AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 28, 1994
1933 ACT FILE NO. 33-
1940 ACT FILE NO. 811-07109
===============================================================================
U.S. 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. ( )
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 (X)
AMENDMENT NO. 2 (X)
-------------------
INTERCAPITAL INSURED MUNICIPAL SECURITIES
(A MASSACHUSETTS BUSINESS TRUST)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
-------------------
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(NUMBER, STREET, CITY, STATE, ZIP CODE)
-------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 392-1600
-------------------
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE) OF AGENT FOR SERVICE
SHELDON CURTIS, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
COPIES TO:
STUART M. STRAUSS, ESQ. FRANK P. BRUNO, ESQ.
GORDON ALTMAN BUTOWSKY BROWN & WOOD
WEITZEN SHALOV & WEIN ONE WORLD TRADE CENTER
114 WEST 47TH STREET NEW YORK, NEW YORK 10048
NEW YORK, NEW YORK 10036
-------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
-------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==================================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE(*) FEE
- - - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Auction Rate Preferred Shares,
Series , Series , Series ,
Series , Series ............ 1,000 Shares $50,000 $50,000,000 $17,241
<FN>
==================================================================================================================================
* Estimated solely for purposes of calculating the registration fee.
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FUTURE AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
==============================================================================
<PAGE>
<TABLE>
<CAPTION>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
---------------
FORM N-2
CROSS REFERENCE SHEET
PART A
ITEM NO. CAPTION PROSPECTUS CAPTION
- - - ------- ------- -----------------
<C> <S> <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.............................. Not Applicable; Prospectus Summary
4. Financial Highlights................................ Financial Highlights
5. Plan of Distribution................................ Cover Page; Prospectus Summary; Underwriting
6. Selling Shareholders................................ Not Applicable
7. Use of Proceeds..................................... Use of Proceeds; Investment Objective and Policies
8. General Description of the Trust.................... Investment Objective and Policies; The Trust and its Management;
Description of ARPS; Description of Shares
9. Management.......................................... Trustees and Officers; Investment Management Agreement;
Portfolio Transactions and Brokerage; Custodian, Dividend
Disbursing Agent and Transfer Agent
10. Capital Stock; Long-Term Debt; Other Securities..... Description of Shares
11. Defaults and Arrears on Senior Securities........... Not Applicable
12. Legal Proceedings................................... Not Applicable
13. Table of Contents of the Statement of Additional
Information........................................ Not Applicable
<CAPTION>
PART B
ITEM NO.*
- - - --------
<C> <S> <C>
14. Cover Page......................................... Cover Page
15. Table of Contents.................................. Not Applicable
16. General Information and History.................... Investment Management Agreement
17. Investment Objective and Policies.................. Investment Objective and Policies; Investment Practices;
Investment Restrictions
18. Management......................................... Investment Management Agreement
19. Control Persons and Principal Holders of
Securities........................................ Description of ARPS; Description of Shares; Statement of Assets and
Liabilities
20. Investment Advisory and Other Services............. Investment Management Agreement
21. Brokerage Allocation and Other Practices........... Brokerage and Portfolio Transactions
22. Tax Status......................................... Taxation
23. Financial Statements............................... Financial Statements
<CAPTION>
PART C
- - - ------
Information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C of this
Registration Statement.
<FN>
- - - ----------
* The information required by Part B has been incorporated into Part A of this Registration Statement.
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION
Dated January 28, 1994
$
INTERCAPITAL INSURED MUNICIPAL SECURITIES
AUCTION RATE PREFERRED SHARES
SHARES SERIES SHARES SERIES
SHARES SERIES SHARES SERIES
SHARES SERIES
Liquidation Preference $50,000 Per Share
---------------
InterCapital Insured Municipal Securities (the "Trust") is a closed-end
diversified management investment company which seeks to provide current income
exempt from federal income tax. The Trust will seek to achieve its investment
objective by investing primarily in a diversified portfolio of tax-exempt
Municipal Obligations which are covered by insurance guarantees with respect to
timely payment of principal and interest thereon. The Trust will also invest in
Municipal Obligations which are backed by an escrow or trust account containing
sufficient U.S. Government securities or U.S. Government agency securities to
ensure timely payment of principal and interest thereon. Certain Municipal
Obligations in which the Trust may invest without limit may be subject to the
individual alternative minimum tax. See "Investment Objective and Policies." No
assurance can be given that the Trust's investment objective will be achieved.
---------------
Dividends on the Auction Rate Preferred Shares of the Trust offered hereby
("ARPS"), to the extent paid from tax-exempt income earned on the Trust's
portfolio securities, will be exempt from federal income tax subject to
possible application of the alternative minimum tax. See "Taxation." The Trust
is currently required to allocate net capital gains and other taxable income,
if any, proportionately between Common Shares and ARPS. If as a result of such
allocation, taxable income is included in any dividend on the ARPS, the Trust
will pay an Additional Dividend as described under "Description of ARPS--
Dividends--Additional Dividends." Also, under certain circumstances, the Trust
will be required to pay Gross-up Dividends to holders of ARPS which are
redeemed or who have received a liquidating distribution. See "Description of
ARPS--Dividends--Gross-up Dividends." Capitalized terms used herein are defined
in the Glossary and, in certain cases, elsewhere in the Prospectus.
---------------
The ARPS offered hereby will have Dividend Periods determined (subject to
certain limitations described herein) at the option of the Trust. A Dividend
Period may be a Short Term Dividend Period or a Long Term Dividend Period. A
Short Term Dividend Period may vary in length from 7 days to 364 days while a
Long Term Dividend Period may be equal to any period of one whole year or more
but not greater than five years. The dividend rates of the ARPS will be
determined pursuant to periodic auctions conducted in accordance with the
procedures described in Appendix D hereto (an "Auction").
---------------
The address of the Trust is Two World Trade Center, New York, New York 10048,
and its telephone number is (212) 392-1600. This Prospectus sets forth
concisely the information about the Trust that a prospective investor should
know before investing. Investors are advised to read this Prospectus carefully
and retain it for future reference.
(Continued on next page)
---------------
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.
<TABLE>
<CAPTION>
===============================================================================
PRICE TO PROCEEDS TO
PUBLIC (1) SALES LOAD (2) THE TRUST (1)(3)
- - - -------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE $50,000 $ $
TOTAL $ $ $
<FN>
===============================================================================
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Trust and the Investment Manager have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(3) Before deduction of offering expenses estimated at $ .
</TABLE>
---------------
The ARPS are offered by the several Underwriters named herein when, as and if
delivered to and accepted by them, subject to their right to reject orders in
whole or in part and subject to certain other conditions. It is expected that
delivery of one certificate for each series of ARPS will be made to the nominee
of The Depository Trust Company in New York City on or about , 1994.
---------------
DEAN WITTER DISTRIBUTORS INC. MERRILL LYNCH & CO.
, 1994
<PAGE>
(Continued from the previous page)
Dividends on the ARPS will be cumulative from the Date of Original Issue and
payable when, as and if declared out of "Available Funds." With respect to the
Initial Dividend Period for the Series ARPS and Series ARPS, dividends on
shares will be payable commencing on the First Initial Dividend Payment Dates
set forth below, on the first Business Day of each calendar month thereafter,
through the first Business Day of the last calendar month in the Initial
Dividend Period for such series of ARPS and on the Last Initial Dividend
Payment Dates set forth below. With respect to the Initial Dividend Period for
the Series ARPS, Series ARPS and Series ARPS, dividends on shares will be
payable commencing on the Initial Dividend Payment Dates set forth below.
Thereafter, dividends on shares of each series of ARPS will be payable at the
option of the Trust, either (i) with respect to any Short Term Dividend Period
of 35 days or less, on the day next succeeding the last day thereof and (ii)
with respect to any Short Term Dividend Period of more than 35 days and with
respect to any Long Term Dividend Period, monthly on the first Business Day of
each calendar month during such Short Term Dividend Period or Long Term
Dividend Period and on the day next succeeding the last day thereof. The table
below sets forth the cash dividend rate for the Initial Dividend Period for
each series of ARPS, the First and Last Initial Dividend Payment Dates for the
Series ARPS and Series ARPS, the Initial Dividend Payment Dates for the
Series ARPS, Series ARPS and Series ARPS and the dates of the first
Auction for each series of ARPS. See "Description of ARPS--Dividends."
---------------
<TABLE>
<CAPTION>
CASH DIVIDEND RATE FIRST INITIAL
FOR INITIAL DIVIDEND PERIOD DIVIDEND AND LAST INITIAL
------------------------------------ INITIAL DIVIDEND DIVIDEND FIRST
ENDING DATE % PER ANNUM PAYMENT DATE PAYMENT DATE AUCTION DATE
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Series............ %
Series............ %
Series............ %
Series............ %
Series............ %
</TABLE>
---------------
After the Initial Dividend Period, the length of each Subsequent Dividend
Period for each series of ARPS will be determined as discussed herein under
"Description of ARPS--Dividends--Notification of Dividend Period." If the Trust
does not specify the length of a Subsequent Dividend Period in accordance with
the procedures set forth herein, each Subsequent Dividend Period will be a 7-
Day Dividend Period. The cash dividend rate (the "Applicable Rate") on ARPS of
each series for each Dividend Period after the Initial Dividend Period will be
reset on the basis of an Auction, conducted pursuant to the Auction Procedures
specified in this Prospectus, on the Business Day preceding the commencement of
such Dividend Period. The Applicable Rate that results from an Auction for any
Dividend Period will not be greater than a rate (the "Maximum Applicable Rate")
that is a percentage of the Reference Rate in effect on the date of the Auction
(depending on the credit rating of the ARPS). If the Trust fails to pay on any
Dividend Payment Date for any series of ARPS (or within the applicable grace
period) the full amount of any dividend or the redemption price of the ARPS of
such series called for redemption, the Applicable Rate for such series will not
be based on the results of an Auction but instead will initially be equal to a
stated percentage as described herein of the applicable Reference Rate until
such failure to pay is cured. For the Initial Dividend Period, the Applicable
Rate upon any such failure would be 220% of the applicable Reference Rate.
---------------
Each prospective purchaser of ARPS should carefully review the detailed
information regarding the Auction Procedures which appears in this Prospectus,
including the Appendices, and should note that (i) an Order constitutes an
irrevocable commitment to hold, purchase or sell ARPS based upon the results of
the related Auction, (ii) the Auctions will be conducted through telephone
communications, (iii) settlement for purchases and sales will be on the
Business Day following the Auction, and (iv) ownership of ARPS will be
maintained in book-entry form by or through The Depository Trust Company or a
successor depository. ARPS may only be transferred pursuant to a Bid or a Sell
Order placed in an Auction through a Broker-Dealer to the Auction Agent or in
the secondary market, if any. Under certain circumstances, holders of ARPS may
be unable to sell their shares in an Auction.
---------------
The ARPS are subject to mandatory and optional redemption under certain
conditions, as described herein. See "Description of ARPS--Redemption."
2
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE TRUST OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
<TABLE>
----------
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................ 4
Financial Highlights.............................................. 16
The Trust and its Management...................................... 16
Use of Proceeds................................................... 17
Capitalization.................................................... 17
Portfolio Composition............................................. 18
Investment Objective and Policies................................. 18
Description of Municipal Obligations.............................. 19
Description of Bond Insurance..................................... 22
Investment Practices.............................................. 24
Rating Agency Guidelines.......................................... 29
Investment Restrictions........................................... 35
Trustees and Officers............................................. 36
Investment Management Agreement................................... 40
Portfolio Transactions and Brokerage.............................. 41
Determination of Net Asset Value.................................. 42
Description of ARPS............................................... 43
Taxation.......................................................... 63
Description of Shares............................................. 67
Share Repurchases and Tenders..................................... 70
Custodian, Dividend Disbursing Agent and Transfer Agent........... 71
Underwriting...................................................... 72
Legal Opinions and Experts........................................ 73
Further Information............................................... 73
Glossary.......................................................... 75
Financial Statements (unaudited)..................................
Statement of Assets and Liabilities at , 1994...........
Appendix A--Ratings of Investments................................ A-1
Appendix B--Futures and Options................................... B-1
Appendix C--Risks of Certain Municipal Obligations................ C-1
Appendix D--Insurance Claims-Paying Ability Ratings............... D-1
Appendix E--Auction Procedures.................................... E-1
Appendix F--Settlement Procedures................................. F-1
</TABLE>
3
<PAGE>
===============================================================================
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus. Capitalized
terms not defined in this summary are defined in the Glossary and in certain
cases elsewhere herein.
THE TRUST................... InterCapital Insured Municipal Securities (the
"Trust") is a closed-end diversified management
investment company investing primarily in tax-
exempt Municipal Obligations. See "The Trust and
its Management." On , 1994, the Trust
issued and sold Common Shares. The net proceeds
of such offering were approximately $ .
(On , 1994, the Trust issued and sold an
additional Common Shares pursuant to the
exercise of the over-allotment option granted by
the Trust to the underwriters of the Common
Shares (the "Common Shares Over-Allotment
Option"). The net proceeds of such sale
were $ .)
THE OFFERING................ The Trust is offering an aggregate of Series
ARPS, Series ARPS, Series ARPS,
Series ARPS and Series ARPS at a purchase
price of $50,000 per share. The ARPS of each
series will be Preferred Shares of the Trust that
entitle their holders to receive cash dividends
at a rate per annum that may vary for the
successive Dividend Periods for each such series.
Each series of ARPS may have different dividend
rates and/or Dividend Periods. The terms of the
ARPS otherwise will be substantially the same.
The Trust anticipates that dividends on the ARPS
will generally be based upon prevailing rates for
short-term or medium-term Municipal Obligations
whereas the proceeds of the offering of the ARPS
will generally be invested in longer-term
Municipal Obligations, which typically have
higher yields than short-term or medium-term
obligations.
Through their Broker-Dealers, Beneficial Owners
and Potential Beneficial Owners of ARPS may
participate in Auctions therefor. For an
explanation of an Auction and the method of
determining the Applicable Rate, see "Description
of ARPS--The Auction."
Except as described herein, investors in ARPS
will not receive certificates representing
ownership of their shares. Ownership of ARPS will
be maintained in book entry form by the
Securities Depository or its nominee for the
account of the investor's Agent Member. The
investor's Agent Member, in turn, will maintain
records of such investor's beneficial ownership
of ARPS. Accordingly, references herein to an
investor's investment in or purchase, sale or
ownership of ARPS are to purchases, sales or
ownership of those shares by Beneficial Owners.
In certain circumstances, the Underwriting
Agreement relating to this offering may be
terminated by notice to the Trust, as a
===============================================================================
4
<PAGE>
===============================================================================
result of adverse market or other conditions,
which may include, among other things, the
suspension of trading of the Trust's Common
Shares on certain exchanges or developments
involving the Trust's business, properties or
securities. See "Underwriting."
INVESTMENT OBJECTIVE
AND POLICIES................. The investment objective of the Trust is to
provide current income exempt from federal income
tax. The Trust will seek to achieve its
investment objective by investing, under normal
circumstances, at least 80% of its net assets in
a diversified portfolio of Municipal Obligations
which are covered by insurance guarantees with
respect to timely payment of principal and
interest thereon. The Trust may also invest in
Municipal Obligations which are backed by an
escrow or trust account containing sufficient
U.S. Government securities or U.S. Government
agency securities to ensure timely payment of
principal and interest thereon. Municipal
Obligations backed by an escrow or trust account
will not constitute more than 20% of the Trust's
net assets. Municipal Obligations consist of
Municipal Bonds, Municipal Notes and Municipal
Commercial Paper, as well as lease obligations.
There can be no assurance that the Trust's
investment objective will be achieved. See
"Investment Objective and Policies."
INSURANCE....................Each insured Municipal Obligation held by the
Trust will either be (i) covered by a separate
insurance policy applicable to a specific
security, whether obtained by the issuer of the
security or by a third party at the time of
original issuance ("Original Issue Insurance") or
by the Trust or a third party subsequent to the
time of original issuance ("Secondary Market
Insurance") or (ii) covered by a master municipal
obligation guaranty insurance policy purchased by
the Trust ("Portfolio Insurance"). While the
Trust may obtain one or more policies of
Portfolio Insurance, the Trust, depending on the
availability of such policies on terms favorable
to the Trust, may determine not to obtain such
policies and to emphasize investments in
Municipal Obligations insured under Original
Issue Insurance or Secondary Market Insurance.
Original Issue Insurance, Secondary Market
Insurance and Portfolio Insurance do not
guarantee either the payment of principal of and
interest on Municipal Obligations on an
accelerated basis in the event of a default
thereunder, or the market value of the Common
Shares or the market value of the Trust's
Municipal Obligations. Municipal Obligations
insured under Original Issue Insurance or
Secondary Market Insurance are insured for the
remaining term of the security, whereas municipal
obligations insured under Portfolio Insurance
remain insured only so long as they are held by
the Trust. Portfolio Insurance is intended to
reduce financial risk but the cost thereof and
compliance with any investment restrictions
imposed under the policy will reduce the yield to
shareholders of the Trust. The Trust's
investments in insured Municipal Obligations will
only consist of Municipal Obligations,
===============================================================================
5
<PAGE>
===============================================================================
covered by Original Issue Insurance or Secondary
Market Insurance, that are themselves assigned a
rating of Aaa by Moody's Investors Service, Inc.
("Moody's") or AAA by Standard & Poor's
Corporation ("S&P") by virtue of the claims-
paying ability of the insurers. The Trust will
only obtain policies of Portfolio Insurance
issued by insurers whose claims-paying ability is
rated Aaa by Moody's or AAA by S&P. See
"Investment Objective and Policies--Description
of Bond Insurance."
INVESTMENT MANAGER.......... Dean Witter InterCapital Inc. (the "Investment
Manager" or "InterCapital") is the Investment
Manager of the Trust. InterCapital is a wholly-
owned subsidiary of Dean Witter, Discover & Co.
("DWDC"), a balanced financial services
organization providing a broad range of
nationally marketed credit and investment
products. In an internal reorganization which
took place in January 1993, the Investment
Manager assumed the investment advisory,
management and administrative activities
previously performed by the InterCapital Division
of Dean Witter Reynolds Inc. ("DWR"), an
affiliate of the Investment Manager. As part of
that reorganization, the investment company share
distribution activities previously performed by
DWR were assumed by Dean Witter Distributors
Inc., a wholly-owned subsidiary of DWDC and an
affiliate of DWR and InterCapital. The Investment
Manager has over twenty years of experience
managing investment companies. InterCapital, and
its wholly-owned subsidiary, Dean Witter Services
Company Inc., act as investment manager, manager,
investment adviser, sub-adviser, administrator or
sub-administrator to a total of seventy-nine
investment companies, twenty-six of which are
listed on the New York Stock Exchange, with
combined assets of approximately $70.7 billion as
of November 30, 1993, including approximately
$12.2 billion in tax-exempt securities. See "The
Trust and its Management" and "Investment
Management Agreement."
MANAGEMENT FEE.............. The Trust pays the Investment Manager a monthly
fee at the annual rate of 0.35% of the Trust's
average weekly net assets. See "Investment
Management Agreement."
DIVIDENDS................... The ARPS will have a Dividend Period consisting
either of a specified number of days, evenly
divisible by seven and not more than 364 (a
"Short Term Dividend Period") or a Dividend
Period consisting of any period of one year or
more but not greater than five years (a "Long
Term Dividend Period"). Dividends on the ARPS
offered hereby are cumulative from the Date of
Original Issue and are payable when, as and if
declared by the Board of Trustees of the Trust,
out of Available Funds. With respect to the
Initial Dividend Period for the Series ARPS and
Series ARPS, dividends on shares will be
payable commencing on the First Initial Dividend
Payment Dates set forth below, on the first
Business Day of each calendar month thereafter,
through the first Business Day of the last
calendar month in the Initial Dividend Period for
such series of ARPS and on the Last Initial
Dividend Payment Dates set forth below. With
respect to the Initial Dividend Period for the
Series ARPS, Series ARPS and Series ARPS,
dividends on
===============================================================================
6
<PAGE>
===============================================================================
shares will be payable commencing on the Initial
Dividend Payment Dates set forth below.
Thereafter, dividends on shares of each series of
ARPS will be payable at the option of the Trust,
either (i) with respect to any Short Term
Dividend Period of 35 days or less, on the day
next succeeding the last day thereof and (ii)
with respect to any Short Term Dividend Period of
more than 35 days and with respect to any Long
Term Dividend Period, monthly on the first
Business Day of each calendar month during such
Short Term Dividend Period or Long Term Dividend
Period and on the day next succeeding the last
day thereof. The table below sets forth the cash
dividend rate for the Initial Dividend Period for
each series of ARPS, the First and Last Initial
Dividend Payment Dates for the Series ARPS and
Series ARPS, the Initial Dividend Payment Dates
for the Series ARPS, the Series ARPS and
Series ARPS and the dates of the first Auction
for each series of ARPS.
<TABLE>
<CAPTION>
CASH DIVIDEND RATE FIRST INITIAL
FOR INITIAL DIVIDEND PERIOD DIVIDEND AND LAST INITIAL
------------------------------------ INITIAL DIVIDEND DIVIDEND FIRST
ENDING DATE % PER ANNUM PAYMENT DATE PAYMENT DATE AUCTION DATE
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Series............ %
Series............ %
Series............ %
Series............ %
Series............ %
</TABLE>
After the Initial Dividend Period, the length of
each Subsequent Dividend Period for each series
of ARPS will be determined as discussed herein
under "Description of ARPS--Dividends--
Notification of Dividend Period." If the Trust
does not specify the length of a Subsequent
Dividend Period in accordance with the procedures
set forth herein, each Subsequent Dividend Period
will be a 7-Day Dividend Period. Dividends for
the ARPS will be paid through the Securities
Depository (The Depository Trust Company or a
successor securities depository) on each Dividend
Payment Date. The Securities Depository's normal
procedures provide for it to distribute dividends
in next-day funds to the Agent Members, who are
in turn expected to distribute such dividends to
the person for whom they are acting as agent in
accordance with the instructions of such person.
Each of the initial Broker-Dealers, however, has
indicated to the Trust that such Broker-Dealer or
one of its affiliates will make such dividend
payments available in same-day funds on each
Dividend Payment Date to customers that use such
Broker-Dealer or affiliate as Agent Member. See
"Description of ARPS--Dividends--General."
The dividend rates on the ARPS for the Initial
Dividend Period (the "Initial Dividend Rate")
will be the respective rates set forth in the
table above. For each Subsequent Dividend Period,
subject to certain exceptions, the dividend rate
on each share of a series of ARPS will be the
Applicable Rate per annum that the Auction Agent
advises the Trust has resulted from an Auction
===============================================================================
7
<PAGE>
===============================================================================
relating to such series of ARPS. See "Description
of ARPS--Dividends."
The Certificate of Designation adopted by the
Trustees specifying the preferences, powers,
restrictions, limitations or qualifications of
the ARPS (the "Certificate") provides that if no
such notice is delivered specifying a Dividend
Period of a different length, each Subsequent
Dividend Period will be a 7-Day Dividend Period.
If such notice is given for Subsequent Dividend
Periods, the Trust may elect Dividend Periods of
any length between 14 days and five years,
subject to, and on, the conditions discussed
under "Description of ARPS--Dividends--General."
The ARPS are non-participating preferred shares
of beneficial interest in that, after the payment
of dividends to holders of the ARPS determined in
accordance with the Auction Procedures, the ARPS
do not participate with the Common Shares in the
Trust's income or gains.
DETERMINATION OF MAXIMUM
DIVIDEND RATES............... Except during a Non-Payment Period, the
Applicable Rate for any Dividend Period will not
be more than the Maximum Applicable Rate. The
Maximum Applicable Rate will depend on the credit
rating or ratings assigned to the ARPS and on the
duration of the Dividend Period. The Maximum
Applicable Rate for any Dividend Period at any
Auction Date will be the Applicable Percentage of
the Reference Rate. The Reference Rate is (i)
with respect to any Short Term Dividend Period
having 28 days or fewer, the higher of the
Applicable "AA" Composite Commercial Paper Rate
and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any
Short Term Dividend Period having more than 28
but fewer than 183 days, the applicable "AA"
Composite Commercial Paper Rate, (iii) with
respect to any Short Term Dividend Period having
189 or more but fewer than 365 days, the
applicable U.S. Treasury Bill Rate and (iv) with
respect to any Long Term Dividend Period, the
applicable U.S. Treasury Note Rate.
The Applicable Percentage varies with the lower
of the credit rating or ratings assigned by
Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the
equivalent of either or both of such ratings
issued by a Substitute Rating Agency or two
Substitute Rating Agencies or, in the event that
only one such rating shall be available, such
rating) to the ARPS on each Auction Date as
follows:
<TABLE>
<CAPTION>
CREDIT RATINGS APPLICABLE
--------------------------------- PERCENTAGE OF
MOODY'S S&P REFERENCE RATE
------- --- --------------
<C> <C> <S>
"aa3" or higher AA- or higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
Below "baa3" Below BBB- 220%
</TABLE>
===============================================================================
8
<PAGE>
===============================================================================
NON-PAYMENT PERIOD;
LATE CHARGE.................. The Applicable Rate for any Dividend Period
commencing during a Non-Payment Period and the
rate used to calculate the late charge with
respect to dividends or redemption payments not
paid in a timely manner will be (i) 220% of the
higher of the applicable "AA" Composite
Commercial Paper Rate and the Taxable Equivalent
of the Short-Term Municipal Bond Rate in the case
of any Short Term Dividend Period having 28 or
fewer days, (ii) 220% of the applicable "AA"
Composite Commercial Paper Rate in the case of
any Short Term Dividend Period having 35 or more
but fewer than 183 days, (iii) 220% of the
applicable U.S. Treasury Bill Rate in the case of
any Short Term Dividend Period having 189 or more
but fewer than 365 days and (iv) 220% of the
applicable U.S. Treasury Note Rate in the case of
any Long Term Dividend Period. See "Description
of ARPS--Dividends--Non-Payment Period; Late
Charge." No interest will be payable in respect
of any dividend payment or payments on the ARPS
which may be in arrears.
ADDITIONAL DIVIDENDS;
GROSS-UP DIVIDENDS........... The Trust is currently required to allocate net
capital gains and other taxable income, if any,
proportionately between the Common Shares and the
ARPS. Whenever the Trust intends to include any
net capital gains or other taxable income in any
dividend on the ARPS, the Trust will pay in cash
an Additional Dividend in an amount equal to the
sum of (i) an amount equal to the capital gains
or other taxable income included in the dividend
multiplied by the maximum marginal regular
federal income tax rate in effect at the
applicable Auction Date (including any surtax on
taxable income, but without taking into account
the effect of any provision allowing or limiting
deductions or phasing out of the benefit of any
tax brackets) applicable to individuals or
corporations, whichever is greater (utilizing the
long-term capital gains rate on the portion of
such distribution which is taxable as long-term
capital gains and utilizing the ordinary income
tax rate on the portion of such distribution
which is other taxable income), and (ii) an
amount equal to 11.11% of the amount determined
under (i). If the Trust treats any of the amounts
paid pursuant to clauses (i) and (ii) in the
preceding sentence as net capital gains or other
taxable income for federal income tax purposes,
such amounts shall be treated in accordance with
this paragraph as dividends which include net
capital gains or other taxable income. See
"Description of ARPS--Dividends--Additional
Dividends." Also, under certain circumstances,
the Trust will be required to pay Gross-up
Dividends of cash to holders of ARPS which are
redeemed or who have received a liquidating
distribution. See "Description of ARPS--
Dividends--Gross-up Dividends."
AUCTION PROCEDURES.......... As used in the following description of the
Auction Procedures, unless the context otherwise
requires, "ARPS" means the series of ARPS subject
to the related Auction and "Beneficial Owners,"
"Potential Beneficial Owners," "Existing Holders"
===============================================================================
9
<PAGE>
===============================================================================
and "Potential Holders" means Beneficial Owners
of such series, Potential Beneficial Owners of
such series, Existing Holders of such series and
Potential Holders of such series, respectively.
After the Initial Dividend Period, the Applicable
Rate for each Subsequent Dividend Period will be
reset on the basis of Bids, Hold Orders and Sell
Orders placed by Existing Holders and Potential
Holders in an Auction. Auctions will be conducted
on the Business Day preceding the commencement of
the Dividend Period.
Unless otherwise permitted by the Trust,
Beneficial Owners and Potential Beneficial Owners
of ARPS may only participate in an Auction
through their Broker-Dealers. Broker-Dealers will
submit the Orders of their respective customers
who are Beneficial Owners and Potential
Beneficial Owners to the Auction Agent,
designating themselves as Existing Holders in
respect of shares subject to Orders submitted or
deemed submitted to them by Potential Beneficial
Owners. On or prior to each Auction Date for each
series of ARPS (in each case the first Business
Day preceding the first day of each Dividend
Period therefor), each Beneficial Owner may
submit Orders to its Broker-Dealer to the Auction
Agent as follows:
-- Hold Order--indicating its desire to hold
ARPS without regard to the Applicable Rate for
the next Dividend Period for such shares.
-- Bid--indicating its desire to hold ARPS,
provided that the Applicable Rate for the next
Dividend Period for such shares is not less than
the rate per annum specified in such Bid.
-- Sell Order--indicating its desire to sell
ARPS without regard to the Applicable Rate for
the next Dividend Period for such shares.
A Beneficial Owner may submit different types of
Orders in any Auction with respect to ARPS then
held by such Beneficial Owner, provided that the
total number of ARPS covered by such Orders does
not exceed the number of ARPS held by such
Beneficial Owner. If, however, a Beneficial Owner
offers to purchase additional ARPS in such
Auction, such Beneficial Owner, for purposes of
such offer to purchase additional shares, will be
treated as a Potential Beneficial Owner as
described below. Bids by Beneficial Owners with
rates per annum higher than the Maximum
Applicable Rate will be treated as Sell Orders. A
Beneficial Owner who does not submit an Order
with respect to ARPS then held by such Beneficial
Owner for any reason, including the failure of a
Broker-Dealer to submit such Beneficial Owner's
Order to the Auction Agent, shall be deemed to
have submitted a Hold Order (in the case of an
Auction relating to a Short Term Dividend Period
of 7 days) and a Sell Order (in the case of an
Auction relating to a Short Term
===============================================================================
10
<PAGE>
===============================================================================
Dividend Period of 14 days or more or any Long
Term Dividend Period).
Potential Beneficial Owners of ARPS may submit
Bids through their Broker-Dealers in which they
offer to purchase ARPS, provided that the
Applicable Rate for the next Dividend Period for
such shares is not less than the rate per annum
specified in such Bid. A Bid by a Potential
Beneficial Owner with a rate per annum higher
than the Maximum Applicable Rate will not be
considered.
Neither the Trust nor the Auction Agent will be
responsible for a Broker-Dealer's failure to
comply with any of the foregoing.
A Broker-Dealer also may hold ARPS for its own
account as a Beneficial Owner. A Broker-Dealer
thus may submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner
and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of
both itself and its customers. An Order placed
with the Auction Agent by a Broker-Dealer as an
Existing Holder or a Potential Holder as or on
behalf of a Beneficial Owner or a Potential
Beneficial Owner, as the case may be, will be
treated in the same manner as an Order placed
with a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner. Similarly, any
failure by a Broker-Dealer to submit to the
Auction Agent an Order in respect of any ARPS
held by it or its customers who are Beneficial
Owners will be treated in the same manner as a
Beneficial Owner's failure to submit to its
Broker-Dealer an Order in respect of ARPS held by
it, as described above. Inasmuch as a Broker-
Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent
the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the
consequences of an Auction for Existing Holders
and Potential Holders also applies to the
underlying beneficial ownership interests
represented.
If Sufficient Clearing Bids exist in an Auction
(that is, in general, the number of ARPS subject
to Bids by Potential Holders is at least equal to
the number of ARPS subject to Sell Orders by
Existing Holders), the Applicable Rate will be
the lowest rate per annum specified in the
Submitted Bids which, taking into account such
rates per annum and all lower rates per annum bid
by Existing Holders and Potential Holders, would
result in Existing Holders and Potential Holders
owning all of the ARPS available for purchase in
the Auction. If Sufficient Clearing Bids do not
exist, the Dividend Period next following the
Auction will automatically be a 7-Day Dividend
Period, the Applicable Rate will be the Maximum
Applicable Rate and, in such event, Existing
Holders that have submitted Sell Orders will not
be able to sell in the Auction all, and may not
be able to sell any, ARPS subject to such Sell
Orders. If all Existing Holders submit (or are
deemed to have submitted) Hold Orders in an
Auction, the Dividend Period next following the
Auction will automatically be
===============================================================================
11
<PAGE>
===============================================================================
the same Dividend Period as that Dividend Period
immediately preceding the Auction and the
Applicable Rate will be (59%) of the Reference
Rate in effect on the date of the Auction with
respect to such Dividend Period.
The Auction Procedures include a pro rata
allocation of shares for purchase and sale, which
may result in an Existing Holder selling, or a
Potential Holder purchasing, a number of ARPS
that is less than the number of ARPS specified in
its Order. A Sell Order by an Existing Holder
will constitute an irrevocable offer to sell the
ARPS subject thereto, and a Bid placed by an
Existing Holder will also constitute an
irrevocable offer to sell the ARPS subject
thereto if the rate per annum specified in the
Bid is higher than the Applicable Rate determined
in the Auction, in each case at a price per share
equal to $50,000. A Bid placed by a Potential
Holder will constitute an irrevocable offer to
purchase the ARPS subject thereto at a price per
share equal to $50,000 if the rate per annum
specified in such Bid is less than or equal to
the Applicable Rate determined in the Auction.
Settlement of purchases and sales will be made on
the next Business Day (also the Dividend Payment
Date) after the Auction Date through the
Securities Depository. Purchasers will make
payment through their Agent Members in same-day
funds to the Securities Depository against
delivery by book entry to their Agent Members.
The Securities Depository will make payment to
the sellers' Agent Members in accordance with the
Securities Depository's normal procedures, which
now provide for payment in same-day funds. See
"Description of ARPS--The Auction--Securities
Depository."
The Broker-Dealer Agreements provide that a
Broker-Dealer may submit Orders in Auctions of
any series of ARPS for its own account, unless
the Trust notifies all Broker-Dealers that they
may no longer do so, provided that Broker-Dealers
may continue to submit Hold Orders and Sell
Orders. If a Broker-Dealer submits an Order for
its own account in any Auction of any series of
ARPS, it may have knowledge of Orders placed
through it in that Auction and therefore have an
advantage over other Bidders; such Broker-Dealer
would not have knowledge of Orders submitted by
other Broker-Dealers in that Auction. The Auction
Agent may not purchase and/or hold ARPS while
acting in the capacity of Auction Agent.
ASSET MAINTENANCE........... Under the Certificate, the Trust must maintain (i)
assets having in the aggregate a Discounted Value
at least equal to the ARPS Basic Maintenance
Amount and (ii) 1940 Act ARPS Asset Coverage of
at least 200%. See "Description of ARPS--Asset
Maintenance."
The Trust estimates that, based on the
composition of its portfolio as of ,
1994, (and after giving effect to the exercise of
the Common Shares Over-Allotment Option,) 1940
Act ARPS Asset Coverage with respect to ARPS
would be approximately % immediately after the
issuance of the ARPS offered hereby.
The Discount Factors and guidelines for
calculating the Discounted Value of the Trust's
portfolio for purposes of determin-
===============================================================================
12
<PAGE>
===============================================================================
ing whether the ARPS Basic Maintenance Amount has
been satisfied have been established by Moody's
and S&P in connection with the Trust's receipt of
ratings on the ARPS on their Date of Original
Issue of "aaa" from Moody's and AAA from S&P. See
"Rating Agency Guidelines."
MINIMUM LIQUIDITY LEVEL..... So long as the ARPS are rated by Moody's and S&P,
the Trust will be required under the Certificate
to maintain as of each Valuation Date certain
Dividend Coverage Assets with a value not less
than the Dividend Coverage Amount (the "Minimum
Liquidity Level"). See "Description of ARPS--
Minimum Liquidity Level."
MANDATORY REDEMPTION........ If the Trust does not maintain or restore, as
specified herein, S&P Eligible Assets with an
aggregate Discounted Value or Moody's Eligible
Assets with an aggregate Discounted Value equal
to or greater than the ARPS Basic Maintenance
Amount or if the Trust does not satisfy the 1940
Act ARPS Asset Coverage, the ARPS will be subject
to mandatory redemption, out of Available Funds,
at the redemption price of $50,000 per share plus
an amount equal to dividends thereon (whether or
not earned or declared) accumulated but unpaid to
the date of redemption. Holders of ARPS which are
redeemed will be entitled to receive Gross-up
Dividends under certain circumstances. A
redemption premium, if applicable, also will be
payable with respect to a Long Term Dividend
Period. Any such redemption will be limited to
the number of ARPS necessary to restore the ARPS
Basic Maintenance Amount and the 1940 Act ARPS
Asset Coverage. The Trust's ability to make such
a mandatory redemption may be restricted by the
terms of the Declaration of Trust or the
Certificate and will be subject to the terms of
the 1940 Act. See "Description of ARPS--
Redemption--Mandatory Redemption."
OPTIONAL REDEMPTION......... Each series of the ARPS is redeemable at the
option of the Trust, as a whole or in part, out
of Available Funds, on any Dividend Payment Date
with respect to any Short Term Dividend Period
having 28 or fewer days, at the redemption price
of $50,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or
declared) to the redemption date. Holders of ARPS
which are redeemed will be entitled to Gross-up
Dividends under certain circumstances. The Trust,
upon the determination of the Board of Trustees
of the Trust, may determine in advance to waive
this option to redeem ARPS with respect to (i)
Short Term Dividend Periods having 35 days or
more and (ii) Long Term Dividend Periods. A
redemption premium, if applicable, also will be
payable with respect to a Long Term Dividend
Period. No ARPS of a series may be redeemed at
the option of the Trust during the Initial
Dividend Period for that series. See "Description
of ARPS--Redemption--Optional Redemption."
LIQUIDATION PREFERENCE...... The liquidation preference of each ARPS will be
$50,000 plus the applicable redemption premium,
if any, plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned
or declared). Holders of ARPS receiving a
liquidating distribution will be entitled to
Gross-up Dividends
===============================================================================
13
<PAGE>
===============================================================================
under certain circumstances. See "Description of
ARPS-- Liquidation Rights."
RATINGS..................... It is a condition to their issuance that the ARPS
be issued with a rating of "aaa" from Moody's and
AAA from S&P.
VOTING RIGHTS............... The 1940 Act requires that at all times at least
two trustees shall have been elected by the
holders of ARPS and any other Preferred Shares,
voting as a separate class. The 1940 Act also
requires that the holders of ARPS and any other
Preferred Shares, voting as a separate class,
have the right to elect a majority of the
trustees at any time two years' dividends on the
ARPS or any other Preferred Shares are unpaid.
The holders of each series of ARPS and any other
Preferred Shares will each vote as a separate
class or collectively as a class on certain other
matters as required under applicable state law,
the Trust's Declaration of Trust, and the
Certificate thereunder and the 1940 Act. Holders
of ARPS and other Preferred Shares will vote with
the holders of Common Shares on the selection of
trustees who are not selected by the Holders of
ARPS and other Preferred Shares voting as a
class. Each of the ARPS is entitled to one vote
per share on each matter submitted to a vote of
shareholders of the Trust. See "Description of
ARPS--Voting Rights" and "Description of Shares."
SPECIAL RISK CONSIDERATIONS. The Trust has a limited operating history. In
connection with the management of its portfolio,
the Trust may engage in certain futures and
options transactions for hedging purposes and may
purchase or sell options on portfolio securities
to achieve additional return or to hedge its
portfolio. The Trust may also enter into
repurchase agreements. These investment practices
involve special risks. In addition, subject to
applicable restrictions of Moody's and S&P and
the 1940 Act, the Trust may borrow money for
emergency purposes or for repurchase of its
shares provided that immediately after such
borrowing the amount borrowed does not exceed
33 1/3% of the value of its total assets
(including the amount borrowed) less its
liabilities (not including any borrowings, but
including the aggregate amount at the time of
computation of any senior securities representing
indebtedness of the Trust plus the aggregate
liquidation preference of each class which is a
stock, including the ARPS). The use of borrowed
funds for other than emergency purposes involves
the speculative factor known as leverage. The
foregoing may involve risks greater than those
assumed by other investment companies which do
not engage in such techniques or transactions.
See "Investment Objective and Policies,"
"Investment Practices" and Appendix B hereto.
The Trust may invest without limit in certain
Municipal Obligations which may be subject to the
individual alternative minimum tax. Additionally,
the Trust may invest without limit in private
activity bonds or industrial development bonds,
the interest on which is not federally tax-exempt
to "substantial users" or "related persons."
Therefore, the Trust may not be a suitable
investment for such investors. See "Taxation."
The Trust reserves the right to invest 25% or
more of its total assets in certain types of
Municipal Obligations. See "Invest-
===============================================================================
14
<PAGE>
===============================================================================
ment Objective and Policies" and "Investment
Restrictions." A discussion of the risks
associated with investment in such obligations is
set forth in Appendix C.
Although the Investment Manager expects that
substantially all of the Trust's investments will
be in securities for which an established resale
market exists, there is no overall limitation on
the percentage of illiquid securities which may
be held by the Trust and, as such, substantially
all of the Trust's assets may be invested in
illiquid securities. For so long as the ARPS are
rated by Moody's and S&P, the Trust's ability to
invest in illiquid securities will be restricted.
See "Investment Objective and Policies" and
"Rating Agency Guidelines."
The value of the Trust's portfolio securities,
and therefore the Trust's net asset value per
Common Share, will increase or decrease due to
various factors, principally changes in
prevailing interest rates and the ability of the
issuers of the Trust's portfolio securities to
pay interest and principal on such obligations.
Net asset value generally increases when interest
rates decline, and decreases when interest rates
rise, although this is not always the case. See
"Determination of Net Asset Value."
The Trust's Declaration of Trust includes anti-
takeover provisions, including a staggered vote
for Trustees and the requirement for an 80%
shareholder vote for certain mergers, share
issuances and asset acquisitions, that are
intended to have the effect of limiting the
ability of other entities or persons to acquire
control of the Trust. See "Description of
Shares."
There are a number of specific factors investors
in ARPS should consider:
-- The credit ratings of the ARPS could be
reduced while an investor holds the ARPS.
-- Neither the Broker-Dealers nor the Trust are
obligated to purchase ARPS in an Auction or
otherwise, nor is the Trust required to redeem
ARPS in the event of a failed Auction.
-- If in an Auction for the ARPS Sufficient
Clearing Bids do not exist, the Applicable Rate
will be the Maximum Applicable Rate and, in such
event, Beneficial Owners that have submitted Sell
Orders will not be able to sell in the Auction
all, and may not be able to sell any, ARPS
subject to such Sell Orders. Thus, under certain
circumstances, Beneficial Owners may not have
liquidity of investment.
The Broker-Dealers may maintain a secondary
trading market in the ARPS outside of Auctions;
however, they have no obligation to do so and
there can be no assurance that a secondary market
for the ARPS will develop or, if it does develop,
that it will provide holders with liquidity of
investment. The ARPS will not be registered on
any stock exchange or on the National Association
of Securities Dealers Automated Quotation system.
No assurance can be given that shareholders will
be able to sell ARPS between Auctions at a price
equal to $50,000 per share.
===============================================================================
15
<PAGE>
FINANCIAL HIGHLIGHTS
===============================================================================
Selected data for a Common Share outstanding for the period , 1994
(commencement of operations) through , 1994 (unaudited) is set forth below.
The financial information has been derived from and should be read in
conjunction with the unaudited financial statements and notes thereto
commencing on page in this Prospectus. Interim results are not necessarily
indicative of results for the full year.
<TABLE>
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $
---------
Investment income--net................................
Unrealized gain on investments--net...................
---------
Total from investment operations.......................
---------
Offering costs charged against capital.................
---------
Net asset value, end of period......................... $
---------
---------
Market value, end of period............................ $
---------
---------
TOTAL INVESTMENT RETURN:................................ %(1)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)............... $
Ratio of expenses to average net assets................ %(2)
Ratio of investment income--net to average net assets.. %(2)
Portfolio turnover rate................................ %
<FN>
- - - ----------
(1) Not annualized.
(2) Annualized.
</TABLE>
THE TRUST AND ITS MANAGEMENT
===============================================================================
InterCapital Insured Municipal Securities (the "Trust") is a closed-end
diversified management investment company whose investment objective is to
provide current income which is exempt from federal income tax. The Trust seeks
to achieve its investment objective by investing primarily in a diversified
portfolio of Municipal Obligations which are covered by insurance guarantees as
to timely payment of principal and interest thereon. The Trust may also invest
in Municipal Obligations which are backed by an escrow or trust account
containing sufficient U.S. Government securities or U.S. Government agency
securities to ensure timely payment of principal and interest thereon. There
can be no assurance that the Trust's investment objective will be achieved.
The Trust is a trust of the type commonly known as a "Massachusetts
business trust" and was organized under the laws of the Commonwealth of
Massachusetts on October 14, 1993. The Trust's principal office is located at
Two World Trade Center, New York, New York 10048.
Dean Witter InterCapital Inc. (the "Investment Manager" or
"InterCapital"), whose address is Two World Trade Center, New York, New York
10048, is the Trust's Investment Manager, pursuant to an Investment Management
Agreement with the Trust. See "Investment Management Agreement". InterCapital
is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWDC"), a
balanced financial services organization providing a broad range of nationally
marketed credit and investment products.
InterCapital, and its wholly-owned subsidiary, Dean Witter Services
Company Inc., act as investment manager, manager, investment adviser, sub-
adviser, administrator or sub-administrator to a total of seventy-nine
investment companies (the "Dean Witter Funds"), twenty-six of which are listed
on the
16
<PAGE>
New York Stock Exchange, and other portfolios, with combined total assets of
approximately $70.7 billion, including approximately $12.2 billion of tax-
exempt securities, at November 30, 1993. The Investment Manager has over twenty
years of experience managing investment companies and currently advises or
administers assets for more than three million investor accounts. In an
internal reorganization which took place in January, 1993, the Investment
Manager assumed the investment advisory, management and administrative
activities formerly performed by the InterCapital Division of Dean Witter
Reynolds Inc. ("DWR"), an affiliate of the Investment Manager. As part of the
January, 1993 reorganization, the investment company underwriting activities
previously performed by DWR were assumed by Dean Witter Distributors Inc., a
wholly-owned subsidiary of DWDC and an affiliate of DWR and InterCapital. DWR
is a major securities broker-dealer and investment banker and is a member of
the New York Stock Exchange, the American Stock Exchange, the Chicago Board of
Options Exchange andother principal regional stock exchanges. DWR maintains its
offices at Two World Trade Center, New York, New York 10048.
USE OF PROCEEDS
===============================================================================
The net proceeds of this offering will be approximately $ after
payment of offering expenses (estimated to be $ ) and the sales load.
Expenses relating to the issuance of the ARPS will be borne by the Trust and
will reduce the net asset value of the Common Shares.
The net proceeds of the offering will be invested in accordance with
the Trust's investment objective and policies during a period not to exceed six
months from completion of the offering of ARPS. See "Investment Objective and
Policies." Pending such investment, it is anticipated that the proceeds will be
invested in high quality Municipal Obligations or high quality short-term tax-
exempt money market instruments, if available, or otherwise in high quality
taxable money market instruments, in any case as described below under
"Investment Objective and Policies."
On , 1994, the Trust issued and sold Common Shares.
The net proceeds to the Trust of such offering of Common Shares, after the
sales load and organization and offering expenses, were approximately
$ . (On , 1994 additional Common Shares were issued and
sold by the Trust pursuant to the Common Shares Over-Allotment Option. The net
proceeds of such sales of Common Shares, after the sales load, were $ .)
The net proceeds from the offering of the Common Shares are being invested in
accordance with the Trust's investment objective and policies.
CAPITALIZATION
===============================================================================
The following table sets forth the unaudited capitalization of the
Trust as of , 1994 and as adjusted to give effect to the (exercise of the
Common Shares Over-Allotment Option and the) issuance of the ARPS offered
hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Preferred shares of beneficial interest,
1,000,000 shares authorized of $.01 par
value (none issued; ARPS issued, as
adjusted, at $50,000 per share liquidation
preference)................................... $ 0 $
Common shares of beneficial interest, unlimited
shares authorized of $.01 par value
( shares issued; shares issued,
as adjusted).................................... *
Unrealized appreciation on investments--net......
Undistributed investment income--net.............
--------- ---------
Net Assets....................................... $ $
========= =========
<FN>
- - - ----------
* Net of ARPS offering expenses and sales load.
</TABLE>
17
<PAGE>
PORTFOLIO COMPOSITION
===============================================================================
As of , 1994, approximately % of the Trust's portfolio was
invested in long-term Municipal Obligations and approximately % was invested
in short-term Municipal Obligations. As of such date, the Trust held long-
term issues of Municipal Obligations, having an aggregate market value of $
.
INVESTMENT OBJECTIVE AND POLICIES
===============================================================================
The investment objective of the Trust is to provide current income
which is exempt from federal income tax. Under normal circumstances, the Trust
will invest at least 80% of its net assets in Municipal Obligations which are
covered by insurance guaranteeing the timely payment of principal and interest
thereon. The Trust may also invest in Municipal Obligations which are backed by
an escrow or trust account containing sufficient U.S. Government securities or
U.S. Government agency securities backed by the full faith and credit of the
United States to ensure timely payment of principal and interest thereon
("escrow secured obligations"). Escrow secured obligations, "temporary
investments" and options and futures, all as described below, will not
constitute more than 20% of the Trust's net assets. Additionally, escrow
secured obligations will not constitute any part of the 80% of the Municipal
Obligations covered by insurance referred to above. "Municipal Obligations"
consist of Municipal Bonds, Municipal Notes and Municipal Commercial Paper, as
well as lease obligations, including such instruments purchased on a when-
issued or delayed delivery basis. See "Investment Practices." Certain Municipal
Obligations in which the Trust may invest without limit may subject certain
investors to the alternative minimum tax and, therefore, a substantial portion
of the income produced by the Trust may be taxable for such investor under the
alternative minimum tax. The Trust, therefore, may not ordinarily be a suitable
investment for investors who are subject to the alternative minimum tax. The
suitability of the Trust for these investors will depend upon a comparison of
the after-tax yield likely to be provided from the Trust to comparable tax-
exempt investments not subject to such tax and also to comparable fully taxable
investments in light of each such investor's tax position. See "Taxation."
Each insured Municipal Obligation held by the Trust will either be (i)
covered by an insurance policy applicable to a specific security, whether
obtained by the issuer of the security or a third party at the time of original
issuance ("Original Issue Insurance") or by the Trust or a third party
subsequent to the time of original issuance ("Secondary Market Insurance") or
(ii) covered by a master municipal insurance policy purchased by the Trust
("Portfolio Insurance"). While the Trust may obtain one or more policies of
Portfolio Insurance, the Trust, depending on the availability of such policies
on terms favorable to the Trust, may determine not to obtain such policies and
to emphasize investments in Municipal Obligations insured under Original Issue
Insurance or Secondary Market Insurance. In any event, the Trust will only
obtain policies of Portfolio Insurance issued by insurers whose claims-paying
ability is rated Aaa by Moody's Investors Service, Inc. ("Moody's") or AAA by
Standard & Poor's Corporation ("S&P"). The Trust's investments in insured
obligations (as described below) will only consist of Municipal Obligations
covered by Original Issue Insurance or Secondary Market Insurance that are
themselves assigned a rating of Aaa or AAA, as the case may be, by virtue of
the claims-paying ability of the insurer. Such Municipal Obligations 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. By way of contrast, the ratings, if any, assigned to Municipal
Obligations insured under Portfolio Insurance will be based primarily upon the
credit characteristics of the issuers without regard to the insurance feature,
and will generally carry a rating that is below Aaa or AAA. In the hands of the
Trust, 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.
The Trust's policy of investing in Municipal Obligations insured by
insurers whose claims-paying ability is rated Aaa or AAA will apply only at the
time of the purchase of a security, and the Trust will not be required to
dispose of securities in the event Moody's or S&P, as the case may be,
downgrades its assessment of the claims-paying ability of a particular insurer
or the credit characteristics of a particular issuer. In this connection, it
should be noted that in the event Moody's or S&P or both should downgrade
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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, and Municipal Obligations insured under Portfolio Insurance
issued by such insurer would also be of reduced quality in the hands of the
Trust. Moody's and S&P continually assess the claims-paying ability of insurers
and the credit characteristics of issuers, and there can be no assurance that
they will not downgrade their assessments subsequent to the time the Trust
purchases securities. See "Description of Bond Insurance."
In addition to insured Municipal Obligations, the Trust may invest in
escrow secured obligations that are entitled to the benefit of an escrow or
trust account which contains securities issued or guaranteed by the U.S.
Government or U.S. Government agencies and backed by the full faith and credit
of the United States sufficient in amount to ensure the payment of interest and
principal on the original interest payment and maturity dates. Such escrow
secured obligations are normally regarded as having the credit characteristics
of the underlying U.S. Government or U.S. Government agency securities. Such
escrow secured obligations will generally not be insured.
The Trust intends to emphasize investments in Municipal Obligations
with long-term maturities because such long-term obligations generally produce
higher income than short-term obligations although such longer-term obligations
are more susceptible to market fluctuations resulting from changes in interest
rates than shorter-term obligations. The average weighted maturity of the
Trust's portfolio under normal circumstances is expected to be in excess of 20
years, but the average maturity, as well as the exemption on longer-term
obligations, may vary depending upon market conditions.
The Trust may invest any percentage of its net assets in "temporary
investments" for defensive purposes (e.g., investments made during times where
temporary imbalances of supply and demand or other temporary dislocations in
the Municipal Obligations market adversely affect the price at which Municipal
Bonds, Notes and Commercial Paper are available) and in order to keep cash on
hand fully invested. Temporary investments are short-term, high quality,
generally uninsured securities which may be either tax-exempt or taxable. The
Trust will invest only in temporary investments which are certificates of
deposit of U.S. domestic banks, including foreign branches of domestic banks,
with assets of $1 billion or more; bankers' acceptances; time deposits; U.S.
Government securities; or debt securities rated within the highest grade by
Moody's or S&P (MIG 1 or SP-1 respectively for Municipal Notes and P-1 or A-1
respectively for Municipal Commercial Paper) or, if not rated, are of
comparable quality as determined by the Investment Manager, and which mature
within one year from the date of purchase. See Appendix A for a general
description of Moody's and S&P's ratings of securities in such categories.
Temporary investments of the Trust may also include repurchase agreements.
The foregoing percentage and rating limitations apply at the time of
acquisition of a security based on the last previous determination of the
Trust's net asset value. Any subsequent change in any rating by a rating
service or change in percentages resulting from market fluctuations or other
changes in the Trust's total assets will not require elimination of any
security from the Trust's portfolio.
Except as otherwise noted, the foregoing investment objective and
policies are fundamental policies of the Trust and may not be changed without
the approval of a majority of the outstanding voting securities of the Trust
(Common Shares and Preferred Shares voting together as a single class and
Preferred Shares voting as a separate class), as defined in the Act. Such a
majority is defined as the lesser of (i) 67% or more of the Trust's shares
present at a meeting of shareholders, if the holders of more than 50% of the
outstanding shares of the Trust are present or represented by proxy, or (ii)
more than 50% of the outstanding shares of the Trust.
DESCRIPTION OF MUNICIPAL OBLIGATIONS
===============================================================================
"Municipal Bonds" and "Municipal Notes" are debt obligations of states,
cities, counties, municipalities and state and local governmental agencies
which generally have maturities, at the time of their issuance, of either one
year or more (Bonds) or from six months to three years (Notes). "Municipal
Commercial Paper," as presently constituted, although issued under programs
having a final maturity of more than one year, is generally short-term paper
subject to periodic rate changes and maturities of less
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than one year selected at the holder's option. Municipal Obligations in which
the Trust primarily will invest bear interest that, in the respective opinions
of bond counsel to the issuers at the time of original issuance of such
obligations, is not includible in the gross income of the holders thereof for
federal income tax purposes. See "Taxation."
