded the Treasury Rate, the Fund may
redeem shares of APS Series D without regard to any Non-Call Period
or Premium Call Period at the Mandatory Redemption Price.
"Subsequent Dividend Period" shall mean, with respect to APS Series
D, any period from and including the first day following the
Initial Dividend Period for such series to but excluding the next
Dividend Payment Date for such series which follows a scheduled
Auction and any period thereafter from and including one Dividend
Payment Date which follows a scheduled Auction for such series to
but excluding the next succeeding Dividend Payment Date which
follows a scheduled Auction for such series; provided, however,
that if any Subsequent Dividend Period is also a Special Dividend
Period, such term shall mean the period commencing on the first day
of such Special Dividend Period and ending on the last day of the
last Dividend Period thereof.
"Substitute Commercial Paper Dealer" shall mean The First Boston
Company or Morgan Stanley & Co. Incorporated or their respective
affiliates or successors, if such entity is a commercial paper
dealer, provided that none of such entities shall be a Commercial
Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean The First
Boston Company and Merrill Lynch, Pierce, Fenner & Smith
Incorporated or their respective affiliates or successors, if such
entity is a U.S. Government securities dealer, provided that none
of such entities shall be a U.S. Government Securities Dealer.
"Treasury Bonds" shall mean United States Treasury Bonds backed by
the full faith and credit of the United States government with
remaining maturities of ten years or more.
"Treasury Rate," on any date for any Rate Period, shall mean
(i) the yield on the most recently auctioned non-callable direct
obligations of the U.S. Government (excluding "flower" bonds) with
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<PAGE>
a remaining maturity within three months of the duration 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 by The Wall Street Journal,
then the arithmetic average of the yields (expressed as an interest
equivalent in the case of a Rate Period which is one year or less
and expressed as a bond equivalent in the case of any longer Rate
Period) on the most recently auctioned non-callable direct
obligations of the U.S. Government (excluding "flower" bonds) with
a remaining maturity within three months of the duration of such
Rate Period as quoted on a discount basis or otherwise by the U.S.
Government Securities Dealers to the Auction Agent for the close of
business on the Business Day immediately preceding such date. If
any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Rate, the Treasury 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.
"U.S. Government Securities Dealer" shall mean Goldman, Sachs &
Co., Smith Barney, Harris Upham & Co. Incorporated or Morgan
Guaranty Trust Company of New York or their respective affiliates
or successors, if such entity is a U.S. Government securities
dealer.
"Valuation Date" shall mean, for purposes of determining whether
the Fund is maintaining the APS Basic Maintenance Amount, each
Business Day.
"Variation Margin" shall mean, in connection with outstanding
purchase or sale positions in futures contracts and outstanding
sales positions with respect to options thereon, the amount of cash
and securities paid to and received from a futures commission
merchant (subsequent to the Initial Margin deposit) from time to
time as the value of such position fluctuates.
"Voting Period" shall have the meaning set forth in paragraph (b)
of Section 5 of this Part I.
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<PAGE>
PART II
1. CERTAIN DEFINITIONS. Capitalized terms not defined in
this Section 1 shall have the respective meaning specified in Part
I hereof. As used in this Part II, the following terms shall have
the following meanings, unless the context otherwise requires:
"Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Fund;
provided that no Broker-Dealer controlled by, in control of or
under common control with the Fund shall be deemed to be an
Affiliate, nor shall any corporation or any Person controlled by,
in control of or under common control with such corporation one of
the directors or executive officers of which is also a director of
the Fund be deemed to be an Affiliate solely because such director
or executive officer is also a director of the Fund.
"Agent Member" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder and is
identified as such in such Bidder's Master Purchaser's Letter.
"Applicable Percentage" for APS Series D on any Auction Date shall
mean the percentage, determined as set forth below, based on the
prevailing rating of such series in effect at the close of business
on the Business Day next preceding such Auction Date:
PREVAILING RATING APPLICABLE PERCENTAGE
----------------- ---------------------
"aa3"/AA- or higher......................... 110%
"a3"/A- .................................... 125%
"baa3"/BBB- ................................ 150%
"ba3"/BB- .................................. 200%
Below "ba3"/BB- ............................ 250%
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 the APS Series D 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 Marginal Tax Rate; provided further, however, that the
Applicable Percentage shall be divided in the foregoing manner only
to the extent of the portion of the dividend on the APS Series D
for such Rate Period that represents the allocation of taxable
income to the APS Series D. If the APS Series D is rated by only
one rating agency, such rating shall be the prevailing rating.
For purposes of this definition, the "prevailing rating" of shares
of APS Series D shall be (i) "aa3"/AA- or higher if shares of such
series 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
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<PAGE>
as provided below, (ii) if not "aa3"/AA- or higher, then "a3"/A- if
the shares of such series 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 the shares of such series
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 the shares of such series have a
rating of "ba3" or better by Moody's and BB- or better by S&P or
the equivalent of such ratings by such agencies or 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 the APS
Series D is rated by only one rating agency, the prevailing rating
will be determined without reference to the rating of any other
rating agency. The Fund shall take all reasonable action necessary
to enable either S&P or Moody's to provide a rating for the APS
Series D. If neither S&P nor Moody's shall make such a rating
available, Goldman, Sachs & Co. or PaineWebber Incorporated or
their successors as Broker-Dealers shall select at least one
nationally recognized statistical rating organization (as that term
is used in the rules and regulations of the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended
from time to time) to act as a substitute rating agency in respect
of the APS Series D, and the Fund shall take all reasonable action
to enable such rating agency or agencies to provide a rating for
shares of such series.
"Available APS" shall have the meaning specified in paragraph (a)
of Section 4 of this Part II.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Bidder" and "Bidders" shall have the respective meanings specified
in paragraph (a) of Section 2 of this Part II.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or
other entity permitted by law to perform the functions required of
a Broker-Dealer in this Part II 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" shall mean an agreement between the
Auction Agent and a Broker-Dealer pursuant to which such Broker-
Dealer agrees to follow the procedures specified in this Part II.
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<PAGE>
"Existing Holder," when used with respect to shares of APS Series
D, shall mean a Person who has signed, or on whose behalf a Broker-
Dealer has signed, a Master Purchaser's Letter and is listed as the
beneficial owner of such shares in the records of the Auction
Agent.
"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Marginal Tax Rate" shall mean the maximum marginal regular federal
individual income tax rate applicable to ordinary income or the
maximum marginal regular federal corporate income tax rate,
whichever is greater.
"Master Purchaser's Letter" shall mean a letter, addressed to the
Fund, the Auction Agent, a Broker-Dealer and an Agent Member in
which a Person agrees, among other things, to offer to purchase, to
purchase, to offer to sell and/or to sell APS Series D as set forth
in this Part II.
"Maximum Rate," for APS Series D on any Auction Date, shall mean:
(i) in the case of any Auction Date which is not
the Auction Date immediately prior to the first day of any proposed
Special Dividend Period of more than 28 Rate Period Days designated
by the Fund pursuant to Section 4 of Part I hereof, the product of
(a) the Reference Rate on such Auction Date for the next Rate
Period of such series and (b) the Applicable Percentage on such
Auction Date, unless such series has or had a Special Dividend
Period (other than a Special Dividend Period of 28 Rate Period Days
or less) and an Auction at which Sufficient Clearing Bids existed
has not yet occurred for a Minimum Dividend Period of such series
after such Special Dividend Period, in which case the higher of:
(A) the dividend rate on shares of such series
for the then-ending Rate Period, and
(B) the product of (1) the higher of (x) the
"AA" Composite Commercial Paper Rate on such Auction Date for the
then-ending Rate Period of such series, if such Rate Period is less
than one year, or the Treasury Rate on such Auction Date for such
Rate Period, if such Rate Period is one year or greater, and (y)
the "AA" Composite Commercial Paper Rate on such Auction Date for
such Special Dividend Period of such series, if such Special
Dividend Period is less than one year, or the Treasury Rate on such
Auction Date for such Special Dividend Period, if such Special
Dividend Period is one year or greater and (2) the Applicable
Percentage 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 Dividend Period of more than 28 Rate Period Days designated
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<PAGE>
by the Fund pursuant to Section 4 of Part I hereof, the product of
(A) the highest of (1) the Reference Rate on such Auction Date for
the then-ending Rate Period of such series, if such Rate Period is
less than one year, or the Treasury Rate on such Auction Date for
such Rate Period, if such Rate Period is one year or greater,
(2) the Reference Rate on such Auction Date for the Special
Dividend Period for which the Auction is being held, if such
Special Dividend Period is less than one year, or the Treasury Rate
on such Auction Date for the Special Dividend Period for which the
Auction is being held, if such Special Dividend Period is one year
or greater, and (3) the Reference Rate on such Auction Date for the
Minimum Dividend Period of such series and (B) the Applicable
Percentage on such Auction Date.
"Moody's Volatility Factor" shall mean 272% (or 302% where notice
of a Special Dividend Period of greater than 28 days but less than
50 days has been given but not yet exercised), as long as there has
been no increase enacted to the Marginal Tax Rate. If such an
increase is enacted but not yet implemented, the Moody's Volatility
Factor shall be as follows:
% CHANGE IN MOODY'S MOODY'S
MARGINAL VOLATILITY VOLATILITY
TAX RATE FACTOR FACTOR*
--------- ---------
Less than or
equal to 5%.................. 292% 323%
Greater than 5% but
less than 10%................ 313 347
Greater than 10% but
less than 15%................ 338 373
Greater than 15% but
less than 20%................ 364 402
Greater than 20% but
less than 25%................ 396 436
Greater than 25% but
less than 30%................ 432 474
Greater than 30% but
less than 35%................ 472 518
Greater than 35% but
less than 40%................ 520 570
- - --------------------
* Applicable where a notice of Special Dividend Period of
greater than 28 days but less than 50 days has been given but
not yet exercised.
"Order" and "Orders" shall have the respective meanings specified
in paragraph (a) of Section 2 of this Part II.
"Person" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint
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<PAGE>
venture or other entity or a government or any agency or political
subdivision thereof.
"Potential Holder," when used with respect to shares of APS Series
D, shall mean any Person, including any Existing Holder of shares
of such series, (i) who shall have executed a Master Purchaser's
Letter and (ii) who may be interested in acquiring shares of such
series (or, in the case of an Existing Holder of shares of such
series, additional shares of such series).
"Reference Rate" shall mean, with respect to any Rate Period of
less than one year, the higher of (i) the applicable AA Composite
Commercial Paper Rate and (ii) the Taxable Equivalent of the Short-
Term Municipal Bond Rate.
"S&P Volatility Factor" shall mean, for APS Series D, (i) during
the Initial Dividend Period, the percentage factor applicable to
the Intermediate Fund Auction Preferred Shares with respect to
which such shares of APS Series D are issued at the Effective Time,
and (ii) thereafter, depending on the applicable Reference Rate or
Treasury Rate, the following percentages:
RATE PERCENTAGE
- - ---- ----------
Taxable Equivalent of the Short-
Term Municipal Bond Rate .........................277%
30 day "AA" Composite Commercial
Paper Rate .......................................228%
60 day "AA" Composite Commercial
Paper Rate .......................................228%
90 day "AA" Composite Commercial
Paper Rate .......................................222%
180 day "AA" Composite Commercial
Paper Rate .......................................217%
1 year U.S. Treasury Bill Rate ...................198%
2 year U.S. Treasury Note Rate....................185%
3 year U.S. Treasury Note Rate ...................178%
4 year U.S. Treasury Note Rate ...................171%
5 year U.S. Treasury Note Rate ...................169%
Notwithstanding the foregoing, the S&P Volatility Factor may mean
such other potential dividend rate increase factor as S&P advises
the Fund in writing is applicable.
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<PAGE>
"Securities Depository" shall mean 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 the
APS Series D.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Submission Deadline" shall mean 1:30 p.m., New York City time, on
any Auction Date or such other time on any Auction Date by which
Brokers-Dealers are required to submit Orders to the Auction Agent
as specified by the Auction Agent from time to time.
"Submitted Bid" and "Submitted Bids" shall have the respective
meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this
Part II.
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this
Part II.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 4 of this Part II.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on any
date shall mean 90% of the quotient of (i) 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"),
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 Information Systems Inc. or any successor
thereto (provided that the use of such successor will not result in
a reduction or withdrawal of the rating of the APS Series D by
Moody's, if Moody's is then rating the APS Series D, or by S&P, if
S&P is then rating the APS Series D), based on 30-day yield
evaluations at par of bonds, the interest on which is excludable
for regular federal income tax purposes under the Code, of "high
grade" component issuers selected by Kenny Information Systems Inc.
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 (ii) 1.00 minus the Marginal
Tax Rate (expressed as a decimal); provided, however, that if the
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<PAGE>
Kenny Index is not made so available by 8:30 a.m., New York City
time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Bond
Rate shall mean the quotient of (x) 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
(y) 1.00 minus the Marginal Tax Rate (expressed as a decimal).
"Winning Bid Rate" shall have the meaning specified in paragraph
(a) of Section 4 of this Part II.
2. Orders by Existing Holders and Potential Holders.
(a) Prior to the Submission Deadline on each Auction
Date:
(i) each Existing Holder of shares of APS Series D
subject to an Auction on such Auction Date may submit to a Broker-
Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any,
of such series held by such Existing Holder which such Existing
Holder desires to continue to hold without regard to the Applicable
Rate for such series for the next succeeding Rate Period of such
series;
(B) the number of Outstanding shares, if any,
of such series which such Existing Holder offers to sell if the
Applicable Rate for such series for the next succeeding Rate Period
of such series shall be less than the rate per annum specified by
such Existing Holder; and/or
(C) the number of Outstanding shares, if any,
of such series held by such Existing Holder which such Existing
Holder offers to sell without regard to the Applicable Rate for
such series for the next succeeding Rate Period of such series;
and
(ii) one or more Broker-Dealers, using lists of
Potential Holders, shall in good faith for the purpose of
conducting a competitive Auction in a commercially reasonable
manner, contact Potential Holders (by telephone or otherwise),
including Persons that are not Existing Holders, on such lists to
determine the number of shares, if any, of APS Series D which each
such Potential Holder offers to purchase if the Applicable Rate for
such series for the next succeeding Rate Period of such series
shall not be less than the rate per annum specified by such
Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of
information referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of
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<PAGE>
this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Existing Holder and each
Potential Holder placing an Order 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 an Existing Holder of shares of APS
Series D subject to an Auction on any Auction Date shall constitute
an irrevocable offer to sell:
(A) the number of Outstanding shares of such
series specified in such Bid if the Applicable Rate for 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 5 of this Part II if the
Applicable Rate for 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 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 5 of this
Part II if the rate specified therein shall be higher than the
Maximum Rate for such series and Sufficient Clearing Bids for such
series do not exist.
(ii) A Sell Order by an Existing Holder of shares
of APS Series D 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 5 of this Part II if Sufficient Clearing
Bids for such series do not exist.
(iii) A Bid by a Potential Holder of shares of APS
Series D subject to an Auction on any Auction Date shall constitute
an irrevocable offer to purchase:
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<PAGE>
(A) the number of Outstanding shares of such
series specified in such Bid if the Applicable Rate for 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 5 of this Part II if the Applicable Rate
for such series determined on such Auction Date shall be equal to
the rate specified therein.
(c) No Order for any number of shares of APS Series D
other than whole shares shall be valid.
3. 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 APS Series D subject to an Auction on such
Auction Date obtained by such Broker-Dealer and shall specify with
respect to each Order for such shares:
(i) the name of the Bidder placing such Order;
(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 placed by such Existing Holder;
(B) the number of shares, if any, of such
series subject to any Bid placed by 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 placed by 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) With respect to an Auction preceding a Rate Period
of less than 90 days, if an Order or Orders covering all of the
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<PAGE>
Outstanding shares of APS Series D held by any Existing Holder are
not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order to have been
submitted on behalf of such Existing Holder covering the number of
Outstanding shares of APS Series D held by such Existing Holder and
not subject to Orders submitted to the Auction Agent. With respect
to an Auction preceding a Rate Period of 90 days or greater, if an
Order or Orders covering all of the Outstanding shares of APS
Series D held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline, the Auction Agent
shall deem a Sell Order to have been submitted 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 any Existing Holder submits through a Broker-
Dealer to the Auction Agent one or more Orders covering in the
aggregate more than the number of Outstanding shares of APS Series
D subject to an Auction held by such Existing Holder, such Orders
shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall
be considered valid, but only up to and including in the aggregate
the number of Outstanding shares of such series held by such
Existing Holder, and if the number of shares of such series subject
to such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares
subject to each such Hold Order shall be reduced pro rata to cover
the number of Outstanding shares of such series held by such
Existing Holder;
(ii) (A) any Bid for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder over
the number of shares of such series subject to any Hold Orders
referred to in clause (i) above;
(B) subject to subclause (A), if more than one
Bid for shares of such series with the same rate is submitted on
behalf of such Existing Holder 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 for shares of such series with different rates is
submitted on behalf of such Existing Holder, such Bids shall be
considered valid in the ascending order of their respective rates
up to and including the amount of such excess; and
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<PAGE>
(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 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 the APS Series D subject to valid Hold
Orders referred to in clause (i) above and valid Bids by such
Existing Holder referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of APS
Series D is submitted 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) An Order submitted by a Broker-Dealer to the Auction
Agent prior to the Submission Deadline on any Auction Date shall be
irrevocable.
4. Determination of Sufficient Clearing Bids. Winninq Bid
Rate and Applicable Rate.
(a) Not earlier than the Submission Deadline on each
Auction Date, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers (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:
(i) the excess of the number of Outstanding shares
of APS Series D over the number of Outstanding shares of such
series subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available APS");
(ii) from the Submitted Orders for such series
whether:
(A) the number of Outstanding shares of such
series subject to Submitted Bids by Potential Holders specifying
one or more rates equal to or lower than the Maximum Rate for such
series
exceeds or is equal to the sum of
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<PAGE>
(B) the number of Outstanding shares of such
series subject to Submitted Bids by Existing Holders specifying one
or more rates higher than the Maximum Rate for 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 such series); and
(iii) if Sufficient Clearing Bids for such series
exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate" for such series) which if:
(A) (I) each such Submitted Bid from Existing
Holders specifying such lowest rate and (II) all other such
Submitted Bids from 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 from Potential
Holders specifying such lowest rate and (II) all other such
Submitted Bids from 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 APS of such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 4, the
Auction Agent shall advise the Fund of the Maximum Rate for APS
Series D with respect to the Auction being held on the Auction Date
and, based on such determination, the Applicable Rate for such
series for the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for such series
exist, that the Applicable Rate for such series for the next
succeeding Rate Period thereof shall be equal to the Winning Bid
Rate for such series to be determined;
(ii) if Sufficient Clearing Bids for 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
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<PAGE>
Rate for such series for the next succeeding Rate Period, which
shall be a Minimum Dividend Period, thereof shall be equal to the
Maximum Rate for such series; or
(iii) if all of the Outstanding shares of such
series are subject to Submitted Hold Orders, that the Applicable
Rate for such series for the next succeeding Rate Period thereof
shall be equal to the product of (A) (I) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Rate Period, if
such Rate Period is less than one year or (II) the Treasury Rate on
such Auction Date for such Rate Period, if such Rate Period is one
year or greater 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,
whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to the APS
Series D in such Rate Period any net capital gains or other income
taxable for Federal income tax purposes, the Applicable Rate in
respect of that portion of the dividend on the APS Series D for
such Rate Period that represents the allocation of net capital
gains or other income taxable for Federal income tax purposes shall
be the rate described in the preceding clause (A)(I) or (II), as
applicable, without being multiplied by the factor set forth in the
preceding clause (B).
5. Acceptance and Rejection of Submitted Bids and Submitted
Sell Orders and Allocation of Shares. Existing Holders shall
continue to hold shares of APS Series D that are subject to
Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 4 of this Part II, the
Submitted Bids and Submitted Sell Orders shall be accepted or
rejected and the Auction Agent shall take such other action as set
forth below:
(a) If Sufficient Clearing Bids for APS Series D have
been made, all Submitted Sell Orders shall be accepted and, subject
to the provisions of paragraphs (d) and (e) of this Section 5,
Submitted Bids shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids for 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 such series shall be accepted, thus requiring each such
Existing Holder to sell the APS Series D shares 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 such series shall be rejected, thus entitling each such
Existing Holder to continue to hold the APS Series D shares subject
to such Submitted Bids;
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<PAGE>
(iii) Potential Holders' Submitted Bids for shares
of such series specifying any rate that is lower than the Winning
Bid Rate shall be accepted;
(iv) each Existing Holder's Submitted Bid for
shares of such series specifying a rate that is equal to the
Winning Bid Rate for such series shall be rejected, thus entitling
such Existing Holder to continue to hold shares of such series
subject to such Submitted Bid, unless the number of Outstanding
shares of such series subject to all such Submitted Bids shall be
greater than the number of shares of such series ("remaining
shares") in the excess of the Available APS of such series over the
number of shares of APS Series D 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 the shares of APS Series D subject to such Submitted Bid, but
only in an amount equal to the number of shares of such series
obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding
shares of such series held by such Existing Holder subject to such
Submitted Bid and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to such
Submitted Bids made by all such Existing Holders that specified a
rate equal to the Winning Bid Rate for 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 for 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 APS
of such series over the number of shares of APS Series D subject to
Submitted Bids described in clauses (ii) through (iv) of this
paragraph (a) by a fraction, the numerator of which shall be the
number of Outstanding shares of such series subject to such
Submitted Bids and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to such
Submitted Bids made by all such Potential Holders that specified a
rate equal to the Winning Bid Rate for such series; and
(b) If Sufficient Clearing Bids for APS Series D 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 5, Submitted Orders for
such series shall be accepted or rejected as follows in the
following order of priority and all other Submitted Bids for such
series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than the
Maximum Rate for such series shall be rejected, thus entitling such
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<PAGE>
Existing Holders to continue to hold the shares of APS Series D
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 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 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 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 APS Series D are
subject to Submitted Hold Orders, all Submitted Bids for 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 5, 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 APS Series D 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 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 of such series so purchased
or sold by each Existing Holder or Potential Holder on such Auction
Date shall be whole shares.
(e) If, as a result of the procedures described in
clause (v) of paragraph (a) of this Section 5, any Potential Holder
would be entitled or required to purchase less than a whole share
of APS Series D on any Auction Date, the Auction Agent shall, in
such manner as it shall determine in its sole discretion, allocate
shares of such series for purchase among Potential Holders so that
only whole shares 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 APS Series D on such Auction Date.
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<PAGE>
(f) Based on the results of each Auction for APS Series
D, the Auction Agent shall determine the aggregate number of shares
of such series to be purchased and the aggregate number of shares
of such series to be sold by Potential Holders and Existing Holders
on whose behalf each Broker-Dealer submitted Bids or Sell Orders
and, with respect to each Broker-Dealer, 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
Broker-Dealer or Broker-Dealers acting for one or more purchasers
of shares of such series such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more
sellers of shares of such series such Broker-Dealer shall receive,
as the case may be, shares of such series.
6. NOTIFICATION OF ALLOCATIONS. In normal circumstances,
whenever the Fund intends to include any net capital gains or other
income taxable for Federal income tax purposes in any dividend on
the APS Series D, the Fund may notify the Auction Agent of the
amount to be so included 15 days prior to 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 in turn notify each Broker-Dealer, who, on or prior to such
Auction Date, in accordance with its Broker-Dealer Agreement, will
notify its Existing Holders and Potential Holders believed by it to
be interested in submitting an Order in the Auction to be held on
such Auction Date.
7. Miscellaneous.
(a) To the extent permitted by applicable law, the Board
of Directors may interpret or adjust the provisions of these
Articles Supplementary to resolve any inconsistency or ambiguity or
to remedy any formal defect, and may amend these Articles
Supplementary with respect to APS Series D prior to the issuance of
such series.
(b) An Existing Holder may sell, transfer or otherwise
dispose of APS Series D only in whole shares and only pursuant to
a Bid or Sell Order in accordance with the procedures described in
this Part II or to or through a Broker-Dealer or to a Person that
has delivered a signed copy of a Master Purchaser's Letter to the
Auction Agent; provided that, in the case of all transfers other
than pursuant to Auctions, such Existing Holder, its Broker-Dealer
or its Agent Member advises the Auction Agent of such transfer.
(c) All of the shares of APS Series D Outstanding from
time to time shall be represented by one global certificate
registered in the name of the Securities Depository or its nominee.
(d) Neither the Fund nor any affiliate thereof may
submit an Order in any Auction, except that any Broker-Dealer that
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is an affiliate of the Fund may submit Orders in an Auction, but
only if such Orders are not for its own account.
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<PAGE>
IN WITNESS WHEREOF, PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. has caused these presents to be signed in its name and on
its behalf by its Vice President, and its corporate seal to be
hereunto affixed and attested by its Secretary, and the said
officers of the Fund further acknowledged said instrument to be the
corporate act of the Fund, and stated under the penalties of
perjury that to the best of their knowledge, information and belief
the matters and facts therein set forth with respect to approval
are true in all material respects, all on November _, 1994.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
By: /s/ GREGORY K. TODD
------------------------------
Attest:
/s/ DIANNE E. O'DONNELL
- - -----------------------
Dianne E. O'Donnell
Secretary
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August 12, 1993
The Depository Trust Company
55 Water Street, 49th Floor
New York, New York 10041
Attention: General Counsel's Office
Re: PaineWebber Premier Insured Municipal Income Fund Inc.
Auction Preferred Shares Series A, B and C
Ladies and Gentlemen:
The purpose of this letter is to set forth certain matters
relating to the issuance and sale by PaineWebber Premier Insured
Municipal Income Fund Inc. (the "Fund") of 2,400 shares of its
preferred stock, par value $.001 per share, liquidation preference
$50,000 per share, in three series of 800 shares each designated,
respectively, as Auction Preferred Shares, Series A ("APS Series
A"), Auction Preferred Shares, Series B ("APS Series B") and
Auction Preferred Shares, Series C ("APS Series C") (collectively,
the "APS"), pursuant to the Fund's Articles of Incorporation,
including the Articles Supplementary establishing and fixing the
rights and preferences of the APS (together, the "APS Provisions").
Pursuant to the Auction Agency Agreement, dated as of August 12,
1993 (the "Auction Agency Agreement"), between the Fund and Bankers
Trust Company ("Bankers Trust"), Bankers Trust will act as the
auction agent, transfer agent, registrar and dividend and redemp-
tion price disbursing agent and agent for certain notifications for
the Fund in connection with the shares of each series of APS (here-
inafter referred to, when acting in any such capacity, as the
"Auction Agent").
Pursuant to an Underwriting Agreement, dated August 5, 1993
(the "Underwriting Agreement") among Goldman, Sachs & Co. and
PaineWebber Incorporated (the "Underwriter"), the Fund and
Mitchell Hutchins Asset Management Inc. (the "Adviser"), the
Underwriters have agreed to purchase from the Fund, and the Fund
has agreed to issue and sell to the Underwriters, the APS. Pur-
suant to the requirements of the Securities Act of 1933, as
amended, the Fund has filed with the Securities and Exchange
Commission a Registration Statement on Form N-2 and a prospectus
and statement of additional information contained therein (such
prospectus and statement of additional information being
collectively referred to herein as the "Prospectus") concerning the
The Depository Trust Company
August 12, 1993
Page 2
issuance of the APS, which includes, among other things, a
description of the role of The Depository Trust Company ("DTC")
with respect to the APS. A copy of the Prospectus is attached
hereto.
Unless the context otherwise requires, capitalized terms not
otherwise defined herein shall have the respective meanings set
forth in the APS Provisions, a copy of which is attached hereto.
To induce DTC to accept the APS as eligible for deposit at DTC
and to act in accordance with its rules with respect to the APS,
the Fund and the Auction Agent agree with DTC as follows:
1. The Fund shall cause the Underwriters to deliver at
the closing with respect to the Underwriting Agreement, which is
scheduled for August 12, 1993, for deposit with DTC one share
certificate with respect to each series of the APS (each, an "APS
Certificate"), each of which certificates will represent the total
number of shares of the related series of APS issued and registered
in the name of DTC's nominee, Cede & Co. ("Cede"), and each such
APS Certificate shall remain in DTC's custody as provided herein.
2. The APS Provisions provide for the solicitation of
consents from and voting by Holders of the APS under certain
circumstances. The Fund shall establish a record date for such
purposes and give DTC notice of such record date not less than 15
calendar days in advance of such record date to the extent
possible.
3. If fewer than all of the outstanding shares of any
series of APS are to be redeemed pursuant to Part I, Section 3 of
the Articles Supplementary, the number of shares of each series of
APS to be redeemed shall be determined by the Board of Directors of
the Fund, and the Fund shall notify the Auction Agent and DTC by
1:00 p.m., New York City time, (A) in the case of an optional
redemption at least 30 days prior to the earliest date on which
such redemption shall occur and (B) in the case of a mandatory
redemption, at least 30 days prior to the earliest date on which
such redemption shall occur or, if the Fund shall have received the
relief from the Securities and Exchange Commission described in the
Prospectus with respect to mandatory redemptions, on the second
Business Day preceding the redemption date established by the Board
of Directors and specified in such notice. By the close of
business on the day on which the Auction Agent receives a Notice of
Redemption from the Fund, the Auction Agent will give telephonic
notice to DTC, and the Auction Agent shall give DTC a hand deliv-
ered copy of such notice which will be marked "TIME CRITICAL" and
shall include a copy addressed to "Vice President, Reorganization
The Depository Trust Company
August 12, 1993
Page 3
Department" (which notice shall include the aggregate number of
shares of each series of APS to be redeemed).
Unless certificates representing shares of a series of APS are
held by Holders other than DTC or its nominee, DTC, upon receipt of
a Notice of Redemption with respect to a series of APS from the
Auction Agent, will determine by lot the number of shares of such
series of APS to be redeemed from the account of each DTC Partic-
ipant ("Participant"). DTC shall use its best efforts to complete
such lottery and notify the Auction Agent of the results of such
lottery by 10:00 a.m., New York City time, on the Business Day
following the date on which DTC receives the Notice of Redemption
from the Auction Agent. DTC shall notify the Auction Agent by such
time of each Participant that has credited to its DTC account APS
that are selected for redemption by DTC and shall, using its best
efforts, provide the Auction Agent with the names of the persons or
departments at each such Participant to be contacted regarding such
redemption. The Auction Agent will in turn determine by lot the
number of shares of each series of APS to be redeemed from the
accounts of the Existing Holders of shares of such series whose
Participants have been selected, such determination to be made in
sufficient time to enable the Auction Agent to notify such Partic-
ipants (and any affiliates thereof that are Broker Dealers for such
Existing Holders) and such Existing Holders as provided in Part I,
Section 3 of the Articles Supplementary.
4. The APS Provisions provide that the dividend rate for
shares of any series of APS may vary from time to time based upon
the results of the implementation of the Auction Procedures set
forth in Part II of the Articles Supplementary. The Auction Agent
shall telecopy notice to Manager, Announcements, Dividends Depart-
ment, The Depository Trust Company, at (212) 709-1723, of the
Applicable Rate and the Dividend Payment Date with respect to the
APS (the "Dividend Rate Notice") no later than the day following
each Auction after implementation of such procedures and shall
verify receipt by DTC of such notice by contacting the Supervisor,
Announcements, Dividends Department, The Depository Trust Company,
at (212) 709-1270. The Auction Agent shall make available, by
telecopy, facsimile or other similar means, to Interactive Data
Services, Inc., or any other announcement service to which DTC may
subscribe, the Applicable Rate and the Dividend Payment Date on
each Auction Date after implementation of such procedures.
5. The Prospectus indicates that each purchaser of APS
or its Broker-Dealer must sign a Master Purchaser's Letter which
contains provisions restricting transfer of such APS. The Fund and
the Auction Agent acknowledge that so long as Cede is the sole
record owner of any series of the APS, it shall be entitled to all
The Depository Trust Company
August 12, 1993
Page 4
voting rights applicable to such series of APS and to receive the
full amount of all dividends, liquidation proceeds and redemption
proceeds payable with respect to such series of APS. The Fund and
the Auction Agent acknowledge that DTC shall treat any Participant
having any APS credited to its DTC account as entitled to the full
benefits of ownership of such APS even if the crediting of such APS
to the DTC accounts of such Participant results from transfers or
failures to transfer in violation of the provisions of the Master
Purchaser's Letter. Without limiting the generality of the
preceding sentence, the Fund and the Auction Agent acknowledge that
DTC shall treat any Participant having any APS credited to its DTC
account as entitled to receive dividends, distributions and voting
rights, if any, in respect of such APS and, subject to Section 11
hereof, to receive certificates evidencing such APS if such certif-
icates are to be issued in accordance with the APS Provisions. (The
treatment by DTC of the effects of the crediting by it of such APS
to the accounts of Participants described in the preceding two
sentences shall not affect the rights of the Fund, participants in
Auctions relating to such APS or purchasers, sellers or Holders of
such APS against any Participant.) DTC shall have no responsib-
ility to ascertain that any transfer of APS is made in accordance
with the provisions of the Master Purchaser's Letter.
