-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B4km1vgR1I1bawV3YHGpzu7LxOy74Kscy73UwNuQjZcfewGt/pCIqz8UcLMH7b8G Hkju3i4/j5Wm5Ma7JD94eg== 0000950135-99-002171.txt : 19990429 0000950135-99-002171.hdr.sgml : 19990429 ACCESSION NUMBER: 0000950135-99-002171 CONFORMED SUBMISSION TYPE: N-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLONIAL MUNICIPAL INCOME TRUST CENTRAL INDEX KEY: 0000809844 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 333-77261 FILM NUMBER: 99603534 FILING VALUES: FORM TYPE: N-2 SEC ACT: SEC FILE NUMBER: 811-04992 FILM NUMBER: 99603535 BUSINESS ADDRESS: STREET 1: ONE FINANCIAL CTR CITY: BOSTON STATE: MA ZIP: 02111 BUSINESS PHONE: 6174263750 N-2 1 COLONIAL MUNICIPAL INCOME TRUST 1 AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999 SECURITIES ACT FILE NO. 333- INVESTMENT COMPANY ACT FILE NO. 811-4992 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-2 (Check appropriate box or boxes) REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] ----------- Post-Effective Amendment No. [ ] ----------- and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 8 [X] --------------- COLONIAL MUNICIPAL INCOME TRUST (Exact Name of Registrant as Specified in Charter) One Financial Center, Boston, Massachusetts 02111 (Address of Principal Executive Offices) (617) 426-3750 (Registrant's Telephone Number, including Area Code) Name and Address of Agent for Service Copy to William J. Ballou, Esq. John M. Loder, Esq. Colonial Management Associates, Inc. Ropes & Gray One Financial Center One International Place Boston, Massachusetts 02111-2621 Boston, Massachusetts 02110-2624 APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] It is proposed that this filing will become effective (check appropriate box): [ ] when declared effective pursuant to Section 8(c) CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF BEING REGISTERED REGISTERED (1) UNIT (1) PRICE (1) REGISTRATION FEE (2) - ---------------------- -------------------- --------------------- --------------------- -------------------- Municipal Auction 3,600 $25,000 $90,000,000 $25,020 Rate Cumulative Preferred Shares No Par Value Per Share
(1) Estimated solely for purposes of calculating the registration fee. (2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA. 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 further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 2 COLONIAL MUNICIPAL INCOME TRUST MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES CROSS REFERENCE SHEET ITEMS REQUIRED BY FORM N-2 PART A
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION - -------- ------------ ------------------- 1 Outside Front Cover Front Cover Page 2 Inside Front and Outside Front and Back Cover Page Back Cover Page 3 Fee Table and Synopsis Not Applicable 4 Financial Highlights Financial Highlights 5 Plan of Distribution Underwriting 6 Selling Shareholders Not Applicable 7 Use of Proceeds Use of Proceeds 8 General Description of the Prospectus Summary; The Trust; Management of the Trust; Investment Objectives and Policies; Risk Factors and Special Considerations 9 Management Management of the Trust; Custodian, Transfer Agent, Dividend Disbursing Agent and Registrar 10 Capital Stock, Long-Term Debt, Capitalization at February Other Securities 28, 1999; and Description of Municipal Preferred; Description of Common Shares; Certain Provisions in the Agreement and Declaration of Trust
3 11 Defaults and Arrears on Senior Not Applicable Securities 12 Legal Proceedings Not Applicable 13 Table of Contents of the Table of Contents of the Statement of Additional Statement of Additional Information Information
PART B
STATEMENT OF ADDITIONAL ITEM NO. ITEM CAPTION INFORMATION CAPTION - --------- ------------ ------------------------ 14 Cover Page Cover Page 15 Table of Contents Table of Contents 16 General Information and History Not Applicable 17 Investment Objective and Investment Objectives and Policies Policies; Miscellaneous Investment Practices 18 Management Management of the Trust 19 Control Persons and Principal Management of the Trust Holders of Securities 20 Investment Advisory and Other Management of the Trust Services 21 Brokerage Allocation and Other Portfolio Transactions Practices 22 Tax Status Tax Matters 23 Financial Statements Financial Statements
-2- 4 SUBJECT TO COMPLETION, DATED APRIL 28, 1999 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS $____________ COLONIAL MUNICIPAL INCOME TRUST MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES _____ SHARES, SERIES __ LIQUIDATION PREFERENCE $25,000 PER SHARE Colonial Municipal Income Trust is selling __ Series __ Municipal Auction Rate Cumulative Preferred Shares. The Trust is a nondiversified, closed-end management investment company that seeks, as its primary investment objective, to provide high current income exempt from federal income tax. The Trust's secondary investment objective is to seek total return. The bonds and notes purchased by the Trust generally are issued by or on behalf of state and local governmental units, whose interest is exempt from federal income tax. Under normal circumstances, the Trust will invest at least 80% of its assets in debt securities that are consistent with its objectives of high current income and total return. Typically, these investments include tax-exempt bonds that are rated to be of medium and lower quality or, if unrated, are considered by the Trust's investment advisor to be of comparable quality. The Trust's investments in medium and lower quality bonds and notes involve special risks. An investment in the Trust is not appropriate for all investors. Investors in Municipal Preferred shares will be entitled to receive cash dividends at an annual rate that may vary for the successive dividend periods for such shares. The dividend rate on the Municipal Preferred shares for the period between the date of issue and ___________ __, 1999 will be __% per year. For each subsequent period, the auction agent will determine the dividend rate for a particular period by an auction conducted on the business day prior to that period. Investors in shares of Municipal Preferred may participate in auctions through their broker-dealers in accordance with the procedures specified herein. The Trust may redeem shares of Municipal Preferred as described under "Description of the Municipal Preferred--Redemption." This Prospectus sets forth concisely the information you should know before investing, including information about risks. You should read this Prospectus before you invest and keep it for future reference. The Trust's Statement of Additional Information, dated _________ __, 1999, contains additional information about the Trust and is incorporated by reference into (which means it is considered to be a part of) this Prospectus. You may obtain a free copy by calling Colonial Management Associates, Inc. at 1-800-426-3750. See page 40 of this Prospectus for a table of contents of the Statement of Additional Information. ______________ INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS. SEE THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ______________
PER SHARE TOTAL __________ ________ Public Price $25,000 $ _______ ________ Sales Load $ $ _______ ________ Proceeds to Trust (before expenses) $ $ _______ ________
The public offering price per share will be increased by the amount of dividends, if any, that have accumulated from the date the shares of Municipal Preferred are first issued. ______________ The underwriter is offering the shares of Municipal Preferred subject to various conditions. The underwriter expects to deliver the shares to purchasers on or about ________, 1999. ______________ SALOMON SMITH BARNEY ______________ , 1999 5 YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE TRUST HAS NOT, AND THE UNDERWRITER HAS NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. THE TRUST IS NOT, AND THE UNDERWRITER IS NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE TRUST'S BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE. -------------- TABLE OF CONTENTS PAGE PROSPECTUS SUMMARY...................................................... 1 RISK FACTORS AND SPECIAL CONSIDERATIONS................................. 5 FINANCIAL HIGHLIGHTS.................................................... 7 THE TRUST............................................................... 9 USE OF PROCEEDS......................................................... 9 CAPITALIZATION AT FEBRUARY 28, 1999..................................... 10 PORTFOLIO COMPOSITION................................................... 10 INVESTMENT OBJECTIVES AND POLICIES...................................... 11 MANAGEMENT OF THE TRUST................................................. 18 THE AUCTION............................................................. 19 DETERMINATION OF NET ASSET VALUE........................................ 22 DESCRIPTION OF MUNICIPAL PREFERRED...................................... 22 RATING AGENCY GUIDELINES................................................ 28 DESCRIPTION OF COMMON SHARES............................................ 29 CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST............ 30 REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND................ 30 TAX MATTERS............................................................. 31 CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR...... 34 UNDERWRITING............................................................ 34 LEGAL OPINIONS.......................................................... 34 REPORTS TO SHAREHOLDERS................................................. 35 EXPERTS................................................................. 35 FURTHER INFORMATION..................................................... 35 GLOSSARY................................................................ 36 TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION................ 40 6 PROSPECTUS SUMMARY This summary highlights some information from this Prospectus. It may not contain all of the information that is important to you. To understand the offering of the Municipal Preferred shares fully, you should read this entire Prospectus carefully, including the risk factors. You should also refer to the Glossary, which defines certain terms used in this Prospectus. This summary is qualified in its entirety by reference to the detailed information included in this Prospectus and the Statement of Additional Information. THE OFFERING Colonial Municipal Income Trust (the "Trust") is offering a total of ____ shares of Series __ Municipal Preferred at a purchase price of $25,000 per share plus dividends, if any, that have accumulated from the date the Trust first issues the shares. Salomon Smith Barney is offering the shares as underwriter. The Municipal Preferred shares will be preferred shares of the Trust that entitle their holders to receive cash dividends at an annual rate that may vary for the successive dividend periods for such shares. In general, except as described under "--Dividends and Dividend Periods" and "Description of the Municipal Preferred--Dividends and Dividend Periods", each dividend period will be seven days. An auction agent will determine the dividend rate for a particular period by an auction conducted on the business day immediately prior to the start of that dividend period. Investors and potential investors in the Municipal Preferred shares may participate in auctions for the Municipal Preferred shares through their broker-dealers. Generally, investors in Municipal Preferred shares will not receive certificates representing ownership of their shares. The securities depository (The Depository Trust Company or any successor) or its nominee for the account of the investor's agent member (generally the investor's broker-dealer) will maintain ownership of the Municipal Preferred shares in book-entry form. An investor's agent member, in turn, will maintain records of that investor's beneficial ownership of Municipal Preferred shares. THE TRUST Colonial Municipal Income Trust has operated as a nondiversified, closed-end management investment company since 1987. See "The Trust." The Trust was organized as a Massachusetts business trust on January 22, 1987 and has registered under the Investment Company Act of 1940, as amended. The Trust's common shares of beneficial interest are traded on the New York Stock Exchange under the symbol "CMU." DIVIDENDS AND DIVIDEND Dividends on Municipal Preferred shares are PERIODS cumulative from the date the shares are first issued. The Trust will pay dividends on the shares of Municipal Preferred, out of legally available funds, beginning on ________ ___, 1999. After the initial dividend period, each dividend period for the shares of Municipal Preferred will generally consist of seven days; provided, however, that before any auction, the Trust may decide, subject to certain limitations and only if it gives certain notices, to declare a special dividend period of up to 7 five years. Accordingly, in the case of dividend periods that are not special dividend periods, dividends generally will be payable on each succeeding _____. The Trust may specify different dividend payment dates for certain special dividend periods. The Trust will pay dividends through the securities depository (the Depository Trust Company) on each dividend payment date. The dividend rate on the shares of Municipal Preferred for the period between the date of issue and ________ ___, 1999 will be ___% per year. For each subsequent dividend period, the auction agent (____________) will determine the dividend rate on the shares of Municipal Preferred through an auction. MAXIMUM DIVIDEND RATE Generally, the dividend rate for any dividend period for shares of Municipal Preferred may not exceed that period's maximum dividend rate. The maximum dividend rate is a function of the credit rating assigned to the shares of Municipal Preferred and an independently determined reference rate. If sufficient clearing bids do not exist in an auction for shares of Municipal Preferred, the applicable dividend rate for the subsequent dividend period will be the maximum rate. In addition, if the Trust fails to pay a dividend on, or the redemption price of, shares of Municipal Preferred and does not subsequently cure such failure, then the maximum dividend rate will apply for subsequent dividend periods until the Trust cures the failure to pay. ASSET MAINTENANCE Under the Trust's Amended and Restated By-Laws, which establish and fix the rights and preferences of the shares of Municipal Preferred, the Trust must maintain - asset coverage of the Municipal Preferred shares as required by the rating agency or agencies rating the Municipal Preferred shares, and - asset coverage of the Municipal Preferred shares of at least 200% as required by the Investment Company Act of 1940. Based on the composition of the Trust's portfolio and market conditions as of _______ __, 1999, the asset coverage of the Municipal Preferred shares as required by the Investment Company Act of 1940 would be approximately ___% if the Trust were to issue all Municipal Preferred shares offered in this Prospectus, representing approximately ___% of the Trust's capital. MANDATORY REDEMPTION If the Trust does not maintain, or restore as necessary, the required asset coverage, the Trust must redeem shares of Municipal Preferred at the price of $25,000 per share plus accumulated but unpaid dividends on such shares, if any, whether or not earned or declared, to the date fixed for redemption. The Trust will limit redemption to the number of Municipal Preferred shares, together with all other preferred shares of the Trust, necessary to restore the required asset coverage. The provisions of the Investment Company Act of 1940 may restrict the Trust's ability to make a mandatory redemption, in connection with a failure to comply with the rating agencies' asset coverage requirements. -2- 8 OPTIONAL REDEMPTION The Trust, at its option and subject to certain conditions, may choose to redeem all or a portion of the shares of Municipal Preferred generally on the second business day preceding any dividend payment date at the price of $25,000 per share plus accumulated but unpaid dividends, if any, whether or not earned or declared to (but not including) the date fixed for redemption, and, during certain special dividend rate periods, any applicable premium. LIQUIDATION PREFERENCE The liquidation preference (that is, the amount the Trust must pay to Municipal Preferred shareholders if the Trust is liquidated) for shares of Municipal Preferred will be $25,000 per share plus accumulated but unpaid dividends, if any, whether or not earned or declared. VOTING RIGHTS The Investment Company Act of 1940 requires that the holders of Municipal Preferred shares, and the holders of any other preferred shares of the Trust, voting as a separate class, have the right to - elect at least two trustees at all times, and - elect a majority of the trustees at any time when dividends on the Municipal Preferred shares, or any other preferred shares of the Trust, are unpaid for two full years. In each case, the holders of common shares, Municipal Preferred shares, and any other preferred stock of the Trust, voting together as a single class, will elect the remaining trustees. The holders of Municipal Preferred shares, and the holders of any other preferred shares of the Trust, will vote as a separate class or classes on certain other matters as required under the Trust's Agreement and Declaration of Trust, the Investment Company Act of 1940, and Massachusetts law. Each common share, each Municipal Preferred share, and each share of any other class of preferred shares of the Trust is entitled to one vote per share. TAXATION Dividends on shares of Municipal Preferred will be exempt from regular Federal income tax in the hands of owners of such shares to the extent such dividends are payable from tax-exempt income earned on the Trust's investments. All or a portion of the Trust's dividends may be subject to the Federal alternative minimum tax. The Trust is currently required to allocate net capital gain and other income taxable for Federal income tax purposes, if any, proportionately between common shares of beneficial interest and shares of Municipal Preferred. The Trust shall, in the case of a seven-day dividend period or a special dividend period of 28 days or fewer for the shares of Municipal Preferred, and may, in the case of any other special dividend period for such shares, give notice of the amount of any income taxable for Federal income tax purposes to be included in a dividend on shares of Municipal Preferred in advance of the related auction. The amount of taxable income allocable to shares of Municipal Preferred will depend upon the amount of such income realized by the Trust, but is not generally expected to be significant. INVESTMENT