Municipal Bonds are issued to raise funds for various public purposes,
including the construction of such public facilities as airports, bridges,
highways, housing, hospitals, mass transportation, schools, streets, electric
systems, solid waste disposal and water and sewer works. Other public purposes
for which Municipal Bonds may be issued include the refinancing of outstanding
obligations, the obtaining of funds for general operating expenses and for
loans to other public institutions and facilities. In addition, certain private
activity bonds, industrial development bonds and pollution control bonds may be
included within the term Municipal Bonds if the interest paid thereon, in the
opinion of bond counsel to the issuer, qualifies as not includible in the gross
income of the holders thereof for federal income tax purposes. The principal
types of Municipal Notes currently being issued include tax anticipation notes,
bond anticipation notes and revenue anticipation notes, although there are
other types of Municipal Notes in which the Trust may invest. Notes sold in
anticipation of collection of taxes, a bond sale or receipt of other revenues
are usually general obligations of the issuing state, municipality or agency.
Municipal Commercial Paper is likely to be used to meet seasonal working
capital needs of an issuer or interim construction financing and to be paid
from general revenues of the issuer or refinanced with long-term debt.
Municipal Commercial Paper may be backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions.
The two principal classifications of Municipal Obligations are "general
obligation" and "revenue" bonds, notes or commercial paper. General obligation
bonds, notes or commercial paper are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Issuers of general obligation bonds, notes or commercial paper include states,
counties, cities, towns and other governmental units. Revenue bonds, notes or
commercial paper are payable from the revenues derived from a particular
facility or class of facilities or, in some cases, from other specific revenue
sources. Revenue bonds, notes or commercial paper are issued for a wide variety
of purposes, including the financing of electric, gas, water and sewer systems
and other public utilities; industrial development and pollution control
facilities; single and multi-family housing units; public buildings and
facilities; air and marine ports; transportation facilities such as toll roads,
bridges and tunnels; and health and educational facilities such as hospitals
and dormitories. They rely primarily on user fees to pay debt service, although
the principal revenue source may be supplemented by additional security
features which are intended to enhance the creditworthiness of the issuer's
obligations. In some cases, particularly revenue bonds issued to finance
housing and public buildings, a direct or implied "moral obligation" of a
governmental unit may be pledged to the payment of debt service. In other
cases, a special tax or other charge may augment user fees. Municipal bonds may
also be classified as "tax allocation" bonds, which are payable from tax
increment revenues, that is, from collected property taxes in the project area
allocable to the increase in the assessed valuation of land, improvements, and
personal and public utility property due to the project. There are, of course,
variations in the security of Municipal Bonds, Notes and Commercial Paper, both
within a particular classification and between classifications, depending on
numerous factors.
Also included within the general category of Municipal Obligations are
participations in lease obligations or installment purchase contract
obligations (hereinafter collectively called "lease obligations") of municipal
authorities or entities. Although lease obligations do not constitute general
obligations of the municipality for which the municipality's taxing power is
pledged, a lease obligation is ordinarily backed by the municipality's covenant
to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in any year unless money is appropriated for such
purpose for such year. In addition to the "non-appropriation" risk, these
securities represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more conventional
Municipal Obligations and therefore certain lease obligations may be considered
to be illiquid securities. Although "non-appropriation" lease obligations are
secured by the leased property, disposition of the property in the event of
default and foreclosure might prove difficult. The Trust will seek to minimize
these risks by only investing in those "non-appropriation" lease obliga-
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tions where (1) the nature of the leased equipment or property is such that its
ownership or use is essential to a governmental function of the municipality,
(2) the lease payments will commence amortization of principal at an early date
resulting in an average life of seven years or less for the lease obligation,
(3) appropriate covenants will be obtained from the municipal obligor
prohibiting the substitution or purchase of similar equipment if lease payments
are not appropriated, (4) the investment is of a size that will be attractive
to institutional investors, and (5) the underlying leased equipment has
elements of portability or use that enhance its marketability in the event
foreclosure on the underlying equipment is ever required. The Trust may also
purchase "certificates of participation," which are securities issued by a
particular municipality or municipal authority to evidence a proportionate
interest in base rental or lease payments relating to a specific project to be
made by the municipality, agency or authority. The risks and characteristics of
investments in certificates of participation are similar to the risks and
characteristics of lease obligations discussed above.
Although the Investment Manager expects that substantially all of the
Trust's investments will be in securities for which an established resale
market exists, there is no overall limitation on the percentage of illiquid
securities which may be held by the Trust and, as such, substantially all of
the Trust's assets may be invested in illiquid securities. For so long as the
ARPS are rated by Moody's and S&P, the Trust's ability to invest in illiquid
securities will be restricted. See "Investment Objective and Policies" and
"Rating Agency Guidelines."
The yields on Municipal Obligations are dependent on a variety of
factors, including the condition of the general money market and the tax-exempt
market, changes in federal and state income taxes, the size of a particular
offering, the maturity of the obligation and the rating of the issue. The
ratings of Moody's and S&P represent their opinions as to the quality of the
securities which they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields while obligations of the same maturity and coupon with
different ratings may have the same yield. The market value of the Trust's
portfolio securities, and therefore the Trust's net asset value per share, will
vary with changes in prevailing interest rate levels and as a result of
changing evaluations of the ability of issuers of the Trust's portfolio
securities to meet interest and principal payments on a timely basis.
Generally, a rise in interest rates will result in a decrease in the Trust's
net asset value per share, while a drop in interest rates will result in an
increase in the Trust's net asset value per share, although this is not always
the case.
Securities of issuers of Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Bankruptcy Reform Act of 1978. In addition,
the obligations of such issuers may become subject to the laws enacted in the
future by Congress, state legislatures or referenda extending the time for
payment of principal and/or interest, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. There is also the possibility that, as a result of legislation or other
conditions, the power or ability of any one or more issuers to pay, when due,
the principal of and interest on its, or their, Municipal Obligations may be
materially affected.
The Internal Revenue Code of 1986, as amended, limits the types and
volume of bonds qualifying for the federal income tax exemption on interest
with the result that in recent years the volume of new issues of municipal
obligations has declined substantially. As a result, this legislation and
legislation which may be enacted in the future, may affect the availability of
Municipal Obligations for investment by the Trust.
As set forth herein in Investment Restriction 3 under "Investment
Restrictions," the Trust reserves the right to invest 25% or more of its total
assets in the following types of Municipal Obligations provided that the
percentage of the Trust's total assets in private activity bonds in any one
category does not exceed 25% of the Trust's total assets: health facility
obligations, housing obligations, single family mortgage revenue bonds,
industrial revenue obligations (including pollution control obligations),
electric utility obligations, airport facility revenue obligations, water and
sewer obligations, university and college revenue obligations, bridge authority
and toll road obligations and resource recovery obligations. A discussion of
the risks associated with investment in such obligations is set forth in
Appendix C.
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DESCRIPTION OF BOND INSURANCE
===============================================================================
Each insured Municipal Obligation in which the Trust will invest will
be covered by Original Issue Insurance, Secondary Market Insurance or Portfolio
Insurance. While the Trust may obtain one or more policies of Portfolio
Insurance, the Trust, depending on the availability of such policies on terms
favorable to the Trust, may determine not to obtain such policies and to
emphasize investment in Municipal Obligations insured under Original Issue
Insurance or Secondary Market Insurance. In any event, the Trust will only
obtain policies of Portfolio Insurance issued by insurers whose claims-paying
ability is rated "Aaa" by Moody's or AAA by S&P. See Appendix D for a brief
description of S&P's and Moody's insurance claims-paying ability ratings.
Currently, the following insurance companies which issue municipal obligation
insurance satisfy the foregoing requirement: AMBAC Indemnity Corporation,
Financial Guaranty Insurance Company, Financial Security Assurance and
Municipal Bond Investors Assurance Corporation. There is no limitation on the
percentage of the Trust's assets that may be invested in Municipal Obligations
insured by any given insurer.
Original Issue 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 issuance of such Municipal
Obligations. Under such insurance, the insurer unconditionally guarantees to
the holder of the 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 guaranteed may be made in such amount 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's issuer
or from any other source in connection with such obligation. Original Issue
Insurance does not guarantee 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 shares of the Trust or the market
value of Municipal Obligations, or payments of any tender purchase price upon
the tender of the Municipal Obligations. Original Issue 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.
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 (the "Fiscal Agent") equal to such unpaid amounts of prinicpal and
interest not later than one business day after the insurer has been notified
that such nonpayment has occurred (but not earlier that the date such payment
is due). The Fiscal Agent will disburse to the Trust 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 Trust's right to receive payment of such
principal and interest and (ii) evidence, including any appropriate instruments
of assignments, that all of the rights to payment of such principal or interest
then due for payment shall thereupon vest in the insurer. Upon payment by the
insurer of any principal payments with respect to any Municipal Obligations,
the insurer shall succeed to the rights of the Trust with respect to such
payment.
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 Trust 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 Trust 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
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and the insurer remains in business, regardless of whether the Trust ultimately
disposes of such Municipal Obligations.
One of the purposes of acquiring Secondary Market Insurance with
respect to a particular Municipal Obligation would be to enable the Trust to
enhance the value of such Municipal Obligation. The Trust, for example, might
seek to purchase a particular Municipal Obligation and obtain Secondary Market
Insurance with respect thereto if, in the opinion of the Investment Manager,
the market value of such Municipal Obligation, as insured, would exceed the
current value of such Municipal Obligation without insurance plus the cost of
the Secondary Market Insurance. Similarly, if the Trust owns but wishes to sell
a Municipal Obligation that is then covered by Portfolio Insurance, the Trust
might seek to obtain Secondary Market Insurance with respect thereto if, in the
opinion of the Investment Manager, the net proceeds of a sale by the Trust of
such obligation, as insured, would exceed the current value of such obligation
plus the cost of the Secondary Market Insurance. All premiums respecting
Municipal Obligations covered by Original Issue Insurance or Secondary Market
Insurance are paid in advance by the issuer, the Trust or other party obtaining
the insurance.
Portfolio Insurance. The Trust may obtain, but has no obligation to
obtain, one or more policies of Portfolio Insurance, each of which would
guarantee the payment of principal and interest on specified eligible Municipal
Obligations purchased by the Trust. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance. Municipal Obligations insured under one Portfolio
Insurance policy would generally not be insured under any other policy
purchased by the Trust. 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
shareholders of the Trust.
If a Municipal Obligation is already covered by Original Issue
Insurance or Secondary Market Insurance, then such Municipal Obligation is not
required to be additionally insured under any policy of Portfolio Insurance
that the Trust may purchase.
Portfolio Insurance policies are effective only as to Municipal
Obligations owned by and held by the Trust, and do not cover Municipal
Obligations for which the contract for purchase fails. A "when-issued"
Municipal Obligation will be covered under a Portfolio Insurance policy upon
the purchase date of the issue of such "when-issued" Municipal Obligation.
In determining whether to insure the Municipal Obligations held by the
Trust, an insurer will apply its own standards, which correspond generally to
the standards it has established for determining the insurability of new issues
of Municipal Obligations. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be noncancellable by the insurer
and will remain in effect so long as the Trust exists, the Municipal
Obligations covered by the policy continue to be held by the Trust and the
Trust pays the premiums for the policy. The Trust will generally reserve the
right to terminate each policy upon 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 Trust.
Each Portfolio Insurance policy shall terminate as to any Municipal
Obligation that has been redeemed from or sold by the Trust on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability under a policy as to any such Municipal Obligation thereafter,
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 Trust.
One or more policies of Portfolio Insurance may provide the Trust,
pursuant to an irrevocable commitment of the insurer, with the option to
exercise the right to obtain permanent insurance ("Permanent Insurance") with
respect to a Municipal Obligation that is to be sold by the Trust. The Trust
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 Trust
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<PAGE>
will exercise the right to obtain Permanent Insurance for a Municipal
Obligation only if upon such exercise, in the opinion of the Investment
Manager, the net proceeds from the sale by the Trust 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 Trust 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 Trust.
The Trust generally intends to retain any insured securities covered by
Portfolio Insurance that are in default or in significant risk of default and
to place a value on the insurance, which ordinarily will be the difference
between the market value of the defaulted security and the market value of
similar securities of minimum investment grade (i.e., rated BBB by S&P or Baa
by Moody's) that are not in default. In certain circumstances, however, the
Investment Manager may determine that an alternative value for the insurance,
such as the difference between the market value of the defaulted security and
either its par value or the market value of securities of a similar nature that
are not in default or in significant risk of default, is more appropriate. To
the extent that the Trust holds such defaulted securities, it may be limited in
its ability to manage its investment portfolio and to purchase other Municipal
Obligations. Except as described above with respect to securities covered by
Portfolio Insurance that are in default or subject to significant risk of
default, the Trust will not place any value on the insurance in valuing the
Municipal Obligations that it holds.
Because each Portfolio Insurance policy will terminate as to Municipal
Obligations sold by the Trust 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 Trust), the
provision for this insurance will not enhance the marketability of securities
held by the Trust, whether or not the securities are in default or in
significant risk of default. 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 marketability
cannot be estimated. Accordingly, the Trust 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.
Premiums for a Portfolio Insurance policy are generally paid by the
Trust monthly, and are adjusted for purchases and sales of Municipal
Obligations covered by the policy during the month. The yield on the Trust's
portfolio is reduced to the extent of the insurance premiums paid by the Trust
which, in turn, will depend upon the characteristics of the covered Municipal
Obligations held by the Trust. In the event the Trust were to purchase
Secondary Market Insurance with respect to any Municipal Obligation then
covered by a Portfolio Insurance policy, the coverage and the obligation of the
Trust to pay monthly premiums under such policy would cease with such purchase.
INVESTMENT PRACTICES
===============================================================================
The following investment practices apply to the portfolio investments
of the Trust and may be changed by the Trustees of the Trust without
shareholder approval, following written notice to the shareholders.
For so long as the ARPS are rated by Moody's or S&P, the Trust will
engage in options and futures transactions only to the extent specified under
Appendix B hereto unless it receives written confirmation from S&P and/or
Moody's, as the case may be, that engaging in such transactions would not
impair the ratings then assigned to the ARPS by S&P and/or Moody's.
Futures Contracts and Options Thereon. The Trust may purchase and sell
financial futures contracts ("futures contracts") and may purchase and write
put and call options on such futures contracts only for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates.
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If the Investment Manager anticipates that interest rates may rise, the
Trust may sell a futures contract to protect against the potential decline in
the value of the securities held by the Trust. If declining interest rates are
anticipated, the Trust may purchase a futures contract to protect against a
potential increase in the price of securities the Trust intends to purchase.
As a futures contract purchaser, the Trust incurs an obligation to take
delivery of a specified amount of the obligation underlying the contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Trust incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
The specified securities taken or delivered at the settlement date would not be
determined until or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was effected. Although the terms of futures contracts specify actual delivery
or receipt of securities, in most instances the contracts are closed out before
the settlement date without the making or taking of delivery of the securities.
Closing out a futures contract is effected by entering into an offsetting
purchase or sale transaction.
Unlike a futures contract, which requires the parties to buy and sell a
security on a set date, an option on a futures contract entitles its holder to
decide on or before a future date whether to enter into such a contract. If the
holder decides not to enter into the contract, the premium paid for the option
is lost. Since the value of the option is fixed at the point of sale, there are
no daily payments of cash to reflect the change in the value of the underlying
contract as there are by a purchaser or seller of a futures contract. The value
of the option does change and is reflected in the net asset value of the Trust.
The Trust may not purchase and sell futures contracts or purchase
related options thereon if, immediately thereafter, the amount committed to
initial margin plus the amount paid for premiums for unexpired options on
futures contracts for other than bona fide hedging purposes exceeds 5% of the
value of the Trust's total assets.
Special Risk Considerations Relating to Futures and Options Thereon.
Certain risks are inherent in the Trust's use of futures contracts and options
on futures. One such risk arises because the correlation between movements in
the price of the futures contracts or options on futures and movements in the
price of the securities hedged or used for cover will not be perfect. Another
risk is that the price of futures contracts or options on futures may not move
inversely with changes in interest rates. The risk of imperfect correlations
may be increased by the fact that the Trust may invest in futures contracts on
taxable securities and there is no guarantee that the prices of taxable
securities will move in a similar manner to the prices of tax-exempt
securities.
The Trust's ability to establish and close out positions in futures
contracts and options on futures contracts will be subject to the development
and maintenance of a liquid secondary market. Although the Trust generally will
purchase only those futures contracts and options thereon for which there
appears to be a liquid market, there is no assurance that a liquid market on an
exchange will exist for any particular futures contract or option or at any
particular time.
Successful use of futures and options thereon by the Trust is subject
to the ability of the Investment Manager to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
These skills are different from those needed to select portfolio securities. If
the Investment Manager's expectations are not met, the Trust will be in a worse
position than if a hedging strategy had not been pursued. For example, if the
Trust has hedged against the possibility of an increase in interest rates which
would adversely affect the price of securities in its portfolio and the price
of such securities increases instead, the Trust will lose part or all of the
benefit of the increased value of its securities because it will have
offsetting losses in its futures positions.
Certain federal income tax requirements may limit the Trust's ability
to engage in transactions in options and futures. Gains from transactions in
options and futures contracts distributed to shareholders will be taxable as
ordinary income or, in certain circumstances, as long-term capital gains to
shareholders.
Set forth in Appendix B hereto is a description of the options and
futures transactions in which the Trust may engage, limitations on the use of
such transactions and risks associated therewith.
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<PAGE>
Municipal Bond Index Futures. The Trust may purchase and sell municipal
bond index futures contracts for hedging purposes. The Trust's strategies in
employing such contracts will be similar to that discussed above with respect
to financial futures and options thereon. A municipal bond index is a method of
reflecting in a single number the market value of many different municipal
bonds and is designed to be representative of the municipal bond market
generally. The index fluctuates in response to changes in the market values of
the bonds included within the index. Unlike futures contracts on particular
financial instruments, transactions in futures on a municipal bond index will
be settled in cash, if held until the close of trading in the contract.
However, like any other futures contract, a position in the contract may be
closed out by purchase or sale of an offsetting contract for the same delivery
month prior to expiration of the contract.
Options on Debt Securities. The Trust may purchase or sell (write)
options on debt securities as a means of achieving additional return or hedging
the value of the Trust's portfolio. The Trust will only write covered call or
covered put options, or buy call or put options, which are listed on national
securities exchanges. The Trust may not write covered options in an amount
exceeding 20% of the value of its total assets. The Trust will not purchase
options if, as a result, the aggregate cost of all outstanding options exceeds
10% of the Trust's total assets.
A call option is a contract that gives the holder of the option the
right to buy from the writer (seller) of the call option, in return for a
premium paid, the security underlying the option at a specified exercise price
at any time during the term of the option. The writer of the call option has
the obligation upon exercise of the option to deliver the underlying security
upon payment of the exercise price during the option period. A put option is a
contract that gives the holder of the option, in return for a premium paid, the
right to sell to the writer (seller) the underlying security at a specified
price during the term of the option. The writer of the put option, who receives
the premium, has the obligation to buy the underlying security upon exercise,
at the exercise price during the option period.
If the Trust has written an option, it may terminate its obligation by
effecting a closing purchase transaction. This is accomplished by purchasing an
option of the same series as the option previously written. There can be no
assurance that either a closing purchase or sale transaction can be effected
when the Trust so desires.
An option position may be closed out only on an exchange which provides
a secondary market for an option of the same series. Although the Trust will
generally purchase or write only those options for which there appears to be an
active secondary market, there is no assurance that a liquid secondary market
on an exchange will exist for any particular option.
New options and futures contracts and other financial products and
various combinations thereof continue to be developed. The Trust may invest in
any such options, futures and products as may be developed to the extent
consistent with its investment objective and the regulatory requirements
applicable to investment companies.
For further discussion of the use, risks and costs of options trading,
see Appendix B.
Variable Rate Obligations. The interest rates payable on certain
Municipal Obligations are not fixed and may fluctuate based upon changes in
market rates or indexes, such as a tax-exempt money market or bank prime index.
Municipal obligations of this type are called "variable rate" obligations. The
interest rate payable on a variable rate obligation is adjusted either at
predesignated periodic intervals or whenever there is a change in the market
rate of interest or index on which the interest rate payable is based. There is
no limit on the percentage of the Trust's assets which may be invested in
variable rate obligations.
When-Issued and Delayed Delivery Securities. The Trust may purchase
tax-exempt securities on a when-issued or delayed delivery basis, i.e.,
delivery and payment can take place a month or more after the date of the
transaction. The securities so purchased are subject to market fluctuation
during this period and no interest accrues to the purchaser prior to the date
of settlement. At the time the Trust makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value, each day, of such security in
determining the net asset
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<PAGE>
value of the Trust. At the time of delivery of the securities, the value may be
more or less than the purchase price. Since the Trust is dependent on the party
issuing the when-issued or delayed delivery security to complete the
transaction, failure by the other party to deliver the securities as arranged
would result in the Trust losing an investment opportunity. The Trust will also
establish a segregated account with its custodian bank in which it will
maintain cash or high grade tax-exempt debt obligations equal in value to
commitments for such when-issued or delayed delivery securities; subject to
this requirement, the Trust may purchase securities on such basis without
limit. An increase in the percentage of the Trust's assets committed to the
purchase of securities on a when-issued or delayed delivery basis may increase
the volatility of the Trust's net asset value. The Investment Manager and the
Trustees do not believe that the Trust's net asset value or income will be
adversely affected by its purchase of securities on such basis.
Repurchase Agreements. When cash may be available for only a few days,
it may be invested by the Trust in repurchase agreements until such time as it
may otherwise be invested or used for payments of obligations of the Trust.
These agreements, which may be viewed as a type of secured lending by the
Trust, typically involve the acquisition by the Trust of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. The agreement provides that the Trust will sell back to the
institution, and that the institution will repurchase, the underlying security
("collateral"), which is held by the Trust's Custodian, at a specified price
and at a fixed time in the future, usually not more than seven days from the
date of purchase. The Trust will accrue interest from the institution until the
time when the repurchase is to occur. Although such date is deemed by the Trust
to be the maturity date of a repurchase agreement, the maturities of securities
subject to repurchase agreements are not subject to any limits and may exceed
one year, except that a Trust asset which underlies a repurchase agreement will
be considered an S&P Eligible Asset only if (a) it is a U.S. Treasury security
and (b) the term of the repurchase agreement is less than one year. While
repurchase agreements involve certain risks not associated with direct
investments in debt securities, the Trust will follow procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Trust will seek to liquidate such collateral.
However, the exercising of the Trust's right to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the Trust could suffer a loss. In addition, to the extent that the
Trust's security interest in the collateral may not be properly perfected, the
Trust could suffer a loss up to the entire amount of the collateral. It is the
current policy of the Trust not to invest in repurchase agreements that do not
mature within seven days if any such investment amounts to more than 10% of its
total assets.
Borrowing. Subject to the restrictions of S&P and Moody's described
below and of the 1940 Act, the Trust may borrow money from a bank for temporary
or emergency purposes or for the repurchase of its shares, provided that
immediately after such borrowing the amount borrowed does not exceed 33 1/3% of
the value of its total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the aggregate amount at
the time of computation of any senior securities representing indebtedness of
the Trust plus the aggregate liquidation preference of each class which is a
stock, including the ARPS). However, for so long as the ARPS are rated by S&P
or Moody's, the Trust will not, unless it has received written notice from S&P
or Moody's, as the case may be, that such action would not impair the rating
then assigned to the ARPS by S&P or Moody's, as the case may be, borrow money
except for the purpose of clearing transactions in portfolio securities. If,
due to market fluctuations or other reasons, the value of the Trust's assets
falls below the foregoing required coverage requirement, the Trust, within
three business days, will reduce its bank debt to the extent necessary to
comply with such requirement. To achieve such reduction, it is possible that
the Trust may be required to sell portfolio securities at a time when it may be
disadvantageous to do so. After the issuance of ARPS, any borrowing by the
Trust will be subject to further restrictions as a result of asset coverage
requirements imposed by
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the ARPS Basic Maintenance Amount or the 1940 Act ARPS Asset Coverage. See
"Description of ARPS--Asset Maintenance."
Borrowings other than for temporary or emergency purposes would involve
additional risk to the Trust, since the interest expense may be greater than
the income from or appreciation of the securities carried by the borrowing.
Investment activity will continue while the borrowing is outstanding. The
purchase of additional securities while any borrowing is outstanding involves
the speculative factor known as "leverage," and will result in increased
volatility of the Trust's net asset value. The increased volatility resulting
from the use of such borrowings could have a negative effect on the Trust's net
asset value greater than would be the case with other funds having similar
objectives and policies but which do not utilize such borrowings.
Lending of Portfolio Securities. The Trust is authorized to lend its
securities. However, for so long as the ARPS are rated by S&P, the Trust will
not do so unless and until S&P indicates in writing that such lending will not
impair the ratings then assigned to the ARPS. If S&P so indicates, the Trust
may, consistent with applicable regulatory requirements and subject to S&P
Guidelines (see "Rating Agency Guidelines"), lend its portfolio securities to
brokers, dealers and financial institutions, provided that such loans are
callable at any time by the Trust (subject to notice provisions described
below), and are at all times secured by cash or cash equivalents, which are
maintained in a segregated account pursuant to applicable regulations and that
are equal to at least 102% of the market value, determined daily, of the loaned
securities. The advantage of such loans is that the Trust continues to receive
the income on the loaned securities while at the same time earning interest on
the cash amounts deposited as collateral, which will be invested in short-term
obligations. The Trust will not lend its portfolio securities if such loans are
not permitted by the laws or regulations of any state in which its shares are
qualified for sale and will not lend more than 10% of the value of its total
assets.
A loan may be terminated by the borrower on one business day's notice,
or by the Trust on four business days' notice. If the borrower fails to deliver
the loaned securities within four days after receipt of notice, the Trust could
use the collateral to replace the securities while holding the borrower liable
for any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail
financially. However, these loans of portfolio securities will only be made to
firms deemed by the Trust's management to be creditworthy and when the income
which can be earned from such loans justifies the attendant risks. Upon
termination of the loan, the borrower is required to return the securities to
the Trust. Any gain or loss in the market price during the loan period would
inure to the Trust. The creditworthiness of firms to which the Trust lends its
portfolio securities will be monitored on an ongoing basis by the Investment
Manager pursuant to procedures adopted and reviewed, on an ongoing basis, by
the Trustees of the Trust.
When voting or consent rights which accompany loaned securities pass to
the borrower, the Trust will follow the policy of calling the loaned
securities, to be delivered within one day after notice, to permit the exercise
of such rights if the matters involved would have a material effect on the
Trust's investment in such loaned securities. The Trust will pay reasonable
finder's, administrative and custodial fees in connection with a loan of its
securities.
Private Placements. The Trust may invest up to 15% of its total assets
in obligations customarily sold to institutional investors in private
transactions for which only a limited market may exist at the time of purchase.
This type of limited private offering is frequently utilized with respect to
smaller issues of Municipal Obligations or when issuers wish to restrict the
number of holders to reduce issuance costs and to permit maximum flexibility in
structuring the transactions and to facilitate the prompt issuance of the
securities. Although such securities are not restricted securities unless they
contain restrictions on resale, due to the limited market for such issues, the
Trust may be unable to dispose of such securities promptly at reasonable
prices. See "Determination of Net Asset Value."
Restricted Securities. The Trust may invest up to 15% of its total
assets in securities subject to contractual restrictions on resale. Contractual
limitations on the resale of such securities have an adverse effect on their
marketability and may prevent the Trust from disposing of them promptly.
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Portfolio Management and Turnover Rate. The Trust's portfolio will be
managed by its Investment Manager with a view to achieving its investment
objective. Securities are purchased and sold principally in response to the
Investment Manager's current evaluation of an issuer's ability to meet its debt
obligations in the future, and the Investment Manager's current assessment of
future changes in the levels of interest rates on tax-exempt securities of
varying coupon rates and maturities. The Trust may engage in short-term trading
consistent with its investment objective. Securities may be sold in
anticipation of a market decline (a rise in interest rates) or purchased in
anticipation of a market rise (a decline in interest rates). In addition, a
security may be sold and another security of comparable quality purchased at
approximately the same time to take advantage of what the Investment Manager
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the general movement
of interest rates, such as changes in the overall demand for, or supply of,
various types of tax-exempt securities. In general, purchases and sales may
also be made to restructure the portfolio in terms of average maturity,
quality, coupon yield, or diversification for any one or more of the following
purposes: (a) to increase income, (b) to improve portfolio quality, (c) to
minimize capital depreciation, (d) to realize gains or losses, or for such
other reasons as the Investment Manager deems relevant in light of economic and
market conditions. Fluctuation in the supply of Municipal Obligations at an
acceptable price may affect the Trust's ability to achieve its investment
objective.
Securities purchased by the Trust are generally sold by dealers acting
as principal for their own accounts. The Trust may incur brokerage commissions
on transactions conducted through DWR.
While it is not possible to predict turnover rates with any certainty,
at present it is anticipated that the Trust's portfolio turnover rate, under
normal circumstances after the Trust's portfolio is invested in accordance with
its investment objective, will not exceed 100%. The Trust will incur
transaction costs commensurate with its portfolio turnover rate. Additionally,
see "Taxation" for a discussion of the tax policy of the Trust and see
"Portfolio Transactions and Brokerage" for a more extensive discussion of the
Trust's portfolio brokerage policies.
The portfolio manager of the Trust is Mr. James F. Willison and as such
he will be primarily responsible for the day-to-day management of the Trust's
portfolio. For a more detailed discussion of Mr. Willison's business experience
during the past five years, see "Trustees and Officers."
RATING AGENCY GUIDELINES
===============================================================================
The Trust intends that, so long as the ARPS are outstanding, the
composition of its portfolio will reflect guidelines established by Moody's and
S&P in connection with the Trust's receipt of a rating for such shares on their
date of Original Issue of at least "aaa" from Moody's and AAA from S&P. Moody's
and S&P, nationally recognized statistical rating agencies, issue ratings for
various securities reflecting their perceived creditworthiness of such
securities. The guidelines described below have been developed by Moody's and
S&P in connection with issuances of asset-backed and similar securities,
including debt obligations and variable rate preferred stocks, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are designed to ensure that assets underlying outstanding debt
or preferred stock will be sufficiently varied and will be of sufficient
quality and amount to justify investment grade ratings. The guidelines do not
have the force of law but have been adopted by the Trust in order to satisfy
current requirements necessary for Moody's and S&P to issue the above-described
ratings for the ARPS, which ratings are generally relied upon by institutional
investors in purchasing such securities. The guidelines provide a set of tests
for portfolio composition and asset coverage that supplement (and in some cases
are more restrictive than) the applicable requirements under the 1940 Act.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the ARPS are not recommendations to purchase, hold
or sell ARPS, inasmuch as the ratings do not comment as to market price or
suitability for a particular investor. Nor do the rating agency guidelines
described herein address the likelihood that a holder of the ARPS will be able
to sell such shares in an Auction. The ratings are based on current information
furnished to Moody's and S&P by the Trust and the Investment Manager, and
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information obtained from other sources. The ratings may be changed, suspended
or withdrawn as a result of changes in, or the unavailability of, such
information. The Common Shares have not been rated by a nationally recognized
statistical rating organization.
The Trust intends to maintain a Discounted Value for its portfolio at
least equal to the ARPS Basic Maintenance Amount and to maintain the Minimum
Liquidity Level. Moody's and S&P have each established separate guidelines for
determining Discounted Value. To the extent any particular portfolio holding
does not satisfy the applicable rating agency's guidelines, all or a portion of
such holding's value will not be included in the calculation of Discounted
Value (as defined by such rating agency). For purposes of Moody's and S&P's
guidelines, the market value of any Municipal Obligation held by the Trust
shall be the market value thereof determined by the Pricing Service (as defined
below), except where the Trust is unable to obtain such information from the
Pricing Service, in which case the market value of any Municipal Obligation
held by the Trust shall be the lower of two dealer bid prices (one of which
must be in writing) for such securities as reported as of close of business on
the business day immediately preceding the Valuation Date by any two dealers
making a market in such securities which are members of the National
Association of Securities Dealers, Inc. In the event that the Trust is unable
to obtain the market value of any Municipal Obligation from the Pricing Service
and the Trust is unable to obtain any such dealer bids on any Municipal
Obligation as stated above, the market value of such Municipal Obligation shall
be deemed to be zero for purposes of calculating the Discounted Value of its
portfolio. The Moody's and S&P guidelines do not impose any limitations on the
percentage of Trust assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Trust's portfolio.
For so long as the ARPS are rated by Moody's, the Investment Manager,
in managing the Trust's portfolio, will not alter the composition of the
Trust's portfolio if the Investment Manager knows that the effect of any such
alteration would be to cause the Trust to have Moody's Eligible Assets with an
aggregate Discounted Value, as of the immediately preceding Valuation Date,
less than the ARPS Basic Maintenance Amount as of such Valuation Date. In
addition, in the event that, as of the immediately preceding Valuation Date,
the aggregate Discounted Value of the Trust's Moody's Eligible Assets exceeded
the ARPS Basic Maintenance Amount by five percent or less, the Investment
Manager will not alter the composition of the Trust's portfolio in a manner
that the Investment Manager knows will reduce the aggregate Discounted Value of
the Trust's Moody's Eligible Assets unless the Trust shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of the
Trust's Moody's Eligible Assets would exceed the ARPS Basic Maintenance Amount.
Upon any failure to maintain the required Discounted Value, the Trust
will seek to alter the composition of its portfolio to maintain S&P Eligible
Assets with an aggregate Discounted Value and Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the ARPS Basic Maintenance
Amount on or prior to the ARPS Basic Maintenance Cure Date, thereby incurring
additional transaction costs and possible losses and/or gains on dispositions
of portfolio securities. To the extent any such failure is not cured in a
timely manner, the ARPS will be subject to redemption. See "Description of
ARPS--Asset Maintenance" and "Description of ARPS--Redemption." The ARPS Basic
Maintenance Amount includes the sum of (i) the aggregate liquidation value of
ARPS then outstanding and (ii) certain accrued and projected payment
obligations of the Trust. See "Description of ARPS--Asset Maintenance."
The Trust may, but is not required to, adopt any modifications to these
guidelines that may hereafter be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the ARPS may, at any time, change or withdraw any
such rating. As set forth in the Certificate, the Trustees may, without
shareholder approval, modify certain definitions or restrictions which have
been adopted by the Trust pursuant to the rating agency guidelines, provided
the Board of Trustees has obtained written confirmation from Moody's and S&P
that any such change would not impair the ratings then assigned by Moody's and
S&P to the ARPS.
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S&P AAA Rating Guidelines. For purposes of calculating the Discounted
Value of the Trust's portfolio under current S&P guidelines, the fair market
value of Municipal Obligations eligible for consideration under such guidelines
must be discounted by certain discount factors set forth in the table below
("S&P Discount Factors"). S&P Eligible Assets are cash, Receivables for
Municipal Obligations Sold or a Municipal Obligation that meets the
requirements set forth below. The Discounted Value of a Municipal Obligation
under S&P guidelines is the fair market value thereof set forth below divided
by the S&P Discount Factor (but shall never exceed the par value of such
Municipal Obligation). The S&P Discount Factor used to discount a particular
Municipal Obligation will be determined by reference to (a) the S&P Exposure
Period and (b)(i) the S&Por Moody's rating on such Municipal Obligation, (ii)
in the event the Municipal Obligation is insured under a Secondary Market
Insurance policy which guarantees the timely payment of interest on such
Municipal Obligation and principal thereof to maturity, the S&P claims-paying
ability of the issuer of the insurance policy or (iii) in the event the
Municipal Obligation is insured under a Portfolio Insurance policy and the
terms of the policy permit the Trust, at its option, to obtain Permanent
Insurance guaranteeing timely payment of interest on such Municipal Obligation
and the principal thereof to maturity, the S&P insurance claims-paying ability
of the issuer of the policy. S&P Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
S&P DISCOUNT FACTORS
RATING CATEGORY
---------------------------------
EXPOSURE PERIOD AAA AA A BBB
--------------- ---- --- --- ---
<S> <C> <C> <C> <C>
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 ARPS Basic Maintenance cure period currently applicable to
the Trust is seven Business Days, the S&P Discount Factors currently applicable
to S&P Eligible Assets (as hereinafter defined) will be determined by reference
to the factors set forth opposite the Exposure Period Line entitled "7 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+ and mature or have a demand feature exercisable in 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 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 short-term
Municipal Obligations rated by Moody's but not rated by S&P 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. "Receivables for Municipal
Obligations Sold," for purposes of calculating S&P Eligible Assets as of any
Valuation Date, means the book value of receivables for Municipal Obligations
sold as of or prior to such Valuation Date if such receivables are due within
five Business Days of such Valuation Date. 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 and Grant Anticipation Notes (GANs) and Bond Anticipation Notes
(BANs) rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Municipal Obligations. "Anticipation Notes" shall
mean the following Municipal Obligations: Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RANs) and Tax and Revenue Anticipation Notes
(TRANs).
S&P Eligible Assets are cash, Receivables for Municipal Obligations
Sold or a Municipal Obligation that meets the requirements set forth below. 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 must:
(a) Be interest bearing and pay interest at least semi-annually;
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(b) Be payable in U.S. dollars;
(c) Be publicly rated BBB or higher by S&P or, if not rated by S&P but
rated by 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 the S&P Eligible Assets. For purposes of
determining the S&P Discount Factors applicable to such Moody's-rated Municipal
Obligations, any such Municipal Obligations will be deemed to have an S&P
rating which is one full rating category lower than its Moody's rating;
(d) Not be subject to a covered call option written by the Trust;
(e) Not be private placements; and
(f) Be part of an issue with an original issue size of at least $20
million or, if of an issue with an original issue size below $20 million but in
no event lower than $10 million, be issued by an issuer with a total of at
least $50 million of issues outstanding.
(2) Solely for the purposes of determining S&P Eligible Assets, the
term "Municipal Obligations" means any obligation the interest on which is
exempt from regular federal income taxation and which is issued by any of the
50 states of the United States, the District of Columbia or any of the
territories of the United States, 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:
(3) 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 the S&P Eligible Assets, provided that 2% is
added to the applicable Discount Factor for every 1% by which the fair market
value of such Municipal Obligations exceeds 5% of the aggregate fair market
value of the S&P Eligible Assets;
(4) Municipal Obligations issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent the fair
market value of such Municipal Obligations does not exceed 20% of the aggregate
fair market value of the S&P Eligible Assets; and
(5) A security which underlies a repurchase agreement will be
considered an S&P Eligible Asset only if (a) it is a U.S. Treasury security and
(b) the term of the repurchase agreement is less than one year.
Moody's "aaa" Rating Guidelines. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Moody's guidelines, the
fair market value of Municipal Obligations eligible for consideration under
such guidelines must be discounted by certain discount factors set forth in the
table below ("Moody's Discount Factors"). The Discounted Value of a Municipal
Obligation under Moody's guidelines is 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 (a) the
Moody's Exposure Period and (b)(i) the Moody's rating (or the S&P rating where
no Moody's rating is available) on such asset, (ii) in the event the Moody's
Eligible Asset is insured under a Portfolio Insurance policy and the terms of
the policy permit the Trust, at its option, to obtain Permanent Insurance
guaranteeing the timely payment of interest on such Municipal Obligation and
principal thereof to maturity, the Moody's insurance claims-paying ability
rating of the issuer of the policy or (iii) in the event the Moody's Eligible
Asset is insured under a Secondary Market Insurance policy which guarantees the
timely payment of interest on such Municipal Obligation and principal thereof
to maturity, the Moody's insurance claims-paying ability rating of the issuer
of the insurance policy (provided that for purposes of clauses (ii) and (iii)
if the insurance claims-paying ability of an issuer of an insurance policy is
not rated by Moody's but is rated by S&P, such issuer shall be deemed to have a
Moody's insurance claims-paying
32
<PAGE>
ability rating which is one full category lower than the S&P insurance claims-
paying ability rating). Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
MOODY'S DISCOUNT FACTORS
RATING CATEGORY
------------------------------------------------------------------------
EXPOSURE PERIOD Aaa* Aa* A* Baa* OTHER** VMIG 1*** SP-1+***
- - - --------------- ---- ---- ---- ---- ------- -------- --------
<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
<FN>
- - - ----------
* Moody's Rating
** Municipal Obligations not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
*** Municipal Obligations rated MIG 1 or VMIG 1 or, if not rated by Moody's, rated SP-1+ by S&P which do not mature or have a
demand feature at par exercisable within the Moody's Exposure Period and which do not have a long-term rating. For the
purposes of the definition of Moody's Eligible Assets, these securities will have an assumed rating of "A" by Moody's.
</TABLE>
Since the number of days used in calculating the dividend component of
the ARPS Basic Maintenance Amount currently is 49 days, the Moody's Discount
Factors currently applicable to Moody's Eligible Assets (as hereinafter
defined) will be determined by reference to the factors set forth opposite the
Exposure Period line entitled "7 weeks or less." However, in the event a
Moody's Discount Factor applicable to a Moody's Eligible Asset is determined by
reference to an insurance claims-paying ability rating in accordance with
clause b(ii) or b(iii) of the foregoing paragraph, such Moody's Discount Factor
shall 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
which is one category lower than 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 P-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% if such Municipal
Obligations are not rated by Moody's but are rated A-1+ or SP-1+ or 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 Receivables for Municipal Obligations Sold. "Receivables for Municipal
Obligations Sold," for purposes of calculating Moody's Eligible Assets (as
hereinafter defined) as of any Valuation Date, means no more than the aggregate
of the following: (i) the book value of Receivables for Municipal Obligations
Sold as of or prior to such Valuation Date if such receivables are due within
five Business Days of such Valuation Date, and if the trades which generated
such receivables are (x) settled through clearing house firms with respect to
which the Trust has received prior written authorization from Moody's or (y)
with counterparties having a Moody's long-term debt rating of at least Baa3;
and (ii) the Moody's Discounted Value of Municipal Obligations Sold as of or
prior to such Valuation Date which generated receivables, if such receivables
are due within five Business Days of such Valuation Date but do not comply with
either of conditions (x) or (y) of the preceding clause (i).
Moody's Eligible Assets are cash, Receivables for Municipal Obligations
Sold or a Municipal Obligation that meets the requirements set forth below.
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, do not have suspended ratings and are part of an issue of
municipal obligations of at least $10,000,000. For purposes of determining the
Moody's Discount Factors applicable to such S&P-rated Municipal Obligations,
any such Municipal Obligation (excluding short-term Municipal Obligations) will
be deemed to have a Moody's rating which is one full rating category lower than
its S&P rating.
When the Trust sells a Municipal Obligation and agrees to repurchase it
at a future date, the Discounted Value of such Municipal Obligation will
constitute a Moody's Eligible Asset and the amount the Trust is required to pay
upon repurchase of such Municipal Obligations will count as a liability for
purposes of calculating the ARPS Basic Maintenance Amount. When the Trust
purchases a Municipal
33
<PAGE>
Obligation and agrees to sell it at a future date to another party, cash
receivable by the Trust thereby will constitute a Moody's Eligible Asset if the
long-term debt of such other party is rated at least A-2 by Moody's and such
agreement has a term of 30 days or less; otherwise the Discounted Value of such
Municipal Obligation will constitute a Moody's Eligible Asset.
The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets (excluding cash), as set forth in the table below:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM MAXIMUM
ISSUE SIZE UNDERLYING STATE OR TERRITORY
RATING ($ MILLIONS) OBLIGOR (%)(1)(2) CONCENTRATION (%) (1)
- - - ------ ----------- -------------- ------------------
<S> <C> <C> <C>
Aaa............... 10 100 100
Aa................ 10 20 60
A................. 10 10 40
Baa............... 10 6 20
Other(3).......... 10 4 12
<FN>
- - - ----------
(1) The referenced percentages represent maximum cumulative totals for the
related ratings category and each lower rating category.
(2) For purposes of defining Maximum Underlying Obligor, any obligation backed
by the guarantee, letter of credit or insurance issued by a third party
will be deemed to be issued by such third party if the issuance of such
third party credit is the sole determinant of the rating of such
obligation.
(3) Municipal Obligations not rated by Moody's but rated BBB-, BBB or BBB+ by
S&P.
</TABLE>
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset if (1) it is irrevocably deposited by the Trust for the
payment of the expenses described in (a)(i) through (a)(vi) under the
definition herein of ARPS Basic Maintenance Amount, (2) it is held in a margin
account or if it is subject to any material lien, mortgage, pledge, security
interest or security agreement of any kind (collectively, "Liens"), except for
(a) Liens to secure payment for services rendered or cash advanced to the Trust
by the Investment Manager, the Auction Agent or any Broker-Dealer and (b) any
Lien by virtue of a repurchase agreement or (3) it is held for the purchase of
a security pursuant to a Forward Commitment in accordance with the terms and
limitations set forth in the Trust's Certificate.
For so long as the ARPS are rated by S&P or Moody's, the Trust will
not, unless it has received written confirmation from S&P and/or Moody's, as
the case may be, that such action would not impair the ratings then assigned to
the ARPS by S&P and/or Moody's, as the case may be: (1) borrow money, except
for a term of 60 days or less and on terms that prohibit automatic renewal and
as long as the ARPS Basic Maintenance Amount is satisfied after giving effect
to such borrowing; (2) engage in short sales of securities; (3) enter into
reverse repurchase agreements; (4) overdraw on any of its bank accounts; (5)
lend portfolio securities; or (6) issue parity shares or securities senior to
the ARPS. The Trust may engage in any transaction not prohibited by the terms
of this Prospectus, the Trust's Certificate or any applicable law, including,
but not limited to, the entering into of repurchase agreements.
34
<PAGE>
INVESTMENT RESTRICTIONS
===============================================================================
The investment restrictions listed below have been adopted by the Trust
as fundamental policies, which may not be changed without the vote of a
majority, as defined in the 1940 Act, of the outstanding voting securities of
the Trust (Common Shares and Preferred Shares voting together as a single class
and Preferred Shares voting as a separate class). For purposes of the
restrictions: (a) an "issuer" of a security is the entity whose assets and
revenues are committed to the payment of interest and principal on that
particular security; (b) a "taxable security" is any security the interest on
which is subject to federal income tax (which does not include "private
activity bonds" subject to the alternative minimum tax discussed under
"Taxation"); and (c) all percentage limitations apply immediately after a
purchase or initial investment, and any subsequent change in any applicable
percentage resulting from market fluctuations or other changes in the amount of
total or net assets does not require elimination of any security from the
portfolio.
The Trust may not:
1. As to 75% of its total assets, invest more than 5% of the value of
its total assets in the securities of any one issuer. This limitation shall not
apply to obligations issued or guaranteed by the U.S. Government, its agencies
or instrumentalities or to the investment of 25% of the Trust's total assets.
2. Purchase more than 10% of all outstanding taxable debt securities of
any one issuer (other than obligations issued, or guaranteed as to principal
and interest, by the U.S. Government, its agencies or instrumentalities).
3. Invest 25% or more of the value of its total assets in securities of
issuers in any one industry; provided, however, that such limitations shall not
be applicable to Municipal Obligations issued by governments or political
subdivisions of governments, and obligations issued or guaranteed by the United
States Government, its agencies or instrumentalities. In addition, the Trust
reserves the right to invest 25% or more of its assets in any of the following
types of Municipal Obligations, provided that the percentage of the Trust's
total assets in private activity bonds in any one category does not exceed 25%
of the Trust's total assets: health facility obligations, housing obligations,
single family mortgage revenue bonds, industrial revenue obligations (including
pollution control obligations), electric utility obligations, airport facility
revenue obligations, water and sewer obligations, university and college
revenue obligations, bridge authority and toll road obligations and resource
recovery obligations. A discussion of certain risks associated with investing
in such obligations is set forth in Appendix C.
4. Invest more than 5% of the value of its total assets in taxable
securities of issuers having a record, together with predecessors, of less than
three years of continuous operation. This restriction shall not apply to any
obligation of the United States Government, its agencies or instrumentalities.
5. Invest in common stock.
6. Invest in securities of any issuer, other than securities of the
Trust, if, to the knowledge of the Trust, any officer or trustee of the Trust
or any officer or director of the Investment Manager owns more than 1/2 of 1%
of the outstanding securities of such issuer, and such officers, trustees and
directors who own more than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of such issuer.
7. Purchase or sell real estate or interests therein, although it may
purchase securities secured by real estate or interests therein. This shall not
prohibit the Trust from purchasing, holding and selling real estate acquired as
a result of the ownership of such securities.
8. Purchase or sell commodities except that the Trust may purchase or
sell financial futures contracts and related options thereon.
9. Purchase oil, gas or other mineral leases, rights or royalty
contracts, or exploration or development programs.
35
<PAGE>
10. Write, purchase or sell puts, calls, or combinations thereof,
except for options on futures contracts or options on debt securities or on
indices.
11. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets or, by purchase in the open market of securities of closed-end
investment companies where no underwriter's or dealer's commission or profit,
other than customary broker's commissions, is involved and only if immediately
thereafter not more than (i) 5% of the Trust's total assets taken at market
value would be invested in any one such company; and (ii) 10% of the Trust's
total assets taken at market value would be invested in such securities.
12. Borrow money, except that the Trust may borrow from a bank for
temporary or emergency purposes or for repurchase of its shares provided that
immediately after such borrowing the amount borrowed does not exceed 33 1/3% of
the value of its total assets (including the amount borrowed) less its
liabilities (not including any borrowings but including the aggregate amount at
the time of computation of any senior securities which are outstanding at the
time, including the Preferred Shares).
13. Pledge its assets or assign or otherwise encumber them except to
secure borrowings effected within the limitations set forth in Investment
Restriction 12. However, for the purpose of this Restriction, collateral
arrangements with respect to the writing of options and collateral arrangements
with respect to initial margin for futures are not deemed to be pledges of
assets.
14. Issue senior securities as defined in the 1940 Act, other than
preferred shares of beneficial interest (in accordance with the terms of the
Prospectus and the 1940 Act), except insofar as the Trust may be deemed to have
issued a senior security by reason of: (a) entering into any repurchase
agreement; (b) purchasing any securities on a when-issued or delayed delivery
basis; (c) purchasing or selling any financial futures contracts; (d) borrowing
money in accordance with restrictions described above; or (e) lending portfolio
securities.
15. Make loans of money or securities, except: (a) by the purchase of
debt obligations in which the Trust may invest consistent with its investment
objective and policies; (b) by investment in repurchase agreements (provided
that no more than 10% of the Trust's total assets will be invested in
repurchase agreements that do not mature within seven days); and (c) by lending
its portfolio securities (provided that the Trust may not lend its portfolio
securities in excess of 10% of its total assets).
16. Make short sales of securities.
17. Purchase securities on margin, except for such short-term loans as
are necessary for the clearance of purchases of portfolio securities.
18. Engage in the underwriting of securities, except insofar as the
Trust may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
19. Invest for the purpose of exercising control or management of any
other issuer.
TRUSTEES AND OFFICERS
===============================================================================
The Trustees and Executive Officers of the Trust and their principal
occupations for at least the last five years and their affiliations, if any,
with InterCapital and with the Dean Witter Funds and with the investment
companies to which TCW Funds Management, Inc. serves as investment adviser and
Dean Witter Services Company Inc. serves as manager (the "TCW/DW Funds") are
set forth below, with those Trustees who are "interested persons" of the Trust
(as defined in the Act) indicated by an asterisk.
36
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- - - ----------------------------- ---------------------------------------------
<S> <C>
Jack F. Bennett.............. Retired; Director or Trustee of the Dean Witter
Trustee Funds; formerly Senior Vice President and Director
141 Taconic Road of Exxon Corporation (1975-January, 1989) and Under
Greenwich, Connecticut Secretary of the U.S. Treasury for Monetary Affairs
(1974-1975); director of Philips Electronics N.V.,
Tandem Computers Inc. and Massachusetts Mutual Life
Insurance Co.; Director or trustee of various
not-for-profit and business organizations.
Charles A. Fiumefreddo*...... Chairman, Chief Executive Officer and Director
Chairman of the Board, of InterCapital and Dean Witter Distributors Inc.;
President, Chief Executive Executive Vice President and Director of DWR;
Officer and Trustee Chairman, Director or Trustee, President and Chief
Two World Trade Center Executive Officer of the Dean Witter Funds;
New York, New York Chairman, Chief Executive Officer and Trustee of
the TCW/DW Funds; Chairman and Chief Executive
Officer of Dean Witter Services Company Inc.;
Chairman and Director of Dean Witter Trust Company;
Director and/or officer of various DWDC
subsidiaries; formerly Executive Vice President and
Director of DWDC (until February, 1993).
Edwin J. Garn................ Director or Trustee of the Dean Witter Funds;
Trustee formerly United States Senator (R-Utah) (1974-1992)
2000 Eagle Gate Tower and Chairman, Senate Banking Committee (1980-1986);
Salt Lake City, Utah formerly Mayor of Salt Lake City, Utah (1971-1974);
formerly Astronaut, Space Shuttle Discovery (April
12-19, 1985); Vice Chairman, Huntsman Chemical
Corporation (since January, 1993); member of the
board of various civic and charitable organizations.
John R. Haire................ Chairman of the Audit Committee and Chairman of the
Trustee Committee of the Independent Directors or Trustees
439 East 51st Street and Director or Trustee of the Dean Witter Funds;
New York, New York Trustee of the TCW/DW Funds; formerly President,
Council for Aid to Education (1978-October, 1989),
Chairman and Chief Executive Officer of Anchor
Corporation, an Investment Adviser (1964-1978);
Director of Washington National Corporation
(insurance) and Bowne & Co., Inc. (printing).
Dr. John E. Jeuck............ Retired; Director or Trustee of the Dean Witter
Trustee Funds; formerly Robert Law professor of Business
70 East Cedar Street Administration, Graduate School of Business,
Chicago, Illinois University of Chicago (until July, 1989); Business
consultant.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- - - ----------------------------- ---------------------------------------------
<S> <C>
Dr. Manuel H. Johnson........ Senior Partner, Johnson Smick International, Inc.,
Trustee a consulting firm; Koch Professor of International
7521 Old Dominion Drive Economics and Director of the Center for Global
MacLean, Virginia Market Studies at George Mason University (since
September, 1990); Director or Trustee of the Dean
Witter Funds; Trustee of the TCW/DW Funds;
Co-Chairman and a founder of the Group of Seven
Council (G7C), an international economic commission
(since September, 1990); Director of Greenwich
Capital Markets, Inc. (broker-dealer); formerly
Vice Chairman of the Board of Governors of the
Federal Reserve System (February, 1986-August, 1990)
and Assistant Secretary of the U.S. Treasury (1982-1986).
Paul Kolton.................. Director or Trustee of the Dean Witter Funds;
Trustee Chairman of the Audit Committee and Chairman of the
Nine Hunting Ridge Road Committee of the Independent Trustees and Trustee
Stamford, Connecticut of the TCW/DW Funds; formerly Chairman of the
Financial Accounting Standards Advisory Council and
Chairman and Chief Executive Officer of the American
Stock Exchange; Director of UCC Investors Holding
Inc. (Uniroyal Chemical Company Inc.); Director or
trustee of various not-for-profit organizations.
Michael E. Nugent............ General Partner, Triumph Capital, L.P., a private
Trustee investment partnership (since April, 1988); Director
237 Park Avenue or Trustee of the Dean Witter Funds; Trustee of the
New York, New York TCW/DW Funds; formerly Vice President, Bankers
Trust Company and BT Capital Corporation (September,
1984-March, 1988); Director of various business
organizations.
Albert T. Sommers............ Senior Fellow and Economic Counselor (formerly
Trustee Senior Vice President and Chief Economist) of the
845 Third Avenue Conference Board, a non-profit business research
New York, New York organization; President, Albert T. Sommers, Inc.,
an economic consulting firm; Director or Trustee
of the Dean Witter Funds; formerly Chairman, Price
Advisory Committee of the Council on Wage and Price
Stability (December, 1979-December, 1980); Economic
Adviser, The Ford Foundation; Director of Grow
Group, Inc. (chemicals), MSI, Inc. (medical
services) and Westbridge Capital Inc. (insurance).
