AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1994
SECURITIES ACT FILE NO. 33-50663
INVESTMENT COMPANY ACT FILE NO. 811-07109
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 (X)
PRE-EFFECTIVE AMENDMENT NO. 2 (X)
Post-EFFECTIVE AMENDMENT NO. ( )
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 (X)
AMENDMENT NO. 3 (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 OFFICE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 392-1600
SHELDON CURTIS, ESQ.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
FRANK P. BRUNO, ESQ. CHRISTINE A. EDWARDS, ESQ. DAVID M. BUTOWSKY, ESQ.
BROWN & WOOD TWO WORLD TRADE CENTER GORDON ALTMAN BUTOWSKY
ONE WORLD TRADE CENTER NEW YORK, NEW YORK 10048 WEITZEN SHALOV & WEIN
NEW YORK, NEW YORK 10048 114 WEST 47TH STREET
NEW YORK, NEW YORK 10036
------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this registration statement
------------
<TABLE>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
==================================================================================================================================
<CAPTION>
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED (1) PER UNIT OFFERING PRICE FEE (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest,
$.01 par value............... 10,925,000 Shares $15.00 $163,875,000 $52,605.07
==================================================================================================================================
<FN>
(1) Includes 1,425,000 shares subject to the Underwriters' over-allotment option.
(2) $37,734.78 previously paid on October 19, 1993; payment of $14,870.69 has been made by wire transfer to the designated lockbox
in Pittsburgh, PA.
</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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
<PAGE>
<TABLE>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
FORM N-2
CROSS REFERENCE SHEET
<CAPTION>
PARTS A AND B
ITEM NUMBER CAPTION PROSPECTUS CAPTION
- ------------------ --------------------------------------------
<S> <C>
1. Outside Front Cover Page.......................... Cover Page
2. Inside Front and Outside Back Cover Pages......... Cover Page; Underwriting
3. Fee Table and Synopsis............................ Prospectus Summary; Summary of Fund
Expenses
4. Financial Highlights.............................. Not Applicable
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 Registrant................. The Trust and its Management; Description of
Shares
9. Management........................................ Trustees and Officers; The Trust and its Management;
Investment Management Agreement;
Investment Objective and Policies;
Investment Practices; Investment Restrictions;
Portfolio Transactions and Brokerage;
Custodian, Dividend Disbursing Agent and
Transfer Agent.
10. Capital Stock, Long-Term Debt, and Other
Securities........................................ Description of Shares; Taxation
11. Defaults and Arrears on Senior Securities......... Not Applicable
12. Pending Legal Proceedings......................... Not Applicable
13. Table of Contents of Statement of Additional
Information....................................... Not Applicable
14. Cover Page........................................ Not Applicable
15. Table of Contents................................. Not Applicable
16. General Information and History................... Not Applicable
17. Investment Objectives and Policies................ Investment Objective and Policies; Other Investment Policies;
Investment Restrictions
18. Management........................................ The Trust and its Management; Trustees and Officers;
Investment Management Agreement;
19. Control Persons and Principal Holders of
Securities........................................ The Trust and its Management; Investment
Management Agreement
20. Investment Advisory and Other Services............ Investment Management Agreement; Custodian, Dividend Disbursing
Agent and Transfer Agent
21. Brokerage Allocations and Other Practices......... Portfolio Transactions and Brokerage
22. Tax Status........................................ Taxation
23. Financial Statements.............................. Statement of Assets and Liabilities
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.
</TABLE>
<PAGE>
PROSPECTUS
9,500,000 COMMON SHARES OF BENEFICIAL INTEREST
INTERCAPITAL INSURED MUNICIPAL SECURITIES
------------
InterCapital Insured Municipal Securities (the "Trust") is a newly organized,
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.
------------
Within approximately six months of the completion of the offering of the Common
Shares of Beneficial Interest (the "Common Shares") described herein, and
subject to market conditions, the Trust currently intends to offer an
additional class of beneficial interest with preference rights (the "Preferred
Shares"). The timing of a Preferred Shares offering and the terms of the
Preferred Shares will be determined by the Trust's Board of Trustees. It is
anticipated that the dividends on the Preferred Shares will be based on short-
term or medium-term rates and that the proceeds of the Preferred Shares
offering will be generally invested in long-term Municipal Obligations which
typically have higher yields than short-term or medium-term obligations. The
issuance of the Preferred Shares will result in the financial leveraging of the
Common Shares. This two-class, leveraged capital structure will enable the
Trust to pay a potentially higher yield on the Common Shares as compared with
securities of investment companies with an investment objective similar to that
of the Trust but without an additional class of preferred shares similar to
those anticipated with respect to the Preferred Shares to be issued by the
Trust. Investors should note that there are special risks associated with the
leveraging of the Common Shares. See "Special Leverage Considerations" and
"Description of Shares."
------------
The address of the Trust is Two World Trade Center, New York, New York 10048,
and its telephone number is (212) 392-1600. The Prospectus sets forth the
information investors should know before investing in the Trust. Investors are
advised to read this Prospectus and retain it for future reference.
------------
The Trust's Common Shares have been approved for listing on the New York Stock
Exchange under the symbol "IMS." Prior to this offering, there has been no
public market for the Trust's Common Shares. Shares of closed-end investment
companies frequently trade at a discount from their net asset value. The risk
of loss may be greater for initial investors expecting to sell their shares in
a relatively short period after completion of the public offering. See
"Prospectus Summary--Special Risk Considerations."
------------
The minimum purchase in this offering is 100 shares ($1,500).
------------
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 COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
===============================================================================
Price to Sales Proceeds to
Public Load (1) the Trust (2)
- -------------------------------------------------------------------------------
Per Common Share $15.00 $0.94 $14.06
Total (3) $142,500,000 $8,930,000 $133,570,000
===============================================================================
(1) The Trust and the Investment Manager have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
(2) Before deduction of offering expenses and organization costs payable by
the Trust from the proceeds of this offering, estimated at $150,000.
Organization costs (estimated at $44,000) will be amortized over five
years and charged as an expense against the income of the Trust. Offering
expenses (estimated at $406,000) will be reflected as a reduction of the
initial net assets of the Trust at the closing of this offering. See
"Statement of Assets and Liabilities at February 10, 1994."
(3) The Trust has granted the several Underwriters a 45-day option to purchase
up to an additional 1,425,000 Common Shares to cover over-allotments, if
any. If all such Common Shares are purchased, the total price to public,
underwriting discounts and commissions and proceeds to the Trust will be
$163,875,000, $10,269,500 and $153,605,500, respectively. See
"Underwriting."
------------
The Common Shares 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 the Common Shares will be made in New York City on or
about February 28, 1994.
------------
DEAN WITTER DISTRIBUTORS INC.
February 18, 1994
<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 OF CONTENTS
-PAGE-
----
Prospectus Summary............................................... 3
Summary of Trust Expenses........................................ 9
The Trust and its Management..................................... 10
Use of Proceeds.................................................. 11
Investment Objective and Policies................................ 12
Special Leverage Considerations.................................. 19
Investment Practices............................................. 22
Investment Restrictions.......................................... 27
Trustees and Officers............................................ 29
Investment Management Agreement.................................. 33
Portfolio Transactions and Brokerage............................. 34
Determination of Net Asset Value................................. 35
Dividends and Distributions; Dividend Reinvestment Plan.......... 36
Taxation......................................................... 38
Description of Shares............................................ 42
Share Repurchases and Tenders.................................... 46
Custodian, Dividend Disbursing Agent and Transfer Agent.......... 48
Underwriting..................................................... 49
Reports to Shareholders.......................................... 50
Legal Opinions and Experts....................................... 51
Further Information.............................................. 51
Report of Independent Accountants................................ 52
Statement of Assets and Liabilities at February 10, 1994......... 53
Appendix A....................................................... A-1
Appendix B....................................................... B-1
Appendix C....................................................... C-1
Appendix D....................................................... D-1
Appendix E....................................................... E-1
Appendix F....................................................... F-1
UNTIL MARCH 15, 1994, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE TRUST'S
COMMON SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
===============================================================================
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference to
the more detailed information included elsewhere in this Prospectus.
THE TRUST.................. InterCapital Insured Municipal Securities (the
"Trust") is a newly organized, closed-end
diversified management investment company
investing primarily in tax-exempt Municipal
Obligations. See "The Trust and its Management."
THE OFFERING.............. The Trust is offering 9,500,000 common shares of
beneficial interest (the "Common Shares"), of
$.01 par value, at an offering price of $15.00
per share, through a group of Underwriters (the
"Underwriters") represented by Dean Witter
Distributors Inc. The Underwriters have been
granted an option to purchase up to 1,425,000
additional Common Shares to cover over-
allotments. See "Underwriting." The minimum
purchase is 100 shares ($1,500).
INVESTMENT OBJECTIVE...... 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
remain-
===============================================================================
3
<PAGE>
===============================================================================
ing 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, 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."
PROPOSED OFFERING OF
PREFERRED SHARES.......... The Trust currently intends to offer an
additional class of shares of beneficial interest
with preference rights (the "Preferred Shares")
within approximately six months of the completion
of this offering of Common Shares. The exact
timing of the Preferred Shares offering and the
terms of the Preferred Shares will be determined
by the Trust's Board of Trustees, subject to a
determination by the Trust's Board of Trustees
that the issuance of Preferred Shares is likely
to achieve the benefits to the holders of the
Common Shares (the "Common Shareholders")
described in this Prospectus and subject to then
prevailing market conditions. It is anticipated
that the dividends on the Preferred Shares will
be based on short-term or medium-term rates and
that the proceeds of the Preferred Shares
offering generally will be invested in long-term
Municipal Obligations which typically have higher
yields than short-term or medium-term
obligations. The issuance and ongoing expenses of
the Preferred Shares will be borne by the Trust
and will reduce the net asset value of the Common
Shares.
Under the asset coverage requirements of the
Investment Company Act of 1940, as amended (the
"Act"), the value of the Trust's total assets,
less all liabilities and indebtedness of the
Trust, must at least be equal, immediately after
such issuance of Preferred Shares, to 200% of the
aggregate liquidation value of the Preferred
Shares. If the Preferred Shares are issued, their
liquidation value is expected to equal their
aggregate original purchase price plus any
accrued and unpaid dividends thereon. The Trust
will seek a rating of the Preferred Shares from
two nationally recognized rating organizations,
and therefore asset coverage provisions in
addition to those required by the Act may be
imposed in connection with the issuance of such
ratings.
Once the Preferred Shares are issued, Common
Shareholders will receive all net income of the
Trust, if any, remaining after payment of
dividends on the Preferred Shares and generally
will be entitled to their pro rata share of any
net realized capital gains to the extent such
capital gains are not necessary to satisfy the
dividend, redemption or liquidation preferences
of the Preferred Shares. Upon any liquidation of
the Trust, the holders of the Preferred
===============================================================================
4
<PAGE>
===============================================================================
Shares will be entitled to receive liquidating
distributions equal to their liquidation value
before any distribution is made to the holders of
Common Shares. Until the Preferred Shares are
issued, the special leverage considerations
described herein will not apply. See "Special
Leverage Considerations," "Description of Shares"
and "Taxation."
RISKS OF LEVERAGE.......... The issuance of the Preferred Shares will result
in the financial leveraging of the Common Shares,
which is a speculative technique. Such leveraging
involves certain risks, including higher
volatility of the net asset value and possibly
the market value of the Common Shares. As long as
the Trust is able to invest the proceeds of the
Preferred Shares offering in securities that
provide a higher net return than the then current
dividend rate of the Preferred Shares after
taking into account the expenses of the Preferred
Shares offering, the ongoing expenses of the
Preferred Shares and the Trust's operating
expenses, the effect of leverage will be to cause
Common Shareholders to realize a higher current
rate of return than if the Trust were not
leveraged. However, if the current dividend rate
on the Preferred Shares were to approach the net
return on the Trust's investment portfolio after
expenses, the benefit of leverage to Common
Shareholders would be reduced, and if the current
dividend rate on the Preferred Shares were to
exceed the net return on the Trust's portfolio,
the Trust's leveraged capital structure would
result in a lower rate of return to the Common
Shareholders than if the Trust had an unleveraged
capital structure. Similarly, since, to the full
extent permitted under applicable law, most net
capital gains, if any, realized by the Trust
generally are expected to be payable to Common
Shareholders, if net capital gains are realized,
the effect of leverage will be to increase the
amount of such gains distributed to Common
Shareholders. However, since any decline in the
net asset value of the Trust's investment
portfolio is borne entirely by Common
Shareholders, the effect of leverage in a
declining market would be to cause a greater
decline in the net asset value of Common Shares
than if the Trust were not leveraged, which would
likely be reflected in a greater decline in the
market price for the Common Shares. Thus, a rise
in interest rates will likely result in two
separate adverse effects on the Common
Shareholders: first, a decrease in the Trust's
net asset value and, second (as a result of
increased rates payable to Preferred
Shareholders), lower income available for
distribution to the Common Shareholders.
Reflecting the foregoing, leverage creates risks
for Common Shareholders, including the likelihood
of greater volatility of the net asset value and
possibly the market value of the Common Shares,
and the risk that fluctuations in the short-term
or medium- term dividend rates of the Preferred
Shares may affect the income available for
distribution to Common Shareholders. See "Special
Leverage Considerations."
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
===============================================================================
5
<PAGE>
===============================================================================
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-seven of which are
listed on the New York Stock Exchange, with
combined assets of approximately $71.2 billion at
December 31, 1993, including approximately $12.2
billion in tax-exempt securities. See "The Trust
and its Management" and "Investment Management
Agreement."
MANAGEMENT FEE........... The Trust will pay 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."
DISTRIBUTIONS............. Prior to any issuance of the Preferred Shares,
the Trust's policy will be to make monthly
distributions to Common Shareholders of
substantially all net investment income of the
Trust. Initial distributions to Common
Shareholders are expected to be declared within
approximately 60 days and paid within
approximately 90 days from the completion of this
offering. Net capital gains, if any, will be
distributed at least annually to the extent such
net capital gains are not necessary to satisfy
the dividend, redemption or liquidation
preferences of the Preferred Shares. From and
after the issuance of the Preferred Shares,
monthly distributions to Common Shareholders will
consist of substantially all net investment
income of the Trust, if any, remaining after the
payment of the dividends on the Preferred Shares.
For tax purposes, the Trust is currently required
to allocate net tax-exempt interest, net capital
gains and other taxable income, if any, between
the Common Shares and the Preferred Shares in
proportion to total distributions paid to each
class for the year in which such net tax-exempt
interest, net capital gains or other taxable
income is realized. The Preferred Shares may
provide for additional dividend payments to
compensate the holders thereof for any assumed
tax detriment resulting from certain required
allocations to them of ordinary income and/or
capital gains. Each Common Shareholder of record
may elect to have all dividends and distributions
automatically reinvested in Common Shares
purchased in the open market at the prevailing
market price pursuant to a dividend reinvestment
plan. See "Dividends and Distributions; Dividend
Reinvestment Plan" and "Taxation."
During any annual period when the Trust's net
investment income and undistributed net capital
gains are insufficient to pay the dividends due
on the Preferred Shares, the Trust would be
precluded from paying dividends on the Common
Shares until such dividends on the Preferred
Shares have been
===============================================================================
6
<PAGE>
===============================================================================
paid or provided for. In addition, under the Act
the Trust is not permitted to declare any cash
dividend or other distribution on its Common
Shares unless, at the time of such declaration
and after deducting the amount of such dividend,
the Trust is in compliance with the 200% asset
coverage requirements of the Act, and any more
stringent asset coverage requirements which may
be imposed in connection with the Trust's
obtaining a rating of the Preferred Shares. Such
prohibition on the payment of dividends or
distributions might impair the ability of the
Trust to maintain its qualification, for federal
income tax purposes, as a regulated investment
company. The Trust intends, however, to the
extent possible, and may be required in
connection with the Trust's obtaining a rating of
the Preferred Shares, to purchase or redeem
Preferred Shares from time to time to maintain
compliance with such asset coverage requirements.
See "Special Leverage Considerations," "Dividends
and Distributions; Dividend Reinvestment Plan"
and "Taxation."
SHARE REPURCHASES AND
TENDERS................. The Trustees may authorize the Trust to
repurchase the Common Shares in the open market
or to tender for the Common Shares at net asset
value. The Trustees have presently determined to
consider, on an annual basis, the making of a
tender offer for the Common Shares of the Trust.
Asset coverage requirements in connection with
the issuance of the Preferred Shares may limit or
prevent the Trust from repurchasing and/or
tendering for Common Shares. See "Share
Repurchases and Tenders."
LISTING.................... The Trust's Common Shares have been approved for
listing on the New York Stock Exchange under the
symbol "IMS."
CUSTODIAN.................. The Bank of New York will serve as Custodian of
the Trust's assets. See "Custodian, Dividend
Disbursing Agent and Transfer Agent."
SPECIAL RISK
CONSIDERATIONS........... The Trust has no 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
may involve special risks. In addition, 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 fair market value at
the time of computation of any other senior
securities then outstanding, including the
Preferred Shares). 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" and
"Investment Practices."
The Trust may invest without limit in certain
Municipal Obligations which may be subject to the
individual alternative minimum tax. Additionally,
the Trust
===============================================================================
7
<PAGE>
===============================================================================
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 "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.
The value of the Trust's portfolio securities,
and therefore the Trust's net asset value per
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."
Shares of closed-end investment companies
frequently trade at a discount to net asset
value, especially shortly after the completion of
the public offering. This characteristic of
shares of closed-end funds is a risk separate and
distinct from the risk that a fund's net asset
value will decrease. It should be noted, however,
that in some cases, shares of closed-end funds
may trade at a premium to net asset value. The
Trust cannot predict whether its own Common
Shares will trade at, below, or above net asset
value. The Trust is designed primarily as a long-
term investment and not as a trading vehicle.
The Common Shareholders will elect ten Trustees
at the first annual meeting of Common
Shareholders unless any Preferred Shares are
outstanding at the time, in which event the
shareholders (Common Shareholders and Preferred
Shareholders voting as a single class) will elect
eight Trustees and the Preferred Shareholders,
voting as a separate class, will elect two
Trustees. If at any time dividends on the
Preferred Shares are unpaid in an amount equal to
two full years' dividends thereon, the holders of
all outstanding Preferred Shares, voting as a
separate class, will be entitled to elect a
majority of the Trustees until all dividends in
arrears have been paid or otherwise provided for.