6. All notices and payment advices sent to DTC shall
contain the CUSIP number set forth in the appropriate APS Certificate.
7. Notices to DTC by facsimile transmission shall be
sent to (212) 709-1093 or (212) 709-1094. Notices to DTC by any
other means shall be sent to:
Manager, Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, New York 10004
8. Dividend payments shall be received by Cede, as
nominee of DTC, or its registered assigns in same-day funds on each
payment date (or the equivalent in accordance with existing arran-
gements between the Fund or the Auction Agent and DTC). Such pay-
ments shall be made payable to the order of "Cede & Co." Absent
any other existing arrangements such payments shall be addressed as
follows:
Manager, Cash Receipts, Dividends
The Depository Trust Company
7 Hanover Square, 24th Floor
New York, New York 10004
The Depository Trust Company
August 12, 1993
Page 5
9. Redemption payments shall be made in same-day funds
by the Auction Agent in the manner set forth in the SDFS Paying
Agent Operating Procedures (a copy of which previously has been
furnished to the Auction Agent).
10. DTC may direct the Auction Agent to use any other
telephone number for facsimile transmission, address or department
of DTC as the number, address or department to which payments of
dividends, redemption proceeds or notices may be sent.
11. In the event of a partial redemption necessitating
a reduction in the number of outstanding shares of a series of APS,
DTC, in its discretion, (a) may request the Fund to direct the
Auction Agent to issue and authenticate a new APS Certificate with
respect to such series in exchange for surrender of the old APS
Certificate with respect to such series or (b) shall make an
appropriate notation on the APS Certificate with respect to such
series of APS indicating the date and amounts of such reduction in
the outstanding shares of such series, except in the case of a
final redemption of as series of APS in which case the APS Certif-
icate with respect to such series must be surrendered to the
Auction Agent prior to payment.
12. In the event that beneficial owners of any series of
APS shall be able to obtain certified shares, the Auction Agent may
notify DTC of the availability of certificates representing the
ownership of shares of such series. In such event, the Auction
Agent will issue, transfer and exchange APS Certificates with
respect to such series as required by DTC and others in appropriate
amounts.
13. Whenever DTC requests the Fund and the Auction Agent
to do so, the Auction Agent and the Fund will cooperate with DTC in
taking appropriate action to make available one or more separate
certificates evidencing any APS to any Participant having such APS
credited to its DTC account.
14. DTC may determine to discontinue providing its
services as securities depository with respect to the APS at any
time by giving 90 days written notice to the Fund and the Auction
Agent (at which time DTC will confirm with the Auction Agent the
aggregate amount of outstanding shares of each series of APS).
Under such circumstances, at DTC's request, the Fund or the Auction
Agent will cooperate with DTC in taking appropriate action to make
available one or more separate certificates evidencing such APS to
any Participant having such APS credited to its DTC account.
The Depository Trust Company
August 12, 1993
Page 6
15. The Fund hereby authorizes DTC to provide to the
Auction Agent position listings of its Participants with respect to
shares of each series of APS from time to time at the request of
the Auction Agent and upon DTC's receipt of its customary fee, and
also authorizes DTC in the event of a partial redemption of shares
of any series of APS to provide the Auction Agent, upon request,
with the names of those Participants whose position in such series
has been selected for redemption by DTC. DTC agrees to use its
best efforts to notify the Auction Agent of those Participants
whose position in such series of APS has been selected for redemp-
tion by DTC and to provide the Auction Agent with the names of the
person or department at such Participants to contact regarding such
redemption. The Fund authorizes the Auction Agent to provide DTC
with such signatures, examples of signatures and authorizations to
act as may be deemed necessary to DTC to permit DTC to discharge
its obligations to its Participants and appropriate regulatory
authorities.
This authorization, unless revoked by the Fund, shall
continue with respect to the APS while such APS are on deposit at
DTC, until and unless the Auction Agent shall no longer be acting.
In such event, the Fund shall provide DTC with similar evidence of
authorization of any successor thereto to so act. Such requests
for securities positions shall be addressed as follows:
Supervisory; Proxy
Reorganization Department
The Depository Trust Company
7 Hanover Square; 23rd Floor
New York, NY 10004-2695
Phone (212) 789-6870
Fax (212) 709-6896
16. (a) The Prospectus indicates that the Fund may at
any time designate a Special Dividend Period with respect to any
series of APS prior to the commencement of such Special Dividend
Period. In the event of designation of a Special Dividend Period
of more than 28 days, the Fund will notify DTC in writing at least
seven days prior to the Auction Date relating to such Special
Dividend Period of all details concerning the Special Dividend
Period. If the new dividend for such a Special Dividend Period is
to be payable on more than one Dividend Payment Date, such notice
shall state all such Dividend Payment Dates and payment factors
associated with such Dividend Period. The Auction Agent shall also
notify DTC of each upcoming Dividend Payment Date on the business
day after the preceding Dividend Payment Date.
The Depository Trust Company
August 12, 1993
Page 7
(b) The Fund will notify DTC, at least 10 business days
prior to the payment date for an Additional Dividend (as defined in
the Prospectus) in respect of any series of APS, of (i) the record
date for Holders of such series entitled to receive Additional
Dividends, (ii) the amount of Additional Dividends payable on a per
share basis to such Holders and (ii) the CUSIP number set forth on
the share certificate representing such series.
If you are in agreement with the terms of this Letter
Agreement, please execute this Letter Agreement in the space
provided below.
Very truly yours,
PAINEWEBBER PREMIER INSUREDBANKERS TRUST COMPANY
MUNICIPAL INCOME FUND INC. as Auction Agent
By: /s/JULIAN F. SLUYTERS By: /s/ SANDRA BECKER
---------------------- ----------------------
Name: JULIAN F. SLUYTERS Name: SANDRA BECKER
Title: VICE PRESIDENT Title: ASSISTANT TREASURER
Accepted as of the date first
written above.
THE DEPOSITORY TRUST COMPANY
By: /s/ RICHARD B. NESSON
----------------------
Name: RICHARD B. NESSON
Title: GENERAL COUNSEL
(enclosures)
cc: Goldman, Sachs & Co.
PaineWebber Incorporated
November 28, 1994
The Depository Trust Company
55 Water Street, 49th Floor
New York, New York 10041
Attention: General Counsel's Office
Re: PaineWebber Premier Insured Municipal Income Fund Inc.
Auction Preferred Shares Series D
Ladies and Gentlemen:
The purpose of this letter is to set forth certain matters
relating to the issuance by PaineWebber Premier Insured
Municipal Income Fund Inc. (the "Fund") of 600 shares of its
preferred stock, par value $.001 per share, liquidation preference
$50,000 per share, in a series designated, as Auction Preferred Shares,
Series D ("APS Series D"), pursuant to the Fund's Articles of Incorporation,
including the Articles Supplementary establishing and fixing the
rights and preferences of the APS Series D (together, the "APS Provisions").
Pursuant to the Auction Agency Agreement, dated as of November 28, 1994
(the "Auction Agency Agreement"), between the Fund and Bankers Trust Company
("Bankers Trust"), Bankers Trust will act as the auction agent, transfer
agent, registrar and dividend and redemption price disbursing agent and
agent for certain notifications for the Fund in connection with the shares
of APS Series D (hereinafter referred to, when acting in any such capacity,
as the "Auction Agent").
Pursuant to an Agreement, and Plan of Reorganization and
Liquidation ("Reorganization Agreement") between the Fund and
PaineWebber Premier Intermediate Tax-Free Income Fund Inc.
("Intermediate Fund"), the Fund has agreed to issue the APS Series D
in connection with the reorganization and liquidation of Intermediate Fund.
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Fund has filed with the Securities and Exchange Commission a Registration
Statement on Form N-14 and a prospectus/proxy statement and statement of
additional information contained therein (such prospectus/proxy
statement and statement of additional information being collectively
referred to herein as the "Prospectus") concerning the issuance of the
APS Series D, which includes, among other things, a description of the
role of The Depository Trust Company ("DTC") with respect to the APS Series D.
A copy of the Prospectus is attached hereto.
The Depository Trust Company
November 28, 1994
Page 2
Unless the context otherwise requires, capitalized terms not
otherwise defined herein shall have the respective meanings set
forth in the APS Provisions, a copy of which is attached hereto.
To induce DTC to accept the APS Series D as eligible for deposit
at DTC and to act in accordance with its Rules with respect to the APS
Series D, the Fund and the Auction Agent agree with DTC as follows:
1. The Fund shall deliver at the effective time of the
reorganization pursuant to the Reorganization Agreement, which is
November 28, 1994, for deposit with DTC one share certificate with
respect to APS Series D (the "APS Certificate"), which certificate
will represent the total number of shares of the APS Series D issued
and registered in the name of DTC's nominee, Cede & Co. ("Cede"),
and such APS Certificate shall remain in DTC's custody as
provided herein.
2. The APS Provisions provide for the solicitation of
consents from and voting by Holders of the APS Series D under certain
circumstances. The Fund shall establish a record date for such purposes
and give DTC notice of such record date not less than 15 calendar days
in advance of such record date to the extent possible.
3. If fewer than all of the outstanding shares of
APS Series D are to be redeemed pursuant to Part I, Section 3 of
the Articles Supplementary, the number of shares of APS Series D to be
redeemed shall be determined by the Board of Directors of the Fund,
and the Fund shall notify the Auction Agent and DTC by 1:00 p.m.,
New York City time, (A) in the case of an optional redemption at least
30 days prior to the earliest date on which such redemption shall occur
and (B) in the case of a mandatory redemption, at least 30 days prior
to the earliest date on which such redemption shall occur or, if the Fund
shall have received the relief from the Securities and Exchange Commission
described in the Prospectus with respect to mandatory redemptions, on
the second Business Day preceding the redemption date established by
the Board of Directors and specified in such notice. By the close of
business on the day on which the Auction Agent receives a Notice of
Redemption from the Fund, the Auction Agent will give telephonic
notice to DTC, and the Auction Agent shall give DTC a hand delivered
copy of such notice which will be marked "TIME CRITICAL" and shall
include a copy addressed to "Vice President, Reorganization Department"
(which notice shall include the aggregate number of shares of APS Series D
to be redeemed).
The Depository Trust Company
August 12, 1993
Page 3
Unless certificates representing shares of APS Series D are
held by Holders other than DTC or its nominee, DTC, upon receipt of
a Notice of Redemption with respect to APS Series D from the
Auction Agent, will determine by lot the number of shares of such
series to be redeemed from the account of each DTC Participant
("Participant"). DTC shall use its best efforts to complete
such lottery and notify the Auction Agent of the results of such
lottery by 10:00 a.m., New York City time, on the Business Day
following the date on which DTC receives the Notice of Redemption
from the Auction Agent. DTC shall notify the Auction Agent by such
time of each Participant that has credited to its DTC account shares of
APS Series D that are selected for redemption by DTC and shall, using
its best efforts, provide the Auction Agent with the names of the persons or
departments at each such Participant to be contacted regarding such
redemption. The Auction Agent will in turn determine by lot the
number of shares of APS Series D to be redeemed from the accounts of the
Existing Holders of shares of such series whose Participants have been
selected, such determination to be made in sufficient time to enable the
Auction Agent to notify such Participants (and any affiliates thereof
that are Broker Dealers for such Existing Holders) and such Existing Holders
as provided in Part I, Section 3 of the Articles Supplementary.
4. The APS Provisions provide that the dividend rate for
shares of APS Series D may vary from time to time based upon
the results of the implementation of the Auction Procedures set
forth in Part II of the Articles Supplementary. The Auction Agent
shall telecopy notice to Manager, Announcements, Dividends Department,
The Depository Trust Company, at (212) 709-1723, of the Applicable Rate
and the Dividend Payment Date with respect to the APS Series D
(the "Dividend Rate Notices") no later than the day following each Auction
after implementation of such procedures and shall verify receipt by DTC
of such notice by contacting the Supervisor, Announcements, Dividends
Department, The Depository Trust Company, at (212) 709-1270. The Auction Agent
shall make available, by telecopy, facsimile or other similar means, to
Interactive Data Services, Inc., or any other announcement service to
which DTC may subscribe, the Applicable Rate and the Dividend Payment Date
on each Auction Date after implementation of such procedures.
5. The Prospectus indicates that each purchaser of APS Series D
or its Broker-Dealer must sign a Master Purchaser's Letter which
contains provisions restricting transfer of such APS Series D. The Fund and
the Auction Agent acknowledge that so long as Cede is the sole record
owner of any series of the APS Series D, it shall be entitled to all
voting rights applicable to such series and to receive the
full amount of all dividends, liquidation proceeds and redemption
proceeds payable with respect to such series. The Fund and the
The Depository Trust Company
November 28, 1994
Page 4
Auction Agent acknowledge that DTC shall treat any Participant
having any APS Series D credited to its DTC account as entitled to the
full benefits of ownership of such shares even if the crediting of such
shares to the DTC accounts of such Participant results from transfers or
failures to transfer in violation of the provisions of the Master
Purchaser's Letter. Without limiting the generality of the
preceding sentence, the Fund and the Auction Agent acknowledge that
DTC shall treat any Participant having any APS Series D credited to its DTC
account as entitled to receive dividends, distributions and voting
rights, if any, in respect of such shares and, subject to Section 11
hereof, to receive certificates evidencing such shares if such certificates
are to be issued in accordance with the APS Provisions. (The treatment
by DTC of the effects of the crediting by it of such shares to the
accounts of Participants described in the preceding two sentences shall not
affect the rights of the Fund, participants in Auctions relating to such
APS Series D or purchasers, sellers or Holders of such APS Series D
against any Participant.) DTC shall have no responsibility to ascertain
that any transfer of APS Series D is made in accordance with the provisions
of the Master Purchaser's Letter.
6. All notices and payment advices sent to DTC shall
contain the CUSIP number set forth in the appropriate APS Certificate.
7. Notices to DTC by facsimile transmission shall be sent to
(212) 709-1093 or (212) 709-1094. Notices to DTC by any other means shall
be sent to:
Manager, Reorganization Department
Reorganization Window
The Depository Trust Company
7 Hanover Square, 23rd Floor
New York, New York 10004
8. Dividend payments shall be received by Cede, as
nominee of DTC, or its registered assigns in same-day funds on each
payment date (or the equivalent in accordance with existing arrangements
between the Fund or the Auction Agent and DTC). Such payments shall
be made payable to the order of "Cede & Co." Absent any other existing
arrangements such payments shall be addressed as follows:
Manager, Cash Receipts, Dividends
The Depository Trust Company
7 Hanover Square, 24th Floor
New York, New York 10004
The Depository Trust Company
November 28, 1994
Page 5
9. Redemption payments shall be made in same-day funds
by the Auction Agent in the manner set forth in the SDFS Paying
Agent Operating Procedures (a copy of which previously has been
furnished to the Auction Agent).
10. DTC may direct the Auction Agent to use any other
telephone number for facsimile transmission, address or department
of DTC as the number, address or department to which payments of
dividends, redemption proceeds or notices may be sent.
11. In the event of a partial redemption necessitating
a reduction in the number of outstanding shares of APS Series D,
DTC, in its discretion, (a) may request the Fund to direct the
Auction Agent to issue and authenticate a new APS Certificate with
respect to such series in exchange for surrender of the old APS
Certificate with respect to such series or (b) shall make an
appropriate notation on the APS Certificate with respect to such
series indicating the date and amounts of such reduction in
the outstanding shares of such series, except in the case of a
final redemption of the series in which case the APS Certificate
with respect to such series must be surrendered to the Auction Agent
prior to payment.
12. In the event that beneficial owners of APS Series D shall
be able to obtain certified shares, the Auction Agent may notify DTC
of the availability of certificates representing the ownership of shares
of such series. In such event, the Auction Agent will issue, transfer
and exchange APS Certificates with respect to such series as required
by DTC and others in appropriate amounts.
13. Whenever DTC requests the Fund and the Auction Agent
to do so, the Auction Agent and the Fund will cooperate with DTC in
taking appropriate action to make available one or more separate
certificates evidencing any shares of APS Series D to any Participant
having such series credited to its DTC account.
14. DTC may determine to discontinue providing its
services as securities depository with respect to the APS Series D
at any time by giving 90 days written notice to the Fund and the Auction
Agent (at which time DTC will confirm with the Auction Agent the
aggregate amount of outstanding shares of APS Series D).
Under such circumstances, at DTC's request, the Fund or the Auction
Agent will cooperate with DTC in taking appropriate action to make
available one or more separate certificates evidencing such APS Series D
to any Participant having such APS Series D credited to its DTC account.
The Depository Trust Company
November 28, 1994
Page 6
15. The Fund hereby authorizes DTC to provide to the
Auction Agent position listings of its Participants with respect to
shares of APS Series D from time to time at the request of
the Auction Agent and upon DTC's receipt of its customary fee, and
also authorizes DTC in the event of a partial redemption of shares
of APS Series D to provide the Auction Agent, upon request,
with the names of those Participants whose position in such series
has been selected for redemption by DTC. DTC agrees to use its
best efforts to notify the Auction Agent of those Participants
whose position in such series of APS has been selected for redemption
by DTC and to provide the Auction Agent with the names of the
person or department at such Participants to contact regarding such
redemption. The Fund authorizes the Auction Agent to provide DTC
with such signatures, examples of signatures and authorizations to
act as may be deemed necessary to DTC to permit DTC to discharge
its obligations to its Participants and appropriate regulatory authorities.
This authorization, unless revoked by the Fund, shall continue
with respect to the APS Series D while such shares are on deposit at
DTC, until and unless the Auction Agent shall no longer be acting.
In such event, the Fund shall provide DTC with similar evidence of
authorization of any successor thereto to so act. Such requests
for securities positions shall be addressed as follows:
Supervisory; Proxy
Reorganization Department
The Depository Trust Company
7 Hanover Square; 23rd Floor
New York, NY 10004-2695
Phone (212) 789-6870
Fax (212) 709-6896
16. (a) The Prospectus indicates that the Fund may at any time
designate a Special Dividend Period with respect to APS Series D prior
to the commencement of such Special Dividend Period. In the event of
designation of a Special Dividend Period of more than 28 days, the
Fund will notify DTC in writing at least seven days prior to the
Auction Date relating to such Special Dividend Period of all details
concerning the Special Dividend Period. If the new dividend for such
a Special Dividend Period is to be payable on more than one Dividend
Payment Date, such notice shall state all such Dividend Payment Dates
and payment factors associated with such Dividend Period. The Auction
Agent shall also notify DTC of each upcoming Dividend Payment Date on
the business day after the preceding Dividend Payment Date.
(b) The Fund will notify DTC, at least 10 business days
The Depository Trust Company
November 28, 1994
Page 7
prior to the payment date for an Additional Dividend (as defined in
the Prospectus) in respect of APS Series D, of (i) the record date
for Holders of such series entitled to receive Additional Dividends,
(ii) the amount of Additional Dividends payable on a per share basis
to such Holders and (ii) the CUSIP number set forth on the share
certificate representing such series.
If you are in agreement with the terms of this Letter
Agreement, please execute this Letter Agreement in the space
provided below.
Very truly yours,
PAINEWEBBER PREMIER INSUREDBANKERS TRUST COMPANY
MUNICIPAL INCOME FUND INC. as Auction Agent
By: /s/ JOAN L. COHEN By: /s/ FERNANDO ACEBEDO
Name: JOAN L. COHEN Name: FERNANDO ACEBEDO
Title: VICE PRESIDENT & Title: ASSISTANT TREASURER
ASST. SECRETARY
Accepted as of the date first
written above.
THE DEPOSITORY TRUST COMPANY
By: /s/ RICHARD B. NESSON
Name: RICHARD B. NESSON
Title: GENERAL COUNSEL
(enclosures)
cc: Goldman, Sachs & Co.
PaineWebber Incorporated
<PAGE>
- - -----------------------------------------------------------------------
BROKER-DEALER AGREEMENT
BETWEEN
BANKERS TRUST COMPANY
AND
GOLDMAN, SACHS & CO.
DATED AS OF AUGUST 12, 1993
RELATING TO
AUCTION PREFERRED SHARES
OF
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
- - -----------------------------------------------------------------------
<PAGE>
BROKER-DEALER AGREEMENT dated as of August 12,
1993 between BANKERS TRUST COMPANY (the "Auction Agent"),
a New York banking corporation (not in its individual
capacity but solely as agent of PaineWebber Premier
Insured Municipal Income Fund Inc. (the "Fund") pursuant
to authority granted it in the Auction Agency Agreement),
and GOLDMAN, SACHS & CO. (together with its successors
and assigns, "BD")
The Fund has issued three series of shares of
Auction Preferred Shares, par value $.OO1 per share,
liquidation preference $50,000 per share (the "APS")
pursuant to its Articles of Incorporation, as amended by
the Articles supplementary (the "Articles Supplementary").
The Articles Supplementary will provide that,
for each Subsequent Dividend Period of any series of APS
then outstanding, the Applicable Rate for such series for
such Subsequent Dividend Period shall, under certain
conditions, be the rate per annum that a bank or trust
company appointed by the Fund advises results from
implementation of the Auction Procedures for such series.
The Board of Directors has adopted a resolution appointing
Bankers Trust Company as Auction Agent for purposes of
the Auction Procedures for each series of APS.
The Auction Procedures require the participation
of one or more Broker-Dealers for each series of APS.
NOW, THEREFORE, in consideration of the premises
and the mutual covenants contained herein the Auction Agent
and BD agree as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to Statement.
Capitalized terms not defined herein shall have the
respective meanings specified in the Articles Supplementary.
<PAGE>
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures,
the following terms shall have the following meanings,
unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the
Articles Supplementary establishing three series of preferred
stock and authorizing the issuance of APS as filed by the Fund
with the Department of Assessments and Taxation of the State
of Maryland.
(b) "Auction" shall have the meaning specified
in Section 2.1 hereof.
(c) "Auction Agency Agreement" shall mean the
Auction Agency Agreement, dated as of August 12, 1993,
between the fund and the Auction Agent relating to the APS.
(d) "Auction Procedures" shall mean the auction
procedures constituting Part II of the Articles Supplementary.
(e) "Authorized Officer" shall mean each Senior
Vice President, Vice President, Assistant Vice President,
Trust Officer, Assistant Treasurer and Assistant Secretary
of the Auction Agent assigned to its Corporate Trust and
Agency Group and every other officer or employee of the
Auction Agent designated as an "Authorized Officer" for
purposes of this Agreement in a communication to BD.
(f) "BD Officer" shall mean each officer or
employee of BD designated as a "BD Officer" for purposes
of this Agreement in a communication to the Auction Agent.
(g) "Broker-Dealer Agreement" shall mean this
Agreement and any substantially similar agreement between
the Auction Agent and a Broker-Dealer.
(h) "Master Purchaser's Letter" shall mean a letter
addressed to the Fund, the Auction Agent, a Broker-Dealer
and an Agent Member, substantially in the form attached hereto
as Exhibit A.
<PAGE>
(i) "Settlement Procedures" shall mean the
Settlement Procedures attached hereto as Exhibit B.
1.3 Rules of Construction.
Unless the context or use indicates another or
different meaning or intent, the following rules shall
apply to the construction of this Agreement:
(a) Words importing the singular number shall
include the plural number and vice versa.
(b) The captions and headings herein are
solely for convenienee of referenee and shall not consti-
tute a part of this Agreement nor shall they affect its
meaning, construction or effect.
(c) The words "hereof", "herein", "hereto",
and other words of similar import refer to this Agreement
as a whole.
(d) All referenees herein to a particular time
of day shall be to New York City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures.
(a) The provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of
determining the Applicable Rate for any Subsequent Dividend
Period of any series of APS for which the Applicable Rate
is to be determined by an Auction. Each periodic operation
of such procedures is hereinafter referred to as an "Auction".
(b) All of the provisions contained in the
Auction Procedures and the Settlement Procedures are
incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as
if such provisions were fully set forth herein.
(c) BD agrees to act as, and assumes the
obligations of, and limitations and restrictions placed
upon, a Broker-Dealer under this Agreement for each
series of APS. BD understands that other Persons meeting
<PAGE>
the requirements specified in the definition of "Broker-Dealer"
contained in the Auction Procedures may execute Broker-Dealer
Agreements and Master Purchaser's Letters and participate as
Broker-Dealers in Auctions.
2.2 Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction
Date for the APS, the Auction Agent shall advise the
Broker-Dealers for such series by telephone of the Maximum
Rate therefor and the "AA" Composite Commercial Paper
Rate(s), Taxable Equivalent of the Short-Term Municipal
Bond Rate(s) and Treasury Rate(s), as the case may be,
used in determining such Maximum Rate.
(b) In the event that any Auction Date for the
APS shall be changed after the Auction Agent has given
the notice referred to in clause (vi) of paragraph (a) of
the Settlement Procedures, or after the notice referred
to in Section 2.5(a) hereof, if applicable, the Auction
Agent, by such means as the Auction Agent deems practicable,
shall give notice of such change to BD not later than the
earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M.
on the old Auction Date.
(c) The Auction Agent from time to time may
request the Broker-Dealers to provide the Auction Agent
with a list of their respective customers that such
Broker-Dealers believe are Existing Holders of shares of
APS. BD shall comply with any such request, and the
Auction Agent shall keep confidential any such information
so provided by BD and shall not disclose any information so
provided by BD to any Person other than the Fund and BD.
(d) BD agrees to maintain a list of Potential Holders
and to use its best efforts to contact the Potential Holders
on such list whom BD believes may be interested in participating
in such Auction on each Auction Date for the purposes set forth
in the Auction Procedures.
(e) The Auction Agent is not required to accept the
Master Purchaser's Letter of any Potential Holder who wishes
to submit a Bid for the first time in an Auction or of any
Potential Holder or Existing Holder who wishes to amend its
Master Purchaser's Letter unless
<PAGE>
such letter or amendment is received by the Auction Agent
by 3:00 P.M. on the Business Day preceding such Auction.
2.3 Auction Schedule; Method of Submission of Orders.
(a) The Auction Agent shall conduct Auctions
for APS in accordance with the schedule set forth below.
Such schedule may be changed by the Auction Agent with
the consent of the Fund, which consent shall not be
unreasonably withheld. The Auction Agent shall give
written notice of any such change to each Broker-Dealer.
Such notice shall be given prior to the close of business
on the Business Day next preceding the first Auction Date
on which such change shall be effective.
TIME EVENT
- - ---- -----
By 9:30 A.M. Auction Agent advises the
Fund and the Broker-Dealers
of the applicable
Maximum Rate and the "AA"
Composite Commercial Paper
Rate(s), Taxable Equivalent
of the Short-Term
Municipal Bond Rate(s) and
Treasury Rate(s), as the
case may be, used in
determining such Maximum
Rate as set forth in
Section 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles
information communicated
to it by Broker-Dealers as
provided in Section 3(a)
of the Auction Procedures.
Submission Deadline is
1:30 P.M.
Not earlier than 1:30 P.M.Auction Agent makes
determinations pursuant to
Section 4(a) of the Auction
Procedures.
<PAGE>
By approximately 3:00 P.M.Auction Agent advises Fund
of results of Auction as
provided in Section 4(b)
of the Auction Procedures.
Submitted Bids and Submitted
Sell Orders are accepted
and rejected and shares
of APS allocated as
provided in Section 5 of
the Auction Procedures.
Auction Agent gives notice
of Auction results as set
forth in section 2.4(a)
hereof.
(b) BD agrees not to sell, assign or dispose
of any share of APS to any Person who has not delivered,
or on whose behalf a Broker-Dealer has not delivered, a
signed Master Purchaser's Letter to the Auction Agent.
(c) BD shall submit Orders to the Auction
Agent in writing substantially in the form attached hereto
as Exhibit C. BD shall submit a separate Order to the
Auction Agent for each Potential Holder or Existing
Holder on whose behalf BD is submitting an Order and
shall not net or aggregate the Orders of different Potential
Holders or Existing Holders on whose behalf BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a written
notice in substantially the form attached hereto as Exhibit D
for transfers of shares of APS made through BD by an
Existing Holder to another Person other than pursuant to
an Auction and shall deliver or cause to be delivered the
related Master Purchaser's Letter executed by such Person
if such Person has not previously so delivered a Master
Purchaser's Letter and (ii) a written notice, substantially
in the form attached hereto as Exhibit E, of the failure of
any shares of APS to be transferred to or by any Person that
purchased or sold shares of APS through BD pursuant to an Auction.
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. on the Business Day preceding such Auction.
<PAGE>
(e) BD has delivered to the Auction Agent its executed
Master Purchaser's Letter. BD and other Broker-Dealers which have
delivered duly executed Master Purchaser's Letters may submit
Orders in Auctions for their own accounts unless BD is an
affiliate of the Fund or the Fund shall have notified BD and
all other Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit Hold Orders and Sell
Orders for their own accounts.
(f) BD agrees to handle its customers' Orders in
accordance with its duties under applicable securities laws
and rules.
2.4 Notices of Auction Results.
(a) On each Auction Date for APS, the Auction
Agent shall notify BD by telephone of the results of the
Auction as set forth in paragraph (a) of the Settlement
Procedures. By approximately 11:30 A.M., on the Business
Day next succeeding such Auction Date, the Auction Agent
shall confirm to BD in writing the disposition of all
Orders submitted by BD in such Auction.
(b) BD shall notify each Existing Holder or
Potential Holder on whose behalf BD has submitted an
Order as set forth in paragraph (b) of the Settlement
Procedures and take such other action as is required of
BD pursuant to the Settlement Procedures.
2.5 Designation of Special Dividend Period.
(a) If the Fund delivers to the Auction Agent
a notice of the Auction Date for APS for a Rate Period
thereof that next succeeds a Rate Period that is not a
Minimum Dividend Period in the form of Exhibit E to the
Auction Agency Agreement, the Auction Agent shall deliver
such notice to BD as promptly as practicable after its
receipt of such notice from the Fund.
(b) If the Board of Directors proposes to
designate any succeeding Subsequent Dividend Period of
any series of APS as a Special Dividend Period and the
Fund delivers to the Auction Agent a notice of such
proposed Special Dividend Period in the form of Exhibit F
to the Auction Agency Agreement, the Auction Agent shall
<PAGE>
deliver such notice to BD as promptly as practicable
after its receipt of such notice from the Fund.
(c) If the Board of Directors determines to
designate such succeeding Subsequent Dividend Period as a
Special Dividend Period, and the Fund delivers to the
Auction Agent a notice of such Special Dividend Period in
the form of Exhibit G to the Auction Agency Agreement not
later than 11:00 A.M. on the second Business Day next
preceding the first day of such Rate Period, the Auction
Agent shall deliver such notice to BD not later than 3:00
P.M. on such second Business Day.
(d) If the Fund shall deliver to the Auction
Agent a notice not later than 11:00 A.M. on the second
Business Day next preceding the first day of any Rate
Period stating that the Fund has determined not to exer-
cise its option to designate such succeeding Subsequent
Dividend Period as a Special Dividend Period, in the form
of Exhibit H to the Auction Agency Agreement, or shall
fail to timely deliver either such notice or a notice in
the form of Exhibit G to the Auction Agency Agreement,
the Auction Agent shall deliver a notice in the form of
Exhibit H to the Auction Agency Agreement to BD not later
than 3:00 P.M. on such second Business Day.
2.6 Allocation of Taxable Income.
If the Fund delivers to the Auction Agent a
notice in the form of Exhibit K to the Auction Agency
Agreement designating all or a portion of any dividend on
shares of any series of APS to consist of net capital
gains or other income taxable for Federal income tax
purposes, the Auction Agent shall deliver such notice to
BD on the Business Day following its receipt of such
notice from the Fund. On or prior to the Auction Date
referred to in such notice, BD will contact each of its
customers that BD believes to be an Existing Holder of
shares of APS or a Potential Holder interested in submit-
ting an Order with respect to the Auction to be held on
such Auction Date, and BD will notify such customer of
the contents of such notice. BD will be deemed to have
notified such Existing Holders and Potential Holders if,
for each such Holder, (i) it makes a reasonable effort to
contact such Holder by telephone, and (ii) upon failing
to contact such Holder by telephone it mails written
notification to such Holder at the mailing address indi-
<PAGE>
cated in such Holder's most recently submitted Master Purchaser's
Letter or at such other address as is indicated in the account
records of BD.