Edward R. Telling*........... Retired; Director or Trustee of the Dean Witter
Trustee Funds; formerly Chairman of the Board of Directors
Sears Tower and Chief Executive Officer (until December, 1985)
Chicago, Illinois and President (from January, 1981-March, 1982 and
from February, 1984-August, 1984) of Sears,
Roebuck and Co.; formerly Director of Sears Roebuck
and Co.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- - - ----------------------------- ---------------------------------------------
<S> <C>
Sheldon Curtis............... Senior Vice President, Secretary and General
Vice President, Secretary Counsel of InterCapital; Senior Vice President,
and General Counsel Secretary and General Counsel of Dean Witter
Two World Trade Center Services Company Inc.; Assistant Secretary and
New York, New York Assistant General Counsel of Dean Witter
Distributors Inc.; Senior Vice President and
Secretary of DWTC (since October, 1989);
Assistant Secretary of DWR and DWDC and Vice
President, Secretary and General Counsel of
the Dean Witter Funds and the TCW/DW Funds.
James F. Willison............ Senior Vice President of InterCapital; Vice
Vice President President of various Dean Witter Funds.
Two World Trade Center
New York, New York
Thomas F. Caloia............. First Vice President (since May, 1991) of
Treasurer InterCapital and Treasurer of the Dean Witter
Two World Trade Center Funds; Treasurer of the TCW/DW Funds; First Vice
New York, New York President and Assistant Treasurer of Dean Witter
Services Company Inc.; previously Vice
President of InterCapital.
<FN>
- - - ----------
* Denotes Trustees who are "interested persons" of the Trust, as defined in the 1940 Act.
</TABLE>
In addition, Robert M. Scanlan, President and Chief Operating Officer
of InterCapital, and David A. Hughey and Edmund C. Puckhaber, Executive Vice
Presidents of InterCapital, are Vice Presidents of the Trust and Peter M.
Avelar and Jonathan Page, Senior Vice Presidents of InterCapital, and Katherine
H. Stromberg and Joseph Arcieri, Vice Presidents of InterCapital, are Vice
Presidents of the Trust, and Barry Fink, First Vice President and Assistant
General Counsel of InterCapital, and Marilyn K. Cranney, Lawrence S. Lafer, Lou
Anne D. McInnis and Ruth Rossi, Vice Presidents and Assistant General Counsels
of InterCapital, are Assistant Secretaries of the Trust.
All Trustees will be subject to election by the shareholders at the
first meeting of shareholders. Following the first meeting of shareholders, the
Board of Trustees of the Trust will be divided into three classes, each class
having a term of three years (after an initial phase-in). Each year the term of
one class of the Board of Trustees will expire, and the shareholders, at each
annual meeting of shareholders or special meeting in lieu thereof called for
that purpose, will elect Trustees to replace the Trustees who are members of
the class the term of which expired at such meeting. The Trust's shareholders
(Common Shareholders and Preferred Shareholders voting together as a single
class) have the right to elect eight Trustees. At all times, two Trustees shall
have been elected by the Preferred Shareholders, voting as a separate class.
See "Description of Shares." Messrs. Haire and Fiumefreddo have been designated
as Trustees for the Preferred Shareholders subject to election at the first
meeting of shareholders after issuance of the ARPS.
The Trust pays each Trustee who is not an employee or a retired
employee of the Investment Manager or an affiliated company an annual fee of
$1,200 plus $50 for each meeting of the Board of Trustees, the Audit Committee
or the Committee of Independent Trustees attended by the Trustee in person (the
Trust pays the Chairman of the Audit Committee an additional annual fee of
$1,000, and pays the Chairman of the Committee of the Independent Trustees an
additional annual fee of $2,400, in each case inclusive of the Committee
meeting fees). The Trust also reimburses such Trustees for travel and other
out-of-pocket expenses incurred by them in connection with attending such
meetings. Trustees and officers of the Trust who are or have been employed by
the Investment Manager or an affiliated
39
<PAGE>
company, or are retired from such employment, receive no compensation or
expense reimbursement from the Trust.
INVESTMENT MANAGEMENT AGREEMENT
===============================================================================
The Trust has retained Dean Witter InterCapital Inc. (the "Investment
Manager" or "InterCapital") to provide administrative services, manage its
business affairs and manage the Trust's assets, including the placing of orders
for the purchase and sale of portfolio securities, pursuant to an Investment
Management Agreement (the "Management Agreement").
The Investment Manager obtains and evaluates such information and
advice relating to the economy, securities markets, and specific securities as
it considers necessary or useful to continuously manage the assets of the Trust
in a manner consistent with its investment objective and policies. The Trust's
Board of Trustees reviews the various services provided by the Investment
Manager to ensure that the Trust's general investment policies and programs are
being properly carried out and that administrative services are being provided
to the Trust in a satisfactory manner.
Under the terms of the Management Agreement, in addition to managing
the Trust's investments, the Investment Manager maintains certain of the
Trust's books and records and furnishes, at its own expense, such office space,
facilities, equipment, clerical help, bookkeeping and certain legal services as
the Trust may reasonably require in the conduct of its business, including the
preparation of proxy statements and reports required to be filed with federal
and state securities commissions (except insofar as the participation or
assistance of independent accountants and attorneys is, in the opinion of the
Investment Manager, necessary or desirable). In addition, the Investment
Manager pays the salaries of all personnel, including officers of the Trust,
who are employees of the Investment Manager. The Investment Manager also bears
the cost of telephone service, heat, light, power and other utilities provided
to the Trust. InterCapital has retained Dean Witter Services Company Inc., a
wholly-owned subsidiary of InterCapital, to perform the aforementioned
administrative services for the Trust.
Expenses not expressly assumed by the Investment Manager under the
Management Agreement will be paid by the Trust. The expenses borne by the Trust
include, but are not limited to: charges and expenses of any registrar,
custodian, stock transfer and dividend disbursing agent; brokerage commissions;
taxes; engraving and printing of share certificates; registration costs of the
Trust and its shares under federal and state securities laws; the costs of
issuing and the ongoing expenses of the Preferred Shares; all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
proxy statements and reports to shareholders; fees and travel expenses of
Trustees or members of any advisory board or committee who are not employees or
retired employees of the Investment Manager or any corporate affiliate of
either; all expenses incident to any dividend or distribution program; charges
and expenses of any outside service used for pricing of the Trust's portfolio
securities; fees and expenses of legal counsel, including counsel to the
Trustees who are not interested persons of the Trust or of the Investment
Manager (not including compensation or expenses of attorneys who are employees
of the Investment Manager) and independent accountants; membership dues of
industry associations; interest on Trust borrowings; fees and expenses incident
to the listing of the Trust's shares on any stock exchange; postage; insurance
premiums on property or personnel (including officers and trustees) of the
Trust which inure to its benefit; extraordinary expenses (including, but not
limited to, legal claims and liabilities and litigation costs and any
indemnification relating thereto); and all other costs of the Trust's
operation.
As full compensation for the services furnished to the Trust, the Trust
pays the Investment Manager monthly compensation calculated weekly by applying
the annual rate of 0.35% to the Trust's average weekly net assets. For purposes
of calculating the management fee, the liquidation preference of the ARPS will
not be deducted from the Trust's total assets.
The Management Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Trust or
any of its shareholders for any act or omission by the Investment Manager or
for any losses sustained by the Trust or its shareholders. The Management
Agreement in no way restricts the Investment Manager from acting as investment
manager or adviser to others.
40
<PAGE>
The Management Agreement was initially approved by the Trustees on
December 2, 1993 and by the Investment Manager as the sole shareholder on
February , 1994. The Management Agreement may be terminated at any time,
without penalty, on thirty days' notice by the Trustees of the Trust, by the
holders of a majority, as defined in the 1940 Act, of the outstanding shares of
the Trust (Common Shares and Preferred Shares voting together as a single
class), or by the Investment Manager. The Management Agreement will
automatically terminate in the event of its assignment (as defined in the 1940
Act and the Rules thereunder).
Under its terms, the Management Agreement will continue in effect until
April 30, 1995, and from year to year thereafter, provided continuance of the
Management Agreement is approved at least annually by the vote of the holders
of a majority, as defined in the 1940 Act, of the outstanding voting securities
of the Trust (Common Shares and Preferred Shares voting together as a single
class), or by the Trustees of the Trust, provided that in either event such
continuance is approved annually by the vote of a majority of the Trustees of
the Trust who are not parties to the Management Agreement or "interested
persons" (as defined in the 1940 Act) of any such party (the "Independent
Trustees"), which vote must be cast in person at a meeting called for the
purpose of voting on such approval.
PORTFOLIO TRANSACTIONS AND BROKERAGE
===============================================================================
Subject to the general supervision of the Board of Trustees, the
Investment Manager is responsible for decisions to buy and sell securities and
futures contracts for the Trust, the selection of brokers and dealers to effect
the transactions, and the negotiation of brokerage commissions, if any. The
Trust expects that the primary market for the securities in which it intends to
invest will generally be the over-the-counter market. Securities are generally
traded in the over-the-counter market on a "net" basis with dealers acting as
principal for their own accounts without charging a stated commission, although
the price of the security usually includes a profit to the dealer. Options and
futures transactions will usually be effected through a broker and a commission
will be charged. The Trust also expects that securities will be purchased at
times in underwritten offerings, where the price includes a fixed amount of
compensation, generally referred to as the underwriter's concession or
discount. On occasion, the Trust may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid.
The Investment Manager currently serves as investment manager to a
number of clients and may in the future act as investment manager or adviser to
others. It is the practice of the Investment Manager to cause purchase and sale
transactions to be allocated among the Trust and other investment companies or
other accounts whose assets it manages or advises in such manner as it deems
equitable. This allocation could adversely affect the size or price of the
position purchased or sold. In making such allocations among the Trust and
other client accounts, the main factors considered are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the opinions of the persons
responsible for managing the portfolios of the Trust and other client accounts.
The policy of the Trust regarding purchases and sales of securities and
futures contracts for its portfolio is that primary consideration will be given
to obtaining the most favorable prices and efficient execution of transactions.
In seeking to implement the Trust's policies, the Investment Manager will
effect transactions with those brokers and dealers who the Investment Manager
believes provide the most favorable prices and who are capable of providing
efficient executions. If the Investment Manager believes such price and
execution are obtainable from more than one broker or dealer, it may give
consideration to placing portfolio transactions with those brokers and dealers
who also furnish research and other services to the Trust or the Investment
Manager. Such services may include, but are not limited to, any one or more of
the following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
wire services; and appraisals or evaluations of portfolio securities. The Trust
will not purchase at a higher price or sell at a lower price in connection with
transactions effected with a dealer, acting as principal, who furnishes
research services to the Trust than would be the case if no weight were given
by the Trust to the dealer's furnishing of such services.
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The information and services received by the Investment Manager from
brokers and dealers may be of benefit to the Investment Manager and its
affiliates in the management of other accounts and may not in all cases benefit
the Trust directly. While the receipt of such information and services is
useful in varying degrees and would generally reduce the amount of research or
services otherwise performed by the Investment Manager and thus reduce its
expenses, it is of indeterminable value and the advisory fee paid to the
Investment Manager is not reduced by any amount that may be attributable to the
value of such services.
Pursuant to an order of the Securities and Exchange Commission, the
Trust may effect principal transactions in certain money market instruments
with DWR. The Trust will limit its transactions with DWR to U.S. Government and
U.S. Government agency securities, bank money market instruments (i.e.,
certificates of deposit and bankers' acceptances) and commercial paper (not
including tax-exempt municipal paper). Such transactions will be effected with
DWR only when the price available from DWR is better than that available from
other dealers.
Consistent with the policy described above, brokerage transactions in
securities and futures contracts listed on exchanges or admitted to unlisted
trading privileges may be effected through DWR. In order for DWR to effect
portfolio transactions for the Trust, the commissions, fees or other
remuneration received by DWR must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection
with comparable transactions involving similar securities being purchased or
sold on an exchange during a comparable period of time. This standard would
allow DWR to receive no more than the remuneration which would be expected to
be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees of the Trust, including a majority of
the Independent Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to DWR are
consistent with the foregoing standard.
Section 11(a) of the Securities Exchange Act of 1934 which generally
prohibits members of United States national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts which
they manage, permits such exchange members to execute such securities
transactions on an exchange only if the affiliate or account expressly
consents. To the extent Section 11(a) would apply to DWR acting as a broker for
the Trust in any of its portfolio transactions executed on any such securities
exchange of which DWR is a member, appropriate written consents have been
given.
DETERMINATION OF NET ASSET VALUE
===============================================================================
The net asset value per share of the Trust's Common Shares is
determined as of 4:00 P.M., New York City time, on the last day of each week on
which the New York Stock Exchange is open for trading by taking the value of
all assets of the Trust, subtracting its liabilities (including for these
purposes the liquidation value of the ARPS), dividing by the number of Common
Shares outstanding and adjusting to the nearest cent.
In the calculation of the Trust's net asset value: (1) a portfolio
security listed or traded on the New York or American Stock Exchange is valued
at its last sale price on that exchange (if there were no sales that day, the
security is valued at the closing bid price); (2) all other portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest bid price; and (3) when market quotations are not
readily available, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Trust's Board of Trustees (valuation of securities for which
market quotations are not readily available may be based upon current market
prices of securities which are comparable in coupon, rating and maturity or an
appropriate matrix utilizing similar factors).
Portfolio securities for which market quotations are not readily
available (other than short-term debt securities and futures and options) are
valued for the Trust by an outside independent pricing service approved by the
Board of Trustees (the "Pricing Service"). The Pricing Service has informed the
Trust that in valuing the Trust's portfolio securities it uses both a
computerized grid matrix of tax-exempt
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<PAGE>
securities and evaluations by its staff, in each case based on information
concerning market transactions and quotations from dealers which reflect the
bid side of the market each day. The Trust's portfolio securities are thus
valued by reference to a combination of transactions and quotations for the
same or other securities believed to be comparable in quality, coupon,
maturity, type of issue, call provisions, trading characteristics and other
features deemed to be relevant. The Trustees believe that timely and reliable
market quotations are generally not readily available to the Trust for purposes
of valuing tax-exempt securities and that the valuations supplied by the
Pricing Service, using the procedures outlined above and subject to periodic
review, are more likely to approximate the fair value of such securities. The
Investment Manager will periodically review and evaluate the procedures,
methods and quality of services provided by the Pricing Service then being used
by the Trust and may, from time to time, recommend to the Trustees the use of
other pricing services or discontinuance of the use of any pricing service in
whole or in part. The Trustees may determine to approve such recommendation or
to make other provisions for pricing of the Trust's portfolio securities.
Short-term taxable debt securities with remaining maturities of 60 days
or less at time of purchase are valued at amortized cost, unless the Trustees
determine such does not reflect the securities' fair value, in which case these
securities will be valued at their market value as determined by the Trustees.
Other short-term taxable debt securities will be valued on a marked-to-market
basis until such time as they reach a remaining maturity of 60 days, whereupon
they will be valued at amortized cost using their value on the 61st day unless
the Trustees determine such does not reflect the securities' fair value, in
which case the securities will be valued at their fair value as determined by
the Trustees. Listed options are valued at the latest sale price on the
exchange on which they are listed unless no sales of such options have taken
place that day, in which case they will be valued at the mean between their
latest bid and asked prices. Unlisted options are valued at the mean between
their latest bid and asked prices. Futures are valued based on the latest sale
price as of the close of the commodities exchange on which they trade unless
the Trustees determine that such price does not reflect their fair value, in
which case they will be valued at their fair market value as determined by the
Trustees. All other securities and other assets are valued at their fair value
as determined in good faith under procedures established by and under the
supervision of the Trustees.
DESCRIPTION OF ARPS
===============================================================================
Certain of the capitalized terms used herein are defined in the
Glossary that appears at the back of this Prospectus.
The ARPS of each series will be Preferred Shares of the Trust that
entitle their holders to receive dividends when, as and if declared by the
Board of Trustees, out of Available Funds, at a rate per annum that may vary
for the successive Dividend Periods for each such series. In general, the
Applicable Rate for a particular Dividend Period will be determined by an
Auction conducted on the day before the start of such Dividend Period. Existing
Holders and Potential Holders of the ARPS may participate in Auctions therefor,
although, if such Auctions relate to a Short Term Dividend Period of 7 days,
Existing Holders desiring to continue to hold all of their ARPS regardless of
the Applicable Rate resulting from Auctions need not participate. In the case
of Auctions relating to a Short Term Dividend Period of 14 days or more or any
Long Term Dividend Period, if an Order or Orders covering all of the
Outstanding ARPS held by an 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. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"Description of ARPS--The Auction."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of a series of ARPS will be represented by a
single certificate registered in the name of the nominee of the Securities
Depository (initially expected to be Cede & Co.), and no person acquiring ARPS
will be entitled to receive a certificate representing such shares. See
Appendix E (Auction Procedures). As a result, the nominee of the Securities
Depository is expected to be the sole holder of record of the ARPS.
Accordingly, each purchaser of ARPS must rely on (i) the procedures of the
Securities Depository and, if
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<PAGE>
such purchaser is not a member of the Securities Depository, such purchaser's
Agent Member, to receive dividends, distributions and notices and to exercise
voting rights (if and when applicable) and (ii) the records of the Securities
Depository and, if such purchaser is not a member of the Securities Depository,
such purchaser's Agent Member, to evidence its beneficial ownership of ARPS.
When issued and sold, the ARPS will have a liquidation preference of
$50,000 per share plus applicable redemption premium, if any, plus an amount
equal to accumulated but unpaid dividends thereon (whether or not earned or
declared) and will be fully paid and non-assessable. Holders of ARPS receiving
a liquidating distribution will be entitled to receive Gross-up Dividends, if
any. See "Description of ARPS--Dividends--Gross-up Dividends." The ARPS will
not be convertible into Common Shares or other capital shares of the Trust and
the holders thereof will have no preemptive rights. The ARPS will not be
subject to any sinking fund but will be subject to redemption at the option of
the Trust on any Dividend Payment Date with respect thereto (subject to certain
conditions including in some cases waiver of such option by the Board of
Trustees and payment of a redemption premium) and, under certain circumstances,
will be subject to mandatory redemption by the Trust on a date fixed by the
Board of Trustees, in each case at the redemption price stated herein. See
"Description of ARPS--Redemption."
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, Bankers Trust Company will be the transfer
agent, registrar, dividend disbursing agent and redemption agent for the ARPS.
The Auction Agent, however, will serve merely as the agent of the Trust, acting
in accordance with the Trust's instructions, and will not be responsible for
any evaluation or verification of any matters certified to it.
Except in an Auction, the Trust will have the right (to the extent
permitted by applicable law, the Declaration of Trust and the Certificate) to
purchase or otherwise acquire any of the ARPS, so long as the Trust is current
in the payment of dividends on the ARPS and on any other capital stock of the
Trust ranking on a parity with the ARPS with respect to the payment of
dividends or upon liquidation. Any of the ARPS redeemed, purchased or otherwise
acquired by the Trust may, pursuant to an effective Registration Statement
under the Securities Act of 1933, be reissued in accordance with the
Certificate, subject to applicable provisions of the 1940 Act.
The following is a brief description of the terms of the ARPS. This
description does not purport to be complete and is subject to and qualified in
its entirety by reference to the Trust's Declaration of Trust and the
Certificate including the provisions thereof establishing the Series ARPS,
the Series ARPS, the Series ARPS, the Series ARPS and the Series
ARPS, respectively. The Trust's Declaration of Trust and Certificate
establishing the terms of the ARPS are filed as exhibits to the Registration
Statement of which this Prospectus is a part.
THE AUCTION
General. Holders of the ARPS of any series will be entitled to receive
cumulative cash dividends on their shares when, as and if declared by the Board
of Trustees of the Trust or a duly authorized committee thereof, out of
Available Funds, on each Dividend Payment Date with respect to the Dividend
Period then ending at the rate per annum equal to the Applicable Rate for each
such Dividend Period.
The provisions of the Certificate establishing the terms of the ARPS
offered hereby provide that the Applicable Rate for each series of ARPS for
each Dividend Period after the Initial Dividend Period therefor will be equal
to the rate per annum that the Auction Agent advises has resulted on the
Business Day preceding the first day of such Dividend Period due to
implementation of the auction procedures set forth in the Certificate (the
"Auction Procedures"), in which persons determine to hold or offer to purchase
or sell shares of a series of ARPS. The Auction Procedures are attached as
Appendix E to this Prospectus. Each periodic operation of such procedures with
respect to ARPS is hereinafter referred to as an "Auction." If, however, the
Trust should fail to pay or duly provide for the full amount of any dividend on
the ARPS of any series offered hereby or the redemption price of ARPS of any
series offered hereby called for redemption, the Applicable Rate for such ARPS
will be determined as set forth under "Description of ARPS--Dividends--
Determination of Dividend Rate." Also, the Trust may pay an Additional Dividend
as set forth under "Description of ARPS--Dividends--Additional Dividends."
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Auction Agent Agreement. The Trust will enter into an agreement (the
"Auction Agent Agreement") with Bankers Trust Company (together with any
successor bank or trust company or other entity entering into a similar
agreement with the Trust, the "Auction Agent"), which provides, among other
things, that the Auction Agent will follow the Auction Procedures for the
purpose of determining the Applicable Rates for each series of ARPS. The Trust
will pay the Auction Agent compensation for its services under the Auction
Agent Agreement.
The Auction Agent will act as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made by it in the performance of its duties under the Auction
Agent Agreement, and will not be liable for any error of judgment made in good
faith unless the Auction Agent shall have been negligent in ascertaining (or
failing to ascertain) the pertinent facts. Pursuant to the Auction Agent
Agreement, the Trust is required to indemnify the Auction Agent for, and hold
it harmless against, any loss, liability or expense incurred by the Auction
Agent without negligence or bad faith on its part arising out of or in
connection with the performance of its duties under such agreement and the
Broker-Dealer Agreements (referred to below), including reasonable attorneys'
fees and other costs incurred.
The Auction Agent may terminate the Auction Agent Agreement upon prior
notice to the Trust, on the date specified in such notice which shall be no
earlier than 100 days following the delivery of such notice. If the Auction
Agent resigns, the Trust will use its best efforts to enter into an agreement
with a successor Auction Agent containing substantially the same terms and
conditions as the Auction Agent Agreement. The Trust may terminate the Auction
Agent Agreement at any time upon notice to the Auction Agent, provided that
prior to such termination the Trust shall have entered into an agreement in
substantially the form of the Auction Agent Agreement with respect thereto with
a successor Auction Agent. In the event that there is no Auction Agent on the
Business Day prior to the first day of a Dividend Period with respect to any
series of ARPS, such Dividend Period for such ARPS shall automatically be a 7-
Day Dividend Period and the dividend rate shall be equal to the Maximum
Applicable Rate.
Broker-Dealer Agreements. The Auctions require the participation of one
or more broker-dealers. The Auction Agent will enter into an agreement with
Dean Witter Reynolds Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and may enter into similar agreements (collectively, the "Broker-
Dealer Agreements") with one or more other broker-dealers (collectively, the
"Broker-Dealers") selected by the Trust which provide for the participation of
such Broker-Dealers in Auctions. Dean Witter InterCapital Inc., a subsidiary of
Dean Witter Reynolds Inc., is the Investment Manager. A Broker-Dealer Agreement
may be terminated by the Auction Agent or a Broker-Dealer on five days' notice
to the other party provided that the Broker-Dealer Agreement with Dean Witter
Reynolds Inc. may not be terminated without the prior written consent of the
Trust, which consent may not be unreasonably withheld.
Securities Depository. The Depository Trust Company initially will act
as Securities Depository for the Agent Members with respect to each series of
ARPS. One registered certificate for all of the Series ARPS, one registered
certificate for all of the Series ARPS, one registered certificate for all
of the Series ARPS, one registered certificate for all of the Series ARPS
and one registered certificate for all of the Series ARPS initially will be
registered in the name of Cede & Co., as nominee of the Securities Depository.
Each certificate will bear a legend to the effect that such certificate is
issued subject to the provisions restricting transfers of the series to which
it relates contained in the Certificate. Cede & Co. initially will be the
holder of record of all the ARPS, and Beneficial Owners will not be entitled to
receive certificates representing their ownership interest in such shares. See
Appendix E (Auction Procedures). The Securities Depository will maintain lists
of its participants and will maintain the positions (ownership interests) of
ARPS held by each Agent Member, whether as the Beneficial Owner thereof for its
own account or as a nominee for the Beneficial Owner thereof. Payments made by
the Trust to holders of ARPS will be duly made by making payments to the
nominee of the Securities Depository.
AUCTION PROCEDURES
The following is a brief summary of the procedures to be used in
conducting Auctions. Separate Auctions will be conducted for each series of
ARPS. Accordingly, as used in the following brief summary,
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<PAGE>
unless the context otherwise requires, ARPS means the series of ARPS subject to
the related Auction and "Beneficial Owners," "Potential Beneficial Owners,"
"Existing Holders" and "Potential Holders" mean Beneficial Owners of such
series, Potential Beneficial Owners of such series, Existing Holders of such
series and Potential Holders of such series, respectively. This summary is
qualified by reference to the Auction Procedures set forth in Appendix E
hereto. The settlement procedures to be used with respect to Auctions are set
forth in Appendix F hereto.
Auction Date. An Auction to determine the Applicable Rate for each
series of ARPS offered hereby for each Dividend Period (other than the Initial
Dividend Period therefor) will be held on the first Business Day (as
hereinafter defined) preceding the first day of such Dividend Period, normally
a in the case of Series ARPS, Series ARPS and Series ARPS, a in
the case of Series ARPS and a in the case of Series ARPS (the date of
each Auction for each series being referred to herein as an "Auction Date").
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close. As discussed under
"Dividends" below, the Trust reserves the option, subject to certain
conditions, to modify the Dividend Period for each series of ARPS. The Auction
Date and the first day of the related Dividend Period (both of which must be
Business Days) need not be consecutive calendar days. For example, in the case
of Series ARPS, if the that normally would be an Auction Date is not a
Business Day, then such Auction Date will be the immediately preceding and
the first day of the related Dividend Period will continue to be the
immediately following the Auction Date. See "Description of ARPS--Dividends"
for information concerning the circumstances under which the Auction Date or
the first day of a Dividend Period, or both, may be moved to a date other than
such and , respectively.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to the Submission Deadline (defined
below) on each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer a:
(i) Hold Order--indicating the number of outstanding ARPS that such
Beneficial Owner desires to continue to hold without regard to the
Applicable Rate for the next Dividend Period for such shares;
(ii) Bid--indicating the number of outstanding ARPS that such
Beneficial Owner desires to continue to hold, provided that the
Applicable Rate for the next Dividend Period for such shares is not
less than the rate per annum then specified by such Beneficial Owner;
and/or
(iii) Sell Order--indicating the number of outstanding ARPS that
such Beneficial Owner offers to sell without regard to the Applicable
Rate for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of ARPS to determine whether such Potential Beneficial Owners desire to
submit Bids indicating the number of ARPS which they offer to purchase
providing that the Applicable Rate for the next Dividend Period for such shares
is not less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner
to a Broker-Dealer and the communication by a Broker-Dealer, whether or not
acting for its own account, to the Auction Agent of the foregoing information
is hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by
a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by
a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
In an Auction, an Existing Holder may submit different types of Orders
with respect to ARPS then held by such Existing Holder, as well as Bids for
additional ARPS. For information concerning the priority given to different
types of Orders placed by Existing Holders, see "Submission of Orders by
Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate on any Auction Date will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent. The
Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
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The Applicable Percentage varies with the lower of the credit rating or
ratings assigned by Moody's and S&P (or if Moody's or S&P or both shall not
make such rating available, the equivalent of either or both of such ratings by
a Substitute Rating Agency or two Substitute Rating Agencies or, in the event
that only one such rating shall be available, such rating) to the ARPS on each
Auction Date as follows:
<TABLE>
<CAPTION>
CREDIT RATINGS APPLICABLE
-------------------------- PERCENTAGE OF
MOODY'S S&P REFERENCE RATE
------- --- --------------
<C> <C> <S>
"aa3" or higher AA- or higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
Below "baa3" Below BBB- 220%
</TABLE>
The Trust will take all reasonable action necessary to enable S&P and
Moody's to provide a rating for the ARPS. If either S&P or Moody's shall not
make such a rating available, or neither S&P nor Moody's shall make such a
rating available, Dean Witter Reynolds Inc. or its affiliate or successor,
after consultation with the Trust, will select a nationally recognized
statistical rating organization (a "Substitute Rating Agency") or two
nationally recognized statistical rating organizations ("Substitute Rating
Agencies") to act as a substitute rating agency or substitute rating agencies,
as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than
the Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer may also hold ARPS in its own account as a Beneficial
Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on behalf of both itself
and its customers. Any Order placed with the Auction Agent by a Broker-Dealer
as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be
treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect to any ARPS
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of ARPS held by it, as described in the next paragraph.
Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder or
a Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented. For information concerning the priority given
to different types of Orders placed by Existing Holders, see "Submission of
Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an Auction
will be settled on the Business Day next succeeding the Auction Date at a price
per share equal to $50,000. See "Notification of Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding
ARPS held by a Beneficial Owner are not submitted to the Auction Agent prior to
the Submission Deadline, the Auction Agent shall deem a Hold Order (in the case
of an Auction relating to a Short Term Dividend Period of 7 days) and a Sell
Order (in the case of an Auction relating to a Short Term Dividend Period of 14
days or more or any Long Term Dividend Period) to have been submitted on behalf
of such Beneficial Owner covering the number of outstanding ARPS held by such
Beneficial Owner and not subject to Orders submitted to the Auction Agent.
If all of the outstanding ARPS are subject to Submitted Hold Orders,
the Dividend Period next succeeding the Auction shall automatically be the same
Dividend Period as that Dividend Period immedi-
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<PAGE>
ately preceding the Auction and the Applicable Rate will be 59% of the
Reference Rate on the date of the Auction with respect to such Dividend Period.
For the purposes of an Auction, ARPS for which the Trust shall have
given notice of redemption and deposited moneys therefor with the Auction Agent
in trust, as set forth under "Description of ARPS-- Redemption," will not be
considered as outstanding and will not be included in such Auction.
Submission of Orders by Broker-Dealers to Auction Agent. Prior to 1:00
P.M., New York City time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing
Holder or Potential Holder in respect of the ARPS subject to such Orders. Any
Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its
Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the
Submission Deadline on any Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (0.001) of one percent.
If one or more Orders are submitted to the Auction Agent on behalf of
an Existing Holder and such Orders cover in the aggregate more than the number
of ARPS held by such Existing Holder, such Orders will be considered valid in
the following order of priority:
(i) any Hold Order submitted on behalf of such Existing Holder will be
considered valid up to and including the number of outstanding ARPS held by
such Existing Holder, provided that if more than one Hold Order is submitted on
behalf of such Existing Holder and the number of ARPS subject to such Hold
Orders exceeds the number of outstanding ARPS held by such Existing Holder, the
number of ARPS subject to each of such Hold Orders will be reduced pro rata so
that such Hold Orders in the aggregate will cover exactly the number of
outstanding ARPS held by such Existing Holder;
(ii) any Bids submitted on behalf of such Existing Holder will be
considered valid, in the ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of such Existing Holder, up to and
including the excess of the number of outstanding ARPS held by such Existing
Holder over the number of ARPS subject to any Hold Order referred to in clause
(i) above (and if more than one Bid submitted on behalf of such Existing Holder
specifies the same rate per annum and together they cover more than the
remaining number of shares that can be the subject of valid Bids after
application of clause (i) above and of the foregoing portion of this clause
(ii) to any Bid or Bids specifying a lower rate or rates per annum, the number
of shares subject to each of such Bids will be reduced pro rata so that such
Bids, in the aggregate, cover exactly such remaining number of shares); and the
number of shares, if any, subject to Bids not valid under this clause (ii)
shall be treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding ARPS held by such Existing Holder over the
number of ARPS subject to Hold Orders referred to in clause (i) above and valid
Bids by such Existing Holder referred to in clause (ii) above; provided that if
more than one Sell Order is submitted on behalf of any Existing Holder and the
number of ARPS subject to such Sell Orders is greater than such excess, the
number of ARPS subject to each of such Sell Orders will be reduced pro rata so
that such Sell Orders, in the aggregate, will cover exactly the number of ARPS
equal to such excess.
If more than one Bid is submitted on behalf of any Potential Holder,
each Bid submitted will be a separate Bid with the rate per annum and number of
ARPS specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. Not earlier than the Submission Deadline for each Auction, the
Auction Agent will assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted
or deemed submitted by a Broker-Dealer being hereinafter referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
total number of outstanding ARPS over the number of outstanding ARPS subject to
Submitted Hold Orders (such excess being referred to as the "Available ARPS")
and whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding ARPS that are
the subject of Submitted Bids by Potential Holders with rates per annum not
higher than the Maximum Applicable Rate equals or exceeds the number of
outstanding
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ARPS that are the subject of Submitted Sell Orders (including the number of
shares subject to Bids by Existing Holders specifying rates per annum higher
than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being
at least equal to the Available ARPS. If Sufficient Clearing Bids have been
made, the Winning Bid Rate will be the Applicable Rate for the next Dividend
Period for all ARPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because all
outstanding ARPS are the subject of Submitted Hold Orders), the Dividend Period
next following the Auction will automatically be a 7-Day Dividend Period and
the Applicable Rate for the next Dividend Period for the ARPS will be equal to
the Maximum Applicable Rate. If Sufficient Clearing Bids have not been made,
Beneficial Owners that have Submitted Sell Orders will not be able to sell in
the Auction all, and may not be able to sell any, ARPS subject to such
Submitted Sell Orders. See "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares."
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in
the order of priority set forth in the Auction Procedures with the result that
Existing Holders and Potential Holders of ARPS will sell, continue to hold
and/or purchase ARPS as set forth below. Existing Holders that submit or are
deemed to have submitted Hold Orders will continue to hold the ARPS subject to
such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Winning Bid Rate or a Submitted Sell Order will be
required to sell the outstanding ARPS subject to such Submitted Bid or
Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will continue to hold the outstanding
ARPS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will purchase the number of ARPS
subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will continue to hold the outstanding
ARPS subject to such Submitted Bid, unless the number of outstanding ARPS
subject to all Submitted Bids of Existing Holders is greater than the excess of
the Available ARPS over the number of ARPS accounted for in clauses (b) and (c)
above, in which event each Existing Holder with such a Submitted Bid will sell
a number of outstanding ARPS determined on a pro rata basis based on the number
of outstanding ARPS subject to all such Submitted Bids by such Existing
Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will purchase any Available ARPS not
accounted for in clauses (b), (c) or (d) above on a pro rata basis based on the
outstanding ARPS subject to all such Submitted Bids of Potential Holders that
specified rates per annum equal to the Winning Bid Rate.
If Sufficient Clearing Bids have not been made (other than because all
the outstanding ARPS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will continue to
hold the outstanding ARPS subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will be required
to purchase the number of ARPS subject to such Submitted Bid; and
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(c) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Maximum Applicable Rate will be required to sell a
number of outstanding ARPS determined on a pro rata basis based on the
outstanding ARPS subject to all such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of an ARPS on any Auction Date,
the Auction Agent will, in such manner as, in its sole discretion, it shall
determine, round up or down the number of ARPS being sold or purchased on such
Auction Date so that each outstanding ARPS sold or purchased by each Existing
Holder or Potential Holder will be a whole ARPS. If any Potential Holder would
be entitled or required to purchase less than a whole ARPS, the Auction Agent
will, in such manner as, in its sole discretion, it shall determine, allocate
ARPS for purchase among Potential Holders so that only whole ARPS are purchased
by any such Potential Holder, even if such allocation results in one or more of
such Potential Holders not purchasing any ARPS on such Auction Date.
Notification of Results; Settlement. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction on behalf of a
Bidder whether such Bid or Sell Order was accepted or rejected in whole or in
part and of the Applicable Rate for the next Dividend Period for the related
ARPS by telephone at approximately 3:00 P.M., New York City time, on such
Auction Date. Each such Broker-Dealer will then advise such Bidder whether such
Bid or Sell Order was accepted or rejected, will confirm purchases and sales
with each Bidder purchasing or selling ARPS as a result of the Auction and will
advise each Bidder purchasing or selling ARPS to give instructions to its Agent
Member of the Securities Depository to pay the purchase price against delivery
of such shares or to deliver such shares against payment therefor as
appropriate. If an Existing Holder selling ARPS as a result of an Auction shall
fail to instruct its Agent Member to deliver such shares, the Broker-Dealer
that submitted such Existing Holder's Bid or Sell Order will instruct such
Agent Member to deliver such shares against payment therefor. Each Broker-
Dealer that submitted a Hold Order in an Auction on behalf of an Existing
Holder will also advise such Existing Holder of the Applicable Rate for the
next Dividend Period for the ARPS. The Auction Agent will record each transfer
of ARPS on the record book of Existing Holders to be maintained by the Auction
Agent.
In accordance with the Securities Depository's normal procedures, on
the Business Day after each Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited as necessary to effect the purchases and sales of ARPS as determined
in such Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their
Agent Members; the Securities Depository will make payment in accordance with
its normal procedures, which now provide for payment in same-day funds. If the
certificate for ARPS is not held by the Securities Depository or its nominee,
payment will be made in same-day funds to the Auction Agent against delivery of
such certificate.
If any Existing Holder selling ARPS in an Auction fails to deliver such
shares, the Broker-Dealer of any person that was to have purchased ARPS in such
Auction may deliver to such person a number of whole shares that is less than
the number of shares that otherwise was to be purchased by such person. In such
event, the number of ARPS to be so delivered will be determined by such Broker-
Dealer. Delivery of such lesser number of shares will constitute good delivery.
Each Broker-Dealer Agreement will also provide that neither the Trust nor the
Auction Agent will have responsibility or liability with respect to the failure
of a Potential Beneficial Owner, Beneficial Owner, Potential Holder, Existing
Holder or their respective Agent Members to deliver ARPS or to pay for ARPS
purchased or sold pursuant to an Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from
funds provided by the Trust to each Broker-Dealer on the basis of the purchase
price of the ARPS of each series placed by such Broker-Dealer at such Auction.
The service charge (i) for any Short Term Dividend Period of 28 days or less
shall be payable at the annual rate of 0.25% of the purchase price of ARPS
placed by such Broker-
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Dealer in any such Auction and (ii) for any Short Term Dividend Period of more
than 28 days and for any Long Term Dividend Period shall be determined by
mutual consent of the Trust and any such Broker-Dealer or Broker-Dealers and
shall be based upon a selling concession that would be applicable to an
underwriting of fixed or variable rate preferred shares with a similar final
maturity or variable rate dividend period, respectively, at the commencement of
the Dividend Period with respect to such Auction. ARPS will be deemed to be
placed by a Broker-Dealer if such shares were (i) the subject of Hold Orders
deemed to have been made by Beneficial Owners that were acquired by such
Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold such
shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit
Orders in Auctions of any series of ARPS for its own account, unless the Trust
notifies all Broker-Dealers that they may no longer do so, provided that
Broker-Dealers may continue to submit Hold Orders and Sell Orders. If a Broker-
Dealer submits an Order for its own account in any Auction of ARPS, it may have
knowledge of Orders placed through it in that Auction and therefore have an
advantage over other Bidders; such Broker-Dealer would not have knowledge of
Orders submitted by other Broker-Dealers in that Auction. The Auction Agent may
not purchase and/or hold ARPS while acting in the capacity of Auction Agent.
The Broker-Dealers may maintain a secondary trading market in the ARPS
outside of Auctions; however, they have no obligation to do so and there can be
no assurance that a secondary market for the ARPS will develop or, if it does
develop, that it will provide holders with liquidity of investment. The ARPS
will not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotation system. No assurance can be given that
an investor will be able to sell ARPS between Auctions at a price equal to
$50,000 per share.
DIVIDENDS
General. The holders of ARPS will be entitled to receive, when, as and
if declared by the Board of Trustees of the Trust or by a duly authorized
committee thereof, out of Available Funds, cumulative cash dividends on their
shares, at the Applicable Rate (plus any Additional Dividends) determined as
set forth below under "Determination of Dividend Rate," payable on the
respective dates set forth below. Dividends on the ARPS so declared and payable
shall be paid in preference to and in priority over any dividends declared and
payable on the Common Shares. Pursuant to a ruling promulgated by the IRS, the
Trust must designate a portion of dividends paid on the ARPS as ordinary income
and/or capital gains if the Trust realizes ordinary income and/or capital
gains. See "Taxation." To the extent that such designations are made, and any
net capital gains or other taxable income is included in any dividend, the
Trust will pay in cash an Additional Dividend as discussed under "Description
of ARPS--Dividends--Additional Dividends." Also, each Dividend shall include an
uncertificated right (a "Right") to receive a Gross-up Dividend as discussed
under "Description of ARPS--Gross-up Dividends."
Dividends on the ARPS will accumulate from the date on which the Trust
originally issues the ARPS (the "Date of Original Issue") and will be payable
commencing on the First Initial Dividend Payment Date with respect to the
Series ARPS and Series ARPS, and on the Initial Dividend Payment Dates with
respect to the Series ARPS, Series ARPS and Series ARPS. After the First
Initial Dividend Payment Date, dividends on the Series ARPS and Series ARPS
during the Initial Dividend Period shall be payable on the first Business Day
of each calendar month during the Initial Dividend Period and on the Last
Initial Dividend Payment Date. Following the Last Initial Dividend Payment
Dates for the Series ARPS and Series ARPS and the Initial Dividend Payment
Dates for the Series ARPS, Series ARPS and Series ARPS, dividends on the
ARPS will be payable at the option of the Trust, either (i) with respect to any
Short Term Dividend Period of 35 days or less, on the day next succeeding the
last day thereof and (ii) with respect to any Short Term Dividend Period of
more than 35 days and with respect to any Long Term Dividend Period, monthly on
the first Business Day of each calendar month during such Short Term Dividend
Period or Long Term Dividend Period and on the day next succeeding the last day
thereof. In the case of clause (i) of the preceding sentence, if the day that
otherwise would be the Dividend Payment Date is not a Business Day, then (i)
the Dividend Payment Date shall be the first Business
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Day next succeeding such day that would otherwise be the Dividend Payment Date
if such day that would otherwise be the Dividend Payment Date is a Monday,
Tuesday, Wednesday or Thursday, or (ii) the Dividend Payment Date shall be the
first Business Day next preceding such day that would otherwise be the Dividend
Payment Date if such day that would otherwise be the Dividend Payment Date is a
Friday. If, however, in the case of clause (ii) in the preceding sentence, the
Securities Depository shall make available to its participants and members in
funds immediately available in New York City on Dividend Payment Dates, the
amount due as dividends on such Dividend Payment Dates (and the Securities
Depository shall have so advised the Trust), and if the day that otherwise
would be the Dividend Payment Date is not a Business Day, then the Dividend
Payment Date shall be the next succeeding Business Day. Each dividend payment
date as provided above is hereinafter referred to as a "Dividend Payment Date."
After the Initial Dividend Period, the length of each Subsequent Dividend
Period for each series of ARPS will be determined as discussed herein under
"Description of ARPS--Dividends--Notification of Dividend Period." If the Trust
does not specify the length of a Subsequent Dividend Period in accordance with
the procedures set forth herein, each Subsequent Dividend Period will be a 7-
Day Dividend Period. If for any reason a Dividend Payment Date cannot be fixed
as described above, then the Board of Trustees or a duly authorized committee
thereof shall fix the Dividend Payment Date.
Prior to each Dividend Payment Date, the Trust is required to deposit
with the Auction Agent sufficient funds for the payment of declared dividends.
The Trust does not intend to establish any reserves for the payment of
dividends.
Each dividend will be paid to the record holder of the ARPS, which
holder is expected to be the nominee of the Securities Depository, on the
Business Day preceding the Dividend Payment Date. See "Description of ARPS--The
Auction--Securities Depository." The Securities Depository will credit the
accounts of the Agent Members of the Beneficial Owners in accordance with the
Securities Depository's normal procedures which now provide for it to
distribute dividends in next-day funds to Agent Members, who in turn are
expected to distribute such dividend payments to the persons for whom they are
acting as agents in accordance with the instructions of such person. The Agent
Member of a Beneficial Owner will be responsible for holding or disbursing such
payments on the applicable Dividend Payment Date to such Beneficial Owner in
accordance with the instructions of such Beneficial Owner. Each of the initial
Broker-Dealers, however, has represented to the Trust that such Broker-Dealer
(or if such Broker-Dealer does not act as Agent Member, one of its affiliates)
will make such dividend payments available in same-day funds on each Dividend
Payment Date to customers that use such Broker-Dealer or affiliate as Agent
Member. A holder of ARPS that does not use one of the initial Broker-Dealers or
an affiliate thereof as its Agent Member should contact the Agent Member used
by such holder to determine whether such Agent Member will make dividend
payments available to such holder in next-day or same-day funds. If any Agent
Member does not make such dividends available in same-day funds to a holder,
such holder who uses such Agent Member would not have same-day funds available
to it until the next Business Day, which in the case of dividends payable on a
Friday, would be the following Monday if it is a Business Day. 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 nominee of the
Securities Depository. Any dividend payment made on the ARPS shall first be
credited against the earliest declared but unpaid dividends accumulated with
respect to such ARPS.
Holders of the ARPS will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of full cumulative dividends
except as described under "Determination of Dividend Rate." No interest will be
payable in respect of any dividend payment or payments on the ARPS which may be
in arrears.
The ARPS are non-participating preferred shares of beneficial interest
in that, after the payment of dividends to Holders of ARPS in accordance with
the Auction Procedures, the ARPS do not participate with the Common Shares of
the Trust in the Trust's income or gains.
Determination of Dividend Rate. The dividend rate on each series of
ARPS during the period from and including the Date of Original Issue to and
including the calendar day prior to the Last Initial Dividend Payment Dates for
Series ARPS and Series ARPS and the Initial Dividend Payment Dates for the
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Series ARPS, Series ARPS and Series ARPS (the "Initial Dividend Period")
will be the rate per annum set forth on the cover page hereof. Commencing on
the Last Initial Dividend Payment Dates for Series ARPS and Series ARPS and
the Initial Dividend Payment Dates for Series ARPS, Series ARPS and
Series ARPS, the Applicable Rate on the ARPS for each period commencing on a
Dividend Payment Date, including the Initial Dividend Payment Date and the Last
Initial Dividend Payment Date therefor, and ending on the calendar day prior to
the next Dividend Payment Date (or last Dividend Payment Date in a Dividend
Period if there is more than one Dividend Payment Date) (hereinafter referred
to as a "Subsequent Dividend Period," and the Initial Dividend Period or any
Subsequent Dividend Period being hereinafter referred to as a "Dividend
Period") will be the dividend rate per annum that results from the Auction
conducted with respect to such Dividend Period, as adjusted, by any Additional
Dividends, to the extent due. The amount of cash dividends per share payable on
any Dividend Payment Date in each series for each Short Term Dividend Period or
part thereof shall be computed by multiplying the Applicable Rate for such
Short Term Dividend Period by a fraction, the numerator of which will be the
number of days in such Short Term Dividend Period or part thereof that such
share was outstanding and for which dividends have not been paid and the
denominator of which will be 365, multiplying the amount so obtained by
$50,000, and rounding the amount so obtained to the nearest cent. During any
Long Term Dividend Period or part thereof, the amount of cash dividends per
share payable on any Dividend Payment Date in each series shall be computed by
multiplying the Applicable Rate for such Long Term Dividend Period by a
fraction, the numerator of which will be the number of days in such part of
such Long Term Dividend Period that such share was outstanding and for which
dividends have not been paid and the denominator of which will be 360,
multiplying the amount so obtained by $50,000, and rounding the amount so
obtained to the nearest cent. The Trust will pay an Additional Dividend in the
event that any net capital gains or net taxable income is included in the
dividend. See "Description of ARPS--Dividends--Additional Dividends."
Notification of Dividend Period. The Dividend Period with respect to
each series of ARPS may be a Short Term Dividend Period or a Long Term Dividend
Period, as described below. With regard to each Dividend Period that is a Short
Term Dividend Period, on or prior to the 15th day prior to an Auction Date for
ARPS, the Trust shall provide telephonic and written notice to the Auction
Agent, to the Securities Depository and to each Broker-Dealer of the number of
days, evenly divisible by 7, and not more than 364, in the Short Term Dividend
Period next succeeding such notice and the Broker-Dealers shall promptly inform
the holders of such ARPS of the length of such Short Term Dividend Period. The
Trust is required to give telephonic and written notice (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the second Business Day prior to the relevant Auction
Date if the Broker-Dealer(s) jointly advise the Trust that they have concluded
that it is advisable to give a Notice of Revocation. In making such
determination the Broker-Dealer(s) will consider (1) existing short-term and
long-term taxable and tax-exempt market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term taxable and tax-exempt securities, (3) existing yield curves for
short-term and long-term securities comparable to the ARPS, (4) industry and
financial conditions which may affect the ARPS, (5) the investment objective of
the Trust, and (6) the Dividend Periods and dividend rates at which current and
potential beneficial holders of the ARPS would remain or become beneficial
holders. If the Trust gives a Notice of Revocation with respect thereto, the
next succeeding Dividend Period will be a 7-Day Dividend Period for a series.
In addition, in the event the Trust has given a notice in accordance with this
paragraph with respect to the next succeeding Dividend Period for a series but
Sufficient Clearing Bids are not made in the applicable Auction or such Auction
is not held for any reason, such next succeeding Dividend Period will be a 7-
Day Dividend Period and the Trust may not again give such notice (and any such
attempted notice shall be null and void) until Sufficient Clearing Bids have
been made in an Auction with respect to a Short Term Dividend Period for that
series. Notwithstanding the foregoing, the Trust shall not give a notice for:
(i) a Short Term Dividend Period of greater than 28 days unless, at the time of
giving such a notice, the Trust would not, as a result of the commencement of a
Short Term Dividend Period of greater than 28 days, fail to comply with the
ARPS Basic Maintenance Amount; and (ii) a Short Term Dividend Period of greater
than 28 days unless the Trust has received written confirmation from Moody's
and S&P that such action would not adversely affect the Moody's and S&P
ratings, respectively, of the ARPS. Following a notice of
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a Short Term Dividend Period of greater than 28 days, the Trust will calculate
the Projected Dividend Amount using the Moody's Volatility Factor and S&P
Volatility Factor applicable to such Dividend Period of greater than 28 days.
With respect to each Dividend Period that is a Long Term Dividend
Period, on or prior to the 20th day but not more than 28 days prior to an
Auction Date, the Trust may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Long Term Dividend
Period") to the Auction Agent and to each Broker-Dealer, request that the next
succeeding Dividend Period for that series will be a Long Term Dividend Period
the length of which shall be specified in such Request for Long Term Dividend
Period, provided that for any Auction for a series occurring after the initial
Auction for that series, the Trust may not give a Request for Long Term
Dividend Period (and any such request shall be null and void) unless Sufficient
Clearing Bids were made in the last occurring Auction for that series and each
more recently occurring Auction, if any, for the other series or if full
cumulative dividends, and any amounts due with respect to mandatory
redemptions, for each series of ARPS payable prior to such date have not been
paid in full. Upon receiving such Request for Long Term Dividend Period, the
Broker-Dealer(s) shall jointly determine whether, given the factors set forth
below, it is advisable that the Trust issue a Notice of Long Term Dividend
Period for the series of ARPS as contemplated by such Request for Long Term
Dividend Period and, if so, the Mandatory Redemption Price and the Optional
Redemption Price of the ARPS during such Long Term Dividend Period, the times
during such Long Term Dividend Period that optional redemptions of the ARPS
will be permitted and the Maximum Applicable Rate for such Long Term Dividend
Period, and shall give the Trust and the Auction Agent written notice (a
"Response") of such determination by no later than the 16th day prior to such
Auction Date. In making such determination the Broker-Dealer(s) will consider
the factors set forth in the previous paragraph. If the Broker-Dealer(s) shall
not give the Trust and the Auction Agent a Response by such 16th day or if the
Response states that given the factors set forth above it is not advisable that
the Trust give a Notice of Long Term Dividend Period for the shares of such
series, the Trust may not give a Notice of Long Term Dividend Period in respect
of such Request for Long Term Dividend Period. In the event the Response
indicates that it is advisable that the Trust give a Notice of Long Term
Dividend Period for the shares of such series, the Trust will by no later than
the 15th day prior to such Auction Date give a notice (a "Notice of Long Term
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer which notice will specify (i) the duration of the Long Term
Dividend Period, (ii) the Mandatory Redemption Price and Optional Redemption
Price of the ARPS during such Long Term Dividend Period as specified in the
related Response, (iii) the Maximum Applicable Rate for such Long Term Dividend
Period as specified in the related Response and (iv) the times during such Long
Term Dividend Period that the optional redemption of the ARPS will be permitted
as specified in the related Response. The Trust shall also provide a copy of
such Notice to Moody's and S&P. The Trust is required to give telephonic and
written notice (a "Notice of Revocation of a Long Term Dividend Period") to the
Auction Agent, each Broker-Dealer, and the Securities Depository on or prior to
the second Business Day prior to the relevant Auction Date if (x) either the
1940 Act ARPS Coverage or the ARPS Basic Maintenance Amount is not satisfied on
each of the two Valuation Dates immediately preceding the related Auction Date
on an actual basis and on a pro forma basis giving effect to the proposed Long
Term Dividend Period, (y) sufficient funds for the payment of dividends payable
on the immediately succeeding Dividend Payment Date have not been irrevocably
deposited with the Auction Agent by the close of business on the third Business
Day preceding the related Auction Date or (z) the Broker-Dealer(s) jointly
advise the Trust that after consideration of the factors listed above they have
concluded that it is advisable to give a Notice of Revocation of a Long Term
Dividend Period. If the Trust gives a Notice of Revocation of a Long Term
Dividend Period with respect thereto, the next succeeding Dividend Period will
be a 7-Day Dividend Period. In addition, in the event the Trust has given a
Notice of Long Term Dividend Period with respect to the next succeeding
Dividend Period but Sufficient Clearing Bids are not made in the applicable
Auction or such Auction is not held for any reason, such next succeeding
Dividend Period will be a 7-Day Dividend Period and the Trust may not again
give a Notice of Long Term Dividend Period (and any such attempted notice shall
be null and void) until Sufficient Clearing Bids have been made in an Auction
with respect to a Short Term Dividend Period for that series.
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If the Trust does not specify the length of a Subsequent Dividend
Period in accordance with the procedures set forth above, each Subsequent
Dividend Period will be a 7-Day Dividend Period.
Non-Payment Period; Late Charge. A Non-Payment Period will commence on
and include the day on which the Trust fails to (i) declare, prior to the close
of business on the second Business Day preceding any Dividend Payment Date for
ARPS, for payment on or (to the extent permitted as described below) within
three Business Days after such Dividend Payment Date to the persons who held
such ARPS as of 12:00 noon, New York City time, on the Business Day preceding
such Dividend Payment Date, the full amount of any dividend on such ARPS
payable on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in
same-day funds, with the Auction Agent by 12:00 noon, New York City time, (A)
on or (to the extent permitted as described below) within three Business Days
after any Dividend Payment Date for ARPS the full amount of any cash dividend
on such shares (if declared) payable on such Dividend Payment Date or (B) on or
(to the extent permitted as described below) within three Business Days after
any redemption date for ARPS called for redemption, the Mandatory Redemption
Price per share of such ARPS or, in the case of Optional Redemption, the
Optional Redemption Price per share of such ARPS. Such Non-Payment Period will
consist of the period commencing on and including the aforementioned Dividend
Payment Date or redemption date, as the case may be, and ending on and
including the Business Day on which, by 12:00 noon, New York City time, all
unpaid cash dividends and unpaid redemption prices shall have been so deposited
or shall have otherwise been made available to the applicable holders in same-
day funds; provided that a Non-Payment Period for any series of ARPS will not
end unless the Trust shall have given at least five days', but no more than 30
days', written notice to the Auction Agent, the Securities Depository and all
holders of ARPS of such series. The Applicable Rate for such Dividend Period
for ARPS of any series, commencing during a Non-Payment Period, will be equal
to the Non-Payment Period Rate; and each Dividend Period for ARPS of any
series, commencing after the first day of, and during, a Non-Payment Period
shall be a 7-Day Dividend Period. Any dividend on ARPS due on any Dividend
Payment Date for such shares (if, prior to the close of business on the second
Business Day preceding such Dividend Payment Date, the Trust has declared such
dividend payable on or within three Business Days after such Dividend Payment
Date to the persons who held such shares as of 12:00 noon, New York City time,
on the Business Day preceding such Dividend Payment Date) or redemption price
with respect to such ARPS not paid to such persons when due may (if such non-
payment is not solely due to the willful failure of the Trust) be paid to such
persons in the same form of funds by 12:00 noon, New York City time, on any of
the first three Business Days after such Dividend Payment Date or due date, as
the case may be, provided that such amount is accompanied by a late charge
calculated for such period of non-payment at the Non-Payment Period Rate
applied to the amount of such non-payment based on the actual number of days
comprising such period divided by 365. For the purposes of the foregoing,
payment to a person in same-day funds on any Business Day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day. The
Non-Payment Period Rate will initially be (i) 220% of the higher of the
applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of
the Short-Term Municipal Bond Rate in the case of any Short Term Dividend
Period having 28 or fewer days, (ii) 220% of the applicable "AA" Composite
Commercial Paper Rate in the case of any Short Term Dividend Period having 35
or more but fewer than 189 days, (iii) 220% of the applicable U.S. Treasury
Bill Rate in the case of any Short Term Dividend Period having 189 or more, but
fewer than 365 days, and (iv) 220% of the applicable U.S. Treasury Note Rate in
the case of any Long Term Dividend Period, provided that the Board of Trustees
of the Trust shall have the authority to adjust, modify, alter or change from
time to time the initial Non-Payment Period Rate if the Board of Trustees of
the Trust determines, and Moody's, S&P and any Substitute Rating Agencies
advise the Trust in writing, that such adjustment, modification, alteration or
change will not adversely affect their then-current ratings on the ARPS.