See "Description of Shares."
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."
===============================================================================
8
<PAGE>
SUMMARY OF TRUST EXPENSES
===============================================================================
The following table illustrates all expenses and fees that a
shareholder of the Trust will incur. The expenses and fees set forth in the
table are for the year ending October 31, 1994.
Shareholder Transaction Expenses
Sales Load (as a Percentage of Offering Price)...................... 6.27%
Dividend Reinvestment Plan.......................................... None
Annual Expenses
(as a Percentage of Net Assets Attributable to the Common Shares)
Management Fees*.................................................... 0.35%
Other Expenses*..................................................... 0.12%
Total Annual Expenses**............................................. 0.47%
* "Management Fees" as shown above are for the fiscal year of the
Trust ending October 31, 1994. "Other Expenses" as shown above is based upon
estimated amounts of expenses of the Trust for its fiscal period ending
October 31, 1994.
** The expenses set forth in this table do not include expenses
associated with the Preferred Shares since the costs associated with the
Preferred Shares could not be determined at the date of the Prospectus. See
"Special Leverage Considerations."
EXAMPLE 1 year 3 years 5 years 10 years
- ------- ------ ------ ------ -------
You would pay the following expenses
on a $1,000 investment, assuming a
5% annual return:................... $67 $77 $87 $118
- ------------
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES OF THE TRUST MAY BE GREATER OR
LESS THAN THOSE SHOWN.
The purpose of this table is to assist the investor in understanding
the various costs and expenses that an investor in the Trust will bear directly
or indirectly. For a more complete description of these costs and expenses, see
the cover page of this Prospectus and "Use of Proceeds" and "Investment
Management Agreement."
9
<PAGE>
THE TRUST AND ITS MANAGEMENT
===============================================================================
InterCapital Insured Municipal Securities (the "Trust") is a newly
organized, closed-end diversified management investment company whose
investment objective is to provide current income which is exempt from federal
income tax. The Trust will seek 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. As a newly organized entity, the Trust has
no operating history. The Trust's principal office is located at Two World
Trade Center, New York, New York 10048.
The Trust's Declaration of Trust authorizes the issuance of both Common
Shares and Preferred Shares. The Trust currently intends to offer Preferred
Shares within approximately six months of the completion of this offering of
Common Shares. It is anticipated that the dividends on the Preferred Shares
will be based on short-term or medium-term rates and that the proceeds of the
Preferred Shares offering will be generally invested in long-term Municipal
Obligations, which typically have higher yields than short-term or medium-term
obligations. The effect of this two-class, leveraged capital structure will be
to provide Common Shareholders an opportunity to realize a higher level of tax-
free income than would be provided by an investment company having a similar
investment portfolio and an unleveraged capital structure. However, this
leveraged capital structure will also create greater risks for Common
Shareholders, including higher volatility of the net asset value and possibly
the market value of the Common Shares. See "Special Leverage Considerations."
The issuance and ongoing expenses of the Preferred Shares will be borne by the
Trust and will reduce the net asset value of the Common Shares. The timing and
other terms of the offering of the Preferred Shares and the terms of the
Preferred Shares will be determined by the Trustees of the Trust, subject to
then prevailing market conditions and also subject to a determination by the
Trustees that the issuance of Preferred Shares is likely to achieve the
benefits to the Common Shareholders described in this Prospectus. In the event
that, in the opinion of the Trustees, prevailing economic or market conditions
make issuance of the Preferred Shares inadvisable, the Trustees have agreed in
such case to permit the Trust to continue indefinitely as an unleveraged
entity.
Investment in shares of the Trust is designed to offer several
benefits. The Trust offers investors the opportunity to receive income
substantially exempt from federal income taxes by investing in a professionally
managed portfolio of Municipal Obligations. The Trust also relieves the
investor of the burdensome administrative details involved in managing a
portfolio of Municipal Obligations. These benefits are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the fee of the Investment Manager and the
operational costs of the Trust.
The Trust has been organized as a closed-end investment company.
Closed-end investment companies differ from open-end investment companies
(commonly referred to as "mutual funds") in that closed-end investment
companies have a permanent capital base and do not redeem their shares, whereas
open-end investment companies issue securities redeemable at net asset value at
any time at the option of the shareholder and typically engage in a continuous
offering of their shares. Accordingly, open-end companies are subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
Closed-end investment companies do not face the prospect of having to liquidate
portfolio holdings in the event of net redemptions or having to maintain cash
positions to meet potential redemptions. The Trust, however, will be required
to maintain cash sufficient to meet dividend payments on the Preferred Shares.
Shares of closed-end investment companies frequently trade at a discount to net
10
<PAGE>
asset value. This characteristic of shares of closed-end funds is a risk
separate and distinct from the risk that the fund's net asset value will
decrease. The Trust cannot predict whether its own Common Shares will trade at,
below, or above net asset value. The Trust is designed primarily as a long-term
investment and not as a trading vehicle.
Dean Witter InterCapital Inc., whose address is Two World Trade Center,
New York, New York 10048, is the Trust's Investment Manager (the "Investment
Manager" or "InterCapital"), 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-seven of which are
listed on the New York Stock Exchange, and other portfolios, with combined
total assets of approximately $71.2 billion, including $12.2 billion of tax-
exempt securities, at December 31, 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"), and 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 and other 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 the offering will be approximately $133,120,000
($153,155,500 if the Underwriters exercise their over-allotment option in full)
after payment of the sales load and organization and offering expenses. A
portion of the organization and offering expenses have been advanced by the
Trust's Investment Manager.
Organization expenses relating to the Trust incurred and to be incurred
by the Investment Manager will be reimbursed by the Trust. Such expenses,
estimated at $44,000, will be deferred and amortized on the straight-line
method by the Trust against operations over a period not to exceed sixty months
from the commencement of operations of the Trust. Costs relating to the public
offering of its Common Shares, estimated to be $406,000, will be paid from the
proceeds of the offering and charged to capital at the time of issuance of such
shares.
The net proceeds of the offering will be invested in accordance with
the Trust's investment objective and policies. Investment of the net proceeds
will take place during a period which is not expected to exceed six months from
commencement of operations. Additionally, it may take up to six months after
the completion of the offering of the Preferred Shares before the proceeds of
that offering are invested in long-term Municipal Obligations. Pending their
respective investment, the proceeds of both offerings 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."
In order for the benefits of leverage to be realized by Common
Shareholders, the proceeds of the Preferred Shares offering must be invested in
Municipal Obligations that provide a higher net return than the then current
dividend rate paid on the Preferred Shares.
11
<PAGE>
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 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 investors 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
12
<PAGE>
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 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" below.
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 emphasis 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 (see
below).
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.
13
<PAGE>
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 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.
14
<PAGE>
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 obligations
where (1) the nature of the leased equipment or property is such that its
ownership or use is essential to a governmental function of the municipality,
(2) the lease payments will commence amortization of principal at an early date
resulting in an average life of seven years or less for the lease obligation,
(3) appropriate covenants will be obtained from the municipal obligor
prohibiting the substitution or purchase of similar equipment if lease payments
are not appropriated, (4) the investment is of a size that will be attractive
to institutional investors, and (5) the underlying leased equipment has
elements of portability 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 a 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.
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
15
<PAGE>
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.
Prior to the time it offers the Preferred Shares, the Trust will apply
for ratings on such shares from one or more nationally recognized rating
agencies. Obtaining one or more ratings for the Preferred Shares may enhance
the marketability of the Preferred Shares and thereby reduce the dividend rate
on the Preferred Shares from that which the Trust would be required to pay if
the Preferred Shares were not rated. If the Trust issues Preferred Shares and
seeks to obtain a rating of the Preferred Shares, the rating service issuing
such rating may, as a condition thereof, impose restrictions on the types or on
the amounts of certain categories of municipal securities in which the Trust
may invest. The Trust cannot predict what, if any, restrictions may be imposed
by such rating service in connection with its rating of the Preferred Shares.
As set forth in investment restriction 3 under "Investment Restrictions," the
Trust reserves the right to invest 25% or more of its total 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 the risks
associated with investment in such obligations is set forth in Appendix C.
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
16
<PAGE>
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
obligations. 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 principal and
interest not later than one business day after the insurer has been notified
that such nonpayment has occurred (but not earlier than the date such payment
is due). The Fiscal Agent will disburse to the 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 assignment, 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 or interest 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 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 the 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
17
<PAGE>
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 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 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.
18
<PAGE>
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.
SPECIAL LEVERAGE CONSIDERATIONS
===============================================================================
EFFECTS OF LEVERAGE
The Trust currently intends to offer Preferred Shares within
approximately six months of the completion of this offering of Common Shares.
The timing and other terms of the offering of the Preferred Shares will be
determined by the Trustees of the Trust, subject to then prevailing market
conditions and subject to a determination by the Trustees that the issuance of
Preferred Shares is likely to achieve the benefits to the Common Shareholders
described in this Prospectus. It is anticipated that the dividends on the
Preferred Shares will be based on short-term or medium-term rates and that the
proceeds of the Preferred Shares offering will be generally invested in long-
term Municipal Obligations which typically have higher yields than short-term
or medium-term obligations. The issuance and ongoing expenses of the Preferred
Shares will be borne by the Trust and will reduce the net asset value of the
Common Shares.
The issuance of the Preferred Shares will result in the financial
leveraging of the Common Shares, which is a speculative technique. This two-
class, leveraged capital structure of the Trust would enable the Trust to pay a
potentially higher yield on the Common Shares as compared with securities of
investment companies with an investment objective similar to that of the Trust
but with an unleveraged capital structure.
19
<PAGE>
RISKS OF LEVERAGE
Investors should note, however, that there are risks associated with
issuing Preferred Shares to increase the yield on the Common Shares, including
higher volatility of the net asset value and possibly the market value of the
Common Shares, and that fluctuations in the dividend rates on the Preferred
Shares, which will be based on short-term or medium-term rates, may affect the
yield to the Common Shareholders.
As long as the Trust is able to realize a higher net return on its
investment portfolio than the then current dividend rate of the Preferred
Shares, after taking into account the offering costs of the Preferred Shares,
the ongoing expenses of the Preferred Shares and the Trust's operating
expenses, the effect of the leverage provided by the Preferred Shares will be
to cause the Common Shareholders to realize a higher current rate of return
than if the Trust were not so leveraged. Similarly, if net capital gains are
realized by the Trust, the effect of leverage will be to increase the amount of
such gains distributed to the Common Shareholders. On the other hand, short-
term, medium-term and long-term interest rates change from time to time as does
their relationship to each other (i.e., the slope of the yield curve) depending
upon such factors as supply and demand forces, monetary and tax policies and
investor expectations. Changes in such factors could cause the relationship
between short-term, medium-term and long-term rates to change (i.e., to flatten
or to invert the slope of the yield curve) so that short-term and medium-term
rates may substantially increase relative to the rates of long-term obligations
in which the Trust may be invested. To the extent that the then current
dividend rate on the Preferred Shares approaches the net return on the Trust's
investment portfolio, the benefit of leverage to the Common Shareholders will
be reduced, and if the then current dividend rate on the Preferred Shares were
to exceed the net return on the Trust's portfolio, the Trust's leveraged
capital structure would result in a lower rate of return to the Common
Shareholders than if the Trust were not so structured. Similarly, since any
decline in the net asset value of the Trust's investments will be borne
entirely by the Common Shareholders, the effect of leverage in a declining
market would result in a greater decrease in net asset value to the Common
Shareholders than if the Trust were not so leveraged. Any such decrease would
likely be reflected in a decline in the market price for Common Shares. Thus, a
rise in interest rates will likely result in two separate adverse economic
effects on Common Shareholders: first, a decrease in the Trust's net asset
value and, second (as a result of increased rates payable to Preferred
Shareholders), lower income available for distribution to the Common
Shareholders.
If the Trust's current investment income were not sufficient to meet
dividend requirements on the Preferred Shares, the Trust might have to
liquidate certain of its investments, thereby reducing the net asset value
attributable to the Trust's Common Shares. Such liquidations may also cause the
Trust to realize gains on securities held for less than three months. Because
of the limitation of 30% on the portion of the Trust's gross income that may be
derived from the sale or disposition of securities held less than three months
(in order to retain the Trust's status as a regulated investment company under
the Internal Revenue Code of 1986, as amended), such gains would limit the
ability of the Trust to sell other securities held for less than three months
that the Trust may wish to sell in the ordinary course of its portfolio
management and thus may adversely affect the Trust's yield.
The Trust is currently required to allocate net capital gains and other
taxable income, if any, between the Common Shares and the Preferred Shares in
proportion to total distributions paid to each class for the year in which such
net capital gains or other taxable income is realized. To the extent net
capital gains are allocated to the Preferred Shares for tax purposes, there
would likely be an increase in the dividends payable to Preferred Shareholders
as a result of the increase in tax liability to them resulting from such
allocation. However, the negative impact on Common Shareholders of such
increased dividends to Preferred Shareholders may be offset in whole or in part
by the allocation to the Common
20
<PAGE>
Shares of a greater share of the Trust's tax-exempt income, likely resulting in
a lower tax liability for Common Shareholders than if all of the Trust's net
capital gains or other taxable income had been allocated to the Common Shares.
To the extent any such increase in dividend payments to Preferred Shareholders
is not entirely offset by a reduction in the tax liability of Common
Shareholders, the advantage of the Trust's leveraged structure to Common
Shareholders will be reduced. See "Taxation."
Until the Preferred Shares are issued, the Trust's capital structure
will not be leveraged, and the special leverage considerations described in
this Prospectus will not apply. There can be no assurance that the Preferred
Shares will be issued.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE
In the event of an increase in short-term or medium-term rates or other
changes in market conditions, to the extent that the Trust's leveraged capital
structure could adversely affect Common Shareholders as noted above, or in
anticipation of such increase or changes, the Trust may attempt to shorten the
average maturity of its investment portfolio, which would tend to offset
partially the negative impact of such structure on the Common Shareholders. The
Trust may also attempt to reduce the degree to which its capital structure is
leveraged by redeeming or otherwise purchasing all or a portion of the
outstanding Preferred Shares. If market conditions subsequently warrant
"releveraging" of the Trust's capital structure, the Trust may, subject to the
provisions of Section 18 of the Act, sell shares of an additional series of
beneficial interest with preference rights, previously unissued Preferred
Shares or Preferred Shares that the Trust previously issued but later
repurchased.
Under the Act, the Trust is not permitted to issue Preferred Shares
unless immediately after such issuance the value of the Trust's total assets,
less all liabilities and indebtedness of the Trust, is at least 200% of the
liquidation value of the outstanding Preferred Shares. The liquidation value of
the Preferred Shares is expected to equal their aggregate original purchase
price plus any accrued and unpaid dividends thereon. It is anticipated that
immediately after the completion of any offering of the Preferred Shares, the
Trust's asset coverage ratio will be at least 280%. See "Description of
Shares." In addition, the Trust is not permitted to declare any cash dividend
or other distribution on its Common Shares unless, at the time of such
declaration, the Trust meets such 200% asset coverage requirement (determined
after deducting the amount of such dividend or distribution). Such prohibition
on the payment of dividends or other distributions might impair the ability of
the Trust to maintain its qualification for federal income tax purposes as a
regulated investment company. The Trust intends, however, to the extent
possible, to purchase or redeem Preferred Shares from time to time to maintain
such asset coverage of the Preferred Shares of at least 200%. See "Taxation."
In addition to the requirements of the Act, the Trust may be required to comply
with other asset coverage requirements as a condition of the Trust's obtaining
a rating on the Preferred Shares from a nationally recognized rating service.
To qualify for federal income taxation as a regulated investment
company, the Trust must distribute in each fiscal year an amount at least equal
to the sum of 90% of its net taxable investment income and net short-term
capital gains plus 90% of net income from tax-exempt obligations. To the extent
dividends on the Preferred Shares constitute less than the amount of such
required distribution, the remainder must be distributed to the holders of the
Common Shares. In addition, the Trust would generally have to distribute 100%
of its net taxable investment income and net short-term and long-term capital
gains in order to eliminate tax liability of the Trust. In the event that the
Trust is precluded from making distributions on the Common Shares because of
any applicable asset coverage requirements, the terms of the Preferred Shares
may provide that any amounts so precluded from being distributed, but required
to be distributed in order for the Trust to meet the distribution requirements
for federal tax purposes (or to otherwise avoid tax liability of the Trust),
will be paid to the holders of the Preferred Shares as a special dividend,
which dividend would be expected to decrease the amount such holders would be
entitled to receive upon redemption or liquidation of the Preferred Shares.
21
<PAGE>
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. Such
practices may be restricted or limited following the issuance of the Preferred
Shares as a condition of the Trust's obtaining a rating on the Preferred
Shares.
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.
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 specific 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 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.
22
<PAGE>
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 contracts 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
would 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 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.
For a further discussion of the use, risks and costs of futures
contracts and options thereon, see Appendix B.
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.
23
<PAGE>
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 indices, 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 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
24
<PAGE>
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. 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. 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 fair market value
at the time of computation of any other senior securities then outstanding,
including the Preferred Shares). 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 Preferred Shares, any borrowing by the Trust would be subject to
further restrictions as a result of asset coverage requirements imposed by the
Act or by any rating service as a condition of its rating of the Preferred
Shares.
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. Consistent with applicable regulatory
requirements, the Trust may 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
25
<PAGE>
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.
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 move-
26
<PAGE>
ment 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 generally are 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."
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 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
27
<PAGE>
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.
10. Write, purchase or sell puts, calls, or combinations thereof,
except for options on futures contracts or options on debt securities.
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 fair market value
at the time of computation of any other 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 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 Act, other than preferred
shares of beneficial interest (in accordance with the terms of the 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.
28
<PAGE>
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.
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- ----------------------------- ---------------------------------------------
Jack F. Bennett
Trustee
141 Taconic Road
Greenwich, Connecticut Retired; Director or Trustee of the Dean Witter
Funds; formerly Senior Vice President and
Director of Exxon Corporation (1975-January,
1989) and Under 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 of the Board,
President, Chief Executive
Officer and Trustee
Two World Trade Center
New York, New York Chairman, Chief Executive Officer and Director of
InterCapital and Dean Witter Distributors Inc.;
Executive Vice President and Director of DWR;
Chairman, Director or Trustee, President and
Chief Executive Officer of the Dean Witter Funds;
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).