The Auction Agent shall be required to notify
BD within two Business Days after each Auction that
involves an allocation of income taxable for Federal
income tax purposes as to the dollar amount per share of
such taxable income and income exempt from Federal income
taxation included in the related dividend.
2.7 Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall
have occurred with respect to shares of
APS during any Rate Period thereof and
(ii) prior to 12:00 Noon on the third
Business Day next succeeding the date on
which such Failure to Deposit occurred,
such Failure to Deposit shall have been
cured as described in Section 2.7(a) of
the Auction Agency Agreement and the Fund
shall have paid to the Auction Agent a
late charge as described in such Section
2.7(a);
then, the Auction Agent shall deliver a notice in the
form of Exhibit I to the Auction Agency Agreement by
first-class mail, postage prepaid, to BD not later than
one Business Day after its receipt of the payment from
the Fund curing such Failure to Deposit and such late
charge.
(b) If:
(i) any Failure to Deposit shall
have occurred with respect to shares of
any series of APS during a Rate Period
thereof, and, prior to 12:00 Noon on the
third Business Day succeeding the date on
which such Failure to Deposit occurred,
such Failure to Deposit shall not have
been cured as described in Section 2.7(a)
of the Auction Agency Agreement and the
Fund shall not have paid to the Auction
<PAGE>
Agent the late charge described in such
Section 2.7(a), but such Failure to Depos-
it shall subsequently be so cured;
then, the Auction Agent shall deliver a notice in the
form of Exhibit J to the Auction Agency Agreement to the
Broker-Dealers for such series not later than one Busi-
ness Day after the receipt of the payment from the Fund
curing such Failure to Deposit.
2.8 Service Charge to be Paid to BD.
On the Business Day next succeeding each Auc-
tion Date, the Auction Agent shall pay to BD from moneys
received from the Fund an amount equal to the product of
(a) (i) in the case of any Auction Date immediately
preceding a Rate Period of such series consisting of less
than one year, 1/4 of 1%, or (ii) in the case of any
Auction Date immediately preceding a Rate Period of such
series consisting of one year or more, a percentage
agreed upon in writing by the Fund and the Broker-Dealers
times (b) a fraction, the numerator of which is the num-
ber of days in the Rate Period therefor beginning on such
Business Day and the denominator of which is 365 if such
Rate Period is less than one year and 360 for all other
Rate Periods, times (c) $50,000 times (d) the sum of (i)
the aggregate number of shares of such series placed by
BD in such Auction that were (A) the subject of Submitted
Bids of Existing Holders submitted by BD and continued to
be held as a result of such submission and (B) the sub-
ject of Submitted Bids of Potential Holders submitted by
BD and purchased as a result of such submission plus (ii)
the aggregate number of shares of such series subject to
valid Hold Orders (determined in accordance with para-
graph (d) of Section 3 of the Auction Procedures) submit-
ted to the Auction Agent by BD plus (iii) the number of
shares of APS deemed to be subject to Hold Orders by
Existing Holders pursuant to paragraph (c) of Section 3
of the Auction Procedures that were acquired by such
Existing Holders through BD.
For purposes of subclause (d)(iii) of the
foregoing paragraph, if any Existing Holder who acquired
shares of any series of APS through BD transfers those
shares to another Person other than pursuant to an Auc-
tion, then the Broker-Dealer for the shares so trans-
ferred shall continue to be BD; provided, however, that
<PAGE>
if the transfer was effected by, or if the transferee is,
a Broker-Dealer other than BD, then such Broker-Dealer
shall be the Broker-Dealer for such shares.
2.9 Settlement.
(a) If any Existing Holder on whose behalf BD
has submitted a Bid or Sell Order for shares of APS that
was accepted in whole or in part fails to instruct its
Agent Member to deliver the shares of APS subject to such
Bid or Sell Order against payment therefor, BD shall in-
struct such Agent Member to deliver such shares against
payment therefor and BD may deliver to the Potential
Holder on whose behalf BD submitted a Bid for shares of
APS that was accepted in whole or in part a number of
shares of APS of such series that is less than the number
of shares of APS of such series specified in such Bid to
be purchased by such Potential Holder. Notwithstanding
the foregoing terms of this Section, any delivery or non-
delivery of shares of APS which represents any departure
from the results of an Auction for such series, as deter-
mined by the Auction Agent, shall be of no effect unless
and until the Auction Agent shall have been notified of
such delivery or non-delivery in accordance with the
terms of Section 2.3(d)(ii) hereof. The Auction Agent
shall have no duty or liability with respect to enforce-
ment of this Section 2.9.
(b) Neither the Auction Agent nor the Fund
shall have any responsibility or liability with respect
to the failure of an Existing Holder, a Potential Holder
or its respective Agent Member to deliver shares of APS
of any series or to pay for shares of APS of any series
sold or purchased pursuant to the Auction Procedures or
otherwise.
3. The Auction Agent.
3.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as
agent for the Fund hereunder and owes no fiduciary duties
to any other Person, other than the Fund, by reason of
this Agreement.
(b) The Auction Agent undertakes to perform
such duties and only such duties as are specifically set
<PAGE>
forth in this Agreement, and no implied covenants or
obligations shall be read into this Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence
on its part, the Auction Agent shall not be liable for
any action taken, suffered, or omitted or for any error
of judgment made by it in the performance of its duties
under this Agreement. The Auction Agent shall not be
liable for any error or judgment made in good faith
unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts.
3.2 Rights of the Auction Agent.
(a) The Auction Agent may rely and shall be
protected in acting or refraining from acting upon any
communication authorized hereby and upon any written in-
struction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper
or document believed in good faith by it to be genuine.
The Auction Agent shall not be liable for acting upon any
telephone communication authorized by this Agreement
which the Auction Agent believes in good faith to have
been given by the Fund or by a Broker-Dealer. The Auc-
tion Agent may record telephone communications with the
Broker-Dealers.
(b) The Auction Agent may consult with counsel
of its choice and the advice of such counsel shall be
full and complete authorization and protection in respect
of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to
advance, expend or risk its own funds or otherwise incur
or become exposed to financial liability in the perfor-
mance of its duties hereunder.
3.3 Auction Agent's Disclaimer.
The Auction Agent makes no representation as to
the validity or adequacy of this Agreement, the Auction
Agency Agreement or the shares of APS of any series.
<PAGE>
4. Miscellaneous.
4.1 Termination.
Either party may terminate this Agreement at
any time on five days' notice to the other party, provid-
ed that neither BD nor the Auction Agent may terminate
this Agreement without first obtaining prior written
consent of the Fund to such termination, which consent
shall not be unreasonably withheld. This Agreement shall
automatically terminate upon the termination of the
Auction Agency Agreement.
4.2 Participant in Securities Depository; Payment
of Dividends in Same-day Funds.
(a) BD is, and shall remain for the term of
this Agreement, a member of, or participant in, the
Securities Depository (or an affiliate of such a member
or participant).
(b) BD represents that it (or if such BD does
not act as Agent Member, one of its affiliates) shall
make all dividend payments on the APS available in same-
day funds on each Dividend Payment Date to customers that
use such BD or affiliate as Agent Member.
4.3 Communications.
Except for (i) communications authorized to be
by telephone by this Agreement or the Auction Procedures
and (ii) communications in connection with Auctions
(other than those expressly required to be in writing),
all notices, requests and other communications to any
party hereunder shall be in writing (including telecopy
or similar writing) and shall be given to such party, ad-
dressed to it, at its address or telecopy number set
forth below:
If to BD,Goldman, Sachs & Co.
addressed:85 Broad Street
New York, New York 10004
Attention:
Telecopier No.: (212) 902-4869
Telephone No.:(212) 902-6535
<PAGE>
If to theBankers Trust Company
Auction Corporate Trust
Agent, and Agency Group
addressed:Four Albany Street
New York, New York 10006
Attention: Auction Rate/
Remarketed Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or such other address or telecopy number as such party
may hereafter specify for such purpose by notice to the
other parties. Each such notice, request or communica-
tion shall be effective when delivered at the address
specified herein. Communications shall be given on
behalf of BD by a BD Officer and on behalf of the Auction
Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.
4.4 Entire Agreement.
This Agreement contains the entire agreement
among the parties hereto relating to the subject matter
hereof, and there are no other representations, endorse-
ments, promises, agreements or understandings, oral,
written or implied, among the parties hereto relating to
the subject matter hereof.
4.5 Benefits.
Nothing in this Agreement, express or implied,
shall give to any person, other than the Fund, the Auc-
tion Agent, BD and their respective successors and as-
signs, any benefit of any legal or equitable right,
remedy or claim hereunder.
4.6 Amendment; Waiver.
(a) This Agreement shall not be deemed or
construed to be modified, amended, rescinded, cancelled
or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of
the party to be charged.
(b) Failure of any party hereto to exercise
any right or remedy hereunder in the event of a breach
<PAGE>
hereof by any other party shall not constitute a waiver
of any such right or remedy with respect to any subse-
quent breach.
4.7 Successors and Assigns.
This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by, the respective
successors and assigns of each of the Auction Agent and
BD. This Agreement may not be assigned by either party
hereto absent the prior written consent of the other
party; provided, however, that this Agreement may be
assigned by the Auction Agent to a successor Auction
Agent selected by the Fund without the consent of BD.
4.8 Severability.
If any clause, provision or section hereof
shall be ruled invalid or unenforceable by any court of
competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section
shall not affect any of the remaining clauses, provisions
or sections hereof.
4.9 Execution in Counterparts.
This Agreement may be executed in several coun-
terparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
4.10 Governing Law.
This Agreement shall be governed by and con-
strued in accordance with the laws of the State of New
York applicable to agreements made and to be performed in
said State.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be duly executed and delivered
by their proper and duly authorized officers as of the
date first above written.
BANKERS TRUST COMPANY
By /s/ Sandra Becker
-------------------------
Name: Sandra Becker
Title: A.T.
GOLDMAN, SACHS & CO.
By /s/ Goldman, Sachs & Co.
-------------------------
(Goldman, Sachs & Co.)
<PAGE>
EXHIBIT C
(Submit only one Order on this Order form)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES [A] [B] [C] ("APS")
ORDER FORM
To:_________________________
_________________________ _______________
_________________________ Date of Auction
New York, New York_______
Attention:_____________
The undersigned Broker-Dealer submits the
following Order on behalf of the Bidder listed below:
Name of Bidder:________________________________________
Bidder places the Order listed below covering the number
of shares indicated (complete only one blank):
_____ shares now held by Bidder (an existing
Holder), and the Order is a (check one):
_____ Hold Order; or
_____ Bid at a rate of ___%; or
_____ Sell Order;
- or -
_____ shares not now held by Bidder (a Potential
Holder), and the Order is a Bid at a rate of ___%.
Notes:
(1) If submitting more than one Order for one Bidder,
use additional Order forms.
<PAGE>
(2) If one or more Orders covering in the aggregate more
than the number of outstanding shares of APS held by any
Existing Holder are submitted, such Orders shall be
considered valid in the order of priority set forth in
the Auction Procedures.
(3) A Hold Order may be placed only by an Existing Holder
covering a number of shares of APS not greater than the
number of shares of APS currently held by such Existing Holder.
(4) Potential holders may make only Bids, each of which
must specify a rate. If more than one Bid is submitted
on behalf of any Potential Holder, each Bid submitted
shall be a separate Bid with the rate specified.
(5) Bids may contain no more than three figures to the
right of the decimal point (.001 of 1%).
Name of Broker-Dealer:
By:
------------------------
<PAGE>
EXHIBIT D
(To be used only for transfers made
other than pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES [A] [B] [C] ("APS")
TRANSFER FORM
We are (check one):
___ the Existing Holder named below;
___ the Broker-Dealer for such Existing Holder; or
___ the Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder has trans-
ferred ___ shares of the above series of APS to ________.
_________________________________
(Name of Existing Holder)
_________________________________
(Name of Broker-Dealer)
_________________________________
(Name of Agent Member)
By:______________________________
Printed Name:
Title:
<PAGE>
EXHIBIT E
(To be used for failures to
deliver shares of Auction Preferred
Shares sold pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES [A] [B] [C] ("APS")
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for _____________________ (the
"Purchaser"), which purchased ____ shares of the
above series of APS in the Auction held on __________
from the seller of such shares.
II. We are a Broker-Dealer for_____________________ (the
"Seller"), which sold ____ shares of the above series
of APS in the Auction held on ______________ to the
purchaser of such shares.
We hereby notify you that (check one)--
___ the Seller failed to deliver such shares of Auction
Preferred Shares to the Purchaser
___ the Purchaser failed to make payment to the Seller
upon delivery of such shares of Auction Preferred
Shares
Name:_______________________
(Name of Broker-Dealer)
By:_________________________
Printed Name:
Title:
<PAGE>
- - -----------------------------------------------------------------------
BROKER-DEALER AGREEMENT
BETWEEN
BANKERS TRUST COMPANY
AND
PAINEWEBBER INCORPORATED
DATED AS OF AUGUST 12, 1993
RELATING TO
AUCTION PREFERRED SHARES
OF
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
- - -----------------------------------------------------------------------
<PAGE>
BROKER-DEALER AGREEMENT dated as of August 12,
1993 between BANKERS TRUST COMPANY (the "Auction Agent"),
a New York banking corporation (not in its individual
capacity but solely as agent of PaineWebber Premier
Insured Municipal Income Fund Inc. (the "Fund") pursuant
to authority granted it in the Auction Agency Agreement),
and PaineWebber Incorporated (together with its succes-
sors and assigns, "BD")
The Fund has issued three series of shares of
Auction Preferred Shares, par value $.001 per share,
liquidation preference $50,000 per share (the "APS")
pursuant to its Articles of Incorporation, as amended by
the Articles supplementary (the "Articles Supplementa-
ry").
The Articles Supplementary will provide that,
for each Subsequent Dividend Period of any series of APS
then outstanding, the Applicable Rate for such series for
such Subsequent Dividend Period shall, under certain
conditions, be the rate per annum that a bank or trust
company appointed by the Fund advises results from imple-
mentation of the Auction Procedures for such series. The
Board of Directors has adopted a resolution appointing
Bankers Trust Company as Auction Agent for purposes of
the Auction Procedures for each series of APS.
The Auction Procedures require the participa-
tion of one or more Broker-Dealers for each series of
APS.
NOW, THEREFORE, in consideration of the premis-
es and the mutual covenants contained herein the Auction
Agent and BD agree as follows:
1. Definitions And Rules Of Construction.
1.1 Terms Defined By Reference To Statement.
Capitalized terms not defined herein shall have
the respective meanings specified in the Articles Supple-
mentary.
<PAGE>
1.2 Terms Defined Herein.
As used herein and in the Settlement Proce-
dures, the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Articles Supplementary" shall mean the
Articles Supplementary establishing three series of pre-
ferred stock and authorizing the issuance of APS as filed
by the Fund with the Department of Assessments and Taxa-
tion of the State of Maryland.
(b) "Auction" shall have the meaning specified
in Section 2.1 hereof.
(c) "Auction Agency Agreement" shall mean the
Auction Agency Agreement, dated as of August 12, 1993,
between the fund and the Auction Agent relating to the
APS.
(d) "Auction Procedures" shall mean the auc-
tion procedures constituting Part II of the Articles
Supplementary.
(e) "Authorized Officer" shall mean each
Senior Vice President, Vice President, Assistant Vice
President, Trust Officer, Assistant Treasurer and Assis-
tant Secretary of the Auction Agent assigned to its
Corporate Trust and Agency Group and every other officer
or employee of the Auction Agent designated as an "Autho-
rized Officer" for purposes of this Agreement in a commu-
nication to BD.
(f) "BD Officer" shall mean each officer or
employee of BD designated as a "BD Officer" for purposes
of this Agreement in a communication to the Auction
Agent.
(g) "Broker-Dealer Agreement" shall mean this
Agreement and any substantially similar agreement between
the Auction Agent and a Broker-Dealer.
(h) "Master Purchaser's Letter" shall mean a
letter addressed to the Fund, the Auction Agent, a Bro-
ker-Dealer and an Agent Member, substantially in the form
attached hereto as Exhibit A.
<PAGE>
(i) "Settlement Procedures" shall mean the
Settlement Procedures attached hereto as Exhibit B.
1.3 Rules Of Construction.
Unless the context or use indicates another or
different meaning or intent, the following rules shall
apply to the construction of this Agreement:
(a) Words importing the singular number shall
include the plural number and vice versa.
(b) The captions and headings herein are
solely for convenienee of referenee and shall not consti-
tute a part of this Agreement nor shall they affect its
meaning, construction or effect.
(e) The words "hereof", "herein", "hereto",
and other words of similar import refer to this Agreement
as a whole.
(d) All referenees herein to a particular time
of day shall be to New York City time.
2. The Auction.
2.1 Purpose; Incorporation By Reference Of Auction
Procedures And Settlement Procedures.
(a) The provisions of the Auction Procedures
will be followed by the Auction Agent for the purpose of
determining the Applicable Rate for any Subsequent Divi-
dend Period of any series of APS for which the Applicable
Rate is to be determined by an Auction. Each periodic
operation of such procedures is hereinafter referred to
as an "Auction".
(b) All of the provisions contained in the
Auction Procedures and the Settlement Procedures are
incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as
if such provisions were fully set forth herein.
(c) BD agrees to act as, and assumes the
obligations of, and limitations and restrictions placed
upon, a Broker-Dealer under this Agreement for each
series of APS. BD understands that other Persons meeting
<PAGE>
the requirements specified in the definition of "Broker-
Dealer" contained in the Auction Procedures may execute
Broker-Dealer Agreements and Master Purchaser's Letters
and participate as Broker-Dealers in Auctions.
2.2 Preparation For Each Auction.
(a) Not later than 9:30 A.M. on each Auction
Date for the APS, the Auction Agent shall advise the
Broker-Dealers for such series by telephone of the Maxi-
mum Rate therefor and the "AA" Composite Commercial Paper
Rate(s), Taxable Equivalent of the Short-Term Municipal
Bond Rate(s) and Treasury Rate(s), as the case may be,
used in determining such Maximum Rate.
(b) In the event that any Auction Date for the
APS shall be changed after the Auction Agent has given
the notice referred to in clause (vi) of paragraph (a) of
the Settlement Procedures, or after the notice referred
to in Section 2.5(a) hereof, if applicable, the Auction
Agent, by such means as the Auction Agent deems practica-
ble, shall give notice of such change to BD not later
than the earlier of 9:15 A.M. on the new Auction Date or
9:15 A.M. on the old Auction Date.
(c) The Auction Agent from time to time may
request the Broker-Dealers to provide the Auction Agent
with a list of their respective customers that such
Broker-Dealers believe are Existing Holders of shares of
APS. BD shall comply with any such request, and the
Auction Agent shall keep confidential any such informa-
tion so provided by BD and shall not disclose any infor-
mation so provided by BD to any Person other than the
Fund and BD.
(d) BD agrees to maintain a list of Potential
Holders and to use its best efforts to contact the Poten-
tial Holders on such list whom BD believes may be inter-
ested in participating in such Auction on each Auction
Date for the purposes set forth in the Auction Proce-
dures.
(e) The Auction Agent is not required to
accept the Master Purchaser's Letter of any Potential
Holder who wishes to submit a Bid for the first time in
an Auction or of any Potential Holder or Existing Holder
who wishes to amend its Master Purchaser's Letter unless
<PAGE>
such letter or amendment is received by the Auction Agent
by 3:00 P.M. on the Business Day preceding such Auction.
2.3 Auction Schedule; Method Of Submission Of
Orders.
(a) The Auction Agent shall conduct Auctions
for APS in accordance with the schedule set forth below.
Such schedule may be changed by the Auction Agent with
the consent of the Fund, which consent shall not be
unreasonably withheld. The Auction Agent shall give
written notice of any such change to each Broker-Dealer.
Such notice shall be given prior to the close of business
on the Business Day next preceding the first Auction Date
on which such change shall be effective.
Time Event
- - ---- -----
By 9:30 A.M. Auction Agent advises the
Fund and the Broker-Deal-
ers of the applicable
Maximum Rate and the "AA"
Composite Commercial Paper
Rate(s), Taxable Equiva-
lent of the Short-Term
Municipal Bond Rate(s) and
Treasury Rate(s), as the
case may be, used in de-
termining such Maximum
Rate as set forth in Sec-
tion 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles
information communicated
to it by Broker-Dealers as
provided in Section 3(a)
of the Auction Procedures.
Submission Deadline is
1:30 P.M.
Not earlier than 1:30 P.M.Auction Agent makes de-
terminations pursuant to
Section 4(a) of the Auc-
tion Procedures.
<PAGE>
By approximately 3:00 P.M.Auction Agent advises Fund
of results of Auction as
provided in Section 4(b)
of the Auction Procedures.
Submitted Bids and Submit-
ted Sell Orders are ac-
cepted and rejected and
shares of APS allocated as
provided in Section 5 of
the Auction Procedures.
Auction Agent gives notice
of Auction results as set
forth in section 2.4(a)
hereof.
(b) BD agrees not to sell, assign or dispose
of any share of APS to any Person who has not delivered,
or on whose behalf a Broker-Dealer has not delivered, a
signed Master Purchaser's Letter to the Auction Agent.
(c) BD shall submit Orders to the Auction
Agent in writing substantially in the form attached here-
to as Exhibit C. BD shall submit a separate Order to the
Auction Agent for each Potential Holder or Existing
Holder on whose behalf BD is submitting an Order and
shall not net or aggregate the Orders of different Poten-
tial Holders or Existing Holders on whose behalf BD is
submitting Orders.
(d) BD shall deliver to the Auction Agent (i)
a written notice in substantially the form attached
hereto as Exhibit D for transfers of shares of APS made
through BD by an Existing Holder to another Person other
than pursuant to an Auction and shall deliver or cause to
be delivered the related Master Purchaser's Letter exe-
cuted by such Person if such Person has not previously so
delivered a Master Purchaser's Letter and (ii) a written
notice, substantially in the form attached hereto as
Exhibit E, of the failure of any shares of APS to be
transferred to or by any Person that purchased or sold
shares of APS through BD pursuant to an Auction. 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. on the Business Day preceding such Auction.
<PAGE>
(e) BD has delivered to the Auction Agent its
executed Master Purchaser's Letter. BD and other Broker-
Dealers which have delivered duly executed Master
Purchaser's Letters may submit Orders in Auctions for
their own accounts unless BD is an affiliate of the Fund
or the Fund shall have notified BD and all other Broker-
Dealers that they may no longer do so, in which case
Broker-Dealers may continue to submit Hold Orders and
Sell Orders for their own accounts.
(f) BD agrees to handle its customers' Orders
in accordance with its duties under applicable securities
laws and rules.
2.4 Notices Of Auction Results.
(a) On each Auction Date for APS, the Auction
Agent shall notify BD by telephone of the results of the
Auction as set forth in paragraph (a) of the Settlement
Procedures. By approximately 11:30 A.M., on the Business
Day next succeeding such Auction Date, the Auction Agent
shall confirm to BD in writing the disposition of all
Orders submitted by BD in such Auction.
(b) BD shall notify each Existing Holder or
Potential Holder on whose behalf BD has submitted an
Order as set forth in paragraph (b) of the Settlement
Procedures and take such other action as is required of
BD pursuant to the Settlement Procedures.
2.5 Designation Of Special Dividend Period.
(a) If the Fund delivers to the Auction Agent
a notice of the Auction Date for APS for a Rate Period
thereof that next succeeds a Rate Period that is not a
Minimum Dividend Period in the form of Exhibit E to the
Auction Agency Agreement, the Auction Agent shall deliver
such notice to BD as promptly as practicable after its
receipt of such notice from the Fund.
(b) If the Board of Directors proposes to
designate any succeeding Subsequent Dividend Period of
any series of APS as a Special Dividend Period and the
Fund delivers to the Auction Agent a notice of such
proposed Special Dividend Period in the form of Exhibit F
to the Auction Agency Agreement, the Auction Agent shall
<PAGE>
deliver such notice to BD as promptly as practicable
after its receipt of such notice from the Fund.
(c) If the Board of Directors determines to
designate such succeeding Subsequent Dividend Period as a
Special Dividend Period, and the Fund delivers to the
Auction Agent a notice of such Special Dividend Period in
the form of Exhibit G to the Auction Agency Agreement not
later than 11:00 A.M. on the second Business Day next
preceding the first day of such Rate Period, the Auction
Agent shall deliver such notice to BD not later than 3:00
P.M. on such second Business Day.
(d) If the Fund shall deliver to the Auction
Agent a notice not later than 11:00 A.M. on the second
Business Day next preceding the first day of any Rate
Period stating that the Fund has determined not to exer-
cise its option to designate such succeeding Subsequent
Dividend Period as a Special Dividend Period, in the form
of Exhibit H to the Auction Agency Agreement, or shall
fail to timely deliver either such notice or a notice in
the form of Exhibit G to the Auction Agency Agreement,
the Auction Agent shall deliver a notice in the form of
Exhibit H to the Auction Agency Agreement to BD not later
than 3:00 P.M. on such second Business Day.
2.6 Allocation Of Taxable Income.
If the Fund delivers to the Auction Agent a
notice in the form of Exhibit K to the Auction Agency
Agreement designating all or a portion of any dividend on
shares of any series of APS to consist of net capital
gains or other income taxable for Federal income tax
purposes, the Auction Agent shall deliver such notice to
BD on the Business Day following its receipt of such
notice from the Fund. On or prior to the Auction Date
referred to in such notice, BD will contact each of its
customers that BD believes to be an Existing Holder of
shares of APS or a Potential Holder interested in submit-
ting an Order with respect to the Auction to be held on
such Auction Date, and BD will notify such customer of
the contents of such notice. BD will be deemed to have
notified such Existing Holders and Potential Holders if,
for each such Holder, (i) it makes a reasonable effort to
contact such Holder by telephone, and (ii) upon failing
to contact such Holder by telephone it mails written
notification to such Holder at the mailing address indi-
<PAGE>
cated in such Holder's most recently submitted Master
Purchaser's Letter or at such other address as is indi-
cated in the account records of BD.
The Auction Agent shall be required to notify
BD within two Business Days after each Auction that
involves an allocation of income taxable for Federal
income tax purposes as to the dollar amount per share of
such taxable income and income exempt from Federal income
taxation included in the related dividend.
2.7 Failure To Deposit.
(a) If:
(i) any Failure to Deposit shall
have occurred with respect to shares of
APS during any Rate Period thereof and
(ii) prior to 12:00 Noon on the third
Business Day next succeeding the date on
whieh sueh Failure to Deposit occurred,
such Failure to Deposit shall have been
cured as described in Section 2.7(a) of
the Auction Agency Agreement and the Fund
shall have paid to the Auction Agent a
late charge as described in such Section
2.7(a);
then, the Auction Agent shall deliver a notice in the
form of Exhibit I to the Auction Agency Agreement by
first-class mail, postage prepaid, to BD not later than
one Business Day after its receipt of the payment from
the Fund curing such Failure to Deposit and such late
charge.
(b) If:
(i) any Failure to Deposit shall
have occurred with respect to shares of
any series of APS during a Rate Period
thereof, and, prior to 12:00 Noon on the
third Business Day succeeding the date on
which such Failure to Deposit occurred,
such Failure to Deposit shall not have
been cured as described in Section 2.7(a)
of the Auction Agency Agreement and the
Fund shall not have paid to the Auction
<PAGE>
Agent the late charge described in such
Section 2.7(a), but such Failure to Depos-
it shall subsequently be so cured;
then, the Auction Agent shall deliver a notice in the
form of Exhibit J to the Auction Agency Agreement to the
Broker-Dealers for such series not later than one Busi-
ness Day after the receipt of the payment from the Fund
curing such Failure to Deposit.
2.8 Service Charge To Be Paid To BD.
On the Business Day next succeeding each Auc-
tion Date, the Auction Agent shall pay to BD from moneys
received from the Fund an amount equal to the product of
(a) (i) in the case of any Auction Date immediately
preceding a Rate Period of such series consisting of less
than one year, 1/4 of 1%, or (ii) in the case of any
Auction Date immediately preceding a Rate Period of such
series consisting of one year or more, a percentage
agreed upon in writing by the Fund and the Broker-Dealers
times (b) a fraction, the numerator of which is the num-
ber of days in the Rate Period therefor beginning on such
Business Day and the denominator of which is 365 if such
Rate Period is less than one year and 360 for all other
Rate Periods, times (c) $50,000 times (d) the sum of (i)
the aggregate number of shares of such series placed by
BD in such Auction that were (A) the subject of Submitted
Bids of Existing Holders submitted by BD and continued to
be held as a result of such submission and (B) the sub-
ject of Submitted Bids of Potential Holders submitted by
BD and purchased as a result of such submission plus (ii)
the aggregate number of shares of such series subject to
valid Hold Orders (determined in accordance with para-
graph (d) of Section 3 of the Auction Procedures) submit-
ted to the Auction Agent by BD plus (iii) the number of
shares of APS deemed to be subject to Hold Orders by
Existing Holders pursuant to paragraph (c) of Section 3
of the Auction Procedures that were acquired by such
Existing Holders through BD.
For purposes of subclause (d)(iii) of the
foregoing paragraph, if any Existing Holder who acquired
shares of any series of APS through BD transfers those
shares to another Person other than pursuant to an Auc-
tion, then the Broker-Dealer for the shares so trans-
ferred shall continue to be BD; provided, however, that
<PAGE>
if the transfer was effected by, or if the transferee is,
a Broker-Dealer other than BD, then such Broker-Dealer
shall be the Broker-Dealer for such shares.
2.9 Settlement.
(a) If any Existing Holder on whose behalf BD
has submitted a Bid or Sell Order for shares of APS that
was accepted in whole or in part fails to instruct its
Agent Member to deliver the shares of APS subject to such
Bid or Sell Order against payment therefor, BD shall in-
struct such Agent Member to deliver such shares against
payment therefor and BD may deliver to the Potential
Holder on whose behalf BD submitted a Bid for shares of
APS that was accepted in whole or in part a number of
shares of APS of such series that is less than the number
of shares of APS of such series specified in such Bid to
be purchased by such Potential Holder. Notwithstanding
the foregoing terms of this Section, any delivery or non-
delivery of shares of APS which represents any departure
from the results of an Auction for such series, as deter-
mined by the Auction Agent, shall be of no effect unless
and until the Auction Agent shall have been notified of
such delivery or non-delivery in accordance with the
terms of Section 2.3(d)(ii) hereof. The Auction Agent
shall have no duty or liability with respect to enforce-
ment of this Section 2.9.
(b) Neither the Auction Agent nor the Fund
shall have any responsibility or liability with respect
to the failure of an Existing Holder, a Potential Holder
or its respective Agent Member to deliver shares of APS
of any series or to pay for shares of APS of any series
sold or purchased pursuant to the Auction Procedures or
otherwise.
3. The Auction Agent.
3.1 Duties And Responsibilities.
(a) The Auction Agent is acting solely as
agent for the Fund hereunder and owes no fiduciary duties
to any other Person, other than the Fund, by reason of
this Agreement.
(b) The Auction Agent undertakes to perform
such duties and only such duties as are specifically set
<PAGE>
forth in this Agreement, and no implied covenants or
obligations shall be read into this Agreement against the
Auction Agent.
(c) In the absence of bad faith or negligence
on its part, the Auction Agent shall not be liable for
any action taken, suffered, or omitted or for any error
of judgment made by it in the performance of its duties
under this Agreement. The Auction Agent shall not be
liable for any error or judgment made in good faith
unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts.
3.2 Rights Of The Auction Agent.
(a) The Auction Agent may rely and shall be
protected in acting or refraining from acting upon any
communication authorized hereby and upon any written in-
struction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper
or document believed in good faith by it to be genuine.
The Auction Agent shall not be liable for acting upon any
telephone communication authorized by this Agreement
which the Auction Agent believes in good faith to have
been given by the Fund or by a Broker-Dealer. The Auc-
tion Agent may record telephone communications with the
Broker-Dealers.
(b) The Auction Agent may consult with counsel
of its choice and the advice of such counsel shall be
full and complete authorization and protection in respect
of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to
advance, expend or risk its own funds or otherwise incur
or become exposed to financial liability in the perfor-
mance of its duties hereunder.