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Trust may not declare dividends or make other distributions on Common Shares or
purchase any such shares if, at the time of the declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage
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(as defined in the 1940 Act) with respect to the outstanding ARPS and shares of
other series of Preferred Shares, if any, would be less than 200% (or such
other percentage as may in the future be required by law). The Trust estimates
that, based on the composition of its portfolio as of , 1994, (and
after giving effect to the exercise of the Common Shares Over-Allotment
Option,) asset coverage with respect to the ARPS would be approximately %
immediately after the issuance of the ARPS offered hereby. There are currently
no other series of Preferred Shares outstanding. Under the Code, the Trust
must, among other things, distribute at least 90% of the sum of its investment
company taxable income plus net tax-exempt income each year in order to
maintain its qualification for tax treatment as a regulated investment company.
The foregoing limitations on dividends, distributions and purchases may under
certain circumstances impair the Trust's ability to maintain such
qualification. See "Taxation."
Upon any failure to pay dividends on the ARPS for two years or more,
the holders of the ARPS will acquire certain additional voting rights. See
"Voting Rights." Such rights shall be the exclusive remedy of the holders of
ARPS upon any failure to pay dividends on shares of the Trust.
For so long as any of the ARPS are outstanding, the Trust will 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 Shares or other shares of
beneficial interest, if any, ranking junior to ARPS as to dividends or upon
liquidation) in respect of Common Shares or any other shares of beneficial
interest of the Trust ranking junior to or on a parity with the ARPS as to
dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or any other such junior
shares (except by conversion into or exchange for Shares of the Trust ranking
junior to ARPS as to dividends and upon liquidation) or any other such parity
shares (except by conversion into or exchange for Shares of the Trust ranking
junior to or on a parity with ARPS as to dividends and upon liquidation),
unless, for so long as S&P or Moody's, as the case may be, is rating the ARPS
(A) immediately after such transaction, the Trust shall have S&P Eligible
Assets with an aggregate Discounted Value and Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the ARPS Basic Maintenance
Amount and the Trust shall maintain the 1940 Act ARPS Asset Coverage (see
"Asset Maintenance" and "Redemption" below), (B) full cumulative dividends on
the ARPS and due on or prior to the date of the transaction have been declared
and paid or shall have been declared and sufficient funds for the payment
thereof deposited with the Auction Agent, (C) any Gross-up Dividend required to
be paid on or before the date of such declaration or payment has been paid and
(D) the Trust has redeemed the full number of ARPS of each series required to
be redeemed by any provision for mandatory redemption contained in the
Certificate.
Additional Dividends. For any taxable year of the Trust, the Trust will
be allowed to designate dividends paid on the ARPS and the Trust's Common
Shares as exempt-interest dividends only to the extent of the Trust's net tax-
exempt income for that year, and such designation will be required to be made
between the ARPS and the Trust's Common Shares in proportion to the total
dividend paid to each class during the year. Whenever the Trust intends to
include any net capital gains or other taxable income in any dividend on the
ARPS, the Trust will pay in cash an additional dividend ("Additional Dividend")
in an amount equal to the sum of (i) an amount equal to the capital gains or
other taxable income included in the dividend multiplied by the maximum
marginal regular federal income tax rate in effect at the applicable Auction
Date (including any surtax on taxable income, but without taking into account
the effect of any provision allowing or limiting deductions or phasing out of
the benefit of tax brackets) applicable to individuals or corporations,
whichever is greater (utilizing the long-term capital gains rate on the portion
of such distribution which is taxable as long-term capital gains and utilizing
the ordinary income tax rate on the portion of such distribution which is other
taxable income), and (ii) an amount equal to 11.11% of the amount determined
under (i) to offset an assumed 10% rate of state and local taxes on the
Additional Dividends. If the Trust treats any of the amounts paid pursuant to
clauses (i) and (ii) in the preceding sentence as net capital gains or other
taxable income for federal income tax purposes, such amounts shall be treated
in accordance with this paragraph as dividends which include net capital gains
or other taxable income. Holders may find the Additional Dividends they receive
differ from the actual tax detriment incurred from the allocation of taxable
income or capital gains and the receipt of the Additional
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Dividends to the extent their actual tax circumstances differ from those
assumed in calculating the amount of the Additional Dividends.
Gross-up Dividends. If the Trust retroactively allocates any net
capital gains or other taxable income to ARPS solely by reason of the fact that
such allocation is made as a result of the redemption of all or a portion of
the outstanding ARPS or the liquidation of the Trust (the amount of such
allocation being referred to herein as a "Retroactive Taxable Allocation"), the
Trust will, within 90 days (and generally within 60 days) after the end of the
Trust's fiscal year for which a Retroactive Taxable Allocation is made, provide
notice thereof to the Auction Agent and to each holder of a Right applicable to
such ARPS (initially Cede & Co. as nominee of The Depository Trust Company)
during such fiscal year at such holder's address as the same appears or last
appeared on the Share Books of the Trust. The Trust will, within 30 days after
such notice is given to the Auction Agent, pay to the Auction Agent (who will
then distribute to such holders of Rights) out of Available Funds, an amount
equal to the aggregate Gross-up Dividend (as defined below) with respect to all
Retroactive Taxable Allocations made to such holders during the fiscal year in
question.
A "Gross-up Dividend" means payment of cash to a holder of ARPS of an
amount which, when taken together with the aggregate amount of Retroactive
Taxable Allocations made to such holder with respect to the fiscal year in
question, would cause such holder's dividends in dollars (after federal and
assumed state and local income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Gross-up Dividend 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 Gross-up Dividend shall
be calculated (i) without consideration being given to the time value of money;
(ii) assuming that no holder of ARPS is subject to the federal alternative
minimum tax with respect to dividends received from the Trust; (iii) assuming
that each Retroactive Taxable Allocation would be taxable in the hands of each
holder of ARPS at the maximum marginal regular federal income tax rate
(including any surtax on taxable income, but without taking into account the
effect of any provision allowing or limiting deductions or phasing out of the
benefit of tax brackets) applicable to individuals or corporations, whichever
is greater, in effect during the fiscal year in question (utilizing the long-
term capital gains rate on the portion of such distribution which is taxable as
long-term capital gains and utilizing the ordinary income tax rate on the
portion of such distribution which is other taxable income) and (iv) assuming
each holder is subject to a combined marginal rate of state and local income
tax of 10%. No Gross-up Dividends shall for any reason become payable during
any taxable year of the Trust in respect of any dividend which first became
payable in an earlier taxable year. In particular, and without limiting the
generality of the foregoing, no Gross-up Dividends shall become payable as a
result of any IRS challenge to the allocations of types of income or
designations made by the Trust relating to distributions made with respect to
an earlier fiscal year. Additionally, no Gross-up Dividends shall be payable as
a result of any change in the law concerning the eligibility of amounts paid
with respect to the ARPS for treatment as exempt-interest dividends or the
excludability of amounts paid with respect to the ARPS from the taxable income
of any Holder for federal income tax purposes. Holders may find the Gross-up
Dividends they receive differ from the actual tax detriment incurred from the
allocation of taxable income or capital gains and the receipt of the Gross-up
Dividends to the extent their actual tax circumstances differ from those
assumed in calculating the amount of the Gross-up Dividends.
Simultaneous with the declaration of each dividend, the Board of
Trustees will declare a dividend consisting of the Right to receive any Gross-
up Dividends in respect of such dividend. See "Description of ARPS--Dividends--
General."
ASSET MAINTENANCE
The Trust will be required to satisfy two separate asset maintenance
requirements under the terms of the Certificate. These requirements are
summarized below.
1940 Act ARPS Asset Coverage. The Trust will be required under the
Certificate to maintain, with respect to the ARPS, as of the last Business Day
of each month in which any of the ARPS are outstanding, asset coverage of at
least 200% with respect to all outstanding senior securities which are stock,
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including the ARPS (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
paying dividends on its common stock) ("1940 Act ARPS Asset Coverage"). If the
Trust fails to maintain 1940 Act ARPS Asset Coverage and such failure is not
cured as of the last Business Day of the following month (the "1940 Act Cure
Date"), the Trust will be required under certain circumstances to redeem
certain of the ARPS. See "Description of ARPS--Redemption."
Based upon the composition of the Trust's portfolio as of ,
1994, (adjusted to reflect the exercise of the Common Shares Over-Allotment
Option) and assuming the issuance of all of the ARPS offered hereby (after
giving effect to the deduction of the sales load and offering expenses for the
ARPS estimated at $ ), the 1940 Act ARPS Asset Coverage would be computed
as follows:
Value of Trust assets less liabilities
not constituting senior securities $
---------------------------------------- = ----------- = %
Senior securities $
representing indebtedness plus
liquidation value of the ARPS
ARPS Basic Maintenance Amount. So long as the ARPS are outstanding,
the Trust will be required under the Certificate to maintain as of each
Business Day (a "Valuation Date") assets having in the aggregate a Discounted
Value at least equal to the ARPS Basic Maintenance Amount, calculated
separately for Moody's and S&P. If the Trust fails to meet such requirement as
of any Valuation Date and such failure is not cured on or before the sixth
Business Day after such Valuation Date (the "ARPS Basic Maintenance Cure
Date"), the Trust will be required under certain circumstances to redeem
certain of the ARPS. See "Description of ARPS-- Redemption."
The ARPS Basic Maintenance Amount as of any Valuation Date is defined
as the dollar amount equal to (A) the sum of (i) the product of the number of
ARPS outstanding on such date multiplied by the sum of (a) $50,000 and (b) any
applicable redemption premium; (ii) the aggregate amount of cash dividends that
will have accumulated (whether or not earned or declared) on the ARPS
outstanding, to the end of the current Dividend Period or 49 days, whichever is
earlier; (iii) the Projected Dividend Amount (based on the number of
outstanding ARPS on such date); (iv) the amount of anticipated Trust expenses
for the 90 days subsequent to such Valuation Date (including any interest
accruing on any debt); (v) the amount of the Trust's Maximum Potential Gross-up
Dividends Liability as of such Valuation Date; and (vi) any current liabilities
as of such Valuation Date to the extent not reflected in any of (A)(i) through
(A)(v) (including, without limitation and immediately upon determination,
payables for Municipal Obligations purchased as of such Valuation Date), less
(B) either (i) the Discounted Value (for purposes of calculating the ARPS Basic
Maintenance Amount for Moody's) or the Market Value (for purposes of
calculating the ARPS Basic Maintenance Amount for S&P) of any Trust assets, or
(ii) the face value of any of the Trust's Assets if such assets mature prior to
or on the date of redemption of ARPS or payment of a liability and are either
securities issued or guaranteed by the United States Government or have a
rating assigned by Moody's of at least Aaa, P-1, VMIG 1 or MIG 1 and with
respect to S&P, at least AAA, SP-1+ or A-1+, in both cases irrevocably
deposited by the Trust for the payment of any of (A)(i) through (A)(vi).
For so long as the ARPS are rated by Moody's and S&P, the Trust shall,
in its daily calculation of the ARPS Basic Maintenance Amount, include as a
liability an amount, to be calculated on a semi-annual basis, equal to 150% of
the estimated cost of insuring the payment of principal and interest thereon to
maturity of all Municipal Obligations which are (i) covered by a Portfolio
Insurance policy permitting the Trust, at its option, to obtain Permanent
Insurance and in the event a Discount Factor applicable to a Moody's Eligible
Asset or an S&P Eligible Asset, respectively, is determined by reference to an
insurance claims-paying ability rating of the insurance provider, and (ii)
required to be included, at the time of such semi-annual calculation, in
Moody's Eligible Assets or S&P Eligible Assets, respectively, in order for the
Trust to have Moody's Eligible Assets or S&P Eligible Assets, respectively,
with a Discounted Value equal to or greater than the aggregate liquidation
value of all outstanding ARPS.
The Discount Factors and guidelines for determining the market value
of the Trust's portfolio holdings have been based on criteria established in
connection with rating the ARPS. These factors include,
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but are not limited to, the sensitivity of the market value of the relevant
asset to changes in interest rates, the liquidity and depth of the market for
the relevant asset, the credit quality of the relevant asset (for example, the
lower the rating of a debt obligation, the higher the related discount factor)
and the frequency with which the relevant asset is marked to market. In no
event shall the Discounted Value of any asset of the Trust exceed its unpaid
principal balance or face amount as of the date of calculation. The Discount
Factor relating to any asset of the Trust and the ARPS Basic Maintenance
Amount, the assets eligible for inclusion in the calculation of the Discounted
Value of the Trust's portfolio and certain definitions and methods of
calculation relating thereto may be changed from time to time by the Trust,
with- out shareholder approval, but only in the event the Trust receives
written confirmation from S&P, Moody's or any Substitute Rating Agency that any
such changes would not impair the rating then assigned to the ARPS by S&P,
Moody's or any Substitute Rating Agency, as the case may be.
On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to maintain S&P Eligible Assets
with an aggregate Discounted Value or Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the ARPS Basic Maintenance Amount and
on or before 5:00 P.M., New York City time, on the third Business Day after the
day on which such failure is cured by the Trust, the Trust is required to
deliver to the Auction Agent, Moody's and S&P a complete report with respect to
the calculation of the ARPS Basic Maintenance Amount and the value of its
portfolio holdings as of the date of such failure or as of the date on which
such failure was cured, as the case may be (an "ARPS Basic Maintenance
Report"). In addition, the Trust will deliver an ARPS Basic Maintenance Report
to Moody's or S&P, respectively, on or before 5:00 P.M., New York City time, on
the third Business Day after a Valuation Date on which the aggregate Discounted
Value of the Trust's Moody's Eligible Assets or S&P Eligible Assets,
respectively, exceeded the ARPS Basic Maintenance Amount by 5% or less. The
Trust will also deliver an ARPS Basic Maintenance Report to the Auction Agent
and to the Trust's independent accountants as of each Quarterly Valuation Date
on or before the third Business Day after such date. Whenever the Trust
delivers an ARPS Basic Maintenance Report to S&P pursuant to the foregoing
provisions, it shall also deliver a Certificate of Minimum Liquidity to S&P and
the Auction Agent. The Trust shall also provide Moody's and S&P with an ARPS
Basic Maintenance Report when specifically requested by either Moody's or S&P.
Within ten Business Days after delivery of such report (and certificate, with
regard to S&P and the Auction Agent) relating to each Quarterly Valuation Date,
the Trust will deliver to the Auction Agent, Moody's and S&P a letter, to which
a copy of the ARPS Basic Maintenance Report is attached, prepared by the
Trust's independent accountants regarding the accuracy of the calculations made
by the Trust in its most recent ARPS Basic Maintenance Report and in any other
ARPS Basic Maintenance Report prepared by the Trust and randomly selected by
the Trust's independent accountants during the quarter (and Certificate of
Minimum Liquidity, with regard to S&P and the Auction Agent). If any such
letter prepared by the Trust's independent accountants shows that an error was
made in the ARPS Basic Maintenance Report, the calculation or determination
made by the Trust's independent accountants will be conclusive and binding on
the Trust.
MINIMUM LIQUIDITY LEVEL
Pursuant to S&P guidelines, the Trust is required under the Certificate
to have, as of each Valuation Date, Deposit Securities with maturity or tender
payment dates not later than the Dividend Payment Date (collectively, "Dividend
Coverage Assets") for each of the ARPS outstanding that follows such Valuation
Date and having in the aggregate a value not less than the Dividend Coverage
Amount (the "Minimum Liquidity Level"). The "Dividend Coverage Amount," as of
any Valuation Date, means (A) the aggregate amount of cash dividends that will
accumulate on the ARPS outstanding to (but not including) the next Dividend
Payment Date for each of the ARPS outstanding that follows such Valuation Date
plus all liabilities of the Trust including, without limitation, declared and
unpaid dividends and operating expenses that are required to be paid on or
prior to the next Dividend Payment Date less (B) the sum of (i) the combined
Market Value of Deposit Securities irrevocably deposited for the payment of
cash dividends on the ARPS, (ii) the aggregate sales price of securities sold
for which settlement is scheduled to occur on or prior to the next Dividend
Payment Date, and (iii) interest on Municipal Obligations which is scheduled to
be paid on or prior to the next Dividend Payment Date. "Deposit Securities"
means cash and Municipal Obligations rated at least AAA, A-1+ or SP-1+ by S&P.
The definitions of "Deposit Securities," "Divi-
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dend Coverage Assets" and "Dividend Coverage Amount" may be changed from time
to time by the Trust without shareholder approval, but only in the event the
Trust receives confirmation from S&P that any such change would not impair the
ratings then assigned by S&P to the ARPS.
REDEMPTION
Optional Redemption. To the extent permitted under the Certificate and
subject to the provisions of the 1940 Act, upon giving a Notice of Redemption,
as provided below, the Trust at its option may redeem the ARPS of any series,
in whole or in part, out of Available Funds, at a redemption price equal to
$50,000 per share, plus applicable redemption premium, if any, plus an amount
equal to dividends thereon (whether or not earned or declared) accumulated but
unpaid to the date of redemption, excluding Gross-up Dividends (the "Optional
Redemption Price"). In addition, Holders of ARPS which are redeemed will be
entitled to Gross-up Dividends, if there is Retroactive Taxable Allocation
after such redemption. The Trust, upon determination of the Board of Trustees
of the Trust, may determine in advance to waive this option to redeem ARPS with
respect to (i) Short Term Dividend Periods having 35 days or more and (ii) Long
Term Dividend Periods. No ARPS of a series may be redeemed at the option of the
Trust during the Initial Dividend Period for that series.
Mandatory Redemption. The Trust will be required to redeem, out of
Available Funds, at a redemption price equal to $50,000 per share, plus the
applicable redemption premium, if any, plus accumulated but unpaid dividends
thereon (whether or not earned or declared) to the date of redemption,
excluding Gross-up Dividends (the "Mandatory Redemption Price"), ARPS, to the
extent permitted under the Declaration of Trust and the Certificate, and
subject to the provisions of the 1940 Act, on a date fixed by the Board of
Trustees, if (as long as the ARPS are rated by S&P or Moody's, as the case may
be) the Trust fails to maintain S&P Eligible Assets with an aggregate
Discounted Value or Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the ARPS Basic Maintenance Amount or to satisfy the
1940 Act ARPS Asset Coverage and such failure is not cured on or before the
ARPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein respectively
referred to as a "Cure Date"), as the case may be. In addition, Holders of ARPS
which are redeemed will be entitled to Gross-up Dividends, if there is
Retroactive Taxable Allocation after such redemption. The number of ARPS to be
redeemed will be equal to the lesser of (a) the minimum number of ARPS the
redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, would, together with all other Preferred
Shares subject to redemption or retirement, result in the maintenance of S&P
Eligible Assets with an aggregate Discounted Value and Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the ARPS Basic
Maintenance Amount and the satisfaction of 1940 Act ARPS Asset Coverage on such
Cure Date (provided that, if there is no such minimum number of shares, the
redemption of which would have such result, all of the ARPS then outstanding
will be redeemed), and (b) the maximum number of ARPS, together with all other
Preferred Shares subject to redemption and retirement, that can be redeemed out
of estimated Available Funds on such redemption date. In determining the number
of shares of a series of ARPS required to be redeemed in accordance with the
foregoing, the Trust will allocate the number required to maintain S&P Eligible
Assets with an aggregate Discounted Value and Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the ARPS Basic Maintenance
Amount and satisfaction of the 1940 Act ARPS Asset Coverage, as the case may
be, pro rata among each series of ARPS and other shares of Preferred Stock
subject to redemption pursuant to provisions similar to these mandatory
redemption provisions. The Trust is required to effect such a mandatory
redemption not later than 35 days after such Cure Date, except that if the
Trust does not have Available Funds sufficient for the redemption of all of the
required number of ARPS which are subject to mandatory redemption or the Trust
otherwise is unable to effect such redemption on or prior to such Cure Date,
the Trust will redeem those ARPS which it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption.
General. If ARPS of any series are to be redeemed, a notice of
redemption will be mailed to each record holder of such series of ARPS
(initially Cede & Co., as nominee of the Securities Depository) and to the
Auction Agent at least 30 days prior to the date fixed for the redemption. Each
notice of redemption will include a statement setting forth: (i) the redemption
date, (ii) the aggregate number of ARPS of such
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series to be redeemed, (iii) the redemption price, (iv) the place or places
where ARPS of such series are to be surrendered for payment of the redemption
price, (v) a statement that dividends on the shares to be redeemed will cease
to accumulate on such redemption date and (vi) the provision pursuant to which
such shares are being redeemed. The notice will also be published in The Wall
Street Journal. No defect in the notice of redemption or in the mailing or
publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.
In the event that less than all of the outstanding shares of any
series of ARPS are to be redeemed, the number of shares thereof to be redeemed
will be selected by lot or such other method as the Trust shall deem fair and
equitable and the results thereof will be communicated to the Auction Agent.
The Auction Agent will give notice to the Securities Depository, whose nominee
will be the record holder of all the ARPS, and the Securities Depository will
determine the number of shares to be redeemed from the account of the Agent
Member of each Existing Holder. Each Agent Member will determine the number of
shares to be redeemed from the account of each Existing Holder for which it
acts as agent. An Agent Member may select for redemption shares from the
accounts of some Existing Holders without selecting for redemption any shares
from the accounts of other Existing Holders. Notwithstanding the foregoing, if
neither the Securities Depository nor its nominee is the record holder of all
of the shares of such series, the particular shares to be redeemed shall be
selected by the Trust by lot or by such other method as the Trust shall deem
fair and equitable.
If the Trust gives notice of redemption, and concurrently or
thereafter deposits in trust with the Auction Agent a sum sufficient to redeem
the ARPS as to which notice of redemption has been given, with irrevocable
instructions and authority to pay the redemption price to the record holders
thereof, then upon the date of such deposit or, if no such deposit is made,
upon such date fixed for redemption (unless the Trust shall default in making
payment of the redemption price), all rights of the holders of such shares
called for redemption will cease and terminate, except the right of such
holders to receive the redemption price thereof, but without interest, and such
shares will no longer be deemed to be outstanding. The Trust will be entitled
to receive, from time to time, the interest, if any, earned on such moneys
deposited with the Auction Agent, and the holders of any shares so redeemed
will have no claim to any such interest. Any funds so deposited which are
unclaimed at the end of one year from such redemption date will be repaid, upon
demand, to the Trust, after which the holders of the ARPS of such series so
called for redemption may look only to the Trust for payment thereof. Such
redemption payment shall be in the form of Deposit Securities and Municipal
Obligations rated at least P-1, MIG 1, or VMIG 1 by Moody's with maturity or
tender dates not later than the day preceding the applicable redemption date
and having a value not less than the amount due to Holders by reason of the
redemption of their ARPS on such redemption date.
So long as any ARPS are held of record by the nominee of the
Securities Depository (initially Cede & Co.), the redemption price for such
shares will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it to
distribute the amount of the redemption price to Agent Members who, in turn,
are expected to distribute such funds to the persons for whom they are acting
as agent.
Notwithstanding the provisions for redemption described above, no ARPS
may be redeemed unless all dividends in arrears, including Gross-up Dividends
then due and payable on the outstanding ARPS, and all capital shares of the
Trust ranking on a parity with the ARPS with respect to the payment of
dividends or upon liquidation, have been or are being contemporaneously paid or
set aside for payment provided, however, that the Trust without regard to such
limitations (i) may redeem, purchase or otherwise acquire ARPS (a) with other
Preferred Shares, as a whole pursuant to any optional redemption or (b)
pursuant to a purchase or exchange offer made for all of the outstanding ARPS
and other Preferred Shares.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Trust, whether
voluntary or involuntary, the holders of shares of all series of ARPS will be
entitled to receive, out of the assets of the Trust available for distribution
to shareholders, before any distribution or payment is made upon any Common
Shares or any other capital shares of the Trust ranking junior in right of
payment upon liquidation to ARPS, $50,000
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<PAGE>
per share, plus applicable redemption premium, if any, together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of ARPS
will be entitled to no other payments other than Gross-up Dividends. See
"Description of ARPS--Dividends--Gross-up Dividends." If such assets of the
Trust shall be insufficient to make the full liquidation payment on each
outstanding series of ARPS and liquidation payments on any other outstanding
class or series of Preferred Shares of the Trust ranking on a parity with the
ARPS as to payment upon liquidation, then such assets will be distributed among
the holders of shares of each such series of ARPS and the holders of shares of
such other class or series ratably in proportion to the respective preferential
amounts to which they are entitled. After payment of the full amount of
liquidation distribution to which they are entitled, the holders of ARPS will
not be entitled to any further participation in any distribution of assets by
the Trust except for Gross-up Dividends. A consolidation or merger of the
Trust with or into any other corporation or corporations or a sale, whether for
cash, shares of stock, securities or properties, of all or substantially all or
any part of the assets of the Trust shall not be deemed or construed to be a
liquidation, dissolution or winding up of the Trust.
VOTING RIGHTS
Each of the ARPS is entitled to one vote per share on each matter
submitted to a vote of shareholders of the Trust.
ELECTION OF TRUSTEES
All Trustees will be subject to election by the shareholders at the
first meeting of shareholders. Thereafter, the Board of Trustees of the Trust
will be divided into three classes, each class having a term of three years
(after an initial phase-in). The term of office of one class will expire each
year. At the first annual meeting after issuance of the ARPS, the Trust's
shareholders (Common shareholders and holders of ARPS, together with holders of
any other series of Preferred Shares, voting together as a single class) will
have the right to elect eight trustees and the holders of ARPS, together with
holders of any other Preferred Shares, voting as a separate class, will have
the right to elect two Trustees. At all times, two of the Trustees shall have
been elected by the holders of Preferred Shares. Under the 1940 Act and the
Certificate, if at any time dividends on the ARPS or any other Preferred Shares
of the Trust are unpaid in an amount equal to two full years' dividends
thereon, the holders of all outstanding ARPS and other Preferred Shares, voting
as a class, will be entitled to elect at a special meeting of shareholders a
majority of the Trust's Trustees until all dividends in default have been paid
or otherwise provided for.
OTHER MATTERS
To the extent permitted under the 1940 Act, the affirmative vote of the
holders of a majority (unless a higher percentage vote is required under the
Declaration of Trust or Certificate) of the outstanding shares of each series
of ARPS, 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
Trust's shares including, without limitation, any proposal to do the following:
(1) increase or decrease the aggregate number of authorized shares of a series;
(2) effect an exchange, reclassification, or cancellation of all or part of the
shares of such series; (3) effect an exchange, or create a right of exchange,
of all or any part of the shares of another class for the shares of a series;
(4) change the rights or preferences of the shares of a series; (5) change the
shares of a series, whether with or without par value, into the same or
different number of shares either with or without par value, of the same or
another class; (6) cancel or otherwise affect distributions on the shares that
have accrued but have not been declared; (7) adopt any plan of reorganization
(including bankruptcy proceedings) adversely affecting the ARPS; (8) approve or
take any action requiring a vote of shareholders under Section 13(a) of the
1940 Act or (9) otherwise amend, alter or repeal the provisions of the
Declaration of Trust or Certificate whether by merger, consolidation, or
otherwise so as to affect any preference right or power of any series of ARPS
or the holders thereof. To the extent that the interests of a series affected
by a matter are substantially identical to the interests of other Preferred
Shares of the Trust affected by such matter (e.g., a vote of shareholders
required under Section 13(a) of the 1940 Act), each such series and other
Preferred Shares shall vote together collectively as one class. The vote of
holders of Preferred Shares described above will in each case be in addition to
a separate
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<PAGE>
vote of the requisite percentage of Common Shares and Preferred Shares
necessary to authorize the action in question.
Notwithstanding the foregoing, absent prior written approval of
Moody's and S&P, no exchange of all or any part of the shares of another class
or series for a series of ARPS may be effected unless (i) the shares to be
exchanged are rated "aaa" by Moody's and AAA by S&P, respectively, or (ii) the
exchange is approved by all shareholders of the outstanding shares of such
series of ARPS.
The Trust has no intention to file a voluntary application for relief
under federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent.
The Board of Trustees may, without shareholder approval, amend, alter
or repeal any or all of the provisions reflecting the various rating agency
guidelines described herein, provided that the Trust receives confirmation from
the rating agencies that an amendment, alteration, or repeal would not impair
the ratings then assigned to the ARPS.
The foregoing voting provisions will not apply if, at or prior to the
time when the act with respect to which such vote would otherwise be required
to be effected, all outstanding Preferred Shares shall have been redeemed or
shall no longer be deemed to be outstanding.
TAXATION
===============================================================================
It is expected that the Trust will not be subject to federal income tax
because the Trust intends to distribute all of its taxable net income, net
capital gain and tax-exempt net income to shareholders and intends to otherwise
comply with all the provisions of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code").
The Trust currently intends to qualify to pay "exempt-interest
dividends" to its shareholders by maintaining, as of the close of each quarter
of its taxable year, at least 50% of the value of its total assets in
securities which are exempt from federal income tax under Section 103 of the
Code ("tax-exempt securities"), subject to the potential applicability of the
alternative minimum tax, as discussed below. Exempt-interest dividends are
dividends or any part thereof (other than a capital gain dividend) paid by the
Trust which are attributable to interest on tax-exempt securities and
designated by the Trust as exempt-interest dividends in a written notice mailed
to the Trust's shareholders within 60 days after the close of its taxable year.
Exempt-interest dividends are treated by shareholders for all purposes as items
of interest excludable from their gross income under Section 103 of the Code.
Every person required to file a tax return must include on such return the
amount of exempt-interest dividends received from the Trust during the taxable
year. It should be noted that exempt-interest dividends are included in
determining what portion, if any, of a person's Social Security and railroad
retirement benefits are subject to federal income tax.
Because the Trust may invest without limit in private activity bonds or
industrial development bonds, the interest on which is not federally tax-exempt
to persons who are "substantial users" of the facilities financed by such bonds
or "related persons" of such "substantial users," the Trust may not be an
appropriate investment for shareholders who are considered either a
"substantial user" of a "related person." Such persons should consult their tax
advisers before investing in the Trust.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of an investment company paying exempt-interest dividends, such as the
Trust, will not be deductible by the investor for federal income tax purposes.
In order for any distributions to holders of shares of ARPS to be
eligible to be treated as exempt-interest dividends, the ARPS must be treated
as stock for federal income tax purposes. In the opinion of Gordon Altman
Butowsky Weitzen Shalov & Wein, special tax counsel to the Trust ("Tax
Counsel"), the ARPS will, under current law, constitute stock of the Trust and
distributions with respect to the ARPS (other than distributions in redemption
of the ARPS subject to Sectuion 302(b) of the Code) will constitute dividends
to the extent of the Trust's current and accumulated earnings and profits as
calculated for federal income tax purposes. Further, in a published revenue
ruling, the IRS held, among other things,
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<PAGE>
that stock that has its dividend rate periodically set pursuant to an auction
process similar to the auction process to be established for the ARPS will be
treated as equity for federal income tax purposes. The opinion of Tax Counsel
represents only its best legal judgment, and is not binding on the IRS or the
courts. It is possible that the IRS might assert that the ARPS constitute debt
of the Trust. If this position were upheld, distributions by the Trust to
holders of the ARPS would constitute interest, whether or not they exceeded the
earnings and profits of the Trust, would be included in full in the income of
the recipient and would be taxed as ordinary income. Tax Counsel believes that
such a position, if asserted by the IRS, would be unlikely to prevail.
The IRS has taken the position in a published revenue ruling that a
regulated investment company that has two or more classes of shares must
allocate to each such class proportionate amounts of each type of its income
for each tax year based upon the percentage of total dividends distributed to
each class for such year. The revenue ruling does not address whether dividends
paid following the close of a taxable year that are treated for tax purposes as
derived from income from the prior year are treated as dividends "paid" in the
prior year for purposes of determining the proportionate share of a particular
type of income for each class. To the extent that any such dividends are paid
following the close of a taxable year, the Trust anticipates (pending further
clarification) that it will treat such dividends as "paid" in the prior year
for purposes of determining a class' proportionate share of a particular type
of income. There can be no assurance that the IRS will respect such treatment.
The Trust intends to designate distributions made to the Common Shares
and the ARPS as consisting of particular types of income in accordance with the
classes' proportionate shares of such income. Accordingly, the Trust will
designate dividends paid as exempt-interest dividends in a manner that
allocates such dividends between the Common Shareholders and the holders of
ARPS in proportion to the total dividends paid to each class during the taxable
year (including certain dividends paid after the close of the taxable year as
discussed in the prior paragraph), or otherwise as required by applicable law.
Tax Counsel believes that the Trust's proposed manner of allocating tax-exempt
income, net capital gains and other taxable income among shareholders will be
respected for federal tax purposes. However, there is no direct guidance from
the IRS or other sources addressing the treatment of dividends paid after the
close of the taxable year and the treatment of Additional Dividends and Gross-
up Dividends for purposes of allocating items of income and gain among
different classes of shares. As a result, it is possible that the IRS could
disagree with the Trust's method of allocation in which case the IRS could
attempt to recharacterize a portion of exempt-interest dividends paid to the
ARPS as capital gains or other taxable income (in addition to amounts
previously designated by the Trust as capital gains or taxable income). If the
IRS were to prevail with respect to any such attempted recharacterization there
would be no Additional Dividends or Gross-up Dividends paid to offset any
additional tax due by shareholders of the ARPS since Additional Dividends or
Gross-up Dividends are only calculated based on amounts of capital gains or
taxable dividends originally designated by the Trust. Although Tax Counsel
believes that it is unlikely that the IRS would prevail in any such attempted
recharacterization, such belief represents only its best legal judgment and is
not binding on the IRS or the courts.
Interest received on certain otherwise tax-exempt securities is subject
to an alternative minimum tax. This alternative minimum tax applies to interest
received on "private activity bonds" (in general, bonds that benefit non-
governmental entities) issued after August 7, 1986 which, although tax-exempt,
are used for purposes other than those generally performed by governmental
units (e.g., bonds used for commercial or housing purposes). Income received on
such bonds is classified as a "tax preference item," under the alternative
minimum tax, for both individual and corporate investors. The Trust may invest
without limit in such "private activity bonds" with the result that a
substantial portion of the exempt-interest dividends paid by the Trust may be
an item of tax preference to shareholders subject to the alternative minimum
tax. The Trust will report to shareholders the portion of its dividends
declared during the year which are a tax preference item for alternative
minimum tax purposes, as well as the overall percentage of dividend
distributions which constitutes exempt-interest dividends. Taxpayers are
generally subject to the alternative minimum tax if their "regular tax"
liability is less than (a) in the case of an individual taxpayer, 26% of his or
her first $175,000 of alternative minimum taxable income and 28% of his or her
alternative minimum taxable income in excess of $175,000 and (b) in the case of
a corporate taxpayer, 20% of its alternative minimum taxable income, reduced by
an exemption amount ranging from
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<PAGE>
$0 to $45,000 depending upon the taxpayer's income and status. Alternative
minimum taxable income is generally equal to taxable income with certain
adjustments and increased by certain "tax preference items" which may include a
portion of the Trust's dividends as described above. In addition, corporations
are subject to an alternative minimum tax based, in part, on 75% of any excess
of "adjusted current earnings" over taxable income as adjusted for other tax
preferences. Because an exempt-interest dividend paid by the Trust will be
included in computing adjusted current earnings, a corporate shareholder may
therefore be required to pay an increased alternative minimum tax as the result
of receiving exempt-interest dividends paid by the Trust.
Under the market discount rules (Section 1276 through Section 1278 of
the Code), gain on the disposition of a market discount bond is treated as
ordinary income to the extent that it does not exceed the amount of accrued
market discount on such bond. Recently enacted tax legislation generally
extends the market discount rules to tax-exempt obligations (as well as to
bonds issued on or before July 18, 1984). The recently enacted tax legislation
also, among other things, increases the maximum individual tax rate (including
the surtax imposed on taxpayers with taxable income in excess of $250,000) from
31% to 39.6% and generally increases the maximum corporate rate from 34% to
35%. Shareholders should consult their own tax advisors concerning the impact
of the recently enacted tax law changes on an investment in the Trust.
The consequences of the Gross-up Dividends under existing federal
income tax law are uncertain. The Trust intends to treat a holder as receiving
dividend distributions in the amount of any Gross-up Dividends only as and when
such Gross-up Dividends are made. However, it is possible that the IRS could
view the right to receive Gross-up Dividends with respect to any dividends as
separate property which is distributed to the holder at the time such dividends
are declared or at some other time prior to the payment of the Gross-up
Dividend. In such event, the fair market value of the right to receive Gross-up
Dividends with respect to any dividend, if ascertainable, would be required to
be included in gross income as a dividend at the time such dividend is declared
or at such other time to the extent of the Trust's current and accumulated
earnings and profits.
With respect to a shareholder who receives exempt-interest dividends
on shares held for less than six months (unless regulations provide for a
shorter period), any loss on the sale or exchange of such shares will, to the
extent of the amount of such exempt-interest dividends, be disallowed.
In order to qualify for favorable treatment under Subchapter M, the
Trust must distribute annually an amount at least equal to the sum of 90% of
its net taxable income plus 90% of its net tax-exempt income. A distribution
will be counted for this purpose, and for purposes of computing the Trust's
taxable income, only if it qualifies for the dividends-paid deduction under the
Code. Issuance of five series of ARPS may raise the issue whether distributions
on the ARPS are "preferential dividends" and, therefore, are not eligible for
the dividends-paid deduction. In the opinion of Tax Counsel, distributions with
respect to the five series of ARPS will not result in preferential dividends
within the meaning of Section 562(c) of the Code. It is possible that the IRS
might assert that such distributions constitute preferential dividends which
are not eligible for the dividends-paid deduction. Tax Counsel believes that
such a position, if asserted by the IRS, would be unlikely to prevail.
The Superfund Amendments and Reauthorization Act of 1986 (the
"Superfund Act") imposes a deductible tax on a corporation's alternative
minimum taxable income (computed without regard to the alternative minimum tax
net operating loss deduction) at a rate of $12 per $10,000 (0.12%) of
alternative minimum taxable income in excess of $2,000,000. The tax is imposed
for taxable years beginning before January 1, 1996. The tax is imposed even if
the corporation is not required to pay an alternative minimum tax because the
corporation's regular income tax liability exceeds its minimum tax liability.
Exempt-interest dividends paid by the Trust that create alternative minimum tax
preferences for corporate shareholders under the Code (as described above) may
be subject to the tax.
The Code requires each regulated investment company to pay a
nondeductible 4% excise tax to the extent the company does not distribute,
during each calendar year, 98% of its ordinary income, determined on a calendar
year basis, and 98% of its capital gains, determined in general on an October
31 year end, plus certain undistributed amounts from previous years. The
required distributions, however, are based only on the taxable income of a
regulated investment company. The excise tax, therefore, will
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<PAGE>
generally not apply to the tax-exempt income of a regulated investment company
such as the Trust that pays exempt-interest dividends. The Trust intends
generally to make sufficient timely distributions to avoid imposition of the
excise tax.
If at any time when ARPS are outstanding, the Trust does not meet
applicable asset coverage requirements, the Trust will be required to suspend
distributions to holders of Common Shares until the asset coverage is restored.
See "Description of ARPS--Dividends--Restrictions on Dividends and Other
Payments." Any such suspension may prevent the Trust from qualifying for
favorable treatment as a regulated investment company since one of the
requirements for such favorable treatment is that an amount at least equal to
the sum of 90% of its net taxable income plus 90% of its net tax-exempt income
must be distributed to shareholders. If the Trust were not able to make such
distributions, it would not be able to pay exempt-interest dividends to
shareholders. Upon failure to meet applicable asset coverage requirements, the
Trust may redeem the ARPS in order to meet such requirements. Such a redemption
of the ARPS could be taxed as an ordinary dividend instead of as a capital gain
to a holder of ARPS who redeemed only a portion of the ARPS held by such
holder.
Shareholders will normally be subject to federal income tax on
dividends paid from interest income derived from taxable securities and gains,
if any, relating to foreign currency changes (which are taxed as ordinary
dividends), and on distributions of net short-term capital gains. Taxable long-
term or short-term capital gains may be generated by the sale of portfolio
securities and by transactions in options and futures contracts engaged in by
the Trust. Distributions of long-term capital gains, if any, are taxable as
long-term capital gains, regardless of how long the shareholder has held the
Trust shares. For federal income tax purposes, a capital gain distribution with
respect to shares held for six months or less, however, will cause any loss on
a subsequent sale or exchange of such shares to be treated as long-term capital
loss to the extent of such long-term capital gain distribution. It should also
be noted that any ordinary income or capital gain allocated to a holder would
not be eligible for the corporate dividends-received deduction.
The tax treatment of listed put and call options written or purchased
by the Trust on debt securities and certain futures contracts and options
thereon entered into by the Trust will be governed by Section 1256 of the Code.
Absent a tax election to the contrary, each such position held by the Trust
will be marked to market (i.e., treated as if it were sold for fair market
value) on the last business day of each taxable year of the Trust, and all gain
or loss associated with transactions in such positions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss.
Positions of the Trust which consist of at least one debt security and at least
one option or futures contract which substantially diminishes the Trust's risk
of loss with respect to such debt security could be treated as "mixed
straddles" which are subject to the straddle rules of Section 1092 of the Code,
the operation of which may cause deferral of losses, adjustments in the holding
periods of debt securities and conversion of short-term capital losses into
long-term capital losses and long-term capital gains into short-term capital
gains. Certain tax elections exist for mixed straddles which reduce or
eliminate the operation of the straddle rules. Furthermore, as a regulated
investment company, the Trust is subject to the requirement that less than 30%
of its gross income be derived from the sale or other disposition of securities
and certain other investments held for less than three months. This requirement
may limit the Trust's ability to engage in options and futures transactions.
The Trust will monitor its transactions in options and futures contracts and
may make certain tax elections in order to mitigate the effect of these rules
and prevent disqualification of the Trust as a regulated investment company
under Subchapter M of the Code. Such tax elections may result in an increase in
distributions of ordinary income (relative to long-term capital gain) to
shareholders.
Under certain provisions of the Code, some shareholders of ARPS may be
subject to 31% withholding on reportable dividends, capital gains distributions
and redemption payments ("backup withholding"). Generally, shareholders of ARPS
subject to backup withholding will be those for whom a taxpayer identification
number is not on file with the Trust or who, to the Trust's knowledge, have
furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such
investor is not subject to backup withholding.
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<PAGE>
Dividends paid by the Trust from its ordinary income and distributions
of the Trust's net short-term capital gains paid to shareholders who are non-
resident aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to foreign
individuals and entities, unless a reduced rate of withholding or a withholding
exemption is provided under applicable treaty law.
The exemption of interest income for federal income tax purposes does
not necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Accordingly, shareholders of the Trust may be
subject to state and local taxes on exempt-interest dividends.
Shareholders should consult their tax advisers regarding specific
questions as to federal, foreign, state or local taxes.
DESCRIPTION OF SHARES
===============================================================================
GENERAL
The Declaration of Trust provides that the Trustees of the Trust may
authorize separate classes of shares of beneficial interest, and the Trustees
have authorized the issuance of the Common Shares and the Preferred Shares.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for the obligations of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations. Given the nature of the Trust's assets and operations,
the possibility of the Trust being unable to meet its obligations is remote
and, in the opinion of Massachusetts counsel to the Trust, the risk to Trust
shareholders is remote.
The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually, but only upon the property of
the Trust and that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust protects a
Trustee against any liability to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
The Trust may be terminated (i) by the affirmative vote of the holders
of 80% of each of the Common Shares and the Preferred Shares, including the
ARPS, outstanding and entitled to vote, voting as separate classes or (ii) by
an instrument signed by a majority of the Trustees and consented to by the
holders of two-thirds of each of the Trust's Common Shares and Preferred
Shares, including the ARPS. Upon termination of the Trust, the Trustees will
wind up the affairs of the Trust, the Trust's business will be liquidated and
the Trust's net assets, after liquidating distributions to which they are
entitled are made to the Preferred Shareholders, including the holders of ARPS,
will be distributed to the Trust's Common Shareholders on a pro rata basis. If
not so terminated, the Trust will continue indefinitely.
COMMON SHARES
The Trust's Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional Common Shares of beneficial interest,
of $.01 par value. Share certificates will be issued upon request to the holder
of record of Trust Common Shares. So long as any Preferred Shares are
outstanding, including the ARPS, Common Shareholders will not be entitled to
receive any net income of, or other distributions from, the Trust unless all
accrued dividends on the ARPS have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to the ARPS would be at least 200% after
giving effect to such distributions.
The Trust's Declaration of Trust permits the Trustees to divide or
combine the Common Shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interests in
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the Trust. Each Common Share represents an equal proportionate interest in the
Trust with each other Common Share. The Trust has no present intention of
offering additional Common Shares. Other offerings of its Common Shares, if
made, will require approval of the Trust's Board of Trustees. Any additional
offering will be subject to the requirements of the 1940 Act that Common 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 Common Shareholders or with the consent
of the holders of a majority of the outstanding Common Shares of the Trust.
Pursuant to the Declaration of Trust, the Trust will hold annual
meetings of shareholders. Common Shareholders are entitled to one vote for each
Common Share held and to vote in the election of Trustees, subject to certain
voting rights of the Preferred Shareholders, and on other matters submitted to
meetings of shareholders. No material amendment may be made to the Trust's
Declaration of Trust without the affirmative vote of a majority or greater of
its shareholders (majority of each of the Common Shares and the Preferred
Shares, including the ARPS, voting as separate classes). Under certain
circumstances the Trustees may be removed by action of the Trustees. The
shareholders also have the right under certain circumstances to remove the
Trustees. Common Shares have no preemptive or conversion rights. Common Shares
when issued are fully paid and non-assessable.
The Common Shares have traded on the New York Stock Exchange
since , 1994. The following table shows the range of the Trust's
net asset value per share and sales prices of the Common Shares and the volume
of shares traded.
<TABLE>
<CAPTION>
NET ASSET VALUE MARKET PRICES
----------------- ----------------
PERIOD ENDED SHARES TRADED HIGH LOW HIGH LOW
------------ ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
, 1994 $ $ $ $
</TABLE>
For the period , 1994 through , 1994, the average
weekly trading volume of the Common Shares was . For such period, the
Common Shares traded above net asset value. At , 1994, the net asset
value per share of the Common Shares was $ and the closing price on the
New York Stock Exchange was $ .
PREFERRED SHARES
The Trust's Declaration of Trust authorizes the issuance of up to
1,000,000 Preferred Shares of beneficial interest having a par value of $.01
per share in one or more series, with rights as determined by the Board of
Trustees, by action of the Board of Trustees without the approval of the Common
Shareholders. Common Shareholders have no preemptive right to purchase any
Preferred Shares that might be issued.
Under the Declaration of Trust and the Certificate, the Trust is
authorized to issue an aggregate of Series ARPS, Series ARPS, Series
ARPS, Series ARPS and Series ARPS designated respectively as Auction Rate
Preferred Shares, Series , Auction Rate Preferred Shares, Series , Auction
Rate Preferred Shares, Series , Auction Rate Preferred Shares, Series and
Auction Rate Preferred Shares, Series . See "Description of ARPS." Under the
1940 Act, the Trust is permitted to have more than one series of Preferred
Shares outstanding so long as no single series has a priority over another
series as to distribution of assets of the Trust or the payment of dividends.
Holders of Common Shares have no preemptive right to purchase any shares of
Preferred Shares that might be issued. It is anticipated that the net asset
value per share of the Preferred Shares will equal its original purchase price
per share plus accrued dividends per share.
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The following table shows the amount of (i) shares authorized, (ii)
shares held by the Trust for its own account and (iii) shares outstanding for
each class of authorized securities of the Trust as of , 1994.
<TABLE>
<CAPTION>
===============================================================================
AMOUNT OUTSTANDING
(EXCLUSIVE OF
AMOUNT HELD AMOUNT HELD
BY TRUST FOR BY TRUST FOR
TITLE OF CLASS AMOUNT AUTHORIZED ITS OWN ACCOUNT ITS OWN ACCOUNT)
- - - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Shares....... Unlimited -0-
Preferred Shares.... 1,000,000 -0- -0-
===============================================================================
</TABLE>
ANTI-TAKEOVER PROVISIONS
The Trust presently has certain anti-takeover provisions in its
Declaration of Trust which are intended to have the effect of limiting the
ability of other entities or persons to acquire control of the Trust, to cause
it to engage in certain transactions or to modify its structure. Following the
first meeting of shareholders, the Board of Trustees will be divided into three
classes, each having a term of three years (after an initial phase-in). Each
year the term of one class expires. This provision could delay for up to two
years the replacement of a majority of the Board of Trustees. See "Trustees and
Officers." In addition, the affirmative vote or consent of the holders of 80%
of the shares (Common Shares and Preferred Shares voting as separate classes)
of the Trust (a greater vote than that required by the 1940 Act and greater
than the required vote applicable to business corporations under state law) is
required to authorize the conversion of the Trust from a closed-end to an open-
end investment company, or generally to authorize any of the following
transactions:
(i) merger or consolidation of the Trust with or into any other entity;
(ii) issuance of any securities of the Trust to any person or entity for
cash;
(iii) sale, lease or exchange of all or any substantial part of the
assets of the Trust to any entity or person (except assets having an aggregate
fair market value of less than $1,000,000);
(iv) sale, lease or exchange to the Trust, in exchange for securities of
the Trust, 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 5% or more of the outstanding shares of the
Trust. However, such 80% vote or consent will not be required with respect to
the foregoing transactions where the Board of Trustees under certain conditions
approves the transaction, in which case, with respect to (i) and (iii) above, a
majority shareholder vote or consent will be required, and, with respect to
(ii) and (iv) above, no shareholder vote or consent would be required.
Furthermore, any amendment to the provisions in the Declaration of Trust
requiring an 80% shareholder vote or consent for the foregoing transactions
similarly requires an 80% shareholder vote or consent. Reference is made to the
Declaration of Trust of the Trust, on file with the Securities and Exchange
Commission, for the full text of these provisions. See "Further Information."
The foregoing provisions will make more difficult a change in the
Trust's management, or consummation of the foregoing transactions without the
Trustees' approval, and could have the effect of depriving Common Shareholders
of an opportunity to sell their Common Shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Trust in a tender offer or similar transaction. However, the Board of
Trustees has considered these anti-takeover provisions and believes that they
are in the shareholders' best interests and benefit shareholders by providing
the advantage of potentially requiring persons seeking control of the Trust to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Trust's management.
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SHARE REPURCHASES AND TENDERS
===============================================================================
Common Shares of closed-end investment companies frequently trade at a
discount from net asset value. In recognition of the possibility that the
Trust's Common Shares might similarly trade at a discount, the Trustees have
determined that it would be in the interest of Common Shareholders for the
Trust to take action to attempt to reduce or eliminate a market value discount
from net asset value. To that end, the Trustees presently contemplate that the
Trust would from time to time take action either to repurchase or redeem its
Common Shares in the open market or to tender for its Common Shares at net
asset value. The Board presently intends, on an annual basis, to consider the
making of a tender offer for one of its Common Shares. At no time, however,
will the Trustees be required to make such repurchases or tender offers.
The Trust may repurchase its Common Shares in the open market or in
privately negotiated transactions, at a price not above market value, if any,
or net asset value, whichever is lower, at the time of such purchase. Such
repurchases will be done in accordance with applicable securities laws.
Common Shares will not be repurchased unless after such repurchase the
Trust would continue to satisfy the 1940 Act ARPS Asset Coverage requirements
and ARPS Basic Maintenance Amount and any other asset coverage requirements
with respect to other outstanding series of Preferred Shares. Any repurchase of
Common Shares may also require the Trust to repurchase ARPS and/or other
Preferred Shares then outstanding.
Although the Trustees believe that share repurchases and tenders
generally would have a favorable effect on the market price of the Trust's
Common Shares, it should be recognized that the acquisition of Common Shares by
the Trust will decrease the total assets of the Trust and therefore have the
effect of increasing the Trust's expense ratio and decreasing the asset
coverage available with respect to the Preferred Shares, including the ARPS.
Because of the nature of the Trust's investment objective, policies and
portfolio, the Investment Manager does not anticipate that repurchases and
tenders should have an adverse effect on the Trust's investment performance and
does not anticipate any material difficulty in disposing of portfolio
securities in order to consummate share repurchases and tenders.
Even if a tender offer has been made, it is the Trustees' announced
policy, which may be changed by the Trustees, not to accept tenders or effect
repurchases if (1) such transactions, if consummated, would (a) result in the
delisting of the Trust's Common Shares from the New York Stock Exchange (the
Exchange having advised the Trust that it would consider delisting if the
aggregate market value of the Trust's outstanding publicly held Common Shares
is less than $5,000,000, the number of publicly held Common Shares falls below
600,000 or the number of round lot holders falls below 1,200), or (b) impair
the Trust's status as a regulated investment company under the Code (which
would make the Trust a taxable entity, causing the Trust's income to be taxed
at the corporate level in addition to the taxation of shareholders who receive
dividends from the Trust) or (c) result in a failure to comply with applicable
asset coverage requirements, or (d) result in the forced redemption of
Preferred Shares including the ARPS due to the asset coverage requirements
imposed by the 1940 Act or by a rating agency as a condition of its rating of
the ARPS or other series of Preferred Shares; (2) the Trust would not be able
to liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment objective and policies in order to repurchase Common Shares;
or (3) there is, in the judgment of the Trustees, any material (a) legal action
or proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Trust, (b) suspension of or
limitation on prices for trading securities generally on the New York Stock
Exchange or any foreign exchange on which portfolio securities of the Trust are
traded, (c) declaration of a banking moratorium by federal, state or foreign
authorities or any suspension of payment by banks in the United States, New
York State or foreign countries in which the Trust invests, (d) limitation
affecting the Trust or the issuers of its portfolio securities imposed by
federal, state or foreign authorities on the extension of credit by lending
institutions or on the exchange of foreign currency, (e) commencement of war,
armed hostilities or other international or national calamity directly or
indirectly involving the United States or other countries in which the Trust
invests, or (f) other
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<PAGE>
event or condition which would have a material adverse effect on the Trust or
its shareholders if Common Shares were repurchased. The Trustees may modify
these conditions in light of experience.
It is anticipated that any tender offer made by the Trust will be at a
price equal to the net asset value of the Common Shares on a date subsequent to
the Trust's receipt of all tenders. A procedure will be established whereby the
current net asset value of the Common Shares is readily ascertainable to the
Common Shareholders throughout the offering period. Each offer will be made and
Common Shareholders 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 offering document will contain such information as is
prescribed by such laws and the rules and regulations promulgated thereunder.