29
<PAGE>
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- ----------------------------- ---------------------------------------------
Edwin J. Garn
Trustee
2000 Eagle Gate Tower
Salt Lake City, Utah Director or Trustee of the Dean Witter Funds;
formerly United States Senator (R-Utah) (1974-
1992) and Chairman, Senate Banking Committee
(1980-1986); 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
Trustee
439 East 51st Street
New York, New York Chairman of the Audit Committee and Chairman of
the Committee of the Independent Directors or
Trustees and Director or Trustee of the Dean
Witter Funds; 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
Trustee
70 East Cedar Street
Chicago, Illinois Retired; Director or Trustee of the Dean Witter
Funds; formerly Robert Law professor of Business
Administration, Graduate School of Business,
University of Chicago (until July, 1989);
Business consultant.
Dr. Manuel H. Johnson
Trustee
7521 Old Dominion Drive
MacLean, Virginia Senior Partner, Johnson Smick International,
Inc., a consulting firm; Koch Professor of
International Economics and Director of the
Center for Global 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).
30
<PAGE>
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- ----------------------------- ---------------------------------------------
Paul Kolton
Trustee
Nine Hunting Ridge Road
Stamford, Connecticut Director or Trustee of the Dean Witter Funds;
Chairman of the Audit Committee and Chairman of
the Committee of the Independent Trustees and
Trustee 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
Trustee
237 Park Avenue
New York, New York General Partner, Triumph Capital, L.P., a private
investment partnership (since April, 1988);
Director or Trustee of the Dean Witter Funds;
Trustee of the 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
Trustee
845 Third Avenue
New York, New York Senior Fellow and Economic Counselor (formerly
Senior Vice President and Chief Economist) of the
Conference Board, a non-profit business research
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*
Trustee
Sears Tower
Chicago, Illinois Retired; Director or Trustee of the Dean Witter
Funds; formerly Chairman of the Board of
Directors and Chief Executive Officer (until
December, 1985) 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.
Sheldon Curtis
Vice President, Secretary
and General Counsel
Two World Trade Center
New York, New York Senior Vice President, Secretary and General
Counsel of InterCapital; Senior Vice President,
Secretary and General Counsel of Dean Witter
Services Company Inc.; Assistant Secretary and
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.
31
<PAGE>
PRINCIPAL OCCUPATIONS DURING LAST FIVE YEARS;
NAME, POSITION WITH THE TRUST AFFILIATIONS WITH INTERCAPITAL
AND ADDRESS AND THE DEAN WITTER FUNDS
- ----------------------------- ---------------------------------------------
James F. Willison
Vice President
Two World Trade Center
New York, New York Senior Vice President of InterCapital; Vice
President of various Dean Witter Funds.
Thomas F. Caloia
Treasurer
Two World Trade Center
New York, New York First Vice President (since May, 1991) of
InterCapital and Treasurer of the Dean Witter
Funds; Treasurer of the TCW/DW Funds; First Vice
President and Assistant Treasurer of Dean Witter
Services Company Inc.; previously Vice President
of InterCapital.
- ------------
* Denotes Trustees who are "interested persons" of the Trust, as defined in the
1940 Act.
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. Thereafter, the Board of Trustees of the Trust
will be divided into three classes, each class having a term of three years.
The term of office of one class will expire each year. The Common Shareholders
will have the right, voting as a class, to elect ten Trustees of the Trust at
the next annual meeting of Common Shareholders unless any Preferred Shares are
outstanding at the time, in which event the Trust's shareholders (Common
Shareholders and Preferred Shareholders voting together as a single class) will
have the right to elect eight Trustees and the Preferred Shareholders, voting
as a separate class, will have the right to elect two Trustees. See
"Description of Shares."
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 the Independent Trustees attended by the Trustee in person
(the Trust pays the Chairman of the Audit Committee an 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 fee). 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 employed by the Investment Manager or an
affiliated company, or are retired from such employment, receive no
compensation or expense reimbursement from the Trust.
32
<PAGE>
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 "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 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
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 cost 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 the
purposes of calculating the management fee, the liquidation preference of any
Preferred Shares issued by the Trust will not be deducted from the Trust's
total assets.
The 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
33
<PAGE>
of its shareholders for any act or omission by the Investment Manager or for
any losses sustained by the Trust or its shareholders. The Agreement in no way
restricts the Investment Manager from acting as investment manager or adviser
to others.
The Agreement was initially approved by the Trustees on December 2,
1993, and by Dean Witter InterCapital Inc. as the sole shareholder on
February 18, 1994. The 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 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 Agreement will automatically terminate in the event
of its assignment (as defined in the Act).
Under its terms, the Agreement will continue in effect until April 30,
1995, and from year to year thereafter, provided continuance of the Agreement
is approved at least annually by the vote of the holders of a majority, as
defined in the 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 Agreement or "interested persons" (as defined in the
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
34
<PAGE>
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.
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
Government agency securities, bank money 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 will be
determined as of 4:00 p.m., New York 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 Preferred Shares), dividing by the number
of Common Shares outstanding and adjusting to the nearest cent.
35
<PAGE>
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 has informed the Trust that in valuing
the Trust's portfolio securities it uses both a computerized grid matrix of
tax-exempt 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 at 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.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
===============================================================================
It is the Trust's present policy, which may be changed by the Board of
Trustees, to pay monthly dividends to Common Shareholders from net investment
income of the Trust. Initial distributions to Com-
36
<PAGE>
mon Shareholders are expected to be declared within approximately 60 days and
paid within approximately 90 days from the completion of this offering. From
and after the issuance of the Preferred Shares, monthly distributions to Common
Shareholders will consist of substantially all net investment income of the
Trust, if any, remaining after the payment of dividends on the Preferred
Shares. Net investment income of the Trust consists of all interest income
accrued on portfolio assets less all expenses of the Trust. Expenses of the
Trust are accrued each day. The Trust will distribute all of its net realized
long-term and short-term capital gains, if any, at least once per year to the
extent not necessary to pay dividends on or meet the liquidation preference of
the Preferred Shares, but it may make such distributions on a more frequent
basis to comply with the distribution requirements of the Tax Reform Act of
1986, as amended, in all events in a manner consistent with such Act.
For tax purposes, the Trust is currently required to allocate net tax-
exempt interest, net capital gains and other taxable income, if any, between
the Common Shares and the Preferred Shares in proportion to total distributions
paid to each class for the year in which such net capital gains or other
taxable income is realized. See "Taxation." For information relating to the
impact of the issuance of the Preferred Shares on the distributions made by the
Trust to Common Shareholders, see "Special Leverage Considerations--Risks of
Leverage."
While there are any Preferred Shares outstanding, the Trust may not
declare any cash dividend or other distribution on its Common Shares unless at
the time of such declaration, (1) all accrued Preferred Share dividends have
been paid and (2) the net asset value of the Trust's portfolio (determined
after deducting the amount of such dividend or other distribution) is at least
200% (or possibly in excess thereof if required by a rating service as a
condition of obtaining a rating on the Preferred Shares) of the liquidation
value of the outstanding Preferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon). This
limitation on the Trust's ability to make distributions on its Common Shares
could under certain circumstances impair the ability of the Trust to maintain
its qualification for taxation as a regulated investment company. The Trust
intends, however, to the extent possible, to purchase or redeem Preferred
Shares from time to time to maintain such asset coverage requirements and may
pay special dividends to the holders of such Preferred Shares in certain
circumstances in connection with any such impairment of the Trust's status as a
regulated investment company. See "Taxation."
All persons becoming registered holders of Common Shares of the Trust
(other than brokers and nominees of banks or other financial institutions) may
elect to have all dividends and capital gains distributions automatically
reinvested in additional Common Shares pursuant to the Trust's Dividend
Reinvestment Plan (the "Plan"), and will be deemed to have appointed Dean
Witter Trust Company (the "Transfer Agent") as their Plan agent to act on their
behalf under the Plan. All distributions under the Plan will automatically be
reinvested in Common Shares of the Trust in full and fractional Shares as
described below. Shareholders who do not participate in the Plan will receive
all distributions in cash paid by check mailed directly to the shareholder of
record by the Transfer Agent as dividend disbursing agent.
DETAILS OF THE PLAN
Whenever the Trust declares a dividend or other distribution, it will
pay the amount thereof in cash to the Transfer Agent on behalf of Common
Shareholders participating in the Plan, which the Transfer Agent must use to
buy Common Shares in the open market for the participants' accounts. Market
price for the purpose of the Plan will be the market price of the Common Shares
on a national securities exchange, or in the event that the Common Shares are
not listed on a securities exchange at the time, market price will be the asked
price, or the mean of the asked prices if more than one is available, of the
Common Shares in the over-the-counter market.
37
<PAGE>
Common Shareholders may terminate their participation in the Plan at
any time and elect to receive distributions in cash by notifying the Transfer
Agent in writing. Such notification must be received prior to the record date
of any distribution. There will be no charge or other penalty for such
termination.
The Transfer Agent will maintain the Common Shareholder's account, hold
the certificates representing the additional Common Shares acquired through the
Plan in safekeeping and furnish the Common Shareholder with written
confirmation of all transactions in the account, including information needed
for personal and tax records. The Transfer Agent will vote shares in the Common
Shareholder's account in accordance with any proxy the Common Shareholder gives
the Trust for Common Shares held of record by him or her. On termination of the
account, a certificate for full shares in the account, plus a check for the
market value of any fractional interest, will be sent to the Common
Shareholder.
Brokers and nominees of banks and financial institutions are advised to
contact the Transfer Agent to determine whether the beneficial holders of
Common Shares held in their names may participate in the Plan.
The automatic reinvestment of dividends and distributions will not
relieve participants of any income tax that may be payable on such dividends or
distributions. See "Taxation" for a discussion of the taxation of dividends and
distributions and for a discussion of certain possible tax consequences of the
Plan.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan. There
is no service charge to participants in the Plan; however, the Trust reserves
the right to amend the Plan to include a service charge payable by the
participants to the Transfer Agent to cover its expenses in administering the
Plan. Each participant will pay a pro rata share of brokerage commissions
incurred with respect to the Transfer Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
All correspondence concerning the Plan should be directed to Dean Witter Trust
Company, Harborside Financial Center, Plaza Two, Jersey City, New Jersey 07311.
TAXATION
===============================================================================
Because the Trust intends to distribute all of its net investment
income and capital gains to shareholders and intends to otherwise comply with
all the provisions of Subchapter M of the Internal Revenue Code of 1986 (the
"Code"), it is not expected that the Trust will be required to pay any federal
income tax on such income and capital gains.
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 exempt from federal income tax. If the Trust satisfies such
requirement, distributions from net investment income to shareholders will be
excludable from gross income for federal income tax purposes to the extent
properly designated as exempt-interest dividends and to the extent net
investment income is derived from tax-exempt securities. Exempt-interest
dividends are included, however, in determining what portion, if any, of a
person's Social Security and railroad retirement benefits are subject to
federal income tax. As discussed below, such dividends may also be subject to
the alternative minimum tax. 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 to the extent attributable to exempt-interest
dividends.
The Internal Revenue Service ("IRS") currently requires a regulated
investment company that has two or more classes of shares to allocate
proportionate amounts of each type of the Trust's income for the year to each
class of shares based upon the percentage of total dividends distributed to
each class
38
<PAGE>
for the taxable year. So long as the IRS maintains this position, the Trust
intends to allocate net tax-exempt interest, net capital gains and other
taxable income, if any, between the Common Shares and the Preferred Shares in
proportion to the total dividends paid to each class with respect to the
taxable year. To the extent permitted under applicable law, the Trust reserves
the right to make special allocations of income within a class, consistent with
the objectives of the Trust. When capital gain or other taxable income is
allocated to holders of preferred stock pursuant to the allocation rules
described above, the terms of the preferred stock may require the Trust to make
an additional distribution to or otherwise compensate such holders for the tax
liability resulting from such allocation.
Dividends on the Common or any Preferred Shares, to the extent payable
from tax-exempt income earned on the Trust's investments, will be exempt from
Federal income tax in the hands of holders of such shares, subject to the
possible application of the alternative minimum tax. Shareholders will normally
be subject to federal income tax on dividends paid from interest income derived
from taxable securities and gains, if any, and on distributions derived from an
excess of net short-term capital gains over long-term capital losses. No part
of the distributions to shareholders will qualify for the dividends received
deduction for corporations. 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 and regardless of whether
the distribution is received in additional shares or in cash. Under the Revenue
Reconciliation Act of 1993, all or a portion of the Trust's gain from the sale
or redemption of tax-exempt obligations purchased at a market discount will be
treated as ordinary income rather than capital gain. This rule may increase the
amount of ordinary income dividends received by shareholders. 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. In addition, 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. If the Trust pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend or distribution will be treated for tax purposes as being paid by the
Trust and received by its shareholders on December 31 of the year in which such
dividend was declared.
Taxpayers who may have alternative minimum tax liability should note
that interest received on certain otherwise tax-exempt securities will increase
alternative minimum taxable income and, as a result, may increase or create
alternative minimum tax liability for such taxpayers. 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 is a tax preference item for alternative minimum
tax purposes, as well as the overall percentage of dividend distributions which
constitutes exempt-interest dividends. Individual taxpayers are generally
subject to the alternative minimum tax if their "regular tax" liability is less
than their alternative minimum tax liability (which is based on graduated rates
of 26% and 28%) on their "alternative minimum taxable income" reduced by an
exemption amount ranging from $0 to $45,000 depending upon the taxpayer's
income and filing status. Alter-
39
<PAGE>
native 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, the Code
further provides that 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.
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 generally not
apply to the tax-exempt income of a regulated investment company such as the
Trust that pays exempt-interest dividends. The Trust anticipates that it will
make sufficient timely distributions to avoid imposition of the excise tax.
The Code provides that 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.
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 after December 31, 1986 and 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.
If at any time when Preferred Shares 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 "Dividends and Distributions." 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 investment company taxable
income (which includes any net short-term capital gains) plus 90% of its net
tax-exempt interest 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 Preferred Shares in order to meet
such requirements. Alternatively, the Trust may pay special dividends to the
Preferred Shareholders (which would decrease the amount such holders would be
entitled to receive upon redemption or liquidation of the Preferred Shares).
As noted above, the Trust must distribute annually an amount at least
equal to the sum of 90% of its investment company taxable income plus 90% of
its net tax-exempt interest income. A distribution will be counted for this
purpose, and for purposes of computing taxable income, only if it qualifies for
the dividends-paid deduction under the Code. Some types of preferred shares
that the Trust currently contemplates issuing may raise an issue whether
distributions on such preferred shares are "preferential" under the Code and
therefore not eligible for the dividends-paid deduction. The Trust intends to
rely on the advice of its counsel and may seek a private letter ruling from the
IRS on the issues raised by issuance of
40
<PAGE>
those types of preferred shares. Moreover, the Trust intends to issue preferred
shares that counsel advises will not result in the payment of a preferential
dividend. If the Trust ultimately relies solely on a legal opinion when it
issues such preferred shares, there is no assurance that the IRS would agree
that dividends on the preferred shares are not preferential. If the IRS
successfully disallowed the dividends-paid deduction on the preferred shares,
the Trust could be disqualified as a regulated investment company. In this
case, dividends on the Common Shares would not be exempt from Federal income
tax. Additionally, the Trust may be subject to the alternative minimum tax.
The tax treatment of listed put and call options written or purchased
by the Trust on debt securities and on 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. 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 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.
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" or a "related person." Such persons should consult their tax
advisers before investing in the Trust.
Under certain provisions of the Code, shareholders may be subject to a
31% withholding on reportable dividends, capital gains distributions and
redemption payments ("backup withholding"). Generally, shareholders 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.
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
nonresident 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. Thus, shareholders of the Trust may be subject
to state and local taxes on exempt-interest dividends.
Shareholders should consult their tax advisers as to the applicability
of the above to their own tax situation.
41
<PAGE>
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 not less than 80% of each of the Common Shares and the Preferred Shares
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 not less than two-thirds, of each of the Trust's Common Shares and Preferred
Shares. 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, 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, Common Shareholders will not be entitled to receive any net income
of or other distributions from the Trust unless all accrued dividends on the
Preferred Shares have been paid, and unless asset coverage (as defined in the
Act) with respect to the Preferred Shares would be at least 200% after giving
effect to such distributions. See "Preferred Shares" below.
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 the Trust. Each
Common Share represents an equal proportionate interest in the Trust with each
other Common Share. 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 Act that Common
42
<PAGE>
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 Trus-
tees, 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 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 pre-emptive or conversion rights. Common Shares
when issued are fully paid and non-assessable.
PREFERRED SHARES
The Trust's Declaration of Trust authorizes the issuance of up to
1,000,000 Preferred Shares 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 pre-emptive right to purchase any Preferred Shares that
might be issued.
The Trust's Board of Trustees has indicated its present intention to
authorize an offering of Preferred Shares within approximately six months of
the completion of the offering of Common Shares, subject to market conditions
and to the Board's continuing to believe that leveraging the Trust's capital
structure through the issuance of Preferred Shares is likely to achieve the
benefits to the Common Shareholders described in this Prospectus. There can be
no assurance that the Preferred Shares will be issued. In addition, if required
by an agency rating the Preferred Shares or if the Board of Trustees determines
it to be in the best interests of the Common Shareholders, more restrictive
provisions may be imposed than required by the Act. Such provisions may include
entitling holders of the Preferred Shares to elect a majority of the Trust's
Board of Trustees if payments on the Preferred Shares are unpaid in an amount
less than the amount specified in the Act.
Under the requirements of the Act, the Trust must, immediately after
the issuance of the Preferred Shares, have an "asset coverage" of at least
200%. With respect to the Preferred Shares, asset coverage means the ratio
which the value of the total assets of the Trust, less all liability and
indebtedness not represented by senior securities (as defined in the Act),
bears to the aggregate amount of senior securities representing indebtedness of
the Trust, if any, plus the aggregate liquidation preference of the Preferred
Shares. The liquidation value of the Preferred Shares is expected to equal
their aggregate original purchase price plus any accrued and unpaid dividends
thereon. It is anticipated that immediately after the completion of any
offering of the Preferred Shares, the Trust's asset coverage ratio will be at
least 280%. The terms of the Preferred Shares, including the dividend rate,
voting rights, liquidation preference and redemption provisions, will be
determined by the Board of Trustees (subject to applicable law and the Trust's
Declaration of Trust) if and when it authorizes the Preferred Shares offering.