OBJECTIVES The Trust's primary investment objective is to provide high current income generally exempt from Federal income taxes. The Trust's secondary objective is to seek total return. -3- 9 INVESTMENT STRATEGIES The interest on the instruments in which the Trust primarily invests is exempt from federal income tax (other than the possible incidence of any alternative minimum tax). Under normal circumstances, the Trust will invest at least 80% of its assets in medium and lower quality municipal obligations (which are considered to be bonds rated Baa or lower by Moody's Investors Service, Inc. ("Moody's) or BBB or lower by Standard & Poor's Ratings Group ("Standard & Poor's"), or which are unrated but considered by the Trust's investment advisor, Colonial Management Associates, Inc., to be of comparable quality). The Trust may invest in bonds in the lowest rating categories (bonds rated C by Moody's or D by Standard & Poor's), but will do so only when the Trust's investment advisor believes the true quality of the credit of the issuer of such bonds is stronger than the rating indicates. The Trust may invest in bonds on which the issuer has defaulted or failed to pay principal or interest when due. Conversely, the Trust may invest in higher quality issues, particularly when the difference in returns between quality classifications is narrow or when the Trust's investment advisor expects interest rate volatility. In addition to investing in municipal obligations, the Trust may hedge against changes in interest rates by engaging in the following: - interest rate futures contracts, - index futures, and - options on interest rate futures contracts, tax-exempt indices, and index futures. INVESTMENT ADVISOR Colonial Management Associates, Inc., an investment advisor registered under the Investment Advisers Act of 1940, as amended, has served as the Trust's investment advisor since the Trust's inception. The investment advisor is a wholly owned subsidiary of Liberty Funds Group LLC, which is an indirect wholly owned subsidiary of Liberty Mutual Insurance Company. RATINGS The Trust will not issue shares of Municipal Preferred unless such shares have a rating of Aaa from Moody's and AAA from Standard & Poor's. SECONDARY MARKET Broker-dealers may, but are not obligated to, TRADING maintain a secondary market in shares of Municipal Preferred outside of auctions. There can be no assurance that a secondary market will develop or, if it does develop, that it will provide owners with liquidity of investment. Shares of Municipal Preferred may be transferred outside of auctions only to a broker-dealer or such other persons who may be permitted by the Trust. -4- 10 RISK FACTORS AND SPECIAL CONSIDERATIONS You should consider the following risk factors and other special considerations in deciding whether to invest in shares of Municipal Preferred: LOWER-RATED SECURITIES. Municipal obligations offering the high current income sought by Colonial Municipal Income Trust (the "Trust") are ordinarily in the medium and lower rating categories of recognized rating agencies or are unrated and, therefore, generally involve greater volatility of price and risk of nonpayment of principal and interest than securities in higher rating categories. The possibility of defaults by or bankruptcies of issuers of securities cause, in part, this risk of principal and interest and may result in nonpayment of principal or interest or restructuring of the debt obligation and, possibly, a reduction in the Trust's net asset value. The medium and lower quality municipal obligations in which the Trust will invest are speculative to varying degrees. While such securities may have some quality and protective characteristics, large uncertainties or major risk exposures to adverse conditions are expected to outweigh such characteristics. Municipal obligations in the lower rating categories are regarded as predominantly speculative in character. With respect to unrated tax-exempt securities, the Trust will rely more on the judgment, analysis and experience of the Trust's investment advisor, Colonial Management Associates, Inc. (the "Advisor"), than for rated securities. In evaluating the creditworthiness of an issue, whether rated or unrated, the Advisor will consider, among other things, the following factors: - the issuer's financial resources; - its sensitivity to economic conditions and trends; - any operating history of and the community support for the facility financed by the issue; - the ability of the issuer's management; and - regulatory matters. The Trust may invest in bonds in the lowest rating categories (for example, bonds rated C by Moody's, which Moody's regards as having extremely poor prospects of ever attaining any real investment standing, or bonds rated D by Standard & Poor's), but will do so only when the Advisor believes the rating does not accurately reflect the true quality of the credit of the issuer of such bonds. The Trust may invest in bonds that are in default or on which the issuer has not made required payments of principal or interest, or both. In addition, medium and lower rated or unrated municipal obligations are frequently traded only in markets where the number of potential purchasers and sellers, if any, is very limited. This may limit the availability of such securities for the Trust to purchase and the ability of the Trust to sell such securities at their fair value. The Advisor will attempt to reduce the risks of investing in medium or lower rated or unrated municipal obligations to the greatest extent practicable through the use of credit analysis and hedging transactions. NON-DIVERSIFICATION. The Trust is registered as a "non-diversified" investment company. This means that the Trust may invest a greater percentage of its assets in a single issuer than a diversified investment company. Even as a non-diversified investment company, the Trust must still meet the diversification requirements of applicable Federal income tax laws. Because the Trust may invest a relatively high percentage of its assets in a limited number of issuers, the Trust may be more exposed to any single economic, political or regulatory occurrence than a more widely-diversified investment company. -5- 11 PRIVATE ACTIVITY BONDS. The Trust may invest in certain tax-exempt securities classified as "private activity bonds." These bonds may subject certain investors in the Trust to the alternative minimum tax. The Trust may invest all or any part of its assets in such private activity bonds. OPTIONS AND FUTURES TRANSACTIONS. The Trust may seek to hedge its portfolio against changes in interest rates using options, index options and futures and financial futures contracts. The Trust's hedging transactions are designed to reduce volatility but come at some cost. However, the Trust must pay for the option, and the price of the security may not in fact drop. In large part, the success of the Trust's hedging activities depends on its ability to forecast movements in securities prices and interest rates. The Trust does not, however, intend to enter into options and futures transactions for speculative purposes. The Trust is not required to hedge its portfolio. ANTITAKEOVER PROVISIONS. The Trust's Agreement and Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Trust or to change the composition of its Board of Trustees. Such provisions could discourage a third party from seeking to obtain control of the Trust. INVESTMENT CONSIDERATIONS. Investors in the shares of Municipal Preferred should consider the following factors: - The credit ratings of the shares of Municipal Preferred could be reduced while an investor holds such shares. - Neither broker-dealers nor the Trust are obligated to purchase shares of the Municipal Preferred in an auction or otherwise nor is the Trust required to redeem shares of the Municipal Preferred in the event of a failed auction. - If sufficient bids do not exist in an auction, the applicable dividend rate will be the maximum applicable dividend rate, and in such event, owners of the shares of Municipal Preferred wishing to sell will not be able to sell all, and may not be able to sell any, of such shares in the auction. As a result, investors may not have liquidity of investment. SECONDARY MARKET. The broker-dealers intend to maintain a secondary trading market in the shares of Municipal Preferred outside of auctions; however, they have no obligation to do so and there can be no assurance that a secondary market for the Municipal Preferred will develop or, if it does develop, that it will provide holders with a liquid trading market. The shares of Municipal Preferred will not be registered on any stock exchange or on any automated quotation system. An increase in the level of interest rates likely will have an adverse effect on the secondary market price of the shares of Municipal Preferred, and a selling shareholder may have to sell Municipal Preferred between auctions at a price per share of less than $25,000. You may transfer shares outside of auctions only to broker-dealers or such other persons as may be permitted by the Trust. YEAR 2000 COMPLIANCE. Like other investment companies, financial and business organizations and individuals around the world, the Trust could be adversely affected if the computer systems used by the Advisor and other service providers do not properly process and calculate date-related information and data from and after January 1, 2000. This is commonly known as the "Year 2000 Problem." The Advisor is taking steps that it believes are reasonably designed to address the Year 2000 Problem, including communicating with vendors who provide services, software and systems to the Trust to help ensure that date-related information and data can be properly processed and calculated on and after January 1, 2000. Many Trust service providers and vendors, including the Advisor, are in the process of making Year 2000 modifications to their services, software and systems and believe that such modifications will be completed on a timely basis prior to January 1, 2000. The cost of these modifications will not affect the Trust. However, no assurances can be given that all modifications required to ensure proper data processing and calculation on and after January 1, 2000 will be timely made or that services to the Trust will not be adversely affected. -6- 12 FINANCIAL HIGHLIGHTS The table below sets forth certain specified information for a share of beneficial interest of the Trust outstanding throughout each period presented. The financial highlights for each period presented have been audited by PricewaterhouseCoopers LLP, the Trust's independent accountants, whose unqualified report is included in the Trust's November 30, 1998 Annual Report and in "Report of Independent Accountants" in the Statement of Additional Information. The financial highlights should be read in conjunction with the financial statements and notes thereto included in "Financial Statements" in the Statement of Additional Information.
FOR THE FISCAL YEARS ENDED NOVEMBER 30, --------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Net asset value -- beginning of period $ 7.410 $ 7.410 $ 7.480 $ 7.150 $ 7.830 -------- -------- -------- -------- -------- Net investment income 0.469 0.509 0.508 0.547 0.609 Net realized and unrealized gain (loss) 0.183 (0.002) (0.068) 0.335 (0.707) -------- -------- -------- -------- -------- Total from investment operations 0.652 0.507 0.440 0.882 (0.098) -------- -------- -------- -------- -------- Distributions: From net investment income (0.487) (0.507) (0.510) (0.552) (0.582) In excess of net investment income (0.005) -- -- -- -- -------- -------- -------- -------- -------- Total distributions (0.492) (0.507) (0.510) (0.552) (0.582) -------- -------- -------- -------- -------- Net asset value -- end of period $ 7.570 $ 7.410 $ 7.410 $ 7.480 $ 7.150 -------- -------- -------- -------- -------- Per share market value: End of Period $ 8.125 $ 7.560 $ 7.250 $ 6.750 $ 6.750 -------- -------- -------- -------- -------- Total return based on net asset value (b) 8.99% 7.07% 6.38% 12.96% (0.42)% -------- -------- -------- -------- -------- Total return based on market value(c) 14.57% 11.67% 15.36% 8.04% (10.06)% -------- -------- -------- -------- -------- Net assets, end of period (000) $208,931 $203,533 $202,793 $204,666 $195,444 Ratio of operating expenses to average net assets 0.82%(d) 0.86%(d) 0.91%(d) 0.98%(d) 0.90% Ratio of net investment income to average net assets 6.20%(d) 6.83%(d) 6.87%(d) 7.47%(d) 8.12% Portfolio turnover rate 34% 15% 22% 24% 24%
1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Net asset value -- beginning of period $ 7.890 $ 8.060 $ 8.370 $ 8.650 $ 8.980 -------- -------- -------- -------- -------- Net investment income 0.639 0.636 0.682 0.751 0.768 Net realized and unrealized gain (loss) (0.063) (0.170) (0.279) (0.311) (0.321) -------- -------- -------- -------- -------- Total from investment operations 0.576 0.466 0.403 0.440 0.447 -------- -------- -------- -------- -------- Distributions: From net investment income (0.632) (0.636) (0.713) (0.720) (0.777) In excess of net investment income (0.004) -- -- -- -- -------- -------- -------- -------- -------- Total distributions (0.636) (0.636) (0.713) (0.720) (0.777) -------- -------- -------- -------- -------- Net asset value -- end of period $ 7.830 $ 7.890 $ 8.060 $ 8.370 $ 8.650 -------- -------- -------- -------- -------- Per share market value: End of Period (a) (a) (a) (a) (a) Total return based on net asset value (b) (b) (b) (b) (b) (b) Total return based on market value(c) 11.56% 1.82% 17.77% (12.27)% 7.19% -------- -------- -------- -------- -------- Net assets, end of period (000) $213,292 $213,420 $216,394 $223,091 $229,209 Ratio of operating expenses to average net assets 0.87% 0.87% 0.87% 0.86% 0.87% Ratio of net investment income to average net assets 8.03% 7.99% 8.29% 8.92% 8.66% Portfolio turnover rate 21% 10% 12% 20% 18%
-7- 13 - ------------ (a) Per share market value: End of period of the Trust was not included in the audited financial statements for years prior to 1994. (b) Total return at net asset value assuming all distributions reinvested and excluding brokerage commissions. Total return at net asset value for the Trust was not included in the audited financial statements for years prior to 1994. (c) Total return at market value assuming all distributions reinvested and excluding brokerage commissions. (d) The benefits derived from custody credits and directed brokerage arrangements had no impact. Prior years' ratios are net of benefits received, if any. -8- 14 THE TRUST The Trust is a closed-end, nondiversified management investment company. The Trust's primary investment objective is to provide high income, generally exempt from Federal income taxes. The Trust's secondary investment objective is to seek total return. The bonds and notes purchased by the Trust generally are issued by or on behalf of state and local governmental units, whose interest is exempt from Federal income tax (other than the possible incidence of any alternative minimum tax) ("Municipal Obligations"). See "Investment Objectives and Policies." No assurance can be given that the Trust's investment objectives will be achieved. All or a portion of the Trust's dividends may be subject to the Federal alternative minimum tax. The Trust was organized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts on January 22, 1987, and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"). In March 1987, the Trust issued 26,000,000 shares of beneficial interest, no par value (the "Common Shares"), pursuant to the initial public offering thereof and commenced operations. The Trust's Common Shares are traded on the New York Stock Exchange under the symbol "CMU." The Trust's principal office is located at One Financial Center, Boston, MA 02111, and its telephone number is (617) 426-3750. USE OF PROCEEDS The net proceeds of this offering will be approximately $___________, after payment of the sales load to Salomon Smith Barney (the "Underwriter") and offering costs. The net proceeds of the offering will be invested in accordance with the Trust's investment objectives and policies. It is presently anticipated that the Trust will be able to invest substantially all of the net proceeds in Municipal Obligations that meet the Trust's investment objectives at or shortly (within six to eight weeks) after the completion of the offering. To the extent that all of the proceeds cannot be so invested, pending such investment, the Trust will invest such proceeds initially in high-quality, short-term tax-exempt money market securities, the income on which will be exempt from Federal income taxes, or in high-quality Municipal Obligations with relatively low volatility (such as pre-refunded and intermediate-term securities), to the extent such securities are available. If necessary to invest fully the net proceeds of the offerings immediately, the Trust may also purchase, as temporary investments, short-term taxable investments of the type described under "Investment Objectives and Policies--Temporary and Defensive Investments," the income on which is subject to Federal income taxes. -9- 15 CAPITALIZATION AT FEBRUARY 28, 1999 The following table sets forth the unaudited capitalization of the Trust at February 28, 1999 and as adjusted to give effect to the issuance of the shares of Series __ Municipal Preferred offered hereby.
ACTUAL AS ADJUSTED ------ ----------- Shareholders' Equity: Preferred Shares, no par value per share; ______ shares authorized (no shares issued; _____ shares of Municipal Auction Rate Cumulative Preferred Shares issued, as adjusted, at $25,000 per share liquidation preference) ........................................... $ -- $ Common Shares, no par value per share; unlimited shares authorized; 27,623,344 shares outstanding* ........................ 246,258,872 -- Paid-in surplus ...................................................... 0 Undistributed net investment income .................................. (425,636) Net realized gain from investment transactions ....................... (44,725,523) Net unrealized appreciation of investments ........................... 7,230,703 ------------- --- Net Assets ........................................................ $ 208,338,386 $ ============= ===
- --------------- * None of these outstanding shares are held by or for the account of the Trust. PORTFOLIO COMPOSITION As of February 28, 1999, approximately __% of the market value of the Trust's portfolio was invested in long and intermediate-term Municipal Obligations and approximately __% of the market value of the Trust's portfolio was invested in short-term securities. The following table sets forth certain information with respect to the composition of the Trust's investment portfolio (excluding short-term investments) as of February 28, 1999.