Each person tendering Common Shares to the Trust will be charged a service
charge, currently expected to be $25.00, to help defray certain costs,
including the processing of tender forms, effecting payment, postage and
handling. In accordance with the current SEC staff position, such service
charge may not be deducted from the proceeds of the tender. Accordingly,
payment of the proceeds to Common Shareholders tendering their shares will be
delayed until payment of the service charge is received by the Trust. The
Trust's transfer agent will receive the fee as an offset to these costs. The
Trust expects the cost to the Trust of effecting a tender offer will exceed the
aggregate of all service charges received from those who tender their Common
Shares. These excess costs, if any, will be charged against capital.
Subject to its investment restrictions, the Trust may borrow money to
finance the repurchase of its Common Shares in the open market or pursuant to
any tender offer. Interest on any borrowings to finance share repurchase
transactions will reduce the Trust's net income. See "Investment Practices--
Borrowing" and "Investment Restrictions."
Tendered shares that have been accepted and purchased by the Trust will
be retired by the Trustees. Treasury shares will be recorded and reported as an
offset to shareholders' equity, and accordingly will reduce the Trust's net
asset value. If treasury shares are retired, shares of beneficial interest
issued and outstanding and capital in excess of par will be reduced.
CUSTODIAN, DIVIDEND DISBURSING AGENT AND TRANSFER AGENT
===============================================================================
The Bank of New York, 110 Washington Street, New York, New York 10286
is the Custodian of the Trust's assets. The Custodian has no part in choosing
the Trust's investment policies or in deciding which securities are to be
purchased or sold for the Trust's portfolio. Any Trust cash balances with the
Custodian in excess of $100,000 are unprotected by federal deposit insurance.
Such amounts may, at times, be substantial.
Dean Witter Trust Company, Harborside Financial Center, Plaza Two,
Jersey City, New Jersey 07311, an affiliate of InterCapital, is the Transfer
Agent of the Trust's Common Shares, Dividend Disbursing Agent for payment of
dividends and distributions on the Common Shares and Agent for Common
Shareholders under the Dividend Reinvestment Plan. For these services Dean
Witter Trust Company receives an annual per shareholder account fee from the
Trust. In addition, Bankers Trust Company, 4 Albany Street, New York, New York
10006, is the Transfer Agent, Registrar, Dividend Disbursing Agent and
Redemption Agent with respect to the ARPS.
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<PAGE>
UNDERWRITING
===============================================================================
UNDERWRITERS
The Underwriters named below, for whom Dean Witter Distributors Inc.,
Two World Trade Center, New York, New York 10048, and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, North Tower, World Financial Center, New York, New
York 10281, are acting as Representatives (the "Representatives"), have,
subject to the terms and conditions of the Underwriting Agreement (a copy of
which has been filed as an exhibit to the Registration Statement), agreed to
purchase from the Trust the respective number of ARPS set forth opposite their
names in the table below:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF NUMBER OF NUMBER OF
UNDERWRITER SERIES ARPS SERIES ARPS SERIES ARPS SERIES ARPS SERIES ARPS
- - - ----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Dean Witter Distributors Inc....
Merrill Lynch, Pierce, Fenner
& Smith Incorporated...........
----- ----- ----- ----- -----
Total......................
===== ===== ===== ===== =====
</TABLE>
The nature of the Underwriters' obligation is such that they must purchase all
of the shares offered hereby if any are purchased.
The Underwriting Agreement may be terminated by notice to the Trust if
at or prior to the Closing Date (as defined in the Underwriting Agreement) (i)
trading in the Common Shares of the Trust has been suspended or trading in
securities on the New York or American Stock Exchanges shall have been
suspended or minimum or maximum prices shall have been established on either
such exchange, or a banking moratorium shall have been declared by New York or
United States authorities; (ii) there shall have been any material adverse
change in the financial markets in the United States, Japan or Europe or any
outbreak or escalation of hostilities between the United States and any foreign
power, or of any other insurrection or armed conflict involving the United
States which, in the judgment of the Representatives, makes it impracticable or
inadvisable to offer or sell the ARPS; (iii) there shall have been since the
date of the Underwriting Agreement or since the respective dates as of which
information is given in the Registration Statement, any material adverse change
in the condition (financial or otherwise), or in the earnings, business affairs
or business prospects of the Trust; or (iv) there shall be any litigation,
pending or threatened, which, in the judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the ARPS on the terms
contemplated hereby.
The Representatives have advised the Trust that the Underwriters
propose to offer the ARPS to the public at the initial offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less
a concession not in excess of $ per share of which $ per share may be
reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance may be changed. The sales load of
$ per share is equal to % of the initial public offering price. Investors
must pay for any ARPS purchased in the initial public offering on or before
, 1994.
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<PAGE>
Certain of the Underwriters or their affiliates will act in Auctions as
Broker-Dealers as set forth under "Description of ARPS--The Auction--Broker-
Dealer Agreements" and will be entitled to fees for services as Broker-Dealers
as set forth under "Description of ARPS--Broker-Dealers." Such firms may also
provide information to be used in ascertaining the Reference Rate and/or
whether to establish a Short Term Dividend Period or a Long Term Dividend
Period.
The Trust and the Investment Manager have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933, or
to contribute to payments the Underwriters may be required to make in respect
thereof.
Dean Witter Distributors Inc. was the representative of the
underwriters in the initial public offering of the Common Shares, which closed
on , 1994. The Trust anticipates that certain of the Underwriters
may from time to time act as brokers or dealers in connection with the
execution of the Trust's portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as brokers while
they are Underwriters. See "Portfolio Transactions and Brokerage." An affiliate
of Dean Witter Distributors Inc., Dean Witter InterCapital Inc., is the
Investment Manager of the Trust and receives compensation from the Trust in
connection with such services. See "The Trust and its Management." Certain
Trustees and Executive Officers of the Trust are, or formerly were, officers
and/or directors of Dean Witter Distributors Inc., or its parent, DWR, and its
affiliates. See "Trustees and Officers."
INITIAL SETTLEMENT
Payment by each initial purchaser of ARPS will be made by such
purchaser's Agent Member on the Date of Original Issue of such shares to the
Underwriters in same-day funds settled through the New York Clearing House. On
such Date of Original Issue, the Underwriters will accept delivery of the ARPS
offered hereby and will thereafter deposit such shares in their respective
accounts at DTC. Immediately thereafter on the Date of Original Issue, DTC will
deliver (by book entry) the ARPS purchased by each purchaser from the
Underwriter's account to the account of such purchaser's Agent Member against
payment for such ARPS to the account of the Underwriter of an amount equal to
the purchase price from the account of such Agent Member.
LEGAL OPINIONS AND EXPERTS
===============================================================================
Certain legal matters in connection with the ARPS offered hereby will
be passed upon for the Trust by Gordon Altman Butowsky Weitzen Shalov & Wein,
New York, New York. Certain legal matters in connection with the ARPS offered
hereby will be passed upon for the Underwriters by Brown & Wood, New York, New
York. Both Gordon Altman Butowsky Weitzen Shalov & Wein and Brown & Wood may
rely upon the opinion of Lane & Altman, Boston, Massachusetts for matters of
Massachusetts law.
The statement of assets and liabilities of the Trust at ,
1994 included herein has been so included in reliance upon the report of Price
Waterhouse, independent accountants, given on authority of said firm as experts
in auditing and accounting. The principal business address of Price Waterhouse
is 1177 Avenue of the Americas, New York, New York 10036.
FURTHER INFORMATION
===============================================================================
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith is
required to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Any such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's New York Regional
Office, 75 Park Place, New York, New York 10007 and Chicago Regional Office,
Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60611-2511. Copies of such materials can be obtained from the public reference
section of the Commission at
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<PAGE>
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Reports,
proxy statements and other information concerning the Trust can also be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
Additional information regarding the Trust and the ARPS is contained
in the Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Trust with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Trust and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
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<PAGE>
GLOSSARY
" 'AA' Composite Commercial Paper Rate" means (i) the interest
equivalent of the rate on commercial paper placed on behalf of issuers whose
corporate bonds are rated AA by S&P or Aa by Moody's or the equivalent of such
rating issued by another nationally recognized rating agency, as such rate is
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 such a
rate, then the arithmetic average of the interest equivalent of the rate on
commercial paper placed on behalf of such issuers, as quoted on a discount
basis or otherwise by Dean Witter Reynolds Inc. or its successors that are
commercial paper dealers (the "Commercial Paper Dealers"), to the Auction Agent
for the close of business on the Business Day immediately preceding such date.
If one of the Commercial Paper Dealers does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate will be determined on the basis of the quotation or
quotations furnished by any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Trust to provide such rate or rates
not being supplied by the Commercial Paper Dealer. If the number of Dividend
Period Days shall be (i) 7 or more but fewer than 49 days, such rate shall be
the interest equivalent on the 30-day rate on such commercial paper; (ii) 49 or
more but fewer than 70 days, such rate shall be the interest equivalent of the
60-day rate on such commercial paper; (iii) 70 or more days but fewer than 85
days, such rate shall be the arithmetic average of the interest equivalent on
the 60-day and 90-day rates on such commercial paper; (iv) 85 or more days but
fewer than 99 days, such rate shall be the interest equivalent of the 90-day
rate on such commercial paper; (v) 99 or more days but fewer than 120 days,
such rate shall be the arithmetic average of the interest equivalent of the 90-
day and 120-day rates on such commercial paper; (vi) 120 or more days but fewer
than 141 days, such rate shall be the interest equivalent of the 120-day rate
on such commercial paper; (vii) 141 or more days but fewer than 162 days, such
rate shall be the arithmetic average of the interest equivalent of the 120-day
and 180-day rates on such commercial paper; and (viii) 162 or more days but
fewer than 183 days, such rate shall be the interest equivalent of the 180-day
rate on such commercial paper. For the purpose of such definition, "interest
equivalent" means the equivalent yield on a 360-day basis of a discount-basis
security to an interest-bearing security.
"Additional Dividend" has the meaning set forth on pages of
this Prospectus.
"Agent Member" means a member of the Securities Depository that will
act on behalf of a Beneficial Owner or Potential Beneficial Owner.
"Applicable Percentage" has the meaning described on page of this
Prospectus.
"Applicable Rate" means, with respect to the ARPS, the rate per annum
at which cash dividends are payable for any Dividend Period.
"ARPS" means, as the case may be, Auction Rate Preferred Shares,
Series , Auction Rate Preferred Shares, Series , Auction Rate Preferred
Shares, Series , Auction Rate Preferred Shares, Series or Auction Rate
Preferred Shares, Series .
"ARPS Basic Maintenance Amount" has the meaning set forth on page
of this Prospectus.
"ARPS Basic Maintenance Cure Date" has the meaning set forth on page
of this Prospectus.
"ARPS Basic Maintenance Report" has the meaning described on page
of this Prospectus.
"Auction" means a periodic operation of the Auction Procedures with
respect to the ARPS.
"Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Trustees of the Trust or a duly authorized committee
thereof enters into an agreement with the Trust to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent.
"Auction Agent Agreement" means the agreement entered into between the
Trust and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of determining
the Applicable Rate.
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<PAGE>
"Auction Date" has the meaning set forth on page of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Appendix E to this Prospectus.
"Auction Rate Preferred Shares" means the Auction Rate Preferred
Shares of the Trust, par value $.01 per share, liquidation preference $50,000
per share plus applicable redemption premium, if any, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared).
"Available ARPS" has the meaning specified in Paragraph 11(D)(i) of
the Auction Procedures.
"Available Funds" means, in the case of dividends, the lesser of (i)
an amount not in excess of the Trust's net investment income and net realized
capital gains from the beginning of its current taxable year through such date;
plus accumulated and undistributed net investment income and net realized
capital gains from all prior years; less prior distributions in or with respect
to the current taxable year to such date on the ARPS, or (ii) an amount not in
excess of the maximum amount which the Trust could distribute to its
shareholders without thereby being rendered insolvent. In the case of
redemptions, Available Funds shall refer to the amount specified in (ii) above.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as
a holder of ARPS or a Broker-Dealer that holds ARPS for its own account.
"Bid" has the meaning specified in Paragraph 11(B)(i) of the Auction
Procedures.
"Bidder" has the meaning specified in Paragraph 11(B)(i) of the
Auction Procedures.
"Board of Trustees" or "Board" means the Board of Trustees of the
Trust.
"Broker-Dealer" means any broker-dealer, or other entity permitted by
law to perform the functions required of a Broker-Dealer in the Auction
Procedures, that has been selected by the Trust and has entered into a Broker-
Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between
the Auction Agent and a Broker-Dealer, including Dean Witter Reynolds Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated, pursuant to which
such Broker-Dealer agrees to follow the Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which
banks in the City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC and in whose name the
ARPS initially will be registered.
"Certificate" means the Certificate of Designation adopted by the
Board of Trustees of the Trust specifying the preferences, powers,
restrictions, limitations, or qualifications of the ARPS.
"Closing Transaction" means the termination of a futures contract or
option position by taking a position opposite thereto.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" has the meaning set forth on page of
this Prospectus in the definition of "'AA' Composite Commercial Paper Rate."
"Commission" means the United States Securities and Exchange
Commission.
"Common Shares" means the common shares of beneficial interest, par
value $.01 per share, of the Trust.
"Date of Original Issue" means, with respect to any share of ARPS,
the date on which such share is initially issued by the Trust.
"Deposit Securities" has the meaning set forth on page of this
Prospectus.
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<PAGE>
"Discount Factor" means a Moody's Discount Factor and/or an S&P
Discount Factor, as the case may be.
"Discounted Value" of any asset of the Trust means (i) with respect to
an S&P Eligible Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor (provided that the Discounted Value shall never
exceed the par value of such S&P Eligible Asset) 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 the Discounted Value shall
never exceed the par value of such Moody's Eligible Asset).
"Dividend Coverage Amount" has the meaning set forth on page of
this Prospectus.
"Dividend Coverage Assets" has the meaning set forth on page of
this Prospectus.
"Dividend Payment Date" has the meaning set forth on pages of
this Prospectus.
"Dividend Period" means with respect to each series of ARPS, the
Initial Dividend Period and each Subsequent Dividend Period commencing on a
Dividend Payment Date and ending on the calendar day prior to the next Dividend
Payment Date.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets and/or S&P Eligible
Assets, as the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as
may be permitted by the Trust that is listed as the holder of record of ARPS in
the records of the Auction Agent.
"First Initial Dividend Payment Date" means , 1994, in the
case of Series ARPS and Series ARPS.
"Forward Commitment" means a contract to purchase newly-issued
securities on the date such securities are issued.
"Gross-up Dividends" has the meaning set forth on page of this
Prospectus.
"Holder" means a person identified as a holder of record of ARPS in
the Share Register.
"Hold Order" has the meaning specified in Paragraph 11(B)(i) of the
Auction Procedures.
"Initial Dividend Payment Date" means, with respect to Series ARPS
and Series ARPS, each of the First Initial Dividend Payment Date, the Last
Initial Dividend Payment Date and the first Business Day of each calendar month
during the Initial Dividend Period for such series; with respect to Series
ARPS, , 1994; with respect to Series ARPS, , 1994 and with
respect to Series ARPS, , 1994.
"Initial Dividend Period" means with respect to each series of ARPS
the period from and including the Date of Original Issue to but excluding the
Last Initial Dividend Payment Date in the case of Series ARPS and Series
ARPS and the Initial Dividend Payment Date in the case of Series ARPS, Series
ARPS and Series ARPS.
"Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.
"InterCapital" means Dean Witter InterCapital Inc.
"Investment Manager" means Dean Witter InterCapital Inc.
"IRS" means the United States Internal Revenue Service.
"Last Initial Dividend Payment Date" means , 1994 in the case
of Series ARPS and , 1994, in the case of Series ARPS.
"Long Term Dividend Period" has the meaning set forth on page of
this Prospectus.
"Mandatory Redemption Price" means (i) $50,000 per share of ARPS in
the case of a Short Term Dividend Period or (ii) the redemption price per share
(and in no event less than $50,000), which may
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<PAGE>
provide for a redemption premium, of any ARPS as specified by the Broker-
Dealers in their related Response to a Request for a Long Term Dividend Period;
in each case plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of redemption, excluding Gross-
up Dividends.
"Marginal Tax Rate" means 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.
"Maximum Applicable Rate" has the meaning specified under "Description
of ARPS--Auction Procedures--Orders by Existing Holders and Potential Holders"
in the Prospectus.
"Maximum Potential Gross-up Dividend Liability" as of any Valuation
Date, means the aggregate amount of Gross-up Dividends that would be due
estimated based upon dividends paid and the amount of undistributed realized
net capital gains and other taxable income earned by the Trust, as of the end
of the calendar month immediately preceding such Valuation Date and assuming
such Gross-up Dividends are fully taxable.
"Minimum Liquidity Level" has the meaning set forth on page of
this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on page of
this Prospectus.
"Moody's Eligible Assets" has the meaning set forth on page of
this Prospectus.
"Moody's Exposure Period" means a period that is the same length or
longer than the number of days used in calculating the cash dividend component
of the ARPS Basic Maintenance Amount and shall initially be the period
commencing on and including a given Valuation Date and ending 48 days
thereafter.
"Moody's Volatility Factor" means 272% 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:
<TABLE>
<CAPTION>
% CHANGE IN MOODY'S VOLATILITY
MARGINAL TAX RATE FACTOR
----------------- -------------------
<S> <C>
< or = to 5% 292%
> 5% but < or = to 10% 313%
>10% but < or = to 15% 338%
>15% but < or = to 20% 364%
>20% but < or = to 25% 396%
>25% but < or = to 30% 432%
>30% but < or = to 35% 472%
>35% but < or = to 40% 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may
mean such other potential dividend rate increase factor as Moody's advises the
Trust in writing is applicable.
"Municipal Obligations" has the meaning set forth on page of
this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
"1940 Act Cure Date" has the meaning set forth on page of this
Prospectus.
"1940 Act ARPS Asset Coverage" has the meaning set forth on pages
of this Prospectus.
"Non-Payment Period" has the meaning set forth on page of this
Prospectus.
"Non-Payment Period Rate" has the meaning set forth on page of
this Prospectus.
"Notice of Long Term Dividend Period" has the meaning set forth on
page of this Prospectus.
"Notice of Revocation" has the meaning set forth on page of this
Prospectus.
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<PAGE>
"Notice of Revocation of a Long Term Dividend Period" has the
meaning set forth on page 50 of this Prospectus.
"Optional Redemption Price" shall mean (i) $50,000 per share of ARPS
in the case of a Short Term Dividend Period or (ii) the redemption price per
share (and in no event less than $50,000), which may provide for a redemption
premium, of any of ARPS as specified by the Broker-Dealers in their related
Response to a Request for a Long Term Dividend Period; in each case plus an
amount equal to accumulated but unpaid dividends thereon (whether or not earned
or declared) to the date of redemption, excluding Gross-up Dividends.
"Order" has the meaning specified in Paragraph 11(B)(i) of the
Auction Procedures.
"Original Issue Insurance" has the meaning set forth on page of
this Prospectus.
"Permanent Insurance" has the meaning set forth on page of this
Prospectus.
"Portfolio Insurance" has the meaning set forth on page of this
Prospectus.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or
a Broker-Dealer that is not a Beneficial Owner of ARPS but that wishes to
purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional ARPS.
"Potential Holder" means any Broker-Dealer or any such other person
as may be permitted by the Trust, including any Existing Holder, who may be
interested in acquiring ARPS (or, in the case of an Existing Holder, additional
ARPS).
"Preferred Shares" means the preferred shares of beneficial interest,
par value $.01 per share, of the Trust, including the ARPS.
"Projected Dividend Amount" means, with respect to the ARPS, on the
Projected Dividend Valuation Date, in the event the then current Dividend
Period will end within 49 calendar days of the Projected Dividend Valuation
Date, the aggregate amount of cash dividends that would accumulate on the ARPS
outstanding on the Projected Dividend Valuation Date, calculated as follows:
from and after the last day of the current Dividend Period until a date 49
calendar days from the Projected Dividend Valuation Date, assume a dividend
rate equal to the Maximum Applicable Rate for a 7-Day Dividend Period
multiplied by the larger of the Moody's Volatility Factor and the S&P
Volatility Factor that the Trust has been informed by Moody's and S&P,
respectively, is applicable to the Projected Dividend Amount. During a Non-
Payment Period, the Projected Dividend Amount shall be calculated by reference
to the Non-Payment Period Rate.
"Projected Dividend Valuation Date" means the date on which the
Projected Dividend Amount is calculated.
"Receivables for Municipal Obligations Sold" for Moody's has the
meaning set forth under the definition of Moody's Discount Factor and for S&P
has the meaning set forth under the definition of S&P Discount Factor.
"Reference Rate" means (i) with respect to a Short Term Dividend
Period having 28 days or fewer, the higher of the applicable "AA" Composite
Commercial Paper Rate and the Taxable Equivalent of the Short-Term Municipal
Bond Rate, (ii) with respect to any Short Term Dividend Period having more than
28 days but fewer than 183 days, the applicable "AA" Composite Commercial Paper
Rate, (iii) with respect to any Short Term Dividend Period having 189 or more
but fewer than 365 days, the applicable U.S. Treasury Bill Rate and (iv) with
respect to any Long Term Dividend Period, the applicable U.S. Treasury Note
Rate.
"Request for Long Term Dividend Period" has the meaning set forth
on page of this Prospectus.
"Response" has the meaning set forth on page of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page
of this Prospectus.
"S&P" means Standard & Poor's Corporation or its successors.
"S&P Discount Factors" has the meaning set forth on page of this
Prospectus.
"S&P Eligible Assets" has the meaning set forth on pages of
this Prospectus.
79
<PAGE>
"S&P Exposure Period" has the meaning set forth on page of this
Prospectus.
"S&P Volatility Factor" means 277% or such other potential dividend
rate increase factor as S&P advises the Trust in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with ARPS.
"Secondary Market Insurance" has the meaning specified on page
of this Prospectus.
"Sell Order" has the meaning specified in Paragraph 11(B)(i) of the
Auction Procedures.
"Series ARPS" means the Auction Rate Preferred shares of the Trust,
Series , par value $.01 per share, Liquidation preference $50,000 per share
plus applicable redemption premium, if any, plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared).
"Series ARPS" means the Auction Rate Preferred shares of the Trust,
Series , par value $.01 per share, Liquidation preference $50,000 per share
plus applicable redemption premium, if any, plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared).
"Series ARPS" means the Auction Rate Preferred shares of the Trust,
Series , par value $.01 per share, Liquidation preference $50,000 per share
plus applicable redemption premium, if any, plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared).
"Series ARPS" means the Auction Rate Preferred shares of the Trust,
Series , par value $.01 per share, Liquidation preference $50,000 per share
plus applicable redemption premium, if any, plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared).
"Series ARPS" means the Auction Rate Preferred shares of the Trust,
Series , par value $.01 per share, Liquidation preference $50,000 per share
plus applicable redemption premium, if any, plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared).
"7-Day Dividend Period" means, with respect to the ARPS, a Short Term
Dividend Period consisting of 7 days.
"Short Term Dividend Period" has the meaning specified on page of
this Prospectus.
"Submission Deadline" has the meaning specified in Paragraph
11(A)(xi) of the Auction Procedures.
"Submitted Bid" has the meaning specified in Paragraph 11(D)(i) of
the Auction Procedures.
"Submitted Hold Order" has the meaning specified in Paragraph
11(D)(i) of the Auction Procedures.
"Submitted Order" has the meaning specified in Paragraph 11(D)(i) of
the Auction Procedures.
"Submitted Sell Order" has the meaning specified in Paragraph
11(D)(i) of the Auction Procedures.
"Subsequent Dividend Period" means with respect to each series of
ARPS each Dividend Period after the Initial Dividend Period commencing on a
Dividend Payment Date for such series and ending on the calendar day prior to
the next Dividend Payment Date for such series.
"Substitute Commercial Paper Dealers" means such Substitute
Commercial Paper Dealer or Dealers as the Trust may from time to time appoint
or, in lieu of any thereof, their respective affiliates and successors.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall
mean a nationally recognized statistical rating organization or two nationally
recognized securities rating organizations, respectively, selected by Dean
Witter Reynolds Inc., or its respective affiliates and successors, after
consultation with the Trust, to act as a substitute rating agency or substitute
rating agencies, as the case may be, to determine the credit rating of ARPS.
80
<PAGE>
"Sufficient Clearing Bids" has the meaning specified in Paragraph
11(D)(i) of the Auction Procedures.
"Taxable Equivalent of the Short Term Municipal Bond Rate" on any date
for any Short Term Dividend Period of 28 days or fewer means 90% of the
quotient of (A) the per annum rate expressed on an interest equivalent basis
equal to the Kenny S&P 30-day High Grade Index or any successor index (the
"Kenny Index") 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, based upon
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 (B) 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 (A) the per annum rate
expressed on an interest equivalent basis equal to the most recent Kenny Index
so made available for any preceding Business Day, divided by (B) 1.00 minus the
Marginal Tax Rate (expressed as a decimal). For purposes of the foregoing, for
so long as the ARPS are rated by Moody's and S&P, the Trust will obtain written
confirmation from Moody's and S&P that the appointment of a successor to Kenny
Information Systems Inc. would not impair the rating assigned to the ARPS by
Moody's and S&P, respectively.
"Trust" means InterCapital Insured Municipal Securities, a
Massachusetts business trust that is the issuer of the ARPS.
"U.S. Treasury Bill Rate" on any date means (i) the interest
equivalent yield of the rate on the actively traded Treasury Bill with a
maturity most nearly comparable to the length of the related Dividend Period,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S.
Government Securities report for such Business Day, or (ii) if such yield as so
calculated is not available, the Alternate Treasury Bill Rate on such date.
"Alternate Treasury Bill Rate" on any date means the interest equivalent of the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of any time on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as
calculated by reference to the bid price quotation of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as such bid price quotation is published
on the Business Day immediately preceding such date by the Federal Reserve Bank
of New York in its Composite 3:30 P.M. Quotations for U.S. Government
Securities report for such Business Day, or (ii) if such yield as so calculated
is not available, the Alternate Treasury Note Rate on such date. "Alternate
Treasury Note Rate" on any date means the yield as calculated by reference to
the arithmetic average of the bid price quotations of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by the bid price
quotations as of any time on the Business Day immediately preceding such date,
obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"Valuation Date" has the meaning set forth on page of this
Prospectus.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to
and received from a broker (subsequent to the Initial Margin payment) from time
to time as the price of such futures contract fluctuates.
"Winning Bid Rate" has the meaning specified in Paragraph 11(D)(i) of
the Auction Procedures.
81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
===============================================================================
To the Shareholder and Trustees of
InterCapital Insured Municipal Securities
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of InterCapital
Insured Municipal Securities (the "Trust") at , 1994, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Trust's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York,
, 1994
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<PAGE>
APPENDIX A
RATINGS OF INVESTMENTS
===============================================================================
MOODY'S INVESTORS SERVICE INC. ("MOODY'S")
MUNICIPAL BOND RATINGS
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and, therefore, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca present obligations which are speculative in a
high degree. Such issues are often in default or have other market
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which
some other limiting condition attaches. Parenthetical rating denotes probable
credit stature upon completion of construction or elimination of basis of
condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the
A-1
<PAGE>
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and a modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). MIG 1 denotes best quality
and means there is present strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market for
refinancing. MIG 2 denotes high quality and means that margins of protection
are ample although not as large as in MIG 1. MIG 3 denotes favorable quality
and means that all security elements are accounted for but that the undeniable
strength of the previous grades, MIG 1 and MIG 2, is lacking. MIG 4 denotes
adequate quality and means that the protection commonly regarded as required of
an investment security is present and that while the notes are not distinctly
or predominantly speculative, there is specific risk.
VARIABLE RATE DEMAND OBLIGATIONS
A short-term rating, in addition to the Bond or MIG ratings, designated
VMIG may also be assigned to an issue having a demand feature. The assignment
of the VMIG symbol reflects such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. The VMIG rating criteria are identical to the MIG criteria discussed
above.
COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. These ratings apply to Municipal Commercial Paper as well as
taxable Commercial Paper. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers: Prime-1, Prime-2, Prime-3.
Issuers rated Prime-1 have a superior capacity for repayment of short-
term promissory obligations. Issuers rated Prime-2 have a strong capacity for
repayment of short-term promissory obligations; and Issuers rated Prime-3 have
an acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
MUNICIPAL BOND RATINGS
A Standard & Poor's municipal bond rating is a current assessment of
the creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers,
or lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default-capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligations; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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-2
<PAGE>
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payment.
B Debt rated "B" has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC Debt rated "CCC" has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal.
CC The rating "CC" is typically applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC" rating.
C The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
Bonds rated "BB," "B," "CCC," "CC" and "C" are regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation
and "C" the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or minus (-): the ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major ratings categories.
The foregoing ratings are sometimes followed by a "p" which indicates
that the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by bonds being rated and indicates
that payment of debt service requirements is largely or entirely dependent upon
the successful and timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the project, makes
no comment on the likelihood or risk of default upon failure of such
completion.
MUNICIPAL NOTE RATINGS
Commencing on July 27, 1984, Standard & Poor's instituted a new rating
category with respect to certain municipal note issues with a maturity of less
than three years. The new note ratings denote the following:
SP-1 denotes a very strong or strong capacity to pay principal and
interest. Issues determined to possess overwhelming safety characteristics are
given a plus (+) designation (SP-1+).
A-3
<PAGE>
SP-2 denotes a satisfactory capacity to pay principal and interest.
SP-3 denotes a speculative capacity to pay principal and interest.
COMMERCIAL PAPER RATINGS
Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. The commercial paper rating is not a recommendation to purchase
or sell a security. The ratings are based upon current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information. Ratings are graded into group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Ratings are applicable to both taxable and tax-exempt commercial paper. The
categories are as follows:
Issues assigned "A" ratings are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety.
A-1 indicates that the degree of safety regarding timely payment is
very strong.
A-2 indicates capacity for timely payment on issues with this
designation is strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1."
A-3 indicates a satisfactory capacity for timely payment. Obligations
carrying this designation are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
A-4
<PAGE>
APPENDIX B
FUTURES AND OPTIONS
===============================================================================
Interest Rate Futures Contracts. The Trust may purchase and sell
interest rate futures contracts ("futures contracts") that are traded on U.S.
commodity exchanges on such underlying securities as U.S Treasury bonds, notes
and bills. As a futures contract purchaser, the Trust incurs an obligation to
take delivery of a specified amount of the obligation underlying the contract
at a specified time in the future for a specified price. As a seller of a
futures contract, the Trust incurs an obligation to deliver the specified
amount of the underlying obligation at a specified time in return for an agreed
upon price.
The Trust will purchase or sell futures contracts only for the
purpose of hedging its portfolio (or anticipated portfolio) securities against
changes in prevailing interest rates. If the Investment Manager anticipates
that interest rates may rise, the Trust may sell a futures contract to protect
against the potential decline in the value of the securities held by the Trust.
However, it is possible that the futures market may advance and the value of
securities held in the Trust's portfolio may decline. If this were to occur,
the Trust would lose money on the futures contracts and also experience a
decline in value in its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio will tend to move in the same direction as the futures
contracts. If declining interest rates are anticipated, the Trust may purchase
a futures contract to protect against a potential increase in the price of
securities the Trust intends to purchase. If the Trust purchases a futures
contract to hedge against the increase in value of securities it intends to
buy, and the value of such securities decreases, then the Trust may determine
not to invest in the securities as planned and will realize a loss on the
futures contract that is not offset by a reduction in the price of the
securities.
Although most interest rate futures contracts call for actual
delivery or acceptance of debt securities, the contracts usually are closed out
before the settlement date without the making or taking of delivery. A futures
contract sale is closed out by effecting a futures contract purchase for the
same aggregate amount of the specific type of debt security and the same
delivery date. If the sale price exceeds the offsetting purchase price, the
seller would be paid the difference and would realize a gain. If the offsetting
purchase price exceeds the sale price, the seller would pay the difference and
would realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same aggregate amount of the specific
type of debt security and the same delivery date. If the offsetting sale price
exceeds the purchase price, the purchaser would realize a gain whereas if the
purchase price exceeds the offsetting sale price, the purchaser would realize a
loss. There is no assurance that the Trust will be able to enter into a closing
transaction.
When the Trust enters into a futures contract it is initially
required to deposit with its custodian, in a segregated account in the name of
the broker performing the transaction, an "initial margin" of cash, U.S.
Government securities or other high-grade short-term debt obligations equal to
approximately 2% of the contract amount. Initial margin requirements are
established by the Exchanges on which futures contracts trade and may, from
time to time, change. In addition, brokers may establish margin deposit
requirements in excess of those required by the Exchanges.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing
of funds by a broker's client but is, rather, a good faith deposit on the
futures contract which will be returned to the Trust upon the proper
termination of the futures contract. The margin deposits made are marked to
market daily and the Trust may be required to make subsequent deposits into the
segregated account, maintained at its custodian for that purpose, of cash, U.S.
Government securities or other high-grade short-term debt obligations called
"variation margin," in the name of the broker, which are reflective of price
fluctuations in the futures contract.
Options on Interest Rate Futures. The Trust may purchase and write
call and put options on futures contracts which are traded on an Exchange or
Board of Trade and enter into closing transactions with respect to such options
to terminate an existing position. (Put and call options on financial futures
have similar characteristics as Exchange-traded options on debt securities. For
a further description of
B-1
<PAGE>
such options, see the "Options" section below.) Premiums received from the
writing of an option are included in initial margin deposits. An option on a
futures contract gives the purchaser the right, and the writer the obligation,
in return for the premium paid, to assume a position in a futures contract (a
long position of the option is a call and a short position of the option is a
put) at a specified exercise price at any time during the term of the option.
Upon exercise of the option, the delivery of the futures position by the writer
of the option to the holder of the option is accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract at the time of
exercise exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If the holder decides
not to enter into the contract, the premium paid for the contract is lost.
Since the value of the option is fixed at the point of sale, there are no daily
payments of cash to reflect the change in the value of the underlying contract,
as discussed for futures contracts. The value of the option changes and is
reflected in the net asset value of the Trust.
Limitations on Futures and Options Thereon. The Trust is required to
maintain margin deposits with brokerage firms through which it effects futures
contracts and options thereon. The initial margin requirements vary according
to the type of the underlying security. In addition, due to current industry
practice, daily variations in gains and losses on open contracts are required
to be reflected in cash in the form of variation margin payments. The Trust may
be required to make additional margin payments during the term of the contract.
Premiums received from the writing of an option on a futures contract are
included in initial margin deposits.
The Trust may not purchase and sell futures contracts or purchase
related options thereon if, immediately thereafter, the amount committed to
initial margin plus the amount paid for premiums for unexpired options on
futures contracts for other than bona fide hedging purposes exceeds 5% of the
value of the Trust's total assets.
The Trust will only purchase and write options on futures contracts
to hedge a position or anticipated position in Municipal Obligations or to
close out a long or short position in futures contracts. If, for example, the
Investment Manager wished to protect against an increase in interest rates and
the resulting negative impact on the value of a portion of its portfolio, it
might write a call option on a futures contract, the underlying security of
which correlates with the portion of the portfolio the Investment Manager seeks
to hedge. Any premiums received in the writing of options on futures contracts
may, of course, augment the income of the Trust and thereby provide a further
hedge against losses resulting from price declines in portions of the Trust's
portfolio.
In instances involving the purchase of futures contracts by the
Trust, an amount of cash, Treasury bills or other high-grade short-term debt
obligations equal to the market value of the futures contract will be deposited
in a segregated account with its custodian to collateralize the position and
thereby ensure that the use of such futures contract is unleveraged. There is
no overall limitation on the percentage of the Trust's portfolio securities
which may be subject to a hedge position. In addition, the Trust will cover all
purchases of futures contracts and options thereon by maintaining a segregated
account with its custodian consisting of cash, Treasury bills or other high-
grade short-term debt obligations in an amount equal to the value of the
futures or option position less than the amount of initial or variation margin
for the contracts.
Options. The Trust may purchase or sell (write) options on debt
securities as a means of achieving additional return or hedging the Trust's
portfolio securities. The Trust will only write covered call or covered put
options, and will only purchase options which are listed on national securities
exchanges. Listed options are issued by the Options Clearing Corporation
("OCC"). Ownership of a listed call option gives the Trust the right to buy
from the OCC the underlying security covered by the option at the stated
exercise price (the price per unit of the underlying security) by filing an
exercise notice prior to the expiration date of the option. The writer (seller)
of the option would then have the obligation to sell to the OCC the underlying
security at that exercise price prior to the expiration date of the option,
regardless of its then current market price. Ownership of a listed put option
would give the Trust the right to sell the underlying security to the OCC at
the stated exercise price. Upon notice of exercise of the put option, the
writer of the put would have the obligation to purchase the underlying security
from the OCC at the exercise price.
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Covered Call Writing. The Trust may write covered call options on debt
securities only, in order to achieve additional return. As a writer of a call
option, the Trust has the obligation, upon notice of exercise of the option, to
deliver the security underlying the option prior to the expiration date of the
option. Generally, a call option is "covered" if the Trust owns, or has the
right to acquire, without additional cash consideration (or for additional cash
consideration held for the Trust by its custodian in a segregated account) the
underlying security subject to the option. A call option is also covered if the
Trust holds a call on the same security as the underlying security of the
written option, where the exercise price of the call used for coverage is equal
to or less than the exercise price of the call written or greater than the
exercise price of the call written if the marked to market difference is
maintained by the Trust in cash, U.S. Government securities or other high-grade
short-term debt obligations which the Trust may hold in its portfolio in a
segregated account maintained with the Trust's custodian.
The Trust will receive from the purchaser, in return for a call it
has written, a "premium"; i.e., the price of the option. Furthermore, the
income received from the premium will offset a portion of any potential loss
incurred by the Trust if the securities underlying the option are ultimately
sold by the Trust at a loss. The income received from premiums will fluctuate
with varying economic market conditions. If the market value of the securities
upon which call options have been written increases, the Trust may receive less
total return from the portion of its portfolio upon which calls have been
written than it would have had such calls not been written.
As regards listed options, during the option period the Trust may be
required, at any time, to deliver the underlying security against payment of
the exercise price on any calls it has written. This obligation is terminated
upon the expiration of the option period or at such earlier time when the
writer effects a closing purchase transaction. A closing purchase transaction
is accomplished by purchasing an option of the same series as the option
previously written. However, once the Trust has been assigned an exercise
notice, the Trust will be unable to effect a closing purchase transaction.
Closing purchase transactions are ordinarily effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, to permit the sale of an underlying security or to enable the
Trust to write another call option on the underlying security with either a
different exercise price or expiration date or both. Also, effecting a closing
purchase transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments by the
Trust. The Trust may realize a net gain or loss from a closing purchase
transaction depending upon whether the amount of the premium received on the
call option is more or less than the cost of effecting the closing purchase
transaction. Any loss incurred in a closing purchase transaction may be wholly
or partially offset by unrealized appreciation in the market value of the
underlying security. Conversely, a gain resulting from a closing purchase
transaction could be offset in whole or in part or exceeded by a decline in the
market value of the underlying security.
If a call option expires unexercised, the Trust realizes a gain in the
amount of the premium on the option less the commission paid. Such a gain,
however, may be offset by depreciation in the market value of the underlying
security during the option period. If a call option is exercised, the Trust
realizes a gain or loss from the sale of the underlying security equal to the
difference between the purchase price of the underlying security and the
proceeds of the sale of the security plus the premium received on the option
less the commission paid.
Options written by the Trust will normally have expiration dates of up
to nine months from the date written. The exercise price of a call option may
be below, equal to or above the current market value of the underlying security
at the time the option is written.
Covered Put Writing. As a writer of covered put options, the Trust
incurs an obligation to buy the security underlying the option from the
purchaser of the put, at the option's exercise price at any time during the
option period, at the purchaser's election. A put is "covered" if, at all
times, the Trust maintains, in a segregated account maintained on its behalf at
the Trust's custodian, cash, U.S. Government securities or other high-grade
short-term debt obligations, in an amount equal to at least the exercise
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price of the option, at all times during the option period. In writing puts,
the Trust assumes the risk of loss should the market value of the underlying
security decline below the exercise price of the option. During the option
period, the Trust may be required, at any time, to make payment of the exercise
price against delivery of the underlying security. The operation of and
limitations on covered put options in other respects are substantially
identical to those of call options.
The Trust will write put options for two purposes: (1) to receive
the income derived from the premiums paid by purchasers; and (2) when the
Investment Manager wishes to purchase the security underlying the option at a
price lower than its current market price, in which case it will write the
covered put at an exercise price reflecting the lower purchase price sought.
The potential gain on a covered put option is limited to the premium received
on the option (less the commissions paid on the transaction) while the
potential loss equals the difference between the exercise price of the option
and the current market price of the underlying securities when the put is
exercised, offset by the premium received (less the commissions paid on the
transaction).
Purchasing Call and Put Options. The Trust may purchase listed call
and put options on debt securities. The Trust may purchase call options only in
order to close out a covered call position (see "Covered Call Writing" above).
The Trust may purchase put options on securities which it holds (or
has the right to acquire) in its portfolio only to protect itself against a
decline in the value of the security. If the value of the underlying security
were to fall below the exercise price of the put purchased in an amount greater
than the premium paid for the option, the Trust would incur no additional loss.
The Trust may also purchase put options to close out written put positions in a
manner similar to call options closing purchase transactions. In addition, the
Trust may sell a put option which it has previously purchased prior to the sale
of the securities underlying such option. Such a sale would result in a net
gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the put option which
is sold. Any such gain or loss could be offset in whole or in part by a change
in the market value of the underlying security. If a put option purchased by
the Trust expired without being sold or exercised, the premium would be lost.
Risks of Options and Futures Transactions. During the option period,
the covered call writer has, in return for the premium on the option, given up
the opportunity for capital appreciation above the exercise price should the
market price of the underlying security increase, but has retained the risk of
loss should the price of the underlying security decline. The secured put
writer also retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option. In both cases, the
writer has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the underlying
securities at the exercise price.
Prior to exercise or expiration, an option position can only be
terminated by entering into a closing purchase or sale transaction. If a
covered call option writer is unable to effect a closing purchase transaction,
it cannot sell the underlying security until the option expires or the option
is exercised. Accordingly, a covered call option writer may not be able to sell
an underlying security at a time when it might otherwise be advantageous to do
so. A secured put option writer who is unable to effect a closing purchase
transaction would continue to bear the risk of decline in the market price of
the underlying security until the option expires or is exercised. In addition,
a secured put writer would be unable to utilize the amount held in cash, U.S.
Government securities or other high-grade short-term debt obligations as
security for the put option for other investment purposes until the exercise or
expiration of the option.
The Trust may close out its position as writer of an option only if
a liquid secondary market exists on options exchanges for options of that
series. There is no assurance that such a market will exist. However, the Trust
may be able to purchase an offsetting option which does not close out its
position as a writer but constitutes an asset of equal value to the obligation
under the option written. If the Trust is not able to either enter into a
closing purchase transaction or purchase an offsetting position, it will be
required to maintain the securities subject to the call, or the collateral
underlying the put, even though it might not be advantageous to do so, until a
closing transaction can be entered into (or the option is
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exercised or expires). Among the possible reasons for the absence of a liquid
secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or the OCC to handle current trading volume; or (vi)
a decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the OCC
as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms.
There is similarly no assurance that a liquid secondary market will
exist for futures contracts and related options in which the Trust may invest.
In the event a liquid market does not exist, it may not be possible to close
out a futures position, and in the event of adverse price movements, the Trust
would continue to be required to make daily cash payments of variation margin.
In addition, limitations imposed by an exchange on which futures contracts are
traded may compel or prevent the Trust from closing out a contract which may
result in reduced gain or increased loss to the Trust. The absence of a liquid
market in futures contracts might cause the Trust to make or take delivery of
the underlying securities at a time when it may be disadvantageous to do so.
Exchanges may limit the amount by which the price of a futures
contract may move on any day. If the price moves equal the daily limit on
successive days, then it may prove impossible to liquidate a futures position
until the daily limit movements have ceased. In the event of adverse price
movements, the Trust would continue to be required to make daily cash payments
of variation margin on open futures positions. In such situations, if the Trust
has insufficient cash, it may have to sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous to do
so. In addition, the Trust may be required to make or take delivery of the
instruments underlying interest rate futures contracts it holds at a time when
it is disadvantageous to do so. The inability to close options and futures
positions could also have an adverse impact on the Trust's ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Trust
engages in transactions in options, futures or options thereon, the Trust could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Transactions are entered into by the Trust only with brokers
or financial institutions deemed creditworthy by the Investment Manager.
Each of the exchanges has established limitations governing the
maximum number of call or put options on the same underlying security or
futures contract (whether or not covered) which may be written by a single
investor, whether acting alone or in concert with others (regardless of whether
such options are written on the same or different exchanges or are held or
written on one or more accounts or through one or more brokers). An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. These position limits may
restrict the number of listed options which the Trust may write.
While the futures contracts and options transactions to be engaged in
by the Trust for the purpose of hedging the Trust's portfolio securities are
not speculative in nature, there are risks inherent in the use of such
instruments. One such risk which may arise in employing futures contracts to
protect against the price volatility of portfolio securities is that the prices
of securities subject to futures contracts (and thereby the futures contract
prices) may correlate imperfectly with the behavior of the cash prices of the
Trust's portfolio securities. The risk of imperfect correlation may be
increased by the fact that the Trust will invest in futures contracts on
taxable securities and there is no guarantee that the prices of taxable
securities will move in a similar manner to the prices of tax-exempt
securities. Another such risk is that the price of the futures contract may not
move in tandem with the change in prevailing interest rates against which the
Trust seeks a hedge. A correlation may be distorted by the fact that the
futures market is dominated by short-term traders seeking to profit from the
difference between a contract or security price objective and their cost of
borrowed funds. If participants in the futures market elect to close out their
contracts through offsetting transactions rather than meet margin deposit
requirements, distortions
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in the normal relationships between the debt securities and futures market
could result. Price distortions could also result if investors in futures
contracts opt to make or take delivery of underlying securities rather than
engage in closing transactions due to the resultant reduction in the liquidity
of the futures market. In addition, due to the fact that, from the point of
view of speculators, the deposit requirements in the futures markets are less
onerous than margin requirements in the cash market, increased participation by
speculators in the futures market could cause distortions. Due to the
possibility of price distortions in the futures market and because of the
imperfect correlation between movements in the prices of debt securities and
movements in the prices of futures contracts, a correct forecast of interest
rate trends by the Investment Manager may still not result in a successful
hedging transaction. However, such distortions are generally minor and would
diminish as the contract approaches maturity.
Another risk is that the Investment Manager could be incorrect in its
expectations as to the direction or extent of various interest rate movements
or the time span within which the movements take place. For example, if the
Trust sold futures contracts for the sale of securities in anticipation of an
increase in interest rates, and then interest rates went down instead, causing
bond prices to rise, the Trust would lose money on the sale.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to the
Trust because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances when a purchase
of a call or put option on a futures contract would result in a loss to the
Trust when the purchase or sale of a futures contract would not result in a
loss, such as when there is no movement in the prices of the underlying
securities. The writing of a put or call option on a futures contract involves
risks similar to those relating to transactions in futures contracts as
described above.
S&P'S AND MOODY'S OPTIONS AND FUTURES GUIDELINES
In connection with obtaining certain ratings on the ARPS from S&P and
Moody's, such rating agencies have imposed certain restrictions on the Trust's
options and futures transactions set forth below.
For so long as the ARPS are rated by S&P: (1) the Trust will not,
unless it has received written confirmation from S&P that any such action would
not impair the rating then assigned by S&P to the ARPS, purchase or sell
futures contracts or options thereon or write uncovered put or uncovered call
options on portfolio securities, except that (i) the Trust may engage in S&P
Hedging Transactions based on the Municipal Index, provided that the Trust
shall not engage in any S&P Hedging Transaction based on the Municipal Index
(other than Closing Transactions) which would cause the Trust at the time of
such transaction to own or have sold (a) more than 1,000 outstanding futures
contracts based on the Municipal Index, (b) outstanding futures contracts based
on the Municipal Index and Treasury Bonds exceeding in number 25% of the
quotient of the market value of the Trust's total assets divided by 100,000 or
(c) 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 Trust may engage in S&P
Hedging Transactions based on Treasury Bonds, provided that the Trust shall not
engage in any S&P Hedging Transaction based on Treasury Bonds (other than
Closing Transactions) which would cause the Trust at the time of such
transaction to own or have sold (a) outstanding futures contracts based on the
Municipal Index and Treasury Bonds exceeding in number 25% of the quotient of
the Market Value of the Trust's total assets divided by 100,000 or (b)
outstanding futures contracts based on Treasury Bonds exceeding in number 10%
of the average number of daily traded futures contracts based on Treasury Bonds
in the month prior to the time of effecting such transaction as reported by The
Wall Street Journal; (2) the Trust will engage in Closing Transactions to close
out any outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (i) the Trust does
not have S&P Eligible Assets with an aggregate Discounted Value equal to or
greater than the ARPS Basic Maintenance Amount on two consecutive Valuation
Dates and (ii) the Trust is required to pay Variation Margin on the second such
Valuation Date; (3) the Trust will engage in a Closing Transaction to close out
any outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds securities deliverable under such terms. For purposes of
calculating the Discounted Value of S&P Eligible Assets to
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determine compliance with the ARPS Basic Maintenance Amount, such Discounted
Value shall be reduced by an amount equal to (i) 30% of the aggregate
settlement price, as marked to market, of any outstanding futures contracts
based on the Municipal Index which are owned by the Trust plus (ii) 25% of the
aggregate settlement price, as marked to market, of any outstanding futures
contracts based on Treasury Bonds which contracts are owned by the Trust; and
(4) there shall be a quarterly review made by the Independent Accountant of the
Trust's options and futures transactions to confirm that the Trust is in
compliance with the standards set forth in this paragraph. The foregoing
restrictions on options and futures transactions may be modified if the Trust
receives written confirmation from S&P that the action the Trust proposes to
take would not impair the rating then assigned to the ARPS.
For so long as the ARPS are rated by Moody's: (1) the Trust will
not, unless it has received written confirmation from Moody's that any such
action would not impair the rating then assigned by Moody's to the ARPS and
except as necessary to effect Closing Transactions, purchase or sell futures
contracts or options thereon or uncovered call options on portfolio securities
except that (i) the Trust may engage in Moody's Hedging Transactions provided
that the Trust shall not engage in any Moody's Hedging Transaction based on the
Municipal Index which would cause the Trust at the time of such transaction to
own or have sold (a) outstanding futures contracts based on the Municipal Index
exceeding in number 10% of the average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal or (b) outstanding
futures contracts based on the Municipal Index and options on such futures
contracts having an aggregate Market Value exceeding the Market Value of
Moody's Eligible Assets owned by the Trust not otherwise hedged with a Treasury
Bond contract or other options and (ii) the Trust may engage in Moody's Hedging
Transactions provided that the Trust shall not engage in any Moody's Hedging
Transaction based on Treasury Bonds which would cause the Trust at the time of
such transaction to own or have sold (a) outstanding futures contracts based on
Treasury Bonds and options on such futures contracts having an aggregate Market
Value exceeding 40% of the aggregate Market Value of Moody's Eligible Assets
owned by the Trust not otherwise hedged with a Municipal Bond contract or other
options and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P,
rated AAA by S&P) or (b) outstanding futures contracts based on Treasury Bonds
and options on such futures contracts having an aggregate Market Value
exceeding 80% of the aggregate Market Value of Moody's Eligible Assets not
otherwise hedged with a Municipal Bond contract owned by the Trust and rated
Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated AA or
A by S&P). For purposes of the foregoing clauses (i) and (ii), the Trust shall
be deemed to own the number of futures contracts that underlie any outstanding
option written by the Trust; (2) the Trust will engage in Closing Transactions
to close out any outstanding futures contract based on the Municipal Index if
at any time the open interest in the contract as reported by The Wall Street
Journal is less than 5,000; (3) the Trust 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; (4) the Trust will engage in Moody's Hedging Transactions only with
respect to futures contracts or options thereon having the next settlement date
or the settlement date immediately thereafter; (5) the Trust will not engage in
options and futures transactions for leveraging or speculative purposes and
will not write any anticipatory call options or sell any anticipatory futures
contracts pursuant to which the Trust hedges the anticipated purchase of an
asset prior to the completion of such purchase; (6) the Trust will not enter
into an option or futures transaction unless after giving effect to such
transaction the Trust would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the ARPS Basic Maintenance
Amount. For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the ARPS
Basic Maintenance Amount, the Trust shall mark to market daily; (7) the Trust
will engage in Moody's Hedging Transactions only with respect to Moody's
Eligible Assets; (8) where delivery may be made to the Trust with any of a
class of securities, the Trust shall assume for purposes of the ARPS Basic
Maintenance Amount that it takes delivery of that security which yields it the
least value; (9) (i) if the Trust writes a call option, the underlying asset
will be valued as follows: (A) if the option is exchange-traded and may be
offset readily or if the option expires before the earliest possible redemption
of the ARPS, at the lower of (a) the Dis-
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counted Value and (b) exercise price of the call option; (B) otherwise, it has
no value; (ii) if the Trust is the seller under a futures contract, the
underlying security will be valued at the lower of (a) settlement price and (b)
market value of the security multiplied by the Moody's Discount Factor; (iii)
if a contract matures before the earliest possible redemption of the ARPS, the
security may be valued at the settlement price; (iv) if the Trust writes a put
option, the underlying asset will be valued at the lower of (a) the exercise
price and (b) the Discounted Value of the security; (v) if the Trust is a
purchaser of an exchange traded futures contract, the underlying asset will be
valued at the lower of (a) the settlement price and (b) the Discounted Value of
the security. If, however, such contract matures within 59 days, security may
be valued at the Discounted Value. For purposes of calculating the Discounted
Value of Moody's Eligible Assets to determine compliance with the ARPS Basic
Maintenance Amount, such Discounted Value shall be reduced by an amount equal
to: (i) 10% of the exercise price of a call option written by the Trust; (ii)
10% of the settlement price of assets sold under a futures contract; (iii) 100%
of the settlement price of assets purchased under a futures contract; and (iv)
if the Trust writes a call option on a futures contract and does not own the
underlying contract, 105% of market value of the underlying futures contract;
and (10) there shall be a quarterly review made by the Independent Accountant
of the Trust's options and futures transactions to confirm that the Trust is in
compliance with the standards set forth in this paragraph. The foregoing
restrictions on options and futures transactions may be modified if the Trust
receives written confirmation from Moody's that the action the Trust proposes
to take would not impair the rating then assigned to the ARPS.
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APPENDIX C
RISKS OF CERTAIN MUNICIPAL OBLIGATIONS
===============================================================================
The following is a summary of the risks associated with certain
Municipal Obligations in which the Trust reserves the right to invest more than
25% of its total assets:
Health Facility Obligations. Some of the Municipal Obligations in
which the Trust may invest are obligations of issuers whose revenues are
derived from services provided by hospitals or other health care facilities,
including nursing homes. Ratings of bonds issued for health care facilities are
often based on feasibility studies that contain projections of occupancy
levels, revenues and expenses. A facility's gross receipts and net income
available for debt service may be affected by future events and conditions
including, among other things, demand for services, the ability of the facility
to provide the services required, physicians' confidence in the facility,
management capabilities, economic developments in the service area, competition
from other similar providers, efforts by insurers and governmental agencies to
limit rates, legislation establishing state rate-setting agencies, expenses,
government regulation, the cost and possible unavailability of malpractice
insurance, and the termination or restriction of governmental financial
assistance, including that associated with Medicare, Medicaid and other similar
third party payor programs. Medicare reimbursements are currently calculated on
a prospective basis utilizing a single nationwide schedule of rates and are not
based on a provider's actual costs. Such method of reimbursement may adversely
affect reimbursements to hospitals and other facilities for services provided
under the Medicare program and thereby may have an adverse effect on the
ability of such institutions to satisfy debt service requirements.
Certain health care facility bonds provide for redemption at par at
any time upon the sale by the issuer of the health care facilities to a non-
affiliated entity or in other special circumstances. In the event of a default
upon a bond secured by health care facilities, the limited alternative uses for
such facilities may result in the recovery upon such collateral not providing
sufficient funds to fully repay the bonds.