However, the Board has stated that the terms of the initial series of Preferred
Shares would likely provide for the periodic redetermination of the dividend
rate at relatively short intervals through an auction or remarketing procedure.
If issued, the dividend rate and the issue price of the Preferred Shares will
reflect the tax status of the distributions to the holders of the Preferred
Shares. As an example, the Preferred Shares may provide for additional dividend
payments to compensate the holders thereof for any
43
<PAGE>
assumed tax detriment resulting from certain required allocations to them of
ordinary income and/or capital gains. The Board has also indicated that the
liquidation preference, voting rights and redemption provisions of the
Preferred Shares will likely be as stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Trust, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus accrued and
unpaid dividends, whether or not earned or declared) before any distribution of
assets is made to holders of Common Shares. After payment of the full amount of
the liquidating distribution to which they are entitled, the Preferred
Shareholders will not be entitled to any further participation in any
distribution of assets by the Trust. A consolidation or merger of the Trust
with or into any other corporation or corporations or a sale of all or
substantially all of the assets of the Trust will not be deemed to be a
liquidation, dissolution or winding up of the Trust.
Voting Rights. Except as indicated above and as set forth below under
"Anti-Takeover Provisions," or except as expressly required by applicable law
or expressly set forth in the designation of rights and preferences with
respect to the Preferred Shares, the Preferred Shareholders will have no
separate voting rights. When Preferred Shareholders are entitled to vote, each
holder shall be entitled to cast one vote per Preferred Share (except as may
otherwise be required by provisions of the Act).
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.
The term of office of one class will expire each year. At the first annual
meeting after issuance of the Preferred Shares, the Trust's shareholders
(Common Shareholders and Preferred Shareholders voting together as a single
class) will have the right to elect eight Trustees and the Preferred
Shareholders, voting as a separate class, will have the right to elect two
Trustees. Under the Act, if at any time dividends on the Trust's Preferred
Shares are unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding Preferred Shares, voting as a class, will be
entitled to elect a majority of the Trust's Trustees until all dividends in
arrears have been paid or otherwise provided for.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights, or
powers, or increase or decrease the number of Preferred Shares authorized to be
issued. Unless a higher percentage is provided for under "Anti-Takeover
Provisions" in the Declaration of Trust, the affirmative vote of the holders of
a majority of the outstanding Preferred Shares, voting as a class, will be
required to approve any plan of reorganization adversely affecting such shares
or any action requiring a vote of security holders under Section 13(a) of the
Act including, among other things, changes in the Trust's investment objective
or changes in the investment restrictions described above under "Investment
Restrictions."
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.
Redemption, Purchase and Sale of Preferred Shares by the Trust. The
terms of the Preferred Shares may include optional or mandatory redemption
provisions which provide for the redemption of such shares at certain times, in
whole or in part, at the original purchase price per Preferred Share plus
accrued dividends and redemption premium, if any. The terms may also provide
that the Trust may tender for or purchase Preferred Shares and that the Trust
may subsequently resell any shares so
44
<PAGE>
tendered for or purchased. In addition, if the Preferred Shares are rated, the
rating agency may impose additional mandatory redemption requirements if
certain asset coverage or other tests are not met by the Trust or if there is
an arrearage in the payment of dividends. The Trust cannot predict what, if
any, additional mandatory redemption requirements may be imposed by a rating
agency in connection with its rating of the Preferred Shares. Any redemption or
purchase of Preferred Shares by the Trust will reduce the leverage applicable
to the Common Shares, while any resale of Preferred Shares by the Trust will
increase such leverage. See "Special Leverage Considerations."
The discussion above describes the Board of Trustees' present intention
with respect to an offering of Preferred Shares. If the Board of Trustees
determines to proceed with such an offering, the terms of the Preferred Shares
may be the same as, or different from, the terms described above, subject to
applicable law and the Trust's Declaration of Trust. The Board of Trustees,
without the approval of the Common Shareholders, may authorize an offering of
Preferred Shares or may determine not to authorize such an offering, and may
fix the terms of the Preferred Shares.
ANTI-TAKEOVER PROVISIONS
The Trust presently has certain anti-takeover provisions in its
Declaration of Trust which could 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. 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 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
corporation;
(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
45
<PAGE>
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.
PRINCIPAL SHAREHOLDER
InterCapital provided the initial capital for the Trust by purchasing
7,113 Common Shares of the Trust for $100,008.78 on February 9, 1994. As of the
date of this Prospectus, InterCapital owned 100% of the outstanding shares of
the Trust. InterCapital may be deemed to control the Trust until such time as
it owns less than 25% of the outstanding shares of the Trust.
SHARE REPURCHASES AND TENDERS
===============================================================================
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 the Common Shares at net
asset value. The Board presently intends, on an annual basis, to consider the
making of a tender offer for the 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.
In addition, the Trustees have currently determined to consider, on an
annual basis, the making of an offer to each shareholder of record to purchase
shares owned by such shareholder at a price to be determined in accordance with
the terms and conditions described below.
There can be no assurance that repurchases and/or tenders will result
in the Trust's shares trading at a price which is equal to their net asset
value. The Trust anticipates that the market price of its Common Shares will
vary from time to time from net asset value. The market price of the Trust's
Common Shares will, among other things, be determined by the relative demand
for and supply of such Common Shares in the market, the Trust's investment
performance, the Trust's dividends and yield and investor perception of the
Trust's overall attractiveness as an investment as compared with other
investment alternatives. Nevertheless, the fact that the Trust's Common Shares
may be the subject of repurchases and/or tender offers from time to time may
enhance their attractiveness to investors and thus reduce the spread between
market price and net asset value that might otherwise exist. In the opinion of
the Investment Manager, sellers will be less inclined to accept a significant
discount if they have some prospect of being able to recover net asset value in
conjunction with a possible tender offer. Common Shares will not be repurchased
unless after such repurchase the Trust would continue to satisfy the Act asset
coverage requirements under the Act with respect to the Preferred Shares and
any asset coverage requirements which may be imposed by any rating service as a
condition of its rating of the Preferred Shares. If Preferred Shares are
issued, any repurchase of Common Shares may also require the Trust to redeem
Preferred Shares.
46
<PAGE>
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. 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 roundlot 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) would result in the forced redemption of
Preferred Shares due to the asset coverage requirements imposed by the Act or
by a rating agency as a condition of its rating of the 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 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 currently 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 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. When a tender offer is authorized to be made by the
Trustees, the terms of such tender offer will set forth the maximum number of
Common Shares (if less than all) that the Trust is willing to purchase pursuant
to the tender offer. The Trust will purchase, subject to such maximum number of
Common Shares tendered in accordance with the terms of the offer, all Common
Shares tendered in accordance with the terms of the offer unless it determines
to accept none of them. In the event that a number of Common Shares in excess
of such maximum number of outstanding Common Shares are tendered in accordance
with the Trust's tender
47
<PAGE>
offer, the Trust intends to purchase, on a pro rata basis, an amount of
tendered Common Shares equal to such maximum amount of the outstanding Common
Shares. 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 Common Shares that have been accepted and purchased by the
Trust will be held in the treasury ("Treasury Shares") until retired by the
Trustees. Treasury Shares will be recorded and reported as an offset to
shareholders' equity, and accordingly will reduce the Trust's total net asset
value. If Treasury Shares are retired, Common Shares 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 and Agent for Shareholders under the Plan. For
these services Dean Witter Trust Company receives an annual per shareholder
account fee from the Trust.
48
<PAGE>
UNDERWRITING
===============================================================================
The Underwriters named below, for whom Dean Witter Distributors Inc.,
Two World Trade Center, New York, New York 10048, is acting as Representative,
have severally agreed, subject to the terms and conditions of the Underwriting
Agreement (a copy of which has been filed as an exhibit to the Registration
Statement), to purchase from the Trust the respective number of Common Shares
set forth opposite their names in the table below:
NUMBER OF
NAME COMMON SHARES
- ----- --------------
Dean Witter Distributors Inc. ............................... 5,285,000
Bear, Stearns & Co. Inc. .................................... 155,000
CS First Boston Corporation ................................. 155,000
Alex. Brown & Sons Incorporated ............................. 155,000
A. G. Edwards & Sons, Inc. ................................. 155,000
Kemper Securities Group, Inc. .............................. 155,000
Lehman Brothers Inc. ....................................... 155,000
Oppenheimer & Co., Inc. .................................... 155,000
Prudential Securities Incorporated .......................... 155,000
J. C. Bradford & Co. ....................................... 100,000
Cowen & Co. ................................................ 100,000
Dain Bosworth Incorporated .................................. 100,000
Legg Mason Wood Walker Inc. ................................. 100,000
McDonald & Company Securities, Inc. ......................... 100,000
Morgan Keegan & Company, Inc. ............................... 100,000
Piper, Jaffray & Hopwood Incorporated ....................... 100,000
Raymond James & Associates, Inc. ............................ 100,000
The Robinson-Humphrey Company, Inc. ........................ 100,000
Tucker Anthony Incorporated ................................ 100,000
Advest, Inc. ............................................... 65,000
Robert W. Baird & Co. Incorporated .......................... 65,000
The Chicago Corporation ..................................... 65,000
Crowell, Weedon & Co. ...................................... 65,000
Doft & Co., Inc. ........................................... 65,000
Fahnestock & Co. Inc. ...................................... 65,000
First Albany Corporation ................................... 65,000
First of Michigan Corporation .............................. 65,000
Gruntal & Co., Incorporated ................................ 65,000
Hamilton Investments, Inc. ................................. 65,000
Hanifen, Imhoff Inc. ....................................... 65,000
Interstate/Johnson Lane Corporation ......................... 65,000
Janney Montgomery Scott Inc. ............................... 65,000
Ladenburg, Thalmann & Co. Inc. ............................. 65,000
Needham & Company, Inc. .................................... 65,000
The Ohio Company ............................................ 65,000
The Principal/Eppler, Guerin & Turner Inc. ................. 65,000
Rauscher Pierce Refsnes, Inc. .............................. 65,000
Roney & Co. ................................................ 65,000
Scott & Stringfellow, Inc. ................................. 65,000
Stephens Inc. .............................................. 65,000
Stifel, Nicolaus & Company, Incorporated ................... 65,000
Wedbush Morgan Securities .................................. 65,000
George K. Baum & Company ................................... 30,000
D. A. Davidson & Co. Incorporated .......................... 30,000
Dominick & Dominick, Incorporated .......................... 30,000
Foley Mufson Howe & Company ................................ 30,000
Gabelli & Company, Inc. .................................... 30,000
Gerard Klauer Mattison & Co., Inc. ......................... 30,000
Johnston, Lemon & Co. Incorporated ......................... 30,000
John G. Kinnard and Company, Incorporated .................. 30,000
Mesirow & Company .......................................... 30,000
Parker/Hunter Incorporated ................................. 30,000
Paulson Investment Company Inc. ............................ 30,000
Pennsylvania Merchant Group Ltd. ........................... 30,000
Rodman & Renshaw, Inc. ..................................... 30,000
The Seidler Companies Incorporated ......................... 30,000
Southwest Securities, Inc. ................................. 30,000
Van Kasper & Company ....................................... 30,000
---------
Total.............................................. 9,500,000
---------
---------
The nature of the Underwriters' obligation is such that they must
purchase all of the Common Shares offered hereby (other than those covered by
the over-allotment option described below) if any are purchased.
49
<PAGE>
The Representative has advised the Trust that the Underwriters propose
to offer the Common Shares 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 $0.67 per Common Share of which $0.10 per
Common Share may be reallowed to other dealers. Additionally, the
Representative has advised the Trust that the Representative, at its
discretion, may pay out of the management fee portion of the sales load an
additional fee, not in excess of $0.10 per share, to each Underwriter which
sells in excess of a specified number of Common Shares as set forth in each
Underwriter's underwriting syndicate invitation. If an Underwriter sells in
excess of the specified number of Common Shares, this additional fee will be
payable on all Common Shares sold by such Underwriter. The sales load of $0.94
per Common Share is equal to 6.27% of the public offering price. After the
initial public offering, the public offering price, concession and reallowance
may be changed.
All monies for Common Shares purchased by Shareholders in the
underwriting must be received by February 28, 1994, five business days from the
date of this Prospectus.
The Trust has granted to the Underwriters an option, exercisable not
later than 45 days after the date of this Prospectus, to purchase up to
1,425,000 additional Common Shares of the Trust at the same price per share as
the Trust will receive for the 9,500,000 Common Shares which the Underwriters
have agreed to purchase. The Underwriters may exercise such option only to
cover over-allotments, if any, of Common Shares made in connection with the
sale of Common Shares offered hereby. If the Underwriters exercise their over-
allotment option, they have severally agreed, subject to certain conditions, to
purchase approximately the same percentage thereof that the number of Common
Shares purchased by each of them in the underwriting bears to the total number
of Common Shares indicated above. If purchased, the Underwriters will sell such
additional Common Shares on the same terms as those on which the initial Common
Shares are being offered.
The Trust and the Investment Manager have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the Underwriters may be
required to make in respect thereof.
Prior to this offering there has been no trading market for the Common
Shares of the Trust.
The Trust anticipates that certain 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. An
affiliate of the Representative is the Investment Manager of the Trust and
receives compensation from the Trust in connection with such services. See "The
Trust and its Management," "Investment Management Agreement" and "Portfolio
Transactions and Brokerage." Certain Trustees and Executive Officers of the
Trust are, or formerly were, officers and/or directors of the Representative or
its parent, DWR. See "Trustees and Officers."
The Trust's Common Shares have been approved for listing on the New
York Stock Exchange under the symbol "IMS." In order to meet the requirements
for listing, the Underwriters have undertaken to sell lots of 100 or more
Common Shares to a minimum of 2,000 beneficial owners.
REPORTS TO SHAREHOLDERS
===============================================================================
The Trust will send to shareholders semi-annual reports showing the
Trust's portfolio and other information. An annual report, containing financial
statements audited by independent accountants, together with their report
thereon, will be sent to shareholders each year.
50
<PAGE>
LEGAL OPINIONS AND EXPERTS
===============================================================================
Certain legal matters in connection with the Common Shares offered
hereby will be passed upon for the Trust by Sheldon Curtis, Esq., who is an
officer and the General Counsel of the Trust and of InterCapital, and for the
Underwriters by Brown & Wood, New York, New York. Both Sheldon Curtis, Esq. and
Brown & Wood may rely upon the opinion of Lane & Altman, Boston, Massachusetts
as to matters of Massachusetts law.
The statement of assets and liabilities of the Trust at February 10,
1994 included herein has been so included in reliance upon the report
of Price Waterhouse, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
FURTHER INFORMATION
===============================================================================
This Prospectus does not contain all of the information set forth in
the Registration Statement that the Trust has filed with the Securities and
Exchange Commission. The complete Registration Statement may be obtained from
the Securities and Exchange Commission upon payment of the fee prescribed by
the Rules and Regulations of the Commission.
51
<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 February 10, 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
February 17, 1994
52
<PAGE>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
STATEMENT OF ASSETS AND LIABILITIES AT FEBRUARY 10, 1994
===============================================================================
Assets:
Cash.............................................. $100,009
Deferred organization expenses (Note 1)........... 44,000
--------
Total assets.................................... 144,009
Liabilities:
Organization expenses payable (Note 1)............ 44,000
Commitments (Notes 1 and 2).......................
--------
100,009
Net assets:
Preferred Shares of beneficial interest,
$.01 par value; 1,000,000 shares
authorized, none issued (Note 3)................
Common Shares of beneficial interest,
$.01 par value; unlimited number of
shares authorized, 7,113 shares
issued and outstanding.......................... 71
Paid-in surplus attributable to Common Shares..... 99,938
--------
$100,009
--------
--------
Net asset value per Common Share.................. $ 14.06
--------
--------
- ----------
Note 1-- InterCapital Insured Municipal Securities (the "Trust") was organized
as a Massachusetts business trust on October 14, 1993 and has had no
operations other than those relating to organizational matters and
the issuance of 7,113 Common Shares of beneficial interest for
$100,009 to Dean Witter InterCapital Inc. (the "Investment Manager").
The Trust is registered under the Investment Company Act of 1940, as
amended (the "Act"), as a diversified closed-end management
investment company.
Organization expenses relating to the Trust incurred and to be
incurred by the Investment Manager will be reimbursed by the Trust.
Such expenses, estimated at $44,000, will be deferred and amortized
on the straight-line method by the Trust against operations over a
period not to exceed sixty months from the commencement of operations
of the Trust. Costs relating to the public offering of its common
shares, estimated to be $406,000, will be paid from the proceeds of
the offering and charged to capital at the time of issuance of such
Common Shares.
Note 2-- The Trust is expected to enter into an Investment Management
Agreement with the Investment Manager. Certain officers and/or
Trustees of the Trust are officers and/or directors of the Investment
Manager. The Investment Manager is a wholly-owned subsidiary of Dean
Witter, Discover & Co.
The Investment Management Agreement provides for the Investment
Manager to receive a fee computed weekly and payable monthly at the
annual rate of 0.35% of the Trust's average weekly net assets. The
Investment Manager will provide portfolio management and certain
administrative, clerical and bookkeeping services for the Trust. For
purposes of calculating the management fee, the liquidation
preference of any Preferred Shares issued by the Trust will not be
deducted from the Trust's total assets.
Dean Witter Trust Company (the "Transfer Agent"), an affiliate of the
Investment Manager, is the transfer agent of the Trust's Common
Shares, Dividend Disbursing Agent for payment of dividends and
distributions and Agent for Shareholders under the Dividend
Reinvestment Plan.
Note 3-- The Trust is authorized by its Declaration of Trust to issue 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 Trustees, by action of the Trustees without the approval of the
Common Shareholders.
53
<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 marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
A-1
<PAGE>
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 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" OR "S&P")
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.
A-2
<PAGE>
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 obligation; (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 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.
A-3
<PAGE>
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+).
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 and 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.