3.3 Auction Agent's Disclaimer.
The Auction Agent makes no representation as to
the validity or adequacy of this Agreement, the Auction
Agency Agreement or the shares of APS of any series.
<PAGE>
4. Miscellaneous.
4.1 Termination.
Either party may terminate this Agreement at
any time on five days' notice to the other party, provid-
ed that neither BD nor the Auction Agent may terminate
this Agreement without first obtaining prior written
consent of the Fund to such termination, which consent
shall not be unreasonably withheld. This Agreement shall
automatically terminate upon the termination of the
Auction Agency Agreement.
4.2 Participant In Securities Depository; Payment
Of Dividends In Same-Day Funds.
(a) BD is, and shall remain for the term of
this Agreement, a member of, or participant in, the
Securities Depository (or an affiliate of such a member
or participant).
(b) BD represents that it (or if such BD does
not act as Agent Member, one of its affiliates) shall
make all dividend payments on the APS available in same-
day funds on each Dividend Payment Date to customers that
use such BD or affiliate as Agent Member.
4.3 Communications.
Except for (i) communications authorized to be
by telephone by this Agreement or the Auction Procedures
and (ii) communications in connection with Auctions
(other than those expressly required to be in writing),
all notices, requests and other communications to any
party hereunder shall be in writing (including telecopy
or similar writing) and shall be given to such party, ad-
dressed to it, at its address or telecopy number set
forth below:
If to BD,PaineWebber Incorporated
addressed:1285 Avenue of the Americas
New York, New York 10019
Attention:
Telecopier No.: (212) 713-1054
Telephone No.:(212) 713-2000
<PAGE>
If to theBankers Trust Company
Auction Corporate Trust
Agent, and Agency Group
addressed:Four Albany Street
New York, New York 10006
Attention: Auction Rate/
Remarketed Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or such other address or telecopy number as such party
may hereafter specify for such purpose by notice to the
other parties. Each such notice, request or communica-
tion shall be effective when delivered at the address
specified herein. Communications shall be given on
behalf of BD by a BD Officer and on behalf of the Auction
Agent by an Authorized Officer. BD may record telephone
communications with the Auction Agent.
4.4 Entire Agreement.
This Agreement contains the entire agreement
among the parties hereto relating to the subject matter
hereof, and there are no other representations, endorse-
ments, promises, agreements or understandings, oral,
written or implied, among the parties hereto relating to
the subject matter hereof.
4.5 Benefits.
Nothing in this Agreement, express or implied,
shall give to any person, other than the Fund, the Auc-
tion Agent, BD and their respective successors and as-
signs, any benefit of any legal or equitable right,
remedy or claim hereunder.
4.6 Amendment; Waiver.
(a) This Agreement shall not be deemed or
construed to be modified, amended, rescinded, cancelled
or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of
the party to be charged.
(b) Failure of any party hereto to exercise
any right or remedy hereunder in the event of a breach
<PAGE>
hereof by any other party shall not constitute a waiver
of any such right or remedy with respect to any subse-
quent breach.
4.7 Successors And Assigns.
This Agreement shall be binding upon, inure to
the benefit of, and be enforceable by, the respective
successors and assigns of each of the Auction Agent and
BD. This Agreement may not be assigned by either party
hereto absent the prior written consent of the other
party; provided, however, that this Agreement may be
assigned by the Auction Agent to a successor Auction
Agent selected by the Fund without the consent of BD.
4.8 Severability.
If any clause, provision or section hereof
shall be ruled invalid or unenforceable by any court of
competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section
shall not affect any of the remaining clauses, provisions
or sections hereof.
4.9 Execution In Counterparts.
This Agreement may be executed in several coun-
terparts, each of which shall be an original and all of
which shall constitute but one and the same instrument.
4.10 Governing Law.
This Agreement shall be governed by and con-
strued in accordance with the laws of the State of New
York applicable to agreements made and to be performed in
said State.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have
caused this Agreement to be duly executed and delivered
by their proper and duly authorized officers as of the
date first above written.
BANKERS TRUST COMPANY
By /s/ Sandra Becker
---------------------------
Name: Sandra Becker
Title: A.T.
PAINEWEBBER INCORPORATED
By /s/ Peter Mason
---------------------------
Name: Peter Mason
Title: Mgn. Director
<PAGE>
EXHIBIT C
(Submit only one Order on this Order form)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES [A] [B] [C] ("APS")
ORDER FORM
To:_________________________
_________________________ _______________
_________________________ Date of Auction
New York, New York_______
Attention:_____________
The undersigned Broker-Dealer submits the
following Order on behalf of the Bidder listed below:
Name of Bidder:________________________________________
Bidder places the Order listed below covering the number
of shares indicated (complete only one blank):
_____ shares now held by Bidder (an existing
Holder), and the Order is a (check one):
_____ Hold Order; or
_____ Bid at a rate of ___%; or
_____ Sell Order;
- or -
_____ shares not now held by Bidder (a Potential
Holder), and the Order is a Bid at a rate of ___%.
Notes:
(1) If submitting more than one Order for one Bidder,
use additional Order forms.
<PAGE>
(2) If one or more Orders covering in the aggregate more
than the number of outstanding shares of APS held by any
Existing Holder are submitted, such Orders shall be
considered valid in the order of priority set forth in
the Auction Procedures.
(3) A Hold Order may be placed only by an Existing Hold-
er covering a number of shares of APS not greater than
the number of shares of APS currently held by such Exist-
ing Holder.
(4) Potential holders may make only Bids, each of which
must specify a rate. If more than one Bid is submitted
on behalf of any Potential Holder, each Bid submitted
shall be a separate Bid with the rate specified.
(5) Bids may contain no more than three figures to the
right of the decimal point (.001 of 1%).
Name of Broker-Dealer:
By:_______________________
<PAGE>
EXHIBIT D
(To be used only for transfers made
other than pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES [A] [B] [C] ("APS")
TRANSFER FORM
We are (check one):
___ the Existing Holder named below;
___ the Broker-Dealer for such Existing Holder; or
___ the Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder has trans-
ferred ___ shares of the above series of APS to ________.
_________________________________
(Name of Existing Holder)
_________________________________
(Name of Broker-Dealer)
_________________________________
(Name of Agent Member)
By:______________________________
Printed Name:
Title:
<PAGE>
EXHIBIT E
(To be used for failures to
deliver shares of Auction Preferred
Shares sold pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES [A] [B] [C] ("APS")
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for _____________________ (the
"Purchaser"), which purchased ____ shares of the
above series of APS in the Auction held on __________
from the seller of such shares.
II. We are a Broker-Dealer for_____________________ (the
"Seller"), which sold ____ shares of the above series
of APS in the Auction held on ______________ to the pur-
chaser of such shares.
We hereby notify you that (check one)--
___ the Seller failed to deliver such shares of Auction
Preferred Shares to the Purchaser
___ the Purchaser failed to make payment to the Seller
upon delivery of such shares of Auction Preferred
Shares
Name:_______________________
(Name of Broker-Dealer)
By:_________________________
Printed Name:
Title:
<PAGE>
- - -------------------------------------------------------------------------------
AUCTION AGENCY AGREEMENT
between
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
and
BANKERS TRUST COMPANY
Dated as of August 12, 1993
Relating to
AUCTION PREFERRED SHARES, SERIES A, B AND C
of
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
- - -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 DEFINITIONS AND RULES OF CONSTRUCTION.............................................. 1
1.1 Terms Defined by Reference to APS Provisions................................. 1
1.2 Terms Defined Herein......................................................... 1
1.3 Rules of Construction........................................................ 3
SECTION 2 The Auction........................................................................ 3
2.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement
Procedures................................................................. 3
2.2 Preparation of Each Auction; Maintenance of Registry of Beneficial Owners.... 3
2.3 Information Concerning Rates................................................. 6
2.4 Auction Schedule............................................................. 9
2.5 Designation of Special Dividend Period....................................... 9
2.6 Allocation of Taxable Income................................................. 11
2.7 Failure to Deposit........................................................... 11
2.8 Broker-Dealers............................................................... 13
2.9 Ownership of Shares of APS................................................... 13
2.10 Access to and Maintenance of Auction Records................................. 14
2.11 Dividend and Redemption Price Deposit; Funds to Be Held in Trust............. 14
SECTION 3 The Auction Agent as Dividend and Redemption Price Disbursing Agent................ 14
SECTION 4 The Auction Agent as Transfer Agent and Registrar.................................. 15
4.1 Issue of Share Certificates.................................................. 15
<PAGE>
4.2 Registration of Transfer of Shares........................................... 15
4.3 Removal of Legend on Restricted Shares....................................... 15
4.4 Lost Share Certificates...................................................... 15
4.5 Disposition of Canceled Certificates; Record Retention....................... 16
4.6 Share Transfer Books......................................................... 16
4.7 Return of Funds.............................................................. 16
SECTION 5 Representations and Warranties of the Fund......................................... 16
SECTION 6 The Auction Agent.................................................................. 17
6.1 Duties and Responsibilities.................................................. 17
6.2 Rights of the Auction Agent.................................................. 18
6.3 Auction Agent's Disclaimer................................................... 18
6.4 Compensation, Expenses and Indemnification................................... 18
SECTION 7 Miscellaneous...................................................................... 19
7.1 Term of Agreement............................................................ 19
7.2 Communications............................................................... 19
7.3 Entire Agreement............................................................. 20
7.4 Benefits..................................................................... 20
7.5 Amendment; Waiver............................................................ 21
7.6 Successors and Assigns....................................................... 21
7.7 Severability................................................................. 21
7.8 Execution in Counterparts.................................................... 21
7.9 Governing Law................................................................ 21
</TABLE>
<PAGE>
EXHIBITS
<TABLE>
<S> <C> <C>
Exhibit A - Form of Broker-Dealer Agreement
Exhibit B - Form of Master Purchaser's Letter
Exhibit C - Settlement Procedures
Exhibit D - Form of APS Provisions
Exhibit E - Form of Notice of Auction Date
Exhibit F - Form of Notice of Proposed Change of Length of Rate Period
Exhibit G - Form of Notice of Change of Length of Rate Period
Exhibit H - Form of Notice of Determination Not to Change Length of Rate Period
Exhibit I - Form of Notice of Cure of Failure to Deposit
Exhibit J - Form of Notice of Subsequent Cure of Failure to Deposit
Exhibit K - Form of Notice of Taxable Income
</TABLE>
<PAGE>
AUCTION AGENCY AGREEMENT, dated as of August 12, 1993, between PAINEWEBBER
PREMIER INSURED MUNICIPAL INCOME FUND INC., a Maryland Corporation (the "Fund"),
and BANKERS TRUST COMPANY, a New York banking corporation (the "Auction Agent").
WHEREAS, the Fund proposes to issue preferred shares of beneficial interest,
par value $.001 per share, liquidation preference $50,000 per share, in three
series designated, respectively, as Auction Preferred Shares, Series A ("APS
Series A"), Auction Preferred Shares, Series B ("APS Series B") and Auction
Preferred Shares, Series C ("APS Series C") (collectively, the "APS") pursuant
to the APS Provisions (as hereinafter defined) and desires that the Auction
Agent perform certain duties in connection with the APS upon the terms and
subject to the conditions of this Agreement, and hereby appoints the Auction
Agent to act in the capacities set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Fund and the Auction Agent agree as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to APS Provisions. Capitalized terms not
defined herein shall have the respective meanings specified in the APS
Provisions.
1.2 Terms Defined Herein. As used herein and in the Settlement
Procedures, the following terms shall have the following meanings,
unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member of, or participant
in, the Securities Depository that will act on behalf of a Bidder and is
identified as such in such Bidder's Master Purchaser's Letter.
(b) "APS Provisions" shall mean the Fund's Articles of Incorporation,
including the Articles Supplementary ("Articles Supplementary") establishing and
fixing the rights and preferences of the shares of each series of APS on file
with the State of Maryland, a copy of which is attached hereto as Exhibit D.
(c) "Auction" shall have the meaning specified in Section 2.1 hereof.
(d) "Auction Procedures" shall mean the auction procedures constituting
Part II of the form of the Articles Supplementary.
(e) "Authorized Officer" shall mean each Senior Vice President, Vice
President, Assistant Vice President, Assistant Treasurer, and Assistant
Secretary of the Auction Agent and every other officer or employee of the
Auction Agent designated as an
<PAGE>
"Authorized Officer" for purposes hereof in a communication to the Fund.
(f) "Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions 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.
(g) "Broker-Dealer Agreement" shall mean each agreement among the Fund, the
Auction Agent and a Broker-Dealer substantially in the form attached hereto as
Exhibit A.
(h) "Existing Holder," when used with respect to the APS, shall mean a
Person who has signed a Master Purchaser's Letter and is listed as the
beneficial owner of such APS in the records of the Auction Agent.
(i) "Fund Officer" shall mean the Chairman of the Board of Directors of the
Fund, the President, each Vice President (whether or not designated by a number
or word or words added before or after the title "Vice President"), the
Secretary, the Treasurer, each Assistant Secretary and each Assistant Treasurer
of the Fund and every other officer or employee of the Fund designated as a
"Fund Officer" for purposes hereof in a notice to the Auction Agent.
(j) "Master Purchaser's Letter" shall mean a letter addressed to the Fund,
the Auction Agent, a Broker-Dealer and an Agent Member, substantially in the
form attached hereto as Exhibit B.
(k) "Potential Holder," when used with respect to the APS, shall mean any
Person, including any Existing Holder of APS, (i) who shall have executed a
Master Purchaser's Letter and (ii) who may be interested in acquiring APS (or,
in the case of an Existing Holder of APS, additional APS).
(l) "Settlement Procedures" shall mean the Settlement Procedures attached
hereto as Exhibit C.
(m) "Underwriters" shall mean Goldman, Sachs & Co. and PaineWebber
Incorporated and any other person named as an underwriter of the APS
in the Underwriting Agreement or any schedule thereto.
(n) "Underwriting Agreement" shall mean the Underwriting Agreement dated
August 5, 1993 among the Fund and the Underwriters.
<PAGE>
1.3 Rules of Construction. Unless the context or use indicates another or
different meaning or intent, the following rules shall apply to the construction
of this Agreement:
(a) Words importing the singular number shall include the plural number and
vice versa.
(b) The captions and headings herein are solely for convenience of
reference and shall not constitute a part of this Agreement nor shall they
affect its meaning, construction or effect.
(c) The words "hereof," "herein," "hereto" and other words of similar
import refer to this Agreement as a whole.
(d) All references herein to a particular time of day shall be to New York
City time.
2. The Auction.
2.1 Purpose; Incorporation by Reference of Auction Procedures and Settlement
Procedures. (a) The APS Provisions provide that the Applicable Rate per annum
for each series of APS for each Subsequent Dividend Period after the Initial
Dividend Period with respect to such series of APS shall, except under certain
conditions, be equal to the rate per annum that a bank or trust company
appointed by the Fund advises has resulted on the Business Day preceding the
first day of such Subsequent Dividend Period from implementation of the Auction
Procedures for such series. Each periodic implementation of the Auction
Procedures is hereinafter referred to as an "Auction." The Board of Directors
has adopted a resolution appointing Banker Trust Company as Auction Agent for
purposes of the Auction Procedures for the APS. The Auction Agent accepts such
appointment and agrees to follow the procedures set forth in this Section 2 and
the Auction Procedures for the purpose of determining the Applicable Rate for
each series of APS for each Subsequent Dividend Period thereof for which the
Applicable Rate is to be determined by an Auction.
(b) All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
2.2 Preparation of Each Auction; Maintenance of Registry of Beneficial Owners.
(a) Not later than seven days prior to the first Auction Date for the APS, the
Fund shall provide the Auction Agent with a list of the Broker-Dealers and a
manually signed copy of each Broker-Dealer Agreement for execution by the
Auction Agent. Not later than seven days prior to any Auction Date for the APS
for which any change in such list of Broker-Dealers is to be
<PAGE>
effective, the Fund will notify the Auction Agent in writing of such change and,
if any such change involves the addition of a Broker-Dealer to such list, shall
cause to be delivered to the Auction Agent for execution by the Auction Agent a
Broker-Dealer Agreement signed by such Broker-Dealer; provided, however, that if
the Fund proposes to designate any Special Dividend Period for any series of APS
pursuant to Section 4 of Part I of the Articles Supplementary, not later than
11:00 A.M., New York City time, on the Business Day next preceding the Auction
next preceding the first day of such Special Dividend Period, the Fund shall
provide the Auction Agent with a list of the Broker-Dealers for such series and
a manually signed copy of each Broker-Dealer Agreement or a new Schedule A to
the Broker-Dealer Agreement (which Schedule A shall replace and supersede any
previous Schedule A to such Broker-Dealer Agreement) with each Broker-Dealer for
such series. The Auction Agent shall have entered into a Broker-Dealer Agreement
with each Broker-Dealer prior to the participation of any such Broker-Dealer in
any Auction.
(b) In the event that any Auction Date for any series of APS shall be
changed after the Auction Agent shall have given the notice referred to in
clause (vi) of paragraph (a) of the Settlement Procedures, or after the notice
referred to in Section 2.5(a) hereof, if applicable, the Auction Agent, by such
means as the Auction Agent deems practicable, shall give notice of such change
to the Broker-Dealers for such series not later than the earlier of 9:15 A.M. on
the new Auction Date or 9:15 A.M. on the old Auction Date.
(c)(i) The Auction Agent shall maintain a registry of the beneficial owners
of each series of APS, who shall constitute Existing Holders of such APS for
purposes of Auctions, and the Auction Agent shall indicate thereon the identity
of the respective Broker-Dealer of each Existing Holder, if any, on whose behalf
such Broker-Dealer submitted the most recent Order in any Auction which resulted
in such Existing Holder continuing to hold or purchasing such series of APS. The
Auction Agent shall keep such registry current and accurate. The Fund shall
provide or cause to be provided to the Auction Agent at or prior to the Date of
Original Issue of each series of APS a list of the initial Existing Holders of
the shares of each such series, the number of shares of such series purchased by
each such Existing Holder and the respective Broker-Dealer of each such Existing
Holder or the affiliate thereof through which each such Existing Holder
purchased such shares. The Auction Agent shall advise the Fund in writing
whenever the number of Existing Holders is 500 or more. The Auction Agent may
rely upon, as conclusive evidence of the identities of the Existing Holders of
any series of APS, (A) such list, (B) the results of Auctions and (C) notices
from any Existing Holder, the Agent Member of any Existing Holder or the
Broker-Dealer of any Existing Holder as described in the first sentence of
Section 2.2(c)(iii) hereof.
<PAGE>
(ii) In the event of any partial redemption of any series of APS, the
Auction Agent shall, at least two Business Days prior to the next Auction for
such series, request the Agent Member of each Existing Holder of shares of such
series to disclose to the Auction Agent (upon selection by such Agent Member of
the Existing Holders whose shares of such series of APS are to be redeemed) the
number of shares of such series of APS, if any, of such Existing Holder which
are subject to such redemption, provided the Auction Agent has been furnished
with the name and telephone number of a person or department at such Agent
Member from which it shall request such information. Upon any refusal of an
Agent Member to release such information, the Auction Agent shall deliver to
such Agent Member a facsimile copy of the Existing Holder's Master Purchaser's
Letter, which authorizes and instructs such Agent Member to release such
information to the Auction Agent. In the absence of receiving any such
information with respect to an Existing Holder, from such Existing Holder's
Agent Member or otherwise, the Auction Agent may continue to treat such Existing
Holder as the beneficial owner of the number of shares of such series of APS
shown in the Auction Agent's registry.
(iii) The Auction Agent shall be required to register a transfer of shares
of any series of APS from an Existing Holder of such shares to another Person
only if such transfer is made to a Person that has delivered, or on whose behalf
has been delivered, a signed Master Purchaser's Letter to the Auction Agent and
if (A) such transfer is pursuant to an Auction or (B) the Auction Agent has been
notified in writing (I) in a notice substantially in the form of Exhibit D to
the Broker-Dealer Agreements by such Existing Holder, the Agent Member of such
Existing Holder or the Broker-Dealer of such Existing Holder of such transfer or
(II) in a notice substantially in the form of Exhibit E to the Broker-Dealer
Agreements by the Broker-Dealer of any Person that purchased or sold shares of
such series of APS in an Auction of the failure of such shares to be transferred
as a result of such Auction. 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. on the Business Day preceding such Auction.
(iv) The Auction Agent is not required to accept the Master Purchaser's
Letter of any Potential Holder who wishes to submit a Bid for the first time in
an Auction or of any Potential Holder or Existing Holder who wishes to amend its
Master Purchaser's Letter unless such letter or amendment is received by the
Auction Agent by 3:00 P.M. on the Business Day preceding such Auction.
(d) The Auction Agent may request the Broker-Dealers, as set forth in the
Broker-Dealer Agreements, to provide the Auction Agent with a list of their
respective customers that such Broker-Dealers believe are Existing Holders of
any series of APS. The Auction Agent shall keep confidential such registry of
Existing
<PAGE>
Holders and shall not disclose the identities of the Existing Holders of such
shares to any Person other than the Fund and the Broker-Dealer that provided
such information.
2.3 Information Concerning Rates. (a) The Applicable Percentage on the date of
this Agreement for each series of APS is 110%. If there is any change in the
credit rating of any series of APS by either of the rating agencies (or
substitute or successor rating agencies) referred to in the definition of
"Applicable Percentage" resulting in any change in the Applicable Percentage for
such series of APS after the date of this Agreement, the Fund shall notify the
Auction Agent in writing of such change in the Applicable Percentage prior to
12:00 Noon on the Business Day prior to the next Auction Date for such series
succeeding such change. If the Fund designates all or a portion of any dividend
on shares of any series of APS to consist of net capital gains or other income
taxable for federal income tax purposes, it will indicate, in its notice in the
form of Exhibit K hereto to the Auction Agent pursuant to Section 2.6 hereof,
the Applicable Percentage for such series to be in effect for the Auction Date
on which the dividend rate for such dividend is to be fixed. In determining the
Maximum Rate for the APS on any Auction Date as set forth in Section 2.3(b)(i)
hereof, the Auction Agent shall be entitled to rely on the last Applicable
Percentage for such series of APS of which it has most recently received notice
from the Fund (or, in the absence of such notice, the percentage set forth in
the first sentence of this paragraph (a)).
(b)(i) On each Auction Date for any series of APS, the Auction Agent
shall determine the Maximum Rate for such series. The Maximum Rate for any
series of APS on any Auction Date shall be:
(A) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Dividend Period of
more than 28 Rate Period Days designated by the Fund pursuant to Section 4 of
Part I of the Articles Supplementary, the product of (x) the Reference Rate on
such Auction Date for the next Rate Period of such series and (y) the Applicable
Percentage on such Auction Date, unless such series has or had a Special
Dividend Period (other than a Special Dividend Period of 28 Rate Period Days or
less) and an Auction at which Sufficient Clearing Bids existed has not yet
occurred for a Minimum Dividend Period of such series after such Special
Dividend Period, in which case the higher of:
(1) the dividend rate on shares of such series for the then-ending
Rate Period, and
(2) the product of (x) the higher of (I) the "AA" Composite Commercial
Paper Rate on such Auction Date for the then-ending Rate Period of such series,
if such Rate Period is
<PAGE>
less than one year, or the Treasury Rate on such Auction Date for such Rate
Period, if such Rate Period is one year or greater, and (II) the "AA" Composite
Commercial Paper Rate on such Auction Date for such Special Dividend Period of
such series, if such Special Dividend Period is less than one year, or the
Treasury Rate on such Auction Date for such Special Dividend Period, if such
Special Dividend Period is one year or greater and (2) the Applicable Percentage
on such Auction Date; or
(B) in the case of any Auction Date which is the Auction Date immediately
prior to the first day of any proposed Special Dividend Period of more than 28
Rate Period Days designated by the Fund pursuant to Section 4 of Part I of the
Articles Supplementary, the product of (1) the highest of (x) the Reference Rate
on such Auction Date for the then-ending Rate Period of such series, if such
Rate Period is less than one year, or the Treasury Rate on such Auction Date for
such Rate Period, if such Rate Period is one year or greater, (y) the Reference
Rate on such Auction Date for the Special Dividend Period for which the Auction
is being held, if such Special Dividend Period is less than one year, or the
Treasury Rate on such Auction Date for the Special Dividend Period for which
the Auction is being held, if such Special Dividend Period is one year or
greater, and (z) the Reference Rate on such Auction Date for the Minimum
Dividend Period of such series and (2) the Applicable Percentage on such Auction
Date.
Not later than 9:30 A.M. on each Auction Date, the Auction Agent shall notify
the Fund and the Broker-Dealers of the Maximum Rate so determined and the "AA"
Composite Commercial Paper Rate(s), Taxable Equivalent of the Short-Term
Municipal Bond Rate(s) and the Treasury Rate(s), as the case may be, used to
make such determination.
(ii) From and after a Failure to Deposit by the Fund during any Rate Period
of any series of APS, until such failure is cured and a late charge, if
applicable, is paid, in accordance with subparagraph (c)(i) of Section 2 of Part
I of the Articles Supplementary, on the first day of each Rate Period of such
APS the Auction Agent shall determine the Treasury Rate for such Rate Period, if
such Rate Period is one year or greater, and the "AA" Composite Commercial Paper
Rate and the Taxable Equivalent of the Short-Term Municipal Bond Rate for
Minimum Dividend Periods and Rate Periods that are less than one year. Not later
than 9:30 A.M. on each such first day, the Auction Agent shall notify the Fund
of the applicable "AA" Composite Commercial Paper Rate, Taxable Equivalent of
the Short-Term Municipal Bond Rate and Treasury Rate.
(iii) If any "AA" Composite Commercial Paper Rate, Taxable Equivalent of the
Short-Term Municipal Bond Rate or Treasury Rate, as the case may be, is not
quoted on an interest basis, the Auction Agent shall convert the quoted rate to
the interest equivalent thereof as set forth in the definition of such rate in
the
<PAGE>
APS Provisions if the rate obtained by the Auction Agent is quoted on a discount
basis, or if such rate is quoted on a basis other than an interest or discount
basis the Auction Agent shall convert the quoted rate to an interest rate after
consultation with the Fund as to the method of such conversion.
(iv) If any "AA" Composite Commercial Paper Rate is to be based on rates
supplied by Commercial Paper Dealers and one or more of the Commercial Paper
Dealers shall not provide a quotation for the determination of such "AA"
Composite Commercial Paper Rate, the Auction Agent shall immediately notify the
Fund so that the Fund can determine whether to select a Substitute Commercial
Paper Dealer or Substitute Commercial Paper Dealers to provide the quotation or
quotations not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers. The Fund shall promptly advise the Auction Agent of any such selection.
(v) If any Treasury Rate is to be based on rates supplied by U.S. Government
Securities Dealers and one or more of the U.S. Government Securities Dealers
shall not provide a quotation for the determination of such Treasury Rate, the
Auction Agent shall immediately notify the Fund so that the Fund can determine
whether to select a Substitute U.S. Government Securities Dealer or Substitute
U.S. Government Securities Dealers to provide the quotation or quotations not
being supplied by any U.S. Government Securities Dealer or U.S. Government
Securities Dealers. The Fund shall promptly advise the Auction Agent of any such
selection.
<PAGE>
2.4 Auction Schedule. The Auction Agent shall conduct Auctions in accordance
with the schedule set forth below. Such schedule may be changed by the Auction
Agent with the consent of the Fund, which consent shall not be unreasonably
withheld. The Auction Agent shall given written notice of any such change to
each Broker-Dealer. Such notice shall be given prior to the close of business on
the Business Day next preceding the first Auction Date on which any such change
shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Fund and Broker-
Dealers of the applicable Maximum Rate and
the "AA" Composite Commercial Paper Rate(s),
Taxable Equivalent of the Short-Term
Municipal Bond Rate(s) and Treasury Rate(s),
as the case may be, used in determining such
Maximum Rate as set forth in Section
2.3(b)(i) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 3(a) of the
Auction Procedures. Submission Deadline is
1:30 P.M.
Not earlier Auction Agent makes determinations pursuant to
than 1:30 P.M. Section 4(a) of the Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises Fund of results of
Auction as provided in Section 4(b) of the
Auction Procedures. Submitted Bids and
Submitted Sell Orders are accepted and
rejected and shares of APS allocated as
provided in Section 5 of the Auction
Procedures. Auction Agent gives notice of
Auction results as set forth in paragraph
(a) of the Settlement Procedures.
2.5 Designation of Special Dividend Period. (a) The APS Provisions will
provide that, subject to the Fund's option to designate a Special Dividend
Period as referred to in paragraph (b) of this Section 2.5, (i) each Rate Period
for APS Series A will consist of 7 days, (ii) each Rate Period for APS Series B
will consist of 28 days and (iii) each Rate Period for APS Series C will consist
of 3 months. Not less than 10 nor more than 20 days prior to the last day of any
Rate Period that is more than 28 days, (i) the Fund shall deliver to the Auction
Agent a notice of the Auction
<PAGE>
Date of the next succeeding Auction for such series of APS in the form of
Exhibit E hereto and (ii) the Auction Agent shall deliver such notice by
first-class mail, postage prepaid, to each Existing Holder of such series at the
address specified in such Existing Holder's Master Purchaser's Letter and to the
Broker-Dealers for such series as promptly as practicable after its receipt of
such notice from the Fund.
(b) Pursuant to the APS Provisions, the Fund may, at its option, designate a
Special Dividend Period for the APS in the manner described in Section 4 of Part
I of the Articles Supplementary.
(i) If the Fund proposes to designate any succeeding Subsequent Dividend
Period of any series of APS as a Special Dividend Period of more than 28 Rate
Period Days, (A) the Fund shall deliver to the Auction Agent a notice of such
proposed Special Dividend Period in the form of Exhibit F hereto not less than
20 nor more than 30 days prior to the first day of such proposed Special
Dividend Period and (B) the Auction Agent on behalf of the Fund shall deliver
such notice by first-class mail, postage prepaid, to each Existing Holder of
shares of such series at the address specified in such Existing Holder's Master
Purchaser's Letter and to the Broker-Dealers for such series as promptly as
practicable after its receipt of such notice from the Fund.
(ii) If the Board of Directors determines to designate such succeeding
Subsequent Dividend Period as a Special Dividend Period, (A) the Fund shall
deliver to the Auction Agent a notice of such determination in the form of
Exhibit G hereto not later than 11:00 A.M. on the second Business Day next
preceding the first day of such proposed Special Dividend Period and (B) the
Auction Agent shall deliver such notice to the Broker-Dealers for such series
not later than 3:00 P.M. on such second Business Day.
(iii) If the Fund shall deliver to the Auction Agent a notice stating that
the Fund has determined not to exercise its option to designate such succeeding
Subsequent Dividend Period as a Special Dividend Period with respect to which it
has delivered a notice in the form of Exhibit F hereto not later than 11:00 A.M.
on the second Business Day next preceding the first day of such proposed Special
Dividend Period, or shall fail to timely deliver either such notice or a notice
in the form of Exhibit G hereto, the Auction Agent shall deliver a notice in the
form of Exhibit H hereto to the Broker-Dealers for such series not later than
3:00 P.M. on such second Business Day.
A Special Dividend Period designated by the Fund for any series of APS shall
not become effective if (a) on the Auction Date next preceding the first day of
such Special Dividend Period Sufficient Clearing Bids for such series shall not
exist or (b) a Failure to Deposit shall have occurred with respect to such
series
<PAGE>
prior to such change and shall not have been cured in accordance with the APS
Provisions.
2.6 Allocation of Taxable Income. The Fund may, at its option, designate all
or a portion of any dividend on shares of any series of APS to consist of net
capital gains or other income taxable for federal income tax purposes by
delivering to the Auction Agent a notice in the form of Exhibit K hereto of such
designation 15 days prior to the Auction Date on which the Applicable Rate for
such dividend is to be fixed or by retroactively allocating income taxable for
federal income tax purposes as provided in the APS Provisions. The Auction Agent
will deliver such notice to the Broker-Dealers for such series on the Business
Day following its receipt of such notice from the Fund. Within two Business Days
after any Auction Date involving the allocation of income taxable for federal
income tax purposes as provided in the APS Provisions, or if the Fund
retroactively allocates income taxable for federal income tax purposes as
provided in the APS Provisions, the Auction Agent shall notify each
Broker-Dealer for the related series as to the dollar amount per share of such
taxable income and income exempt from federal income taxation included in the
related dividend.