STANDARD & NUMBER OF MARKET NUMBER OF MARKET POOR'S* ISSUES VALUE PERCENT MOODY'S* ISSUES VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------ AAA 16 $ 25,186,432.84 12.18% Aaa 18 $ 29,386,749.85 14.21% AA 2 5,459,422.50 2.64 Aa 3 5,994,037.50 2.90 A 6 9,485,690.00 4.59 A 2 4,315,880.00 2.09 BBB 34 38,678,093.20 18.71 Baa 23 27,110,061.05 13.11 BB 6 6,767,906.26 3.27 Ba 9 9,963,750.01 4.82 B 3 2,112,000.00 1.02 B 1 746,250.00 .36 NR** 113 119,062,222.53 57.59 NR** 124 129,235,038.92 62.51 - ------------------------------------------------------------------------------------------------------------------ Total 180 $206,751,767.33 100.00% Total 180 $206,751,767.33 100.00% ===================================================================================================================
* Standard & Poor's rating categories may be modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories may be modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings. ** Many bonds are rated by only one rating agency, which results in a higher percentage of bonds in this category. The total market value of bonds that do not carry a rating from any rating service is $102,069,200, which represents 50.1% of the Trust. -10- 16 INVESTMENT OBJECTIVES AND POLICIES The Trust's primary investment objective is to provide high current income, generally exempt from Federal income taxes, by investing primarily in medium and lower quality bonds and notes issued by or on behalf of state and local governmental units whose interest is exempt from Federal income tax (other than the possible incidence of any alternative minimum tax). The Trust's secondary objective is to seek total return. The Trust may seek to achieve its objectives by engaging in hedging transactions. Under normal circumstances, the Trust will invest at least 80% of its assets in debt securities that are consistent with its objectives of seeking high current income and total return. Typically, the Trust's investments include medium and lower quality Municipal Obligations (which are considered to be bonds which are rated Baa or lower by Moody's or BBB or lower by Standard & Poor's or comparably rated by any other national bond rating service, or which are unrated but considered by the Advisor to be of comparable quality). The high yields the Trust seeks are generally available from such securities. These obligations are considered to be speculative to varying degrees. For example, bonds rated Ba or BB are regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. For a more complete description of bond ratings, see Appendix A in the Statement of Additional Information. As noted above under "Risk Factors and Special Considerations," the Trust may invest in bonds in the lowest rating categories (bonds rated C by Moody's or D by Standard & Poor's), but will do so only when the Advisor believes such rating does not accurately reflect the true quality of the credit of the issuer of such bonds. The Trust may invest in bonds that are in default or on which the payment of principal or interest, or both, is in arrears. The medium and lower rated or unrated Municipal Obligations that the Trust intends to purchase are frequently traded in markets where the number of potential purchasers and sellers, if any, is very limited. This consideration may limit the availability of such securities for the Trust to purchase and may also limit the ability of the Trust to sell such securities at their fair value in response to changes in the economy or the financial markets. In addition to its investments in medium and lower quality Municipal Obligations, the Trust may invest in higher quality issues. These investments may lessen the risk of decline in net asset value due to credit deterioration but may also affect the amount of current income, since yields on high quality securities are usually lower than yields on medium and lower quality securities. The Trust may invest in a relatively high percentage of Municipal Obligations issued by entities having similar characteristics. The issuers may be located in the same geographic area or may pay their interest obligations from revenues of similar projects. This may make the Trust more susceptible to similar economic, political or regulatory occurrences. As the similarity in issuers increases, the potential for fluctuation of the net asset value of the Trust's securities also increases. The Trust's policy is not to concentrate in any industry, but the Trust may invest up to 25% of its assets in industrial development revenue bonds or private activity revenue bonds that are based, directly or indirectly, on the credit of private entities in any one industry, or in securities of private issuers in any one industry (governmental issuers are not considered to be part of any "industry"). See "Investment Objectives and Policies--Fundamental Investment Policies" and "Investment Objectives and Policies--Other Investment Policies" in the Statement of Additional Information. It is a fundamental policy of the Trust, which may not be changed without approval of holders of a majority of the Trust's outstanding voting securities (as defined in "Investment Objectives and Policies--Fundamental Investment Policies" and "Investment Objectives and Policies--Other Investment Policies" in the Statement of Additional Information), to invest, under normal circumstances, at least 80% of its assets in tax-exempt bonds and tax-exempt notes. Except for this policy and the investment policies listed in the Statement of Additional Information under "Investment Objectives and Policies--Fundamental Investment Policies," the Trust's investment policies and its investments objectives, may be changed without shareholder approval. -11- 17 In addition to investing in Municipal Obligations, the Trust may engage in transactions involving interest rate futures contracts ("financial futures"), index futures and options on financial futures, tax-exempt indices and index futures, as a hedge against changes in interest rates. See "Investment Objectives and Policies--Hedging Activities." The costs of and possible losses incurred from such transactions may reduce the Trust's current return. The Trust may also purchase securities on a "when-issued" basis, enter into repurchase agreements and invest in other taxable instruments, subject to certain limitations. See "Investment Objectives and Policies--Forward Commitments," "Investment Objectives and Policies--Repurchase Agreements" and "Investment Objectives and Policies--Temporary and Defensive Investments." DESCRIPTION OF MUNICIPAL OBLIGATIONS As used in this Prospectus, the term "Municipal Obligations" refers to debt obligations the interest on which was at the time of issuance, in the opinion of bond counsel to the issuer, exempt from Federal income tax (other than the possible applicability of any Federal alternative minimum tax). (For a description of the Federal alternative minimum tax, see "Tax Matters--Federal Taxation of Shareholders.") Municipal Obligations include debt obligations issued by a state (including the District of Columbia), a territory or a possession of the United States, or any political subdivision thereof, to obtain funds for various public purposes, including the construction of a wide range of public facilities such as airports, bridges, highways, housing, mass transportation, roads, schools and water and sewer works or for other public purposes. Interest on industrial development bonds used to fund the construction, equipment, repair or improvement of privately-operated industrial or commercial facilities may also be exempt from Federal income tax, but the size of such issues is limited under current Federal tax law. The Trust may not be a desirable investment for "substantial users" of facilities financed by industrial development bonds or private activity bonds or for "related persons" of substantial users. See "Tax Matters" in this Prospectus and "Tax Matters" in the Statement of Additional Information. The Trust has no present intention of investing in Municipal Obligations the interest on which is not exempt from Federal income tax (other than the possible applicability of any Federal alternative minimum tax). The two principal classifications of Municipal Obligations are general obligation bonds and limited obligation (or revenue) bonds. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from the issuer's general unrestricted revenues and not from any particular fund or source. The characteristics and method of enforcement of general obligation bonds vary according to the law applicable to the particular issuer, and payment may be dependent upon appropriation by the issuer's legislative body. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise or other specific revenue source. Tax-exempt industrial development bonds and private activity bonds also generally are revenue bonds and thus not payable from the unrestricted revenues of the issuer. The credit quality of industrial development bonds and private activity bonds is usually directly related to the credit of the corporate user of the facilities. Payment of principal of and interest on industrial development bonds and private activity bonds is the responsibility of the corporate user (and any guarantor). Prices and yields on Municipal Obligations are dependent on a variety of factors, including general money market conditions, the financial condition of the issuer, general conditions in the tax-exempt bond market, the size of a particular offering, the maturity of the obligation and the ratings of particular issues, and are subject to change from time to time. Information about the financial condition of an issuer of Municipal Obligations may not be as extensive as that which is made available by corporations whose securities are publicly traded. The ratings of Moody's, Standard & Poor's and other national bond rating services represent their opinions and are not absolute standards of quality. Municipal Obligations with the same maturity, interest rate and rating may have different yields while Municipal Obligations of the same maturity and interest rate with different ratings may have the same yield. -12- 18 Obligations of issuers of Municipal Obligations are subject to the provisions of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the rights and remedies of creditors. Congress or state legislators may seek to extend the time for payment of principal or interest, or both, or to impose other constraints upon enforcement of such obligations. There is also the possibility that, as a result of litigation or other conditions, the power or ability of issuers to meet their obligations to pay interest on and principal of their Municipal Obligations may be materially impaired or their obligations may be found to be invalid or unenforceable. Such litigation or conditions may from time to time have the effect of introducing uncertainties in the market for Municipal Obligations or certain segments thereof, or materially affecting the credit risk with respect to particular bonds. Adverse economic, business, legal or political developments might affect all or a substantial portion of the Trust's Municipal Obligations in the same manner. HEDGING ACTIVITIES Hedging is a means of transferring risk that an investor does not desire to assume in an uncertain interest rate environment. The Advisor believes it is possible to reduce or enhance the effects of interest rate fluctuations through the use of futures contracts and options on financial instruments. The Trust may purchase and sell financial futures and tax-exempt bond index futures contracts ("index futures") to hedge against changes, caused by changing interest rates, in the market value of Municipal Obligations in its portfolio or that it intends to acquire. In order to hedge, the Trust may also purchase and write put and call options on financial futures, tax-exempt bond indices and index futures. The costs of and possible losses incurred from these transactions may reduce the Trust's current return. Income earned by the Trust from its hedging activities will be treated as capital gain and, if not offset by net realized capital loss, will be distributed to shareholders in taxable distributions. See "Tax Matters--Federal Taxation of Shareholders." The Trust will not engage in transactions in futures contracts or related options for speculative purposes but only as a hedge against changes resulting from market conditions in the values of securities in its portfolio or that it intends to acquire. In addition, the Trust will not purchase or sell futures contracts or purchase or sell related options if immediately thereafter the sum of the amount of its initial margin deposits on its existing futures and related options positions and premiums paid for related options would exceed 5% of its total assets (taken at current value). In instances involving the purchase of futures contracts or call options thereon or the writing of put options thereon by the Trust, an amount of cash and cash equivalents, equal to the underlying commodity value of the futures contracts and options (less any related margin deposits) will be deposited in a segregated account with the Trust's custodian to collateralize the position and thereby ensure that the use of such futures contracts and options is unleveraged. Financial Futures. In connection with its hedging activities, the Trust may engage in transactions involving financial futures. A financial future is a contract that obligates the seller to deliver and the purchaser to take delivery of a specified type of financial instrument at a specified future time and at a specified price. Although financial futures contracts by their terms require actual delivery and acceptance of securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery of securities. Closing out a futures contract purchase or sale is effected by entering into an offsetting transaction. Financial futures trade on boards of trade that have been designated "contracts markets" by the Commodity Futures Trading Commission. Financial futures trade on these markets in a manner that is similar to the way a stock trades on a stock exchange. The boards of trade, through their clearing corporations, guarantee performance of the contracts. Currently, there are financial futures based on long-term U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA") certificates, three-month U.S. Treasury bills and three-month domestic bank certificates of deposit. The Trust expects other financial futures to be developed and traded. The Trust expects to engage in transactions involving financial futures if, in the opinion of the Advisor, they are appropriate hedging instruments for the Trust. The sale of financial futures by the Trust is for the purpose of hedging the Trust's holdings of long-term debt securities. In the event of a rise in interest rates, the value of the Trust's short position in financial futures would -13- 19 increase at approximately the same rate as the value of the long-term bonds in its portfolio would decline, thereby keeping the net asset value of the Trust from declining as much as it otherwise would have. If, on the other hand, the Trust held cash reserves and interest rates were expected to decline, the Trust might purchase futures contracts and thus take advantage of the anticipated rise in the value of long-term securities without actually buying them. In such an event, the futures contracts could be liquidated and the Trust's cash reserves could then be used to buy long-term securities in the cash market. Unlike when the Trust purchases or sells a security, no price is paid or received by the Trust upon the sale or purchase of a financial future. The Trust will initially be required to deposit with the Trust's custodian an amount of "initial margin" of cash or U.S. Treasury bills equal to a small percentage of the contract amount. The nature of initial margin in futures transactions is different from that of margin in securities transactions in that initial margin on financial futures does not involve the borrowing of funds by the customer to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract which is returned to the Trust upon termination of the financial future, assuming all contractual obligations have been satisfied. Subsequent payments, called maintenance margin, to and from the broker, will be made on a daily basis as the price of the underlying debt security fluctuates, making the long and short positions in the financial future more or less valuable, a process known as "marking to market." For example, when the Trust has sold a financial future and the price of the underlying debt security has declined, that position will have increased in value and the Trust will receive from the broker a maintenance margin payment equal to that increase. Conversely, where the Trust has sold a financial future and the price of the underlying debt security has increased, the position would be less valuable, and the Trust would be required to make a maintenance margin payment to the broker. At any time prior to expiration of the financial future, the Trust may elect to close the position by taking an opposite position in the financial future. A final determination of maintenance margin is then made, additional cash is required to be paid by or released to the Trust, and the Trust realizes a loss or a gain. While financial futures based on debt securities do provide for the delivery and acceptance of securities, such deliveries and acceptances are very seldom made. Generally, the financial future is terminated by entering into an offsetting transaction. An offsetting transaction for a financial future sale is effected by the Trust entering into a financial future purchase for the same aggregate amount of the specific type of financial instrument and same delivery date. If the price in the sale exceeds the price in the offsetting purchase, the Trust immediately is paid the difference and thus realizes a gain. If the offsetting purchase price exceeds the sale price, the Trust pays the difference and realizes a loss. There are several risks in connection with the use of financial futures by the Trust as a hedging device. One risk arises because of the imperfect correlation between movements in the price of the financial future and movements in the price of the debt securities that are the subject of the hedge. Financial futures based on U.S. Government securities and GNMA certificates historically have reacted to an increase or decrease in interest rates in a similar fashion to the underlying U.S. Government securities and GNMA certificates. To the extent, however, that the Trust enters into financial futures on other than Municipal Obligations, which are the only financial futures currently available, there is a possibility that the value of such financial futures would not vary in direct proportion to the value of the Trust's holdings of Municipal Obligations. Another result of the imperfect correlation between movements in the prices of the financial future and of the debt securities being hedged is that the price of the financial future may move more or less than the price of the debt securities being hedged. If the price of the financial future moves less than the price of the securities that are the subject of the hedge, the hedge will not be fully effective, but if the price of the securities being hedged has moved in an unfavorable direction, the Trust would be in a better position than if it had not hedged at all. If the price of the securities being hedged has moved in a favorable direction, the advantage will be partially offset by the futures contract. If the price of the financial future moves more than the price of the security, the Trust will experience either a loss or a gain on the future which will not be completely offset by movements in the prices of the debt securities which are the subject of the hedge. To compensate for the imperfect correlation of movements in the price of debt securities being hedged and movements in the price of related financial futures, the Trust may sell financial futures in a greater or lesser dollar amount than the dollar amount of the securities being hedged. -14- 20 The market prices of financial futures may be affected by several factors other than interest rates. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close financial futures through offsetting transactions, which could distort the normal relationship between the debt securities and futures markets. Second, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market and the imperfect correlation between movements in the prices of debt securities and movements in the prices of related financial futures, a correct forecast of interest rate trends by the Trust's investment advisor may still not result in a successful hedging transaction. Positions in futures contracts may be closed out only on an exchange or board of trade that provides a secondary market for such futures. Although the Trust intends to engage in futures transactions only on exchanges or boards of trade where there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract or at any particular time. If there is not a liquid secondary market at a particular time, it may not be possible to close a futures position at such time, and in the event of adverse price movements, the Trust would continue to be required to make daily cash payments of maintenance margin. However, in the event financial futures are used to hedge portfolio securities, such securities will not be sold until the financial futures can be terminated. In such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the financial futures. Options on Financial Futures. The Trust may also purchase put and call options on financial futures which are traded on a U.S. exchange or board of trade and enter into closing transactions with respect to such options to terminate an existing position. The purchase of put options on financial futures is analogous to the sale of futures so as to hedge the Trust's portfolio of debt securities against the risk of rising interest rates. The purchase of call options on financial futures is analogous to the purchase of futures contracts and represents a means of obtaining temporary exposure to market appreciation at limited risk. Such options may be used to protect against a market advance when the Trust is not fully invested. The Trust may write call options on futures contracts, which constitutes a partial hedge against any declining price of long-term debt securities. If the futures price at expiration is below the exercise price, the Trust will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the Trust's holdings of debt securities. If the futures price at expiration exceeds the exercise price, the Trust will ordinarily realize a loss equal to the amount of such excess. The Trust may write put options on futures contracts, which constitutes a partial hedge against an increase in the price of long-term debt securities when the Trust is not fully invested. If the futures price at expiration is above the exercise price, the Trust will retain the full amount of the option premium, which provides a partial hedge against any increase in the market price of long-term debt securities. If the futures price at expiration is less than the exercise price, the Trust will ordinarily realize a loss equal to the difference between the futures price and the exercise price. An option on a futures contract gives the purchaser the right, 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 period 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 will be 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 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 an option is exercised on the last trading day prior to the expiration date of the option, the settlement will be made entirely in cash in an amount equal to the difference between the exercise price of the option and the closing price of the futures contract on the expiration date. Currently options can be purchased or written with respect to futures contracts on U.S. Treasury bonds on the Chicago Board of Trade. The holder or writer of an option may terminate his position by selling or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected. -15- 21 Several special risks relate to transactions in options on futures. The ability to establish any close out positions on such options will be subject to the maintenance of a liquid secondary market. Compared to the sale of financial futures, the purchase of put options on financial futures 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 the purchase of a put option on a financial future would result in a loss to the Trust when the sale of a financial future would not, such as when there is no movement in the price of debt securities. An option position may be closed out only on an exchange or board of trade that provides a secondary market for an option of the same series. Although the Trust generally will purchase 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 or board of trade will exist for any particular option, or at any particular time, and for some options, no secondary market on an exchange or board of trade may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that the Trust would have to exercise its options in order to realize any profit and would incur transaction costs upon closing out the futures positions acquired pursuant to the exercise of such option. Reasons for the absence of a liquid secondary market on an exchange or board of trade include the following: - there may be insufficient trading interest in certain options; - restrictions may be imposed by an exchange or board of trade on opening transactions or closing transactions or both; - trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options; - unusual or unforeseen circumstances may interrupt normal operations on an exchange or board of trade; - the facilities of an exchange or board of trade or the Options Clearing Corporation (the "Clearing Corporation") may not at all times be adequate to handle current trading volume; or - one or more exchanges or boards of trade could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange or board of trade (or in that class or series of options) would cease to exist, although outstanding options on that exchange or board of trade which had been issued by the Clearing Corporation as a result of trades on that exchange or board of trade could continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of the Clearing Corporation inadequate, and thereby result in the institution by an exchange or board of trade of special procedures that may interfere with the timely execution of customers' orders. Tax-Exempt Bond Index Transactions. The Trust anticipates utilizing tax-exempt bond index futures as a hedge against changes in the market value of the Municipal Obligations in its portfolio or which it intends to acquire. A tax-exempt bond index assigns relative values to the Municipal Obligations included in the index. A tax-exempt bond index fluctuates with changes in the market values of the Municipal Obligations included in the index. An index future is a bilateral agreement pursuant to which two parties agree to receive or deliver at settlement an amount of cash equal to a specified dollar amount multiplied by the difference between the value of the index at the close of the last trading day of the contract and the price at which the future was originally written. An index future has similar characteristics to financial futures discussed above except that settlement is made through delivery of cash rather than the underlying securities. -16- 22 The Trust's strategies in employing index futures will be similar to the strategies involved in financial futures transactions. Tax-exempt bond index futures transactions also will be subject to risks similar to those described above with respecting to financial futures, except that the correlation between movements in the price of a futures contract and movements in the price of the Trust's portfolio securities is likely to be higher for index futures than for financial futures. The Trust may also purchase and write put and call options on tax-exempt bond indices and on tax-exempt bond index futures and enter into closing transactions with respect to such options. An option on an index gives the holder the right to receive cash upon exercise of the option in an amount equal to a specified multiple times the amount by which the fixed exercise price of the option exceeds, in the case of a put, or is less than, in the case of a call, the closing value of the underlying index on the date of exercise. An option on an index future gives the purchaser the right, in return for the premium paid, to assume a position in an index contract rather than to sell (in the case of a put option) or buy (in the case of a call option) a debt instrument at a specified exercise price at any time during the period of the option. Upon exercise of the put option, the delivery of the futures position by the holder of the option to the writer of the option will be accompanied by delivery of the accumulated balance of the writer's futures margin account, which represents the amount by which the market price of the index futures contract, at exercise, is less than the exercise price of the put option on the index future. FORWARD COMMITMENTS New issues of Municipal Obligations are often purchased on a "when-issued" or delayed delivery basis. The payment obligations and the interest rate that will be received on the securities are fixed at the time the buyer enters into the commitment. The Trust will not begin earning interest on such securities, however, until the securities are scheduled for settlement. The Trust may enter into such "forward commitments" if it holds and maintains until the settlement date, in a segregated account, cash or short-term debt obligations in an amount sufficient to meet the purchase price provided such obligations are rated A-1 + or SP-1+ by Standard & Poor's or the long-term debt of the issuers of such obligations is rated AAA by Standard & Poor's. Forward commitments involve a risk of loss if the value of the Municipal Obligation to be purchased declines prior to the settlement date. Such a decline in value could result from, among other things, changes in the level of interest rates or other market factors. This risk is in addition to the risk of decline in the value of the Trust's other assets. Although the Trust generally will enter into forward commitments with the intention of acquiring Municipal Obligations for its portfolio, the Trust may dispose of a commitment prior to settlement if the Advisor deems it appropriate to do so. The Trust may realize capital gain or loss upon the sale of forward commitments. Any such gains, if not offset by net realized capital losses, will be distributed to shareholders in taxable distributions. REPURCHASE AGREEMENTS The Trust may purchase U.S. Government securities and concurrently enter into so-called "repurchase agreements" with the seller, usually a bank or broker-dealer, whereby the seller agrees to repurchase such securities at the Trust's cost plus interest within a specified time (normally one day). While repurchase agreements involve certain risks not associated with direct investments in U.S. Government securities, the Trust will follow procedures designed to minimize such risks. These procedures include effecting repurchase transactions only with the member banks of the Federal Reserve System and registered broker-dealers having creditworthiness substantially equivalent to that of the issuers of investment grade debt securities. In addition, the Trust's repurchase agreements 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 seller, the Trust will seek to liquidate such collateral. However, the exercise 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. -17- 23 ZERO COUPON SECURITIES (ZEROS) The Trust may invest in zero coupon securities, which are securities issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security and in certificates representing undivided interests in the interest or principal of mortgage-backed securities (interest only/principal only), which tend to be more volatile than other types of securities. The Trust will accrue and distribute income from zero coupon and stripped securities and certificates on a current basis and may have to sell securities to generate cash for distributions. TEMPORARY AND DEFENSIVE INVESTMENTS A portion of the Trust's assets will be held in cash or invested in short-term securities for day-to-day operating purposes. It is the intention of the Trust that short-term investments will also be in tax-exempt securities. However, if suitable short-term tax-exempt securities are not available or if short-term tax-exempt securities are available only on a when-issued basis, the Trust may invest up to 20% of its assets in short-term obligations of the U.S. Government or in repurchase agreements, or short-term notes and obligations rated A-1+, of banks that have or whose parent holding companies have long-term debt ratings of AAA or of corporations with long-term debt ratings of AAA, the interest on all of which is not exempt from Federal income taxes. Notwithstanding the foregoing, the Trust may temporarily invest more than 20% of its assets in such taxable obligations for defensive purposes. The ability of the Trust to invest in securities other than tax-exempt securities (as well as its ability to enter into repurchase agreements) is limited, however, by a requirement of the Code that at least 50% of its total assets be invested in tax-exempt securities at the end of each quarter in order to pass through to shareholders the Federal income tax exemption for dividends derived from net investment income on tax-exempt securities. See "Tax Matters--Federal Taxation of Shareholders." MANAGEMENT OF THE TRUST TRUSTEES AND OFFICERS The Board of Trustees is responsible for the general supervision of the Trust, including general supervision of the duties performed by the Advisor under its Management Agreement (as defined below) with the Trust. There are 13 trustees of the Trust, two of whom are "interested persons" (as defined in the 1940 Act). The names and addresses of the trustees and officers of the Trust and their principal occupations and other affiliations during the past five years are set forth under "Management of the Trust" in the Statement of Additional Information. THE ADVISOR The Advisor is Colonial Management Associates, Inc., a Massachusetts corporation having its principal offices at One Financial Center, Boston, Massachusetts 02111. The Advisor is a wholly owned subsidiary of Liberty Funds Group LLC ("Liberty Funds Group") and both Liberty Funds Group and the Advisor are indirect subsidiaries of Liberty Mutual Insurance Company ("Liberty"), an underwriter of workers' compensation insurance and a property and casualty insurer in the U.S. The Advisor has been an investment advisor since 1931. As of the date of this Prospectus, the Advisor serves as investment advisor or sub-advisor for 34 open-end and 5 closed-end management investment companies and managed over $16 billion in assets. The Advisor's investment advisory business is managed together with the mutual funds and institutional investment advisory businesses of its affiliate, Stein Roe & Farnham Incorporated (Stein Roe), by a combined management team of employees from both companies. Stein Roe also shares personnel, facilities and systems with Colonial that may be used in providing administrative services to the Trust. Both the Advisor and Stein Roe are subsidiaries of Liberty Financial Companies, Inc. Maureen Newman, a Senior Vice President of the Advisor, has managed the Trust since July 1998. Ms. Newman joined the Advisor in May 1996 as Vice President, Portfolio Manager and Director of Municipal -18- 24 Research and has served in that capacity since that date. Prior to joining the Advisor, Ms. Newman was a portfolio manager and bond analyst at Fidelity Investments from May 1985 until May 1996. MANAGEMENT AGREEMENT The Management Agreement between the Advisor and the Trust (the "Management Agreement") provides that, subject to the direction of the Board of Trustees of the Trust and the applicable provisions of the 1940 Act, the Advisor is responsible for the actual management of the Trust's portfolio. The responsibility for making decisions to buy, sell or hold a particular investment rests with the Advisor, subject to review by the Board of Trustees of the Trust and compliance with the applicable provisions of the 1940 Act. The Advisor provides the Trust with accounting, bookkeeping and pricing services and other services and office facilities (the expenses of which are borne by the Trust as specified below), except to the extent these services are provided by an administrator or an accounting firm hired by the Trust. Under the Management Agreement with the Trust, the Advisor receives a monthly advisory fee at the annual rate of 0.65% of the average weekly net assets of the Trust. Since the Advisor's fee is based on the average weekly net assets of the Trust, the Advisor will benefit from the increase in the Trust's net assets resulting from the offering of the shares of Municipal Preferred. It is not possible to state precisely the amount of additional compensation the Advisor will receive as a result of the offering because the proceeds of the offering will be invested in additional portfolio securities which will fluctuate in value. However, based on the estimated proceeds from the offering, assuming all the shares of Municipal Preferred offered hereby are purchased, the Advisor would receive additional annual advisory fees of approximately ______ as a result of the increase in average weekly net assets under management over the Trust's current net assets under management, assuming no fluctuations in the value of Trust portfolio securities. The Advisor places all orders for the purchase and sale of portfolio securities. In selecting broker-dealers, the Advisor may consider research and brokerage services furnished by such broker-dealers to the Advisor and its affiliates. In recognition of the research and brokerage services provided, the Advisor may cause the Trust to pay the selected broker-dealer a higher commission than would have been charged by another broker-dealer not providing such services. Subject to seeking best execution, the Advisor may consider sales of shares of certain other funds distributed by affiliates of Liberty in selecting broker-dealers for portfolio security transactions. THE AUCTION GENERAL The proposed provisions of the Amended and Restated By-Laws of the Trust (the "By-Laws") provide that, except as otherwise described herein, the Applicable Rate with respect to shares of Municipal Preferred for each Rate Period after the Initial Rate Period thereof shall be equal to the rate per annum that the Auction Agent advises has resulted on the Business Day preceding the first day of such Subsequent Rate Period (an "Auction Date") from implementation of the auction procedures (the "Auction Procedures") set forth in the By-Laws and summarized below, in which persons determine to hold or offer to sell or, based on dividend rates bid by them, offer to purchase or sell such shares. Each periodic implementation of the Auction Procedures is referred to herein as an "Auction." Certain defined terms used in this section and under "Description of the Municipal Preferred" are defined in the Glossary. AUCTION PROCEDURES Prior to the Submission Deadline on each Auction Date for shares of Municipal Preferred, each customer of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder -19- 25 of shares of Municipal Preferred (a "Beneficial Owner") may submit orders ("Orders") to that Broker-Dealer as follows: - Hold Order - indicating its desire to hold shares of Municipal Preferred without regard to the Applicable Rate for the next Rate Period. - Bid - indicating its desire to sell shares of Municipal Preferred at $25,000 per share if the Applicable Rate for the next Rate Period is less than the rate specified in such Bid (also known as a hold-at-a rate order). - Sell Order - indicating its desire to sell shares of Municipal Preferred at $25,000 per share without regard to the Applicable Rate for the next Rate Period. A Beneficial Owner may submit different types of Orders to its Broker-Dealer with respect to shares of Municipal Preferred then held by such Beneficial Owner. A Beneficial Owner that submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on the Auction Date will be treated as having submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to submit an Order to its Broker-Dealer will be deemed to have submitted a Hold Order to its Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit an Order to its Broker-Dealer for an Auction relating to a Rate Period for Municipal Preferred of more than 28 Rate Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order to its Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the shares of Municipal Preferred subject thereto. A Beneficial Owner that offers to become the Beneficial Owner of additional shares of Municipal Preferred is, for purposes of such offer, a Potential Beneficial Owner of additional shares of Municipal Preferred as discussed below. A customer of a Broker-Dealer that is not a Beneficial Owner of shares of Municipal Preferred but that wishes to purchase shares, or that is a Beneficial Owner that wishes to purchase additional shares (in each case, a "Potential Beneficial Owner"), may submit Bids to its Broker-Dealer in which it offers to purchase shares of Municipal Preferred at $25,000 per share if the Applicable Rate for the next Rate Period is not less than the rate specified in such Bid. A Bid placed by a Potential Beneficial Owner specifying a rate higher than the Maximum Rate on the Auction Date will not be accepted. The Broker-Dealers in turn will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves (unless otherwise permitted by the Trust) as Existing Holders in respect of shares subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of shares subject to Orders submitted to them by Potential Beneficial Owners. However, neither the Trust nor the Auction Agent will be responsible for a Broker-Dealer's failure to comply with the foregoing. Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder will be treated in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of any shares of Municipal Preferred held by it or customers who are Beneficial Owners will be treated in the same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect of shares of Municipal Preferred held by it. A Broker-Dealer may also submit Orders to the Auction Agent for its own account as an Existing Holder or Potential Holder, provided it is not an affiliate of the Trust. The Auction Agent after each Auction for shares of Municipal Preferred will pay to each Broker-Dealer, from funds provided by the Trust, a service charge at the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate Period of less than one year, or a percentage agreed to by the Trust and the Broker-Dealers in the case of any Auction immediately preceding a Rate Period of one year or longer, of the purchase price of shares of Municipal Preferred placed by such Broker-Dealer at such Auction. See "The Auction--Broker-Dealers" in the Statement of Additional Information. If Sufficient Clearing Bids exist (that is, the number of shares of Municipal Preferred subject to Bids submitted or deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates equal to or lower than the Maximum Rate is at least equal to the number of shares of Municipal Preferred subject to Sell Orders submitted or deemed submitted to the Auction Agent by Broker-Dealers as or on behalf of Existing -20- 26 Holders), the Applicable Rate for the next succeeding Rate Period will be the lowest rate specified in the Submitted Bids which, taking into account such rate and all lower rates bid by Brokers-Dealers as or on behalf of Existing Holders and Potential Holders, would result in Existing Holders and Potential Holders owning all the shares of Municipal Preferred available for purchase in the Auction. If Sufficient Clearing Bids do not exist, the Applicable Rate for the next succeeding Rate Period will be the Maximum Rate on the Auction Date. In such event, Beneficial Owners that have submitted or are deemed to have submitted Sell Orders may not be able to sell in such Auction all shares of Municipal Preferred subject to such Sell Orders. If Broker-Dealers submit or are deemed to have submitted to the Auction Agent Hold Orders with respect to all Existing Holders, the Applicable Rate for the next succeeding Rate Period will be the All Hold Order Rate. The Auction Procedures include a pro rata allocation of shares for purchase and sale, which may result in an Existing Holder continuing to hold or selling, or a Potential Holder purchasing, a number of shares of Municipal Preferred that is fewer than the number of shares of Municipal Preferred specified in its Order. To the extent the allocation procedures have that result, Broker-Dealers that have designated themselves as Existing Holders or Potential Holders in respect of customer Orders will be required to make appropriate pro rata allocations among their respective customers. Settlement of purchases and sales with respect to shares of Municipal Preferred will be made on the next Business Day (also a Dividend Payment Date) after the Auction Date through the Securities Depository. Purchasers will make payment through their Agent Members in same-day funds to the Securities Depository against delivery to their respective Agent Member. The Securities Depository will make payment to the Sellers' Agent Members in accordance with Securities Depository's normal procedures, which now provide for payment against delivery by their Agent Members in same-day funds. The settlement procedures to be used with respect to Auctions for shares of Municipal Preferred are set forth in Appendix C to the Statement of Additional Information. The first Auction for shares of Municipal Preferred will be held on ________, _________ __, 1999, the Business Day preceding the Dividend Payment Date for the Initial Rate Period thereof. Thereafter, except during Special Rate Periods, Auctions will normally be held every ________, and each Subsequent Rate Period will normally begin on the following ________. Whenever the Trust intends to include any net capital gain or other income taxable for Federal income tax purposes in any dividend on shares of Municipal Preferred, the Trust shall, in the case of Minimum Rate Periods or Special Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any other Special Rate Period, notify the Auction Agent of the amount to be so included not later than the Dividend Payment Date next preceding the Auction Date on which the Applicable Rate for such dividend is to be established. Whenever the Auction Agent receives such notice from the Trust, it will be required in turn to notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance with its Broker-Dealer Agreement, will be required to notify its customers who are Beneficial Owners and Potential Beneficial Owners believed by it to be interested in submitting an Order in the Auction to be held on such Auction Date. SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED The Broker-Dealers (including the Underwriter) expect, but are not obligated, to maintain a secondary trading market in shares of Municipal Preferred outside of Auctions. There can be no assurance that a secondary trading market for shares of Municipal Preferred will develop or, if it does develop, that it will provide owners with liquidity of investment. The shares of Municipal Preferred will not be registered on any stock exchange or on the National Association of Securities Dealers Automated Quotations System. Investors who purchase shares of Municipal Preferred in an Auction for a Special Rate Period should note that because the dividend rate on such shares will be fixed for the length of such Rate Period, the value of such shares may fluctuate in response to the changes in interest rates, and may be more or less than their original cost if sold on the open market in advance of the next Auction thereof, depending on market conditions. -21- 27 A Beneficial Owner or an Existing Holder may sell, transfer, or otherwise dispose of shares of Municipal Preferred only in whole shares and only (1) pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with the Auction Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be permitted by the Trust; provided, however, that (a) a sale, transfer or other disposition of shares of Municipal Preferred from a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer as the holder of such shares to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of the foregoing if such Broker-Dealer remains the Existing Holder of the shares so sold, transferred or disposed of immediately after such sale, transfer or disposition and (b) in the case of all transfers other than pursuant to Auctions, the Broker-Dealer (or other person, if permitted by the Trust) to whom such transfer is made shall advise the Auction Agent of such transfer. DETERMINATION OF NET ASSET VALUE Net asset value of the Trust will be determined as of the close of regular trading on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. New York City time) on the last Business Day of each week (generally Friday), and at such other times as the Trust may authorize. The net asset value of the Trust equals the value of the Trust's assets less the Trust's liabilities. Portfolio securities for which market quotations are readily available are valued at current market value. Short-term investments maturing in 60 days or less are valued at amortized cost when the Advisor determines, pursuant to procedures adopted by the Board of Trustees, that such cost approximates current market value. All other securities and assets are valued at their fair value following procedures adopted by the Board of Trustees. DESCRIPTION OF MUNICIPAL PREFERRED GENERAL The Agreement and Declaration of Trust of the Trust (the "Declaration") provides that the Trust may authorize separate classes of shares of beneficial interest. The By-Laws of the Trust will, at the time they are amended and restated, authorize the issuance of ___ preferred shares of beneficial interest, no par value per share, which may be issued from time to time in such series and with such designations, preferences and other rights, qualifications, limitations and restrictions as are determined in a resolution of the Board of Trustees ("Preferred Shares"). The By-Laws authorize the issuance of up to __ shares of Series __ Municipal Preferred. Shares of Municipal Preferred carry one vote per share. Shares of Municipal Preferred will, when issued, be fully paid and, subject to matters discussed in "Certain Provisions in the Agreement and Declaration of Trust," nonassessable, and will have no pre-emptive or conversion rights or rights to cumulative voting. DIVIDENDS AND DIVIDEND PERIODS General. The Initial Rate Period for shares of Municipal Preferred is a period consisting of 7 days. Any Subsequent Rate Period will be a Minimum Rate Period (7 Rate Period Days) unless the Trust, subject to certain conditions, designates such Subsequent Rate Period as a Special Rate Period. See "Designation of Special Rate Periods" below. Dividends on the shares of Municipal Preferred will be payable, when, as and if declared by the Board of Trustees out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law on __________, _____________, 1999, and thereafter on each _______________; provided, however, that (1) if the ________ on which dividends would otherwise be payable is not a Business Day, then dividends shall be payable instead on the first Business Day that falls prior to such _____________ and (2) the Trust may specify different Dividend Payment Dates in respect of any Special Rate Period of such shares of more than 28 Rate Period Days. The amount of dividends per share payable on shares of Municipal Preferred on any date on which dividends shall be payable on such shares shall be computed by multiplying the Applicable Rate in effect for such Dividend Period or Dividend Periods or part thereof for which dividends have not been paid by a fraction, the numerator of -22- 28 which shall be the number of days in such Dividend Period or Dividend Periods or part thereof and the denominator of which shall be 365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other Dividend Periods, and applying the rate obtained against $25,000. Dividends will be paid through the Securities Depository on each Dividend Payment Date in accordance with its normal procedures, which now provide for it to distribute dividends in next-day funds to Agent Members, who in turn are expected to distribute such dividend payments to the persons for whom they are acting as agents. Each of the initial Broker-Dealers, however, has indicated to the Trust that such Broker-Dealer or the Agent Member designated by such Broker-Dealer will make such dividend payments available in same-day funds on each Dividend Payment Date to customers that use such Broker-Dealer or its designee as Agent Member. Dividends on shares of Municipal Preferred shall accumulate from the Date of Original Issue. The dividend rate for the Initial Rate Period will be _____% per annum. For each Subsequent Rate Period, the dividend rate will be the Applicable Rate that the Auction Agent advises the Trust results from an Auction, except as provided below. The Applicable Rate that results from an Auction will not be greater than the Maximum Rate which is: (i) in the case of any Auction Date which is not the Auction Date immediately prior to the first day of any proposed Special Rate Period, the product of (1) the Reference Rate on such Auction Date for the next Rate Period and (2) the Rate Multiple on such Auction Date, unless such shares have or had a Special Rate Period (other than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction at which Sufficient Clearing Bids existed has not yet occurred for a Minimum Rate Period after such Special Rate Period, in which case the higher of: (A) the dividend rate on such shares of the then-ending Rate Period; and (B) the product of (x) the higher of (I) the Reference Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was more than 364 Rate Period Days, and (II) the Reference Rate on such Auction Date for a Rate Period equal in length to such Special Rate Period, if such Special Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in length to such Special Rate Period, if such Special Rate Period was more than 364 Rate Period Days and (y) the Rate Multiple on such Auction Date; or (ii) in the case of any Auction Date which is the Auction Date immediately prior to the first day of any proposed Special Rate Period, the product of (1) the highest or (x) the Reference Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was more than 364 Rate Period Days, (y) the Reference Rate on such Auction Date for the Special Rate Period for which the Auction is being held if such Special Rate Period is 364 Rate Period Days or fewer or the Treasury Note Rate on such Auction Date for the Special Rate Period for which the Auction is being held if such Special Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate on such Auction Date for Minimum Rate Periods and (2) the Rate Multiple on such Auction Date. If any Auction for any Subsequent Rate Period is not held for any reason other than as described below, the dividend rate for such Subsequent Rate Period will be the Maximum Rate on the Auction Date for such Subsequent Rate Period. If the Trust fails to pay in a timely manner to the Auction Agent the full amount of any dividend on, or the redemption price of, shares of Municipal Preferred during any Rate Period thereof (other than any Special Rate Period of more than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period of more than 364 Rate Period Days during which such a failure occurred that has not been cured), and, prior to 12:00 Noon on the third Business Day next succeeding the date such failure occurred, such failure shall have been cured and the Trust shall -23- 29 have paid a late charge, each as described more fully in the Statement of Additional Information, no Auction will be held for the Subsequent Rate Period thereof and the dividend rate for shares of Municipal Preferred for such Subsequent Rate Period will be the Maximum Rate on the Auction Date for such Subsequent Rate Period. If the Trust fails to pay in a timely manner to the Auction Agent the full amount of any dividend on, or the redemption price of, any shares of Municipal Preferred during any Rate Period (other than any Special Rate Period of more than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period of more than 364 Rate Period Days during which such a failure occurred that has not been cured), and, prior to 12:00 Noon on the third Business Day next succeeding the date on which such failure occurred, such failure shall not have been cured or the Trust shall not have paid a late charge, each as described more fully in the Statement of Additional Information, no Auction will be held in respect of such shares for the first Subsequent Rate Period thereof thereafter (or for any Rate Period thereof thereafter to and including the Rate Period during which such failure is so cured and such late charge so paid (such late charge to be paid only in the event Moody's is rating such shares at the time the Trust cures such failure)), and the dividend rate for such shares for each such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on the Auction Date for each such Subsequent Rate Period(but with the prevailing rating for such shares, for purposes of determining such Maximum Rate, being deemed to be "Below 'ba3'/BB-"). If the Trust fails to pay in a timely manner to the Auction Agent the full amount of any dividend on, or the redemption price of, any shares of Municipal Preferred during a Special Rate Period of more than 364 Rate Period Days, or during any Rate Period succeeding any Special Rate Period of more than 364 Rate Period Days during which such a failure occurred that has not been cured, and such failure shall not have been cured or, in the event Moody's is then rating such shares, the Trust shall not have paid a late charge, in each case prior to 12:00 Noon on the fourth Business Day preceding the Auction Date for the Rate Period subsequent to such Rate Period and as more fully described in the Statement of Additional Information, no Auction will be held for such Subsequent Rate Period thereof (or for any Rate Period thereof thereafter to and including the Rate Period during which such failure is so cured and such late charge is so paid (such late charge to be paid only in the event that Moody's is rating the shares at the time and the Trust cures such failure)), and the dividend rate for each such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on the Auction Date for each such Subsequent Rate Period (but with the prevailing rating for such shares, for purposes of determining such Maximum Rate, being deemed to be "Below 'ba3'/BB-"). A failure to pay dividends on or the redemption price of shares of Municipal Preferred shall have been cured with respect to any Rate Period if, within the respective time periods described above, the Trust shall have paid to the Auction Agent (i) all accumulated and unpaid dividends on the shares of Municipal Preferred and (ii) without duplication, the redemption price for the shares of Municipal Preferred, if any, for which notice of redemption has been mailed by the Trust; provided, however, that the foregoing clause (ii) shall not apply to the Trust's failure to pay the redemption price in respect of shares of Municipal Preferred when the related notice of redemption provides that redemption of such shares is subject to one or more conditions precedent and any such condition precedent shall not have been satisfied at the time or times and in the manner specified in such notice of redemption. Gross-up Payments. Holders of shares of Municipal Preferred shall be entitled to receive, when, as and if declared by the Board of Trustees, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, dividends in an amount equal to the aggregate Gross-up Payment in accordance with the following: If, in the case of any Minimum Rate Period or any Special Rate Period of 28 Rate Period Days or fewer, the Trust allocates any net capital gain or other income taxable for Federal income tax purposes to a dividend paid on shares of Municipal Preferred without having given advance notice thereof to the Auction Agent as described above under "The Auction--Auction Procedures" (a "Taxable Allocation") solely by reason of the fact that such allocation is made retroactively as a result of the redemption of all or a portion of the outstanding shares of Municipal Preferred or the liquidation of the Trust, the Trust will, prior to the end of the calendar year in which such dividend was paid, provide notice thereof to the Auction Agent and direct the Trust's dividend disbursing agent to send such notice with a Gross-up Payment to each holder of shares (initially Cede & Co., as nominee of the Securities Depository) that was -24- 30 entitled to such dividend payment with respect to shares of Municipal Preferred during such calendar year at such holder's address as the same appears or last appeared on the record books of the Trust. If, in the case of any Special Rate Period of more than 28 Rate Period Days, the Trust makes a Taxable Allocation to a dividend paid on shares of Municipal Preferred, the Trust shall, prior to the end of the calendar year in which such dividend was paid, provide notice thereof to the Auction Agent and direct the Trust's dividend disbursing agent to send such notice with a Gross-up Payment to each holder of such shares that was entitled to such dividend payment during such calendar year at such holder's address as the same appears or last appeared on the record books of the Trust. The Trust shall not be required to make Gross-up Payments with respect to any net capital gain or other taxable income determined by the Internal Revenue Service to be allocable in a manner different from that allocated by the Trust. A "Gross-up Payment" in respect of any dividend means payment to a holder of shares of Municipal Preferred of an amount which, giving effect to the Taxable Allocations made with respect to such dividend, would cause such holder's after-tax returns (taking into account both the Taxable Allocations and the Gross-up Payment) to be equal to the after-tax return the holder would have received if no such Taxable Allocations had occurred. Such Gross-up Payment shall be calculated: (i) without consideration being given to the time value of money; (ii) assuming that no holder of shares of Municipal Preferred is subject to the Federal alternative minimum tax with respect to dividends