B-1
<PAGE>
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 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 if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
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.
B-2
<PAGE>
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.
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 mark-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.
B-3
<PAGE>
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 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).
B-4
<PAGE>
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 had 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 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
B-5
<PAGE>
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
B-6
<PAGE>
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 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.
B-7
<PAGE>
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
C-1
<PAGE>
as sale of the mortgaged 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.
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, 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 buy-outs 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 public 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
C-2
<PAGE>
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.
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 regulations could affect the continued operation of the
resource recovery facilities.
C-3
<PAGE>
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
be 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 rating. Any further explanation as to the
significance of the ratings may be obtained only from the applicable rating
agency.
D-1
<PAGE>
<TABLE>
APPENDIX E
TAXABLE EQUIVALENT YIELDS FOR 1994
==================================================================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TAXABLE INCOME* 1994 A TAX-FREE YIELD OF
- ------------------------------------------ FEDERAL ---------------------------------------------------------------------
SINGLE JOINT TAX BRACKET** 5.00% 5.50% 6.00%
RETURN RETURN IS EQUAL TO A TAXABLE YIELD OF
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$22,751 - $55,100 $38,001 - $91,850 28.00% 6.94% 7.64% 8.33%
$55,101 - $115,000 $91,851 - $140,000 31.00% 7.25% 7.97% 8.70%
$115,001 - $250,000 $140,001 - $250,000 36.00% 7.81% 8.59% 9.38%
Over $250,000 Over $250,000 39.60% 8.28% 9.11% 9.93%
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
* The above table is based on the federal taxable income brackets, which are adjusted annually for inflation.
** The taxable yields shown above assume that an investor pays regular Federal tax rather than the
alternative minimum tax. The reduction, or possible elimination, of the personal exemption deductions
for high-income taxpayers and the overall limit on itemized deductions may cause an investor's actual
marginal rate to exceed the rate used in the above table for a particular range of taxable income.
Additionally, income may be subject to state and local taxes. The tax rates shown above do not apply
to corporate taxpayers. The tax characteristics of the Trust are described more fully elsewhere in this
Prospectus. Consult your tax adviser for further details. This chart is for illustrative purposes only and
cannot be taken as an indication of anticipated Trust performance.
</TABLE>
E-1
<PAGE>
APPENDIX F
COMPARISON OF COMPOUNDED YIELDS
===============================================================================
5.375% 6.89%
END OF YEAR TAX-EXEMPT INVESTMENT TAXABLE INVESTMENT
----------- --------------------- ------------------
0 $10,000 $10,000
1 10,538 10,441
2 11,104 10,901
3 11,701 11,382
4 12,330 11,884
5 12,992 12,408
6 13,691 12,955
7 14,427 13,526
8 15,202 14,123
9 16,019 14,746
10 16,880 15,396
11 17,787 16,075
12 18,744 16,784
13 19,751 17,524
14 20,813 18,296
15 21,931 19,103
16 23,110 19,946
17 24,352 20,825
18 25,661 21,743
19 27,040 22,702
20 28,494 23,703
ASSUMPTIONS
- -----------
Yield and Reinvestment Rate on Tax-Exempt Investment.......... 5.375%
Yield and Reinvestment Rate on Taxable Investment............. 6.890%
The 6.89% Taxable Investment column reflects a reduction for federal income
taxes at the 36% federal tax bracket. An investor's tax rate may differ from
the 36% rate assumption depending on the amount of the investor's income and
the reduction, or possible elimination, of the personal exemption deduction for
high-income taxpayers and an overall limit on itemized deductions.
Additionally, income may be subject to certain state and local taxes and the
federal alternative minimum tax. The tax characteristics of the Trust are
described more fully elsewhere in this Prospectus. Consult your tax adviser for
further details.
The above table does not apply to corporate investors.
F-1
<PAGE>
INTERCAPITAL INSURED MUNICIPAL
SECURITIES
9,500,000 COMMON SHARES OF
BENEFICIAL INTEREST
PROSPECTUS
DEAN WITTER DISTRIBUTORS INC.
FEBRUARY 18, 1994
<PAGE>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
i. Report of Independent Accountant (contained in
Prospectus)
ii. Statement on Assets and Liabilities as of February 10,
1994
(b) Exhibits:
Exhibit
Number Description
1.(a) -- Declaration of Trust of Registrant*
2. -- By-Laws of Registrant*
3. -- None
4. -- Not Applicable
5. -- Copy of Trust's Dividend Reinvestment Plan**
6. -- Not Applicable
7. -- Form of Investment Management Agreement between
Registrant and Dean Witter InterCapital Inc.**
8.(a) -- Form of Master Agreement Among Underwriters*
(b) -- Form of Underwriting Agreement
(c) -- Form of Selected Dealers Agreement*
9. -- Not Applicable
10.(a) -- Form of Custodian Agreement**
(b) -- Form of Amended and Restated Transfer Agency
Agreement**
(c) -- Form of Services Agreement with Dean Witter
Services Company Inc.**
11. -- Not Applicable
1
<PAGE>
Exhibit
Number Description
12. -- Opinion of Sheldon Curtis, Esq.
13. -- Not Applicable
14. -- Consent of Price Waterhouse
15. -- None
16. -- Investment Letter of Dean Witter InterCapital Inc.
Other -- Powers of Attorney**
- ------------
* Previously filed by Registrant with its initial Registration
Statement dated October 19, 1993.
** Previously filed by Registrant with the Pre-Effective Amendment
No. 1 dated January 7, 1994.
Item 25. Marketing Arrangements.
Reference is made to the Underwriting Agreement to be filed
by Amendment as Exhibit 8(b) to this Registration
Statement.
Item 26. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission
Registration Fee $ 52,605
New York Stock Exchange listed fee $ 105,600
NASD registration fee $ 16,888
Blue Sky Fees and Expenses $ 15,000
(including fees of counsel)
Transfer Agent Fee $ 0
Accounting fees and expenses $ 3,500
Legal fees and expenses $ 6,000
Printing and engraving $ 205,000
Miscellaneous $ 1,407
---------
$ 406,000
=========
2
<PAGE>
Item 27. Persons Controlled by or Under Common Control With
Registrant.
Prior to the effectiveness of this Registration Statement, the
Registrant will sell 7,113 of its shares of beneficial interest to
Dean Witter InterCapital Inc., a Delaware corporation. Dean Witter
InterCapital Inc. is a wholly-owned subsidiary of Dean Witter,
Discover & Co. ("DWDC"), a Delaware corporation, that is a balanced
financial services organization providing a broad range of
nationally marketed credit and investment products.
Item 28. Number of Holders of Securities.
(1) (2)
Number of Record Holders
Title of Class at February 18, 1994
-------------- ------------------------
Shares of Beneficial Interest 1
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 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 8 of the Registrant's 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.
3
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (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 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 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
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
4
<PAGE>
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 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.
5
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
Charles A. Chairman, Chief Executive Vice
Fiumefreddo Executive Officer President and Director
and Director of Dean Witter
Reynolds Inc.("DWR");
Chairman, Director
or Trustee, President
and Chief Executive
Officer of the Dean
Witter Funds;
Chairman, Chief
Executive Officer and
Trustee of the TCW/DW
Funds; Chairman and
Director of Dean
Witter Trust Company
("DWTC"); Chairman,
Chief Executive
Officer and Director
of Dean Witter
Distributors Inc.
("Distributors") 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
Distributors and DWSC.
Richard M. Director President and Chief
DeMartini Operating Officer of
Dean Witter Capital
and Director of DWDC,
DWR and Distributors.
6
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
James F. Higgins Director President and Chief
Operating Officer of
Dean Witter Financial;
Director of DWDC, DWR
DWSC and Distributors.
Thomas C. Executive Vice Director of DWDC and
Schneider President, Chief DWR; Executive Vice
Financial Officer President, Chief
and Director Financial Officer and
Director of
Distributors and DWSC.
Christine A. Director Director of DWR;
Edwards Executive Vice
President, Secretary
and General Counsel of
DWR and DWDC;
Executive Vice
President, Secretary
and Chief Legal
Officer of
Distributors.
Robert M. Scanlan President and Vice President of
Chief Operating the Dean Witter Funds
Officer and the TCW/DW Funds;
President of DWSC;
Executive Vice
President of
Distributors;
Executive Vice
President and Director
of DWTC.
7
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
David A. Hughey Executive Vice Vice President of the
President and Dean Witter Funds and
Chief Administrative the TCW/DW Funds;
Officer Executive 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
Distributors.
Edmund C. Executive Vice Vice President of the
Puckhaber President Dean Witter Funds.
John Van Heuvelen Executive Vice President and Chief
President Executive Officer of
DWTC.
Sheldon Curtis Senior Vice Vice President,
President, Secretary and
General Counsel General Counsel of the
and Secretary Dean Witter Funds and
the TCW/DW Funds;
Senior Vice President
and Secretary of DWTC;
Assistant Secretary of
DWR and DWDC; Senior
Vice President,
General Counsel and
Secretary of DWSC;
Senior Vice President,
Assistant General
Counsel and Assistant
Secretary of
Distributors.
Peter M. Avelar Senior Vice Vice President of
President various Dean Witter
Funds.
8
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
Mark Bavoso Senior Vice
President
Thomas H. Senior Vice Vice President of
Connelly President various Dean Witter
Funds.
Edward Gaylor Senior Vice Vice President of
President various Dean Witter
Funds.
Rajesh K. Gupta Senior Vice Vice President of
President various Dean Witter
Funds.
Kenton J. Senior Vice Vice President of
Hinchliffe President various Dean Witter
Funds.
John B. Kemp, III Senior Vice Director of the
President Provident Savings
Bank, Jersey City,
New Jersey.
Anita Kolleeny Senior Vice Vice President of
President various Dean Witter
Funds.
Jonathan R. Page Senior Vice Vice President of
President various Dean Witter
Funds.
Ira Ross Senior Vice Vice President of
President various Dean Witter
Funds.
Rochelle G. Senior Vice Vice President of
Siegel President various Dean Witter
Funds.
Paul D. Vance Senior Vice Vice President of
President various Dean Witter
Funds.
Elizabeth A. Senior Vice
Vetell President
James F. Senior Vice Vice President of
Willison President various Dean Witter
Funds.
9
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
Ronald Worobel Senior Vice Vice President of
President various Dean Witter
Funds.
Thomas F. Caloia First Vice Treasurer of the
President and Dean Witter Funds
Assistant Treasurer and the TCW/DW Funds;
First Vice President
and Assistant
Treasurer of DWSC;
Assistant Treasurer of
Distributors.
Barry Fink First Vice Assistant Secretary of
President and the Dean Witter Funds
Assistant Secretary and the TCW/DW Funds;
First Vice President
and Assistant
Secretary of DWSC.
Michael Interrante First Vice President First Vice President
and Controller and Controller of
DWSC; Assistant
Treasurer of
Distributors.
Robert Zimmerman First Vice
President
Joseph Arcieri Vice President
Douglas Brown Vice President
Rosalie Clough Vice President
B. Catherine Vice President
Connelly
Marilyn K. Cranney Vice President Assistant Secretary
and Assistant of the Dean Witter
Secretary Funds and 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
10
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
Geoffrey D. Flynn Vice President Vice President of
DWSC.
Bette Freedman 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
Paula LaCosta Vice President Vice President of
various Dean Witter
Funds.
Lawrence S. Lafer Vice President Assistant Secretary
and Assistant of the Dean Witter
Secretary Funds and the TCW/DW
Funds; Vice President
and Assistant
Secretary of DWSC.
Thomas Lawlor Vice President
Lou Anne D. Vice President Assistant Secretary
McInnis and Assistant of the Dean Witter
Secretary Funds and the TCW/DW
Funds; Vice President
and Assistant
Secretary of DWSC.
James Mulcahy Vice President
James Nash Vice President
Hugh Rose Vice President
Ruth Rossi Vice President Assistant Secretary
and Assistant of the Dean Witter
Secretary Funds and the TCW/DW
Funds; Vice President
and Assistant
Secretary of DWSC.
11
<PAGE>
Other Substantial
Business, Profession,
Position with Vocation or Employment,
Dean Witter including Name, Prin-
InterCapital cipal Address and
Name Inc. Nature of Connection
---- ------------- --------------------------
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
Item 31. Location of Accounts and Records
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder are maintained by the Investment Manager 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 Statement of Additional
Information.
Item 32. Management Services
Registrant is not a party to any such management-related
service contract.
Item 33. Undertakings.
(a) 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.
12
<PAGE>
(b) Not applicable
(c) Not applicable
The undersigned Registrant undertakes to assist shareholders in
communicating with other shareholders for the purpose of removing
trustees by providing the support specified in Section 16(c) of the
1940 Act as though such Section applied.
The undersigned Registrant hereby 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 a Registration Statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the
Registrant pursuant to rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York and the State
of New York on the 17th day of February, 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
Pre-Effective Amendment No. 2 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
(1) Principal Executive Officer Chairman, President,
Chief Executive
Officer and Trustee
By /s/ Charles A. Fiumefreddo 02/17/94
----------------------------
Charles A. Fiumefreddo
(2) Principal Financial Officer Treasurer and Principal
Accounting Officer
By /s/ Thomas F. Caloia 02/17/94
----------------------------
Thomas F. Caloia
(3) Majority of the Trustees
Charles A. Fiumefreddo
Edward R. Telling
By /s/ Sheldon Curtis 02/17/94
------------------------------
Sheldon Curtis
Attorney-in-Fact
Jack F. Bennett Paul Kolton
John R. Haire Michael E. Nugent
John E. Jeuck Albert T. Sommers
Manuel H. Johnson Edwin J. Garn
By /s/ David M. Butowsky 02/17/94
-------------------------------
David M. Butowsky
Attorney-in-Fact
<PAGE>
<PAGE>
INTERCAPITAL INSURED MUNICIPAL SECURITIES
EXHIBIT INDEX
1.(a) -- Declaration of Trust of Registrant*
2. -- By-Laws of Registrant*
3. -- None
4. -- Not Applicable
5. -- Copy of Trust's Dividend Reinvestment Plan**
6. -- Not Applicable
7. -- Form of Investment Management Agreement between
Registrant and Dean Witter InterCapital Inc.**
8.(a) -- Form of Master Agreement Among Underwriters*
(b) -- Form of Underwriting Agreement
(c) -- Form of Selected Dealers Agreement*
9. -- Not Applicable
10.(a) -- Form of Custodian Agreement**
(b) -- Form of Amended and Restated Transfer Agency
Agreement**
(c) -- Form of Services Agreement with Dean Witter
Services Company Inc.**
11. -- Not Applicable
12. -- Opinion of Sheldon Curtis, Esq.
13. -- Not Applicable
14. -- Consent of Price Waterhouse
15. -- None
16. -- Investment Letter of Dean Witter InterCapital
Inc.
Other -- Powers of Attorney**
- --------------------
* Previously filed by Registrant with its initial Registration
Statement dated October 19, 1993.
** Previously filed by Registrant with the Pre-Effective
Amendment No. 1 dated January 7, 1994.
INTERCAPITAL INSURED MUNICIPAL SECURITIES
9,500,000 COMMON SHARES OF BENEFICIAL INTEREST
(PAR VALUE $.01 PER SHARE)
UNDERWRITING AGREEMENT
----------------------
February 14, 1994
DEAN WITTER DISTRIBUTORS INC.
As Representative of the several Underwriters
Two World Trade Center
New York, New York 10048
Dear Sirs:
1. Introductory. InterCapital Insured Municipal Securities, a Massachusetts
business trust (the "Trust"), proposes to issue and sell, pursuant to the terms
of this Agreement, to the several Underwriters named in Schedule A hereto (the
"Underwriters" which term also shall include any underwriter substituted as
hereinafter provided in Section 11), an aggregate of 9,500,000 Common Shares of
Beneficial Interest of the Trust, par value $.01 per share (the "Beneficial
Common Shares"), as set forth in Schedule A, except as may be provided
otherwise in the Pricing Agreement, as hereinafter defined. The aggregate of
9,500,000 Beneficial Common Shares so to be sold by the Trust is herein called
the "Firm Shares". The Trust also proposes to sell severally to the
Underwriters, on a pro rata basis, at the option of the Underwriters, an
aggregate of not more than 1,425,000 additional Beneficial Common Shares as
provided in Section 3 of this Agreement. The aggregate of 1,425,000 Beneficial
Common Shares so proposed to be sold is herein called the "Optional Shares".
The Firm Shares and the Optional Shares are collectively referred to herein as
the "Shares". Dean Witter Distributors Inc. is acting as representative of the
several Underwriters and in such capacity is hereinafter referred to as the
"Representative".
Before the purchase and public offering of the Shares by the several
Underwriters, the Trust and the Representative, acting on behalf of the several
Underwriters, shall enter into an agreement substantially in the form of
Exhibit A hereto (the "Pricing Agreement"). The Pricing Agreement may take the
form of an exchange of any standard form of written telecommunication between
the Trust and the Representative and shall specify such applicable information
as is indicated in Exhibit A hereto. The offering of the Shares will be
governed by this Agreement, as supplemented by the Pricing Agreement. From and
after the date of the execution and delivery of the Pricing Agreement, this
Agreement shall be deemed to incorporate the Pricing Agreement.
2. (a) Representations and Warranties. The Trust and Dean Witter InterCapital
Inc., a Delaware corporation (the "Adviser"), each severally represents and
warrants to, and agrees with, the several Underwriters, as of the date hereof
and as of the date of the Pricing Agreement (such latter date being hereinafter
referred to as the "Representation Date"), that:
(i) A registration statement on Form N-2 (File No. 33-50663) with respect to
the Shares has heretofore been delivered to the Underwriters, has been
carefully prepared by the Trust in conformity with the requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company
Act of 1940, as amended (the "1940 Act"), and a notification on Form
N-8A of the registration of the Trust as an investment company has been
similarly prepared by the Trust under the 1940 Act, and, in the case of both
such documents, the published rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
under the 1933 Act and the 1940 Act, and have been filed with the Commission
under the 1933 Act and the 1940 Act. One or more amendments to such
registration statement, including an amended preliminary prospectus, copies of
which have heretofore been delivered to the Underwriters, have been so prepared
and filed; and the Trust has so prepared and proposes so
<PAGE>
to file prior to the effective date of such registration statement an amendment
to such registration statement including the final form of prospectus. Such
registration statement as amended at the time such registration statement
becomes effective and the prospectus constituting a part thereof (including in
each case the information, if any, deemed to be a part thereof pursuant to Rule
430A(b) of the Rules and Regulations) are hereinafter referred to as the
"Registration Statement" and the "Prospectus", respectively, except that if any
revised prospectus shall be provided to the Underwriters by the Trust for use
in connection with the offering of the Shares which differs from the prospectus
on file at the Commission at the time the Registration Statement becomes
effective (whether such prospectus is required to be filed by the Trust
pursuant to Rule 497(c) or Rule 497(h) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use.