2.7 Failure to Deposit. (a) if:
(i) any Failure to Deposit shall have occurred with respect to shares of any
series of APS during any Rate Period thereof, and
(ii) prior to 12:00 Noon 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 within the meaning of the last sentence of Section 2.7(b) or the
Fund shall not have paid to the Auction Agent the late charge described in
Section 2.7(b), then Auctions for such series shall be suspended until such
Failure to Deposit shall have been so cured and the Applicable Rate for shares
of such series of APS for each Subsequent Dividend Period thereof commencing
after such Failure to Deposit to and including the Subsequent Dividend Period,
if any, during which such Failure to Deposit is so cured shall be a rate per
annum equal to the Maximum Rate on the Auction Date for each such Subsequent
Dividend Period (but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below "ba3"/BB-").
(b) If:
(i) any Failure to Deposit shall have occurred with respect to shares of any
series of APS during any Rate Period thereof; and
<PAGE>
(ii) prior to 12:00 Noon 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 sentence and the Fund shall
have paid to the Auction Agent a late charge equal to the sum of: (A) if such
Failure to Deposit consisted of the failure timely to pay to the Auction Agent
the full amount of dividends with respect to any Dividend Period on the shares
of such series, an amount computed by multiplying (1) 200% of the Reference Rate
(or Treasury Rate, if applicable) for the Rate Period during which such Failure
to Deposit occurs on the Dividend Payment Date for such Dividend Period by (2) a
fraction, the numerator of which shall be the number of days for which such
Failure to Deposit was not cured in accordance with the next succeeding sentence
(including the day such Failure to Deposit occurs and excluding the day such
Failure to Deposit was cured) and the denominator of which shall be 365, and
applying the rate obtained against the aggregate liquidation preference of the
outstanding shares of such series of APS; and (B) if such Failure to Deposit
consisted of the failure timely to pay to the Auction Agent the Optional
Redemption Price or Mandatory Redemption Price, as the case may be, of the
shares of such series of APS, if any, for which Notice of Redemption has been
given by the Fund pursuant to paragraph (b) of Section 3 of Part I of the
Articles Supplementary, an amount computed by multiplying (1) 200% of the
Reference Rate (or Treasury Rate, if applicable) for the Rate Period during
which such Failure to Deposit occurs on the redemption date by (2) a fraction,
the numerator of which shall be the number of days for which such Failure to
Deposit was not cured in accordance with the next succeeding sentence (including
the day such Failure to Deposit occurs and excluding the day such Failure to
Deposit was cured) and the denominator of which shall be 365, and applying the
rate obtained against the aggregate liquidation preference of the outstanding
shares of such series of APS to be redeemed, then the Auction Agent shall
deliver a notice in the form of Exhibit I hereto by first-class mail, postage
prepaid, to the Broker-Dealers for such series not later than one Business Day
after its receipt of the payment from the Fund curing such Failure to Deposit
and such late charge. A Failure to Deposit with respect to any series of APS
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 thereof if, not later than 12:00 Noon on the
fourth Business Pay preceding the Auction Date for the Rate Period subsequent to
such Rate Period, the Fund shall have paid to the Auction Agent (A) all
accumulated and unpaid dividends on the shares of such series of APS and (B)
without duplication, the Optional Redemption Price or Mandatory Redemption
Price, as the case may be, for the shares of such series of APS, if any, for
which Notice of Redemption has been given by the Fund pursuant to paragraph (b)
of Section 3 of Part I of the Articles Supplementary.
<PAGE>
(c) If any Failure to Deposit shall have occurred with respect to shares of
any series of APS during a Rate Period thereof and, prior to 12:00 Noon 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 within the meaning
of the last sentence of Section 2.7(b) hereof and the Fund shall not have paid
to the Auction Agent the late charge described in such Section 2.7(b), but such
Failure to Deposit shall subsequently be so cured, then the Auction Agent shall
deliver a notice in the form of Exhibit J hereto to the Broker-Dealers for such
series of APS not later than one Business Day after the receipt of the payment
from the Fund during such Failure to Deposit. Notwithstanding the foregoing, the
Auction Agent shall conduct an Auction on an Auction Date which occurs
simultaneously with the date of commencement of a Failure to Deposit.
2.8 Broker-Dealers. (a) Not later than 12:00 Noon on each Auction Date for any
series of APS, the Fund shall pay to the Auction Agent an amount in cash equal
to the aggregate fees payable to the Broker-Dealers for such series pursuant to
Section 2.8 of the Broker-Dealer Agreements for such series. The Auction Agent
shall apply such moneys as set forth in Section 2.8 of each such Broker-Dealer
Agreement.
(b) The Fund shall obtain the consent of the Auction Agent prior to
selecting any Person to act as a Broker-Dealer, which consent shall not be
unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer Agreement as set
forth therein if so directed by the Fund, provided that at least one
Broker-Dealer Agreement would be in effect for each series of APS after such
termination.
(d) Subject to the Auction Agent's having consented to the selection of the
relevant Broker-Dealer pursuant to Section 2.8(b) hereof, the Auction Agent
shall from time to time enter into such Broker-Dealer Agreements with one or
more Broker-Dealers as the Fund shall request and shall enter into such
schedules to any such Broker-Dealer Agreements as the Fund shall request, which
schedules, among other things, shall set forth the series of APS to which such
Broker-Dealer Agreement relates.
2.9 Ownership of Shares of APS. The Fund shall notify the Auction Agent if the
Fund or any affiliate of the Fund acquires any APS. Neither the Fund nor any
affiliate of the Fund shall submit any Order in any Auction for APS, except as
set forth in the next sentence. 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. For purposes of this Section 2.9, a Broker-Dealer shall not be deemed
to be an affiliate of the Fund solely because one or more of the directors or
executive officers of such Broker-Dealer or of any Person controlled by, in
control of or under
<PAGE>
common control with such Broker-Dealer is also a director of the Fund. The
Auction Agent shall have no duty or liability with respect to enforcement of
this Section 2.9.
2.10 Access to and Maintenance of Auction Records. The Auction Agent shall,
upon the receipt of prior written notice from the Fund, afford to the Fund
access at reasonable times during normal business hours to all books, records,
documents and other information concerning the conduct and results of Auctions.
The Auction Agent shall maintain records relating to any Auction for a period of
six years after such Auction, and such records shall, in reasonable detail,
accurately and fairly reflect the actions taken by the Auction Agent hereunder.
2.11 Dividend and Redemption Price Deposit; Funds to Be Held in Trust. (a) The
Fund shall pay to the Auction Agent, not later than 12:00 noon (A) on the
Business Day next preceding any Dividend Payment Date for any series of APS, 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 such series, and (B) on the Business Day next
preceding any redemption date for any series of APS in funds available on such
redemption date in The City of New York, New York, the Redemption Price to be
paid on such redemption date for such series after notice of redemption is given
as set forth in the APS Provisions.
(b) All amounts paid to the Auction Agent for the payment of dividends on,
or of any late charges with respect to, any shares of any series of APS shall
be held in trust by the Auction Agent for the payment of such dividends and any
such late charges for the benefit of the Holders entitled thereto, and all
moneys paid to the Auction Agent for payment of the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, of the APS called for redemption
shall be held in trust by the Auction Agent for the benefit of the Holders of
shares so to be redeemed.
3. The Auction Agent as Dividend and Redemption Price Disbursing Agent.
The Auction Agent, as dividend and redemption price disbursing agent, shall
pay to the Holders of shares of each series of APS (i) on each Dividend Payment
Date for such series, dividends on the shares of such series, (ii) on any date
fixed for redemption of such series, the Redemption Price of any shares of such
series of APS called for redemption and (iii) any late charge related to any
payment of dividends or Redemption Price, in each case after receipt of the
necessary funds from the Fund with which to pay such dividends, Redemption Price
or late charge. The amount of dividends for any Rate Period for any series of
APS to be paid by the Auction Agent to the Holders of such series will be
determined by
<PAGE>
the Fund as set forth in Section 2 of Part I of the Articles Supplementary with
respect to such APS. The Redemption Price of any shares of any series of APS to
be paid by the Auction Agent to the Holders thereof will be determined by the
Fund as set forth in Section 3 of Part I of the Articles Supplementary with
respect to such series. The Fund shall notify the Auction Agent in writing of a
decision to redeem shares of any series of APS at least five days prior to the
date a notice of redemption is required to be mailed to the Holders of the
shares to be redeemed by paragraph (b) of Section 3 of Part I of the Articles
Supplementary. Such notice by the Fund to the Auction Agent shall contain the
information required by paragraph (b) of Section 3 of Part I of the Articles
Supplementary to be stated in the notice of redemption required to be provided
by the Auction Agent to such Holders. The Auction Agent will provide the notices
required to be given by the Auction Agent in paragraph (b) of Section 3 of Part
I of the Articles Supplementary.
4. The Auction Agent as Transfer Agent and Registrar.
4.1 Issue of Share Certificates. Upon the Date of Original Issue of each
series of APS, one certificate representing all of the shares of each such
series issued on such date shall be issued by the Fund and, at the request of
the Fund, registered in the name of Cede & Co. and countersigned by the Auction
Agent.
4.2 Registration of Transfer of Shares. The APS shall be registered
solely in the name of the Securities Depository or its nominee.
4.3 Removal of Legend on Restricted Shares. All requests for removal of
legends on the APS indicating restrictions on transfer shall be accompanied by
an opinion of counsel stating that such legends may be removed and such APS
freely transferred, such opinion to be delivered under cover of a letter from a
Fund Officer authorizing the Auction Agent to remove the legend on the basis of
said opinion.
4.4 Lost Share Certificates. The Auction Agent shall issue and register
replacement certificates for certificates represented to have been lost, stolen
or destroyed upon the fulfillment of such requirements as shall be deemed
appropriate by the Fund and the Auction Agent, subject at all times to
provisions of law, the By-Laws of the Fund governing such matters and
resolutions adopted by the Fund with respect to lost securities. The Auction
Agent may issue new certificates in exchange for and upon the cancellation of
mutilated certificates. Any request by the Fund to the Auction Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Fund to the Auction Agent that such
issuance will comply with such provisions of law and the By-Laws and resolutions
of the Fund.
<PAGE>
4.5 Disposition of Canceled Certificates; Record Retention. The Auction Agent
shall retain all share certificates which have been canceled in transfer or
exchange and all accompanying documentation in accordance with applicable rules
and regulations of the Securities and Exchange Commission for two calendar
years. Upon the expiration of this two-year period, the Auction Agent shall
deliver to the Fund the canceled certificates and accompanying documentation.
The Fund also shall undertake to furnish to the Securities and Exchange
Commission and to the Board of Governors of the Federal Reserve System, upon
demand, at either the principal office or at any regional office, complete,
correct and current hard copies of any and all such records. Thereafter such
records shall not be destroyed by the Fund without the concurrence of the
Auction Agent.
4.6 Share Transfer Books. For so long as the Auction Agent, Bankers Trust
Company, is acting as the transfer agent for any series of APS pursuant to this
Agreement, it shall maintain a share transfer book containing a list of the
Holders of the shares of each series of APS, the number of shares of each series
held by such Holders and the address of each Holder. The Auction Agent shall
record in such share transfer books any change of address of a Holder upon
notice by such Holder. In case of any request or demand for the inspection of
the share transfer books of the Fund or any other books in the possession of
the Auction Agent, the Auction Agent will notify the Fund and secure
instructions as to permitting or refusing such inspection. The Auction Agent
reserves the right, however, to exhibit the share transfer books or other books
to any Person in case it is advised by its counsel that its failure to do so
would be unlawful.
4.7 Return of Funds. Any funds deposited with the Auction Agent hereunder by
the Fund for any reason, including but not limited to the payment of dividends
or the redemption of the APS, that remain with the Auction Agent after 90 days
shall be repaid to the Fund upon the written request of the Fund, together with
interest, if any, earned thereon.
5. Representations and Warranties of the Fund.
The Fund represents and warrants to the Auction Agent that:
(a) the Fund has been duly organized and is existing as a corporation under
the laws of the State of Maryland and has all necessary power and authority to
execute and deliver this Agreement and to authorize, create and issue the shares
of each series of APS;
(b) this Agreement has been duly and validly authorized, executed and
delivered by the Fund and, assuming due authorization, execution and delivery by
the Auction Agent, constitutes the legal,
<PAGE>
valid and binding obligation of the Fund subject, as to enforceability, to
bankruptcy, insolvency, reorganization, moratorium, receivership or similar
laws, whether statutory or decisional, relating to or affecting creditors'
rights and to general equitable principles (regardless of whether enforcement is
sought in equity or at law);
(c) the form of the certificate evidencing the APS complies with all
applicable laws of the State of Maryland;
(d) the APS, when issued, delivered and paid for on the Date of Original
Issue as contemplated by the Underwriting Agreement, will have been duly
authorized, validly issued, fully paid and nonassessable;
(e) assuming the Underwriters comply with their obligations under the
Underwriting Agreement and that the purchasers of the APS comply with their
obligations in the Master Purchaser's Letter, no consent, authorization or order
of, or filing or registration with, any court, governmental agency or official
(except such as have been obtained and such as may be required under the
Securities Act of 1933, as amended, or the Investment Company Act of 1940, as
amended, or under the blue sky or state securities laws) is required in
connection with the execution and delivery of this Agreement or the issuance of
the APS; and
(f) the issuance and sale of the APS, the execution, delivery and
performance of this Agreement, compliance by the Fund with all provisions
hereof, and the consummation of the transactions contemplated hereby or by the
Underwriting Agreement or the Broker-Dealer Agreements, will not conflict with,
constitute a breach of any of the terms or provisions of, or a default under, or
result in the creation or imposition of any material lien, charge or encumbrance
upon any of the assets of the Fund pursuant to the terms of any agreement,
indenture or instrument to which the Fund is a party or by which the Fund is
bound, or result in a violation of the APS Provisions or By-Laws of the Fund or
of any order, rule or regulation of any court or governmental agency having
jurisdiction over the Fund or its property which conflict, breach, default, lien
or violation, individually or in the aggregate, would have a material adverse
effect on the business, financial position or results of operations of the Fund.
6. The Auction Agent.
6.1 Duties and Responsibilities. (a) Except as provided in Section 2.11(b)
hereof, the Auction Agent is acting solely as agent for the Fund hereunder and
owes no fiduciary duties to any other Person by reason of this Agreement.
(b) The Auction Agent undertakes to perform such duties and only such duties
as are specifically set forth in this Agree-
<PAGE>
ment and the Broker-Dealer Agreements, and no implied covenants or obligations
shall be read into this Agreement against the Auction Agent.
(c) In the absence of bad faith or gross negligence on its part, the Auction
Agent shall not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under this
Agreement except that the Auction Agent shall be liable for any error of
judgment made in good faith if the Auction Agent shall have been grossly
negligent in ascertaining the pertinent facts.
6.2 Rights of the Auction Agent. (a) The Auction Agent may rely and shall be
protected in acting or refraining from acting upon any communication authorized
hereby and upon any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any telephone communication authorized hereby which the Auction Agent
believes in good faith to have been given by the Fund or by any Broker-Dealer.
The Auction Agent may record telephone communications with the Fund or with any
Broker-Dealer.
(b) The Auction Agent may consult with counsel reasonably acceptable to the
Fund and the advice of such counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(c) The Auction Agent shall not be required to advance, expend or risk its
own funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exercise its rights
hereunder either directly or by or through agents or attorneys and shall not be
responsible for any misconduct on the part of any agent or attorney appointed by
it with due care hereunder except as set forth above in Section 6.1(c).
6.3 Auction Agent's Disclaimer. The Auction Agent makes no representation as
to the validity or adequacy of this Agreement (except as to the Auction Agent's
duties hereunder and as to the due authorization, execution and delivery of this
Agreement), the Broker-Dealer Agreements (except as to the Auction Agent's
duties thereunder) or the APS.
6.4 Compensation, Expenses and Indemnification. (a) The Fund shall pay the
Auction Agent from time to time reasonable compensation for all services
rendered by it under this Agreement and the Broker-Dealer Agreements in such
amounts as may be agreed to by the Fund and the Auction Agent from time to time.
<PAGE>
(b) The Fund shall reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of this Agreement and the Broker-Dealer
Agreements (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any expense or disbursement
attributable to its gross negligence or bad faith.
(c) The Fund shall indemnify the Auction Agent for and hold it harmless
against, any loss, liability or expense incurred without gross negligence or bad
faith on its part, arising out of or in connection with its agency under this
Agreement and the Broker-Dealer Agreements, including the costs and expenses of
defending itself against any claim or liability in connection with its exercise
or performance of its duties hereunder and thereunder for which indemnification
is provided by this subsection.
7. Miscellaneous.
7.1 Term of Agreement. (a) The term of this Agreement is unlimited unless it
shall be terminated as provided in this Section 7.1. The Fund may terminate this
Agreement at any time by so notifying the Auction Agent in writing, provided
that the Fund has entered into an agreement in substantially the form of this
Agreement with a successor auction agent. The Auction Agent may terminate this
Agreement upon written notice to the Fund, such termination to be effective on
the earlier of (i) the date specified in such notice which shall not be earlier
than 90 days after the giving of such notice or (ii) the date on which a
successor trust company is appointed by the Fund pursuant to an agreement
containing substantially the same terms and conditions as this Agreement.
(b) Except as otherwise provided in this paragraph (b), the respective
rights and duties of the Fund and the Auction Agent under this Agreement shall
cease upon termination of this Agreement. The Fund's obligations under Section
6.4 hereof and its representations and warranties contained in Section 5 hereof
an the Auction Agent's obligations and liabilities under Sections 2.10 and 4.5
hereof and, with respect to any amounts theretofore paid to the Auction Agent in
respect of dividends, late charges or the Redemption Price on any APS, Sections
2.11(b), 3 and 4.7 hereof, shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall, at the Fund's request,
promptly deliver to the Fund copies of all books and records maintained by it in
connection with its duties hereunder.
7.2 Communications. Except for (a) communications authorized to be by
telephone pursuant to this Agreement or the Auction Procedures and (b)
communications in connection with Auctions (other than those expressly required
to be in writing) and unless otherwise specified by the terms of this Agreement
all
<PAGE>
notices, requests and other communications to any party hereunder shall be in
writing (including telecopy or similar writing) given to such person at its
address or telecopy number set forth below:
<TABLE>
<S> <C>
If to the Company,
addressed: PaineWebber Premier Insured
Municipal Income Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
Attention: Treasurer
Telephone No.: (212) 713-2000
With a copy sent to: Robert P. Hetzer
Vice President
1285 Avenue of the Americas
New York, New York 10019
Telephone No.: (212) 713-2144
Telecopier No.: (212) 713-1459
If to the Auction Agent,
addressed: Bankers Trust Company
Corporate Trust and Agency Group
Four Albany Street
New York, New York 10006
Attention: Auction Rate Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
</TABLE>
or to such other address as the party to whom the communication is addressed
shall have previously communicated to the other party. Communications shall be
given on behalf of the Fund by a Fund Officer and on behalf of the Auction Agent
by an Authorized Officer. Communications shall be effective when received at the
proper address.
7.3 Entire Agreement. This Agreement contains the entire agreement among the
parties relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties.
7.4 Benefits. Nothing herein, express or implied, shall give to any Person,
other than the Fund, the Auction Agent and their respective successors and
assigns, any benefit of any legal or equitable right, remedy or claim hereunder.
<PAGE>
7.5 Amendment; Waiver. (a) This Agreement shall not be deemed or construed to
be modified, amended, rescinded, canceled or waived, in whole or in part, except
by a written instrument signed by a duly authorized representative of the party
to be charged. The Fund shall notify the Auction Agent and each Broker-Dealer of
any change in the APS Provisions as of the date hereof, prior to the effective
date of any such change.
(b) Failure of either party hereto to exercise any right or remedy hereunder
in the event of a breach hereof by the other party shall not constitute a waiver
of any such rights or remedies with respect to any subsequent breach.
7.6 Successors and Assigns. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the respective successors of each of the Fund
and the Auction Agent.
7.7 Severability. If any clause, provision or section hereof shall be ruled
invalid or unenforceable by any court of competent jurisdiction, the invalidity
or unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
7.8 Execution in Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
7.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Auction Agency
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the date first above written.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
By /s/ JULIAN F. SLUYTERS
Name: Julian F. Sluyters
Title: Vice President
BANKERS TRUST COMPANY
By /s/ SANDRA BECKER
Name: Sandra Becker
Title: Assistant Treasurer
<PAGE>
EXHIBIT A
---------
FORM OF
BROKER-DEALER AGREEMENT
-----------------------
<PAGE>
EXHIBIT B
---------
FORM OF
MASTER PURCHASER'S LETTER
-------------------------
<PAGE>
EXHIBIT C
---------
SETTLEMENT PROCEDURES
---------------------
<PAGE>
EXHIBIT D
---------
FORM OF APS PROVISIONS
---------------------
<PAGE>
EXHIBIT E
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF AUCTION DATE FOR
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that the Auction Date of the next Auction for the
APS Series ___ of PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC. (the
"Fund") is scheduled to be _______________ and the next Dividend Payment Date
for the Fund's APS Series ___ will be _______________.
[A Failure to Deposit in respect of the APS Series ___ currently exists. If
such Failure to Deposit is not cured prior to 12:00 Noon on the fourth Business
Day prior to the next scheduled Auction Date of the APS Series ___, as defined,
the next Auction will not be held. Notice of the next Auction for the APS
Series ___ will be delivered when such Failure to Deposit is cured.(1)]
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
__________
(1) Include this language if a Failure to Deposit exists.
<PAGE>
EXHIBIT F
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF PROPOSED CHANGE OF
LENGTH OF RATE PERIOD OF
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. (the "Fund") may exercise its option to designate the Rate Period of
its APS Series ___ commencing [the first day of the proposed Special Dividend
Period] as a Special Dividend Period.
By 11:00 A.M. on the second Business Day next preceding the first day of
such proposed Special Dividend Period, the Fund will notify Bankers Trust
Company of either (a) its determination to exercise such option, designating the
length of such Special Dividend Period and the terms of the Specific Redemption
Provisions, if any, for such series or (b) its determination not to exercise
such option.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
Dated: ________________
<PAGE>
EXHIBIT G
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF CHANGE OF LENGTH OF RATE PERIOD OF
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. (the "Fund") has determined to designate the Rate Period of its APS
Series ___ commencing on [the first day of the Special Dividend Period] as
a Special Dividend Period.
The Special Dividend Period will be ___ [days] [year[s]].
The Auction Date for such Special Dividend Period is [the Business Day next
preceding the first day of such Special Dividend Period].
[Specific Redemption Provisions, if applicable.]
[As a result of the Special Dividend Period designation, the amount of
dividends payable on the APS Series ___ during the Special Dividend
Period will be based on a 360-day year] [include if Rate Period is greater than
28 Rate Period Days].
The Special Dividend Period shall not commence if (a) on such Auction Date
Sufficient Clearing Bids shall not exist or (b) if a Failure to Deposit shall
have occurred prior to the first day thereof with respect to such APS.
The scheduled Dividend Payment Dates for such series of APS during such
Special Dividend Period will be _______________.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
Dated: ________________
<PAGE>
EXHIBIT H
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF RATE PERIOD OF
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. (the "Fund") has determined not to exercise its option to designate a
Special Dividend Period of its APS Series ___ and the next succeeding Dividend
Period of such series will be a Minimum Rate Period of 28 days.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
Dated: ________________
<PAGE>
EXHIBIT I
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. (the "Fund") has cured its Failure to Deposit with respect to its APS
Series ___. The dividend rate on shares of such series for the current Rate
Period is ___% per annum, the Dividend Payment Date[s] for the current Rate
Period is scheduled to be _______________ and the next Auction Date is scheduled
to be _______________.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
Dated: ________________
<PAGE>
EXHIBIT J
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF SUBSEQUENT CURE OF
FAILURE TO DEPOSIT ON
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME
FUND INC. (the "Fund") has cured its Failure to Deposit with respect to its APS
Series ___. The next Auction Date for such series is scheduled to be on
_______________.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
Dated: ________________
<PAGE>
EXHIBIT K
---------
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF
[CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME]*
DIVIDEND FOR
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable on
_______________ for the APS Series ___ of PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC. (the "Fund") will be determined by the Auction to be held on
_______________. Up to [$_A_]** and [$_B_]*** per share of the dividend payable
on such date as determined by such Auction will consist of [capital gains]**
[ordinary income taxable for federal income tax purposes]***. If the dividend
amount payable on such date as determined by such Auction is less than [$_A_]**
and [$_B_]*** per share, the entire amount of the dividend will consist of
[capital gains] [ordinary income taxable for federal income tax purposes].
[To the extent such dividend amount exceeds [$_A_] per share, any excess up to
[$_B_] per share will consist of ordinary income taxable for federal income tax
purposes.]**** Accordingly, the aforementioned composition of the dividend
payable on _______________ should be considered in determining Orders to be
submitted with respect to the Auction to be held on _______________. The
Applicable Percentage in effect for such Auction will be ___%.
PAINEWEBBER PREMIER INSURED MUNICIPAL
INCOME FUND INC.
_______________
* Include language with respect to capital gains, taxable ordinary income or
both, depending on the character of the designation to be made with respect
to the dividend(s).
** Include bracketed material if a portion of the dividend will be designated
capital gains.
*** Include bracketed material if a portion of the dividend will be designated
ordinary income taxable for federal income tax purposes and no portion of
the dividend will be designated capital gains.
**** Include bracketed material if a portion of the dividend will be designated
capital gains and a portion will be designated ordinary income taxable for
federal income tax purposes.
A - the maximum amount of capital gains allocated to such series of APS
to be included in such dividend, divided by the number of shares of
APS.
B - the maximum amount of ordinary income taxable for federal income tax
purposes allocated to such series of APS to be included in such
dividend, divided by the number of shares in such series.
<PAGE>
BROKER-DEALER AGREEMENT
between
BANKERS TRUST COMPANY
and
GOLDMAN, SACHS & CO.
Dated as of November 28, 1994
Relating to
AUCTION PREFERRED SHARES
of
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
<PAGE>
BROKER-DEALER AGREEMENT dated as of November 28, 1994
between BANKERS TRUST COMPANY (the "Auction Agent"), a New York
banking corporation (not in its individual capacity but solely as
agent of PaineWebber Premier Insured Municipal Income Fund Inc.
(the "Fund") pursuant to authority granted it in the Auction
Agency Agreement), and GOLDMAN, SACHS & CO. (together with
its successors and assigns, "BD").
The Fund has issued a series of Auction Preferred Shares,
par value $.001 per share, liquidation preference $50,000 per
share (the "APS Series D") pursuant to its Articles of
Incorporation, as amended by the Articles Supplementary (the
"Articles Supplementary").
The Articles Supplementary will provide that, for each
Subsequent Dividend Period of the APS Series D, the Applicable
Rate for such series for such Subsequent Dividend Period shall,
under certain conditions, be the rate per annum that a bank or
trust company appointed by the Fund advises results from imple-
mentation of the Auction Procedures for such series. The Board
of Directors has adopted a resolution appointing Bankers Trust
Company as Auction Agent for purposes of the Auction Procedures
for the APS Series D.
The Auction Procedures require the participation of one or
more Broker-Dealers for the APS Series D.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein the Auction Agent and BD agree
as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to Statement.
Capitalized terms not defined herein shall have the
respective meanings specified in the Articles Supplementary.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures, the
following terms shall have the following meanings, unless the
context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles
Supplementary establishing and authorizing the issuance of APS
Series D as filed by the Fund with the Department of Assessments
and Taxation of the State of Maryland.
(b) "Auction" shall have the meaning specified in
Section 2.1 hereof.
<PAGE>
(c) "Auction Agency Agreement" shall mean the Auction
Agency Agreement, dated as of November 28, 1994, between the Fund
and the Auction Agent relating to the APS Series D.
(d) "Auction Procedures" shall mean the auction
procedures constituting Part II of the Articles Supplementary.
(e) "Authorized Officer" shall mean each Senior Vice
President, Vice President, Assistant Vice President, Trust
Officer, Assistant Treasurer and Assistant Secretary of the
Auction Agent assigned to its Corporate Trust and Agency Group
and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes of this
Agreement in a communication to BD.
(f) "BD Officer" shall mean each officer or employee
of BD designated as a "BD Officer" for purposes of this Agreement
in a communication to the Auction Agent.
(g) "Broker-Dealer Agreement" shall mean this
Agreement and any substantially similar agreement between the
Auction Agent and a Broker-Dealer.
(h) "Master Purchaser's Letter" shall mean a letter
addressed to the Fund, the Auction Agent, a Broker-Dealer and an
Agent Member, substantially in the form attached hereto as
Exhibit A.
(i) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit B.
1.3 Rules of Construction.
Unless the context or use indicates another or
different meaning or intent, the following rules shall apply to
the construction of this Agreement:
(a) Words importing the singular number shall include
the plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this
Agreement nor shall they affect its meaning, construction or
effect.
(c) The words "hereof", "herein", "hereto", and other
words of similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day
shall be to New York City time.
<PAGE>
2. The Auction.
2.1 Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures.
(a) The provisions of the Auction Procedures will be
followed by the Auction Agent for the purpose of determining the
Applicable Rate for any Subsequent Dividend Period of the APS
Series D for which the Applicable Rate is to be determined by an
Auction. Each periodic operation of such procedures is
hereinafter referred to as an "Auction".
(b) All of the provisions contained in the Auction
Procedures and the Settlement Procedures are incorporated herein
by reference in their entirety and shall be deemed to be a part
hereof to the same extent as if such provisions were fully set
forth herein.
(c) BD agrees to act as, and assumes the obligations
of, and limitations and restrictions placed upon, a Broker-Dealer
under this Agreement for the APS Series D. BD understands that
other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in the Auction Procedures
may execute Broker-Dealer Agreements and Master Purchaser's
Letters and participate as Broker-Dealers in Auctions.
2.2 Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for
the APS Series D, the Auction Agent shall advise the
Broker-Dealers for such series by telephone of the Maximum Rate
therefor and the "AA" Composite Commercial Paper Rate(s), Taxable
Equivalent of the Short-Term Municipal Bond Rate(s) and Treasury
Rate(s), as the case may be, used in determining such Maximum
Rate.
(b) In the event that any Auction Date for the APS
Series D shall be changed after the Auction Agent has given the
notice referred to in clause (vi) of paragraph (a) of the
Settlement Procedures, or after the notice referred to in Section
2.5(a) hereof, if applicable, the Auction Agent, by such means as
the Auction Agent deems practicable, shall give notice of such
change to BD not later than the earlier of 9:15 A.M. on the new
Auction Date or 9:15 A.M. on the old Auction Date.
(c) The Auction Agent from time to time may request
the Broker-Dealers to provide the Auction Agent with a list of
their respective customers that such Broker-Dealers believe are
Existing Holders of shares of APS Series D. BD shall comply with
any such request, and the Auction Agent shall keep confidential
any such information so provided by BD and shall not disclose any
<PAGE>
information so provided by BD to any Person other than the Fund
and BD.
(d) BD agrees to maintain a list of Potential Holders
and to use its best efforts to contact the Potential Holders on
such list whom BD believes may be interested in participating in
such Auction on each Auction Date for the purposes set forth in
the Auction Procedures.
(e) The Auction Agent is not required to accept the
Master Purchaser's Letter of any Potential Holder who wishes to
submit a Bid for the first time in an Auction or of any Potential
Holder or Existing Holder who wishes to amend its Master
Purchaser's Letter unless such letter or amendment is received by
the Auction Agent by 3:00 P.M. on the Business Day preceding such
Auction
2.3 Auction Schedule; Method of Submission of Orders.
(a) The Auction Agent shall conduct Auctions for APS
Series D in accordance with the schedule set forth below. Such
schedule may be changed by the Auction Agent with the consent of
the Fund, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to
each Broker-Dealer. Such notice shall be given prior to the close
of business on the Business Day next preceding the first Auction
Date on which such change shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Fund and
the Broker-Dealers of the
applicable Maximum Rate and the
"AA" Composite Commercial Paper
Rate(s), Taxable Equivalent of the
Short-Term Municipal Bond Rate(s)
and Treasury Rate(s), as the case
may be, used in determining such
Maximum Rate as set forth in Sec-
tion 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by
Broker-Dealers as provided in
Section 3(a) of the Auction
Procedures. Submission Deadline is
1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations
pursuant to Section 4(a) of the
Auction Procedures.