Housing Obligations. Some of the Municipal Obligations in which the
Trust may invest are obligations of issuers whose revenues are primarily
derived from mortgage loans to housing projects for low to moderate income
families. Such issues are generally characterized by mandatory redemption at
par or accreted value in the event of economic defaults and in the event of a
failure of the operator of a project to comply with certain covenants as to the
operation of the project. The ability of such issuers to make debt service
payments will be affected by events and conditions affecting financed projects,
including, among other things, the achievement and maintenance of sufficient
occupancy levels and adequate rental income, employment and income conditions
prevailing in local labor markets, increases in taxes, utility costs and other
operating expenses, the managerial ability of project managers, changes in laws
and governmental regulations, the appropriation of subsidies and social and
economic trends affecting the localities in which the projects are located.
Occupancy of such housing projects may be adversely affected by high rent
levels and income limitations imposed under federal and state programs.
Single Family Mortgage Revenue Bonds. Some of the Municipal
Obligations in which the Trust may invest are single family mortgage revenue
bonds, which are issued for the purpose of making mortgages on or acquiring
from originating financial institutions notes secured by mortgages on,
residences located within the issuer's boundaries and owned by persons of low
or moderate income. Mortgage loans are generally partially or completely
prepaid prior to their final maturities as a result of events such as sale of
the mortgage premises, default, condemnation or casualty loss. Because these
bonds are subject to extraordinary mandatory redemption in whole or in part
from such prepayments of mortgage loans, a substantial portion of such bonds
will probably be redeemed prior to their scheduled maturities or even prior to
their ordinary call dates. Extraordinary mandatory redemption without premium
could also result from the failure of the issuer or the originating financial
institutions to make mortgage loans in sufficient amounts within a specified
time period. The redemption price of such issues may be more or less than the
offering price of such bonds. Additionally, unusually high rates of default on
the underlying mortgage loans may reduce revenues available for the payment of
principal of or interest on such mortgage revenue bonds.
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Industrial Revenue Obligations. Some of the Municipal Obligations in
which the Trust may invest are industrial revenue bonds ("IRBs") which are tax-
exempt securities issued by states, municipalities, public authorities or
similar entities to finance the cost of acquiring, constructing or improving
various industrial projects. These projects are usually operated by corporate
entities. Issuers are obligated only to pay amounts due on the IRBs to the
extent that funds are available from the unexpended proceeds of the IRBs or
receipts or revenues of the issuer under an arrangement between the issuer and
the corporate operator of a project. The arrangement may be in the form of a
lease, installment sale agreement, conditional sale agreement or loan
agreement, but in each case the payments to the issuer are designed to be
sufficient to meet the payments of amounts due on the IRBs. Regardless of the
structure, payment of IRBs is solely dependent upon the creditworthiness of the
corporate operator of the project and, if applicable, the corporate guarantor.
Corporate operators or guarantors may be affected by many factors which may
have an adverse impact on the credit quality of the particular company or
industry. These include cyclicality of revenues and earnings, regulatory and
environmental restrictions, litigation resulting from accidents or
environmentally-caused illnesses, technological developments, extensive
competition and financial deterioration resulting from leveraged buyouts or
takeovers. The IRBs may be subject to special or extraordinary redemption
provisions which may provide for redemption at par or accreted value, plus, if
applicable, a premium. The Trust cannot predict the causes or likelihood of the
redemption of IRBs prior to the stated maturity of such bonds.
Electric Utility Obligations. Some of the Municipal Obligations in
which the Trust may invest are obligations of issuers whose revenues are
primarily derived from the sale of electric energy. The problems faced by such
issuers include the difficulty in obtaining approval for timely and adequate
rate increases from the applicable utility commissions, the difficulty of
financing large construction programs, increased competition, reductions in
estimates of future demand for electricity in certain areas of the country, the
limitations on operations and increased costs and delays attributable to
environmental considerations, the difficulty of the capital market in absorbing
utility debt, the difficulty in obtaining fuel at reasonable prices and the
effect of energy conservation. All of such issuers have been experiencing
certain of these problems in varying degrees. In addition, federal, state and
municipal governmental authorities may from time to time review existing, and
impose additional, regulations governing the licensing, construction and
operation of nuclear power plants, which may adversely affect the ability of
the issuers of certain of the Municipal Obligations to make payments of
principal and/or interest on such bonds.
Airport Facility Revenue Bonds. Some of the Municipal Obligations in
which the Trust may invest are obligations of issuers which are payable from
and secured by revenues derived from the ownership and operation of airports.
The major portion of an airport's gross operating income is generally derived
from fees received from signatory airlines pursuant to use agreements which
consist of annual payments for airport use, occupancy of certain terminal
space, service fees and leases. Airport operating income may therefore be
affected by the ability of the airlines to meet their obligations under the use
agreements. The air transport industry is experiencing significant variations
in earnings and traffic, due to increased competition, excess capacity,
increased costs, deregulation, traffic constraints and other factors, and
several airlines are experiencing severe financial difficulties. In particular,
facilities with use agreements involving airlines experiencing financial
difficulty may experience a reduction in revenue due to the possible inability
of these airlines to meet their use agreement obligations because of such
financial difficulties and possible bankruptcy. The Trust cannot predict what
effect these industry conditions may have on airport revenues which are
dependent for payment on the financial condition of the airlines and their
usage of the particular airport facility.
Water and/or Sewerage Obligations. Some of the Municipal Obligations in
which the Trust may invest are obligations of issuers whose revenues are
derived from the sale of water and/or sewerage services. Such bonds are
generally payable from user fees. The problems of such issuers include the
ability to obtain timely and adequate rate increases, population decline
resulting in decreased user fees, the difficulty of financing large
construction programs, the limitations on operations and increased costs and
delays attributable to environmental considerations, the increasing difficulty
of obtaining or discovering new supplies of fresh water, the effect of
conservation programs and the impact of "no-growth" zoning ordinances. All of
such issuers have been experiencing certain of these problems in varying
degrees.
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University and College Revenue Obligations. Some of the Municipal
Obligations in which the Trust may invest are obligations of issuers which are,
or which govern the operation of, colleges and universities and whose revenues
are derived mainly from tuition, dormitory revenues, grants and endowments.
General problems of such issuers include the prospect of a declining percentage
of the population consisting of "college" age individuals, possible inability
to raise tuitions and fees sufficiently to cover increased operating costs, the
uncertainty of continued receipt of federal grants and state funding, and
government legislation or regulations which may adversely affect the revenues
or costs of such issuers. All of such issuers have been experiencing certain of
these problems in varying degrees.
Bridge Authority and Tollroad Obligations. Some of the Municipal
Obligations in which the Trust may invest are obligations of issuers which
derive their payments from bridge, road or tunnel toll revenues. The problems
faced by such issuers include competition from toll-free vehicular facilities,
a reduction in the availability of fuel to motorists or significant increases
in the costs thereof, increased costs and delays attributable to environmental
considerations and the difficulty in obtaining approval for timely and adequate
toll increases.
Resource Recovery Obligations. Some of the Municipal Obligations in
which the Trust may invest are obligations of issuers whose revenues are
primarily derived from the disposal of solid waste products and the sale of
energy generated by such disposal. Resource recovery plants in the United
States have experienced several well-publicized failures, in response to which
municipal entities wanting to solve their disposal problem by resource recovery
have been unwilling to accept the technological risk, turning instead to
equipment vendors to provide guarantees to cover that risk. The municipal
revenue streams pledged under these obligations can vary considerably, and may
involve a mixture of special taxes, user fees, and the municipal entity's
credit. A general fund pledge can be equal to or less than a full faith and
credit pledge. Economics and financial feasibility of any project depend on a
number of factors, including whether (1) project cost estimates are
commensurate with industry averages, (2) solid waste to obtain full operating
capacity is available, given population growth and historical waste generation
trends, (3) alternative disposal facilities will not pose any competitive
threat to waste flow, (4) the price at which energy produced by such facilities
may be sold is consistent with market assumptions, (5) facility and landfill
options have a useful life corresponding to the life of the bonds, and (6)
management is capable of construction, start-up, and plant operation. Changes
in governmental regulation could affect the continued operation of the resource
recovery facilities.
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APPENDIX D
INSURANCE CLAIMS-PAYING ABILITY RATINGS
===============================================================================
The insurance companies issuing policies insuring the Municipal
Obligations held in the Trust's portfolio will have insurance claims-paying
ability ratings of "AAA" from Standard & Poor's Corporation ("S&P") and "Aaa"
from Moody's Investors Service, Inc. ("Moody's").
An S&P insurance claims-paying ability rating is an assessment of an
operating insurance company's financial capacity to meet obligations under an
insurance policy in accordance with the terms. An insurer with an insurance
claims-paying ability rating of "AAA" has the highest rating assigned by S&P.
Capacity to honor insurance contracts is adjudged by S&P to be extremely strong
and highly likely to remain so over a long period of time. A Moody's insurance
claims-paying ability rating is an opinion of the ability of an insurance
company to repay punctually senior policyholder obligations and claims. An
insurer with an insurance claims-paying ability rating of "Aaa" is judged by
Moody's to be of the best quality. In the opinion of Moody's, the policy
obligations of an insurance company with an insurance claims-paying ability
rating of "Aaa" carry the smallest degree of credit risk and, while the
financial strength of these companies is likely to change, such changes as can
be visualized are most unlikely to impair the company's fundamentally strong
position.
An insurance claims-paying ability rating by S&P or Moody's does not
constitute an opinion on any specific contract in that such an opinion can only
by rendered upon the review of the specific insurance contract. Furthermore, an
insurance claims-paying ability rating does not take into account deductibles,
surrender or cancellation penalties or the timeliness of payment; nor does it
address the ability of a company to meet nonpolicy obligations (i.e., debt
contracts).
The assignment of ratings by S&P or Moody's to debt issues that are
fully or partially supported by insurance policies, contracts, or guarantees is
a separate process from the determination of claims-paying ability ratings. The
likelihood of a timely flow of funds from the insurer to the trustee for the
bondholders is a key element in the rating determination for such debt issues.
Moody's and S&P's ratings are not recommendations to buy, sell or
hold the Municipal Obligations insured by policies issued by insurers and such
ratings may be subject to revision or withdrawal at any time by the rating
agencies. Any downward revision or withdrawal of either or both ratings may
have an adverse effect on the market price of the Municipal Obligations insured
by policies issued by insurers.
The Moody's claims-paying ability rating of an insurer should be
evaluated independently of S&P's ratings. Any further explanation as to the
significance of the ratings may be obtained only from the applicable rating
agency.
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APPENDIX E
AUCTION PROCEDURES
===============================================================================
The following procedures will be set forth in provisions of the
Certificate relating to the ARPS, and will be incorporated by reference in the
Auction Agent Agreement and each Broker-Dealer Agreement. The terms not defined
below are defined in the forepart of this Prospectus. Nothing contained in this
Appendix D constitutes a representation by the Trust that in each Auction each
party referred to herein will actually perform the procedures described herein
to be performed by such party.
A. Paragraph 11(A) Certain Definitions
As used in this Paragraph 11, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "ARPS" shall mean the ARPS being auctioned pursuant to this
Paragraph 11.
(ii) "Auction Date" shall mean the first Business Day preceding the
first day of a Dividend Period.
(iii) "Available ARPS" shall have the meaning specified in Paragraph
11(D)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph 11(B)(i)
below.
(v) "Bidder" shall have the meaning specified in Paragraph 11(B)(i)
below.
(vi) "Hold Order" shall have the meaning specified in Paragraph
11(B)(i) below.
(vii) "Maximum Applicable Rate," on any Auction Date, shall mean the
Applicable Percentage of the Reference Rate.
(viii) "Order" shall have the meaning specified in Paragraph
11(B)(i) below.
(ix) "Reference Rate" shall mean (i) with respect to any Short Term
Dividend Period having 28 days or fewer, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Bond Rate, (ii) with respect to any Short Term Dividend Period having
more than 28 days but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 189 or more but fewer than 365 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable
U.S. Treasury Note Rate.
The Applicable Percentage varies with the lower of the credit
rating or ratings assigned by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) to the
ARPS on each Auction Date as follows:
<TABLE>
<CAPTION>
APPLICABLE
PERCENTAGE
CREDIT RATINGS OF REFERENCE RATE
---------------------------------- ----------------
MOODY'S S&P
<C> <C> <S>
"aa3" or higher AA- or higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
Below "baa3" Below BBB- 220%
</TABLE>
The Applicable Rate for any Dividend Period commencing during a Non-
Payment Period and the rate used to calculate the late charge with respect to
dividends or redemption payments not paid in a timely manner will be (i) 220%
of the higher of the applicable "AA" Composite Commercial Paper Rate and the
Taxable Equivalent of the Short-Term Municipal Bond Rate in the case of any
Short Term Dividend Period having 28 or fewer days, (ii) 220% of the applicable
"AA" Composite Commercial Paper Rate in the case of any Short Term Dividend
Period having 35 or more but fewer
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than 183 days, (iii) 220% of the Applicable U.S. Treasury Bill Rate in the case
of any Short Term Dividend Period having 189 or more but fewer than 365 days
and (iv) 220% of the applicable U.S. Treasury Note Rate in the case of any Long
Term Dividend Period.
(x) "Sell Order" shall have the meaning specified in Paragraph 11(B)(i)
below.
(xi) "Submission Deadline" shall mean 1:00 P.M. New York City time, on
any Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer
must submit to the Auction Agent in writing all Orders obtained by it for the
Auction to be conducted on such Auction Date.
(xii) "Submitted Bid" shall have the meaning specified in Paragraph
11(D)(i) below.
(xiii) "Submitted Hold Order" shall have the meaning specified in
Paragraph 11(D)(i) below.
(xiv) "Submitted Order" shall have the meaning specified in Paragraph
11(D)(i) below.
(xv) "Submitted Sell Order" shall have the meaning specified in
Paragraph 11(D)(i) below.
(xvi) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 11(D)(i) below.
(xvii) "Taxable Equivalent of the Short-Term Municipal Bond Rate," on
any date for any Short-Term Dividend Period of 28 days or fewer shall mean 90%
of the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the Kenny S&P 30 day High Grade Index or any successor index
(the "Kenny Index") 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, based
upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Internal Revenue
Code of 1986, as amended, 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, as
amended, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 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 (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal).
(xviii) "Winning Bid Rate" shall have the meaning specified in
Paragraph 11(D)(i) below.
B. Paragraph 11(B) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders and Potential Holders
(i) Unless otherwise permitted by the Trust, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Brokers-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners
and as Potential Holders in respect of shares subject to Orders submitted to
them by Potential Beneficial Owners. A Broker-Dealer may also hold ARPS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to
the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or Potential Holder
on behalf of both itself and its customers. On or prior to the Submission
Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information
as to:
(1) the number of Outstanding ARPS, if any, held by such Beneficial
Owner which such Beneficial Owner desires to continue to hold without regard to
the Applicable Rate for the next succeeding Dividend Period;
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<PAGE>
(2) the number of Outstanding ARPS, if any, held by such Beneficial
Owner, which such Beneficial Owner desires to continue to hold; provided, that
the Applicable Rate for the next succeeding Dividend Period shall not be less
than the rate per annum specified by such Beneficial Owner; and/or
(3) the number of Outstanding ARPS, if any, held by such Beneficial
Owner, which such Beneficial Owner offers to sell without regard to the
Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained for the purpose of conducting a competitive Auction,
shall contact Potential Beneficial Owners, including Persons that are not
Beneficial Owners, on such list to determine the number of Outstanding ARPS, if
any, which each such Potential Beneficial Owner offers to purchase, provided
that the Applicable Rate for the next succeeding Dividend Period shall not be
less than the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent of information
referred to in clause (A) or (B) of this Paragraph 11(B)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this Paragraph
11(B)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this Paragraph 11(B)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this Paragraph 11(B)(i) is hereinafter referred
to as a "Sell Order." Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying
beneficial ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding ARPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be less than the rate per
annum specified in such Bid; or
(2) such number or a lesser number of Outstanding ARPS to be
determined as set forth in Paragraph 11(E)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified
therein; or
(3) a lesser number of Outstanding ARPS to be determined as set forth
in Paragraph 11(E)(ii)(C) if such specified rate per annum shall be higher than
the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of Outstanding ARPS specified in such Sell Order; or
(2) such number or a lesser number of Outstanding ARPS to be
determined as set forth in Paragraph 11(E)(ii)(C) if Sufficient Clearing Bids
do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:
(1) the number of Outstanding ARPS specified in such Bid if the
Applicable Rate determined on such Auction Date shall be higher than the rate
specified in such Bid; or
(2) such number or a lesser number of Outstanding ARPS to be
determined as set forth in Paragraph 11(E)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified
therein.
C. Paragraph 11(C) Submission of Orders by Broker-Dealers to Auction Agent
(i) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders obtained by
such Broker-Dealer, designating itself (unless otherwise
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permitted by the Trust) as an Existing Holder in respect of shares subject to
Orders submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of outstanding shares of ARPS that are the
subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding ARPS, if any, subject to any Hold Order
placed by such Existing Holder;
(2) the number of Outstanding ARPS, if any, subject to any Bid placed
by such Existing Holder and the rate per annum specified in such Bid; and
(3) the number of Outstanding ARPS, if any, subject to any Sell Order
placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.
(ii) If any rate per annum 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%.
(iii) If an Order or Orders covering all of the Outstanding ARPS held
by an Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Short Term Dividend Period of 7 days) and a Sell Order
(in the case of an Auction relating to a Short Term Dividend Period of 14 days
or longer or any Long Term Dividend Period) to have been submitted on behalf of
such Existing Holder covering the number of Outstanding ARPS held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering, in
the aggregate, more than the number of Outstanding ARPS held by such Existing
Holder are submitted to the Auction Agent, such Orders shall be considered
valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of Outstanding ARPS held by
such Existing Holder; provided that if more than one Hold Order is submitted on
behalf of such Existing Holder and the number of ARPS subject to such Hold
Orders exceeds the number of Outstanding ARPS held by such Existing Holder, the
number of ARPS subject to each of such Hold Orders shall be reduced pro rata so
that such Hold Orders, in the aggregate, cover exactly the number of
Outstanding ARPS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of such Existing Holder, up to and
including the excess of the number of Outstanding ARPS held by such Existing
Holder over the number of ARPS subject to any Hold Order referred to in
Paragraph 11(C)(iv)(A) above (and if more than one Bid submitted on behalf of
such Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid Bids
after application of Paragraph 11(C)(iv)(A) above and of the foregoing portion
of this Paragraph 11(C)(iv)(B) to any Bid or Bids specifying a lower rate or
rates per annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly such
remaining number of shares); and the number of shares, if any, subject to Bids
not valid under this Paragraph 11(C)(iv)(B) shall be treated as the subject of
a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding ARPS held by such Existing Holder over the
number of ARPS subject to
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Hold Orders referred to in Paragraph 11(C)(iv)(A) and Bids referred to in
Paragraph 11(C)(iv)(B); provided that if more than one Sell Order is submitted
on behalf of any Existing Holder and the number of ARPS subject to such Sell
Orders is greater than such excess, the number of ARPS subject to each of such
Sell Orders shall be reduced pro rata so that such Sell Orders, in the
aggregate, cover exactly the number of shares of ARPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum and
number of shares of ARPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
D. Paragraph 11(D) Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all 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 shall determine:
(A) the excess of the total number of Outstanding ARPS over the number
of Outstanding ARPS that are the subject of Submitted Hold Orders (such excess
being hereinafter referred to as the "Available ARPS");
(B) from the Submitted Orders whether the number of Outstanding ARPS
that are the subject of Submitted Bids by Potential Holders specifying one or
more rates per annum equal to or lower than the Maximum Applicable Rate exceeds
or is equal to the sum of:
(1) the number of Outstanding ARPS that are the subject of Submitted
Bids by Existing Holders specifying one or more rates per annum higher than the
Maximum Applicable Rate; and
(2) the number of Outstanding ARPS that are subject to Submitted Sell
Orders (if such excess or such equality exists (other than because the number
of Outstanding ARPS in clauses (1) and (2) above are each zero because all of
the Outstanding ARPS are the subject of Submitted Hold Orders), such Submitted
Bids by Potential Holders being hereinafter referred to collectively as
"Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid
Rate and all other submitted Bids from Existing Holders specifying lower rates
per annum were rejected, thus entitling such Existing Holders to continue to
hold the ARPS that are the subject of such Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying lower
rates per annum were accepted, thus entitling the Potential Holders to purchase
the ARPS that are the subject of such Submitted Bids; would result in the
number of shares subject to all Submitted Bids specifying the Winning Bid Rate
or a lower rate per annum being at least equal to the Available ARPS.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 11(D)(i), the Auction Agent shall advise the Trust of the
Maximum Applicable Rate and, based on such determination, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) If Sufficient Clearing Bids do not exist (other than because all
Outstanding ARPS are the subject of Submitted Hold Orders), that the Applicable
Rate for the next succeeding Dividend Period shall be equal to the Maximum
Applicable Rate; or
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(C) if all of the Outstanding ARPS are the subject of Submitted Hold
Orders, that the Dividend Period for the next Auction Period will automatically
be the same period as that Dividend Period immediately preceding the Auction
and the Applicable Rate for the next succeeding Dividend Period shall be equal
to 59% of the Reference Rate on the date of the Auction with respect to such
Dividend Period.
E. Paragraph 11(E) Acceptance and Rejection of Submitted Bids and Submitted
Sell Orders and Allocation of Shares
Based on the determinations made pursuant to Paragraph 11(D)(i), 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:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of Paragraphs 11(E)(iii) and 11(E)(iv), Submitted Bids and Submitted
Sell Orders shall be accepted or rejected in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Order of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate per annum
that is higher than the Winning Bid Rate shall be accepted, thus requiring each
such Existing Holder to sell the Outstanding ARPS that are the subject of such
Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding ARPS
that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding ARPS
that are the subject of such Submitted Bid, unless the number of Outstanding
ARPS subject to all such Submitted Bids shall be greater than the number of
Outstanding ARPS ("Remaining Shares") equal to the excess of the Available ARPS
over the number of Outstanding ARPS subject to Submitted Bids described in
Paragraphs 11(E)(i)(B) and 11(E)(i)(C), in which event the Submitted Bids of
each such Existing Holder shall be accepted, and each such Existing Holder
shall be required to sell Outstanding ARPS, but only in an amount equal to the
difference between (1) the number of Outstanding ARPS then held by such
Existing Holder subject to such Submitted Bid and (2) the number of ARPS
obtained by multiplying (x) the number of Remaining Shares by (y) a fraction
the numerator of which shall be the number of Outstanding ARPS held by such
Existing Holder subject to such Submitted Bid and the denominator of which
shall be the sum of the numbers of Outstanding ARPS subject to such Submitted
Bids made by all such Existing Holders that specified a rate per annum equal to
the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but only
in an amount equal to the number of Outstanding ARPS obtained by multiplying
(x) the difference between the Available ARPS and the number of Outstanding
ARPS subject to Submitted Bids described in Paragraphs 11(E)(i)(B), 11(E)(i)(C)
and 11(E)(i)(D) by (y) a fraction the numerator of which shall be the number of
Outstanding ARPS subject to such Submitted Bid and the denominator of which
shall be the sum of the numbers of Outstanding ARPS subject to such Submitted
Bids made by all such Potential Holders that specified rates per annum equal to
the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding ARPS are subject to Submitted Hold Orders), subject to
the provisions of Paragraph 11(E)(iii), Submitted Orders shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding ARPS that are the subject of such Submitted Bid;
E-6
<PAGE>
(B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the Outstanding ARPS
that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and the
Submitted Sell Orders of each Existing Holder shall be accepted thus requiring
such Existing Holder to sell the Outstanding ARPS that are subject to such
Submitted Bid or Submitted Sell Orders, in both cases only in an amount equal
to the difference between (1) the number of Outstanding ARPS then held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and (2)
the number of ARPS obtained by multiplying (x) the difference between the
Available ARPS and the aggregate number of Outstanding ARPS subject to
Submitted Bids described in Paragraphs 11(E)(ii)(A) and 11(E)(ii)(B) by (y) a
fraction the numerator of which shall be the number of Outstanding ARPS held by
such Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the number of Outstanding ARPS subject to all
such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraphs
11(E)(i) or 11(E)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of an ARPS on any Auction Date, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, round up or down the
number of ARPS to be purchased or sold by any Existing Holder or Potential
Holder on such Auction Date so that each Outstanding ARPS purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be a whole
ARPS.
(iv) If, as a result of the procedures described in Paragraph 11(E)(i),
any Potential Holder would be entitled or required to purchase less than a
whole ARPS on any Auction Date, the Auction Agent shall, in such manner as in
its sole discretion it shall determine, allocate ARPS for purchase among
Potential Holders so that only whole ARPS are purchased on such Auction Date by
any Potential Holder, even if such allocation results in one or more of such
Potential Holders not purchasing any shares of ARPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate number
of Outstanding ARPS to be purchased and the aggregate number of Outstanding
ARPS to be sold by such Potential Holders and Existing Holders and, to the
extent that such aggregate number of outstanding shares to be purchased and
such aggregate number of outstanding shares to be sold differ, the Auction
Agent shall determine to which other Broker-Dealer or Broker-Dealers acting for
one or more purchasers such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-
Dealer shall receive, as the case may be, Outstanding ARPS.
F. Paragraph 11(F) Miscellaneous
The Board of Trustees may interpret the provisions of this Paragraph 11
to resolve any inconsistency or ambiguity, remedy any formal defect or make any
other change or modification that does not adversely affect the rights of
Beneficial Owners of ARPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of ARPS only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Paragraph 11 or
to or through a Broker-Dealer provided that in the case of all transfers other
than pursuant to Auctions such Beneficial Owner or Existing Holder, its Broker-
Dealer, if applicable, or its Agent Member advises the Auction Agent of such
transfer and (B) except as otherwise required by law, shall have the ownership
of ARPS held by it maintained in book-entry form by the Securities Depository
in the account of its Agent Member, which in turn will maintain records of such
Beneficial Owner's beneficial ownership. Neither the Trust nor any affiliate
(other than Dean Witter Reynolds Inc.) shall submit an Order in any Auction.
Any Beneficial Owner or Existing Holder that is an affiliate (other than Dean
Witter Reynolds Inc.) shall not sell, transfer or otherwise dispose of ARPS to
any person other than the Trust.
All of the outstanding shares of ARPS of each series shall be
represented by a single certificate registered in the name of the nominee of
the Securities Depository unless otherwise required by law or unless there is
no Securities Depository. If there is no Securities Depository, at the Trust's
option and upon its receipt of such documents as it deems appropriate, any ARPS
may be registered in the Stock Register in the name of the Beneficial Owner
thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and will be required to deliver a certificate therefor
upon transfer or exchange thereof.
E-7
<PAGE>
APPENDIX F
SETTLEMENT PROCEDURES
===============================================================================
The following summary of Settlement Procedures sets forth the
procedures expected to be followed in connection with the settlement of each
Auction and will be incorporated by reference in the Auction Agent Agreement
and each Broker-Dealer Agreement. Nothing contained in this Appendix F
constitutes a representation by the Trust that in each Auction each party
referred to herein will actually perform the procedures described herein to be
performed by such party. As used herein, unless the context otherwise requires,
"ARPS" means the ARPS subject to the related Auction and " Beneficial Owners"
and "Potential Beneficial Owners" means Beneficial Owners of such ARPS and
Potential Beneficial Owners of the ARPS, respectively. Otherwise, capitalized
terms used herein shall have the respective meanings specified in the forepart
of this Prospectus.
(a) On each Auction Date, the Auction Agent shall notify by telephone
the Broker-Dealers that participated in the Auction held on such Auction Date
and submitted an Order on behalf of any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a
Bid or a Sell Order on behalf of a Beneficial Owner, the number of shares, if
any, of ARPS to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Beneficial Owner, the number of shares, if any, of
ARPS to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of ARPS to be sold by all
Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell
Order exceeds the aggregate number of shares of ARPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid,
the name or names of one or more Buyer's Broker-Dealers (and the name of the
Agent Member, if any, of each such Buyer's Broker-Dealer) acting for one or
more purchasers of such excess number of shares of ARPS and the number of such
shares to be purchased from one or more Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Potential Beneficial Owners on whose behalf
each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of ARPS to be purchased by all
Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid
exceeds the aggregate number of shares of ARPS to be sold by all Beneficial
Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess number of shares of ARPS and the number of such shares
to be sold to one or more Potential Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Beneficial Owners on whose behalf each of
such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to
the ARPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, to instruct such
Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its
Agent Member) through the Securities Depository the amount necessary to
purchase the number of shares of ARPS to be purchased pursuant to such Bid
against receipt of such shares and advise such Potential Beneficial Owner of
the Applicable Rate for the next succeeding Dividend Period;
F-1
<PAGE>
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, or a Bid that was accepted,
in whole or in part, to instruct such Beneficial Owner's Agent Member to
deliver to such Broker-Dealer (or its Agent Member) through the Securities
Depository the number of shares of ARPS to be sold pursuant to such Order
against payment therefor and advise any such Beneficial Owner that will
continue to hold shares of ARPS of the Applicable Rate for the next succeeding
Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding Dividend
Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-
Dealer submitted a Bid that was accepted, in whole or in part, of the Auction
Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of ARPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct
its Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Existing Holder delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such
shares through the Securities Depository to a Buyer's Broker-Dealer (or its
Agent Member) identified to such Seller's Broker-Dealer pursuant to (a)(v)
above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b)(i) above against receipt of such shares,
and (B) deliver such shares through the Securities Depository to the Agent
Member of the purchaser thereof against payment therefor.
(e) On the next business day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described under
(b)(ii) above, and the Securities Depository shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(ii) above,
and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d)(iii) above,
and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling shares of ARPS in an Auction fails to
deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to
the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole shares of ARPS that is less than the number of
F-2
<PAGE>
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of ARPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
F-3
<PAGE>
INTERCAPITAL INSURED
MUNICIPAL SECURITIES
$
AUCTION RATE PREFERRED SHARES
SHARES SERIES
SHARES SERIES
SHARES SERIES
SHARES SERIES
SHARES SERIES
PROSPECTUS
DEAN WITTER DISTRIBUTORS INC.
MERRILL LYNCH & CO.
, 1994
<PAGE>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
PART C-OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Report of Independent Accountants(1)
Statement of Assets and Liabilities as of __________,
1994 (audited) and as of ________, 1994 (unaudited)(1)
Statement of Operations for the period ____________,
1994 through __________, 1994 (unaudited)(1)
Statement of Changes in Net Assets for the period
____________, 1994 through ___________, 1994
(unaudited)(1)
Selected Per Share Data and Ratios for the period
____________, 1994 through ____________, 1994
(unaudited)(1)
Notes to Financial Statements(1)
(2) Exhibits
Exhibit
Number Description
a. (i) Declaration of Trust of Registrant(2)
(ii) Form of Certificate of Designation
b. By-Laws of Registrant(3)
c. Not applicable
d. Not applicable
e. Not applicable
f. Not applicable
- - - -----------
(1) Included in Part A of this Registration Statement.
(2) Incorporated by reference to Exhibit 1(a) to Registrant's initial
Registration Statement on Form N-2, File No. 33-50663, filed on October 19,
1993 (the "Initial Common Registration Statement").
(3) Incorporated by reference to Exhibit 2 to the Initial Common Registration
Statement.
C-1
<PAGE>
g. Form of Investment Management Agreement
between Registrant and Dean Witter Intercapital
Inc.(4)
h. (i) Form of Master Agreement Among
Underwriters(5)
(ii) Form of Underwriting Agreement**
(iii) Form of Selected Dealer Agreement(6)
i. Not applicable
j. (i) Form of Custodian Agreement(7)
(ii) Form of Letter of Representations to the
Depository Trust Company**
k. (i) Form of Amended and Restated Transfer Agency
Agreement(8)
(ii) Form of Auction Agent Agreement**
(iii)Form of Broker-Dealer Agreement**
(iv) Form of Services Agreement between Dean
Witter Intercapital Inc. and Dean Witter
Services Company Inc.(9)
l. Opinion and Consent of Gordon Altman
Butowsky Weitzen Shalov & Wein**
m. Not applicable
n. (i) Consent of Price Waterhouse, Independent
Accountants for the Trust**
(ii) Tax Opinion of Gordon Altman Butowsky Weitzen
Shalov & Wein**
o. Not applicable
p. Not applicable
q. Not applicable
r. Not applicable
Others Powers of Attorney
- - - ----------
** To be filed by amendment.
(4) Incorporated by reference to Exhibit 7 to Pre-Effective Amendment No. 1 to
the Initial Common Registration Statement, filed on January 7, 1994 ("Common
Pre-Effective Amendment No. 1").
(5) Incorporated by reference to Exhibit 8(a) to the Initial Common
Registration Statement.
(6) Incorporated by reference to Exhibit 8(c) to the Initial Common
Registration Statement.
(7) Incorporated by reference to Exhibit 10(a) to Common Pre-Effective
Amendment No. 1.
(8) Incorporated by reference to Exhibit 10(b) to Common Pre-Effective
Amendment No. 1.
(9) Incorporated by reference to Exhibit 10(c) to Common Pre-Effective
Amendment No. 1.
C-2
<PAGE>
Item 25. Marketing Arrangements
Reference is made to the Form of Master Agreement Among
Underwriters filed as Exhibit 8(a) to the Initial Common Registration
Statement; the Form of Underwriting Agreement to be filed by amendment to the
Trust's Registration Statement on form N-2, File No. 33-_________; the Form of
Selected Dealer Agreement filed as Exhibit 8(c) to the Initial Common
Registration Statement; and the Form of Broker-Dealer Agreement to be filed by
amendment to the Trust's Registration Statement on Form N-2, File No. 33-
_______.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this Registration
Statement:
<TABLE>
<S> <C>
Registration fees . . . . . . . . . . . . . . $
Printing and engraving. . . . . . . . . . . . $
Fees and expenses of qualifications
under the state securities laws
(including fees of counsel) . . . . . . . . $
Legal fees and expenses . . . . . . . . . . . $
Accounting fees and expenses. . . . . . . . . $
Rating Agency fees. . . . . . . . . . . . . . $
Auction Agent fees and expenses . . . . . . . $
Miscellaneous . . . . . . . . . . . . . . . . $
Total . . . . . . . . . . . . . . . . . . . $
============
</TABLE>
Item 27. Persons Controlled by or Under
Common Control with Registrant
Not applicable.
Item 28. Number of Holders of Securities
<TABLE>
<CAPTION>
Number of Record
Title of Class Holders as of , 1994
- - - -------------- -----------------------------------
<S> <C>
Common - $.01 par value ________
Preferred Shares -
$.01 par value 0
</TABLE>
C-3
<PAGE>
Item 29. Indemnification
Pursuant to Section 5.3 of the Registrant's Declaration of
Trust and under Section 4.8 of the Registrant's By-Laws, the indemnification of
the Registrant's trustees, officers, employees and agents is permitted if it is
determined that they acted in good faith and under the belief that their
actions were in or not opposed to the best interest of the Registrant, and,
with respect to any criminal proceeding, they had reasonable cause to believe
their conduct was not unlawful. In addition, indemnification is permitted only
if it is determined that the actions in question did not render them liable by
reason of willful misfeasance, bad faith or gross negligence in the performance
of their duties or by reason of reckless disregard of their obligations and
duties to the Registrant. Trustees, officers, employees and agents will be
indemnified for the expense of litigation if it is determined that they are
entitled to indemnification against any liability established in such
litigation. The Registrant may also advance money for these expenses provided
that they give their undertakings to repay the Registrant unless their conduct
is later determined to permit indemnification.
Pursuant to Section 5.2 of the Registrant's Declaration of
Trust and paragraph 7 of the Registrant's proposed Investment Management
Agreement, neither the Investment Manager nor any trustee, officer, employee or
agent of the Registrant shall be liable for any action or failure to act,
except in the case of bad faith, willful misfeasance, gross negligence or
reckless disregard of duties to the Registrant. In addition, pursuant to
Section 6 of the Underwriting Agreement, the Trust and the Investment Manager
have agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933 (the "Act"), or to contribute to
payments the Underwriter may be required to make in respect thereof.
Insofar as indemnification for liabilities arising under the
Act may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of the Registrant
in connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such trustee, officer or controlling person
in connection with the shares being
C-4
<PAGE>
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that it will apply the
indemnification provision of its by-laws in a manner consistent with Release
11330 of the Securities and Exchange Commission under the Investment Company
Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such
Act remains in effect.
Registrant, in conjunction with the Investment Manager,
Registrant's Trustees, and other registered investment management companies
managed or administered by the Investment Manager, maintains insurance on
behalf of any person who is or was a trustee, officer, employee, or agent of
Registrant, or who is or was serving at the request of Registrant as a trustee,
director, officer, employee, or agent of Registrant, or who is or was serving
at the request of Registrant as a trustee, director, officer, employee or agent
of another trust or corporation, against any liability asserted against him and
incurred by him or arising out of his position. However, in no event will
Registrant maintain insurance to indemnify any such person for any act for
which Registrant itself is not permitted to indemnify him.
Item 30. Business and Other Connections
of Investment Adviser
See "The Fund and Its Management" in the Prospectus regarding
the business of the investment adviser. The following information is given
regarding officers of Dean Witter InterCapital Inc. The term "Dean Witter
Funds" used below refers to the Registrant and the following other Funds: (1)
InterCapital Income Securities Inc., (2) High Income Advantage Trust, (3) High
Income Advantage Trust II, (4) High Income Advantage Trust III, (5) Municipal
Income Trust, (6) Municipal Income Trust II, (7) Municipal Income Trust III,
(8) Dean Witter Government Income Trust, (9) Municipal Premium Income Trust,
(10) Municipal Income Opportunities Trust, (11) Municipal Income Opportunities
Trust II, (12) Municipal Income Opportunities Trust III, (13) Prime Income
Trust, (14) InterCapital Insured Municipal Bond Trust, (15) InterCapital
Quality Municipal Income Trust, (16) InterCapital Quality Municipal Investment
Trust, (17) InterCapital Insured Municipal Income Trust, (18) InterCapital
California Insured Municipal Income Trust, (19) InterCapital Insured Municipal
Trust, (20) InterCapital Quality Municipal Securities, (21) InterCapital
California Quality Municipal Securities and (22) InterCapital New York
C-5
<PAGE>
Quality Municipal Securities, registered closed-end investment companies, and
(1) Dean Witter Equity Income Trust, (2) Dean Witter Tax-Exempt Securities
Trust, (3) Dean Witter Tax-Free Daily Income Trust, (4) Dean Witter Dividend
Growth Securities Inc., (5) Dean Witter Convertible Securities Trust, (6) Dean
Witter Liquid Asset Fund Inc., (7) Dean Witter Developing Growth Securities
Trust, (8) Dean Witter Retirement Series, (9) Dean Witter Federal Securities
Trust, (10) Dean Witter World Wide Investment Trust, (11) Dean Witter U.S.
Government Securities Trust, (12) Dean Witter Select Municipal Reinvestment
Fund, (13) Dean Witter High Yield Securities Inc., (14) Dean Witter
Intermediate Income Securities, (15) Dean Witter New York Tax-Free Income Fund,
(16) Dean Witter California Tax-Free Income Fund, (17) Dean Witter Health
Sciences Trust, (18) Dean Witter California Tax-Free Daily Income Trust, (19)
Dean Witter Managed Assets Trust, (20) Dean Witter U.S. Government Money Market
Trust, (21) Dean Witter American Value Fund, (22) Dean Witter Strategist Fund,
(23) Dean Witter Utilities Fund, (24) Dean Witter Value-Added Market Series,
(25) Dean Witter World Wide Income Trust, (26) Dean Witter New York Municipal
Money Market Trust, (27) Dean Witter Capital Growth Securities, (28) Dean
Witter Precious Metals and Minerals Trust, (29) Dean Witter European Growth
Fund Inc., (30) Dean Witter Global Short-Term Income Fund Inc., (31) Dean
Witter Pacific Growth Fund Inc., (32) Dean Witter Multi-State Municipal Series
Trust, (33) Dean Witter Premier Income Trust, (34) Dean Witter Short-Term U.S.
Treasury Trust, (35) Dean Witter Diversified Income Trust, (36) Dean Witter
Health Sciences Trust, (37) Dean Witter Global Dividend Growth Securities, (38)
Active Assets Tax-Free Trust, (39) Active Assets Money Trust, (40) Active
Assets Government Securities Trust, (41) Active Assets California Tax-Free
Income Trust, (42) Dean Witter Natural Resource Development Securities Inc.,
(43) Dean Witter Variable Investment Series, (44) Dean Witter Limited Term
Municipal Trust and (45) Dean Witter Short-Term Bond Fund, registered open-end
investment companies. InterCapital is a wholly-owned direct subsidiary of Dean
Witter, Discover & Co. The principal address of the Dean Witter Funds is Two
World Trade Center, New York, New York 10048. The term "TCW/DW Funds" refers
to the following Funds: (1) TCW/DW Core Equity Trust, (2) TCW/DW North
American Government Income Trust, (3) TCW/DW Latin American Growth Fund, (4)
TCW/DW Income and Growth Fund, (5) TCW/DW Small Cap Growth Fund and (6) TCW/DW
Balanced Fund, registered open-end investment companies, and (7) TCW/DW Term
Trust 2000, (8) TCW/DW Term Trust 2002 and (9) TCW/DW Term Trust 2003,
registered closed-end investment companies.
C-6
<PAGE>
<TABLE>
<CAPTION>
Other Substantial
Business, Profession,
Vocation or Employment
Position with including Name, Prin-
Dean Witter cipal Address and
Name InterCapital Inc. Nature of Connection
---- ----------------- ----------------------
<S> <C> <C>
Charles A.
Fiumefreddo Chairman, Chief Executive Vice President
Executive Officer and Director of Dean
and Director Witter Reynolds Inc.
("DWR"); Chairman,
Director or Trustee,
President and Chief Exe-
cutive Officer of the
Dean Witter Funds; Chair-
man, Chief Executive
Officer and Trustee of
the TCW/DW Funds; Chair-
man and Director of Dean
Witter Trust Company
("DWTC"); Chairman, Chief
Executive Officer and
Director of Dean Witter
Distributors Inc. ("DWD")
and Dean Witter Services
Company Inc. ("DWSC");
formerly Executive Vice
President and Director of
Dean Witter, Discover &
Co. ("DWDC"); Director
and/or Officer of DWDC
subsidiaries.
Philip J. Purcell Director Chairman, Chief Executive
Officer and Director of
DWDC and DWR; Director of
DWD and DWSC.
Richard M. DeMartini Director President and Chief
Operating Officer of Dean
Witter Capital and
Director of DWDC, DWR,
DWSC and DWD.
James F. Higgins Director President and Chief
Operating Officer of Dean
Witter Financial;
Director of DWDC, DWR,
DWSC and DWD.
Thomas C. Schneider Executive Vice Director of DWDC and DWR;
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
Other Substantial
Business, Profession,
Vocation or Employment
Position with including Name, Prin-
Dean Witter cipal Address and
Name InterCapital Inc. Nature of Connection
---- ----------------- ----------------------
<S> <C> <C>
President, Chief Executive Vice President,
Financial Officer Chief Financial Officer
and Director and Director of DWD and
DWSC.
Christine A. Edwards Director Director of DWR;
Executive Vice President,
Secretary and General
Counsel of DWDC and DWR;
Executive Vice President,
Secretary and Chief Legal
Officer of DWD.
Robert M. Scanlan President and Vice President of the
Chief Operating Dean Witter Funds and the
Officer TCW/DW Funds; President
of DWSC; Executive Vice
President of DWD;
Executive Vice President
and Director of DWTC.
David A. Hughey Executive Vice Vice President of the
President and Dean Witter Funds and the
Chief Administra- TCW/DW Funds; Executive
tive Officer Vice President and Chief
Administrative Officer of
DWSC; Executive Vice
President, Chief
Administrative Officer
and Director of DWTC;
Executive Vice President
and Chief Administrative
Officer of DWD.
Edmund C. Puckhaber Executive Vice Vice President of the
President Dean Witter Funds.
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
Other Substantial
Business, Profession,
Vocation or Employment
Position with including Name, Prin-
Dean Witter cipal Address and
Name InterCapital Inc. Nature of Connection
---- ----------------- ----------------------
<S> <C> <C>
John Van Heuvelen Executive Vice President and Chief
President Executive Officer of
DWTC.
Sheldon Curtis Senior Vice Presi- Vice President, Secretary
dent, General and General Counsel of
Counsel and the Dean Witter Funds and
Secretary the TCW/DW Funds; Senior
Vice President and Secre-
tary of DWTC; Assistant
Secretary of DWR and
DWDC; Senior Vice Presi-
dent, General Counsel and
Secretary of DWSC; Senior
Vice President, Assistant
General Counsel and
Assistant Secretary of
DWD.
Peter M. Avelar Senior Vice Vice President of various
President Dean Witter Funds.
Mark Bavoso Senior Vice
President
Thomas H. Connelly Senior Vice Vice President of various
President Dean Witter Funds.
Edward Gaylor Senior Vice Vice President of various
President Dean Witter Funds.
Rajesh K. Gupta Senior Vice Vice President of various
President Dean Witter Funds.
Kenton J. Hinchliffe Senior Vice Vice President of various
President Dean Witter Funds.
John B. Kemp, III Senior Vice Director of the Provident
President Savings Bank, Jersey
City, New Jersey.
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
Other Substantial
Business, Profession,
Vocation or Employment
Position with including Name, Prin-
Dean Witter cipal Address and
Name InterCapital Inc. Nature of Connection
---- ----------------- ----------------------
<S> <C> <C>
Anita Kolleeny Senior Vice Presi- Vice President of various
dent Dean Witter Funds
Jonathan R. Page Senior Vice Presi- Vice President of various
dent Dean Witter Funds.
Ira Ross Senior Vice Vice President of various
President Dean Witter Funds.
Rochelle G. Siegel Senior Vice Presi- Vice President of various
dent Dean Witter Funds.
Paul D. Vance Senior Vice Presi- Vice President of various
dent Dean Witter Funds.
Elizabeth A. Vetell Senior Vice Presi-
dent
James F. Willison Senior Vice Presi- Vice President of various
dent Dean Witter Funds.
Ronald Worobel Senior Vice Vice President of various
President Dean Witter Funds.
Thomas F. Caloia First Vice Presi- Treasurer of the Dean
dent and Assistant Witter Funds and the
Treasurer TCW/DW Funds; First Vice
President and Assistant
Treasurer of DWSC;
Assistant Treasurer of
DWD.
Barry Fink First Vice Assistant Secretary of
President and the Dean Witter Funds and
Assistant the TCW/DW Funds; First
Secretary Vice President and
Assistant Secretary of
DWSC.
Michael Interrante First Vice First Vice President and
President and Controller of DWSC;
Controller Assistant Treasurer of
DWD.
Robert Zimmerman First Vice
President
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
Other Substantial
Business, Profession,
Vocation or Employment
Position with including Name, Prin-
Dean Witter cipal Address and
Name InterCapital Inc. Nature of Connection
---- ----------------- ----------------------
<S> <C> <C>
Joseph Arcieri Vice President
Douglas Brown Vice President
Rosalie Clough Vice President
B. Catherine Connelly Vice President
Marilyn K. Cranney Vice President and Assistant Secretary of
Assistant the Dean Witter Funds and
Secretary the TCW/DW Funds; Vice
President and Assistant
Secretary of DWSC;
Assistant Secretary of
DWR and DWDC.
Salvatore DeSteno Vice President Vice President of DWSC.
Dwight Doolan Vice President
Bruce Dunn Vice President
Donovan Dykes Vice President
June Ewers Vice President
Geoffrey D. Flynn Vice President Vice President of DWSC.
Bette Freedman Vice President
Robert Geis Vice President
Deborah Genovese Vice President
Peter W. Gurman Vice President
Shant Harootunian Vice President
John Hechtlinger Vice President
David Johnson Vice President
Christopher Jones Vice President
Stanley Kapica Vice President
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
Other Substantial
Business, Profession,
Vocation or Employment
Position with including Name, Prin-
Dean Witter cipal Address and
Name InterCapital Inc. Nature of Connection
---- ----------------- ----------------------
<S> <C> <C>
Paul LaCosta Vice President Vice President of various
Dean Witter Funds.
Lawrence S. Lafer Vice President Assistant Secretary of
and the Dean Witter Funds and
Assistant the TCW/DW Funds; Vice
Secretary President and Assistant
Secretary of DWSC.
Thomas Lawlor Vice President
Lou Anne D. McInnis Vice President and Assistant Secretary of
Assistant the Dean Witter Funds and
Secretary the TCW/DW Funds; Vice
President and Assistant
Secretary of DWSC.
James Nash Vice President
Hugh Rose Vice President
Ruth Rossi Vice President and Assistant Secretary of
Assistant the Dean Witter Funds and
Secretary the TCW/DW Funds; Vice
President and Assistant
Secretary of DWSC.
Howard A. Schloss Vice President
Rose Simpson Vice President
Diane Lisa Sobin Vice President Vice President of various
Dean Witter Funds.
Kathleen Stromberg Vice President Vice President of various
Dean Witter Funds.
Vinh Q. Tran Vice President Vice President of various
Dean Witter Funds.
Alice Weiss Vice President Assistant Vice President
of Dean Witter Value-
Added Market Series.
Marianne Zalys Vice President
</TABLE>
C-12
<PAGE>
Item 31. Location of Accounts and Records
The physical possession of the accounts, books and
other documents required to be maintained by Section 31(a)
of the Investment Company Act of 1940, as amended and Rules
31a-1 to 31a-3 promulgated thereunder is maintained by the
Investment Manager of the Registrant at its offices, except
records relating to holders of shares issued by the
Registrant, which are maintained by the Registrant's
Transfer Agent, at its place of business as shown in the
prospectus.
Item 32. Management Services
Not applicable.
Item 33. Undertakings
1. Registrant undertakes to suspend offering of
the shares covered hereby until it amends its prospectus
contained herein if (1) subsequent to the effective date of
this Registration Statement, its net asset value per share
declines more than 10 per cent from its net asset value per
share as of the effective date of this Registration
Statement, or (2) its net asset value increases to an amount
greater than its net proceeds as stated in the prospectus
contained herein.
2. Not applicable
3. Not applicable
4. Not applicable
5. Registrant undertakes that:
(1) for purposes 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 the form
of prospectus filed by the Registrant pursuant to
Rule 497(h) under the Securities Act shall be
deemed to be a part of this registration statement
as of the time it was declared effective; and
(2) for the purpose of determining any
liability under the Securities Act of 1933, each
post-effective amendment that contains a form of
prospectus shall be deemed to be a new
registration statement relating to the securities
C-13
<PAGE>
offered therein, and the offering of such
securities at that time shall be deemed to be the
initial bona fide offering thereof.
C-14
<PAGE>
SIGNATURE
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933 and the Investment Company Act of 1940, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly
authorized, in the City of New York and the State of New
York, on the 28th day of January, 1994.
INTERCAPITAL INSURED MUNICIPAL
SECURITIES
By:/s/ Sheldon Curtis
-------------------------------------
Sheldon Curtis
Vice President and Secretary
Pursuant to the requirements of the Securities Act
of 1933, this Registration Statement has been signed below
by the following persons in the capacities and on the date
indicated.
Signatures Title Date
---------- ----- -----
(1) Principal Executive Officer Chairman,
President, Chief
/s/ Charles A. Fiumefreddo Executive Officer January 28, 1994
---------------------------- and Trustee
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and
Principal
/s/ Thomas F. Caloia Accounting January 28, 1994
---------------------------- Officer
Thomas F. Caloia
(3) Majority of the Trustees
---------------------------- Trustee , 1994
Edward R. Telling
/s/ Jack F. Bennett Trustee January 16, 1994
---------------------------
Jack F. Bennett
/s/ John R. Haire Trustee January 28, 1994
---------------------------
John R. Haire
/s/ John E. Jeuck Trustee January 28, 1994
---------------------------
John E. Jeuck
/s/ Manuel H. Johnson Trustee January 28, 1994
---------------------------
Manuel H. Johnson
/s/ Paul Kolton Trustee January 28, 1994
---------------------------
Paul Kolton
/s/ Albert T. Sommers Trustee January 28, 1994
---------------------------
Albert T. Sommers
/s/ Michael E. Nugent Trustee January 28, 1994
---------------------------
Michael E. Nugent
/s/ Edwin J. Garn Trustee January 16, 1994
---------------------------
Edwin J. Garn
<PAGE>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
INDEX TO EXHIBITS
Exhibit Number Description Page Number
- - - -------------- ----------- -----------
2(a)(ii) Form of
Certificate
of
Designation
Others Powers of Attoney
EXHIBIT 2(a)(ii)
CERTIFICATE OF DESIGNATION ESTABLISHING POWERS,
QUALIFICATIONS, RIGHTS AND PREFERENCES
OF THE PREFERRED SHARES
WHEREAS the Board of Trustees of InterCapital Insured Municipal
Securities (the "Trust") is expressly empowered pursuant to Section 6.1 of the
Trust's Declaration of Trust to authorize the issuance of preferred shares of
the Trust in one or more series, with such preferences, powers, restrictions,
limitations or qualifications as determined by the Board of Trustees and as set
forth in the resolution or resolutions providing for the issuance of such
preferred shares.
AND WHEREAS the Board of Trustees has determined that it is in
the best interest of the Trust to issue such preferred shares.
NOW THEREFORE, the Board of Trustees does hereby authorize the
issuance of (_____) series of _____ shares each of preferred shares, par value
$.01 per share, liquidation preference $50,000 per share, designated
respectively: Auction Rate Preferred Shares, Series __; Auction Rate Preferred
Shares, Series __; Auction Rate Preferred Shares, Series __; Auction Rate
Preferred Shares, Series __; and Auction Rate Preferred Shares, Series __.
The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the
preferred shares are as follows:
DESIGNATION
SERIES __: A series of ____ preferred shares, par value $.01
per share, liquidation preference $50,000 per share, is hereby designated
"Auction Rate Preferred Shares, Series __." Each share of Auction Rate
Preferred Shares, Series __ shall be issued on _______ __, 1994; have an
Initial Dividend Rate equal to ___% per annum; have an Initial Dividend Payment
Date as set forth herein; and have such other preference, limitations and
relative voting rights, in addition to those required by applicable law or set
forth in the Trust's Declaration of Trust applicable to preferred shares of the
Trust, as are set forth in this Certificate of Designation. The Auction Rate
Preferred Shares, Series __ shall constitute a separate series of preferred
shares of the Trust, and each share of Auction Rate Preferred Shares, Series __
shall be identical.
SERIES __: A series of __ preferred shares, par value $.01 per
share, liquidation preference $50,000 per share, is hereby designated "Auction
Rate Preferred Shares, Series __." Each share of Auction Rate Preferred
Shares, Series __ shall be issued on _______ __, 1994; have an Initial Dividend
Rate equal to ___% per annum; have an Initial Dividend Payment Date as set
forth herein; and have such other preferences, limitations and relative voting
rights, in addition to those required by applicable law or set forth in the
Trust's Declaration of Trust applicable to preferred shares of the Trust, as
are set forth in this Certificate of Designation. The Auction Rate Preferred
Shares, Series __ shall constitute a separate series of preferred shares of the
Trust, and each share of Auction Rate Preferred Shares, Series __ shall be
identical.
SERIES __: A series of __ preferred shares, par value $.01 per
share, liquidation preference $50,000 per share, is hereby designated "Auction
Rate Preferred Shares, Series __." Each share of Auction Rate Preferred
Shares, Series __ shall be issued on _______ __, 1994; have an Initial Dividend
Rate equal to ___% per annum; have an Initial Dividend Payment Date as set
forth herein; and have such other preferences, limitations and relative voting
rights, in addition to those required by applicable law or set forth in the
Trust's Declaration of Trust applicable to preferred shares of the Trust, as
are set forth in this Certificate of Designation. The Auction Rate Preferred
Shares, Series __ shall constitute a separate series of preferred shares of the
Trust, and each share of Auction Rate Preferred Shares, Series __ shall be
identical.