(ii) When the Registration Statement becomes effective and as of the
Representation Date, the Registration Statement and the Prospectus will conform
in all material respects to the requirements of the 1933 Act, the 1940 Act and
the Rules and Regulations. At the time the Registration Statement becomes
effective and at the Representation Date, the Registration Statement will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus, at the time the Registration Statement becomes
effective and as of the Representation Date (unless the term "Prospectus"
refers to a prospectus which has been provided to the Underwriters by the Trust
for use in connection with the offering of the Shares which differs from the
prospectus on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time it is first provided to the
Underwriters for such use) and at the First Closing Date and the Option Closing
Date referred to in Section 3, will not include an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing representations,
warranties and agreements shall not apply to information contained in or
omitted from the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon, and in conformity with, written information
furnished to the Trust by or on behalf of any Underwriter, directly or through
the Representative, specifically for use in the preparation thereof.
(iii) Since the date as of which information is given in the Registration
Statement and the Prospectus, except as otherwise stated therein, (A) there has
been no material adverse change in the condition, financial or otherwise, of
the Trust, or in the earnings, business affairs or business prospects of the
Trust, whether or not arising in the ordinary course of business, (B) there
have been no transactions entered into by the Trust which are material to the
Trust other than those in the ordinary course of business, and (C) there has
been no dividend or distribution of any kind declared, paid or made by the
Trust on any class of its capital shares.
(iv) The statement of assets and liabilities, together with the related
notes, included in the Registration Statement presents fairly the financial
position of the Trust as at the date indicated and said statement has been
prepared in conformity with generally accepted accounting principles.
(v) Price Waterhouse, who have expressed their opinions on the statement of
assets and liabilities included in the Registration Statement, are independent
public accountants as required by the 1933 Act and the Rules and Regulations.
(vi) The Trust has been duly organized and is validly existing as a voluntary
association (commonly referred to as a business trust) in good standing under
the laws of The Commonwealth of Massachusetts; the Declaration of Trust of the
Trust pursuant to which the Trust was established, confers on the Trustees
named therein, and their successors in trust, power and authority to own, lease
and operate its properties and conduct its business as
2
<PAGE>
described in the Registration Statement and the Prospectus; the Trust is duly
qualified to transact business and is in good standing in each jurisdiction in
which such qualification is required; and the Trust has no subsidiaries.
(vii) The Trust is registered with the Commission under the 1940 Act as a
closed-end diversified management investment company.
(viii) The authorized, issued and outstanding capital shares of the Trust are
as set forth in the Prospectus under the caption "Description of Shares"; the
Shares have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Trust pursuant
to this Agreement against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and non-assessable; the Shares
conform in all material respects to all statements relating thereto contained
in the Prospectus; and the issuance of the Shares to be purchased by the
Underwriters is not subject to preemptive rights.
(ix) The Trust is not in violation of its Declaration of Trust or its by-laws
(the "By-laws") or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
to which it is a party or by which it or its properties may be bound; and the
execution and delivery of this Agreement and the Pricing Agreement and the
Investment Management Agreement and the Custodian Agreement referred to in the
Registration Statement (as used herein, the "Management Agreement" and the
"Custodian Agreement", respectively) and the consummation of the transactions
contemplated herein and therein have been duly authorized by all necessary
Trust action and will not conflict with or constitute a breach of, or default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Trust pursuant to, any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
to which the Trust is a party or by which it may be bound or to which any of
the property or assets of the Trust is subject, nor will such action result in
any violation of the provisions of the Declaration of Trust or By-laws or, to
the best of its knowledge, any law, administrative regulation or administrative
or court decree; and no consent, approval, authorization or order of any court
or governmental authority or agency is required for the consummation by the
Trust of the transactions contemplated by this Agreement, the Pricing
Agreement, the Management Agreement or the Custodian Agreement, except such as
has been obtained under the 1940 Act or as may be required under the 1933 Act,
or state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(x) The Trust owns or possesses or has obtained all material governmental
licenses, permits, consents, orders, approvals and other authorizations
necessary to lease or own, as the case may be, and to operate its properties
and to carry on its businesses as contemplated in the Prospectus.
(xi) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Trust, threatened against or affecting the Trust, which might
result in any material adverse change in the condition, financial or otherwise,
business affairs or business prospects of the Trust, or might materially and
adversely affect the properties or assets of the Trust; and there are no
material contracts or documents of the Trust which are required to be filed as
exhibits to the Registration Statement by the 1933 Act, the 1940 Act or by the
Rules and Regulations which have not been so filed.
(xii) The Trust owns or possesses, or can acquire on reasonable terms, by
license or otherwise, adequate trademarks, service marks and trade names
necessary to conduct the business now operated by it, and the Trust has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, would materially adversely affect the conduct of the business,
operations, financial condition or income of the Trust.
3
<PAGE>
(xiii) Any advertisement or other marketing materials approved by the Trust
or the Adviser for use in the public offering of the Shares pursuant to Rule
482 under the Rules and Regulations (the "Omitting Prospectus") complies with
the requirements of such Rule 482.
(xiv) Any advertisement or other marketing materials approved by the Trust or
the Adviser for use by the Underwriters and other securities firms in the
public offering of the Shares do not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(xv) The Shares have been approved for listing on the New York Stock Exchange
upon notice of issuance.
(b) The Adviser represents and warrants to each Underwriter as of the date
hereof and as of the Representation Date, as follows:
(i) The Adviser has been duly incorporated and is validly existing and in
good standing as a corporation under the laws of the State of Delaware with
corporate power and authority to conduct its business as described in the
Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not
prohibited by the Advisers Act or the 1940 Act, or the rules and regulations
under such acts, from acting under the Management Agreement for the Trust as
contemplated by the Prospectus.
(iii) The description of the Adviser in the Prospectus is true and correct
and does not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading.
(iv) This Agreement has been duly authorized, executed and delivered by the
Adviser; the Management Agreement has been duly authorized, executed and
delivered by the Adviser and constitutes a valid and binding obligation of the
Adviser, enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization or other laws relating to or
affecting creditors' rights and to general equity principles; and neither the
execution and delivery of this Agreement or the Advisory Agreement nor the
performance by the Adviser of its respective obligations hereunder and
thereunder, as the case may be, will conflict with, or result in a breach of,
any of the terms and provisions of, or constitute, with or without giving
notice or lapse of time or both, a default under, any agreement or instrument
to which the Adviser is a party or by which it is bound, or any law, order,
rule or regulation applicable to it of any jurisdiction, court, federal or
state regulatory body, administrative agency or other governmental body, stock
exchange or securities association having jurisdiction over the Adviser or its
properties or operations.
(v) The Adviser has the financial resources available to it necessary for the
performance of its services and obligations as contemplated in the Registration
Statement and the Prospectus.
(c) Any certificate signed by any officer of the Trust or the Adviser and
delivered to the Representative or to counsel for the Underwriters shall be
deemed a representation and warranty by the Trust or the Adviser, as the case
may be, to each Underwriter as to the matters covered thereby.
3. Purchase by, and Sale and Delivery to, Underwriters; Closing Date. On the
basis of the representations, warranties, covenants and agreements herein
contained, and subject to the terms and conditions herein set forth, the Trust
agrees to sell to the Underwriters the Firm Shares, and subject to the terms
and conditions herein set forth, the Underwriters agree, severally and not
jointly, to purchase from the Trust at the price per share set forth in the
Pricing Agreement, the number of Firm Shares set opposite their name in
Schedule A (except as otherwise provided in the Pricing Agreement), subject to
adjustment in accordance with Section 11 hereof.
If the Trust has elected not to rely upon Rule 430A under the Rules and
Regulations, the initial public offering price and the purchase price per share
to be paid by the several Underwriters for the
4
<PAGE>
Firm Shares each have been determined and set forth in the Pricing Agreement,
dated the date hereof, and an amendment to the Registration Statement and the
Prospectus will be filed before the Registration Statement becomes effective.
If the Trust has elected to rely upon Rule 430A under the Rules and
Regulations, the purchase price per share to be paid by the several
Underwriters for the Firm Shares shall be an amount equal to the initial public
offering price, less an amount per share to be determined by agreement between
the Representative and the Trust. The initial public offering price and the
purchase price, when so determined, shall be set forth in the Pricing
Agreement. In the event that such prices have not been agreed upon and the
Pricing Agreement has not been executed and delivered by all parties thereto by
the close of business on the fourth business day following the date of this
Agreement, this Agreement shall terminate forthwith, without liability of any
party to any other party, unless otherwise agreed to by the Trust and the
Representative.
The Trust will deliver the Firm Shares to the Representative for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representative may direct by notice in writing to the Trust given at or prior
to 12:00 Noon, New York Time, on the second full business day preceding the
Closing Date or, if no such direction is received, in the names of the
respective Underwriters), against payment of the purchase price therefor by
check or checks in New York Clearing House or similar next day funds, payable
to the order of the Trust, all at the offices of Brown & Wood, One World Trade
Center, New York, New York 10048. The time and date of delivery and closing
shall be at 10:00 A.M., on the fifth full business day after the Registration
Statement becomes effective (or, if the Trust has elected to rely upon Rule
430A, the fifth full business day after execution of the Pricing Agreement);
provided, however, that such date and time may be accelerated or extended by
agreement between the Trust and the Representative or postponed pursuant to the
provisions of Section 11 hereof. The time and date of such payment and delivery
are herein referred to as the "First Closing Date". The Trust shall make the
certificates for the Shares available to the Representative for examination on
behalf of the Underwriters not later than 10:00 A.M., New York Time, on the
business day preceding the Closing Date at the offices of Dean Witter Trust
Company in New York, New York.
In addition, for the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Shares as contemplated by the
Prospectus, the Trust hereby grants the Underwriters an option to purchase,
severally and not jointly, up to 1,425,000 shares in the aggregate of the
Optional Shares. The purchase price per share to be paid for the Optional
Shares shall be the same price per share as for the Firm Shares. The option
granted hereby may be exercised as to all or any part of the Optional Shares at
any time not more than 45 days subsequent to the effective date of this
Agreement (or if the Trust has elected to rely on Rule 430A, not more than 45
days subsequent to the date of the Pricing Agreement). No Optional Shares shall
be sold and delivered unless the Firm Shares previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Shares or any portion thereof may be surrendered and terminated at any time
upon notice by the Representative to the Trust.
The option granted hereby may be exercised by the Representative on behalf of
the Underwriters by giving written notice to the Trust setting forth the number
of Optional Shares to be purchased by them and the date and time for delivery
of and payment for the Optional Shares. Such date and time for delivery of and
payment for the Optional Shares (which may be the First Closing Date) is herein
called the "Option Closing Date" and shall not be later than seven full
business days after written notice is given. Optional Shares shall be purchased
for the account of each Underwriter in the same proportion as the number of
Firm Shares set forth opposite such Underwriter's name in Schedule A hereto
bears to the total number of Firm Shares (except as otherwise provided in the
Pricing Agreement and subject to adjustment by the Representative to eliminate
odd lots). Upon exercise of the option by the Representative the Trust agrees
to sell to the Underwriters the number of Optional Shares set forth in the
written notice of exercise and the Underwriters agree, severally and not
jointly, subject to the terms and conditions herein set forth, to purchase such
Optional Shares.
5
<PAGE>
The Trust will deliver the Optional Shares to the Representative for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representative may direct by notice in writing to the Trust given at or prior
to 12:00 Noon, New York Time, on the second full business day preceding the
Option Closing Date or, if no such direction is received, in the names of the
respective Underwriters), against payment of the purchase price therefor by
check or checks in New York Clearing House or similar next day funds, payable
to the order of the Trust, all at the offices of Brown & Wood. The Trust shall
make the certificates for the Optional Shares available to the Representative
for examination on behalf of the Underwriters not later than 10:00 A.M., New
York Time, on the business day preceding the Option Closing Date at the offices
of Dean Witter Trust Company in New York, New York.
It is understood that Dean Witter Distributors Inc., individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make payment to the Trust on behalf of any Underwriter or Underwriters, for the
Shares to be purchased by such Underwriter or Underwriters. Any such payment by
Dean Witter Distributors Inc. shall not relieve such Underwriter or
Underwriters from any of its or their other obligations hereunder.
After the Registration Statement becomes effective, the several Underwriters
propose to make an initial public offering of the Shares at the initial public
offering price. The Representative shall promptly advise the Trust of the
making of the initial public offering.
4. Covenants and Agreements of the Trust. The Trust covenants and agrees with
the several Underwriters that:
(a) The Trust will use its best efforts to cause the Registration Statement
to become effective under the 1933 Act, will advise the Representative promptly
as to the time at which the Registration Statement becomes effective, will, if
required, cause the issuance of any orders exempting the Trust from any
provisions of the 1940 Act and will advise the Representative promptly as to
the time at which any such orders are granted, will advise the Representative
promptly of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose, and will use its best efforts to prevent the
issuance of any such stop order and to obtain as soon as possible the lifting
thereof, if issued. The Trust will advise the Representative promptly of any
request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for additional information, and
will not at any time file any amendment to the Registration Statement or
supplement to the Prospectus which shall not previously have been submitted to
the Representative a reasonable time prior to the proposed filings thereof or
to which the Representative shall reasonably object in writing or which is not
in compliance with the 1933 Act, the 1940 Act and the Rules and Regulations.
The Trust will advise the Representative promptly when the Prospectus has been
timely filed pursuant to Rule 497(c) or Rule 497(h) of the Rules and
Regulations, or when the certification in lieu of filing pursuant to Rule
497(c) has been timely filed pursuant to Rule 497(j) of the Rules and
Regulations, whichever is applicable under the Rules and Regulations.
(b) The Trust will prepare and file with the Commission, promptly upon the
request of the Representative, any amendments or supplements to the
Registration Statement or the Prospectus (including any revised prospectus
which the Trust proposes for use by the Underwriters in connection with the
offering of the Shares which differs from the prospectus on file at the
Commission at the time the Registration Statement becomes effective, whether
such revised prospectus is required to be filed pursuant to Rule 497(c) or Rule
497(h) of the Rules and Regulations) which in the opinion of the Representative
may be necessary to enable the several Underwriters to continue the
distribution of the Shares and will use its best efforts to cause the same to
become effective as promptly as possible.
(c) If at any time after the effective date of the Registration Statement
when a prospectus relating to the Shares is required to be delivered under the
1933 Act any event relating to or affecting the Trust occurs as a result of
which the Prospectus would include an untrue statement of a material fact, or
omit to state any material fact necessary to make the statements therein, in
the
6
<PAGE>
light of the circumstances under which they were made, not misleading, or if it
is necessary, at any time to amend the Prospectus to comply with the 1933 Act,
the Trust will promptly notify the Representative thereof and will prepare an
amended or supplemented prospectus (in form and substance satisfactory to
counsel to the Underwriters) which will correct such statement or omission;
and, in case any Underwriter is required to deliver a prospectus relating to
the Shares nine months or more after the effective date of the Registration
Statement, the Trust upon the request of the Representative and at the expense
of such Underwriter will prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the 1933 Act.
(d) The Trust will deliver to the Representative, at or before the First
Closing Date, signed copies of the Registration Statement and all amendments
thereto including all financial statements and exhibits thereto and will
deliver to the Representative such number of copies of the Registration
Statement, including such financial statements but without exhibits, and of all
amendments thereto, as the Representative may reasonably request. The Trust
will deliver or mail to or upon the order of the Representative on the date of
the initial public offering, and thereafter from time to time during the period
when delivery of a prospectus relating to the Shares is required under the 1933
Act, as many copies of the Prospectus, in final form or as thereafter amended
or supplemented as the Representative may reasonably request; provided,
however, that the expense of the preparation and delivery of any prospectus
required for use nine months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to deliver
such prospectus.
(e) The Trust will make generally available to its security holders as soon
as practicable, but in any event not later than 60 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) which will be in reasonable detail
(but which need not be audited) and which will comply with Section 11(a) of the
1933 Act, covering a period of at least twelve months beginning not later than
the first day of the Trust's fiscal quarter next following the "effective date"
(as defined in said Rule 158) of the Registration Statement.
(f) The Trust will cooperate with the Representative to enable the Shares to
be qualified for sale under the securities laws of such jurisdictions as the
Representative may designate and at the request of the Representative will make
such applications and furnish such information as may be required of it as the
issuer of the Shares for that purpose; provided, however, that the Trust shall
not be required to qualify to do business or to file a general consent to
service of process in any such jurisdiction. The Trust will, from time to time,
prepare and file such statements and reports as are or may be required of it as
the issuer of the Shares to continue such qualifications in effect for so long
a period as the Representative may reasonably request for the distribution of
the Shares.
(g) The Trust will furnish to its shareholders annual reports containing
financial statements certified by independent public accountants and, at least
semi-annually, reports containing summary financial information in reasonable
detail which may be unaudited. During the period of five years from the date
hereof, the Trust will deliver to the Representative and, upon request, to each
of the other Underwriters, copies of each annual report of the Trust and each
other report furnished by the Trust to its shareholders; and will deliver to
the Representative, as soon as they are available, copies of any other reports
(financial or other) which the Trust shall publish or otherwise make available
to any of its security holders as such, and as soon as they are available,
copies of any reports and financial statements furnished to or filed with the
Commission or any national securities exchange.
(h) The Trust will use the net proceeds received by it from the sale of the
Shares in the manner specified in the Prospectus under "Use of Proceeds".
7
<PAGE>
(i) Between the date of this Agreement and the termination of any trading
restrictions or the First Closing Date, whichever is later, the Trust will not,
without the Representative's prior consent, offer or sell, or enter into any
agreement to sell, any equity or equity-related securities of the Trust other
than the Shares.