<PAGE>
By approximately 3:00 P.M. Auction Agent advises Fund of
results of Auction as provided in
Section 4(b) of the Auction
Procedures.
Submitted Bids and Submitted Sell
Orders are accepted and rejected
and shares of APS Series D
allocated as provided in Section 5
of the Auction Procedures.
Auction Agent gives notice of
Auction results as set forth in
Section 2.4(a) hereof.
(b) BD agrees not to sell, assign or dispose of any
shares of APS Series D to any Person who has not delivered, or on
whose behalf a Broker-Dealer has not delivered, a signed Master
Purchaser's Letter to the Auction Aqent.
(c) BD shall submit Orders to the Auction Agent in
writing substantially in the form attached hereto as Exhibit C.
BD shall submit a separate Order to the Auction Agent for each
Potential Holder or Existing Holder on whose behalf BD is
submitting an Order and shall not net or aggregate the Orders of
different Potential Holders or Existing Holders on whose behalf
BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a
written notice in substantially the form attached hereto as
Exhibit D for transfers of shares of APS Series D made through BD
by an Existing Holder to another Person other than pursuant to an
Auction and shall deliver or cause to be delivered the related
Master Purchaser's Letter executed by such Person if such Person
has not previously so delivered a Master Purchaser's Letter and
(ii) a written notice, substantially in the form attached hereto
as Exhibit E, of the failure of any shares of APS Series D to be
transferred to or by any Person that purchased or sold shares of
APS Series D through BD pursuant to an Auction. 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. on the
Business Day preceding such Auction.
(e) BD has delivered to the Auction Agent its executed
Master Purchaser's Letter. BD and other Broker-Dealers which
have delivered duly executed Master Purchaser's Letters may
submit Orders in Auctions for their own accounts unless BD is an
affiliate of the Fund or the Fund shall have notified BD and all
other Broker-Dealers that they may no longer do so, in which case
Broker-Dealers may continue to submit Hold Orders and Sell Orders
for their own accounts.
<PAGE>
(f) BD agrees to handle its customers' Orders in
accordance with its duties under applicable securities laws and
rules.
2.4 Notices of Auction Results.
(a) On each Auction Date for APS Series D, the Auction
Agent shall notify BD by telephone of the results of the Auction
as set forth in paragraph (a) of the Settlement Procedures. By
approximately 11:30 A.M. on the Business Day next succeeding such
Auction Date, the Auction Agent shall confirm to BD in writing
the disposition of all Orders submitted by BD in such Auction.
(b) BD shall notify each Existing Holder or Potential
Holder on whose behalf BD has submitted an Order as set forth in
paragraph (b) of the Settlement Procedures and take such other
action as is required of BD pursuant to the Settlement
Procedures.
2.5 Designation of Special Dividend Period.
(a) If the Fund delivers to the Auction Agent a notice
of the Auction Date for APS Series D for a Rate Period thereof
that next succeeds a Rate Period that is not a Minimum Dividend
Period in the form of Exhibit E to the Auction Agency Agreement,
the Auction Agent shall deliver such notice to BD as promptly as
practicable after its receipt of such notice from the Fund.
(b) If the Board of Directors proposes to designate
any succeeding Subsequent Dividend Period of APS Series D as a
Special Dividend Period and the Fund delivers to the Auction
Agent a notice of such proposed Special Dividend Period in the
form of Exhibit F to the Auction Agency Agreement, the Auction
Agent shall deliver such notice to BD as promptly as practicable
after its receipt of such notice from the Fund.
(c) If the Board of Directors determines to designate
such succeeding Subsequent Dividend Period as a Special Dividend
Period, and the Fund delivers to the Auction Agent a notice of
such Special Dividend Period in the form of Exhibit G to the
Auction Agency Agreement not later than 11:00 A.M. on the second
Business Day next preceding the first day of such Rate Period,
the Auction Agent shall deliver such notice to BD not later than
3:00 P.M. on such second Business Day.
(d) If the Fund shall deliver to the Auction Agent a
notice not later than 11:00 A.M. on the second Business Day next
preceding the first day of any Rate Period stating that the Fund
has determined not to exercise its option to designate such
succeeding Subsequent Dividend Period as a Special Dividend
Period, in the form of Exhibit H to the Auction Agency Agreement,
or shall fail to timely deliver either such notice or a notice in
<PAGE>
the form of Exhibit G to the Auction Agency Agreement, the
Auction Agent shall deliver a notice in the form of Exhibit H to
the Auction Agency Agreement to BD not later than 3:00 P.M. on
such second Business Day.
2.6 Allocation of Taxable Income.
If the Fund delivers to the Auction Agent a notice in
the form of Exhibit K to the Auction Agency Agreement designating
all or a portion of any dividend on shares of APS Series D to
consist of net capital gains or other income taxable for Federal
income tax purposes, the Auction Agent shall deliver such notice
to BD on the Business Day following its receipt of such notice
from the Fund. On or prior to the Auction Date referred to in
such notice, BD will contact each of its customers that BD
believes to be an Existing Holder of shares of APS Series D or a
Potential Holder interested in submitting an Order with respect
to the Auction to be held on such Auction Date, and BD will
notify such customer of the contents of such notice. BD will be
deemed to have notified such Existing Holders and Potential
Holders if, for each such Holder, (i) it makes a reasonable
effort to contact such Holder by telephone, and (ii) upon failing
to contact such Holder by telephone it mails written notification
to such Holder at the mailing address indicated in such Holder's
most recently submitted Master Purchaser's Letter or at such
other address as is indicated in the account records of BD.
The Auction Agent shall be required to notify BD within
two Business Days after each Auction that involves an allocation
of income taxable for Federal income tax purposes as to the
dollar amount per share of such taxable income and income exempt
from Federal income taxation included in the related dividend.
2.7 Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred
with respect to shares of APS Series D during any Rate
Period thereof and (ii) prior to 12:00 Noon on the
third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to
Deposit shall have been cured as described in Section
2.7(a) of the Auction Agency Agreement and the Fund
shall have paid to the Auction Agent a late charge as
described in such Section 2.7(a);
then, the Auction Agent shall deliver a notice in the form of
Exhibit I to the Auction Agency Agreement by first-class mail,
postage prepaid, to BD not later than one Business Day after its
receipt of the payment from the Fund curing such Failure to
Deposit and such late charge.
<PAGE>
(b) If:
(i) any Failure to Deposit shall have occurred
with respect to shares of APS Series D during a Rate
Period thereof, and, prior to 12:00 Noon on the third
Business Day succeeding the date on which such Failure
to Deposit occurred, such Failure to Deposit shall not
have been cured as described in Section 2.7(a) of the
Auction Agency Agreement and the Fund shall not have
paid to the Auction Agent the late charge described in
such Section 2.7(a), but such Failure to Deposit shall
subsequently be so cured;
then, the Auction Agent shall deliver a notice in the form of
Exhibit J to the Auction Agency Agreement to the Broker-Dealers
for such series not later than one Business Day after the receipt
of the payment from the Fund curing such Failure to Deposit.
2.8 Service Charge to Be Paid to BD.
On the Business Day next succeeding each Auction Date,
the Auction Agent shall pay to BD from moneys received from the
Fund an amount equal to the product of (a) (i) in the case of
any Auction Date immediately preceding a Rate Period of such
series consisting of less than one year, 1/4 of 1%, or (ii) in
the case of any Auction Date immediately preceding a Rate Period
of such series consisting of one year or more, a percentage
agreed upon in writing by the Fund and the Broker-Dealers times
(b) a fraction, the numerator of which is the number of days in
the Rate Period therefor beginning on such Business Day and the
denominator of which is 365 if such Rate Period is less than one
year and 360 for all other Rate Periods, times (c) $50,000 times
(d) the sum of (i) the aggregate number of shares of such series
placed by BD in such Auction that were (A) the subject of
Submitted Bids of Existing Holders submitted by BD and continued
to be held as a result of such submission and (B) the subject of
Submitted Bids of Potential Holders submitted by BD and purchased
as a result of such submission plus (ii) the aggregate number of
shares of such series subject to valid Hold Orders (determined in
accordance with paragraph (d) of Section 3 of the Auction
Procedures) submitted to the Auction Agent by BD plus (iii) the
number of shares of APS Series D deemed to be subject to Hold
Orders by Existing Holders pursuant to paragraph (c) of Section 3
of the Auction Procedures that were acquired by such Existing
Holders through BD.
For purposes of subclause (d)(iii) of the foregoing
paragraph, if any Existing Holder who acquired shares of APS
Series D through BD transfers those shares to another Person
other than pursuant to an Auction, then the Broker-Dealer for the
shares so transferred shall continue to be BD; provided, however,
that if the transfer was effected by, or if the transferee is, a
<PAGE>
Broker-Dealer other than BD, then such Broker-Dealer shall be the
Broker-Dealer for such shares.
2.9 Settlement.
(a) If any Existing Holder on whose behalf BD has
submitted a Bid or Sell Order for shares of APS Series D that was
accepted in whole or in part fails to instruct its Agent Member
to deliver the shares of APS Series D subject to such Bid or Sell
Order against payment therefor, BD shall instruct such Agent
Member to deliver such shares against payment therefor and BD may
deliver to the Potential Holder on whose behalf BD submitted a
Bid for shares of APS Series D that was accepted in whole or in
part a number of shares of APS Series D that is less than the
number of shares of APS Series D specified in such Bid to be
purchased by such Potential Holder. Notwithstanding the
foregoing terms of this Section, any delivery or nondelivery of
shares of APS Series D which represents any departure from the
results of an Auction for such series, as determined by the
Auction Agent, shall be of no effect unless and until the Auction
Agent shall have been notified of such delivery or non-delivery
in accordance with the terms of Section 2.3(d)(ii) hereof. The
Auction Agent shall have no duty or liability with respect to
enforcement of this Section 2.9.
(b) Neither the Auction Agent nor the Fund shall have
any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder or its respective Agent
Member to deliver shares of APS Series D or to pay for shares of
APS Series D sold or purchased pursuant to the Auction Procedures
or otherwise.
3. The Auction Agent.
3.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for
the Fund hereunder and owes no fiduciary duties to any other
Person, other than the Fund, by reason of this Agreement.
(b) The Auction Agent undertakes to perform such
duties and only such duties as are specifically set forth in this
Agreement, and no implied covenants or obligations shall be read
into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its
part, the Auction Agent shall not be liable for any action taken,
suffered, or omitted or for any error of judgment made by it in
the performance of its duties under this Agreement. The Auction
Agent shall not be liable for any error or judgment made in good
faith unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts.
<PAGE>
3.2 Riqhts of the Auction Aqent.
(a) The Auction Agent may rely and shall be protected
in acting or refraining from acting upon any communication
authorized hereby and upon any written instruction, notice,
request, direction, consent, report, certificate, share
certificate or other instrument, paper or document believed in
good faith by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized by
this Agreement which the Auction Agent believes in good faith to
have been given by the Fund or by a Broker-Dealer. The Auction
Agent may record telephone communications with the
Broker-Dealers.
(b) The Auction Agent may consult with counsel of its
choice and the advice of such counsel shall be full and complete
authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon.
(c) The Auction Agent shall not be required to
advance, expend or risk its own funds or otherwise incur or
become exposed to financial liability in the performance of its
duties hereunder.
3.3 Auction Aqent's Disclaimer.
The Auction Agent makes no representation as to the
validity or adequacy of this Agreement, the Auction Agency
Agreement or the shares of APS Series D.
4. Miscellaneous.
4.1 Termination.
Either party may terminate this Agreement at any time
on five days' notice to the other party, provided that neither BD
nor the Auction Agent may terminate this Agreement without first
obtaining prior written consent of the Fund to such termination,
which consent shall not be unreasonably withheld. This Agreement
shall automatically terminate upon the termination of the Auction
Agency Agreement.
4.2 Participant in Securities Depository; Payment of
Dividends in Same-Day Funds.
(a) BD is, and shall remain for the term of this
Agreement, a member of, or participant in, the Securities
Depository (or an affiliate of such a member or participant).
(b) BD represents that it (or if such BD does not act
as Agent Member, one of its affiliates) shall make all dividend
<PAGE>
payments on the APS Series D available in same day funds on each
Dividend Payment Date to customers that use such BD or affiliate
as Agent Member.
4.3 Communications.
Except for (i) communications authorized to be by
telephone by this Agreement or the Auction Procedures and (ii)
communications in connection with Auctions (other than those
expressly required to be in writing), all notices, requests and
other communications to any party hereunder shall be in writing
(including telecopy or similar writing) and shall be given to
such party, addressed to it, at its address or telecopy number
set forth below:
If to BD, addressed: Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004
Telecopier No.: (212) 902-4869
Telephone No.: (212) 902-6535
If to the Auction Agent, Bankers Trust Company
addressed: Corporate Trust and Agency Group
Four Albany Street
New York, NY 10006
Attention: Auction
Rate/Remarketed Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or such other address or telecopy number as such party may
hereafter specify for such purpose by notice to the other
parties. Each such notice, request or communication shall be
effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a BD Officer and
on behalf of the Auction Agent by an Authorized Officer. BD may
record telephone communications with the Auction Agent.
4.4 Entire Agreement.
This Agreement contains the entire agreement among the
parties hereto relating to the subject matter hereof, and there
are no other representations, endorsements, promises, agreements
or understandings, oral, written or implied, among the parties
hereto relating to the subject matter hereof.
<PAGE>
4.5 Benefits.
Nothing in this Agreement, express or implied, shall
give to any person, other than the Fund, the Auction Agent, BD
and their respective successors and assigns, any benefit of any
legal or equitable right, remedy or claim hereunder.
4.6 Amendment: Waiver.
(a) This Agreement shall not be deemed or construed to
be modified, amended, rescinded, canceled or waived, in whole or
in part, except by a written instrument signed by a duly
authorized representative of the party to be charged.
(b) Failure of any party hereto to exercise any right
or remedy hereunder in the event of a breach hereof by any other
party shall not constitute a waiver of any such right or remedy
with respect to any subsequent breach.
4.7 Successors and Assigns.
This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the respective successors and
assigns of each of the Auction Agent and BD. This Agreement may
not be assigned by either party hereto absent the prior written
consent of the other party; provided, however, that this
Agreement may be assigned by the Auction Agent to a successor
Auction Agent selected by the Fund without the consent of BD.
4.8 Severability.
If any clause, provision or section hereof shall be
ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause,
provision or section shall not affect any of the remaining
clauses, provisions or sections hereof.
4.9 Execution in Counterparts.
This Agreement may be executed in several counterparts,
each of which shall be an original and all of which shall
constitute but one and the same instrument.
4.10 Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and
duly authorized officers as of the date first above written.
BANKERS TRUST COMPANY
By /s/ Fernando Acebedo
--------------------
Name: Fernando Acebedo
Title: Assistant Treasurer
GOLDMAN, SACHS & CO.
By /s/ Paul A. St. Pierre
--------------------
Name: Paul A. St. Pierre
Title: Vice President
<PAGE>
EXHIBIT C
(Submit only one Order on this Order form)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES D ("APS")
ORDER FORM
To: ________________________
________________________ ________________________
________________________ Date of Auction
New York, New York _____
Attention: ___________
The undersigned Broker-Dealer submits the following
Order on behalf of the Bidder listed below:
Name of Bidder: __________________________________________________________
Bidder places the Order listed below covering the number of
shares indicated (complete only one blank):
_______ shares now held by Bidder (an existing Holder),
and the Order is a (check one):
____ Hold Order; or
____ Bid at a rate of ___%; or
____ Sell Order;
- or -
_______ shares not now held by Bidder (a Potential
Holder), and the Order is a Bid at a rate of ___%.
Notes:
(1) If submitting more than one Order for one Bidder, use
additional Order forms.
(2) If one or more Orders covering in the aggregate more than
the number of outstanding shares of APS held by any Existing
Holder are submitted, such Orders shall be considered valid in
the order of priority set forth in the Auction Procedures.
<PAGE>
(3) A Hold Order may be placed only by an Existing Holder
covering a number of shares of APS not greater than the number of
shares of APS currently held by such Existing Holder.
(4) Potential holders may make only Bids, each of which must
specify a rate. If more than one Bid is submitted on behalf of
any Potential Holder, each Bid submitted shall be a separate Bid
with the rate specified.
(5) Bids may contain no more than three figures to the right of
the decimal point (.001 of 1%).
Name of Broker-Dealer:
By:
-----------------------------------
<PAGE>
EXHIBIT D
(To be used only for transfers made
other than pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES D ("APS")
TRANSFER FORM
We are (check one):
____ the Existing Holder named below;
____ the Broker-Dealer for such Existing Holder; or
____ the Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder has transferred
_______ shares of the above series of APS to __________.
________________________________________
(Name of Existing Holder)
________________________________________
(Name of Broker-Dealer)
________________________________________
(Name of Agent Member)
By:
------------------------------------
Printed Name:
Title:
<PAGE>
EXHIBIT E
(To be used for failures to
deliver shares of Auction Preferred
Shares sold pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES D ("APS")
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for __________ (the "Purchaser"),
which purchased _______ shares of the above series of APS in
the Auction held on _______ from the seller of such shares.
II. We are a Broker-Dealer for __________ (the "Seller"), which
sold _______ shares of the above series of APS in the Auction
held on __________ to the purchaser of such shares.
We hereby notify you that (check one)--
____ the Seller failed to deliver such shares of Auction
Preferred Shares to the Purchaser
____ the Purchaser failed to make payment to the Seller upon
delivery of such shares of Auction Preferred Shares
Name:
----------------------------------
(Name of Broker-Dealer)
By:
----------------------------------
Printed Name:
Title:
<PAGE>
BROKER-DEALER AGREEMENT
between
BANKERS TRUST COMPANY
and
PAINEWEBBER INCORPORATED
Dated as of November 28, 1994
Relating to
AUCTION PREFERRED SHARES
of
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
<PAGE>
BROKER-DEALER AGREEMENT dated as of November 28, 1994
between BANKERS TRUST COMPANY (the "Auction Agent"), a New York
banking corporation (not in its individual capacity but solely as
agent of PaineWebber Premier Insured Municipal Income Fund Inc.
(the "Fund") pursuant to authority granted it in the Auction
Agency Agreement), and PAINEWEBBER INCORPORATED (together with
its successors and assigns, "BD").
The Fund has issued a series of Auction Preferred Shares,
par value $.001 per share, liquidation preference $50,000 per
share (the "APS Series D") pursuant to its Articles of
Incorporation, as amended by the Articles Supplementary (the
"Articles Supplementary").
The Articles Supplementary will provide that, for each
Subsequent Dividend Period of the APS Series D, the Applicable
Rate for such series for such Subsequent Dividend Period shall,
under certain conditions, be the rate per annum that a bank or
trust company appointed by the Fund advises results from imple-
mentation of the Auction Procedures for such series. The Board
of Directors has adopted a resolution appointing Bankers Trust
Company as Auction Agent for purposes of the Auction Procedures
for the APS Series D.
The Auction Procedures require the participation of one or
more Broker-Dealers for the APS Series D.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein the Auction Agent and BD agree
as follows:
1. Definitions and Rules of Construction.
1.1 Terms Defined by Reference to Statement.
Capitalized terms not defined herein shall have the
respective meanings specified in the Articles Supplementary.
1.2 Terms Defined Herein.
As used herein and in the Settlement Procedures, the
following terms shall have the following meanings, unless the
context otherwise requires:
(a) "Articles Supplementary" shall mean the Articles
Supplementary establishing and authorizing the issuance of APS
Series D as filed by the Fund with the Department of Assessments
and Taxation of the State of Maryland.
(b) "Auction" shall have the meaning specified in
Section 2.1 hereof.
<PAGE>
(c) "Auction Agency Agreement" shall mean the Auction
Agency Agreement, dated as of November 28, 1994, between the Fund
and the Auction Agent relating to the APS Series D.
(d) "Auction Procedures" shall mean the auction
procedures constituting Part II of the Articles Supplementary.
(e) "Authorized Officer" shall mean each Senior Vice
President, Vice President, Assistant Vice President, Trust
Officer, Assistant Treasurer and Assistant Secretary of the
Auction Agent assigned to its Corporate Trust and Agency Group
and every other officer or employee of the Auction Agent
designated as an "Authorized Officer" for purposes of this
Agreement in a communication to BD.
(f) "BD Officer" shall mean each officer or employee
of BD designated as a "BD Officer" for purposes of this Agreement
in a communication to the Auction Agent.
(g) "Broker-Dealer Agreement" shall mean this
Agreement and any substantially similar agreement between the
Auction Agent and a Broker-Dealer.
(h) "Master Purchaser's Letter" shall mean a letter
addressed to the Fund, the Auction Agent, a Broker-Dealer and an
Agent Member, substantially in the form attached hereto as
Exhibit A.
(i) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit B.
1.3 Rules of Construction.
Unless the context or use indicates another or
different meaning or intent, the following rules shall apply to
the construction of this Agreement:
(a) Words importing the singular number shall include
the plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this
Agreement nor shall they affect its meaning, construction or
effect.
(c) The words "hereof", "herein", "hereto", and other
words of similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day
shall be to New York City time.
<PAGE>
2. The Auction.
2.1 Purpose; Incorporation by Reference of Auction
Procedures and Settlement Procedures.
(a) The provisions of the Auction Procedures will be
followed by the Auction Agent for the purpose of determining the
Applicable Rate for any Subsequent Dividend Period of the APS
Series D for which the Applicable Rate is to be determined by an
Auction. Each periodic operation of such procedures is
hereinafter referred to as an "Auction".
(b) All of the provisions contained in the Auction
Procedures and the Settlement Procedures are incorporated herein
by reference in their entirety and shall be deemed to be a part
hereof to the same extent as if such provisions were fully set
forth herein.
(c) BD agrees to act as, and assumes the obligations
of, and limitations and restrictions placed upon, a Broker-Dealer
under this Agreement for the APS Series D. BD understands that
other Persons meeting the requirements specified in the
definition of "Broker-Dealer" contained in the Auction Procedures
may execute Broker-Dealer Agreements and Master Purchaser's
Letters and participate as Broker-Dealers in Auctions.
2.2 Preparation for Each Auction.
(a) Not later than 9:30 A.M. on each Auction Date for
the APS Series D, the Auction Agent shall advise the
Broker-Dealers for such series by telephone of the Maximum Rate
therefor and the "AA" Composite Commercial Paper Rate(s), Taxable
Equivalent of the Short-Term Municipal Bond Rate(s) and Treasury
Rate(s), as the case may be, used in determining such Maximum
Rate.
(b) In the event that any Auction Date for the APS
Series D shall be changed after the Auction Agent has given the
notice referred to in clause (vi) of paragraph (a) of the
Settlement Procedures, or after the notice referred to in Section
2.5(a) hereof, if applicable, the Auction Agent, by such means as
the Auction Agent deems practicable, shall give notice of such
change to BD not later than the earlier of 9:15 A.M. on the new
Auction Date or 9:15 A.M. on the old Auction Date.
(c) The Auction Agent from time to time may request
the Broker-Dealers to provide the Auction Agent with a list of
their respective customers that such Broker-Dealers believe are
Existing Holders of shares of APS Series D. BD shall comply with
any such request, and the Auction Agent shall keep confidential
any such information so provided by BD and shall not disclose any
<PAGE>
information so provided by BD to any Person other than the Fund
and BD.
(d) BD agrees to maintain a list of Potential Holders
and to use its best efforts to contact the Potential Holders on
such list whom BD believes may be interested in participating in
such Auction on each Auction Date for the purposes set forth in
the Auction Procedures.
(e) The Auction Agent is not required to accept the
Master Purchaser's Letter of any Potential Holder who wishes to
submit a Bid for the first time in an Auction or of any Potential
Holder or Existing Holder who wishes to amend its Master
Purchaser's Letter unless such letter or amendment is received by
the Auction Agent by 3:00 P.M. on the Business Day preceding such
Auction
2.3 Auction Schedule; Method of Submission of Orders.
(a) The Auction Agent shall conduct Auctions for APS
Series D in accordance with the schedule set forth below. Such
schedule may be changed by the Auction Agent with the consent of
the Fund, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to
each Broker-Dealer. Such notice shall be given prior to the close
of business on the Business Day next preceding the first Auction
Date on which such change shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Fund and
the Broker-Dealers of the
applicable Maximum Rate and the
"AA" Composite Commercial Paper
Rate(s), Taxable Equivalent of the
Short-Term Municipal Bond Rate(s)
and Treasury Rate(s), as the case
may be, used in determining such
Maximum Rate as set forth in Sec-
tion 2.2(a) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by
Broker-Dealers as provided in
Section 3(a) of the Auction
Procedures. Submission Deadline is
1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations
pursuant to Section 4(a) of the
Auction Procedures.
<PAGE>
By approximately 3:00 P.M. Auction Agent advises Fund of
results of Auction as provided in
Section 4(b) of the Auction
Procedures.
Submitted Bids and Submitted Sell
Orders are accepted and rejected
and shares of APS Series D
allocated as provided in Section 5
of the Auction Procedures.
Auction Agent gives notice of
Auction results as set forth in
Section 2.4(a) hereof.
(b) BD agrees not to sell, assign or dispose of any
shares of APS Series D to any Person who has not delivered, or on
whose behalf a Broker-Dealer has not delivered, a signed Master
Purchaser's Letter to the Auction Aqent.
(c) BD shall submit Orders to the Auction Agent in
writing substantially in the form attached hereto as Exhibit C.
BD shall submit a separate Order to the Auction Agent for each
Potential Holder or Existing Holder on whose behalf BD is
submitting an Order and shall not net or aggregate the Orders of
different Potential Holders or Existing Holders on whose behalf
BD is submitting Orders.
(d) BD shall deliver to the Auction Agent (i) a
written notice in substantially the form attached hereto as
Exhibit D for transfers of shares of APS Series D made through BD
by an Existing Holder to another Person other than pursuant to an
Auction and shall deliver or cause to be delivered the related
Master Purchaser's Letter executed by such Person if such Person
has not previously so delivered a Master Purchaser's Letter and
(ii) a written notice, substantially in the form attached hereto
as Exhibit E, of the failure of any shares of APS Series D to be
transferred to or by any Person that purchased or sold shares of
APS Series D through BD pursuant to an Auction. 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. on the
Business Day preceding such Auction.
(e) BD has delivered to the Auction Agent its executed
Master Purchaser's Letter. BD and other Broker-Dealers which
have delivered duly executed Master Purchaser's Letters may
submit Orders in Auctions for their own accounts unless BD is an
affiliate of the Fund or the Fund shall have notified BD and all
other Broker-Dealers that they may no longer do so, in which case
Broker-Dealers may continue to submit Hold Orders and Sell Orders
for their own accounts.
<PAGE>
(f) BD agrees to handle its customers' Orders in
accordance with its duties under applicable securities laws and
rules.
2.4 Notices of Auction Results.
(a) On each Auction Date for APS Series D, the Auction
Agent shall notify BD by telephone of the results of the Auction
as set forth in paragraph (a) of the Settlement Procedures. By
approximately 11:30 A.M. on the Business Day next succeeding such
Auction Date, the Auction Agent shall confirm to BD in writing
the disposition of all Orders submitted by BD in such Auction.
(b) BD shall notify each Existing Holder or Potential
Holder on whose behalf BD has submitted an Order as set forth in
paragraph (b) of the Settlement Procedures and take such other
action as is required of BD pursuant to the Settlement
Procedures.
2.5 Designation of Special Dividend Period.
(a) If the Fund delivers to the Auction Agent a notice
of the Auction Date for APS Series D for a Rate Period thereof
that next succeeds a Rate Period that is not a Minimum Dividend
Period in the form of Exhibit E to the Auction Agency Agreement,
the Auction Agent shall deliver such notice to BD as promptly as
practicable after its receipt of such notice from the Fund.
(b) If the Board of Directors proposes to designate
any succeeding Subsequent Dividend Period of APS Series D as a
Special Dividend Period and the Fund delivers to the Auction
Agent a notice of such proposed Special Dividend Period in the
form of Exhibit F to the Auction Agency Agreement, the Auction
Agent shall deliver such notice to BD as promptly as practicable
after its receipt of such notice from the Fund.
(c) If the Board of Directors determines to designate
such succeeding Subsequent Dividend Period as a Special Dividend
Period, and the Fund delivers to the Auction Agent a notice of
such Special Dividend Period in the form of Exhibit G to the
Auction Agency Agreement not later than 11:00 A.M. on the second
Business Day next preceding the first day of such Rate Period,
the Auction Agent shall deliver such notice to BD not later than
3:00 P.M. on such second Business Day.
(d) If the Fund shall deliver to the Auction Agent a
notice not later than 11:00 A.M. on the second Business Day next
preceding the first day of any Rate Period stating that the Fund
has determined not to exercise its option to designate such
succeeding Subsequent Dividend Period as a Special Dividend
Period, in the form of Exhibit H to the Auction Agency Agreement,
or shall fail to timely deliver either such notice or a notice in
<PAGE>
the form of Exhibit G to the Auction Agency Agreement, the
Auction Agent shall deliver a notice in the form of Exhibit H to
the Auction Agency Agreement to BD not later than 3:00 P.M. on
such second Business Day.
2.6 Allocation of Taxable Income.
If the Fund delivers to the Auction Agent a notice in
the form of Exhibit K to the Auction Agency Agreement designating
all or a portion of any dividend on shares of APS Series D to
consist of net capital gains or other income taxable for Federal
income tax purposes, the Auction Agent shall deliver such notice
to BD on the Business Day following its receipt of such notice
from the Fund. On or prior to the Auction Date referred to in
such notice, BD will contact each of its customers that BD
believes to be an Existing Holder of shares of APS Series D or a
Potential Holder interested in submitting an Order with respect
to the Auction to be held on such Auction Date, and BD will
notify such customer of the contents of such notice. BD will be
deemed to have notified such Existing Holders and Potential
Holders if, for each such Holder, (i) it makes a reasonable
effort to contact such Holder by telephone, and (ii) upon failing
to contact such Holder by telephone it mails written notification
to such Holder at the mailing address indicated in such Holder's
most recently submitted Master Purchaser's Letter or at such
other address as is indicated in the account records of BD.
The Auction Agent shall be required to notify BD within
two Business Days after each Auction that involves an allocation
of income taxable for Federal income tax purposes as to the
dollar amount per share of such taxable income and income exempt
from Federal income taxation included in the related dividend.
2.7 Failure to Deposit.
(a) If:
(i) any Failure to Deposit shall have occurred
with respect to shares of APS Series D during any Rate
Period thereof and (ii) prior to 12:00 Noon on the
third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to
Deposit shall have been cured as described in Section
2.7(a) of the Auction Agency Agreement and the Fund
shall have paid to the Auction Agent a late charge as
described in such Section 2.7(a);
then, the Auction Agent shall deliver a notice in the form of
Exhibit I to the Auction Agency Agreement by first-class mail,
postage prepaid, to BD not later than one Business Day after its
receipt of the payment from the Fund curing such Failure to
Deposit and such late charge.
<PAGE>
(b) If:
(i) any Failure to Deposit shall have occurred
with respect to shares of APS Series D during a Rate
Period thereof, and, prior to 12:00 Noon on the third
Business Day succeeding the date on which such Failure
to Deposit occurred, such Failure to Deposit shall not
have been cured as described in Section 2.7(a) of the
Auction Agency Agreement and the Fund shall not have
paid to the Auction Agent the late charge described in
such Section 2.7(a), but such Failure to Deposit shall
subsequently be so cured;
then, the Auction Agent shall deliver a notice in the form of
Exhibit J to the Auction Agency Agreement to the Broker-Dealers
for such series not later than one Business Day after the receipt
of the payment from the Fund curing such Failure to Deposit.
2.8 Service Charge to Be Paid to BD.
On the Business Day next succeeding each Auction Date,
the Auction Agent shall pay to BD from moneys received from the
Fund an amount equal to the product of (a) (i) in the case of
any Auction Date immediately preceding a Rate Period of such
series consisting of less than one year, 1/4 of 1%, or (ii) in
the case of any Auction Date immediately preceding a Rate Period
of such series consisting of one year or more, a percentage
agreed upon in writing by the Fund and the Broker-Dealers times
(b) a fraction, the numerator of which is the number of days in
the Rate Period therefor beginning on such Business Day and the
denominator of which is 365 if such Rate Period is less than one
year and 360 for all other Rate Periods, times (c) $50,000 times
(d) the sum of (i) the aggregate number of shares of such series
placed by BD in such Auction that were (A) the subject of
Submitted Bids of Existing Holders submitted by BD and continued
to be held as a result of such submission and (B) the subject of
Submitted Bids of Potential Holders submitted by BD and purchased
as a result of such submission plus (ii) the aggregate number of
shares of such series subject to valid Hold Orders (determined in
accordance with paragraph (d) of Section 3 of the Auction
Procedures) submitted to the Auction Agent by BD plus (iii) the
number of shares of APS Series D deemed to be subject to Hold
Orders by Existing Holders pursuant to paragraph (c) of Section 3
of the Auction Procedures that were acquired by such Existing
Holders through BD.