SERIES __: A series of __ preferred shares, par value $.01 per
share, liquidation preference $50,000 per share, is hereby designated "Auction
Rate Preferred Shares, Series __." Each share of Auction Rate Preferred
Shares, Series 4 shall be issued on _______ __, 1994; have an Initial Dividend
Rate equal to ___% per annum; have Initial Dividend Payment Dates as set forth
herein; and have such other preferences, limitations and relative voting
rights, in addition to those required by applicable law or set forth in the
Trust's Declaration of Trust applicable to preferred shares of the Trust, as
are set forth in this Certificate of Designation. The Auction Rate Preferred
Shares, Series __ shall constitute a separate series of preferred shares of the
Trust, and each share of Auction Rate Preferred Shares, Series __ shall be
identical.
SERIES __: A series of __ preferred shares, par value $.01 per
share, liquidation preference $50,000 per share, is hereby designated "Auction
Rate Preferred Shares, Series __." Each share of Auction Rate Preferred
Shares, Series __ shall be issued on _______ __, 1994; have an Initial Dividend
Rate equal to ___% per annum; have Initial Dividend Payment Dates as set forth
herein and have such other preferences, limitations and relative voting rights,
in addition to those required by applicable law or set forth in the Trust's
<PAGE>
Declaration of Trust applicable to preferred shares of the Trust, as are set
forth in this Certificate of Designation. The Auction Rate Preferred Shares,
Series __ shall constitute a separate series of preferred shares of the Trust,
and each share of Auction Rate Preferred Shares, Series __ shall be identical.
1. Definitions. (a) Unless the context or use indicates
another or different meaning or intent, in this Certificate of Designation, the
following terms have the following meanings, whether used in the singular or
plural:
"'AA' Composite Commercial Paper Rate," on any date of
determination, means (i) the Interest Equivalent, as defined below, of the rate
on commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or "Aa" by Moody's or the equivalent of such rating by another
nationally recognized rating agency, as such rate is 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 such a rate, then the
arithmetic average of the Interest Equivalent of the rate on commercial paper
placed on behalf of such issuers, as quoted on a discount basis or otherwise by
Commercial Paper Dealers to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the 'AA' Composite
Commercial Paper Rate, the 'AA' Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period Days shall be (i) 7
or more but fewer than 49 days, such rate shall be the Interest Equivalent on
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent on the 60-day and 90-day
rates on such commercial paper; (iv) 85 or more days but fewer than 99 days,
such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate
on such commercial paper.
"Accountant's Confirmation" has the meaning set forth in
paragraph 7(c) of this Certificate of Designation.
"Additional Dividend" has the meaning set forth in paragraph
2(g) of this Certificate of Designation.
"Affiliate" shall mean any Person, other than Dean Witter
Reynolds Inc. or its successors, known to the Auction Agent to be controlled
by, in control of, or under common control with, the Trust.
"Agent Member" means a member of the Securities Depository that
will act on behalf of a Beneficial Owner or a Potential Beneficial Owner.
"Anticipation Notes" shall mean the following Municipal
Obligations: Tax Anticipation Notes (TANs), Revenue Anticipation Notes (RANs)
and Tax and Revenue Anticipation Notes (TRANs).
"Applicable Percentage" has the meaning set forth in paragraph
11(A) of this Certificate of Designation.
"Applicable Rate" means the rate per annum at which cash
dividends are payable on the ARPS for any Dividend Period.
"ARPS" means, as the case may be, Auction Rate Preferred
Shares, Series __; Auction Rate Preferred Shares, Series __; Auction Rate
Preferred Shares, Series __; Auction Rate Preferred Shares, Series __; or
Auction Rate Preferred Shares, Series __.
"ARPS Basic Maintenance Amount," as of any Valuation Date, is
defined as the dollar amount equal to (A) the sum of (i) the product of the
number of ARPS outstanding on such date multiplied by the sum of (a) $50,000
and (b) any applicable redemption premium; (ii) the aggregate amount of cash
dividends that will have accumulated (whether or not earned or declared) on the
ARPS outstanding, to the end of the current Dividend Period or 49 days,
whichever is earlier; (iii) the Projected Dividend Amount (based on the number
of outstanding ARPS on such date); (iv) the amount of anticipated Trust
expenses for the 90 days subsequent to such Valuation Date (including any
interest accruing on any debt); (v) the amount of the Trust's Maximum Potential
Gross-up Dividends Liability as of such Valuation Date; and (vi) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(A)(i) through (A)(v) (including, without limitation and immediately upon
determination, payables for Municipal Obligations purchased as of such
Valuation Date) less (B) either (i) the Discounted Value (for purposes of
calculating the ARPS Basic Maintenance Amount for Moody's) or the Market Value
(for purposes of calculating the ARPS Basic Maintenance Amount for S&P) of any
Trust assets, or (ii) the face value of any of the Trust's assets if such
assets mature prior to or on the date of redemption of ARPS or payment of a
liability and are either securities issued or guaranteed by the United States
Government or have a rating assigned by Moody's of at least Aaa, P-1, VMIG 1 or
MIG 1 and, with respect to S&P, at least AAA, SP-1+ or A-1+, in both cases
irrevocably deposited by the Trust for the payment of any of (A)(i) through
<PAGE>
(A)(vi).
For so long as the ARPS are rated by Moody's and S&P, the Trust
shall, in its daily calculation of the ARPS Basic Maintenance Amount, include
as a liability an amount, to be calculated on a semi-annual basis, equal to
150% of the estimated cost of insuring the payment of principal and interest
thereon to maturity of all Municipal Obligations which are (i) covered by a
Portfolio Insurance policy permitting the Trust, at its option, to obtain
Permanent Insurance and in the event a Discount Factor applicable to a Moody's
Eligible Asset or an S&P Eligible Asset, respectively, is determined by
reference to an insurance claims-paying ability rating of the insurance
provider, and (ii) required to be included, at the time of such semi-annual
calculation, in Moody's Eligible Assets or S&P Eligible Assets, respectively,
in order for the Trust to have Moody's Eligible Assets or S&P Eligible Assets,
respectively, with a Discounted Value equal to or greater than the aggregate
liquidation value of all outstanding ARPS.
"ARPS Basic Maintenance Cure Date," with respect to the failure
by the Trust to satisfy the ARPS Basic Maintenance Amount (as required by
paragraph 7(a) of this Certificate of Designation) as of a given Valuation
Date, means the sixth Business Day following such Valuation Date.
"ARPS Basic Maintenance Report" means a report signed by the
President, Treasurer, any Senior Vice President or any Vice President of the
Trust which sets forth, as of the related Valuation Date, the assets of the
Trust, the Market Value and the Discounted Value thereof (seriatim and in
aggregate), and the ARPS Basic Maintenance Amount.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Trust or a duly authorized
committee thereof enters into an agreement with the Trust to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the ARPS.
"Auction Procedures" means the procedures for conducting
Auctions set forth in paragraph 11 of this Certificate of Designation.
"Available Funds" means, in the case of dividends, the lesser
of (i) an amount not in excess of the Trust's net investment income and net
realized capital gains from the beginning of its current taxable year through
such date; plus accumulated and undistributed net investment income and net
realized capital gains from all prior years; less prior distributions in or
with respect to the current taxable year to such date on the ARPS, or (ii) an
amount not in excess of the maximum amount which the Trust could distribute to
its shareholders without thereby being rendered insolvent. In the case of
redemptions, Available Funds shall refer to the amount specified in (ii) above.
"Beneficial Owner" means a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer (or, if applicable, the Auction
Agent) as a holder of ARPS or a Broker-Dealer that holds ARPS for its own
account.
"Broker-Dealer" shall mean any broker-dealer, or other entity
permitted by law to perform the functions required of a Broker-Dealer in
paragraph 11 of this Certificate of Designation that has been selected by the
Trust and has entered into a Broker-Dealer Agreement with the Auction Agent
that remains effective.
"Broker-Dealer Agreement" shall mean an agreement between
the Auction Agent and a Broker-Dealer including Dean Witter Reynolds Inc.
(and Merrill Lynch, Pierce, Fenner & Smith Incorporated) pursuant to which
such Broker-Dealer agrees to follow the procedures specified in paragraph
11 of this Certificate of Designation.
"Business Day" means a day on which the New York Stock Exchange
is open for trading and which is not a Saturday, Sunday or other day on which
banks in the City of New York are authorized or obligated by law to close.
"Certificate of Designation" means this Certificate of
Designation Establishing Powers, Qualifications, Rights and Preferences of the
Preferred Shares of the Trust, as adopted by resolution of the Board of
Trustees of the Trust.
"Closing Transaction" means the termination of a futures
contract or option position by taking a position opposite thereto.
"Certificate of Minimum Liquidity" has the meaning set forth in
paragraph 8 of this Certificate of Designation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means Dean Witter Reynolds Inc. and
such other commercial paper dealer or dealers as the Trust may from time to
time appoint, or, in lieu of any thereof, their respective affiliates or
successors.
"Common Shares" means the common shares, par value $.01 per
share, of beneficial interest of the Trust.
"Cure Date" has the meaning set forth in paragraph 4(a)(ii) of
this Certificate of Designation.
<PAGE>
"Date of Original Issue" means, with respect to any share of
ARPS, the date on which the Trust originally issued such share.
"Deposit Securities" means cash and Municipal Obligations rated
at least AAA, A-1+ or SP-1+ by S&P.
"Discounted Value" of any asset means (i) with respect to an
S&P Eligible Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor provided that the Discounted Value shall never
exceed the par value of such S&P Eligible Asset 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 the Discounted Value shall
never exceed the par value of such Moody's Eligible Asset.
"Dividend Coverage Amount," as of any Valuation Date, means (i)
the aggregate amount of cash dividends that will accumulate on the ARPS
outstanding to (but not including) the next Dividend Payment Date that follows
such Valuation Date plus all liabilities of the Trust including, without
limitation, declared and unpaid dividends and operating expenses that are
required to be paid on or prior to the next Dividend Payment Date less (ii) the
sum of (a) the combined Market Value of Deposit Securities irrevocably
deposited for the payment of cash dividends on the ARPS, (b) the aggregate
sales price of securities sold for which settlement is scheduled to occur on or
prior to the next Dividend Payment Date, and (c) interest on Municipal
Obligations which is scheduled to be paid on or prior to the next Dividend
Payment Date.
"Dividend Coverage Assets," as of any Valuation Date, means, in
the case of the ARPS, Deposit Securities with maturity or tender payment dates
not later than the Dividend Payment Date therefor that follows such Valuation
Date.
"Dividend Payment Date" has the meaning set forth in paragraph
2(b)(i) of this Certificate of Designation.
"Dividend Period" means the Initial Dividend Period and any
Subsequent Dividend Period.
"Existing Holder" means a Broker-Dealer or any such other
Person as may be permitted by the Trust that is listed as the holder of record
of the ARPS in the Share Books.
"First Initial Dividend Payment Date" means _______ __, 199_ in
the case of Series __ ARPS and Series __ ARPS.
"Forward Commitment" has the meaning set forth in paragraph
9(e) of this Certificate of Designation.
"Gross-up Dividends" has the meaning set forth in paragraph
2(h) of this Certificate of Designation.
"Holder" means a Person identified as a holder of record of
ARPS in the Share Register.
"Independent Accountant" means a nationally recognized
accountant, or firm of accountants, that is, with respect to the Trust, an
independent public accountant or firm of independent accountants under the
Securities Act of 1933, as amended.
"Initial Dividend Payment Date" means, with respect to Series
__ ARPS and Series __ ARPS, each of the First Initial Dividend Payment Date,
the Last Initial Dividend Payment Date and the first Business Day of each
calendar month during the Initial Dividend Period; with respect to Series __,
______, 199_; with respect to Series __ ARPS, _________, 199_; and with respect
to Series __ ARPS, _____, 199_.
"Initial Dividend Period" means, with respect to each series of
ARPS, the period from and including the Date of Original Issue to but excluding
the Last Initial Dividend Payment Date for the Series __ ARPS and Series __
ARPS and the Initial Dividend Payment Date for the Series __ ARPS, Series __
ARPS and Series __ ARPS.
"Initial Dividend Rate," with respect to each series of ARPS,
means the rate per annum specified herein as such with respect to the series.
"Initial Margin" means the amount of cash or securities
deposited with a broker as a margin payment at the time of purchase or sale of
a futures contract.
"Interest Equivalent" means a yield on a 360-day basis of a
discount-basis security which is equal to the yield on an equivalent interest-
bearing security.
"Last Initial Dividend Payment Date" means _______ __, 199_ in
the case of Series __ ARPS and _______ __, 199_ in the case of Series __ ARPS.
"Long Term Dividend Period" means a dividend period consisting
of any period of one year or more but not greater than five years.
"Mandatory Redemption Price" shall mean (i) $50,000 per share
of ARPS in the case of a Short Term Dividend Period or (ii) in the case of a
Long Term Dividend Period the redemption price per share (and in no event less
than $50,000), which may provide for a redemption premium of the ARPS as
specified by the Broker-Dealers in their related Response to a Request for a
Long Term Dividend Period; in each case plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to the date of
<PAGE>
redemption, excluding Gross-up Dividends.
"Marginal Tax Rate" means 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.
"Market Value" of any Municipal Obligation held by the Trust
shall be the market value thereof determined by the Pricing Service, except
where the Trust is unable to obtain such information from the Pricing Service,
in which case the Market Value of any Municipal Obligation held by the Trust
shall be the lower of two dealer bid prices (one of which must be in writing)
for such securities as reported as of close of business on the Valuation Date
by any two dealers making a market in such securities which are members of the
National Association of Securities Dealers, Inc. In the event that the Trust
is unable to obtain the Market Value of any Municipal Obligation from the
Pricing Service and the Trust is unable to obtain any such dealer bids on any
Municipal Obligation as stated above, the Market Value of such Municipal
Obligation shall be deemed to be zero for purposes of calculating the ARPS
Basic Maintenance Amount. For so long as the ARPS are rated by S&P or Moody's,
the Trust will not, in connection with determining the market value of
Municipal Obligations held by the Trust, use a pricing service other than the
Pricing Service, unless S&P and/or Moody's, as the case may be, indicates in
writing that such action will not impair the ratings then assigned to the ARPS.
The Market Value of all securities of the Trust other than Municipal
Obligations shall be the market value thereof determined in accordance with the
procedures set forth in the Trust's Registration Statement on Form N-2
(Securities Act File No. 33-_______ (Common) on file with the Securities and
Exchange Commission, as such Registration Statement may be amended from time to
time.
"Maximum Applicable Rate" has the meaning set forth in
paragraph 11(A)(vii) of this Certificate of Designation.
"Maximum Potential Gross-up Dividends Liability," as of any
Valuation Date, means the aggregate amount of Gross-up Dividends that would be
due estimated based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the Trust, as of
the end of the calendar month immediately preceding such Valuation Date and
assuming such Gross-up Dividends are fully taxable.
"Minimum Liquidity Level" means, as of any date of
determination, an aggregate Market Value of the Trust's Dividend Coverage
Assets equal to or in excess of the Dividend Coverage Amount.
"Moody's" means Moody's Investors Service, Inc. or its
successor.
"Moody's Discount Factor" means, for purposes of determining
the Discounted Value of any Moody's Eligible Asset, the percentage determined
by reference to (a) the Moody's Exposure Period and (b)(i) the rating by
Moody's (or to the rating by S&P where no Moody's rating is available to the
extent specified below) on such asset, (ii) in the event the Moody's Eligible
Asset is insured under a Portfolio Insurance policy and the terms of the policy
permit the Trust, at its option, to obtain Permanent Insurance guaranteeing the
timely payment of interest on such Moody's Eligible Asset and principal thereof
to maturity, the Moody's insurance claims-paying ability rating of the issuer
of the policy or (iii) in the event the Moody's Eligible Asset is insured under
a Secondary Market Insurance policy which guarantees the timely payment of
interest on such Moody's Eligible Asset and principal thereof to maturity, the
Moody's insurance claims-paying ability rating of the issuer of the insurance
policy (provided that for purposes of clauses (ii) and (iii) if the insurance
claims-paying ability of an issuer of an insurance policy is not rated by
Moody's but is rated by S&P, such issuer shall be deemed to have a Moody's
insurance claims-paying ability rating which is one full category lower than
the S&P insurance claims-paying ability rating) in accordance with the table
set forth below:
<TABLE>
<CAPTION>
Moody's Discount Factors
Rating Category
-----------------------------------
Moody's Exposure Period Aaa* Aa* A* Baa* Other** VMIG 1*** SP-1+***
- - - ----------------------- --- -- - --- ----- ------ -----
<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..... 154 164 173 205 235 137 149
than seven weeks
9 weeks or less but greater..... 158 169 179 209 242 138 150
than eight weeks
<FN>
__________________
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB-, BBB or BBB+ by S&P.
*** Municipal Obligations rated MIG 1 or VMIG 1 or, if not rated by Moody's, rated SP-1+ by S&P which do not mature or have a
demand feature at par exercisable within the Moody's Exposure Period and which do not have a long-term rating. For the
purposes of the definition of Moody's Eligible Assets, these securities will have an assumed rating of A by Moody's.
</TABLE>
In the event a Moody's Discount Factor applicable to a Moody's
Eligible Asset is determined by reference to an insurance claims-paying ability
rating in accordance with clause b(ii) or b(iii) of the foregoing paragraph,
such Moody's Discount Factor shall be increased by an amount equal to 50% of
<PAGE>
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 which is one category lower than 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 P-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% if
such Municipal Obligations are not rated by Moody's but are rated A-1+ or SP-1+
or 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 Receivables for Municipal Obligations Sold. "Receivables for
Municipal Obligations Sold," for purposes of calculating Moody's Eligible
Assets as of any Valuation Date, means no more than the aggregate of the
following: (i) the book value of receivables for Municipal Obligations sold as
of or prior to such Valuation Date if such receivables are due within five
Business Days of such Valuation Date, and if the trades which generated such
receivables are (x) settled through clearing house firms with respect to which
the Trust has received prior written authorization from Moody's or (y) with
counterparties having a Moody's long-term debt rating of at least Baa3; and
(ii) the Moody's Discounted Value of Municipal Obligations sold as of or prior
to such Valuation Date which generated receivables, if such receivables are due
within five Business Days of such Valuation Date but do not comply with either
of conditions (x) or (y) of the preceding clause (i).
"Moody's Eligible Asset" means 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) will 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 $10,000,000.
When the Trust sells a Municipal Obligation and agrees to
repurchase it at a future date, the Discounted Value of such Municipal
Obligation will constitute a Moody's Eligible Asset and the amount the Trust is
required to pay upon repurchase of such Municipal Obligations will count as a
liability for purposes of calculating the ARPS Basic Maintenance Amount. When
the Trust purchases a Municipal Obligation and agrees to sell it at a future
date to another party, cash receivable by the Trust thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such Municipal Obligation will constitute a Moody's
Eligible Asset.
The Moody's guidelines impose certain minimum issue size,
issuer, geographical diversification and other requirements, for purposes of
determining Moody's Eligible Assets (excluding cash), as set forth in the table
below:
<TABLE>
<CAPTION>
Maximum State or
Minimum Maximum Territory
Issue Size Underlying Type Concen-
Rating ($ Millions) Obligor (%)(1)(2) tration (%)(1)
------ ------------ ----------------- ----------------
<S> <C> <C> <C>
Aaa......... 10 100 100
Aa.......... 10 20 60
A........... 10 10 40
Baa......... 10 6 20
Other(3).... 10 4 12
<FN>
_____________________________
1 The referenced percentages represent maximum cumulative totals for the
related ratings category and each lower rating category.
2 For purposes of defining Maximum Underlying Obligor, any obligation
backed by the guarantee, letter of credit or insurance issued by a
third party will be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the
rating of such obligation.
3 Municipal Obligations not rated by Moody's but rated BBB-, BBB or BBB+
by S&P.
</TABLE>
Notwithstanding the foregoing, an asset will not be considered
a Moody's Eligible Asset if (1) it is irrevocably deposited by the Trust for
the payment of the expenses described in (A)(i) through (A)(vi) under the
definition herein of ARPS Basic Maintenance Amount, (2) it is held in a margin
account or if it is subject to any material lien, mortgage, pledge, security
interest or security agreement of any kind (collectively, "Liens"), except for
(a) Liens to secure payment for services rendered or cash advanced to the Trust
by its investment adviser, the Auction Agent or any Broker-Dealer and (b) any
Lien by virtue of a repurchase agreement or (3) it is held for the purchase of
a security pursuant to a Forward Commitment.
"Moody's Exposure Period" means a period that is the same
<PAGE>
length or longer than the number of days used in calculating the cash dividend
component of the ARPS Basic Maintenance Amount and shall initially be the
period commencing on and including a given Valuation Date and ending 48 days
thereafter.
"Moody's Hedging Transactions" means the selling of an exchange
traded futures contract based on the Municipal Index or Treasury Bonds or the
purchase of an exchange traded put option on such a futures contract or the
writing of an exchange traded call option on such a futures contract or the
writing of an exchange traded option.
"Moody's Volatility Factor" means 272% during any Dividend
Period 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:
<TABLE>
<CAPTION>
% Change in Moody's Volatility
Marginal Tax Rate Factor
----------------- ------------------
<S> <C>
< or = 5% 292%
>5% but < or = 10% 313%
>10% but < or = 15% 338%
>15% but < or = 20% 364%
>20% but < or = 25% 396%
>25% but < or = 30% 432%
>30% but < or = 35% 472%
>35% but < or = 40% 520%
</TABLE>
Notwithstanding the foregoing, the Moody's Volatility Factor may mean such
other potential dividend rate increase factor as Moody's advises the Trust in
writing is applicable.
"Municipal Index" means The Bond Buyer Municipal Bond Index.
"Municipal Obligations" means "Municipal Obligations" as
defined in the Trust's Registration Statement on Form N-2 (File No. 33 -
________ (Preferred)) on file with the Securities and Exchange Commission, as
such Registration Statement may be amended from time to time, except as
otherwise set forth under "S&P Eligible Assets" below.
"1940 Act" means the Investment Company Act of 1940, as amended
from time to time.
"1940 Act Cure Date," with respect to the failure by the Trust
to maintain the 1940 Act ARPS Asset Coverage (as required by paragraph 6 of
this Certificate of Designation) as of the last Business Day of each month,
means the last Business Day of the following month.
"1940 Act ARPS Asset Coverage" means asset coverage, as defined
in Section 18(h) of the 1940 Act, of at least 200% with respect to all
outstanding senior securities of the Trust which are stock, including all of
the outstanding ARPS (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
paying dividends on its common shares).
"Non-Payment Period" means any period commencing on and
including the day on which the Trust shall fail to (i) declare prior to the
close of business on the second Business Day preceding any Dividend Payment
Date, for payment on or (to the extent permitted by paragraph 2(e) of this
Certificate of Designation) within three Business Days after such Dividend
Payment Date to the Holders as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date, the full amount of any
dividend on the ARPS payable on such Dividend Payment Date or (ii) deposit,
irrevocably in trust, in same-day funds, with the Auction Agent by 12:00 noon,
New York City time, (A) on or (to the extent permitted by paragraph 2(e) of
this Certificate of Designation) within three Business Days after such Dividend
Payment Date the full amount of any cash dividend on such shares (if declared)
payable on such Dividend Payment Date or (B) on or (to the extent permitted by
paragraph 2(e) of this Certificate of Designation) within three Business Days
after any redemption date for any of the ARPS called for redemption, the
Mandatory Redemption Price per share of such ARPS or, in the case of an
optional redemption, the Optional Redemption Price per share of such ARPS and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid cash dividends and unpaid redemption prices shall have been so
deposited or shall have otherwise been made available to Holders in same-day
funds; provided that, a Non-Payment Period shall not end unless the Trust shall
have given at least five days' but no more than 30 days' written notice to the
Auction Agent, all Existing Holders (at their addresses appearing in the Share
Books) and the Securities Depository.
"Non-Payment Period Rate" means, initially (i) 220% of the
applicable "AA" Composite Commercial Paper Rate, in the case of any Short Term
Dividend Period having 182 or fewer days, (ii) 220% of the applicable U.S.
Treasury Bill Rate in the case of any Short Term Dividend Period having 189 or
more but fewer than 364 days; and (iii) 220% of the applicable U.S. Treasury
Note Rate in the case of any Long Term Dividend Period, provided that the Board
of Trustees of the Trust shall have the authority to adjust, modify, alter or
change from time to time the initial Non-Payment Period Rate if the Board of
Trustees of the Trust determines, and Moody's, S&P and any Substitute Rating
Agencies advise the Trust in writing, that such adjustment, modification,
alteration or change will not adversely affect their then-current ratings on
<PAGE>
the ARPS.
"Notice of Long Term Dividend Period" has the meaning set forth
in paragraph 2(c) of this Certificate of Designation.
"Notice of Redemption" means any notice with respect to the
redemption of ARPS pursuant to paragraph 4 of this Certificate of Designation.
"Notice of Revocation" has the meaning set forth in paragraph
2(c) of this Certificate of Designation.
"Optional Redemption Price" shall mean (i) $50,000 per share of
ARPS in the case of a Short Term Dividend Period or (ii) in the case of a Long
Term Dividend Period, the redemption price per share (and in no event less than
$50,000), which may provide for a redemption premium of the ARPS as specified
by the Broker-Dealers in their related Response to a Request for a Long Term
Dividend Period; in each case plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to the date of
redemption, excluding Gross-up Dividends.
"Outstanding" means, as of any date (i) the ARPS theretofore
issued by the Trust except, without duplication, (A) any of the ARPS
theretofore canceled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and moneys shall have been deposited in trust by the Trust pursuant to
paragraph 4(c), and (B) any of the ARPS as to which the Trust or any Affiliate
thereof shall be an Existing Holder, and (ii) with respect to other Preferred
Shares, has the equivalent meaning.
"Parity Shares" means the ARPS and any future outstanding
series of Preferred Shares the holders of which, together with the holders of
the ARPS, shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may be,
in proportion to the full respective preferential amounts to which they are
entitled, without preference or priority one
over the other.
"Permanent Insurance" means "Permanent Insurance" as defined in
the Trust's Registration Statement on Form N-2 (File No. 33-_________ (Common))
on file with the Securities and Exchange Commission as such Registration
Statement may be amended from time to time.
"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.
"Portfolio Insurance" means "Portfolio Insurance" as defined in
the Trust's Registration Statement on Form N-2 (File No. 33-__________
(Common)) on file with the Securities and Exchange Commission as such
Registration Statement may be amended from time to time.
"Potential Beneficial Owner" means a customer of a Broker-
Dealer or a Broker-Dealer that is not a Beneficial Owner of ARPS but that
wishes to purchase such shares, or that is a Beneficial Owner that wishes to
purchase additional ARPS.
"Potential Holder" shall mean any Broker-Dealer or any such
other Person as may be permitted by the Trust, including any Existing Holder,
who may be interested in acquiring ARPS (or, in the case of an Existing Holder,
additional ARPS).
"Preferred Shares" means the preferred shares of beneficial
interest, par value $0.01 per share, of the Trust, including the ARPS.
"Pricing Service" means "Pricing Service" as defined in the
Trust's Registration Statement on Form N-2 (File No. 33- _________ (Common)) on
file with the Securities and Exchange Commission, as such Registration
Statement may be amended from time to time.
"Projected Dividend Amount" means, with respect to the ARPS, on
the Projected Dividend Valuation Date, in the event the then current Dividend
Period will end within 49 calendar days of the Projected Dividend Valuation
Date, the aggregate amount of cash dividends that would accumulate on the ARPS
outstanding on the Projected Dividend Valuation Date, calculated as follows:
from and after the last day of the then current Dividend Period until a date 49
calendar days from the Projected Dividend Valuation Date, assume a dividend
rate equal to the Maximum Applicable Rate for a 7-Day Dividend Period
multiplied by the larger of the Moody's Volatility Factor and the S&P
Volatility Factor that the Trust has been informed by Moody's and S&P,
respectively, is applicable to the Projected Dividend Amount. During a Non-
Payment Period, the Projected Dividend Amount shall be calculated by reference
to the Non-Payment Period Rate.
"Projected Dividend Valuation Date" means the date on which the
Projected Dividend Amount is calculated.
"Quarterly Valuation Date" means the last Business Day of each
fiscal quarter of the Trust in each fiscal year of the Trust, commencing
_________, 1994.
"Receivables for Municipal Obligations Sold" for Moody's has
the meaning set forth under the definition of Moody's Discount Factor, and for
S&P has the meaning set forth under the definition of S&P Discount Factor.
"Reference Rate" has the meaning set forth in paragraph 11(A)
of this Certificate of Designation.
<PAGE>
"Request for Long Term Dividend Period" has the meaning set
forth in paragraph 2(c) of this Certificate of Designation.
"Response" has the meaning set forth in paragraph 2(c) of this
Certificate of Designation.
"Retroactive Taxable Allocation" has the meaning set forth in
paragraph 2(h) of this Certificate of Designation.
"Right", with respect to the ARPS, has the meaning set forth in
paragraph 2(h) of this Certificate of Designation and, with respect to the
other Preferred Shares, has the equivalent meaning.
"Rightholder" has the meaning set forth in paragraph 2(h) of
this Certificate of Designation.
"S&P" means Standard & Poor's Corporation or its successors.
"S&P Discount Factor" means, for purposes of determining the
Discounted Value of any Municipal Obligation that constitutes an S&P Eligible
Asset, the percentage determined by reference to (a) the S&P Exposure Period
and (b)(i) the S&P or Moody's rating on such Municipal Obligation or (ii) in
the event the Municipal Obligation is insured under a Portfolio Insurance
policy and the terms of the policy permits the Trust, at its option, to obtain
Permanent Insurance guaranteeing the timely payment of interest on such
Municipal Obligation and principal thereof to maturity, the S&P insurance
claims-paying ability of the issuer of the policy or (iii) in the event the
Municipal Obligation is insured under a Secondary Market Insurance policy which
guarantees the timely payment of interest on such Municipal Obligation and
principal thereof to maturity, the S&P claims-paying ability of the issuer of
the insurance policy, in accordance with the table set forth below:
<TABLE>
<CAPTION>
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
<FN>
____________________
* S&P rating
</TABLE>
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 in 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 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
short-term Municipal Obligations rated by Moody's but not rated by S&P 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. "Receivables for Municipal
Obligations Sold," for purposes of calculating S&P Eligible Assets as of any
Valuation Date, means the book value of receivables for Municipal Obligations
sold as of or prior to such Valuation Date if such receivables are due within
five Business Days of such Valuation Date. 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 and Grant Anticipation Notes (GANs) and Bond Anticipation Notes
(BANs) rated SP-1+ by S&P, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Municipal Obligations.
"S&P Eligible Asset" means cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) is interest bearing and
pays interest at least semi-annually; (ii) is payable in United States
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 Obligations will be included in S&P Eligible Assets
only to the extent the Market Value of such Municipal Obligations does not
exceed 50% of the aggregate Market Value of the 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 subject to a covered call
option written by the Trust; (v) is not part of a private placement of
Municipal Obligations; and (vi) is part of an issue of Municipal Obligations
with an original issue size of at least $20 million or, if of an issue with an
original issue size below $20 million (but in no event below $10 million), is
issued by an issuer with a total of at least $50 million of securities
outstanding. Solely for the purpose of this definition, the term "Municipal
Obligations" means any obligation the interest on which is exempt from regular
federal income taxation and which is issued by any of the fifty 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.
<PAGE>
Notwithstanding the foregoing:
(1) Municipal Obligations of any one issuer or
guarantor (excluding bond insurers) will be considered S&P Eligible Assets only
to the extent the Market Value of such Municipal Obligations does not exceed
10% of the aggregate Market Value of the S&P Eligible Assets, provided that 2%
is added to the applicable S&P Discount Factor for every 1% by which the Market
Value of such Municipal Obligations exceeds 5% of the aggregate Market Value of
the S&P Eligible Assets;
(2) Municipal Obligations issued by issuers in any
one state or territory will be considered S&P Eligible Assets only to the
extent the Market Value of such Municipal Obligations does not exceed 20% of
the aggregate Market Value of the S&P Eligible Assets; and
(3) A security which underlies a repurchase
agreement will be considered an S&P Eligible Asset only if (a) it is a U.S.
Treasury security and (b) the term of the repurchase agreement is less than one
year.
"S&P Exposure Period" means the maximum period of time
following a Valuation Date, including the Valuation Date and the ARPS Basic
Maintenance Cure Date (currently totalling 7 Business Days), that the Trust has
under this Certificate of Designation to cure any failure to maintain, as of
such Valuation Date, the Discounted Value for its portfolio at least equal to
the ARPS Basic Maintenance Amount (as described in paragraph 7(a) of this
Certificate of Designation).
"S&P Hedging Transactions" means the purchasing or selling of a
futures contract based on the Municipal Index or Treasury Bonds, the purchasing
of an option on such a futures contract and the writing of covered call options
and secured put options on portfolio securities.
"S&P Volatility Factor" means 277% or such other potential
dividend rate increase factor as S&P advises the Trust in writing is
applicable.
"Secondary Market Insurance" means "Secondary Market Insurance"
as defined in the Trust's Registration statement on Form N-2 (File No. 33-
________ (Common) on file with the Securities and Exchange Commission as such
Registration Statement may be amended from time to time.
"Securities Depository" means Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust that agrees to follow the procedures required to be followed by such
securities depository in connection with the ARPS.
"Service" means the United States Internal Revenue Service.
"7-Day Dividend Period" means a Short Term Dividend Period
consisting of 7 days.
"Short Term Dividend Period" means a Dividend Period consisting
of a specified number of days evenly divisible by seven and not more than 364.
"Share Books" means the books maintained by the Auction Agent
setting forth at all times a current list, as determined by the Auction Agent,
of Existing Holders of the ARPS.
"Share Register" means the register of holders of record of the
ARPS maintained on behalf of the Trust by the Auction Agent in its capacity as
transfer agent and registrar for the ARPS.
"Subsequent Dividend Period" has the meaning set forth in
paragraph 2(d) of this Certificate of Designation.
"Substitute Commercial Paper Dealers" means such Substitute
Commercial Paper Dealer or Dealers as the Trust may from time to time appoint
or, in lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" and "Substitute Rating Agencies"
mean a nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by Dean
Witter Reynolds Inc. or its respective affiliates and successors, after
consultation with the Trust, to act as the substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit ratings
of the ARPS.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" on
any date for any Short-Term Dividend Period of 28 days or fewer shall mean 90%
of the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the Kenny S&P 30 day High Grade Index or any successor index
(the "Kenny Index") 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, based
upon 30-day yield evaluations at par of bonds the interest on which is
excludable for regular Federal income tax purposes under the Internal Revenue
Code of 1986, as amended, 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, as
amended, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 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
<PAGE>
successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall
mean the quotient of (A) the per annum rate expressed on an interest equivalent
basis equal to the most recent Kenny Index so made available for any preceding
Business Day, divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a
decimal). For purposes of the foregoing, for so long as the ARPS are rated by
Moody's and S&P, The Trust will obtain written confirmation from Moody's and
S&P that the appointment of a successor to Kenny Information Systems Inc. would
not impair the rating assigned to the ARPS by Moody's and S&P, respectively.
"Trust" means InterCapital Insured Municipal Securities.
"Treasury Bonds" mean United States Treasury bonds with
remaining maturities of ten years or more issued by and backed by the full
faith and credit of the United States which are not zero coupon bonds.
"U.S. Treasury Bill Rate" on any date means (i) the interest
equivalent yield of the rate on the actively traded Treasury Bill with a
maturity most nearly comparable to the length of the related Dividend Period,
as such rate is made available on a discount basis or otherwise by the Federal
Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S.
Government Securities reports for such Business Day, or (ii) if such yield as
so calculated is not available, the Alternate Treasury Bill Rate on such date.
"Alternate Treasury Bill Rate" on any date means the interest equivalent of the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as determined by bid
price quotations as of anytime on the Business Day immediately preceding such
date, obtained from at least three recognized primary U.S. Government
securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as
calculated by reference to the bid price quotation of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as such bid price quotation is published
on the Business Day immediately preceding such date by the Federal Reserve Bank
of New York in its Composite 3:30 P.M. Quotations for U.S. Government
Securities report for such Business Day, or (ii) if such yield as so calculated
is not available, the Alternate Treasury Note Rate on such date. "Alternate
Treasury Note Rate" on any date means the yield as calculated by reference to
the arithmetic average of the bid price quotations of the actively traded,
current coupon Treasury Note with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by the bid price
quotations as of any time on the Business Day immediately preceding such date,
obtained from at least three recognized primary U.S. Government securities
dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the
Trust is maintaining the ARPS Basic Maintenance Amount and the Minimum
Liquidity Level, each Business Day commencing with the Date of Original Issue.
"Variation Margin" means, in connection with an outstanding
futures contract owned or sold by the Trust, the amount of cash or securities
paid to and received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such futures contract fluctuates.
"Voting Period" has the meaning set forth in paragraph 5(b) of
this Certificate of Designation.
(b) The Board of Trustees of the Trust shall have the
authority to adjust, modify, alter or change from time to time the definitions
herein; provided, however, (i) that such adjustment, modification, alteration
or change will not adversely affect the ARPS; or (ii) that for so long as the
ARPS are rated by Moody's or S&P, no definition contained herein may be changed
by the Board of Trustees unless Moody's or S&P or any Substitute Rating Agency,
as the case may be, advise the Trust in writing that such adjustment,
modification, alteration or change will not adversely affect their then-current
ratings on the ARPS.
2. Dividends.
(a) The Holders shall be entitled to receive, when, as
and if declared by the Board of Trustees of the Trust or a duly authorized
committee thereof, out of Available Funds, cumulative dividends each consisting
of (i) cash at the Applicable Rate (plus any Additional Dividends as provided
in paragraph 2(g) below) and (ii) a Right to receive cash as set forth in
paragraph 2(h) below, and no more, payable on the respective dates set forth
below. Dividends on the ARPS so declared and payable shall be paid in
preference to and in priority over any dividends declared and payable on the
Common Shares.
(b) (i) Cash dividends on each series of ARPS
shall accumulate from the Date of Original Issue and shall be payable when, as
and if declared by the Board of Trustees or a duly authorized committee
thereof, out of Available Funds, commencing on the First Initial Dividend
Payment Date with respect to the Series __ ARPS and Series __ ARPS and on the
Initial Dividend Payment Date with respect to the Series __ ARPS, Series __
ARPS and Series __ ARPS. After the First Initial Dividend Payment Date,
dividends on the Series __ ARPS and Series __ ARPS during the Initial Dividend
Period shall be payable on the first Business Day of each calendar month during
the Initial Dividend Period and on the Last Initial Dividend Payment Date.
Following the Last Initial Dividend Payment Date for the Series __ ARPS and
Series __ ARPS and the Initial Dividend Payment Date for the Series __ ARPS,
Series __ ARPS and Series __ ARPS, dividends on the ARPS will be payable at the
option of the Trust, either (i) with respect to any Short Term Dividend Periods
of 35 days or less, on the day next succeeding the last day thereof and (ii)
with respect to any Short Term Dividend Period of more than 35 days and with
<PAGE>
respect to any Long Term Dividend Period, monthly on the first Business Day of
each calendar month during such Short Term Dividend Period or Long Term
Dividend Period and on the day next succeeding the last day thereof. If the
day that otherwise would be the Dividend Payment Date is not a Business Day,
then (i) the Dividend Payment Date shall be the first Business Day next
succeeding such day that would otherwise be the Dividend Payment Date if such
day that would otherwise be the Dividend Payment Date is a Monday, Tuesday,
Wednesday or Thursday, or (ii) the Dividend Payment Date shall be the first
Business Day next preceding such day that would otherwise be the Dividend
Payment Date if such day that would otherwise be the Dividend Payment Date is a
Friday. If, however, in the case of clause (ii) in the preceding sentence, the
Securities Depository shall make available to its participants and members, in
funds immediately available in New York City on Dividend Payment Dates, the
amount due as dividends on such Dividend Payment Dates (and the Securities
Depository shall have so advised the Trust), and if the day that otherwise
would be the Dividend Payment Date is not a Business Day, then the Dividend
Payment Date shall be the next succeeding Business Day. Each dividend payment
date determined as provided above is hereinafter referred to as a "Dividend
Payment Date." It is expected that the length of each Subsequent Dividend
Period will be determined in accordance with paragraph 2(c)(i), paragraph
2(c)(ii) or paragraph 2(c)(iii) of this Certificate of Designation. If for any
reason a Dividend Payment Date cannot be fixed as described above, then the
Board of Trustees or a duly authorized committee thereof shall fix the Dividend
Payment Date.
(ii) Each dividend shall be paid to the
Holders as they appear in the Share Register as of 12:00 noon, New York City
time, on the Business Day preceding the 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 they
appear on the Share Register on a date, not exceeding 15 days prior to the
payment date therefor, as may be fixed by the Board of Trustees of the Trust.
The amount of cash dividends per share of ARPS payable (if declared) on
each Dividend Payment Date of each Short Term Dividend Period or part thereof
shall be computed by multiplying the Applicable Rate for such Short Term
Dividend Period by a fraction, the numerator of which will be the number of
days in such Short Term Dividend Period or part thereof that such share was
outstanding and for which dividends have not been paid and the denominator of
which will be 365, multiplying the amount so obtained by $50,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period or part thereof, the amount of cash dividends per share of ARPS payable
(if declared) on any Dividend Payment Date in each series shall be computed by
multiplying the Applicable Rate for such Long Term Dividend Period by a
fraction, the numerator of which will be such number of days in such part of
such Long Term Dividend Period that such share was outstanding and for which
dividends have not been paid and the denominator of which will be 360,
multiplying the amount so obtained by $50,000, and rounding the amount so
obtained to the nearest cent.
(c) (i) With respect to each Dividend Period that
is a Short Term Dividend Period, on or prior to the 15th day prior to an
Auction Date for the ARPS, the Trust shall provide telephonic and written
notice to the Auction Agent, the Securities Depository and to each Broker-
Dealer of the number of days, evenly divisible by seven, and not more than 364,
in the Short Term Dividend Period next succeeding such notice and the Broker-
Dealers shall promptly inform the holders of such ARPS of the length of such
Short Term Dividend Period. The Trust is required to give telephonic and
written notice (a "Notice of Revocation") to the Auction Agent, each Broker-
Dealer, and the Securities Depository on or prior to the second Business Day
prior to the relevant Auction Date if the Broker-Dealer(s) jointly advise the
Trust that they have concluded that it is advisable to give a Notice of
Revocation. In making such determination the Broker-Dealer(s) will consider
(1) existing short-term and long-term taxable and tax-exempt market rates and
indices of such short-term and long-term rates, (2) existing market supply and
demand for short-term and long-term taxable and tax-exempt securities, (3)
existing yield curves for short-term and long-term securities comparable to the
ARPS, (4) industry and financial conditions which may affect the ARPS, (5) the
investment objective of the Trust, and (6) the Dividend Periods and dividend
rates at which current and potential beneficial holders of ARPS would remain or
become beneficial holders. If the Trust gives a Notice of Revocation with
respect thereto, the next succeeding Dividend Period will be a 7-Day Dividend
Period for a series. In addition, in the event the Trust has given a notice in
accordance with this paragraph with respect to the next succeeding Dividend
Period for a series but Sufficient Clearing Bids are not made in the applicable
Auction or such Auction is not held for any reason, such next succeeding
Dividend Period will be a 7-Day Dividend Period and the Trust may not again
give such notice (and any such attempted notice shall be null and void) until
Sufficient Clearing Bids have been made in an Auction with respect to a Short
Term Dividend Period for that series. Notwithstanding the foregoing, the Trust
shall not give a notice for: (A) a Short Term Dividend Period of greater than
28 days unless, at the time of giving such a notice, the Trust would not, as a
result of the commencement of a Short Term Dividend Period of greater than 28
days, fail to comply with the ARPS Basic Maintenance Amount; and (B) a Short
Term Dividend Period of greater than 28 days unless the Trust has received
written confirmation from Moody's that such action would not adversely affect
the Moody's rating of the ARPS and until the Trust notifies S&P of its decision
to give such notice. Following a Notice of Short Term Dividend Period of
greater than 28 days, the Trust will calculate the Projected Dividend Amount
using the Moody's Volatility Factor and S&P Volatility Factor applicable to
such Dividend Period of greater than 28 days.
(ii) With respect to each Dividend Period
that is a Long Term Dividend Period, on or prior to the 20th day but not more
than 28 days prior to an Auction Date for the ARPS, the Trust may, at its sole
option and to the extent permitted by law, by telephonic and written notice (a
<PAGE>
"Request for Long Term Dividend Period") to the Auction Agent, the Securities
Depository and to each Broker-Dealer, request the next succeeding Dividend
Period for that series will be a Long Term Dividend Period the length of which
shall be specified in the Request for Long Term Dividend Period, provided that
for any Auction for a series occurring after the initial Auction, the Trust may
not give a Request for Long Term Dividend Period (and any such request shall be
null and void) unless Sufficient Clearing Bids were made in the last occurring
Auction for that series and each more recently occurring Auction, if any, for
the other series or if full cumulative dividends, and any amounts due with
respect to mandatory redemptions, for each series of ARPS payable prior to such
date have not been paid in full. Upon receiving such Request for Long Term
Dividend Period, the Broker-Dealer(s) shall jointly determine whether, given
the factors set forth below, it is advisable that the Trust issue a Notice of
Long Term Dividend Period for the shares of such series as contemplated by such
Request for Long Term Dividend Period and, if so, the Optional Redemption Price
and Mandatory Redemption Price of the ARPS during such Long Term Dividend
Period, the times during such Long Term Dividend Period that optional
redemptions of the ARPS will be permitted and the Maximum Applicable Rate for
such Long Term Dividend Period, and shall give the Trust and the Auction Agent
written notice (a "Response") of such determination by no later than the 16th
day prior to such Auction Date. In making such determination the Broker-
Dealer(s) will consider the factors set forth in paragraph (c)(i), above. If
the Broker-Dealer(s) shall not give the Trust and the Auction Agent a Response
by such 16th day or if the Response states that given the factors set forth
above it is not advisable that the Trust give a Notice of Long Term Dividend
Period for the shares of such series, the Trust may not give a Notice of Long
Term Dividend Period in respect of such Request for Long Term Dividend Period.
In the event the Response indicates that it is advisable that the Trust give a
Notice of Long Term Dividend Period for the shares of such series, the Trust
will by no later than the 15th day prior to such Auction Date give a notice (a
"Notice of Long Term Dividend Period") to the Auction Agent, the Securities
Depository and each Broker-Dealer which notice will specify (1) the duration of
the Long Term Dividend Period, (2) the Optional Redemption Price and Mandatory
Redemption Price of the ARPS during such Long Term Dividend Period as specified
in the related Response, (3) the Maximum Applicable Rate of such Long Term
Dividend Period as specified in the related Response and (4) the times during
such Long Term Dividend Period that the optional redemption of the ARPS will be
permitted as specified in the related Response. The Trust shall also provide a
copy of such Notice to Moody's and S&P. The Trust is required to give
telephonic and written notice (a "Notice of Revocation of a Long Term Dividend
Period") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the second Business Day prior to the relevant Auction
Date if (x) either the 1940 Act ARPS Asset Coverage or the ARPS Basic
Maintenance Amount is not satisfied on each of the two Valuation Dates
immediately preceding the related Auction Date on an actual basis and on a pro
forma basis giving effect to the proposed Long Term Dividend Period, (y)
sufficient funds for the payment of dividends payable on the immediately
succeeding Dividend Payment Date have not been irrevocably deposited with the
Auction Agent by the close of business on the third Business Day preceding the
related Auction Date or (z) the Broker-Dealer(s) jointly advise the Trust that
after consideration of the factors listed above they have concluded that it is
advisable to give a Notice of Revocation of a Long Term Dividend Period. If
the Trust gives a Notice of Revocation of a Long Term Dividend Period with
respect thereto, the next succeeding Dividend Period will be a 7-Day Dividend
Period for a series. In addition, in the event the Trust has given a Notice of
Long Term Dividend Period with respect to the next succeeding Dividend Period
for a series but Sufficient Clearing Bids are not made in the applicable
Auction or such Auction is not held for any reason, such next succeeding
Dividend Period will be a 7-Day Dividend Period and the Trust may not again
give a Notice of Long Term Dividend Period (and any such attempted notice shall
be null and void) until Sufficient Clearing Bids have been made in an Auction
with respect to a Short Term Dividend Period for that series.
(iii) If the Trust does not specify the length
of a Subsequent Dividend Period for a series of ARPS in accordance with the
procedures set forth in either paragraph 2(c)(i) or paragraph 2(c)(ii) of this
Certificate of Designation, the Subsequent Dividend Period for such series of
ARPS will be a 7-Day Dividend Period.
(d) The dividend rate on each series of ARPS during
the Initial Dividend Period of such series will be the rate per annum set forth
under "Designation" of this Certificate of Designation. Commencing on the Last
Initial Dividend Payment Date for the Series __ ARPS and Series __ ARPS and on
the Initial Dividend Payment Date for the Series __ ARPS, Series __ ARPS and
Series __ ARPS, the Applicable Rate on each series of ARPS for each subsequent
dividend period (hereinafter referred to as a "Subsequent Dividend Period"),
which Subsequent Dividend Period will commence on a Dividend Payment Date and
will end on the calendar day prior to the next Dividend Payment Date (or last
Dividend Payment Date in a Dividend Period if there is more than one Dividend
Payment Date), will be the dividend rate per annum that results from the
Auction conducted with respect to such Dividend Period, as adjusted as provided
in paragraph 2(g) herein. Dividends shall be calculated as set forth in
paragraph 2(c) hereof.
(e) The Applicable Rate for each Dividend Period
commencing during a Non-Payment Period shall be equal to the Non-Payment Period
Rate. Except in the case of the willful failure of the Trust to pay a dividend
on a Dividend Payment Date or to redeem any of the ARPS on the date set for
such redemption, any amount of any dividend due on any Dividend Payment Date
(if, prior to the close of business on the second Business Day preceding such
Dividend Payment Date, the Trust has declared such dividend payable on or
within three Business Days after such Dividend Payment Date to the Holders of
such ARPS as of 12:00 noon, New York City time, on the Business Day preceding
such Dividend Payment Date) or redemption price with respect to any of the ARPS
not paid to such Holders when due may be paid to such Holders in the same form
of funds by 12:00 noon, New York City time, on any of the first three Business
<PAGE>
Days after such Dividend Payment Date or due date, as the case may be, provided
that, such amount is accompanied by a late charge calculated for such period of
non-payment at the Non-Payment Period Rate applied to the amount of such non-
payment based on the actual number of days comprising such period divided by
365. In the case of a willful failure of the Trust to pay a dividend on a
Dividend Payment Date or to redeem any of the ARPS on the date set for such
redemption, the preceding sentence shall not apply and the Applicable Dividend
Rate for the Dividend Period commencing during the Non-Payment Period resulting
from such failure shall be the Non-Payment Period Rate. The Dividend Period in
such case shall be a 7-Day Dividend Period. For the purposes of the foregoing,
payment to a person in same-day funds on any Business Day at any time shall be
considered equivalent to payment to such person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
(f) (i) Holders shall not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends, as herein provided, on the ARPS. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
on the ARPS that may be in arrears.
(ii) For so long as any of the ARPS are
outstanding, the Trust shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase, Common
Shares or other shares of beneficial interest, if any, ranking junior to the
ARPS as to dividends or upon liquidation) in respect of the Common Shares or
any other shares of beneficial interest of the Trust ranking junior to or on a
parity with the ARPS as to dividends or upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any of the
Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Trust ranking junior to the ARPS as to dividends and
upon liquidation) or any other such parity shares (except by conversion into or
exchange for shares of the Trust ranking junior to or on a parity with the ARPS
as to dividends and upon liquidation), unless (A) immediately after such
transaction, the Trust shall have S&P Eligible Assets with an aggregate
Discounted Value and Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the ARPS Basic Maintenance Amount and the Trust shall
maintain the 1940 Act ARPS Asset Coverage, (B) full cumulative dividends on the
ARPS due on or prior to the date of the transaction have been declared and paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent, (C) any Right required to be paid under
paragraph 2(h) below on or before the date of such declaration or payment has
been paid and (D) the Trust has redeemed the full number of the ARPS required
to be redeemed by any provision for mandatory redemption contained herein.
(g) Whenever the Trust intends to include any net
capital gains or other taxable income in any dividend on the ARPS, the Trust
will pay in cash an additional dividend ("Additional Dividend") in an amount
equal to the sum of (i) an amount equal to the capital gains or other taxable
income included in the dividend multiplied by the maximum marginal regular
federal income tax rate in effect at the applicable Auction Date (including any
surtax on taxable income, but without taking into account the effect of any
provision allowing or limiting deductions or phasing out of the benefit of tax
brackets) applicable to individuals or corporations, whichever is greater
(utilizing the long-term capital gains rate on the portion of such distribution
which is taxable as long-term capital gains and utilizing the ordinary income
tax rate on the portion of such distribution which is other taxable income),
and (ii) an amount equal to 11.11% of the amount determined under (i) to offset
an assumed 10% rate of state and local taxes on the Additional Dividends. If
the Trust treats any of the amounts paid pursuant to clauses (i) and (ii) in
the preceding sentence as net capital gains or other taxable income for federal
income tax purposes, such amounts shall be treated in accordance with this
paragraph as dividends which include net capital gains or other taxable income.
(h) Each dividend shall consist of (i) cash at the
Applicable Rate (plus any Additional Dividends as provided in paragraph 2(g)
above) and (ii) a right (a "Right") to receive a Gross-up Dividend (as
determined below). Each Right shall thereafter be independent of the ARPS on
which the dividend was paid. The Trust shall cause to be maintained a record
of each Right received by the respective Holders. The Trust shall not be
required to recognize any transfer of a Right. If the Trust retroactively
allocates any net capital gains or other taxable income to the ARPS solely by
reason of the fact that such allocation is made as a result of the redemption
of all or a portion of the outstanding ARPS or the liquidation of the Trust
(the amount of such allocation referred to herein as a "Retroactive Taxable
Allocation"), the Trust will, within 90 days (and generally within 60 days)
after the end of the Trust's fiscal year for which a Retroactive Taxable
Allocation is made, provide notice thereof to the Auction Agent and to each
holder of a Right applicable to such ARPS (initially Cede & Co. as nominee of
The Depository Trust Company) during such fiscal year at such holder's address
as the same appears or last appeared on the Share Books of the Trust. The
Trust will, within 30 days after such notice is given to the Auction Agent, pay
to the Auction Agent (who will then distribute to such holders of Rights) out
of Available Funds, an amount equal to the aggregate Gross-up Dividends with
respect to all Retroactive Taxable Allocations made to such holders during the
fiscal year in question.
A "Gross-up Dividend" means payment of cash to a holder
of ARPS of an amount which, when taken together with the aggregate amount of
Retroactive Taxable Allocations made to such holder with respect to the fiscal
year in question, would cause such holder's dividends in dollars (after
federal, and assumed state and local income tax consequences) from the
aggregate of both the Retroactive Taxable Allocations and the Gross-up Dividend
<PAGE>
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 Gross-up Dividend shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no holder of ARPS is
subject to the federal alternative minimum tax with respect to dividends
received from the Trust; (iii) assuming that each Retroactive Taxable
Allocation would be taxable in the hands of each holder of ARPS at the maximum
marginal regular federal income tax rate (including any surtax on taxable
income, but without taking into account the effect of any provision allowing or
limiting deductions or phasing out of the benefit of tax brackets) applicable
to individuals or corporations, whichever is greater, in effect during the
fiscal year in question (utilizing the long-term capital gains rate on the
portion of such distribution which is taxable as long-term capital gains and
utilizing the ordinary income tax rate on the portion of such distribution
which is other taxable income) and (iv) assuming each holder is subject to a
combined marginal rate of state and local income tax of 10%.
Except as provided in this paragraph, no Gross-up
Dividends shall for any reason become payable during any taxable year of the
Trust in respect of any dividend which first became payable in an earlier
taxable year. In particular, and without limiting the generality of the
foregoing, no Gross-up Dividends shall become payable as a result of any
Internal Revenue Service challenge to the allocations of types of income or
designations made by the Trust relating to distributions made with respect to
an earlier fiscal year. Additionally, no Gross-up Dividends shall be payable
as a result of any change in the law concerning the eligibility of amounts paid
with respect to the ARPS for treatment as exempt-interest dividends or the
excludability of amounts paid with respect to the ARPS from the taxable income
of any Holder for federal income tax purposes.