(j) If, at the time that the Registration Statement becomes effective, any
information shall have been omitted therefrom in reliance upon Rule 430A of the
Rules and Regulations, then immediately following the execution of the Pricing
Agreement, the Trust will prepare, and file or transmit for filing with the
Commission in accordance with such Rule 430A and Rule 497(h) of the Rules and
Regulations, copies of an amended Prospectus, or, if required by such Rule
430A, a post-effective amendment to the Registration Statement (including an
amended prospectus), containing all information so omitted.
5. Payment of Expenses. The Trust will pay (directly or by reimbursement) all
expenses incident to the performance of its obligations under this Agreement,
including but not limited to all expenses and taxes incident to delivery of the
Shares to the Representative, all expenses incident to the registration of the
Shares under the 1933 Act and the 1940 Act and the printing of copies of the
Registration Statement, each preliminary prospectus, each Omitting Prospectus,
the Prospectus, any amendments or supplements thereto, all expenses incident to
the preparation, printing and delivery of all marketing materials and any
audio-visual materials made available to all Underwriters, all communications
to potential investors, the "Blue Sky" memorandum, this Agreement and the
Pricing Agreement and furnishing the same to the Underwriters and dealers
except as otherwise provided in Sections 4(c) and 4(d), the fees and
disbursements of the Trust's counsel and accountants, all filing and printing
fees and expenses (including legal fees and disbursements of counsel for the
Underwriters) incurred in connection with qualification of the Shares for sale
under the laws of such jurisdictions as the Representative may designate, all
fees and expenses paid or incurred in connection with filings made with the
National Association of Securities Dealers, Inc., the fees and expenses
incurred in connection with the listing of the Shares on the New York Stock
Exchange, the costs of preparing Share certificates, the costs and fees of any
registrar or transfer agent and all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section.
6. Indemnification and Contribution. (a) The Trust and the Adviser, jointly
and severally, agree to indemnify and hold harmless each Underwriter, and each
person, if any, who controls any Underwriter within the meaning of Section 15
of the 1933 Act, against any losses, claims, damages, liabilities or expenses
(including the reasonable cost of investigating and defending against any
claims therefor and counsel fees incurred in connection therewith), joint or
several, as incurred, which may be based upon the 1933 Act, or any other
statute or at common law, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), including the information deemed to be part of the
Registration Statement pursuant to Rule 430A(b) of the Rules and Regulations,
if applicable, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue statement
of a material fact contained in any Omitting Prospectus, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, unless such statement or omission was made in
reliance upon, and in conformity with, written information furnished to the
Trust by any Underwriter, directly or through the Representative, specifically
for use in the preparation thereof; provided, however, that the Trust or the
Adviser shall not be liable with respect to any claims made against any
Underwriter or any such controlling person under this subsection unless such
Underwriter or controlling person shall have notified the Trust or the Adviser
in writing within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have been served
upon such Underwriter or controlling person, but failure to notify the Trust or
the Adviser of any such claim shall not relieve either of them
8
<PAGE>
from any liability which they may have to such Underwriter or controlling
person otherwise than on account of the indemnity agreement contained in this
paragraph. The Trust and the Adviser will be entitled to participate at their
own expense in the defense, or, if they so elect, to assume the defense of any
suit brought to enforce any such liability, but, if the Trust or the Adviser
elects to assume the defense, such defense shall be conducted by counsel chosen
by it or them. In the event the Trust or the Adviser elects to assume the
defense of any such suit and retain such counsel, the Underwriter or
Underwriters or controlling person or persons, defendant or defendants in the
suit, may retain additional counsel but shall bear the fees and expenses of
such counsel unless (i) the Trust or the Adviser shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include such Underwriter or Underwriters or controlling person or persons and
the Trust or the Adviser and such Underwriter or Underwriters or controlling
person or persons have been advised by counsel that one or more legal defenses
may be available to it or them which may not be available to the Trust or the
Adviser, in which case the Trust and the Adviser shall not be entitled to
assume the defense of such suit notwithstanding their obligation to bear the
fees and expenses of such counsel. The Trust and the Adviser shall not be
liable to indemnify any person for any settlement of any such claim effected
without the Trust's and the Adviser's written consent. This indemnity agreement
will be in addition to any liability which the Trust or the Adviser might
otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Trust and the Adviser, their respective trustees and directors, each of the
Trust's officers who signed the Registration Statement and each person, if any,
who controls the Trust or the Adviser within the meaning of Section 15 of the
1933 Act against any losses, claims, damages, liabilities or expenses
(including the reasonable cost of investigating and defending against any
claims therefor and counsel fees incurred in connection therewith), joint or
several, as incurred, which may be based upon the 1933 Act, or any other
statute or at common law, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto) including the information deemed to be part of the
Registration Statement pursuant to Rule 430A(b) of the Rules and Regulations,
if applicable, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue statement
of a material fact contained in any Omitting Prospectus, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or the
omission or alleged omission therefrom of a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, but only insofar as any such statement or omission
was made in reliance upon, and in conformity with, written information
furnished to the Trust or the Adviser by such Underwriter, directly or through
the Representative, specifically for use in the preparation thereof; provided,
however, that an Underwriter shall not be liable with respect to any claims
made against the Trust or the Adviser or any person against whom the action is
brought unless the Trust or the Adviser or such person shall have notified such
Underwriter in writing within a reasonable time after the summons or other
first legal process giving information of the nature of the claim shall have
been served upon the Trust or the Adviser or such person, but failure to notify
such Underwriter of such claim shall not relieve it from any liability which it
may have to the Trust or the Adviser or such person otherwise than on account
of its indemnity agreement contained in this paragraph. Such Underwriter shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense of any suit brought to enforce any such
liability, but, if such Underwriter elects to assume the defense, such defense
shall be conducted by counsel chosen by it. In the event that any Underwriter
elects to assume the defense of any such suit and retain such counsel, the
Trust, the Adviser, said officers, trustees and directors and any other
Underwriter or Underwriters or controlling person or persons, defendant or
defendants in the suit, shall bear the fees and expenses of any additional
counsel retained by them, respectively, unless (i) such Underwriter shall have
specifically authorized the retaining of such counsel or (ii) the parties to
such suit include any indemnified party and such Underwriter, and any such
indemnified party has been advised by counsel that one or more legal defenses
may be available to it which may not be available to such Underwriter, in which
case such Underwriter shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of such counsel.
The Underwriter against whom indemnity
9
<PAGE>
may be sought shall not be liable to indemnify any person for any settlement of
any such claim effected without such Underwriter's consent. This indemnity
agreement will be in addition to any liability which such Underwriter might
otherwise have.
(c) In addition to the foregoing indemnification provided for in this Section
6, the Trust and the Adviser, jointly and severally, also agree to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act, to the same
extent as the indemnity from the Trust and the Adviser to each Underwriter
contained in paragraph (a) of this Section 6, with respect to any advertisement
or other marketing material prepared by the Trust or the Adviser for use by the
Underwriters and other securities firms in the public offering of the Shares.
If any action or claim shall be brought or asserted against the Underwriter (or
any such controlling person), in respect to which indemnity may be sought
against the Trust or the Adviser pursuant to the provisions of this paragraph,
the Trust and the Adviser shall have the rights and duties given to the Trust
and the Adviser, and the Underwriters and any such controlling person shall
have the rights and duties given to the Underwriters, by paragraph (a) of this
Section 6.
(d) If the indemnification provided for in this Section 6 is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above in respect of any losses, claims, damages, liabilities or expenses
(or actions in respect thereof) referred to herein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (or
actions in respect thereof), as incurred, in such proportion as is appropriate
to reflect the relative benefits received by the Trust on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party, as incurred, in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Trust and the Adviser on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Trust and the Adviser on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by
the Trust bear to the total underwriting discounts and commissions received by
the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Trust and the Adviser or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Trust, the Adviser, and the
Underwriters agree that it would not be just and equitable if contribution were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to above shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute are
several in proportion to their respective underwriting obligations and not
joint.
10
<PAGE>
7. Survival of Indemnities, Representations, Warranties, etc. The respective
indemnities, covenants, agreements, representations, warranties and other
statements of the Trust, the Adviser and the several Underwriters, as set forth
in this Agreement or made by them respectively, pursuant to this Agreement,
shall remain in full force and effect, regardless of any investigation made by
or on behalf of any Underwriter, the Trust or the Adviser or any of their
officers, trustees or directors or any controlling person, and shall survive
delivery of and payment for the Shares.
8. Conditions of Underwriters' Obligations. The respective obligations of the
several Underwriters hereunder shall be subject to the accuracy, at and (except
as otherwise stated herein) as of the date hereof, the Representation Date, the
First Closing Date and the Option Closing Date, of the representations and
warranties made herein by the Trust and the Adviser, to the accuracy of the
statements of the Trust's officers or trustees in any certificate furnished
pursuant to the provisions hereof, to compliance at and as of such Closing Date
by the Trust and the Adviser, with their covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to such
Closing Date, and to the following additional conditions:
(a) The Registration Statement shall become effective not later than 5:30
P.M., New York Time, on the date hereof or, with the consent of the
Representative, at a later time and date, not later, however, than 5:30 P.M. on
the first business day following the date hereof, or at such later date as may
be approved by a majority in interest of the Underwriters, and at such Closing
Date (i) no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Trust, the Adviser or the Representative, threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the reasonable satisfaction of the
Representative, and (ii) there shall not have come to the attention of the
Representative any facts that would cause it to believe that the Prospectus, at
the time it was required to be delivered to a purchaser of the Shares,
contained any untrue statement of a material fact or omitted to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading. If the Trust
has elected to rely upon Rule 430A of the Rules and Regulations, the price of
the Shares and any price related information previously omitted from the
effective Registration Statement pursuant to Rule 430A shall have been
transmitted to the Commission for filing pursuant to Rule 497(h) of the Rules
and Regulations within the prescribed time period, and before the First Closing
Date the Trust shall have provided evidence satisfactory to the Representative
of such timely filing, or a post-effective amendment providing such information
shall have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the Rules and Regulations.
(b) At the time of execution of this Agreement, the Representative shall have
received from Price Waterhouse a letter, dated the date of such execution, in
form and substance previously approved by the Representative, and to the effect
that:
(i) They are independent public accountants with respect to the Trust within
the meaning of the 1933 Act and the 1940 Act and the Rules and Regulations as
they relate to registration statements on Form N-2.
(ii) In their opinion, the statement of assets and liabilities examined by
them and included in the Registration Statement complies as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
the 1940 Act and the Rules and Regulations as they relate to registration
statements on Form N-2.
(iii) They have performed specified procedures, not constituting an audit,
including a reading of the latest available interim financial statements of the
Trust, if any, a reading of the minute books of the Trust, inquiries of
officials of the Trust responsible for financial and accounting matters and
such other inquiries and procedures as may be specified in such letter, and on
the basis of such inquiries and procedures nothing came to their attention that
11
<PAGE>
caused them to believe that at the date of the latest available statement of
assets and liabilities read by such accountants, or at a subsequent specified
date not more than five days prior to the date of such letter, there was any
change in the capital shares or net assets of the Trust as compared with
amounts shown on the statement of assets and liabilities included in the
Prospectus.
(c) The Representative shall have received from Price Waterhouse a letter,
dated the First Closing Date, to the effect that such accountants reaffirm, as
of such First Closing Date, and as though made on such First Closing Date, the
statements made in the letter furnished by such accountants pursuant to
paragraph (b) of this Section 8, except that the specified date will be a date
not more than five days prior to the Closing Date.
(d) The Representative shall have received from Sheldon Curtis, Esq., General
Counsel for the Trust, an opinion, dated the First Closing Date, to the effect
that:
(i) The Trust has been duly organized and is validly existing as a business
trust in good standing under the laws of The Commonwealth of Massachusetts.
(ii) The Trust has power and authority to own, lease and operate its
properties and conduct its business as described in the Registration Statement
and the Prospectus.
(iii) The Trust is duly qualified to transact business and is in good
standing in each jurisdiction in which such qualification is required.
(iv) The Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Trust pursuant to this Agreement against payment of the consideration set forth
in the Pricing Agreement, will be validly issued and fully paid and non-
assessable (except for certain possible liability of shareholders described in
the Prospectus under "Description of Shares--General"); the issuance of the
Shares is not subject to preemptive rights; and the authorized capital shares
of the Trust conform in all material respects to the description thereof in the
Registration Statement.
(v) Each of this Agreement and the Pricing Agreement has been duly
authorized, executed and delivered by the Trust and complies with all
applicable provisions of the 1940 Act.
(vi) The Registration Statement is effective under the 1933 Act and, to the
best of such counsel's knowledge and information, no stop order suspending the
effectiveness of the Registration Statement has been issued under the 1933 Act
and no order suspending the Trust's registration has been issued under Section
8(e) of the 1940 Act, or proceedings therefor initiated or threatened by the
Commission.
(vii) At the time the Registration Statement became effective and at the
Representation Date, the Registration Statement (other than the statement of
assets and liabilities included therein, as to which no opinion need be
rendered) complied as to form in all material respects with the requirements of
the 1933 Act and the 1940 Act and the Rules and Regulations; and nothing has
come to such counsel's attention that would lead him to believe that the
Registration Statement, at the time it became effective or at the
Representation Date, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, at the
Representation Date (unless the term "Prospectus" refers to the Prospectus
which has been provided to the Underwriters by the Trust for use in connection
with the offering of the Shares which differs from the Prospectus on file at
the Commission at the time the Registration Statement becomes effective, in
which case at the time it is provided to the Underwriters for such use) or at
the First Closing Date, included an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statement
therein, in light of the circumstances under which they were made, not
misleading.
12
<PAGE>
(viii) To the best of such counsel's knowledge and information, there are no
legal or governmental proceedings pending or threatened against the Trust which
are required to be disclosed in the Registration Statement, other than those
disclosed therein.
(ix) To the best of such counsel's knowledge and information, there are no
contracts, indentures, mortgages, loan agreements, notes, leases or other
instruments of the Trust required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed as exhibits thereto, the descriptions
thereof or references thereto are correct, and no default exists in the due
performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note,
lease or other instrument so described, referred to or filed.
(x) No consent, approval, authorization or order of any court or governmental
authority or agency is required in connection with the sale of the Shares to
the Underwriters, except such as has been obtained under the 1933 Act, the 1940
Act or the Rules and Regulations or such as may be required under state
securities laws; and to the best of such counsel's knowledge and information,
the execution and delivery of this Agreement, the Pricing Agreement, the
Management Agreement and the Custodian Agreement and the consummation of the
transactions contemplated herein and therein will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of
the Trust pursuant to, any contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which the Trust is a party or by which it may be
bound or to which any of the property or assets of the Trust is subject, nor
will such action result in any violation of the provisions of the Declaration
of Trust, as amended, or By-Laws of the Trust, or any law, administrative
regulation or administrative or court decree.
(xi) The Management Agreement and the Custodian Agreement each has been duly
authorized and approved by the Trust and complies with all applicable
provisions of the 1940 Act, and each of said agreements has been duly executed
and delivered by the Trust.
(xii) The Trust is registered with the Commission under the 1940 Act as a
closed-end diversified management investment company, and all required action
has been taken by the Trust under the 1933 Act, the 1940 Act and the Rules and
Regulations to make the public offering and consummate the sale of the Shares
pursuant to this Agreement; the provisions of the Declaration of Trust, as
amended, and By-Laws of the Trust comply as to form in all material respects
with the requirements of the 1940 Act.
(xiii) The information in the Prospectus under the caption "Taxation", to the
extent that it constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is correct.
(e) The representative shall have received from Sheldon Curtis, Esq., General
Counsel for the Adviser, an opinion dated the First Closing Date to the effect
that:
(i) The Adviser has been duly incorporated and is validly existing and in
good standing as a corporation under the laws of the State of Delaware with
corporate power and authority to conduct its business as described in the
Prospectus.
(ii) The Adviser is duly registered as an investment adviser under the
Advisers Act and is not prohibited by the Advisers Act or the 1940 Act, or the
rules and regulations under such Acts, from acting under the Management
Agreement for the Trust as contemplated by the Prospectus.
(iii) This Agreement and the Management Agreement each has been duly
authorized, executed and delivered by the Adviser, and the Management Agreement
constitutes a valid and binding obligation of the Adviser, enforceable in
accordance with its terms, subject, as
13
<PAGE>
to enforcement, to bankruptcy, insolvency, reorganization or other laws
relating to or affecting creditors' rights and to general equity principles,
and, to the best of such counsel's knowledge and information, neither the
execution and delivery of this Agreement or the Management Agreement, nor the
performance by the Adviser of its obligations hereunder or thereunder, will
conflict with, or result in a breach of, any of the terms and provisions of, or
constitute, with or without giving notice or lapse of time or both, a default
under, any agreement or instrument to which the Adviser is a party or by which
the Adviser is bound, or any law, order, rule or regulation applicable to the
Adviser of any jurisdiction, court, federal or state regulatory body,
administrative agency or other governmental body, stock exchange or securities
association having jurisdiction over the Adviser or its properties or
operations.
(iv) To the best of such counsel's knowledge and information, the description
of the Adviser in the Registration Statement and the Prospectus does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated herein or necessary to make the statements therein
not misleading.
(f) The Representative shall have received from Brown & Wood, counsel for the
Underwriters, their opinion or opinions dated the First Closing Date with
respect to the organization of the Trust, the validity of the Shares,
registration under and compliance with the 1933 Act and the 1940 Act, this
Agreement and the Pricing Agreement, the Registration Statement and the
Prospectus and such other related matters as the Representative may require,
and the Trust shall have furnished to such counsel such documents as they may
request for the purpose of enabling them to pass upon such matters.
In giving their opinions, Sheldon Curtis, Esq. and Brown & Wood may rely as
to matters involving the laws of The Commonwealth of Massachusetts upon the
opinion of Lane & Altman. In giving their opinions, Sheldon Curtis, Esq. and
Brown & Wood may rely (i) as to the qualification of the Trust and the Adviser
to do business in any state or jurisdiction, upon certificates of appropriate
government officials, and (ii) as to matters of fact, upon certificates and
written statements of officers and employees of and accountants for the Trust
and the Adviser.