For purposes of subclause (d)(iii) of the foregoing
paragraph, if any Existing Holder who acquired shares of APS
Series D through BD transfers those shares to another Person
other than pursuant to an Auction, then the Broker-Dealer for the
shares so transferred shall continue to be BD; provided, however,
that if the transfer was effected by, or if the transferee is, a
<PAGE>
Broker-Dealer other than BD, then such Broker-Dealer shall be the
Broker-Dealer for such shares.
2.9 Settlement.
(a) If any Existing Holder on whose behalf BD has
submitted a Bid or Sell Order for shares of APS Series D that was
accepted in whole or in part fails to instruct its Agent Member
to deliver the shares of APS Series D subject to such Bid or Sell
Order against payment therefor, BD shall instruct such Agent
Member to deliver such shares against payment therefor and BD may
deliver to the Potential Holder on whose behalf BD submitted a
Bid for shares of APS Series D that was accepted in whole or in
part a number of shares of APS Series D that is less than the
number of shares of APS Series D specified in such Bid to be
purchased by such Potential Holder. Notwithstanding the
foregoing terms of this Section, any delivery or nondelivery of
shares of APS Series D which represents any departure from the
results of an Auction for such series, as determined by the
Auction Agent, shall be of no effect unless and until the Auction
Agent shall have been notified of such delivery or non-delivery
in accordance with the terms of Section 2.3(d)(ii) hereof. The
Auction Agent shall have no duty or liability with respect to
enforcement of this Section 2.9.
(b) Neither the Auction Agent nor the Fund shall have
any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder or its respective Agent
Member to deliver shares of APS Series D or to pay for shares of
APS Series D sold or purchased pursuant to the Auction Procedures
or otherwise.
3. The Auction Agent.
3.1 Duties and Responsibilities.
(a) The Auction Agent is acting solely as agent for
the Fund hereunder and owes no fiduciary duties to any other
Person, other than the Fund, by reason of this Agreement.
(b) The Auction Agent undertakes to perform such
duties and only such duties as are specifically set forth in this
Agreement, and no implied covenants or obligations shall be read
into this Agreement against the Auction Agent.
(c) In the absence of bad faith or negligence on its
part, the Auction Agent shall not be liable for any action taken,
suffered, or omitted or for any error of judgment made by it in
the performance of its duties under this Agreement. The Auction
Agent shall not be liable for any error or judgment made in good
faith unless the Auction Agent shall have been negligent in
ascertaining the pertinent facts.
<PAGE>
3.2 Riqhts of the Auction Aqent.
(a) The Auction Agent may rely and shall be protected
in acting or refraining from acting upon any communication
authorized hereby and upon any written instruction, notice,
request, direction, consent, report, certificate, share
certificate or other instrument, paper or document believed in
good faith by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized by
this Agreement which the Auction Agent believes in good faith to
have been given by the Fund or by a Broker-Dealer. The Auction
Agent may record telephone communications with the
Broker-Dealers.
(b) The Auction Agent may consult with counsel of its
choice and the advice of such counsel shall be full and complete
authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon.
(c) The Auction Agent shall not be required to
advance, expend or risk its own funds or otherwise incur or
become exposed to financial liability in the performance of its
duties hereunder.
3.3 Auction Aqent's Disclaimer.
The Auction Agent makes no representation as to the
validity or adequacy of this Agreement, the Auction Agency
Agreement or the shares of APS Series D.
4. Miscellaneous.
4.1 Termination.
Either party may terminate this Agreement at any time
on five days' notice to the other party, provided that neither BD
nor the Auction Agent may terminate this Agreement without first
obtaining prior written consent of the Fund to such termination,
which consent shall not be unreasonably withheld. This Agreement
shall automatically terminate upon the termination of the Auction
Agency Agreement.
4.2 Participant in Securities Depository; Payment of
Dividends in Same-Day Funds.
(a) BD is, and shall remain for the term of this
Agreement, a member of, or participant in, the Securities
Depository (or an affiliate of such a member or participant).
(b) BD represents that it (or if such BD does not act
as Agent Member, one of its affiliates) shall make all dividend
<PAGE>
payments on the APS Series D available in same day funds on each
Dividend Payment Date to customers that use such BD or affiliate
as Agent Member.
4.3 Communications.
Except for (i) communications authorized to be by
telephone by this Agreement or the Auction Procedures and (ii)
communications in connection with Auctions (other than those
expressly required to be in writing), all notices, requests and
other communications to any party hereunder shall be in writing
(including telecopy or similar writing) and shall be given to
such party, addressed to it, at its address or telecopy number
set forth below:
If to BD, addressed: PaineWebber Incorporated
1285 Avenue of the Americas
New York, NY 10019
Telecopier No.: (212) 713-1054
Telephone No.: (212) 713-2000
If to the Auction Agent, Bankers Trust Company
addressed: Corporate Trust and Agency Group
Four Albany Street
New York, NY 10006
Attention: Auction Rate/
Remarketed Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or such other address or telecopy number as such party may
hereafter specify for such purpose by notice to the other
parties. Each such notice, request or communication shall be
effective when delivered at the address specified herein.
Communications shall be given on behalf of BD by a BD Officer and
on behalf of the Auction Agent by an Authorized Officer. BD may
record telephone communications with the Auction Agent.
4.4 Entire Agreement.
This Agreement contains the entire agreement among the
parties hereto relating to the subject matter hereof, and there
are no other representations, endorsements, promises, agreements
or understandings, oral, written or implied, among the parties
hereto relating to the subject matter hereof.
<PAGE>
4.5 Benefits.
Nothing in this Agreement, express or implied, shall
give to any person, other than the Fund, the Auction Agent, BD
and their respective successors and assigns, any benefit of any
legal or equitable right, remedy or claim hereunder.
4.6 Amendment: Waiver.
(a) This Agreement shall not be deemed or construed to
be modified, amended, rescinded, canceled or waived, in whole or
in part, except by a written instrument signed by a duly
authorized representative of the party to be charged.
(b) Failure of any party hereto to exercise any right
or remedy hereunder in the event of a breach hereof by any other
party shall not constitute a waiver of any such right or remedy
with respect to any subsequent breach.
4.7 Successors and Assigns.
This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the respective successors and
assigns of each of the Auction Agent and BD. This Agreement may
not be assigned by either party hereto absent the prior written
consent of the other party; provided, however, that this
Agreement may be assigned by the Auction Agent to a successor
Auction Agent selected by the Fund without the consent of BD.
4.8 Severability.
If any clause, provision or section hereof shall be
ruled invalid or unenforceable by any court of competent
jurisdiction, the invalidity or unenforceability of such clause,
provision or section shall not affect any of the remaining
clauses, provisions or sections hereof.
4.9 Execution in Counterparts.
This Agreement may be executed in several counterparts,
each of which shall be an original and all of which shall
constitute but one and the same instrument.
4.10 Governing Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered by their proper and
duly authorized officers as of the date first above written.
BANKERS TRUST COMPANY
By /s/ Fernando Acebedo
--------------------
Name: Fernando Acebedo
Title: Assistant Treasurer
PAINEWEBBER INCORPORATED
By /s/ Peter Masco
--------------------
Mgn. Director
<PAGE>
EXHIBIT C
(Submit only one Order on this Order form)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES D ("APS")
ORDER FORM
To: ________________________
________________________ ________________________
________________________ Date of Auction
New York, New York _____
Attention: ___________
The undersigned Broker-Dealer submits the following
Order on behalf of the Bidder listed below:
Name of Bidder: __________________________________________________________
Bidder places the Order listed below covering the number of
shares indicated (complete only one blank):
_______ shares now held by Bidder (an existing Holder),
and the Order is a (check one):
____ Hold Order; or
____ Bid at a rate of ___%; or
____ Sell Order;
- or -
_______ shares not now held by Bidder (a Potential
Holder), and the Order is a Bid at a rate of ___%.
Notes:
(1) If submitting more than one Order for one Bidder, use
additional Order forms.
(2) If one or more Orders covering in the aggregate more than
the number of outstanding shares of APS held by any Existing
Holder are submitted, such Orders shall be considered valid in
the order of priority set forth in the Auction Procedures.
<PAGE>
(3) A Hold Order may be placed only by an Existing Holder
covering a number of shares of APS not greater than the number of
shares of APS currently held by such Existing Holder.
(4) Potential holders may make only Bids, each of which must
specify a rate. If more than one Bid is submitted on behalf of
any Potential Holder, each Bid submitted shall be a separate Bid
with the rate specified.
(5) Bids may contain no more than three figures to the right of
the decimal point (.001 of 1%).
Name of Broker-Dealer:
By:
-----------------------------------
<PAGE>
EXHIBIT D
(To be used only for transfers made
other than pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES D ("APS")
TRANSFER FORM
We are (check one):
____ the Existing Holder named below;
____ the Broker-Dealer for such Existing Holder; or
____ the Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder has transferred
_______ shares of the above series of APS to __________.
________________________________________
(Name of Existing Holder)
________________________________________
(Name of Broker-Dealer)
________________________________________
(Name of Agent Member)
By:
------------------------------------
Printed Name:
Title:
<PAGE>
EXHIBIT E
(To be used for failures to
deliver shares of Auction Preferred
Shares sold pursuant to an Auction)
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
AUCTION PREFERRED SHARES, SERIES D ("APS")
NOTICE OF A FAILURE TO DELIVER
Complete either I or II
I. We are a Broker-Dealer for __________ (the "Purchaser"),
which purchased _______ shares of the above series of APS in
the Auction held on _______ from the seller of such shares.
II. We are a Broker-Dealer for __________ (the "Seller"), which
sold _______ shares of the above series of APS in the Auction
held on __________ to the purchaser of such shares.
We hereby notify you that (check one)--
____ the Seller failed to deliver such shares of Auction
Preferred Shares to the Purchaser
____ the Purchaser failed to make payment to the Seller upon
delivery of such shares of Auction Preferred Shares
Name:
----------------------------------
(Name of Broker-Dealer)
By:
----------------------------------
Printed Name:
Title:
<PAGE>
- - -----------------------------------------------------------------------------
AUCTION AGENCY AGREEMENT
between
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
and
BANKERS TRUST COMPANY
Dated as of November 28, 1994
Relating to
AUCTION PREFERRED SHARES, SERIES D
of
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
- - -----------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
------
SECTION 1 DEFINITIONS AND RULES OF CONSTRUCTION............. 1
1.1 Terms Defined by Reference to APS
Provisions................................. 1
1.2 Terms Defined Herein......................... 1
1.3 Rules of Construction........................ 2
SECTION 2 The Auction....................................... 3
2.1 Purpose; Incorporation by Reference
of Auction Procedures and Settlement
Procedures................................. 3
2.2 Preparation of Each Auction;
Maintenance of Registry of Beneficial
Owners..................................... 3
2.3 Information Concerning Rates................. 6
2.4 Auction Schedule............................. 9
2.5 Designation of Special Dividend
Period..................................... 9
2.6 Allocation of Taxable Income................. 11
2.7 Failure to Deposit........................... 11
2.8 Broker-Dealers............................... 13
2.9 Ownership of Shares of APS Series D.......... 13
2.10 Access to and Maintenance of Auction
Records.................................... 14
2.11 Dividend and Redemption Price
Deposit; Funds to Be Held in Trust......... 14
SECTION 3 The Auction Agent as Dividend and
Redemption Price Disbursing Agent............... 14
SECTION 4 The Auction Agent as Transfer Agent and
Registrar....................................... 15
4.1 Issue of Share Certificates.................. 15
<PAGE>
4.2 Registration of Transfer of Shares........... 15
4.3 Removal of Legend on Restricted
Shares..................................... 15
4.4 Lost Share Certificates...................... 15
4.5 Disposition of Canceled
Certificates; Record Retention............. 16
4.6 Share Transfer Books......................... 16
4.7 Return of Funds.............................. 16
SECTION 5 Representations and Warranties of the
Fund............................................ 16
SECTION 6 The Auction Agent................................. 17
6.1 Duties and Responsibilities.................. 17
6.2 Rights of the Auction Agent.................. 18
6.3 Auction Agent's Disclaimer................... 18
6.4 Compensation, Expenses and
Indemnification............................ 18
SECTION 7 Miscellaneous..................................... 19
7.1 Term of Agreement............................ 19
7.2 Communications............................... 19
7.3 Entire Agreement............................. 20
7.4 Benefits..................................... 20
7.5 Amendment; Waiver............................ 21
7.6 Successors and Assigns....................... 21
7.7 Severability................................. 21
7.8 Execution in Counterparts.................... 21
7.9 Governing Law................................ 21
<PAGE>
EXHIBITS
EXHIBIT A -- Form of Broker-Dealer Agreement
EXHIBIT B -- Form of Master Purchaser's Letter
EXHIBIT C -- Settlement Procedures
EXHIBIT D -- Form of APS Provisions
EXHIBIT E -- Form of Notice of Auction Date
EXHIBIT F -- Form of Notice of Proposed Change of Length of
Rate Period
EXHIBIT G -- Form of Notice of Change of Length of Rate Period
EXHIBIT H -- Form of Notice of Determination Not to Change Length
of Rate Period
EXHIBIT I -- Form of Notice of Cure of Failure to Deposit
EXHIBIT J -- Form of Notice of Subsequent Cure of Failure to
Deposit
EXHIBIT K -- Form of Notice of Taxable Income
<PAGE>
AUCTION AGENCY AGREEMENT, dated as of November 28, 1994,
between PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC., a
Maryland Corporation (the "Fund"), and BANKERS TRUST COMPANY, a New
York banking corporation (the "Auction Agent").
WHEREAS, the Fund proposes to issue preferred shares, par
value $.001 per share, liquidation preference $50,000 per share, in
a series designated as Auction Preferred Shares, Series D ("APS
Series D") pursuant to the APS Provisions (as hereinafter defined)
and desires that the Auction Agent perform certain duties in con-
nection with the APS Series D upon the terms and subject to the
conditions of this Agreement, and hereby appoints the Auction Agent
to act in the capacities set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, the Fund and the Auction Agent
agree as follows:
1. DEFINITIONS AND RULES OF CONSTRUCTION.
1.1 TERMS DEFINED BY REFERENCE TO APS PROVISIONS.
Capitalized terms not defined herein shall have the respective
meanings specified in the APS Provisions.
1.2 TERMS DEFINED HEREIN. As used herein and in the
Settlement Procedures, the following terms shall have the following
meanings, unless the context otherwise requires:
(a) "Agent Member" of any Person shall mean the member
of, or participant in, the Securities Depository that will act on
behalf of a Bidder and is identified as such in such Bidder's
Master Purchaser's Letter.
(b) "APS Provisions" shall mean the Fund's Articles of
Incorporation, including the Articles Supplementary ("Articles
Supplementary") establishing and fixing the rights and preferences
of the shares of APS Series D on file with the State of Maryland,
a copy of which is attached hereto as Exhibit D.
(c) "Auction" shall have the meaning specified in
Section 2.1 hereof.
(d) "Auction Procedures" shall mean the auction
procedures constituting Part II of the form of the Articles
Supplementary.
(e) "Authorized Officer" shall mean each Senior Vice
President, Vice President, Assistant Vice President, Assistant
Treasurer and Assistant Secretary of the Auction Agent and every
other officer or employee of the Auction Agent designated as an
<PAGE>
"Authorized Officer" for purposes hereof in a communication to the
Fund.
(f) "Broker-Dealer" shall mean any broker-dealer,
commercial bank or other entity permitted by law to perform the
functions 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.
(g) "Broker-Dealer Agreement" shall mean each agreement
among the Fund, the Auction Agent and a Broker-Dealer substantially
in the form attached hereto as Exhibit A.
(h) "Existing Holder," when used with respect to the APS
Series D, shall mean a Person who has signed a Master Purchaser's
Letter and is listed as the beneficial owner of shares of such
series in the records of the Auction Agent.
(i) "Fund Officer" shall mean the Chairman of the Board
of Directors of the Fund, the President, each Vice President
(whether or not designated by a number or word or words added
before or after the title "Vice President"), the Secretary, the
Treasurer, each Assistant Secretary and each Assistant Treasurer of
the Fund and every other officer or employee of the Fund designated
as a "Fund Officer" for purposes hereof in a notice to the Auction
Agent.
(j) "Master Purchaser's Letter" shall mean a letter
addressed to the Fund, the Auction Agent, a Broker-Dealer and an
Agent Member, substantially in the form attached hereto as Exhibit
B.
(k) "Potential Holder," when used with respect to APS
Series D, shall mean any Person, including any Existing Holder of
shares of such series, (i) who shall have executed a Master
Purchaser's Letter and (ii) who may be interested in acquiring APS
Series D (or, in the case of an Existing Holder of APS Series D,
additional shares of APS Series D).
(l) "Reorganization Agreement" shall mean the Agreement
and Plan of Reorganization and Liquidation between the Fund and
PaineWebber Premier Intermediate Tax-Free Income Fund Inc.
(m) "Settlement Procedures" shall mean the Settlement
Procedures attached hereto as Exhibit C.
1.3 RULES OF CONSTRUCTION. Unless the context or use
indicates another or different meaning or intent, the following
rules shall apply to the construction of this Agreement:
- 2 -
<PAGE>
(a) Words importing the singular number shall include
the plural number and vice versa.
(b) The captions and headings herein are solely for
convenience of reference and shall not constitute a part of this
Agreement nor shall they affect its meaning, construction or
effect.
(c) The words "hereof," "herein," "hereto" and other
words of similar import refer to this Agreement as a whole.
(d) All references herein to a particular time of day
shall be to New York City time.
2. The Auction.
2.1 PURPOSE; INCORPORATION BY REFERENCE OF AUCTION
PROCEDURES AND SETTLEMENT PROCEDURES. (a) The APS Provisions
provide that the Applicable Rate per annum for APS Series D for
each Subsequent Dividend Period after the Initial Dividend Period
with respect to such series shall, except under certain conditions,
be equal to the rate per annum that a bank or trust company
appointed by the Fund advises has resulted on the Business Day
preceding the first day of such Subsequent Dividend Period from
implementation of the Auction Procedures for such series. Each
periodic implementation of the Auction Procedures is hereinafter
referred to as an "Auction." The Board of Directors has adopted a
resolution appointing Bankers Trust Company as Auction Agent for
purposes of the Auction Procedures for the APS Series D. The
Auction Agent accepts such appointment and agrees to follow the
procedures set forth in this Section 2 and the Auction Procedures
for the purpose of determining the Applicable Rate for the APS
Series D for each Subsequent Dividend Period thereof for which the
Applicable Rate is to be determined by an Auction.
(b) All of the provisions contained in the Auction
Procedures and the Settlement Procedures are incorporated herein by
reference in their entirety and shall be deemed to be a part hereof
to the same extent as if such provisions were fully set forth
herein.
2.2 PREPARATION OF EACH AUCTION; MAINTENANCE OF REGISTRY
OF BENEFICIAL OWNERS. (a) Not later than seven days prior to the
first Auction Date for the APS Series D, the Fund shall provide the
Auction Agent with a list of the Broker-Dealers and a manually
signed copy of each Broker-Dealer Agreement for execution by the
Auction Agent. Not later than seven days prior to any Auction Date
for the APS Series D for which any change in such list of
Broker-Dealers is to be effective, the Fund will notify the Auction
Agent in writing of such change and, if any such change involves
the addition of a Broker-Dealer to such list, shall cause to be
delivered to the Auction Agent for execution by the Auction Agent
- 3 -
<PAGE>
a Broker-Dealer Agreement signed by such Broker-Dealer; provided,
however, that if the Fund proposes to designate any Special
Dividend Period for APS Series D pursuant to Section 4 of Part I of
the Articles Supplementary, not later than 11:00 A.M., New York
City time, on the Business Day next preceding the Auction next
preceding the first day of such Special Dividend Period, the Fund
shall provide the Auction Agent with a list of the Broker-Dealers
for such series and a manually signed copy of each Broker-Dealer
Agreement or a new Schedule A to the Broker-Dealer Agreement (which
Schedule A shall replace and supersede any previous Schedule A to
such Broker-Dealer Agreement) with each Broker-Dealer for such
series. The Auction Agent shall have entered into a Broker-Dealer
Agreement with each Broker-Dealer prior to the participation of any
such Broker-Dealer in any Auction.
(b) In the event that any Auction Date for the APS
Series D shall be changed after the Auction Agent shall have given
the notice referred to in clause (vi) of paragraph (a) of the
Settlement Procedures, or after the notice referred to in Section
2.5(a) hereof, if applicable, the Auction Agent, by such means as
the Auction Agent deems practicable, shall give notice of such
change to the Broker-Dealers for such series not later than the
earlier of 9:15 A.M. on the new Auction Date or 9:15 A.M. on the
old Auction Date.
(c) (i) The Auction Agent shall maintain a registry of
the beneficial owners of the APS Series D, who shall constitute
Existing Holders of such shares for purposes of Auctions, and the
Auction Agent shall indicate thereon the identity of the respective
Broker-Dealer of each Existing Holder, if any, on whose behalf such
Broker-Dealer submitted the most recent Order in any Auction which
resulted in such Existing Holder continuing to hold or purchasing
such shares of APS Series D. The Auction Agent shall keep such
registry current and accurate. The Fund shall provide or cause to
be provided to the Auction Agent at or prior to the Date of
Original Issue of the APS Series D a list of the initial Existing
Holders of the shares of such series, the number of shares of such
series purchased by each such Existing Holder and the respective
Broker-Dealer of each such Existing Holder or the affiliate thereof
through which each such Existing Holder purchased such shares. The
Auction Agent shall advise the Fund in writing whenever the number
of Existing Holders is 500 or more. The Auction Agent may rely
upon, as conclusive evidence of the identities of the Existing
Holders of APS Series D, (A) such list, (B) the results of Auctions
and (C) notices from any Existing Holder, the Agent Member of any
Existing Holder or the Broker-Dealer of any Existing Holder as
described in the first sentence of Section 2.2(c)(iii) hereof.
(ii) In the event of any partial redemption of shares of
APS Series D, the Auction Agent shall, at least two Business Days
prior to the next Auction for such series, request the Agent Member
of each Existing Holder of shares of such series to disclose to the
- 4 -
<PAGE>
Auction Agent (upon selection by such Agent Member of the Existing
Holders whose shares of such series are to be redeemed) the number
of shares of such series, if any, of such Existing Holder which are
subject to such redemption, provided the Auction Agent has been
furnished with the name and telephone number of a person or
department at such Agent Member from which it shall request such
information. Upon any refusal of an Agent Member to release such
information, the Auction Agent shall deliver to such Agent Member
a facsimile copy of the Existing Holder's Master Purchaser's
Letter, which authorizes and instructs such Agent Member to release
such information to the Auction Agent. In the absence of receiving
any such information with respect to an Existing Holder, from such
Existing Holder's Agent Member or otherwise, the Auction Agent may
continue to treat such Existing Holder as the beneficial owner of
the number of shares of such series shown in the Auction Agent's
registry.
(iii) The Auction Agent shall be required to register a
transfer of shares of APS Series D from an Existing Holder of such
shares to another Person only if such transfer is made to a Person
that has delivered, or on whose behalf has been delivered, a signed
Master Purchaser's Letter to the Auction Agent and if (A) such
transfer is pursuant to an Auction or (B) the Auction Agent has
been notified in writing (I) in a notice substantially in the form
of Exhibit D to the Broker-Dealer Agreements by such Existing
Holder, the Agent Member of such Existing Holder or the Broker-
Dealer of such Existing Holder of such transfer or (II) in a notice
substantially in the form of Exhibit E to the Broker-Dealer Agree-
ments by the Broker-Dealer of any Person that purchased or sold
shares of such series in an Auction of the failure of such shares
to be transferred as a result of such Auction. 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. on the Business Day
preceding such Auction.
(iv) The Auction Agent is not required to accept the
Master Purchaser's Letter of any Potential Holder who wishes to
submit a Bid for the first time in an Auction or of any Potential
Holder or Existing Holder who wishes to amend its Master Purch-
aser's Letter unless such letter or amendment is received by the
Auction Agent by 3:00 P.M. on the Business Day preceding such
Auction.
(d) The Auction Agent may request the Broker-Dealers, as
set forth in the Broker-Dealer Agreements, to provide the Auction
Agent with a list of their respective customers that such Broker-
Dealers believe are Existing Holders of APS Series D. The Auction
Agent shall keep confidential such registry of Existing Holders and
shall not disclose the identities of the Existing Holders of such
shares to any Person other than the Fund and the Broker-Dealer that
provided such information.
- 5 -
<PAGE>
2.3 INFORMATION CONCERNING RATES. (a) The Applicable
Percentage on the date of this Agreement for the APS Series D is
110%. If there is any change in the credit rating of APS Series D
by either of the rating agencies (or substitute or successor rating
agencies) referred to in the definition of "Applicable Percentage"
resulting in any change in the Applicable Percentage for such
series after the date of this Agreement, the Fund shall notify the
Auction Agent in writing of such change in the Applicable
Percentage prior to 12:00 Noon on the Business Day prior to the
next Auction Date for such series succeeding such change. If the
Fund designates all or a portion of any dividend on shares of APS
Series D to consist of net capital gains or other income taxable
for federal income tax purposes, it will indicate, in its notice in
the form of Exhibit K hereto to the Auction Agent pursuant to
Section 2.6 hereof, the Applicable Percentage for such series to be
in effect for the Auction Date on which the dividend rate for such
dividend is to be fixed. In determining the Maximum Rate for the
APS Series D on any Auction Date as set forth in Section 2.3(b)(i)
hereof, the Auction Agent shall be entitled to rely on the last
Applicable Percentage for such series of which it has most recently
received notice from the Fund (or, in the absence of such notice,
the percentage set forth in the first sentence of this paragraph
(a)).
(b) (i) On each Auction Date for the APS Series D, the
Auction Agent shall determine the Maximum Rate for such series.
The Maximum Rate for the APS Series D on any Auction Date shall be:
(A) in the case of any Auction Date which is
not the Auction Date immediately prior to the first day of any
proposed Special Dividend Period of more than 28 Rate Period Days
designated by the Fund pursuant to Section 4 of Part I of the
Articles Supplementary, the product of (x) the Reference Rate on
such Auction Date for the next Rate Period of such series and
(y) the Applicable Percentage on such Auction Date, unless such
series has or had a Special Dividend Period (other than a Special
Dividend Period of 28 Rate Period Days or less) and an Auction at
which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Dividend Period of such series after such Special Dividend
Period, in which case the higher of:
(1) the dividend rate on shares of such
series for the then-ending Rate Period, and
(2) the product of (x) the higher of (I)
the "AA" Composite Commercial Paper Rate on such Auction Date for
the then-ending Rate Period of such series, if such Rate Period is
less than one year, or the Treasury Rate on such Auction Date for
such Rate Period, if such Rate Period is one year or greater, and
(II) the "AA" Composite Commercial Paper Rate on such Auction Date
for such Special Dividend Period of such series, if such Special
Dividend Period is less than one year, or the Treasury Rate on such
- 6 -
<PAGE>
Auction Date for such Special Dividend Period, if such Special Div-
idend Period is one year or greater and (2) the Applicable Percen-
tage on such Auction Date; or
(B) in the case of any Auction Date which is
the Auction Date immediately prior to the first day of any proposed
Special Dividend Period of more than 28 Rate Period Days designated
by the Fund pursuant to Section 4 of Part I of the Articles
Supplementary, the product of (1) the highest of (x) the Reference
Rate on such Auction Date for the then-ending Rate Period of such
series, if such Rate Period is less than one year, or the Treasury
Rate on such Auction Date for such Rate Period, if such Rate Period
is one year or greater, (y) the Reference Rate on such Auction Date
for the Special Dividend Period for which the Auction is being
held, if such Special Dividend Period is less than one year, or the
Treasury Rate on such Auction Date for the Special Dividend Period
for which the Auction is being held, if such Special Dividend
Period is one year or greater, and (z) the Reference Rate on such
Auction Date for the Minimum Dividend Period of such series and (2)
the Applicable Percentage on such Auction Date.
Not later than 9:30 A.M. on each Auction Date, the Auction
Agent shall notify the Fund and the Broker-Dealers of the Maximum
Rate so determined and the "AA" Composite Commercial Paper Rate(s),
Taxable Equivalent of the Short-Term Municipal Bond Rate(s) and the
Treasury Rate(s), as the case may be, used to make such determ-
nation.
(ii) From and after a Failure to Deposit by the Fund
during any Rate Period of the APS Series D, until such failure is
cured and a late charge, if applicable, is paid, in accordance with
subparagraph (c)(i) of Section 2 of Part I of the Articles
Supplementary, on the first day of each Rate Period of such series
the Auction Agent shall determine the Treasury Rate for such Rate
Period, if such Rate Period is one year or greater, and the "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the
Short-Term Municipal Bond Rate for Minimum Dividend Periods and
Rate Periods that are less than one year. Not later than 9:30 A.M.
on each such first day, the Auction Agent shall notify the Fund of
the applicable "AA" Composite Commercial Paper Rate, Taxable
Equivalent of the Short-Term Municipal Bond Rate and Treasury Rate.
(iii) If any "AA" Composite Commercial Paper Rate, Tax-
able Equivalent of the Short-Term Municipal Bond Rate or Treasury
Rate, as the case may be, is not quoted on an interest basis, the
Auction Agent shall convert the quoted rate to the interest equiv-
alent thereof as set forth in the definition of such rate in the
APS Provisions if the rate obtained by the Auction Agent is quoted
on a discount basis, or if such rate is quoted on a basis other
than an interest or discount basis the Auction Agent shall convert
the quoted rate to an interest rate after consultation with the
Fund as to the method of such conversion.
- 7 -
<PAGE>
(iv) If any "AA" Composite Commercial Paper Rate is to
be based on rates supplied by Commercial Paper Dealers and one or
more of the Commercial Paper Dealers shall not provide a quotation
for the determination of such "AA" Composite Commercial Paper Rate,
the Auction Agent shall immediately notify the Fund so that the
Fund can determine whether to select a Substitute Commercial Paper
Dealer or Substitute Commercial Paper Dealers to provide the
quotation or quotations not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers. The Fund shall promptly advise
the Auction Agent of any such selection.
(v) If any Treasury Rate is to be based on rates
supplied by U.S. Government Securities Dealers and one or more of
the U.S. Government Securities Dealers shall not provide a quota-
tion for the determination of such Treasury Rate, the Auction Agent
shall immediately notify the Fund so that the Fund can determine
whether to select a Substitute U.S. Government Securities Dealer or
Substitute U.S. Government Securities Dealers to provide the
quotation or quotations not being supplied by any U.S. Government
Securities Dealer or U.S. Government Securities Dealers. The Fund
shall promptly advise the Auction Agent of any such selection.
- 8 -
<PAGE>
2.4 AUCTION SCHEDULE. The Auction Agent shall conduct
Auctions in accordance with the schedule set forth below. Such
schedule may be changed by the Auction Agent with the consent of
the Fund, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to each
Broker-Dealer. Such notice shall be given prior to the close of
business on the Business Day next preceding the first Auction Date
on which any such change shall be effective.
Time Event
-------- ----------
By 9:30 A.M. Auction Agent advises the Fund and
Broker-Dealers of the applicable
Maximum Rate and the "AA" Composite
Commercial Paper Rate(s), Taxable
Equivalent of the Short-Term Muni-
cipal Bond Rate(s) and Treasury
Rate(s), as the case may be, used in
determining such Maximum Rate as set
forth in Section 2.3(b)(i) hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers
as provided in Section 3(a) of the
Auction Procedures. Submission
Deadline is 1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations
pursuant to Section 4(a) of the
Auction Procedures.
By approximately 3:00 P.M. Auction Agent advises Fund of
results of Auction as provided in
Section 4(b) of the Auction
Procedures. Submitted Bids and
Submitted Sell Orders are accepted
and rejected and shares of APS
Series D allocated as provided in
Section 5 of the Auction
Procedures. Auction Agent gives
notice of Auction results as set
forth in paragraph (a) of the
Settlement Procedures.