received from the Trust; and (iii) assuming that each holder of shares of Municipal Preferred is taxable at the maximum marginal regular Federal individual income tax rate applicable to ordinary income or net capital gain, as applicable, or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income or net capital gain, as applicable, whichever is greater, in effect at the time such Gross-up Payment is made. Restrictions on Dividends and Other Distributions. For so long as any shares of Municipal Preferred are outstanding, the Trust may not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or in options, warrants or rights to subscribe for or purchase, Common Shares) in respect of Common Shares or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares (except by conversion into or exchange for shares of the Trust ranking junior to the shares of Municipal Preferred as to the payment of dividends and the distribution of assets upon liquidation), unless (1) full cumulative dividends on shares of Municipal Preferred through their most recently ended Dividend Period shall have been paid or shall have been declared and sufficient funds for the payment thereof deposited with the Auction Agent; (2) the Trust has redeemed the full number of shares of Municipal Preferred required to be redeemed by any provision for mandatory redemption pertaining thereto; and (3) immediately after such transaction the Discounted Value of the Trust's portfolio would at least equal the Municipal Preferred Basic Maintenance Amount in accordance with guidelines of the rating agency or agencies then rating the shares of Municipal Preferred. Except as set forth in the next sentence, no dividends shall be declared or paid or set apart for payment on any class or series of shares of beneficial interest of the Trust ranking, as to the payment of dividends, on a parity with shares of Municipal Preferred for any period unless full cumulative dividends have been or contemporaneously are declared and paid on the shares of Municipal Preferred through their most recent Dividend Payment Date. When dividends are not paid in full upon the shares of Municipal Preferred through their most recent Dividend Payment Date or upon any other class or series of shares ranking on a parity as to the payment of dividends with shares of Municipal Preferred through their most recent respective dividend payment dates, all dividends declared upon shares of Municipal Preferred and any other such class or series of shares ranking on a parity as to the payment of dividends with shares of Municipal Preferred shall be declared pro rata so that the amount of dividends declared per share on shares of Municipal Preferred and such other class or series of shares shall in all cases bear to each other the same ratio that accumulated dividends per share on the shares of Municipal Preferred and such other class or series of shares bear to each other. -25- 31 DESIGNATION OF SPECIAL RATE PERIODS The Trust, at its option, may designate any succeeding Subsequent Rate Period as a Special Rate Period consisting of a specified number of Rate Period Days evenly divisible by seven and not more than 1,820 (approximately 5 years), subject to certain adjustments. A designation of a Special Rate Period shall be effective only if, among other things, (i) the Trust shall give certain notices to the Auction Agent, (ii) an Auction for such shares shall have been held on the Auction Date immediately preceding the first day of such proposed Special Rate Period and Sufficient Clearing Bids for such shares shall have existed in such Auction and (iii) if the Trust shall have mailed a notice of redemption with respect to any shares of Municipal Preferred, the redemption price with respect to such shares shall have been deposited with the Auction Agent. VOTING RIGHTS In addition to voting rights described below under "Certain Provisions in the Agreement and Declaration of Trust" and in the Statement of Additional Information under "Investment Objectives and Policies--Fundamental Investment Policies," holders of shares of Municipal Preferred, voting as a separate class, are entitled to elect (1) two trustees of the Trust at all times and (2) a majority of the trustees if at any time dividends on shares of Municipal Preferred shall be unpaid in an amount equal to two years dividends thereon, and to continue to be so represented until all dividends in arrears shall have been paid or otherwise provided for. In all other cases, trustees shall be elected by holders of Common Shares and Preferred Shares (including Municipal Preferred), voting together as a single class. Subject to the voting rights described above and except as otherwise specified under "Certain Provisions in the Agreement and Declaration of Trust," the Trust may not, among other things, without the approval of the holders of a "majority of the outstanding" shares of Municipal Preferred, voting as a separate class, approve any plan of reorganization adversely affecting shares of Municipal Preferred. In addition, the Trust may not, without the affirmative vote of the holders of at least a majority of the shares of Municipal Preferred outstanding at the time, voting as a separate class: (a) authorize, create or issue additional shares of Municipal Preferred or classes or series of Preferred Shares ranking prior to or on a parity with shares of Municipal Preferred with respect to the payment of dividends or the distribution of assets upon liquidation or (b) amend, alter or repeal the provisions of the Declaration or the By-Laws, whether by merger, consolidation or otherwise, so as to materially affect any preference, right or power of such shares of Municipal Preferred or the holders thereof; provided, however, that a division of a share of Municipal Preferred shall be deemed to materially affect any such preference, right or power only if the terms of such division adversely affect the holders of shares of Municipal Preferred. The Trust may not, without the affirmative vote of the holders of at least 66 2/3% of the shares of Municipal Preferred outstanding at the time, voting as a separate class, file a voluntary application for relief under Federal bankruptcy law or any similar application under state law for so long as the Trust is solvent and does not foresee becoming insolvent. Notwithstanding the first sentence of this paragraph, the Trust may, without the vote of the holders of shares of Municipal Preferred, authorize, create or issue additional shares of Municipal Preferred or classes or series of Preferred Shares ranking on a parity with shares of Municipal Preferred with respect to the payment of dividends and the distribution of assets upon liquidation if, after giving effect thereto, the aggregate liquidation preference of all Preferred Shares then outstanding, exclusive of accumulated and unpaid dividends, would not exceed $__________; provided, however, that the Trust obtains written confirmation from Moody's (if Moody's is then rating the shares Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred) that the issuance of any such additional shares or class or series of shares would not impair the rating then assigned by such rating agency to shares of Municipal Preferred. Further, the Trust may, without the vote of the holders of shares of Municipal Preferred, authorize, create or issue additional shares of Municipal Preferred or classes or series of Preferred Shares ranking on a parity with shares of Municipal Preferred with respect to the payment of dividends and the distribution of assets upon liquidation notwithstanding that, after giving effect thereto, the aggregate liquidation preference of all Preferred Shares then outstanding would exceed $__________; provided, however, that either Moody's or Standard & Poor's is rating the shares of Municipal Preferred and the Trust obtains written confirmation from Moody's (if Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred) that the issuance of any such additional shares or class or series of shares would not impair the rating then assigned by such rating agency to shares of Municipal Preferred. If any action set forth in this -26- 32 paragraph would adversely affect the rights of one or more series (the "Affected Series") of Municipal Preferred in a manner different from any other series of Municipal Preferred, the Trust will not approve any such action without the affirmative vote of the holders of at least a majority of the shares of each such Affected Series outstanding at the time (each such Affected Series voting as a separate class). REDEMPTION Mandatory Redemption. In the event the Trust does not timely cure a failure to maintain (1) a Discounted Value of its portfolio equal to the Municipal Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in each case in accordance with the requirements of the rating agency or agencies then rating the shares of Municipal Preferred, shares of Municipal Preferred will be subject to mandatory redemption on a date specified by the Board of Trustees, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, at the redemption price of $25,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) to (but not including) the date fixed for redemption. Any such redemption will be limited to the number of shares of Municipal Preferred necessary to restore the required Discounted Value or the 1940 Act Municipal Preferred Asset Coverage, as the case may be. In determining the number of shares of Municipal Preferred required to be redeemed in accordance with the foregoing, the Trust will allocate the number of shares required to be redeemed to satisfy the Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be, pro rata among shares of Municipal Preferred and other Preferred Shares of the Trust, subject to redemption or retirement. Optional Redemption. Shares of Municipal Preferred are redeemable, at the option of the Trust: (i) in whole or in part, on the second Business Day preceding any Dividend Payment Date for such shares, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, at the redemption price of $25,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) to (but not including) the date fixed for redemption; provided, however, that (1) shares of Municipal Preferred may not be redeemed in part if after such partial redemption fewer than 500 shares remain outstanding and (2) the notice establishing a Special Rate Period of shares of Municipal Preferred, as delivered to the Auction Agent and filed with the Secretary of the Trust, may provide that such shares shall not be redeemable during the whole or any part of such Special Rate Period (except as provided in (ii) below) or shall be redeemable during the whole or any part of such Special Rate Period only upon payment of such redemption premium or premiums as shall be specified therein; and (ii) as a whole but not in part, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, on the first day following any Dividend Period included in a Rate Period of more than 364 Rate Period Days if, on the date of determination of the Applicable Rate for such Rate Period, such Applicable Rate equaled or exceeded on such date of determination the Treasury Note Rate for such Rate Period, at a redemption price of $25,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) to (but not including) the date fixed for redemption. Notwithstanding the foregoing, if any dividends on shares of Municipal Preferred (whether or not earned or declared) are in arrears, no shares of Municipal Preferred shall be redeemed unless all outstanding shares of Municipal Preferred are simultaneously redeemed, and the Trust shall not purchase or otherwise acquire any shares of Municipal Preferred; provided, however, that the foregoing shall not prevent the purchase or acquisition of all outstanding shares of Municipal Preferred pursuant to the successful completion of an otherwise lawful purchase or exchange offer made on the same terms to, and accepted by, holders of all outstanding shares of Municipal Preferred. -27- 33 LIQUIDATION Subject to the rights of holders of any series or class or classes of shares ranking on a parity with shares of Municipal Preferred with respect to the distribution of assets upon liquidation of the Trust, upon a liquidation of the Trust, whether voluntary or involuntary, the holders of shares of Municipal Preferred then outstanding will be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on the Common Shares, an amount equal to the liquidation preference with respect to such shares ($25,000 per share), plus an amount equal to all dividends thereon (whether or not earned or declared) accumulated but unpaid to (but not including) the date of final distribution in same-day funds, together with any applicable Gross-up Payments in connection with the liquidation of the Trust. After the payment to the holders of the shares of Municipal Preferred of the full preferential amounts provided for a described herein, the holders of Municipal Preferred as such shall have no right or claim to any of the remaining assets of the Trust. Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any Massachusetts business trust or corporation nor the merger or consolidation of any Massachusetts business trust or corporation into or with the Trust shall be a liquidation, whether voluntary or involuntary, for the purposes of the foregoing paragraph. RATING AGENCY GUIDELINES The Trust is required under Moody's and Standard & Poor's guidelines to maintain assets having in the aggregate a Discounted Value at least equal to the Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's have each established separate guidelines for determining Discounted Value. To the extent any particular portfolio holding does not satisfy the applicable rating agency's guidelines, all or a portion of such holding's value will not be included in the calculation of Discounted Value (as defined by such rating agency). The Moody's and Standard & Poor's guidelines do not impose any limitations on the percentage of Trust assets that may be invested in holdings not eligible for inclusion in the calculation of the Discounted Value of the Trust's portfolio. The amount of such assets included in the portfolio at any time may vary depending upon the rating, diversification and other characteristics of the eligible assets included in the portfolio. The Municipal Preferred Basic Maintenance Amount includes the sum of (i) the aggregate liquidation preference of shares of Municipal Preferred then outstanding and (ii) certain accrued and projected payment obligations of the Trust. The Trust is also required under rating agency guidelines to maintain, with respect to the shares of Municipal Preferred, as of the last Business Day of each month in which any shares of Municipal Preferred are outstanding, asset coverage of at least 200% with respect to senior securities which are shares, including shares of Municipal Preferred (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are shares of a closed-end investment company as a condition of declaring dividends on its common shares) ("1940 Act Municipal Preferred Asset Coverage"). Based on the composition of the Trust's portfolio and market conditions as of _____________, 1999, the 1940 Act Municipal Preferred Asset Coverage with respect to shares of Municipal Preferred, assuming the issuance on the date hereof of all shares of Municipal Preferred offered hereby and after giving effect to the deduction of the sales load and offering costs relating thereto estimated at $________, would be computed as follows: Value of Trust assets less liabilities not constituting senior securities $___________ --------------------------------------- = --------------- = ____% Senior securities representing $ __________ indebtedness plus liquidation value of the shares of Municipal Preferred In the event the Trust does not timely cure a failure to maintain (1) a Discounted Value of its portfolio equal to the Municipal Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in -28- 34 each case in accordance with the requirements of the rating agency or agencies then rating the shares of Municipal Preferred, the Trust will be required to redeem shares of Municipal Preferred as described above under "Description of Municipal Preferred--Redemption." The Trust may, but is not required to, adopt any modifications to the guidelines that may hereafter be established by Moody's or Standard & Poor's. Failure to adopt any such modifications, however, may result in a change in the ratings described above or a withdrawal of ratings altogether. In addition, any rating agency providing a rating for the shares of Municipal Preferred may, at any time, change or withdraw any such rating. The Board of Trustees may, without shareholder approval, amend, alter or repeal any or all of the definitions and related provisions which have been adopted by the Trust pursuant to the rating agency guidelines in the event the Trust receives written confirmation from Moody's or Standard & Poor's, or both, as appropriate, that any such change would not impair the ratings then assigned by Moody's and Standard & Poor's to shares of Municipal Preferred. As described by Moody's and Standard & Poor's, a preferred share rating is an assessment of the capacity and willingness of an issuer to pay preferred share obligations. The ratings on the Municipal Preferred are not recommendations to purchase, hold or sell shares of Municipal Preferred, inasmuch as the ratings do not comment as to market price or suitability for a particular investor. The rating agency guidelines described above also do not address the likelihood that an owner of shares of Municipal Preferred will be able to sell such shares in an Auction or otherwise. The ratings are based on current information furnished to Moody's and Standard & Poor's by the Trust and the Advisor, and information obtained from other sources. The ratings may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, such information. A rating agency's guidelines will apply to shares of Municipal Preferred only so long as such rating agency is rating such shares. The Trust will pay certain fees to Moody's or Standard & Poor's, or both, for rating shares of Municipal Preferred. DESCRIPTION OF COMMON SHARES In addition to the shares of Municipal Preferred, the Declaration authorizes the issuance of an unlimited number of Common Shares, no par value. All Common Shares have equal noncumulative voting rights and equal rights with respect to dividends, assets and liquidation. Common Shares are fully paid and nonassessable when issued and have no preemptive, conversion or exchange rights. So long as any shares of Municipal Preferred are outstanding, the Trust is not permitted to declare dividends on, make any distributions with respect to, or purchase its Common Shares unless, at the time of such declaration, distribution or purchase, as applicable (and after giving effect thereto), all accumulated dividends on any preferred shares of the Trust have been paid. In the past, the Trust's Common Shares have traded at various times at either a premium or a discount in relation to net asset value. Although the Trust's Common Shares recently have been trading at a premium above net asset value, there can be no assurance that this premium will continue after the offering of the shares of Municipal Preferred or that the Common Shares will not again trade at a discount. Shares of other closed-end investment companies frequently trade at a discount from net asset value. -29- 35 CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST The Board of Trustees is divided into three classes, each having a term of three years. Each year the term of one class expires. This may make it more difficult to change the Trust's management and could have the effect of depriving shareholders of an opportunity to sell their Common Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Trust in a tender offer or similar transaction. In addition, the Declaration provides that the affirmative vote or consent of two-thirds of the outstanding Common Shares and any Preferred Shares of the Trust (including shares of Municipal Preferred), voting together as a single class, and of the Preferred Shares (including shares of Municipal Preferred) voting together as a single class, would be required to authorize the conversion of the Trust from a closed-end to an open-end investment company. This two-thirds vote requirement is higher than the vote required under the 1940 Act. Reference should be made to the Declaration on file with the Commission for the full text of these provisions. REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND REPURCHASE OF SHARES Shares of closed-end investment companies frequently trade at a discount from net asset value. The Board of Trustees regularly monitors the relationship between the Trust's market price and net asset value. If shares of the Trust were to trade at a substantial discount to net asset value for an extended period of time, the Board may consider the repurchase of its Common Shares on the open market or the making of