(i) The Board of Trustees may in its sole
discretion from time to time declare a special dividend (each, a "special
dividend") in an amount determined in its sole judgment to be necessary to
cause the Trust to comply with any distribution requirements of the Code and
thereby to avoid the incurrence by the Trust of any income tax under the Code.
Any such special dividend shall be payable on a date specified by the Trustee
to Holders on a date specified by the Trustees consistent with the By-laws of
the Trust.
(j) No fractional share of ARPS shall be issued.
3. Liquidation Rights. Upon any liquidation, dissolution or
winding up of the Trust, whether voluntary or involuntary, the Holders shall be
entitled to receive, out of the assets of the Trust available for distribution
to shareholders, before any distribution or payment is made upon any Common
Share or any other capital shares ranking junior in right of payment upon
liquidation to the ARPS, the sum of $50,000 per share plus the applicable
redemption premium, if any, plus accumulated but unpaid dividends (whether or
not earned or declared) thereon to date of distribution, and after such payment
the holders of ARPS will be entitled to no other payments other than Gross-up
Dividends as provided in paragraph 2(h) herein. If upon any liquidation,
dissolution or winding up of the Trust, the amounts payable with respect to the
ARPS and any other outstanding class or series of Preferred Shares of the Trust
ranking on a parity with the ARPS as to payment upon liquidation are not paid
in full, the Holders and the holders of such other class or series will share
ratably in any such distribution of assets in proportion to the respective
preferential amounts to which they are entitled. After payment of the full
amount of the liquidating distribution to which they are entitled, the Holders
will not be entitled to any further participation in any distribution of assets
by the Trust except for any Gross-up Dividends. A consolidation or merger of
the Trust with or into any other trust or trusts or a sale, whether for cash,
shares of stock, securities or properties, of all or substantially all or any
part of the assets of the Trust shall not be deemed or construed to be a
liquidation, dissolution or winding up of the Trust.
4. Redemption. (a) ARPS shall be redeemable by the Trust
as provided below:
(i) Optional Redemption. To the extent
permitted under the 1940 Act, upon giving a Notice of Redemption, the Trust at
its option may redeem ARPS of any series, in whole or in part, out of Available
Funds at the Optional Redemption Price per share. In addition, the holders of
ARPS which are redeemed shall be entitled to receive Gross-up Dividends to the
extent provided in paragraph 2(h) herein. The Trust may not give a Notice of
Redemption or effect a redemption relating to an optional redemption as
described in this paragraph 4(a)(i) unless, at the time of giving such Notice
of Redemption and redemption, (A) the Trust has available Deposit Securities
and Municipal Obligations rated at least P-1, MIG 1 or VMIG 1 by Moody's with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount due to Holders by
reason of the redemption of their ARPS on such redemption date, (B) the Trust,
as a result of such redemption, satisfies the 1940 Act ARPS Asset Coverage
requirement and (C) the Trust would not, as a result of such redemption, fail
to comply with the ARPS Basic Maintenance Amount.
The Trust, upon determination of the Board of Trustees of the
Trust, may determine in advance to waive this option to redeem ARPS with
respect to (i) Short Term Dividend Periods having 35 days or more and (ii) Long
Term Dividend Periods. No ARPS of a series may be redeemed at the option of
the Trust during the Initial Dividend Period for that series.
(ii) Mandatory Redemption. The Trust shall
redeem the ARPS, out of Available Funds, at the Mandatory Redemption Price per
share, to the extent permitted under the 1940 Act on a date fixed by the Board
of Trustees, if the Trust fails to maintain S&P Eligible Assets with an
<PAGE>
aggregate Discounted Value or Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the ARPS Basic Maintenance Amount or
to satisfy the 1940 Act ARPS Asset Coverage and such failure is not cured on or
before the ARPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
referred to respectively as the "Cure Date"), as the case may be. In addition,
holders of ARPS so redeemed shall be entitled to receive Gross-up Dividends to
the extent provided in paragraph 2(h) herein. The number of ARPS to be
redeemed shall be equal to the lesser of (i) the minimum number of ARPS 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 Shares
subject to redemption or retirement, would result in the maintenance of S&P
Eligible Assets with an aggregate Discounted Value and Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the ARPS Basic
Maintenance Amount and the satisfaction of the 1940 Act ARPS Asset Coverage on
such Cure Date (provided that, if there is no such minimum number of ARPS and
other Preferred Shares the redemption of which would have such result, all ARPS
then outstanding shall be redeemed), and (ii) the maximum number of ARPS,
together with all other Preferred Shares subject to redemption or retirement,
that can be redeemed out of Available Funds. In determining the number of ARPS
required to be redeemed in accordance with the foregoing, the Trust shall
allocate the number required to be redeemed that would result in the
maintenance of S&P Eligible Assets with an aggregate Discounted Value and
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than ARPS Basic Maintenance Amount and satisfaction of the 1940 Act ARPS Asset
Coverage pro rata among the ARPS and other Preferred Shares subject to
redemption pursuant to provisions similar to those contained in this paragraph
4(a)(ii). The Trust shall effect such redemption on a Business Day which is
not later than 35 days after such Cure Date, except that if the Trust does not
have Available Funds sufficient for the redemption of all of the required
number of ARPS and other Preferred Shares which are subject to mandatory
redemption or the Trust otherwise is unable to effect such redemption on or
prior to 35 days after such Cure Date, the Trust shall redeem those ARPS which
it is unable to redeem on the earliest practicable date on which it is able to
effect such redemption.
(b) Notwithstanding any other provision of this
paragraph 4, no ARPS may be redeemed pursuant to paragraphs 4(a)(i) or 4(a)(ii)
of this Certificate of Designation unless all dividends in arrears, including
Gross-up Dividends then due and payable, on all remaining outstanding Parity
Shares shall have been or are being contemporaneously paid or declared and set
apart for payment. In the event that less than all the outstanding ARPS are to
be redeemed and there is more than one Holder, the shares to be redeemed shall
be selected by lot or such other method as the Trust shall deem fair and
equitable.
(c) Whenever ARPS are to be redeemed, the Trust, at
least 30 days prior to the date fixed for redemption, shall mail a notice
("Notice of Redemption") by first-class mail, postage prepaid, to each Holder
of ARPS to be redeemed and to the Auction Agent. The Notice of Redemption
shall also be published in the eastern and national editions of The Wall Street
Journal. The Notice of Redemption shall set forth (i) the redemption date,
(ii) the amount of the redemption price, (iii) the aggregate number of ARPS of
such series to be redeemed, (iv) the place or places where ARPS of such series
are to be surrendered for payment of the redemption price, (v) a statement that
dividends on the shares to be redeemed shall cease to accumulate on such
redemption date and (vi) the provision of this Certificate of Designation
pursuant to which such shares are being redeemed. No defect in the Notice of
Redemption or in the mailing or publication thereof shall affect the validity
of the redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as
aforesaid and, concurrently or thereafter, the Trust shall have deposited in
trust with the Auction Agent the redemption payment for the ARPS as to which
such Notice of Redemption has been given with irrevocable instructions and
authority to pay the redemption price to the Holders of such shares, then upon
the date of such deposit or, if no such deposit is made, then upon such date
fixed for redemption (unless the Trust shall default in making the redemption
payment), all rights of the Holders of such shares as shareholders of the Trust
by reason of the ownership of such shares will cease and terminate (except
their right to receive the redemption price in respect thereof and any Gross-up
Dividends, but without interest), and such shares shall no longer be deemed
outstanding. The Trust shall be entitled to receive, from time to time, from
the Auction Agent the interest, if any, on such moneys deposited with it and
the Holders of any shares so redeemed shall have no claim to any of such
interest. In case the Holder of any shares so called for redemption shall not
claim the redemption payment for his shares within one year after the date of
redemption, the Auction Agent shall, upon demand, pay over to the Trust such
amount remaining on deposit and the Auction Agent shall thereupon be relieved
of all responsibility to the Holder of such shares called for redemption and
such Holder thereafter shall look only to the Trust for the redemption payment.
Such redemption payment shall be in the form of Deposit Securities and
Municipal Obligations rated at least P-1, MIG 1 or VMIG 1 by Moody's with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount due to Holders by
reason of the redemption of their ARPS on such redemption date.
5. Voting Rights.
(a) General. Each Holder of ARPS shall be entitled to
one vote for each share held on each matter submitted to a vote of shareholders
of the Trust. At all times, two of the trustees of the Trust shall have been
elected by the holders of Preferred Shares, including ARPS, each Preferred
Share, including ARPS, entitling the holder thereof to one vote. Subject to
paragraph 5(b) hereof, the holders of outstanding Common Shares and the holders
of outstanding Preferred Shares, voting together as a single class, shall elect
the balance of the trustees.
<PAGE>
(b) Right to Elect Majority of Board of Trustees.
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 trustees constituting the Board of Trustees shall be automatically
increased by the smallest number that, when added to the two trustees elected
exclusively by the holders of Preferred Shares, would constitute a majority of
the Board of Trustees as so increased by such smallest number; and the holders
of Preferred Shares 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 shares of the Trust), to elect such smallest number of
additional trustees, together with the two trustees that such holders are in
any event entitled to elect. A Voting Period shall commence:
(i) if at the close of business on any
Dividend Payment Date accumulated dividends (whether or not earned or declared,
and whether or not Available Funds are sufficient therefor) on the outstanding
ARPS 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
Paying Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any other
Preferred Shares are entitled to elect a majority of the trustees of the Trust
under the 1940 Act.
Upon the termination of a Voting Period, the voting
rights described in this paragraph 5(b) 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 5(b).
(c) Right to Vote with Respect to Certain Other
Matters. To the extent permitted under the 1940 Act, the affirmative vote of
the holders of a majority (unless a higher percentage vote is required under
the Declaration of Trust or under this Certificate of Designation) of the
outstanding shares of each series of ARPS, 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 Trust's shares,
including without limitation any proposal to do the following: (1) increase or
decrease the aggregate number of authorized shares of a series; (2) effect an
exchange, reclassification, or cancellation of all or part of the shares of a
series; (3) effect an exchange, or create a right of exchange, of all or any
part of the shares of another class or series for the shares of a series; (4)
change the rights or preferences of the shares of a series; (5) change the
shares of a 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) cancel or otherwise affect distributions on the
shares of a series that have accrued but have not been declared, (7) adopt any
plan of reorganization (including bankruptcy proceedings) adversely affecting
the ARPS, (8) approve or take any action requiring a vote of security holders
under Section 13(a) of the 1940 Act or (9) otherwise amend, alter or repeal the
provisions of the Declaration of Trust or of this Certificate of Designation
whether by merger, consolidation, or otherwise so as to affect any preference
right or power of any series of ARPS or the holders thereof. To the extent
that the interests of a series of ARPS affected by a matter are substantially
identical to the interests of other Preferred Shares of the Trust affected by
such matter (e.g., a vote of shareholders required under Section 13(a) of the
1940 Act), each such holders shall vote together collectively as one class.
The vote of holders of Preferred Shares described above will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and
Preferred Shares necessary to authorize the action in question.
Notwithstanding the foregoing, absent prior written
approval of Moody's and S&P, no exchange of all or any part of the shares of
another class or series for the ARPS of any series may be effected unless (i)
the shares to be exchanged are rated "aaa" by Moody's and AAA by S&P,
respectively, or (ii) the exchange is approved by all shareholders of the
outstanding series of ARPS affected.
(d) Voting Procedures.
(i) As soon as practicable after the accrual
of any right of the holders of Preferred Shares to elect additional trustees as
described in paragraph 5(b) above, the Trust shall notify the Auction Agent and
instruct the Auction Agent to call a special meeting of such holders, by
mailing a notice of such special meeting to such holders, such meeting to be
held not less than 10 nor more than 20 days after the date of mailing of such
notice. If the Trust fails to send such notice to the Auction Agent or if the
Auction Agent does not call such a special meeting, it may be called by any
such holder on like notice. The record date for determining the holders
entitled to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice is
mailed. At any such special meeting and at each meeting held during a Voting
Period, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of capital stock of the Trust),
shall be entitled to elect the number of trustees prescribed in paragraph 5(b)
above on a one-vote-per-share basis. At any such meeting or adjournment
thereof in the absence of a quorum, a majority of such holders present in
person or by proxy shall have the power to adjourn the meeting without notice,
other than an announcement at the meeting, until a quorum is present.
(ii) For purposes of determining any rights of
Holders to vote on any matter or the number of shares required to constitute a
quorum, whether such right is created by the Certificate of Designation, by the
other provisions of the Declaration of Trust, by statute or otherwise, an ARPS
which is not Outstanding shall not be counted.
(iii) The terms of office of all persons who
<PAGE>
are trustees of the Trust at the time of a special meeting of Holders and
holders of other Preferred Shares to elect trustees shall continue,
notwithstanding the election at such meeting by the Holders and such other
holders of the number of trustees that they are entitled to elect, and the
persons so elected by the Holders and such other holders together with the two
incumbent trustees elected by the Holders and such other holders of Preferred
Shares and the remaining incumbent trustees elected by the holders of the
Common Shares and Preferred Shares shall constitute the duly elected trustees
of the Trust.
(iv) Simultaneously with the expiration of a
Voting Period, the terms of office of the additional trustees elected by the
Holders and holders of other Preferred Shares pursuant to paragraph 5(b) above
shall terminate, the remaining trustees shall constitute the trustees of the
Trust and the voting rights of the Holders and such other holders to elect
additional trustees pursuant to paragraph 5(b) above shall cease, subject to
the provisions of the last sentence of paragraph 5(b)(ii).
(e) Exclusive Remedy. Unless otherwise required by
law, the Holders of the ARPS shall not have any relative rights or preferences
or other special rights other than those specifically set forth herein. The
Holders of the ARPS shall have no preemptive rights or rights to cumulative
voting. In the event that the Trust fails to pay any dividends on the ARPS,
the exclusive remedy of the Holders shall be the right to vote for trustees
pursuant to the provisions of this paragraph 5.
6. 1940 Act ARPS Asset Coverage. The Trust shall
maintain, as of the last Business Day of each month in which any ARPS are
outstanding, the 1940 ARPS Asset Coverage.
7. ARPS Basic Maintenance Amount.
(a) The Trust shall maintain, on each Valuation Date,
and shall verify to its satisfaction that it is maintaining on such Valuation
Date, (i) S&P Eligible Assets having an aggregate Discounted Value equal to or
greater than the ARPS Basic Maintenance Amount and (ii) Moody's Eligible Assets
having an aggregate Discounted Value equal to or greater than the ARPS Basic
Maintenance Amount. Upon any failure to maintain the required Discounted
Value, the Trust will use its best efforts to alter the composition of its
portfolio to reattain the ARPS Basic Maintenance Amount on or prior to the ARPS
Basic Maintenance Cure Date.
(b) On or before 5:00 p.m., New York City time, on the
third Business Day after a Valuation Date on which the Trust fails to maintain
S&P Eligible Assets with an aggregate Discounted Value or Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the ARPS
Basic Maintenance Amount and on or before 5:00 p.m., New York City time, on the
third Business Day after the day on which such failure is cured by the Trust,
the Trust shall complete and deliver to the Auction Agent, Moody's and S&P a
complete ARPS Basic Maintenance Report as of the date of such failure and an
ARPS Basic Maintenance Report as of the date such failure is cured, as the case
may be, which will, in each case, 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 Trust mails to the
Auction Agent for delivery on the next Business Day the full ARPS Basic
Maintenance Report. In addition, the Trust will deliver an ARPS Basic
Maintenance Report to Moody's or S&P, respectively, on or before 5:00 p.m., New
York City time, on the third Business Day after a Valuation Date on which the
aggregate Discounted Value of the Trust's Moody's Eligible Assets or S&P
Eligible Assets, respectively, exceeded the ARPS Basic Maintenance amount by 5%
or less. The Trust will also deliver an ARPS Basic Maintenance Report to the
Auction Agent and to the Trust's Independent Accountants as of each Quarterly
Valuation Date on or before the third Business Day after such date. Whenever
the Trust delivers an ARPS Basic Maintenance Report to S&P pursuant to this
paragraph 7(b), it shall also deliver a Certificate of Minimum Liquidity to S&P
and the Auction Agent. The Trust shall also provide Moody's and S&P with an
ARPS Basic Maintenance Report when specifically requested by either Moody's or
S&P. A failure by the Trust to deliver an ARPS Basic Maintenance Report under
this paragraph 7(b) shall be deemed to be delivery of an ARPS Basic Maintenance
Report indicating that the Discounted Value for S&P's Eligible Assets and
Moody's Eligible Assets of the Trust is less than the ARPS Basic Maintenance
Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of
delivery of an ARPS Basic Maintenance Report and a Certificate of Minimum
Liquidity in accordance with paragraph 7(b) above, relating to a Quarterly
Valuation Date, the Independent Accountant will deliver a letter, to which a
copy of the ARPS Basic Maintenance Report is attached, to the Auction Agent,
Moody's and S&P confirming (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other ARPS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was prepared by the Trust
during the quarter ending on such Quarterly Valuation Date) and (with respect
to S&P only while S&P is rating the ARPS) such Certificate of Minimum
Liquidity, (ii) that, in such Report (and in such randomly selected Report),
the Trust determined in accordance with this Certificate of Designation the
assets of the Trust which constitute S&P Eligible Assets or Moody's Eligible
Assets, as the case may be, at such Quarterly Valuation Date, (iii) that, in
such Report (and in such randomly selected Report), the Trust determined in
accordance with this Certificate of Designation whether the Trust had, at such
Quarterly Valuation Date (and at the Valuation Date addressed in such randomly
selected Report), S&P Eligible Assets of an aggregate Discounted Value at least
equal to the ARPS Basic Maintenance Amount and Moody's Eligible Assets of an
aggregate Discounted Value at least equal to the ARPS Basic Maintenance Amount,
(iv) that (with respect to S&P only) in such Certificate of Minimum Liquidity,
the Trust determined the Minimum Liquidity Level and the Trust's Deposit
Securities in accordance with this Certificate of Designation, including
<PAGE>
maturity or tender date, (v) with respect to the S&P rating on Municipal
Obligations, the issuer name, issue size (to the extent such information is
listed in The Standard & Poor's Bond Guide) and coupon rate listed in such
Report and (with respect to S&P only) such Certificate of Minimum Liquidity,
that the information has been traced and agrees with the information listed in
The Standard & Poor's Bond Guide (in the event such information does not agree
or such information is not listed in The Standard & Poor's Bond Guide, the
Independent Accountant will inquire of S&P what such information is, and
provide a listing in its letter of such differences, if any), (vi) with respect
to the Moody's ratings on Municipal Obligations, issuer name, issue size (to
the extent such information is listed in the Moody's Bond Record) and coupon
rate listed in such Report and that such information has been traced and agrees
with the information listed in Moody's Bond Record (in the event such
information does not agree or such information is not listed in Moody's Bond
Record, the Independent Accountant will inquire of Moody's what such
information is, and provide a listing in their letter of such differences), and
(vii) with respect to the price (or such alternative permissible factor used in
calculating the Market Value) utilized by the Trust for purposes of valuing
securities in the Trust's portfolio, the Independent Accountant has traced the
price used in such Report and (with respect to S&P only) such Certificate of
Minimum Liquidity to the bid or lower price listed in the Report and (with
respect to S&P only) such Certificate of Minimum Liquidity as provided to the
Trust and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences) (such confirmation is herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the day on which
the Trust cures its failure to maintain S&P Eligible Assets with an aggregate
Discounted Value or Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the ARPS Basic Maintenance Amount, the Independent
Accountant will provide to the Auction Agent, Moody's and S&P an Accountant's
Confirmation as to the ARPS Basic Maintenance Report that the Trust must
deliver to the Auction Agent, Moody's and S&P relating to the cure of such
failure in accordance with paragraph 7(b) above.
(e) If any Accountant's Confirmation delivered
pursuant to subparagraph (c) or (d) of this paragraph 7 shows that an error was
made in the ARPS 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 or Moody's Eligible Assets, as the case may be, of the Trust was
determined by the Independent Accountant, the calculation or determination made
by such Independent Accountant shall be final and conclusive and shall be
binding on the Trust, and the Trust shall accordingly amend and deliver the
ARPS Basic Maintenance Report to the Auction Agent promptly following receipt
by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the
first Business Day after the Date of Original Issue of the ARPS, the Trust will
complete and deliver to S&P and Moody's an ARPS 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 Independent Accountant will confirm in
writing to S&P and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report and (ii) that the aggregate Discounted Value of S&P
Eligible Assets and the aggregate Discounted Value of Moody's Eligible Assets,
respectively, reflected thereon equals or exceeds the ARPS Basic Maintenance
Amount reflected thereon. Also, on or before 5:00 p.m., New York City time, on
the first Business Day after Common Shares are repurchased by the Trust, the
Trust will complete and deliver to S&P and Moody's an ARPS Basic Maintenance
Report as of the close of business on such date that Common Shares are
repurchased.
8. Minimum Liquidity Level.
(i) For so long as any ARPS are rated by S&P, the
Trust shall be required to have, as of each Valuation Date, Dividend Coverage
Assets having in the aggregate a value not less than the Dividend Coverage
Amount.
(ii) As of each Valuation Date, as long as any ARPS
are rated by S&P, the Trust shall determine (A) the Market Value of the
Dividend Coverage Assets owned by the Trust as of that Valuation Date, (B) the
Dividend Coverage Amount on that Valuation Date, and (C) whether the Minimum
Liquidity Level is met as of that Valuation Date. The calculations of the
Dividend Coverage Assets, the Dividend Coverage Amount and whether the Minimum
Liquidity Level is met shall be set forth in a certificate (a "Certificate of
Minimum Liquidity") dated as of the Valuation Date. The ARPS Basic Maintenance
Report and the Certificate of Minimum Liquidity may be combined in one
certificate. The Trust shall cause the Certificate of Minimum Liquidity to be
delivered to S&P not later than the close of business on the third Business Day
after the Valuation Date applicable to such Certificate of Minimum Liquidity
pursuant to paragraph 7(b) hereof. The Minimum Liquidity Level shall be deemed
to be met as of any date of determination if the Trust has timely delivered a
Certificate of Minimum Liquidity relating to such date which states that the
same has been met and which is not manifestly inaccurate. In the event that a
Certificate of Minimum Liquidity is not delivered to S&P when required, the
Minimum Liquidity Level shall be deemed not to have been met as of the
applicable date.
(iii) If the Minimum Liquidity Level is not met as of
any Valuation Date, then the Trust shall purchase or otherwise acquire Dividend
Coverage Assets to the extent necessary so that the Minimum Liquidity Level is
met as of the fifth Business Day following such Valuation Date. The Trust
shall, by such fifth Business Day, provide to S&P, a Certificate of Minimum
Liquidity setting forth the calculations of the Dividend Coverage Assets and
<PAGE>
the Dividend Coverage Amount and showing that the Minimum Liquidity Level is
met as of such fifth Business Day together with a report of the custodian of
the Trust's assets confirming the amount of the Trust's Dividend Coverage
Assets as of such fifth Business Day.
9. Certain Other Restrictions. (a) For so long as the ARPS
are rated by S&P:
(i) the Trust will not, unless it has
received written confirmation from S&P that any such action would not impair
the rating then assigned by S&P to the ARPS, purchase or sell futures contracts
or options thereon or write uncovered put or uncovered call options on
portfolio securities, except that (i) the Trust may engage in S&P Hedging
Transactions based on the Municipal Index, provided that (A) the Trust shall
not engage in any S&P Hedging Transaction based on the Municipal Index (other
than Closing Transactions) which would cause the Trust at the time of such
transaction to own or have sold (1) more than 1,000 outstanding futures
contracts based on the Municipal Index, (2) outstanding futures contracts based
on the Municipal Index and Treasury Bonds exceeding in number 25% of the
quotient of the Market Value of the Trust'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 Trust may engage in S&P
Hedging Transactions based on Treasury Bonds, provided that (A) the Trust shall
not engage in any S&P Hedging Transaction based on Treasury Bonds (other than
Closing Transactions) which would cause the Trust at the time of such
transaction to own or have sold (1) outstanding futures contracts based on the
Municipal Index and Treasury Bonds exceeding in number 25% of the quotient of
the Market Value of the Trust'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;
(ii) the Trust will engage in Closing
Transactions to close out any outstanding futures contract which the Trust owns
or has sold or any outstanding option thereon owned by the Trust in the event
(i) the Trust does not have S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the ARPS Basic Maintenance Amount on two
consecutive Valuation Dates and (ii) the Trust is required to pay Variation
Margin on the second such Valuation Date;
(iii) the Trust will engage in a Closing
Transaction to close out any outstanding futures contract or option thereon in
the month prior to the delivery month under the terms of such futures contract
or option thereon unless the Trust holds securities deliverable under such
terms.
For purposes of calculating the Discounted Value of S&P
Eligible Assets to determine compliance with the ARPS Basic Maintenance Amount,
such Discounted Value shall be reduced by an amount equal to (i) 30% of the
aggregate settlement price, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (ii)
25% of the aggregate settlement price, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the
Trust; and
(iv) there shall be a quarterly review made by
the Independent Accountant of the Trust's options and futures transactions to
confirm that the Trust is in compliance with the standards set forth in this
paragraph 9(a).
The foregoing restrictions on options and futures
transactions may be modified if the Trust receives written confirmation from
S&P that the action the Trust proposes to take would not impair the rating then
assigned to the ARPS.
(b) For so long as the ARPS are rated by Moody's:
(i) the Trust will not, unless it has
received written confirmation from Moody's that any such action would not
impair the rating then assigned by Moody's to the ARPS and except as necessary
to effect Closing Transactions, purchase or sell futures contracts or options
thereon or write uncovered call options on portfolio securities except that (i)
the Trust may engage in Moody's Hedging Transactions provided that (A) the
Trust shall not engage in any Moody's Hedging Transaction based on the
Municipal Index which would cause the Trust 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 average number of daily traded futures contracts
based on the Municipal Index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal or (2) outstanding
futures contracts based on the Municipal Index and options on such futures
contracts having an aggregate Market Value exceeding the Market Value of
Moody's Eligible Assets owned by the Trust not otherwise hedged with a Treasury
Bond contract or other options and (ii) the Trust may engage in Moody's Hedging
Transactions provided that the Trust shall not engage in any Moody's Hedging
Transaction based on Treasury Bonds which would cause the Trust at the time of
such transaction to own or have sold (A) outstanding futures contracts based on
Treasury Bonds and options on such futures contracts having an aggregate Market
Value exceeding 40% of the aggregate Market Value of Moody's Eligible Assets
owned by the Trust not otherwise hedged with a Municipal Bond contract or other
options and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P,
rated AAA by S&P) or (B) outstanding futures contracts based on Treasury Bonds
and options on such futures contracts having an aggregate Market Value
exceeding 80% of the aggregate Market Value of Moody's Eligible Assets not
<PAGE>
otherwise hedged with a Municipal Bond contract or other options owned by the
Trust and rated Baa or A by Moody's (or, if not rated by Moody's but rated by
S&P, rated AA or A by S&P). For purposes of the foregoing clauses (b)(i) and
(b)(ii), the Trust shall be deemed to own the number of futures contracts that
underlie any outstanding option written by the Trust;
(ii) the Trust will engage in Closing
Transactions to close out any outstanding futures contract based on the
Municipal Index if at any time the open interest in the contract as reported by
The Wall Street Journal is less than 5,000;
(iii) the Trust 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;
(iv) the Trust will engage in Moody's
Hedging Transactions only with respect to futures contracts or options thereon
having the next settlement date or the settlement date immediately thereafter;
(v) the Trust will not engage in options
and futures transactions for leveraging or speculative purposes and will not
write any anticipatory call options or sell any anticipatory futures contracts
pursuant to which the Trust hedges the anticipated purchase of an asset prior
to the completion of such purchase;
(vi) the Trust will not enter into an option
or futures transaction unless after giving effect to such transaction the Trust
would continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the ARPS Basic Maintenance Amount.
For purposes of determining whether the Trust has
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the ARPS Basic Maintenance Amount, the Trust shall mark to market daily;
(vii) the Trust will engage in Moody's Hedging
Transactions only with respect to Moody's Eligible Assets and may not write a
call option on a futures contract if such futures contract is settled by
delivery of a security unless the Trust owns such underlying security;
(viii) where delivery may be made to the Trust
with any of a class of securities, the Trust shall assume for purposes of the
ARPS Basic Maintenance Amount that it takes delivery of that security which
yields it the least value;
(ix) (i) if the Trust writes a call option,
the underlying asset will be valued as follows: (A) if the option is exchange-
traded and may be offset readily or if the option expires within the Moody's
Exposure Period, at the lower of (a) the Discounted Value and (b) exercise
price of the call option; (B) otherwise, it has no value; (ii) if the Trust is
the seller under a futures contract, the underlying security will be valued at
the lower of (a) settlement price and (b) market value of the security divided
by the Moody's Discount Factor; (iii) if the Trust is the seller under a
futures contract and the contract matures within the Moody's Exposure Period,
the security may be valued at the settlement price; (iv) if the Trust writes a
put option, the underlying asset will be valued at the lower of (a) the
exercise price and (b) the Discounted Value of the security; (v) if the Trust
is a purchaser under an exchange traded futures contract, the underlying asset
will be valued at the lower of (a) the settlement price and (b) the Discounted
Value of the security. If, however, such contract matures within the Moody's
Exposure Period, the security may be valued at the Discounted Value.
For purposes of calculating the Discounted Value of
Moody's Eligible Assets to determine compliance with the ARPS Basic Maintenance
Amount, such Discounted Value shall be reduced by an amount equal to: (i) 10%
of the exercise price of a call option written by the Trust; (ii) 10% of the
settlement price of assets sold under a futures contract; (iii) 100% of the
settlement price of assets purchased under a futures contract; (iv) if the
Trust writes a call option on a futures contract and does not own the
underlying contract, 105% of market value of the underlying futures contract;
(v) the exercise price of a put option written by the Trust; and (vi) if the
Trust writes a put option on a futures contract, the daily settlement price of
the underlying futures contract; and
(x) there shall be a quarterly review made by
the Independent Accountant of the Trust's options and futures transactions to
confirm that the Trust is in compliance with the standards set forth in this
paragraph 9(b).
The foregoing restrictions on options and futures
transactions may be modified if the Trust receives written confirmation from
Moody's that the action the Trust proposes to take would not impair the rating
then assigned to the ARPS.
(c) For so long as the ARPS are rated by S&P or
Moody's, the Trust will not, unless it has received written confirmation from
S&P and/or Moody's, as the case may be, that such action would not impair the
ratings then assigned to the ARPS by S&P and/or Moody's, as the case may be:
(1) borrow money, except for a term of 60 days or less and on terms that
prohibit automatic renewal and as long as the ARPS Basic Maintenance Amount is
satisfied after giving effect to such borrowing; (2) engage in short sales of
securities; (3) enter into reverse repurchase agreements; (4) overdraw on any
of its bank accounts; (5) lend portfolio securities; or (6) issue Parity Shares
or securities senior to the ARPS. The Trust may engage in any transaction not
<PAGE>
prohibited by the terms of this Certificate of Designation, the Trust's
Prospectus on Form N-2 or any applicable law, including, but not limited to,
the entering into of repurchase agreements. Although the Trust may enter into
repurchase agreements with respect to any security, a security which is the
subject of a repurchase agreement will be considered an S&P Eligible Asset only
if (a) it is a U.S. Treasury security and (b) the term of the repurchase
agreement is less than one (1) year.
(d) For so long as the ARPS are rated by Moody's, the
Trust's investment adviser, in managing the Trust's portfolio, will not alter
the composition of the Trust's portfolio if the investment adviser knows that
the effect of any such alteration would be to cause the Trust to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the ARPS Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of the
Trust's Moody's Eligible Assets exceeded the ARPS Basic Maintenance Amount by
five percent or less, the investment adviser will not alter the composition of
the Trust's portfolio in a manner that the investment adviser knows will reduce
the aggregate Discounted Value of the Trust's Moody's Eligible Assets unless
the Trust shall have confirmed that, after giving effect to such alteration,
the aggregate Discounted Value of the Trust's Moody's Eligible Assets would
exceed the ARPS Basic Maintenance Amount.
(e) For so long as any shares of ARPS are rated by
Moody's, the Trust will not enter into any contract to purchase securities for
a fixed price at a future date beyond customary settlement time (other than
such contracts that constitute Moody's Hedging Transactions that are permitted
under paragraph 9(b)(i) of this Certificate of Designation), except that the
Trust may enter into such contracts to purchase newly-issued securities on the
date such securities are issued ("Forward Commitments"), subject to the
following limitations:
(i) the Trust will maintain in a segregated
account with its custodian cash, cash equivalents or short-term, fixed-income
securities rated P-1, MIG 1 or VMIG 1 by Moody's and maturing prior to the date
of the Forward Commitment with a face value that equals or exceeds the amount
of the Trust's obligations under any Forward Commitments to which it is from
time to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Trust's obligations under any
Forward Commitment to which it is from time to time a party; and
(ii) the Trust will not enter into a Forward
Commitment unless, after giving effect thereto the Trust would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or greater
than the ARPS Basic Maintenance Account.
For purposes of determining whether the Trust has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds the
ARPS Basic Maintenance Amount, the Discounted Value of all Forward Commitments
to which the Trust is a party and of all securities deliverable to the Trust
pursuant to such Forward Commitments shall be zero provided, however, that the
obligation to purchase securities under a Forward Commitment shall not be
included as a liability in the Trust's calculation of the ARPS Basic
Maintenance Amount.
10. Notice. All notices or communications, unless otherwise
specified in the By-laws of the Trust or this Certificate of Designation, 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.
11. Auction Procedures. The following procedures are set
forth in provisions of the Registration Statement on Form N-2 relating to the
ARPS and will be incorporated by reference in the Auction Agent Agreement and
each Broker-Dealer Agreement. Nothing contained in this paragraph 11
constitutes a representation by the Trust that in each Auction each party
referred to herein will actually perform the procedures described herein to be
performed by such party.
A. Certain Definitions.
As used in this Paragraph 11, the following terms shall have
the following meanings, unless the context otherwise requires:
(i) "ARPS" shall mean the ARPS being auctioned
pursuant to this Paragraph 11.
(ii) "Auction Date" shall mean the first Business Day
preceding the first day of a Dividend Period.
(iii) "Available ARPS" shall have the meaning
specified in Paragraph 11(D)(i) below.
(iv) "Bid" shall have the meaning specified in
Paragraph 11(B)(i) below.
(v) "Bidder" shall have the meaning specified in
Paragraph 11(B)(i) below.
(vi) "Hold Order" shall have the meaning specified in
Paragraph 11(B)(i) below.
(vii) "Maximum Applicable Rate," on any Auction Date,
shall mean the Applicable Percentage of the Reference Rate.
<PAGE>
(viii) "Order" shall have the meaning specified in
Paragraph 11(B)(i) below.
(ix) "Reference Rate" shall mean (i) with respect to
any Short Term Dividend Period having 28 days or fewer, the higher of the
applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of
the Short-Term Municipal Bond Rate, (ii) with respect to any Short Term
Dividend Period having more than 28 days but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any
Short Term Dividend Period having 189 or more but fewer than 365 days, the
applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.
The Applicable Percentage varies with the lower of the credit
rating or ratings assigned by Moody's and S&P (or if Moody's or S&P or both
shall not make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating Agencies or, in
the event that only one such rating shall be available, such rating) to the
ARPS on each Auction Date as follows:
<TABLE>
<CAPTION>
Credit Ratings
---------------------------------- Applicable Percentage
Moody's S&P of Reference Rate
------- --- ---------------------
<C> <C> <S>
"aa3" or higher AA- or higher 110%
"a3" to "a1" A- to A+ 125%
"baa3" to "baa1" BBB- to BBB+ 150%
Below "baa3" Below BBB- 220%
</TABLE>
The Applicable Rate for any Dividend Period commencing during a
Non-Payment Period and the rate used to calculate the late charge with respect
to dividends or redemption payments not paid in a timely manner will be (i)
220% of the higher of the applicable "AA" Composite Commercial Paper Rate and
the Taxable Equivalent of the Short-Term Municipal Bond Rate in the case of any
Short Term Dividend Period having 28 or fewer days, (ii) 220% of the applicable
"AA" Composite Commercial Paper Rate in the case of any Short Term Dividend
Period having 35 or more but fewer than 183 days, (iii) 220% of the applicable
U.S. Treasury Bill Rate in the case of any Short Term Dividend Period having
189 or more but fewer than 365 days and (iv) 220% of the applicable U.S.
Treasury Note Rate in the case of any Long Term Dividend Period.
(x) "Sell Order" shall have the meaning specified in
Paragraph 11(B)(i) below.
(xi) "Submission Deadline" shall mean 1:00 P.M. New
York City time, on any Auction Date or such other time on any Auction Date as
may be specified by the Auction Agent from time to time as the time by which
each Broker-Dealer must submit to the Auction Agent in writing all Orders
obtained by it for the Auction to be conducted on such Auction Date.
(xii) "Submitted Bid" shall have the meaning specified
in Paragraph 11(D)(i) below.
(xiii) "Submitted Hold Order" shall have the meaning
specified in Paragraph 11(D)(i) below.
(xiv) "Submitted Order" shall have the meaning
specified in Paragraph 11(D)(i) below.
(xv) "Submitted Sell Order" shall have the meaning
specified in Paragraph 11(D)(i) below.
(xvi) "Sufficient Clearing Bids" shall have the
meaning specified in Paragraph 11(D)(i) below.
(xvii) "Taxable Equivalent of the Short-Term Municipal
Bond Rate," on any date for any Short-Term Dividend Period of 28 days or fewer
shall mean 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny 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, based upon 30-day yield evaluations at par of bonds
the interest on which is excludable for regular Federal income tax purposes
under the Internal Revenue Code of 1986, as amended, 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, as amended, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 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 (A) the per annum rate
expressed on an interest equivalent basis equal to the most recent Kenny Index
so made available for any preceding Business Day, divided by (B) 1.00 minus the
Marginal Tax Rate (expressed as a decimal).
(xviii) "Winning Bid Rate" shall have the meaning
specified in Paragraph 11(D)(i) below.
<PAGE>
B. Orders by Beneficial Owners, Potential
Beneficial Owners, Existing Holders
and Potential Holders
(i) Unless otherwise permitted by the Trust,
Beneficial Owners and Potential Beneficial Owners may only participate in
Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders
of their respective customers who are Beneficial Owners and Potential
Beneficial Owners to the Auction Agent, designating themselves as Existing
Holders in respect of shares subject to Orders submitted or deemed submitted to
them by Beneficial Owners and as Potential Holders in respect of shares subject
to Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer
may also hold ARPS in its own account as a Beneficial Owner. A Broker-Dealer
may thus submit Orders to the Auction Agent as a Beneficial Owner or a
Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its customers.
On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its
Broker-Dealer information as to:
(1) the number of Outstanding ARPS, if
any, held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of Outstanding ARPS, if
any, held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold; provided, that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by such
Beneficial Owner; and/or
(3) the number of Outstanding ARPS, if
any, held by such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend Period;
and
(B) each Broker-Dealer, using a list of
Potential Beneficial Owners that shall be maintained for the purpose of
conducting a competitive Auction, shall contact Potential Holders, including
Persons that are not Beneficial Owners on such list to determine the number of
Outstanding ARPS, if any, which each such Potential Beneficial Owner offers to
purchase, provided that the Applicable Rate for the next succeeding Dividend
Period shall not be less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial
Owner or Potential Beneficial Owner to a Broker-Dealer, or the communication by
a Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 11(B)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own accounts, is hereinafter referred to as a "Bidder"; an
Order containing the information referred to in clause (A)(1) of this Paragraph
11(B)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this Paragraph 11(B)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this Paragraph 11(B)(i) is hereinafter referred
to as a "Sell Order." Inasmuch as a Broker-Dealer participates in an Auction
as an Existing Holder or a Potential Holder only to represent the interests of
a Beneficial Owner or Potential Beneficial Owner, whether it be its customers
or itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying
beneficial ownership interest represented.
(ii) (A) A Bid by an Existing Holder shall constitute
an irrevocable offer to sell:
(1) the number of Outstanding ARPS
specified in such Bid if the Applicable Rate determined on such Auction Date
shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of
Outstanding ARPS to be determined as set forth in Paragraph 11(E)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to the rate per
annum specified therein; or
(3) a lesser number of Outstanding
ARPS to be determined as set forth in Paragraph 11(E)(ii)(C) if such specified
rate per annum shall be higher than the Maximum Applicable Rate and Sufficient
Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall
constitute an irrevocable offer to sell:
(1) the number of Outstanding ARPS
specified in such Sell Order; or
(2) such number or a lesser number of
Outstanding ARPS to be determined as set forth in Paragraph 11(E)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall
constitute an irrevocable offer to purchase:
(1) the number of Outstanding ARPS
<PAGE>
specified in such Bid if the Applicable Rate determined on such Auction Date
shall be higher than the rate specified in such Bid; or
(2) such number or a lesser number of
Outstanding ARPS to be determined as set forth in Paragraph 11(E)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the rate per
annum specified therein.
C. Submission of Orders by Broker-
Dealers to Auction Agent
(i) Each Broker-Dealer shall submit in writing to the
Auction Agent prior to the Submission Deadline on each Auction Date all Orders
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order;
(B) the aggregate number of Outstanding ARPS
that are the subject of such Order;
(C) to the extent that such Bidder is an
Existing Holder:
(1) the number of Outstanding ARPS, if
any, subject to any Hold Order placed by such Existing Holder;
(2) the number of Outstanding ARPS, if
any, subject to any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of Outstanding ARPS, if
any, subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential
Holder, the rate per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum 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%.
(iii) If an Order or Orders covering all of the
Outstanding ARPS held by an Existing Holder is not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order (in the case of an Auction relating to a Short Term Dividend Period of 7
days) and a Sell Order (in the case of an Auction relating to a Short Term
Dividend Period of 14 days or longer or any Long Term Dividend Period) to have
been submitted on behalf of such Existing Holder covering the number of
Outstanding ARPS held by such Existing Holder and not subject to Orders
submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing
Holder covering in the aggregate more than the number of Outstanding ARPS held
by such Existing Holder are submitted to the Auction Agent, such Orders shall
be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such
Existing Holder shall be considered valid up to and including the number of
Outstanding ARPS held by such Existing Holder; provided that if more than one
Hold Order is submitted on behalf of such Existing Holder and the number of
ARPS subject to such Hold Orders exceeds the number of Outstanding ARPS held by
such Existing Holder, the number of ARPS subject to each of such Hold Orders
shall be reduced pro rata so that such Hold Orders, in the aggregate, cover
exactly the number of Outstanding ARPS held by such Existing Holder;
(B) any Bids submitted on behalf of
suchExisting Holder shall be considered valid, in ascending order of their
respective rates per annum if more than one Bid is submitted on behalf of such
Existing Holder, up to and including the excess of the number of Outstanding
ARPS held by such Existing Holder over the number of ARPS subject to any Hold
Order referred to in Paragraph 11(C)(iv)(A) above (and if more than one Bid
submitted on behalf of such Existing Holder specifies the same rate per annum
and together they cover more than the remaining number of shares that can be
the subject of valid Bids after application of Paragraph 11(C)(iv)(A) above and
of the foregoing portion of this Paragraph 11(C)(iv)(B) to any Bid or Bids
specifying a lower rate or rates per annum, the number of shares subject to
each of such Bids shall be reduced pro rata so that such Bids, in the
aggregate, cover exactly such remaining number of shares); and the number of
shares, if any, subject to Bids not valid under this Paragraph 11(C)(iv)(B)
shall be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid
up to and including the excess of the number of Outstanding ARPS held by such
Existing Holder over the number of ARPS subject to Hold Orders referred to in
Paragraph 11(C)(iv)(A) and Bids referred to in Paragraph 11(C)(iv)(B); provided
that if more than one Sell Order is submitted on behalf of any Existing Holder
and the number of ARPS subject to such Sell Orders is greater than such excess,
the number of ARPS subject to each of such Sell Orders shall be reduced pro
rata so that such Sell Orders, in the aggregate, cover exactly the number of
ARPS equal to such excess.
(v) If more than one Bid is submitted on behalf of any
<PAGE>
Potential Holder, each Bid submitted shall be a separate Bid with the rate per
annum and number of ARPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a
Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
D. Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate
(i) Not earlier than the Submission Deadline on each
Auction Date, the Auction Agent shall assemble all 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 shall determine:
(A) the excess of the total number of
Outstanding ARPS over the number of Outstanding ARPS that are subject of
Submitted Hold Orders (such excess being hereinafter referred to as the
"Available ARPS");
(B) from the Submitted Orders whether the
number of Outstanding ARPS that are the subject of Submitted Bids by Potential
Holders specifying one or more rates per annum equal to or lower than the
Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding ARPS
that are the subject of Submitted Bids by Existing Holders specifying one or
more rates per annum higher than the Maximum Applicable Rate; and
(2) the number of Outstanding ARPS
that are subject to Submitted Sell Orders (if such excess or such equality
exists (other than because the number of Outstanding ARPS in clauses (1) and
(2) above are each zero because all of the Outstanding ARPS are the subject of
Submitted Hold Orders), such Submitted Bids by Potential Holders being
hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the
lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate")
that if:
(1) each Submitted Bid from Existing
Holders specifying the Winning Bid Rate and all other submitted Bids from
Existing Holders specifying lower rates per annum were rejected, this entitling
such Existing Holders to continue to hold the ARPS that are the subject of such
Submitted Bids; and
(2) each Submitted Bid from Potential
Holders specifying the Winning Bid Rate and all other Submitted Bids from
Potential Holders specifying lower rates per annum were accepted, thus
entitling the Potential Holders to purchase the ARPS that are the subject of
such Submitted Bids; would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower rate per annum being
at least equal to the Available ARPS.
(ii) Promptly after the Auction Agent has made the
determinations pursuant to Paragraph 11(D)(i), the Auction Agent shall advise
the Trust of the Maximum Applicable Rate and, based on such determination, the
Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that
the Applicable Rate for the next succeeding Dividend Period shall be equal to
the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist
(other than because all Outstanding ARPS are the subject of Submitted Hold
Orders), that the Applicable Rate for the next succeeding Dividend Period shall
be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding ARPS are the
subject of Submitted Hold Orders, that the Dividend Period for the next auction
period will automatically be the same period as that Dividend Period
immediately preceding the Auction and the Applicable Rate for the next
succeeding Dividend Period shall be equal to 59% of the Reference Rate on the
date of the Auction with respect to such Dividend Period.
E. Acceptance and Rejection of Submitted
Bids and Submitted Sell Orders and
Allocation of Shares
Based on the determinations made pursuant to Paragraph
11(D)(i), 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:
(i) If Sufficient Clearing Bids have been made,
subject to the provisions of Paragraphs 11(E)(iii) and 11(E)(iv), Submitted
Bids and Submitted Sell Orders shall be accepted or rejected in the following
order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Order of Existing
Holders shall be accepted and the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is higher than the Winning Bid Rate shall be
<PAGE>
accepted, thus requiring each such Existing Holder to sell the Outstanding ARPS
that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing
Holders specifying any rate per annum that is lower than the Winning Bid Rate
shall be rejected, thus entitling each such Existing Holder to continue to hold
the Outstanding ARPS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential
Holders specifying any rate per annum that is lower than the Winning Bid Rate
shall be accepted;
(D) the Submitted Bid of each of the Existing
Holders specifying a rate per annum that is equal to the Winning Bid Rate shall
be rejected, thus entitling each such Existing Holder to continue to hold the
Outstanding ARPS that are the subject of such Submitted Bid, unless the number
of Outstanding ARPS subject to all such Submitted Bids shall be greater than
the number of Outstanding ARPS ("Remaining Shares") equal to the excess of the
Available ARPS over the number of Outstanding ARPS subject to Submitted Bids
described in Paragraphs 11(E)(i)(B) and 11(E)(i)(C), in which event the
Submitted Bids of each such Existing Holder shall be accepted, and each such
Existing Holder shall be required to sell Outstanding ARPS, but only in an
amount equal to the difference between (1) the number of Outstanding ARPS then
held by such Existing Holder subject to such Submitted Bid and (2) the number
of ARPS obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of Outstanding ARPS held by
such Existing Holder subject to such Submitted Bid and the denominator of which
shall be the sum of the numbers of Outstanding ARPS subject to such Submitted
Bids made by all such Existing Holders that specified a rate per annum equal to
the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential
Holders specifying a rate per annum that is equal to the Winning Bid Rate shall
be accepted but only in an amount equal to the number of Outstanding ARPS
obtained by multiplying (x) the difference between the Available ARPS and the
number of Outstanding ARPS subject to Submitted Bids described in Paragraphs
11(E)(i)(B), 11(E)(i)(C) and 11(E)(i)(D) by (y) a fraction the numerator of
which shall be the number of Outstanding ARPS subject to such Submitted Bid and
the denominator of which shall be the sum of the numbers of Outstanding ARPS
subject to such Submitted Bids made by all such Potential Holders that
specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made
(other than because all of the Outstanding ARPS are subject to Submitted Hold
Orders), subject to the provisions of Paragraph 11(E)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority and
all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder
specifying any rate per annum that is equal to or lower than the Maximum
Applicable Rate shall be rejected, thus entitling such Existing Holder to
continue to hold the Outstanding ARPS that are the subject of such Submitted
Bid;
(B) the Submitted Bid of each Potential Holder
specifying any rate per annum that is equal to or lower than the Maximum
Applicable Rate shall be accepted, thus requiring such Potential Holder to
purchase the Outstanding ARPS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder
specifying any rate per annum that is higher than the Maximum Applicable Rate
shall be accepted and the Submitted Sell Orders of each Existing Holder shall
be accepted this requiring such Existing Holder to sell the Outstanding ARPS
that are subject to such Submitted Bid or Submitted Sell Orders, in both cases
only in an amount equal to the difference between (1) the number of Outstanding
ARPS then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of ARPS obtained by multiplying (x) the
difference between the Available ARPS and the aggregate number of Outstanding
ARPS subject to Submitted Bids described in Paragraphs 11(E)(ii)(A) and
11(E)(ii)(B) by (y) a fraction of the numerator of which shall be the number of
Outstanding ARPS held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which shall be the number of
Outstanding ARPS subject to all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in
Paragraphs 11(E)(i) or 11(E)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of an ARPS on any Auction Date, the Auction Agent shall,
in such manner as in its sole discretion it shall determine, round up or down
the number of ARPS to be purchased or sold by any Existing Holder or Potential
Holder on such Auction Date so that each Outstanding ARPS purchased or sold by
each Existing Holder or Potential Holder on such Auction Date shall be a whole
ARPS.
(iv) If, as a result of the procedures described in
Paragraph 11(E)(i), any Potential Holder would be entitled or required to
purchase less than a whole ARPS on any Auction Date, the Auction Agent shall,
in such manner as in its sole discretion it shall determine, allocate ARPS for
purchase among Potential Holders so that only whole ARPS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of ARPS on such
Auction Date.
(v) Based on the results of each Auction, the Auction
Agent shall determine, with respect to each Broker-Dealer that submitted Bids
or Sell Orders on behalf of Existing Holders or Potential Holders, the
<PAGE>
aggregate number of Outstanding ARPS to be purchased and the aggregate number
of Outstanding ARPS to be sold by such Potential Holders and Existing Holders
and, to the extent that such aggregate number of Outstanding shares to be
purchased and such aggregate number of Outstanding shares to be sold differ,
the Auction Agent shall determine to which other Broker-Dealer or Broker-
Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or
from which other Broker-Dealer or Broker-Dealers acting for one or more sellers
such Broker-Dealer shall receive, as the case may be, Outstanding ARPS.
F. Miscellaneous.
The Board of Trustees may interpret the provisions of this
Paragraph 11 to resolve any inconsistency or ambiguity, remedy any formal
defect or make any other change or modification that does not adversely affect
the rights of Beneficial Owners of ARPS. A Beneficial Owner or Existing Holder
(A) may sell, transfer or otherwise dispose of ARPS only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Paragraph 11 or
to or through a Broker-Dealer, provided that in the case of all transfers other
than pursuant to Auctions, such Beneficial Owner or Existing Holder of the
shares so transferred, its Broker-Dealer, if applicable, or its Agent Member
advises the Auction Agent of such transfer and (B) except as otherwise required
by law, shall have the ownership of ARPS held by it maintained in book entry
form by the Securities Depository in the account of its Agent Member, which in
turn will maintain records of such Beneficial Owner's beneficial ownership.
Neither the Trust nor any Affiliate shall submit an Order in any Auction. Any
Beneficial Owner or Existing Holder that is an Affiliate shall not sell,
transfer or otherwise dispose of ARPS to any Person other than the Trust.
All of the outstanding shares of each series of ARPS shall be
represented by a single certificate registered in the name of the nominee of
the Securities Depository unless otherwise required by law or unless there is
no Securities Depository. If there is no Securities Depository, at the Trust's
option and upon its receipt of such documents as it deems appropriate, any ARPS
may be registered in the Share Register in the name of the Beneficial Owner
thereof and such Beneficial Owner thereupon will be entitled to receive
certificates therefor and required to deliver certificate therefor upon
transfer or exchange thereof.
12. Securities Depository; Share Certificates.
(a) If there is a Securities Depository, one
certificate for all of the ARPS of each series shall be issued to the
Securities Depository and registered in the name of the Securities Depository
or its nominee. Additional certificates may be issued as necessary to
represent ARPS. All such certificates shall bear a legend to the effect that
such certificates are issued subject to the provisions restricting the transfer
of ARPS contained in this Certificate of Designation. Except as provided in
paragraph (b) below, the Securities Depository or its nominee will be the
Holder, and no Beneficial Owner shall receive certificates representing its
ownership interest in such shares.
(b) If the Applicable Rate applicable to the ARPS of
each series shall be the Non-Payment Period Rate or there is no Securities
Depository, the Trust may at its option issue one or more new certificates with
respect to such shares (without the legend referred to in paragraph 12(a))
registered in the names of the Beneficial Owners or their nominees and rescind
the stop-transfer instructions referred to in paragraph 12(a) with respect to
such shares.
13. Other.
This Certificate constitutes an amendment to the Declaration of
Trust and shall be subject to all of the provisions, limitations and
definitions set forth therein which are not manifestly inconsistent with the
terms hereof, and the interpretation, modification, supplementation and
amendment of this Certificate, including by the Trustees under Section 8.3 of
the Declaration of Trust, shall be subject to the same authority and
limitations set forth therein.
<PAGE>
InterCapital Insured Municipal Securities
Certificate
of
Designation
Dated: _______ __, 1994
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Charles A. Fiumefreddo,
whose signature appears below, constitutes and appoints David M. Butowsky and
Stuart M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ Charles A. Fiumefreddo
----------------------------
Charles A. Fiumefreddo
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Edward R. Telling, whose
signature appears below, constitutes and appoints Sheldon Curtis, Marilyn K.
Cranney and Barry Fink, or either of them, his true and lawful attorneys-in-
fact and agents, with full power of substitution among himself and each of the
persons appointed herein, for him and in his name, place and stead, in any and
all capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 19, 1994
/s/ Edward R. Telling
----------------------------
Edward R. Telling
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Jack F. Bennett, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 16, 1994
/s/ Jack F. Bennett
----------------------------
Jack F. Bennett
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that John R. Haire, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ John R. Haire
----------------------------
John R. Haire
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that John E. Jeuck, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ John E. Jeuck
----------------------------
John E. Jeuck
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Manuel H. Johnson, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ Manuel H. Johnson
----------------------------
Manuel H. Johnson
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Paul Kolton, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ Paul Kolton
----------------------------
Paul Kolton
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Albert T. Sommers, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ Albert T. Sommers
----------------------------
Albert T. Sommers
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Michael E. Nugent, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 28, 1994
/s/ Michael E. Nugent
----------------------------
Michael E. Nugent
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that Edwin J. Garn, whose
signature appears below, constitutes and appoints David M. Butowsky and Stuart
M. Strauss, or either of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution among himself and each of the persons
appointed herein, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement of InterCapital Insured
Municipal Securities and any amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or either or them, may lawfully do or cause to be
done by virtue hereof.
Dated: January 16, 1994
/s/ Edwin J. Garn
----------------------------
Edwin J. Garn