(g) At the First Closing Date (i) the Registration Statement and the
Prospectus shall contain all statements which are required to be stated therein
in accordance with the 1933 Act, the 1940 Act and the Rules and Regulations and
in all material respects shall conform to the requirements of the 1933 Act, the
1940 Act and the Rules and Regulations and neither the Registration Statement
nor the Prospectus shall contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and no action, suit or proceeding at
law or in equity shall be pending or, to the knowledge of the Trust or the
Adviser, threatened against the Trust or the Adviser which would be required to
be set forth in the Prospectus other than as set forth therein, (ii) there
shall not have been, since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material adverse
change in the condition, financial or otherwise, of the Trust or in its
earnings, business affairs or business prospects, whether or not arising in the
ordinary course of business, from that set forth in the Registration Statement
and Prospectus, (iii) the Adviser shall have the financial resources available
to it necessary for the performance of its services and obligations as
contemplated in the Registration Statement and the Prospectus, (iv) no
proceedings shall be pending or, to the knowledge of the Trust or the Adviser,
threatened against the Trust or the Adviser before or by any Federal, state or
other commission, board or administrative agency wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, financial condition or income of either the Trust or the Adviser
other than as set forth in the Prospectus, (v) neither the Trust nor the
Adviser shall be in material default in the performance or observance of any
contract to which it is a party, (vi) no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act and no proceeding therefor shall have been instituted or
14
<PAGE>
threatened by the Commission and (vii) no proceedings shall have been
instituted or threatened by the Commission which would adversely affect the
Trust's standing as a registered investment company under the 1940 Act or the
Adviser's standing as a registered investment adviser under the Advisers Act;
and the Representative shall have received, at such First Closing Date, a
certificate of the President or a Vice President and the chief financial or
accounting officer of the Trust and of the Adviser, dated as of such First
Closing Date, evidencing compliance with the appropriate provisions of this
subsection (g).
(h) The Representative shall have received certificates, dated the First
Closing Date (i) of the President or a Vice President and the chief financial
or accounting officer of the Trust to the effect that the representations and
warranties of the Trust contained in Section 2(a) are true and correct with the
same force and effect as though expressly made at and as of such First Closing
Date and (ii) of the Chief Executive Officer, President or a Vice President and
the chief financial or accounting officer of the Adviser to the effect that the
representations and warranties of the Adviser contained in Sections 2(a) and
(b) are true and correct with the same force and effect as though expressly
made at and as of such First Closing Date.
(i) The Trust and the Adviser shall have furnished to the Representative such
additional certificates as the Representative may have reasonably requested as
to the accuracy, at and as of the First Closing Date, of the representations
and warranties made herein by them as to compliance at and as of the First
Closing Date by them with their covenants and agreements herein contained and
other provisions hereof to be satisfied at or prior to the First Closing Date
and as to other conditions to the obligations of the Underwriters hereunder.
(j) In the event the Underwriters exercise the option granted in Section 3
hereof to purchase all or any portion of the Optional Shares, the
representations and warranties of the Trust and the Adviser contained herein
and the statements in any certificates furnished by the Trust and the Adviser
hereunder shall be true and correct as of the Option Closing Date, and the
Representative shall have received:
(i) A letter from Price Waterhouse, in form and substance satisfactory to the
Representative and dated the Option Closing Date, substantially the same in
scope and substance as the letter furnished to the Representative pursuant to
Section 8(b), except that the specified date in the letter furnished pursuant
to this Section 8(j) shall be a date not more than five days prior to the
Option Closing Date.
(ii) The opinion of Sheldon Curtis, Esq., General Counsel for the Trust, in
form and substance satisfactory to counsel for the Underwriters, dated the
Option Closing Date, relating to the Optional Shares and otherwise to the same
effect as the opinion required by Section 8(d).
(iii) The opinion of Sheldon Curtis, Esq., General Counsel for the Adviser,
in form and substance satisfactory to counsel for the Underwriters, dated the
Option Closing Date, to the same effect as the opinion required by Section
8(e).
(iv) The opinion of Brown & Wood, counsel for the Underwriters, dated the
Option Closing Date, relating to the Optional Shares and otherwise to the same
effect as the opinion required by Section 8(f).
(v) A certificate, dated the Option Closing Date, of the President or a Vice
President and the chief financial or accounting officer of the Trust confirming
that the certificate or certificates delivered at the First Closing Date
pursuant to Section 8(g) and Section 8(h) remains or remain true as of the
Option Closing Date.
(vi) A certificate, dated the Option Closing Date, of the Adviser confirming
that the certificate or certificates delivered at the First Closing Date
pursuant to Section 8(g) and Section 8(h) remains or remain true as of the
Option Closing Date.
15
<PAGE>
(vii) Such additional certificates, dated the Option Closing Date, as the
Representative may have reasonably requested pursuant to Section 8(i).
If any of the conditions hereinabove provided for in this Section shall not
have been satisfied when and as required by this Agreement, this Agreement may
be terminated by the Representative by notifying the Trust of such termination
in writing or by telegram at or prior to the First Closing Date, but the
Representative shall be entitled to waive any of such conditions.
9. Termination. This Agreement may be terminated by the Representative by
notice to the Trust if at or prior to the First Closing Date (i) 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 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 Representative, makes it impracticable or inadvisable to
offer or sell the Shares; (iii) there shall have been, since the date of this
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 Representative, makes it impracticable or inadvisable to
offer or deliver the Shares on the terms contemplated by the Prospectus.
10. Reimbursement of Underwriters. Notwithstanding any other provisions
hereof, if this Agreement shall be terminated by the Representative under
Section 8, Section 9 or Section 12, the Trust and the Adviser will bear and pay
the expenses specified in Section 5 hereof and, in addition to their
obligations pursuant to Section 6, hereof, except when the Representative
terminates this Agreement pursuant to clause (i) or (ii) of Section 9, the
Trust and the Adviser will reimburse the reasonable out-of-pocket expenses of
the several Underwriters (including reasonable fees and disbursements of
counsel for the Underwriters) incurred in connection with this Agreement and
the proposed purchase of the Shares, and promptly upon demand the Trust and the
Adviser will pay such amounts to you as Representative. In addition, the
provisions of Section 6 shall survive any such termination.
11. Default By Underwriters. If any Underwriter or Underwriters shall default
in its or their obligations to purchase Firm Shares hereunder on the First
Closing Date and the aggregate number of Firm Shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed 10%
of the total number of Shares which the Underwriters are obligated to purchase
at the First Closing Date, the other Underwriters shall be obligated severally,
in proportion to their respective commitments hereunder, to purchase the Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase. If any Underwriter or Underwriters shall so default and the aggregate
number of Firm Shares with respect to which such default or defaults occur is
more than 10% of the total number of shares underwritten and arrangements
satisfactory to the Representative and the Trust for the purchase of such
shares of Firm Shares by other persons are not made within 48 hours after such
default, this Agreement shall terminate.
If the remaining Underwriters or substituted underwriters are required hereby
or agree to take up all or part of the Firm Shares of a defaulting Underwriter
or Underwriters as provided in this Section 11, (i) the Trust shall have the
right to postpone the First Closing Date for a period of not more than five
full business days, in order that the Trust may effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or
in any other documents or arrangements, and the Trust agrees promptly to file
any amendments to the Registration Statement or supplements to the Prospectus
which may thereby be made necessary, and (ii) the respective numbers of Firm
Shares to be purchased by the remaining Underwriters or substituted
underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Trust or the Underwriters for
16
<PAGE>
damages occasioned by its default hereunder. Any termination of this Agreement
pursuant to this Section 11 shall be without liability on the part of any non-
defaulting Underwriter or the Trust, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.
12. Default By the Trust. If the Trust shall fail at the First Closing Date
to sell and deliver the number of Shares which it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the
part of any non-defaulting party, other than obligations under Section 10
hereof. No action taken pursuant to this Section 12 shall relieve the Trust
from liability, if any, in respect of such default.
13. Notices. All communications hereunder shall be in writing and, if sent to
the Underwriters shall be mailed, delivered or telegraphed and confirmed to
you, as their Representative, at Two World Trade Center, 64th Floor, New York,
New York 10048, except that notices given to an Underwriter pursuant to Section
6 hereof shall be sent to such Underwriter at the address furnished by the
Representative or if sent to the Trust or the Adviser shall be mailed,
delivered or telegraphed and confirmed at Two World Trade Center, New York, New
York 10048, attention: Sheldon Curtis, Esq., General Counsel.
14. Successors. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters, the Trust, the Adviser and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right,
remedy or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Trust and the Adviser
contained in this Agreement shall also be for the benefit of the person or
persons, if any, who control any Underwriter or Underwriters within the meaning
of Section 15 of the Act, and the indemnities of the several Underwriters shall
also be for the benefit of each trustee or director of the Trust and the
Adviser, each of the Trust's officers who has signed the Registration Statement
and the person or persons, if any, who control the Trust and the Adviser within
the meaning of Section 15 of the 1933 Act.
15. Liability of Shareholders, Trustees and Officers. This Agreement is
executed by or on behalf of the trustees of the Trust solely in their capacity
as such trustees, and shall not constitute their personal obligation either
jointly or severally in their individual capacities. No trustee, officer or
shareholder of the Trust shall be liable for any obligations of the Trust under
this instrument and the Trust shall be solely liable therefor; all parties
hereto shall look solely to the Trust for the payment of any claim, or the
performance of any obligation, hereunder.
16. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed in said state. Specified times of day refer to New York
City time.
17
<PAGE>
17. Authority of the Representative. In connection with this Agreement, the
Representative will act for and on behalf of the several Underwriters, and any
action taken under this Agreement by the Representative, as representative of
the several Underwriters, will be binding on all the Underwriters.
If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
INTERCAPITAL INSURED MUNICIPAL SECURITIES
By: -------------------------------------
Authorized Signature
DEAN WITTER INTERCAPITAL INC.
By:--------------------------------------
Authorized Signature
Accepted and delivered,
as of the date first above written:
DEAN WITTER DISTRIBUTORS INC.
Acting on its own behalf and as
Representative of the several Underwriters
referred to in the foregoing Agreement.
By:-------------------------------------
Authorized Signature
18
<PAGE>
SCHEDULE A
NUMBER OF
FIRM SHARES
NAME TO BE PURCHASED
- ---- ---------------
Dean Witter Distributors Inc. ............................... 5,285,000
Bear, Stearns & Co. Inc. .................................... 155,000
CS First Boston Corporation ................................. 155,000
Alex. Brown & Sons Incorporated ............................. 155,000
A. G. Edwards & Sons, Inc. ................................. 155,000
Kemper Securities Group, Inc. .............................. 155,000
Lehman Brothers Inc. ....................................... 155,000
Oppenheimer & Co., Inc. .................................... 155,000
Prudential Securities Incorporated .......................... 155,000
J. C. Bradford & Co. ....................................... 100,000
Cowen & Co. ................................................ 100,000
Dain Bosworth Incorporated .................................. 100,000
Legg Mason Wood Walker Inc. ................................. 100,000
McDonald & Company Securities, Inc. ......................... 100,000
Morgan Keegan & Company, Inc. ............................... 100,000
Piper, Jaffray & Hopwood Incorporated ....................... 100,000
Raymond James & Associates, Inc. ............................ 100,000
The Robinson-Humphrey Company, Inc. ........................ 100,000
Tucker Anthony Incorporated ................................ 100,000
Advest, Inc. ............................................... 65,000
Robert W. Baird & Co. Incorporated .......................... 65,000
The Chicago Corporation ..................................... 65,000
Crowell, Weedon & Co. ...................................... 65,000
Doft & Co., Inc. ........................................... 65,000
Fahnestock & Co. Inc. ...................................... 65,000
First Albany Corporation ................................... 65,000
First of Michigan Corporation .............................. 65,000
Gruntal & Co., Incorporated ................................ 65,000
Hamilton Investments, Inc. ................................. 65,000
Hanifen, Imhoff Inc. ....................................... 65,000
Interstate/Johnson Lane Corporation ......................... 65,000
Janney Montgomery Scott Inc. ............................... 65,000
Ladenburg, Thalmann & Co. Inc. ............................. 65,000
Needham & Company, Inc. .................................... 65,000
The Ohio Company ............................................ 65,000
The Principal/Eppler, Guerin & Turner Inc. ................. 65,000
Rauscher Pierce Refsnes, Inc. .............................. 65,000
Roney & Co. ................................................ 65,000
Scott & Stringfellow, Inc. ................................. 65,000
Stephens Inc. .............................................. 65,000
Stifel, Nicolaus & Company, Incorporated ................... 65,000
Wedbush Morgan Securities .................................. 65,000
George K. Baum & Company ................................... 30,000
D. A. Davidson & Co. Incorporated .......................... 30,000
Dominick & Dominick, Incorporated .......................... 30,000
Foley Mufson Howe & Company ................................ 30,000
Gabelli & Company, Inc. .................................... 30,000
Gerard Klauer Mattison & Co., Inc. ......................... 30,000
Johnston, Lemon & Co. Incorporated ......................... 30,000
John G. Kinnard and Company, Incorporated .................. 30,000
Mesirow & Company .......................................... 30,000
Parker/Hunter Incorporated ................................. 30,000
Paulson Investment Company Inc. ............................ 30,000
Pennsylvania Merchant Group Ltd. ........................... 30,000
Rodman & Renshaw, Inc. ..................................... 30,000
The Seidler Companies Incorporated ......................... 30,000
Southwest Securities, Inc. ................................. 30,000
Van Kasper & Company ....................................... 30,000
---------
Total.............................................. 9,500,000
---------
---------
19
<PAGE>
EXHIBIT A
INTERCAPITAL INSURED MUNICIPAL SECURITIES
9,500,000 COMMON SHARES OF BENEFICIAL INTEREST
(PAR VALUE $.01 PER SHARE)
PRICING AGREEMENT
-----------------
February 18, 1994
DEAN WITTER DISTRIBUTORS INC.
As Representative of the several Underwriters
Two World Trade Center
New York, New York 10048
Dear Sirs:
Reference is made to the Underwriting Agreement, dated February 18, 1994 (the
"Underwriting Agreement"), relating to the purchase by the several Underwriters
named in Schedule A thereto, for whom Dean Witter Distributors Inc. is acting
as representative (the "Representative"), of the above Common Shares of
Beneficial Interest (the "Firm Shares") of InterCapital Quality Municipal
Securities (the "Trust") and relating to the option granted to such
Underwriters to purchase up to an additional 1,425,000 Common Shares of
Beneficial Interest of the Trust to cover over-allotments in connection with
the sale of the Firm Shares (the "Optional Shares"). The Firm Shares and all or
any part of the Optional Shares are collectively herein referred to as the
"Shares."
Pursuant to Section 3 of the Underwriting Agreement, the Trust agrees with
each Underwriter as follows:
1. The initial public offering price per share for the Shares, determined as
provided in Section 3, shall be $15.00.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $14.06, being an amount equal to the initial public
offering price set forth above less $.94 per share.
This Agreement is executed by or on behalf of the trustees of the Trust
solely in their capacity as such trustees, and shall not constitute their
personal obligation either jointly or severally in their individual capacities.
No trustee, officer or shareholder of the Trust shall be liable for any
obligations of the Trust under this instrument and the Trust shall be solely
liable therefor; all parties hereto shall look solely to the Trust estate for
the payment of any claim, or the performance of any obligation, hereunder.
A-1
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Trust a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Trust in accordance with its terms.
Very truly yours,
INTERCAPITAL INSURED MUNICIPAL SECURITIES
By: -------------------------------------
Authorized Signature
Accepted and delivered,
as of the date first above written:
DEAN WITTER DISTRIBUTORS INC.
Acting on its own behalf and as Representative
of the several Underwriters referred to in the
within-mentioned Underwriting Agreement.
By:---------------------------------------------
Authorized Signature
A-2
INTERCAPITAL INSURED MUNICIPAL SECURITIES
February 17, 1994
InterCapital Insured Municipal Securities
Two World Trade Center
New York, New York 10048
Dear Sirs:
With respect to the Registration Statement on Form N-2 (File No. 33-50663)
(the "Registration Statement") filed by InterCapital Quality Municipal
Securities, a Massachusetts business trust (the "Fund"), with the Securities
and Exchange Commission for the purpose of registering under the Securities Act
of 1933, as amended, 10,925,000 common shares of Beneficial Interest of $0.01
par value of the Fund (the "Common Shares"), I, as your counsel, have examined
such Fund records, certificates and other documents and reviewed such questions
of law as I have considered necessary or appropriate for the purposes of this
opinion, and on the basis of such examination and review, I advise you that, in
my opinion, proper trust proceedings have been taken by the Fund so that the
Common Shares have been validly authorized; and when the Common Shares have
been issued and sold in accordance with the terms of the Underwriting Agreement
referred to in the Registration Statement, the Common Shares will be validly
issued, fully paid and non-assessable.
As to matters of Massachusetts law contained in the foregoing opinion, I
have relied upon the opinion of Lane & Altman, dated February 17, 1994.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to me under the caption "Legal
Opinions and Experts" in the Prospectus forming a part of the Registration
Statement. In giving this consent, I do not thereby admit that I am within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder.
Very truly yours,
Sheldon Curtis
General Counsel
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2 of
our report dated February 17, 1994, relating to the February 10, 1994 Statement
of Assets and Liabilities of Intercapital Insured Municipal Securities, which
appears in such Prospectus. We also consent to the reference to us under the
heading "Legal Opinions and Experts" in such Prospectus.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York 10036
February 17, 1994
February 9, 1994
InterCapital Insured Municipal Securities
Two World Trade Center
New York, New York 10048
Gentlemen:
We are purchasing from you today 7,113 shares of your beneficial interest,
of $0.01 par value, at a price of $14.06 per share, for an aggregate price of
$100,008.78 to provide the initial capital you require pursuant to Section 14
of the Investment Company Act of 1940 in order to make a public offering of
your shares.
We hereby represent that we are acquiring said shares for investment and
not for distribution or resale to the public.
We hereby further represent that in the event we redeem such shares prior
to complete amortization by you of your organization expenses, the amount we
receive upon redemption may be reduced by the proportionate amount which the
total unamortized balance bears to the number of shares being redeemed. For
this purpose, the proportionate amount is based on the ratio of the number of
shares originally issued by you in connection with the furnishing of the
initial capital.
Very truly yours,
DEAN WITTER INTERCAPITAL INC.
By