2.5 DESIGNATION OF SPECIAL DIVIDEND PERIOD. (a) The
APS Provisions will provide that, subject to the Fund's option to
designate a Special Dividend Period as referred to in paragraph (b)
of this Section 2.5, each Rate Period for APS Series D will consist
of seven days.
Not less than 10 nor more than 20 days prior to the last day of any
Rate Period that is more than 28 days, (i) the Fund shall deliver
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to the Auction Agent a notice of the Auction Date of the next
succeeding Auction for such series of APS in the form of Exhibit E
hereto and (ii) the Auction Agent shall deliver such notice by
first-class mail, postage prepaid, to each Existing Holder of such
series at the address specified in such Existing Holder's Master
Purchaser's Letter and to the Broker-Dealers for such series as
promptly as practicable after its receipt of such notice from the
Fund.
(b) Pursuant to the APS Provisions, the Fund may, at its
option, designate a Special Dividend Period for the APS Series D in
the manner described in Section 4 of Part I of the Articles
Supplementary.
(i) If the Fund proposes to designate any succeeding
Subsequent Dividend Period of the APS Series D as a Special
Dividend Period of more than 28 Rate Period Days, (A) the Fund
shall deliver to the Auction Agent a notice of such proposed
Special Dividend Period in the form of Exhibit F hereto not less
than 20 nor more than 30 days prior to the first day of such
proposed Special Dividend Period and (B) the Auction Agent on
behalf of the Fund shall deliver such notice by first-class mail,
postage prepaid, to each Existing Holder of shares of such series
at the address specified in such Existing Holder's Master Purch-
aser's Letter and to the Broker-Dealers for such series as promptly
as practicable after its receipt of such notice from the Fund.
(ii) If the Board of Directors determines to designate
such succeeding Subsequent Dividend Period as a Special Dividend
Period, (A) the Fund shall deliver to the Auction Agent a notice of
such determination in the form of Exhibit G hereto not later than
11:00 A.M. on the second Business Day next preceding the first day
of such proposed Special Dividend Period and (B) the Auction Agent
shall deliver such notice to the Broker-Dealers for such series not
later than 3:00 P.M. on such second Business Day.
(iii) If the Fund shall deliver to the Auction Agent a
notice stating that the Fund has determined not to exercise its
option to designate such succeeding Subsequent Dividend Period as
a Special Dividend Period with respect to which it has delivered a
notice in the form of Exhibit F hereto not later than 11:00 A.M. on
the second Business Day next preceding the first day of such
proposed Special Dividend Period, or shall fail to timely deliver
either such notice or a notice in the form of Exhibit G hereto, the
Auction Agent shall deliver a notice in the form of Exhibit H
hereto to the Broker-Dealers for such series not later than 3:00
P.M. on such second Business Day.
A Special Dividend Period designated by the Fund for the
APS Series D shall not become effective if (a) on the Auction Date
next preceding the first day of such Special Dividend Period
Sufficient Clearing Bids for such series shall not exist or (b) a
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Failure to Deposit shall have occurred with respect to such series
prior to such change and shall not have been cured in accordance
with the APS Provisions.
2.6 ALLOCATION OF TAXABLE INCOME. The Fund may, at its
option, designate all or a portion of any dividend on shares of the
APS Series D to consist of net capital gains or other income tax-
able for federal income tax purposes by delivering to the Auction
Agent a notice in the form of Exhibit K hereto of such designation
15 days prior to the Auction Date on which the Applicable Rate for
such dividend is to be fixed or by retroactively allocating income
taxable for federal income tax purposes as provided in the APS
Provisions. The Auction Agent will deliver such notice to the
Broker-Dealers for such series on the Business Day following its
receipt of such notice from the Fund. Within two Business Days
after any Auction Date involving the allocation of income taxable
for federal income tax purposes as provided in the APS Provisions,
or if the Fund retroactively allocates income taxable for federal
income tax purposes as provided in the APS Provisions, the Auction
Agent shall notify each Broker-Dealer for the related series as to
the dollar amount per share of such taxable income and income
exempt from federal income taxation included in the related
dividend.
2.7 FAILURE TO DEPOSIT. (a) If:
(i) any Failure to Deposit shall have occurred with
respect to shares of APS Series D during any Rate Period thereof,
and
(ii) prior to 12:00 Noon 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 within the meaning of
the last sentence of Section 2.7(b) or the Fund shall not have paid
to the Auction Agent the late charge described in Section 2.7(b),
then Auctions for such series shall be suspended until such Failure
to Deposit shall have been so cured and the Applicable Rate for
shares of such series for each Subsequent Dividend Period thereof
commencing after such Failure to Deposit to and including the
Subsequent Dividend Period, if any, during which such Failure to
Deposit is so cured shall be a rate per annum equal to the Maximum
Rate on the Auction Date for each such Subsequent Dividend Period
(but with the prevailing rating for such shares, for purposes of
determining such Maximum Rate, being deemed to be "Below
"ba3"/BB-").
(b) If:
(i) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period thereof;
and
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<PAGE>
(ii) prior to 12:00 Noon 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 sentence and the Fund shall have paid to the
Auction Agent a late charge equal to the sum of: (A) if such
Failure to Deposit consisted of the failure timely to pay to the
Auction Agent the full amount of dividends with respect to any
Dividend Period on the shares of such series, an amount computed by
multiplying (1) 200% of the Reference Rate (or Treasury Rate, if
applicable) for the Rate Period during which such Failure to
Deposit occurs on the Dividend Payment Date for such Dividend
Period by (2) a fraction, the numerator of which shall be the
number of days for which such Failure to Deposit was not cured in
accordance with the next succeeding sentence (including the day
such Failure to Deposit occurs and excluding the day such Failure
to Deposit was cured) and the denominator of which shall be 365,
and applying the rate obtained against the aggregate liquidation
preference of the outstanding shares of such series; and (B) if
such Failure to Deposit consisted of the failure timely to pay to
the Auction Agent the Optional Redemption Price or Mandatory
Redemption Price, as the case may be, of the shares of such series
for which Notice of Redemption has been given by the Fund pursuant
to paragraph (b) of Section 3 of Part I of the Articles
Supplementary, an amount computed by multiplying (1) 200% of the
Reference Rate (or Treasury Rate, if applicable) for the Rate
Period during which such Failure to Deposit occurs on the redemp-
tion date by (2) a fraction, the numerator of which shall be the
number of days for which such Failure to Deposit was not cured in
accordance with the next succeeding sentence (including the day
such Failure to Deposit occurs and excluding the day such Failure
to Deposit was cured) and the denominator of which shall be 365,
and applying the rate obtained against the aggregate liquidation
preference of the Outstanding shares of such series to be redeemed,
then the Auction Agent shall deliver a notice in the form of
Exhibit I hereto by first-class mail, postage prepaid, to the
Broker-Dealers for such series not later than one Business Day
after its receipt of the payment from the Fund curing such Failure
to Deposit and such late charge. A Failure to Deposit with respect
to such series 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 thereof if, not later than 12:00 Noon on the fourth Business
Day preceding the Auction Date for the Rate Period subsequent to
such Rate Period, the Fund shall have paid to the Auction Agent (A)
all accumulated and unpaid dividends on the shares of such series
and (B) without duplication, the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, for the shares of
such series for which Notice of Redemption has been given by the
Fund pursuant to paragraph (b) of Section 3 of Part I of the
Articles Supplementary.
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<PAGE>
(c) If any Failure to Deposit shall have occurred with
respect to shares of such series during a Rate Period thereof and,
prior to 12:00 Noon 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 within the meaning of the last
sentence of Section 2.7(b) hereof and the Fund shall not have paid
to the Auction Agent the late charge described in such Section
2.7(b), but such Failure to Deposit shall subsequently be so cured,
then the Auction Agent shall deliver a notice in the form of
Exhibit J hereto to the Broker-Dealers for such series not later
than one Business Day after the receipt of the payment from the
Fund during such Failure to Deposit. Notwithstanding the
foregoing, the Auction Agent shall conduct an Auction on an Auction
Date which occurs simultaneously with the date of commencement of
a Failure to Deposit.
2.8 BROKER-DEALERS. (a) Not later than 12:00 Noon on
each Auction Date for the APS Series D, the Fund shall pay to the
Auction Agent an amount in cash equal to the aggregate fees payable
to the Broker-Dealers for such series pursuant to Section 2.8 of
the Broker-Dealer Agreements for such series. The Auction Agent
shall apply such moneys as set forth in Section 2.8 of each such
Broker-Dealer Agreement.
(b) The Fund shall obtain the consent of the Auction
Agent prior to selecting any Person to act as a Broker-Dealer,
which consent shall not be unreasonably withheld.
(c) The Auction Agent shall terminate any Broker-Dealer
Agreement as set forth therein if so directed by the Fund, provided
that at least one Broker-Dealer Agreement would be in effect for
the APS Series D after such termination.
(d) Subject to the Auction Agent's having consented to
the selection of the relevant Broker-Dealer pursuant to Section
2.8(b) hereof, the Auction Agent shall from time to time enter into
such Broker-Dealer Agreements with one or more Broker-Dealers as
the Fund shall request and shall enter into such schedules to any
such Broker-Dealer Agreements as the Fund shall request, which
schedules, among other things, shall set forth the series to which
such Broker-Dealer Agreement relates.
2.9 OWNERSHIP OF SHARES OF APS SERIES D. The Fund shall
notify the Auction Agent if the Fund or any affiliate of the Fund
acquires any shares of APS Series D. Neither the Fund nor any
affiliate of the Fund shall submit any Order in any Auction for
shares of APS Series D, except as set forth in the next sentence.
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. For purposes of this Section 2.9, a Broker-Dealer shall
not be deemed to be an affiliate of the Fund solely because one or
more of the directors or executive officers of such Broker-Dealer
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<PAGE>
or of any Person controlled by, in control of or under common
control with such Broker-Dealer is also a director of the Fund.
The Auction Agent shall have no duty or liability with respect to
enforcement of this Section 2.9.
2.10 ACCESS TO AND MAINTENANCE OF AUCTION RECORDS. The
Auction Agent shall, upon the receipt of prior written notice from
the Fund, afford to the Fund access at reasonable times during
normal business hours to all books, records, documents and other
information concerning the conduct and results of Auctions. The
Auction Agent shall maintain records relating to any Auction for a
period of six years after such Auction, and such records shall, in
reasonable detail, accurately and fairly reflect the actions taken
by the Auction Agent hereunder.
2.11 DIVIDEND AND REDEMPTION PRICE DEPOSIT; FUNDS TO BE
HELD IN TRUST. (a) The Fund shall pay to the Auction Agent, not
later than 12:00 noon (A) on the Business Day next preceding any
Dividend Payment Date for the APS Series D, 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 such series, and (B) on
the Business Day next preceding any redemption date for such series
in funds available on such redemption date in The City of New York,
New York, the Redemption Price to be paid on such redemption date
for such series after notice of redemption is given as set forth in
the APS Provisions.
(b) All amounts paid to the Auction Agent for the
payment of dividends on, or of any late charges with respect to,
any shares of APS Series D shall be held in trust by the Auction
Agent for the payment of such dividends and any such late charges
for the benefit of the Holders entitled thereto, and all moneys
paid to the Auction Agent for payment of the Optional Redemption
Price or Mandatory Redemption Price, as the case may be, of the
shares called for redemption shall be held in trust by the Auction
Agent for the benefit of the Holders of shares so to be redeemed.
3. THE AUCTION AGENT AS DIVIDEND AND
REDEMPTION PRICE DISBURSING AGENT.
The Auction Agent, as dividend and redemption price
disbursing agent, shall pay to the Holders of shares of APS Series
D (i) on each Dividend Payment Date for such series, dividends on
the shares of such series, (ii) on any date fixed for redemption of
such series, the Redemption Price of any shares of such series
called for redemption and (iii) any late charge related to any
payment of dividends or Redemption Price, in each case after
receipt of the necessary funds from the Fund with which to pay such
dividends, Redemption Price or late charge. The amount of divi-
dends for any Rate Period for the APS Series D to be paid by the
Auction Agent to the Holders of such series will be determined by
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<PAGE>
the Fund as set forth in Section 2 of Part I of the Articles
Supplementary with respect to such series. The Redemption Price of
any shares of APS Series D to be paid by the Auction Agent to the
Holders thereof will be determined by the Fund as set forth in
Section 3 of Part I of the Articles Supplementary with respect to
such series. The Fund shall notify the Auction Agent in writing of
a decision to redeem shares of such series at least five days prior
to the date a notice of redemption is required to be mailed to the
Holders of the shares to be redeemed by paragraph (b) of Section 3
of Part I of the Articles Supplementary. Such notice by the Fund
to the Auction Agent shall contain the information required by
paragraph (b) of Section 3 of Part I of the Articles Supplementary
to be stated in the notice of redemption required to be provided by
the Auction Agent to such Holders. The Auction Agent will provide
the notices required to be given by the Auction Agent in paragraph
(b) of Section 3 of Part I of the Articles Supplementary.
4. THE AUCTION AGENT AS TRANSFER AGENT AND REGISTRAR.
4.1 ISSUE OF SHARE CERTIFICATES. Upon the Date of
Original Issue of the APS Series D, one certificate representing
all of the shares of each such series issued on such date shall be
issued by the Fund and, at the request of the Fund, registered in
the name of Cede & Co. and countersigned by the Auction Agent.
4.2 REGISTRATION OF TRANSFER OF SHARES. The APS Series
D shall be registered solely in the name of the Securities
Depository or its nominee.
4.3 REMOVAL OF LEGEND ON RESTRICTED SHARES. All
requests for removal of legends on the APS Series D indicating
restrictions on transfer shall be accompanied by an opinion of
counsel stating that such legends may be removed and such APS
Series D freely transferred, such opinion to be delivered under
cover of a letter from a Fund Officer authorizing the Auction Agent
to remove the legend on the basis of said opinion.
4.4 LOST SHARE CERTIFICATES. The Auction Agent shall
issue and register replacement certificates for certificates repre-
sented to have been lost, stolen or destroyed upon the fulfillment
of such requirements as shall be deemed appropriate by the Fund and
the Auction Agent, subject at all times to provisions of law, the
By-Laws of the Fund governing such matters and resolutions adopted
by the Fund with respect to lost securities. The Auction Agent may
issue new certificates in exchange for and upon the cancellation of
mutilated certificates. Any request by the Fund to the Auction
Agent to issue a replacement or new certificate pursuant to this
Section 4.4 shall be deemed to be a representation and warranty by
the Fund to the Auction Agent that such issuance will comply with
such provisions of law and the By-Laws and resolutions of the Fund.
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<PAGE>
4.5 DISPOSITION OF CANCELED CERTIFICATES; RECORD
RETENTION. The Auction Agent shall retain all share certificates
which have been canceled in transfer or exchange and all accom-
panying documentation in accordance with applicable rules and
regulations of the Securities and Exchange Commission for two
calendar years. Upon the expiration of this two-year period, the
Auction Agent shall deliver to the Fund the canceled certificates
and accompanying documentation. The Fund also shall undertake to
furnish to the Securities and Exchange Commission and to the Board
of Governors of the Federal Reserve System, upon demand, at either
the principal office or at any regional office, complete, correct
and current hard copies of any and all such records. Thereafter
such records shall not be destroyed by the Fund without the concur-
rence of the Auction Agent.
4.6 SHARE TRANSFER BOOKS. For so long as the Auction
Agent, Bankers Trust Company, is acting as the transfer agent for
the APS Series D pursuant to this Agreement, it shall maintain a
share transfer book containing a list of the Holders of the shares
of such series, the number of shares of such series held by such
Holders and the address of each Holder. The Auction Agent shall
record in such share transfer books any change of address of a
Holder upon notice by such Holder. In case of any request or
demand for the inspection of the share transfer books of the Fund
or any other books in the possession of the Auction Agent, the
Auction Agent will notify the Fund and secure instructions as to
permitting or refusing such inspection. The Auction Agent reserves
the right, however, to exhibit the share transfer books or other
books to any Person in case it is advised by its counsel that its
failure to do so would be unlawful.
4.7 RETURN OF FUNDS. Any funds deposited with the
Auction Agent hereunder by the Fund for any reason, including but
not limited to the payment of dividends or the redemption of the
APS Series D, that remain with the Auction Agent after 90 days
shall be repaid to the Fund upon the written request of the Fund,
together with interest, if any, earned thereon.
5. REPRESENTATIONS AND WARRANTIES OF THE FUND.
The Fund represents and warrants to the Auction Agent
that:
(a) the Fund has been duly organized and is existing as
a corporation under the laws of the State of Maryland and has all
necessary power and authority to execute and deliver this Agreement
and to authorize, create and issue the shares of APS Series D;
(b) this Agreement has been duly and validly authorized,
executed and delivered by the Fund and, assuming due authorization,
execution and delivery by the Auction Agent, constitutes the legal,
valid and binding obligation of the Fund subject, as to enforce-
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<PAGE>
ability, to bankruptcy, insolvency, reorganization, moratorium,
receivership or similar laws, whether statutory or decisional,
relating to or affecting creditors' rights and to general equitable
principles (regardless of whether enforcement is sought in equity
or at law);
(c) the form of the certificate evidencing the APS
Series D complies with all applicable laws of the State of
Maryland;
(d) the APS Series D, when issued and delivered on the
Date of Original Issue as contemplated by the Reorganization Agree-
ment, will have been duly authorized, validly issued, fully paid
and nonassessable;
(e) no consent, authorization or order of, or filing or
registration with, any court, governmental agency or official
(except such as have been obtained and such as may be required
under the Securities Act of 1933, as amended, or the Investment
Company Act of 1940, as amended, or under the blue sky or state
securities laws) is required in connection with the execution and
delivery of this Agreement or the issuance of the APS Series D; and
(f) the issuance of the APS Series D, the execution,
delivery and performance of this Agreement, compliance by the Fund
with all provisions hereof, and the consummation of the trans-
actions contemplated hereby or by the Reorganization Agreement or
the Broker-Dealer Agreements, will not conflict with, constitute a
breach of any of the terms or provisions of, or a default under, or
result in the creation or imposition of any material lien, charge
or encumbrance upon any of the assets of the Fund pursuant to the
terms of any agreement, indenture or instrument to which the Fund
is a party or by which the Fund is bound, or result in a violation
of the APS Provisions or By-Laws of the Fund or of any order, rule
or regulation of any court or governmental agency having jurisdic-
tion over the Fund or its property which conflict, breach, default,
lien or violation, individually or in the aggregate, would have a
material adverse effect on the business, financial position or
results of operations of the Fund.
6. THE AUCTION AGENT.
6.1 DUTIES AND RESPONSIBILITIES. (a) Except as
provided in Section 2.11(b) hereof, the Auction Agent is acting
solely as agent for the Fund hereunder and owes no fiduciary duties
to any other Person by reason of this Agreement.
(b) The Auction Agent undertakes to perform such duties
and only such duties as are specifically set forth in this Agree-
ment and the Broker-Dealer Agreements, and no implied covenants or
obligations shall be read into this Agreement against the Auction
Agent.
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<PAGE>
(c) In the absence of bad faith or gross negligence on
its part, the Auction Agent shall not be liable for any action
taken, suffered, or omitted or for any error of judgment made by it
in the performance of its duties under this Agreement except that
the Auction Agent shall be liable for any error of judgment made in
good faith if the Auction Agent shall have been grossly negligent
in ascertaining the pertinent facts.
6.2 RIGHTS OF THE AUCTION AGENT. (a) The Auction Agent
may rely and shall be protected in acting or refraining from acting
upon any communication authorized hereby and upon any written
instruction, notice, request, direction, consent, report, certif-
icate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be
liable for acting upon any telephone communication authorized
hereby which the Auction Agent believes in good faith to have been
given by the Fund or by any Broker-Dealer. The Auction Agent may
record telephone communications with the Fund or with any Broker-
Dealer.
(b) The Auction Agent may consult with counsel reason-
ably acceptable to the Fund and the advice of such counsel shall be
full and complete authorization and protection in respect of any
action taken, suffered or omitted by it hereunder in good faith and
in reliance thereon.
(c) The Auction Agent shall not be required to advance,
expend or risk its own funds or otherwise incur or become exposed
to financial liability in the performance of its duties hereunder.
(d) The Auction Agent may perform its duties and exer-
cise its rights hereunder either directly or by or through agents
or attorneys and shall not be responsible for any misconduct on the
part of any agent or attorney appointed by it with due care
hereunder except as set forth above in Section 6.1(c).
6.3 AUCTION AGENT'S DISCLAIMER. The Auction Agent makes
no representation as to the validity or adequacy of this Agreement
(except as to the Auction Agent's duties hereunder and as to the
due authorization, execution and delivery of this Agreement), the
Broker-Dealer Agreements (except as to the Auction Agent's duties
thereunder) or the APS Series D.
6.4 COMPENSATION, EXPENSES AND INDEMNIFICATION. (a)
The Fund shall pay the Auction Agent from time to time reasonable
compensation for all services rendered by it under this Agreement
and the Broker-Dealer Agreements in such amounts as may be agreed
to by the Fund and the Auction Agent from time to time.
(b) The Fund shall reimburse the Auction Agent upon its
request for all reasonable expenses, disbursements and advances
incurred or made by the Auction Agent in accordance with any prov-
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<PAGE>
ision of this Agreement and the Broker-Dealer Agreements (including
the reasonable compensation and the expenses and disbursements of
its agents and counsel), except any expense or disbursement attrib-
utable to its gross negligence or bad faith.
(c) The Fund shall indemnify the Auction Agent for and
hold it harmless against, any loss, liability or expense incurred
without gross negligence or bad faith on its part, arising out of
or in connection with its agency under this Agreement and the
Broker-Dealer Agreements, including the costs and expenses of
defending itself against any claim or liability in connection with
its exercise or performance of its duties hereunder and thereunder
for which indemnification is provided by this subsection.
7. MISCELLANEOUS.
7.1 TERM OF AGREEMENT. (a) The term of this Agreement
is unlimited unless it shall be terminated as provided in this
Section 7.1. The Fund may terminate this Agreement at any time by
so notifying the Auction Agent in writing, provided that the Fund
has entered into an agreement in substantially the form of this
Agreement with a successor auction agent. The Auction Agent may
terminate this Agreement upon written notice to the Fund, such
termination to be effective on the earlier of (i) the date spec-
ified in such notice which shall not be earlier than 90 days after
the giving of such notice or (ii) the date on which a successor
trust company is appointed by the Fund pursuant to an agreement
containing substantially the same terms and conditions as this
Agreement.
(b) Except as otherwise provided in this paragraph (b),
the respective rights and duties of the Fund and the Auction Agent
under this Agreement shall cease upon termination of this Agree-
ment. The Fund's obligations under Section 6.4 hereof and its
representations and warranties contained in Section 5 hereof and
the Auction Agent's obligations and liabilities under Sections 2.10
and 4.5 hereof and, with respect to any amounts theretofore paid to
the Auction Agent in respect of dividends, late charges or the
Redemption Price on any shares of APS Series D, Sections 2.11(b),
3 and 4.7 hereof, shall survive the termination hereof. Upon
termination of this Agreement, the Auction Agent shall, at the
Fund's request, promptly deliver to the Fund copies of all books
and records maintained by it in connection with its duties
hereunder.
7.2 COMMUNICATIONS. Except for (a) communications
authorized to be by telephone pursuant to this Agreement or the
Auction Procedures and (b) communications in connection with
Auctions (other than those expressly required to be in writing) and
unless otherwise specified by the terms of this Agreement all
notices, requests and other communications to any party hereunder
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<PAGE>
shall be in writing (including telecopy or similar writing) given
to such person at its address or telecopy number set forth below:
If to the Company,
addressed: PaineWebber Premier Insured
Municipal Income Fund Inc.
1285 Avenue of the Americas
New York, New York 10019
Attention: Treasurer
Telephone No.: (212) 713-2000
With a copy sent to: -------------------------------
-------------------------------
1285 Avenue of the Americas
New York, New York 10019
Telephone No.: (212) 713-2144
Telecopier No.: (212) 713-1459
If to the Auction Agent,
addressed: Bankers Trust Company
Corporate Trust and Agency Group
Four Albany Street
New York, New York 10006
Attention: Auction Rate Securities
Telecopier No.: (212) 250-6215
Telephone No.: (212) 250-6850
or to such other address as the party to whom the communication is
addressed shall have previously communicated to the other party.
Communications shall be given on behalf of the Fund by a Fund
Officer and on behalf of the Auction Agent by an Authorized
Officer. Communications shall be effective when received at the
proper address.
7.3 ENTIRE AGREEMENT. This Agreement contains the
entire agreement among the parties relating to the subject matter
hereof, and there are no other representations, endorsements,
promises, agreements or understandings, oral, written or inferred,
between the parties.
7.4 BENEFITS. Nothing herein, express or implied, shall
give to any Person, other than the Fund, the Auction Agent and
their respective successors and assigns, any benefit of any legal
or equitable right, remedy or claim hereunder.
- 20 -
<PAGE>
7.5 AMENDMENT; WAIVER. (a) This Agreement shall not be
deemed or construed to be modified, amended, rescinded, canceled or
waived, in whole or in part, except by a written instrument signed
by a duly authorized representative of the party to be charged.
The Fund shall notify the Auction Agent and each Broker-Dealer of
any change in the APS Provisions as of the date hereof, prior to
the effective date of any such change.
(b) Failure of either party hereto to exercise any right
or remedy hereunder in the event of a breach hereof by the other
party shall not constitute a waiver of any such rights or remedies
with respect to any subsequent breach.
7.6 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon, inure to the benefit of, and be enforceable by, the
respective successors of each of the Fund and the Auction Agent.
7.7 SEVERABILITY. If any clause, provision or section
hereof shall be ruled invalid or unenforceable by any court of
competent jurisdiction, the invalidity or unenforceability of such
clause, provision or section shall not affect any of the remaining
clauses, provisions or sections hereof.
7.8 EXECUTION IN COUNTERPARTS. This Agreement may be
executed in several counterparts, each of which shall be an
original and all of which shall constitute but one and the same
instrument.
7.9 GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
- 21 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Auction Agency Agreement to be duly executed and delivered by their
proper and duly authorized officers as of the date first above
written.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
By /s/ Gregory K. Todd
---------------------------
Name: Gregory K. Todd
Title: Vice President
BANKERS TRUST COMPANY
By /s/ Fernando Acebedo
---------------------------
Name: Fernando Acebedo
Title: Assistant Treasurer
- 22 -
<PAGE>
EXHIBIT A
FORM OF
BROKER-DEALER AGREEMENT
<PAGE>
EXHIBIT B
FORM OF
MASTER PURCHASER'S LETTER
<PAGE>
EXHIBIT C
SETTLEMENT PROCEDURES
<PAGE>
EXHIBIT D
FORM OF APS PROVISIONS
<PAGE>
EXHIBIT E
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF AUCTION DATE FOR
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that the Auction Date of the next
Auction for the APS Series D of PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC. (the "Fund") is scheduled to be
________________ and the next Dividend Payment Date for the Fund's
APS Series D will be ______________________.
[A Failure to Deposit in respect of the APS Series D currently
exists. If such Failure to Deposit is not cured prior to 12:00
Noon on the fourth Business Day prior to the next scheduled Auction
Date of the APS Series D, as defined, the next Auction will not be
held. Notice of the next Auction for the APS Series D will be
delivered when such Failure to Deposit is cured.1]
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
- - ------------------------
1 Include this language if a Failure to Deposit exists.
<PAGE>
EXHIBIT F
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF PROPOSED CHANGE OF
LENGTH OF RATE PERIOD OF
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC. (the "Fund") may exercise its option to
designate the Rate Period of its APS Series D commencing [the first
day of the proposed Special Dividend Period] as a Special Dividend
Period.
By 11:00 A.M. on the second Business Day next preceding the
first day of such proposed Special Dividend Period, the Fund will
notify Bankers Trust Company of either (a) its determination to
exercise such option, designating the length of such Special
Dividend Period and the terms of the Specific Redemption Provis-
ions, if any, for such series or (b) its determination not to
exercise such option.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
Dated: __________________________
<PAGE>
EXHIBIT G
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF CHANGE OF LENGTH OF RATE PERIOD OF
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC. (the "Fund") has determined to designate
the Rate Period of its APS Series D commencing on [the first day of
the Special Dividend Period] as a Special Dividend Period.
The Special Dividend Period will be _____ [days] [year[s]].
The Auction Date for such Special Dividend Period is [the
Business Day next preceding the first day of such Special Dividend
Period].
[Specific Redemption Provisions, if applicable.]
[As a result of the Special Dividend Period designation, the
amount of dividends payable on the APS Series D during the Special
Dividend Period will be based on a 360-day year] [include if Rate
Period is greater than 28 Rate Period Days].
The Special Dividend Period shall not commence if (a) on such
Auction Date Sufficient Clearing Bids shall not exist or (b) if a
Failure to Deposit shall have occurred prior to the first day
thereof with respect to such APS.
The scheduled Dividend Payment Dates for such series of APS
during such Special Dividend Period will be ____________.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
Dated: __________________________
<PAGE>
EXHIBIT H
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF DETERMINATION NOT TO CHANGE
LENGTH OF RATE PERIOD OF
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC. (the "Fund") has determined not to
exercise its option to designate a Special Dividend Period of its
APS Series D and the next succeeding Dividend Period of such series
will be a Minimum Rate Period of 28 days.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
Dated: _______________________
<PAGE>
EXHIBIT I
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF CURE OF
FAILURE TO DEPOSIT ON
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC. (the "Fund") has cured its Failure to
Deposit with respect to its APS Series D. The dividend rate on
shares of such series for the current Rate Period is ______ % per
annum, the Dividend Payment Date[s] for the current Rate Period is
scheduled to be__________________ and the next Auction Date is
scheduled to be __________________.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
Dated: _____________________
<PAGE>
EXHIBIT J
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF SUBSEQUENT CURE OF
FAILURE TO DEPOSIT ON
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC. (the "Fund") has cured its Failure to
Deposit with respect to its APS Series D. The next Auction Date
for such series is scheduled to be on __________________.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
Dated: _____________________
<PAGE>
EXHIBIT K
PAINEWEBBER PREMIER INSURED MUNICIPAL INCOME FUND INC.
NOTICE OF
[CAPITAL GAINS] [AND] [TAXABLE ORDINARY INCOME]*
DIVIDEND FOR
AUCTION PREFERRED SHARES
("APS")
NOTICE IS HEREBY GIVEN that the amount of the dividend payable
on _______________ for the APS Series D of PAINEWEBBER PREMIER
INSURED MUNICIPAL INCOME FUND INC. (the "Fund") will be determined
by the Auction to be held on __________________. Up to [$___ A ___]**
and [$___ B__]*** per share of the dividend payable on such date as
determined by such Auction will consist of [capital gains]**
[ordinary income taxable for federal income tax purposes].*** If
the dividend amount payable on such date as determined by such
Auction is less than [$___ A ___]** and [$___ B ___]*** per share, the
entire amount of the dividend will consist of [capital gains]
[ordinary income taxable for federal income tax purposes]. [To the
extent such dividend amount exceeds [$___ A ___] per share, any excess
up to [$___ B ___] per share will consist of ordinary income taxable
for federal income tax purposes.]**** Accordingly, the aforemen-
tioned composition of the dividend payable on ______________________
should be considered in determining Orders to be submitted with
respect to the Auction to be held on ___________________. The
Applicable Percentage in effect for such Auction will be ___ %.
PAINEWEBBER PREMIER INSURED
MUNICIPAL INCOME FUND INC.
____________________
* Include language with respect to capital gains, taxable
ordinary income or both, depending on the character of the
designation to be made with respect to the dividend(s).
** Include bracketed material if a portion of the dividend will
be designated capital gains.
*** Include bracketed material if a portion of the dividend will
be designated ordinary income taxable for federal income tax
purposes and no portion of the dividend will be designated
capital gains.
<PAGE>
**** Include bracketed material if a portion of the dividend will
be designated capital gains and a portion will be designated
ordinary income taxable for federal income tax purposes.
A = the maximum amount of capital gains allocated to such
series of APS to be included in such dividend, divided by
the number of shares of APS.
B = the maximum amount of ordinary income taxable for federal
income tax purposes allocated to such series of APS to be
included in such dividend, divided by the number of
shares in such series.
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" in the Statement of
Additional Information and to the incorporation by reference of our report dated
May 19, 1995, in this Registration Statement (Form N-2 33-58532) of PaineWebber
Premier Insured Municipal Income Fund Inc.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