tender offers for such shares. Since commencement of the Trust's operations, no such open market purchases or tender offers have been made, and no assurances can be given that such actions will be taken in the future. Subject to its investment restrictions, the Trust may borrow money to finance the repurchase of shares, subject to compliance with the 1940 Act Municipal Preferred Asset Coverage, Section 18 of the 1940 Act and the other limitations described under "Rating Agency Guidelines." Shares may not be repurchased, however, (i) if applicable asset coverage requirements under the 1940 Act (i.e., 200% with respect to any preferred shares of the Trust, including shares of Municipal Preferred) are not met or would not be met following such repurchase or (ii) if otherwise prohibited by applicable law. There can be no assurance that repurchases or tenders, if they were to occur, would result in the shares trading at a price which is equal to their net asset value. The Trust anticipates that the market price of the shares will usually vary from net asset value. The market price of the shares will be determined, among other things, by the relative demand for and supply of the 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. It should be recognized that any such acquisitions of shares would decrease the total assets of the Trust and therefore have the effect of increasing the Trust's expense ratio. Furthermore, any interest on borrowings to finance share repurchase transactions would reduce the Trust's net income. CONVERSION TO OPEN-END STATUS The Trust's Board of Trustees may from time to time consider submitting to the holders of the shares of beneficial interest of the Trust at any time a proposal to convert the Trust to an open-end investment company. In determining whether to exercise its discretion to submit this issue to shareholders, the Board of Trustees would consider all factors then relevant, including the relationship of the market price of the Common Shares to net asset value, the extent to which the Trust's capital structure is leveraged and the possibility of re-leveraging, the spread, if any, between yields on lower rated securities in the Trust's portfolio and interest and dividend charges on senior securities and general market and economic conditions. In addition to any vote required by Massachusetts law, conversion of the Trust to an open-end investment company would require the affirmative vote of two thirds of the Common Shares and any Preferred Shares of the Trust (including shares of Municipal Preferred), voting together as a single class, and of the Preferred Shares (including shares of Municipal Preferred) voting together as a single class, entitled to be voted on the matter. This two-thirds vote requirement is higher than the vote required under the 1940 Act. Shareholders of an open-end investment company may require the company to redeem their shares at any time -30- 36 (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charges, if any, as might be in effect at the time of redemption. If the Trust converted to an open-end investment company, it would be required to redeem all shares of Municipal Preferred then outstanding at the redemption price specified under "Description of Municipal Preferred--Redemption--Optional Redemption." In addition, the Trust could be required to liquidate portfolio securities to meet required and requested redemptions, and its Common Shares would no longer be listed on the Exchange. No assurance can be given that the Board will, at any time in the future, decide to submit a proposal to convert to open-end status to the shareholders of the Trust. TAX MATTERS The following Federal tax discussion is based on the advice of Ropes & Gray, counsel to the Trust, and reflects provisions of the Code, existing Treasury regulations, rulings published by the Internal Revenue Service, and other applicable authority, as of the date of this Prospectus. These authorities are subject to change by legislative or administrative action. The following discussion is only a summary of some of the important tax considerations generally applicable to investments in the Trust. There may be other tax considerations applicable to particular investors. In addition, income earned through an investment in the Trust may be subject to foreign, state and local taxes. Prospective shareholders are therefore urged to consult their tax advisors with respect to the tax consequences to them of an investment in the Trust. For more information on Federal income tax considerations, see "Tax Matters" in the Statement of Additional Information. FEDERAL TAXATION OF THE TRUST The Trust intends to qualify each year for taxation as a regulated investment company under Subchapter M of the Code. If the Trust so qualifies, the Trust will not be subject to Federal income tax on income distributed in a timely manner to Trust shareholders in the form of dividends or capital gain distributions. The Trust's investments and hedging activities are subject to certain special Federal tax rules. Code rules governing the Trust's hedging transactions (including hedging transactions in futures and options) may alter the character of distributions to holders of shares of Municipal Preferred. Income earned as a result of the Trust's hedging transactions will not be eligible to be treated as "exempt-interest dividends" when distributed to shareholders. The Trust's investment in securities issued at a discount will (and investments in securities purchased at a discount may) require the Trust to accrue and distribute income not yet received. Therefore, in order to generate sufficient cash to make the requisite distributions, the Trust may be required to sell securities in its portfolio that it otherwise would have continued to hold. FEDERAL TAXATION OF SHAREHOLDERS Dividends and Other Distributions. Assuming that the Trust qualifies for taxation as a regulated investment company under Subchapter M of the Code and that, at the close of each quarter of the Trust's taxable year, at least 50% of the value of the Trust's total assets consists of obligations the interest on which is exempt from Federal income tax under Code section 103(a), the Trust will qualify to pay "exempt-interest dividends" to its shareholders to the extent of its tax exempt interest income (less applicable expenses). Distributions of net tax-exempt interest income that the Trust properly designates as exempt-interest dividends are treated by shareholders as interest excludable from their gross income for Federal income tax purposes but may be taxable for Federal alternative minimum tax purposes (discussed below) and for foreign, state and local tax purposes. Under the Code, the interest on certain "private activity bonds" issued after August 7, 1986 is treated as a preference item and is (after reduction by applicable expenses) included in the Federal alternative minimum taxable income of both individuals and corporations. The Trust will furnish to shareholders annually a report indicating the percentage of Trust income treated as a preference item for alternative minimum tax purposes. In addition, for corporations, alternative minimum taxable income is increased by a percentage of the amount by which an alternative measure of income that includes interest on all tax-exempt securities exceeds the amount otherwise determined to be alternative minimum taxable income. Accordingly, the portion of the Trust's dividends that would otherwise be tax- -31- 37 exempt to shareholders may cause certain shareholders to be subject to the Federal alternative minimum tax or may increase the tax liability of a shareholder who is subject to such tax. Investors should thus consider the possible effect of an investment in the Trust on their Federal alternative minimum tax liability. Exempt-interest dividends attributable to interest received on certain private activity bonds and certain industrial development bonds will not be tax-exempt to any shareholders who are, within the meaning of Section 147(a) of the Code, "substantial users" of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users. The receipt of exempt-interest dividends may affect the portion, if any, of an individual shareholder's Social Security and Railroad Retirement benefits that will be includable in gross income subject to Federal income tax. Up to 85 percent of Social Security and Railroad Retirement benefits may be included in gross income in cases where the recipient's combined income, consisting of adjusted gross income (with certain adjustments), tax-exempt interest income and one-half of any Social Security and Railroad Retirement benefits, exceeds a base amount ($25,000 for a single individual and $32,000 for individuals filing a joint return). Individual shareholders receiving Social Security or Railroad Retirement benefits should consult their tax advisors. All or a portion of interest on indebtedness incurred or continued by a shareholder to purchase or carry Trust shares may not be deductible by the shareholder. See "Tax Matters--Federal Income Tax Matters--Federal Taxation of the Shareholders" in the Statement of Additional Information. Distributions of net investment income that do not qualify as exempt-interest dividends (including the excess, if any, of net short-term capital gain over net long-term capital loss), will be taxable to shareholders as ordinary income, and will not qualify for the corporate dividends-received deduction. Distributions of net capital gain will be taxable to shareholders as long-term capital gain, without regard to how long a shareholder has held shares of the Trust, and will not qualify for the corporate dividends-received deduction. Due to certain of the Trust's hedging and other investment activities, the net investment income calculated for accounting purposes and distributed to shareholders may in certain circumstances exceed or be less than the Trust's net tax-exempt and taxable income. If the Trust distributes amounts in excess of the Trust's "earnings and profits" (which provides the measure of the Trust's dividend-paying capacity for tax purposes), such distributions to shareholders will be treated as a return of capital to the extent of a shareholder's basis in his or her shares of Municipal Preferred, and thereafter as gain from the sale or exchange of a capital asset. A return of capital is not taxable to a shareholder and has the effect of reducing a shareholder's basis in the relevant shares, which basis reduction would cause shareholders of Municipal Preferred to realize gain if their shares of Municipal Preferred were sold for an amount equal to the liquidation price. Conversely, because Trust expenses attributable to earning tax-exempt income do not reduce the Trust's current earnings and profits, a portion of any distribution in excess of the Trust's net tax-exempt and taxable income may be considered paid out of the Trust's earnings and profits and may therefore be treated as a taxable dividend (even though that portion economically represents a return of the Trust's capital). The Internal Revenue Service has taken the position in a published revenue ruling indicating that the Trust is required to designate distributions paid with respect to its Common Shares and its Preferred Shares as consisting of a portion of each type of income distributed by the Trust. The portion of each type of income deemed received by the holders of each class of shares will be equal to the portion of total Trust distributions received by such class. Thus, the Trust will designate dividends paid as exempt-interest dividends in a manner that allocates such dividends among the holders of the Common Shares, the shares of Municipal Preferred, in proportion to the total dividends paid to each such class during or with respect to the taxable year, or otherwise as required by applicable law. Long-term capital gain distributions and other income subject to regular Federal income tax will similarly be allocated among the two classes. The amount of taxable income allocable to shares of Municipal Preferred will depend on the amount of such income realized by the Trust, but generally is not expected to be significant. No dividend that the Trust pays will be increased to compensate for the fact that it may be subject to foreign, state or local taxes. -32- 38 If for any reason it is determined after the payment of any dividend that a portion of that dividend was subject to Federal income tax, the Trust will not be required to pay any additional amount to compensate for any tax payable on the dividend (other than Gross-up Payments (see "Description of Municipal Preferred--Dividends--Gross-up Payments") payable under the circumstances described in this Prospectus). The Trust will generally designate Gross-up Payments as exempt-interest dividends to the extent it determines such designation is consistent with the allocation principles set forth above. The federal income tax consequences of Gross-up Payments under existing law are uncertain. For example, existing authorities, including the revenue ruling discussed in the above paragraph, do not specifically address whether dividends (including possibly Gross-up Payments) that are paid following the close of a taxable year, but that are treated for tax purposes as derived from the income of such prior taxable year, are treated as dividends "paid" during such prior taxable year for purposes of determining each class's proportionate share of a particular type of income. The Trust currently intends to treat such dividends as having been "paid" in the prior taxable year for purposes of determining each class's proportionate share of a particular type of income with respect to such prior taxable year. Existing authorities also do not specifically address the allocation of taxable income among the dividends paid to holders of a class of shares during or with respect to a taxable year. It is possible that the Internal Revenue Service could disagree with the Trust's position concerning the treatment of dividends paid after the close of a taxable year or with the Trust's method of allocation, in which case the Internal Revenue Service could attempt to recharacterize a portion of the dividends paid to the holders of shares of Municipal Preferred and designated by the Trust as exempt-interest dividends as consisting instead of capital gain or other taxable income. If the Internal Revenue Service were to prevail with respect to any such attempted recharacterization, holders of shares of Municipal Preferred could be subject to tax on amounts so recharacterized and the Trust could be subject to Federal income and excise tax. In such event, no additional amounts (including Gross-up Payments) would be paid by the Trust with respect to dividends so recharacterized to compensate for any additional tax owed by holders of shares of Municipal Preferred. Gross-up Payments will not include any amount to compensate for the fact that the Gross-up Payments or the Taxable Allocations (see "Description of Municipal Preferred--Dividends--Gross-up Payments") may themselves be subject to foreign, state or local taxes. No provision will be made to compensate holders of shares of Municipal Preferred for any alternative minimum tax liability in respect of distributions on such shares of Municipal Preferred. The Trust believes that, should the Internal Revenue Service attempt to so recharacterize amounts allocated by the Trust to shares of Municipal Preferred, the Internal Revenue Service would be unlikely to prevail. Any dividend paid by the Trust during January of a given year generally is deemed to have been received by shareholders on December 31 of the preceding year, provided that the dividend actually was declared by the Trust in October, November or December of such preceding year and payable to shareholders of record on a date in such a month. The Trust will notify shareholders each year of the amount and tax status of dividends and other distributions, including the amount of any distribution of net capital gain. The Code provides that every shareholder required to file a tax return must include for information purposes on such return the amount of exempt-interest dividends received from all sources (including the Trust) during the taxable year. Sale or Redemption of Shares. In certain circumstances, the sale or exchange of shares of Municipal Preferred may give rise to gain or loss. In general, any gain or loss realized upon a taxable disposition of shares of Municipal Preferred by a shareholder will be treated as long-term capital gain or loss if the shares have been held for more than twelve months, and otherwise as short-term capital gain or loss. However, if a shareholder buys shares of Municipal Preferred and sells them at a loss within six months, any loss will be disallowed for Federal income tax purposes to the extent of any exempt-interest dividends received on such shares. In addition, any loss (not already disallowed as provided in the preceding sentence) realized upon a taxable disposition of shares of Municipal Preferred held for six months or less will be treated as long-term, rather than short-term, capital loss to the extent of any net capital gain distributions received by the shareholder with respect to those shares. All or a portion of any loss realized upon a taxable disposition of shares of Municipal Preferred will be disallowed if other shares of Municipal Preferred -33- 39 are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares of Municipal Preferred will be adjusted to reflect the disallowed loss. Gain or loss, if any, resulting from a redemption of shares of Municipal Preferred generally will be treated as gain or loss from the sale or exchange of a capital asset under Code Section 302, rather than as a dividend, but only if the redemption distribution (i) is deemed not to be essentially equivalent to a dividend, (ii) is in complete redemption of an owner's interest in the Trust, (iii) is substantially disproportionate with respect to the owner, or (iv) with respect to non-corporate owners, is in partial liquidation of the Trust. For purposes of (i), (ii) and (iii) above, an owner's common share ownership will be taken into account. CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR The Trust's securities and cash are held by The Chase Manhattan Bank, whose principal business address is 4 Chase MetroTech Center, Brooklyn, New York 11245, as custodian (the "Custodian") under a custodian contract. State Street Bank and Trust Company, whose principal business address is 225 Franklin Street, Boston, Massachusetts 02110, serves as dividend disbursing agent, as agent under the Trust's Dividend Reinvestment Plan and as transfer agent and registrar for the shares. UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement between Salomon Smith Barney Inc. (the "Underwriter") and the Trust (the "Underwriting Agreement") dated the date hereof, the Underwriter has agreed to purchase, and the Trust has agreed to sell ___ shares of Series __ Municipal Preferred offered hereby. The Underwriting Agreement provides that the obligations of the Underwriter are subject to the approval of certain legal matters by counsel and to certain conditions precedent, and that the Underwriter is obligated to purchase all of the shares of Municipal Preferred if any are purchased. In the Underwriting Agreement, the Trust and the Advisor have agreed to indemnify the Underwriter with respect to certain liabilities, including liabilities arising under the Securities Act of 1933, as amended, and to contribute in respect thereof. The Trust has been advised by the Underwriter that it proposes initially to offer the shares of Municipal Preferred offered hereby to the public at the price set forth on the cover page of this Prospectus and to selected dealers at such price less a concession not to exceed $____ per share. The underwriting commission to be paid by the Trust of $_____ per share is equal to ___% of the initial offering price. After the initial public offering, the public offering price and the concession may be changed by the Underwriters. The Trust anticipates that the Underwriter may from time to time act as a broker or dealer in connection with the execution of its portfolio transactions after it has ceased to be an Underwriter. The Trust anticipates that the Underwriter or one of its affiliates may, from time to time, act in Auctions as Broker-Dealers as set forth under "The Auction--General" and will receive the fees described under "The Auction--Broker-Dealers" in exchange for so acting. The Underwriter is an active underwriter of, and dealer in, securities and acts as a market maker in a number of such securities and therefore can be expected to engage in portfolio transactions with the Trust. The principal business address of Salomon Smith Barney is 388 Greenwich Street, New York, New York 10010. LEGAL OPINIONS Certain legal matters in connection with the Series ___ Municipal Preferred offered hereby will be passed upon for the Trust by Ropes & Gray, Boston, Massachusetts, and for the Underwriters by Simpson Thacher & Bartlett, New York, New York. -34- 40 REPORTS TO SHAREHOLDERS The Trust will send unaudited semiannual and audited annual reports to its shareholders, including a list of investments held. EXPERTS The Financial Statements included in the Statement of Additional Information have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The address of PricewaterhouseCoopers LLP is 160 Federal Street, Boston, Massachusetts 02110. FURTHER INFORMATION The Trust has filed with the Securities and Exchange Commission (the "Commission"), Washington, DC 20549, a Registration Statement under the Securities Act with respect to the shares of Municipal Preferred offered hereby. Further information concerning these securities and the Trust may be found in the Registration Statement, of which this Prospectus constitutes a part, on file with the Commission. The Registration Statement may be inspected without charge at the Commission's office in Washington, DC, and copies of all or any part thereof may be obtained from such office after payment of the fees prescribed by the Commission. The Trust is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith files reports and other information with the Commission. Such reports, proxy and information statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, DC 20549 and the Commission's regional offices, including offices at Seven World Trade Center, New York, New York 10048. Call 1-800-SEC-0330 for information about the public reference facilities. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at prescribed rates. Such reports and other information concerning the Trust may also be inspected at the offices of the Exchange. The Commission maintains a Web site (http://www.sec.gov) that contains the Statement of Additional Information, material incorporated by reference into this Prospectus and the Statement of Additional Information, and reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. In addition, reports, proxy and information statements and other information concerning the Trust can be inspected at the offices of the Exchange, 20 Broad Street, New York, New York 10005. -35- 41 GLOSSARY "'AA' Composite Commercial Paper Rate," on any date for any Rate Period, means: (i)(A) in the case of any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period Days, the interest equivalent of the 30-day rate; provided, however, that if such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial Paper Rate is being used to determine the Applicable Rate when all of the outstanding shares of Municipal Preferred are subject to Submitted Hold Orders, then the interest equivalent of the seven-day rate, and (B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70 Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period Days, the arithmetic average of the interest equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but fewer than 120 Rate Period Days, the arithmetic average of the interest equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and 180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the interest equivalent of the 180-day rate, in each case on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's or the equivalent of such rating by Standard & Poor's or another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date; or (ii) in the event that the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by certain commercial paper dealers to the Auction Agent for the close of business on the Business Day next preceding such date. "Agent Member" means a member of or participant in the Securities Depository that will act on behalf of a Bidder. "All Hold Order Rate," with respect to a Rate Period for which an Auction is held, means the lesser of the Kenny Index (if the Rate Period for which the Auction is held consists of fewer than 183 Rate Period Days) or the product of (i)(1) the "AA" Composite Commercial Paper Rate on the Auction Date for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days, (2) the Treasury Bill Rate on such Auction Date for such Rate Period, if such Rate Period consists of more than 182 but fewer than 365 Rate Period Days or (3) the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate Period is more than 364 Rate Period Days (the rate described in the foregoing clause (i)(1), (2) or (3), as applicable, being referred to herein as the "Benchmark Rate"), and (ii) 1 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income, whichever is greater; provided, however, that if the Fund has notified the Auction Agent of its intent to allocate to shares of Municipal Preferred in such Rate Period any net capital gains or other income taxable for Federal income tax purposes ("Taxable Income"), the Applicable Rate on shares of Municipal Preferred for such Rate Period will be (A) if the Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the product of the Benchmark Rate multiplied by the factor set forth in the preceding clause (ii) and (y) the product of the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income, whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate means the rate determined by (a) dividing the amount of Taxable Income available for distribution per share of Municipal Preferred by the number of days in the Dividend Period in respect of which such Taxable Income is contemplated to be distributed, (b) multiplying the amount determined in (a) above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any other Dividend Period), and (c) dividing the amount determined in (b) above by $25,000. "Applicable Rate" means the rate per annum at which dividends are payable on shares of Municipal Preferred for any Rate Period thereof. -36- 42 "Auction Agency Agreement" means an agreement between the Fund and the Auction Agent which provides, among other things, that the Auction Agent will follow the Auction Procedures for purposes of determining the Applicable Rate for shares of Municipal Preferred so long as the Applicable Rate for such shares is to be based on the results of an Auction. "Auction Agent" means the entity appointed as such by a resolution of the Board of Trustees. "Bidder" means a Beneficial Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer or an Existing Holder or Potential Holder placing an order with the Auction Agent or on whose behalf an Order is placed with an Auction Agent. "Board of Trustees" means the Board of Trustees of the Trust or any duly authorized committee thereof. "Broker-Dealer" means any broker-dealer, commercial bank or other entity permitted by law to perform the functions required of a Broker-Dealer, that is a member of, or a participant in, the Securities Depository or is an affiliate of such member or participant, has been selected by the Trust and has entered into a Broker-Dealer Agreement that remains effective. "Broker-Dealer Agreement" means an agreement among the Trust, the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the Auction Procedures. "Business Day" shall mean a day on which the New York Stock Exchange is open for trading, and which is neither a Saturday, Sunday nor any other day on which banks in The City of New York, New York are authorized by law to close. "Code" means the Internal Revenue Code of 1986, as amended. "Date of Original Issue" means the date on which the Trust initially issued shares of Municipal Preferred. "Dividend Payment Date" means any date on which dividends on shares of Municipal Preferred are payable as provided under "Description of Municipal Preferred--Dividends and Dividend Periods." "Dividend Period" means the period from and including the Date of Original Issue of shares of Municipal Preferred to but excluding the initial Dividend Payment Date for such shares and any period thereafter from and including one Dividend Payment Date for such shares to but excluding the next succeeding Dividend Payment Date for such shares. "Existing Holder" means a Broker-Dealer (or any such other person as may be permitted by the Trust) that is listed on the records of the Auction Agent as a holder of shares of Municipal Preferred. "Initial Rate Period" means the period from and including the Date of Original Issue of shares of Municipal Preferred to but excluding _________ __, 1999. "Kenny Index" has the meaning specified under "Taxable Equivalent of the Short-Term Municipal Bond Rate." "Minimum Rate Period" means any Rate Period consisting of 7 Rate Period Days. "Potential Holder" means a Broker-Dealer (or any such other person as may be permitted by the Trust) that is not an Existing Holder of shares of Municipal Preferred or that is an Existing Holder of such shares that wishes to become the Existing Holder of additional shares. -37- 43 "Rate Multiple" means a percentage, determined as set forth below, based on the prevailing rating of shares of Municipal Preferred in effect at the close of business on the Business Day next preceding the relevant Auction Date:
PREVAILING RATING PERCENTAGE ----------------- ---------- "aa3"/AA- or higher............................... 110% "a3"/A-........................................... 125% "baa3"/BBB-....................................... 150% "ba3"/BB-......................................... 200% Below "ba3"/BB-................................... 250%
provided, however, that in the event the Trust has notified the Auction Agent of its intent to allocate income taxable for Federal income tax purposes to shares of Municipal Preferred prior to the Auction establishing the Applicable Rate for such shares, the applicable percentage in the foregoing table shall be divided by the quantity 1 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income, whichever is greater. If the ratings for shares of Municipal Preferred are split between two of the foregoing categories, the lower rating will determine the prevailing rating. If the shares of Municipal Preferred are rated by only one rating agency, such rating will be the prevailing rating. "Rate Period" means the Initial Rate Period of shares of Municipal Preferred and any Subsequent Rate Period of such shares. "Rate Period Days," for any Rate Period or Dividend Period, means the number of days that would constitute such Rate Period or Dividend Period but for either (i) the shortening or lengthening, as the case may be, of such Rate Period or Dividend Period as set forth under "Description of Municipal Preferred--Dividends and Dividend Periods" because the day on which dividends would otherwise be payable is not a Business Day or (ii) the shortening of such Rate Period pursuant to the provisions relating to the designation of Special Rate Periods as set forth in the Statement of Additional Information under "Description of Municipal Preferred--Dividends--Designation of Special Rate Periods." "Reference Rate" means (i) the higher of the Taxable Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days. "Securities Depository" means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Trust which agrees to follow the procedures required to be followed by such securities depository in connection with shares of Municipal Preferred. "Special Rate Period" means any Subsequent Rate Period commencing on the date designated by the Trust, as set forth under "Description of Municipal Preferred--Designation of Special Rate Periods," and ending on the last day of the last Dividend Period thereof. "Submission Deadline" means 1:30 P.M. New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time. "Submitted Bid" means a valid Bid submitted or deemed submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline. -38- 44 "Submitted Hold Order" means a valid Hold Order submitted or deemed submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline. "Subsequent Rate Period" means any period from and including the first day following the Initial Rate Period of shares of Municipal Preferred to but excluding the next Dividend Payment Date for such shares and any period thereafter from and including one Dividend Payment Date for such shares to but excluding the next succeeding Dividend Payment Date for such shares; provided, however, that if any Subsequent Rate Period is also a Special Rate Period, such term shall mean the period commencing on the first day of such Special Rate Period and ending on the last day of the last Dividend Period thereof. "Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or fewer, means 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the Kenny S&P 30-day High Grade Index or any successor index (the "Kenny Index") (provided, however, that any such successor index must be approved by Moody's (if Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred)), made available for the Business Day immediately preceding such date but in any event not later than 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation Services or any successor thereto, based upon 30-day yield evaluations at par of short-term bonds the interest on which is excludable for regular Federal income tax purposes under the Code, of "high grade" component issuers selected by Kenny S&P Evaluation Services or any such successor from time to time in its discretion, which component issuers shall include, without limitation, issuers of general obligation bonds but shall exclude any bonds the interest on which constitutes an item of tax preference under Section 57(a)(5) of the Code, or successor provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income (in each case expressed as a decimal), whichever is greater; provided, however, that if the Kenny Index is not made so available by 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the most recent Kenny Index so made available for any preceding Business Day, divided by (B) 1.00 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income (in each case expressed as a decimal), whichever is greater. "Treasury Bill" means a direct obligation of the U.S. government having a maturity at the time of issuance of 364 days or less. "Treasury Bill Rate," on any date for any Rate Period, means: (i) the bond equivalent yield, calculated in accordance with prevailing industry convention, of the rate on the most recently auctioned Treasury Bill with a remaining maturity closest to the length of such Rate Period, as quoted in The Wall Street Journal on such date for the Business Day next preceding such date; or (ii) in the event that any such rate is not published in The Wall Street Journal, then the bond equivalent yield, calculated in accordance with prevailing industry convention, as calculated by reference to the arithmetic average of the bid price quotations of the most recently auctioned Treasury Bill with a remaining maturity closest to the length of such Rate Period, as determined by bid price quotations as of the close of business on the Business Day immediately preceding such date obtained from certain U.S. government securities dealers to the Auction Agent. "Treasury Note" means a direct obligation of the U.S. government having a maturity at the time of issuance of five years or less but more than 364 days. "Treasury Note Rate," on any date for any Rate Period, means: (i) the yield on the most recently auctioned Treasury Note with a remaining maturity closest to the length of such Rate Period, as quoted in The Wall Street Journal on such date for the Business Day next preceding such date; or (ii) in the event that any such rate is not published in The Wall Street Journal, then the yield as calculated by reference to the arithmetic average -39- 45 of the bid price quotations of the most recently auctioned Treasury Note with a remaining maturity closest to the length of such Rate Period, as determined by bid price quotations as of the close of business on the Business Day immediately preceding such date obtained from certain U.S. government securities dealers to the Auction Agent. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION PAGE Use of Proceeds........................................... B-2 Investment Objectives and Policies........................ B-2 Trust Charges and Expenses................................ B-3 Management of the Trust................................... B-4 Portfolio Transactions.................................... B-10 Net Asset Value........................................... B-11 The Auction............................................... B-12 Description of Municipal Preferred........................ B-23 Repurchase of Common Shares............................... B-40 Miscellaneous Investment Practices........................ B-41 Tax Matters............................................... B-50 Shareholder Liability..................................... B-54 Custodian................................................. B-54 Independent Accountants................................... B-54 Report of Independent Accountants......................... B-54 Financial Statements...................................... B-55 Glossary.................................................. B-82 Appendix A--Ratings of Investments........................ B-89 Appendix B--Auction Procedures............................ B-95 Appendix C--Settlement Procedures......................... B-108 -40- 46 ================================================================================ $______________ COLONIAL MUNICIPAL INCOME TRUST MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES __________ SHARES, SERIES _____ ______________ PROSPECTUS ________________, 1999 ______________ SALOMON SMITH BARNEY ================================================================================ -41- 47 THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 28, 1999 COLONIAL MUNICIPAL INCOME TRUST STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") relating to the Series __ Municipal Auction Rate Cumulative Preferred Shares ("Municipal Preferred") offered by Colonial Municipal Income Trust (the "Trust") contains information which may be useful to investors but which is not included in the Prospectus of the Trust. This SAI is not a prospectus and is authorized for distribution only when accompanied or preceded by the Prospectus of the Trust dated _________ ___, 1999, describing the Municipal Preferred (the "Prospectus"). This SAI should be read together with the Prospectus. Investors may obtain a free copy of the Prospectus by calling Colonial Management Associates, Inc. at 1-800-426-3750. Capitalized terms used but not defined in this SAI have the meanings ascribed to them in the Prospectus. TABLE OF CONTENTS USE OF PROCEEDS.............................................................B-2 INVESTMENT OBJECTIVES AND POLICIES..........................................B-2 TRUST CHARGES AND EXPENSES..................................................B-3 MANAGEMENT OF THE TRUST.....................................................B-4 PORTFOLIO TRANSACTIONS.....................................................B-10 NET ASSET VALUE............................................................B-11 THE AUCTION................................................................B-12 DESCRIPTION OF MUNICIPAL PREFERRED.........................................B-23 REPURCHASE OF COMMON SHARES................................................B-40 MISCELLANEOUS INVESTMENT PRACTICES.........................................B-41 TAX MATTERS................................................................B-50 SHAREHOLDER LIABILITY......................................................B-54 CUSTODIAN..................................................................B-54 INDEPENDENT ACCOUNTANTS....................................................B-54 REPORT OF INDEPENDENT ACCOUNTANTS..........................................B-54 FINANCIAL STATEMENTS.......................................................B-55 GLOSSARY...................................................................B-82 APPENDIX A--Ratings of Investments.........................................B-89 APPENDIX B--Auction Procedures.............................................B-95 APPENDIX C--Settlement Procedures.........................................B-108 48 USE OF PROCEEDS The net proceeds of the offering of shares of Municipal Preferred will be approximately $_________ after payment of the sales load to Salomon Smith Barney (the "Underwriter") and estimated offering costs. A portion of the offering costs has been advanced by the Trust's investment advisor, Colonial Management Associates, Inc. (the "Advisor"). The net proceeds of the offering will be invested in accordance with the Trust's investment objectives and policies. It is presently anticipated that the Trust will be able to invest substantially all of the net proceeds in Municipal Obligations that meet the Trust's investment objectives at or shortly (within six to eight weeks) after the completion of the offering. To the extent that all of the proceeds cannot be so invested, pending such investment, they will be invested initially in high-quality, short-term tax-exempt money market securities, the income on which will be exempt from Federal income taxes, or in high-quality Municipal Obligations with relatively low volatility (such as pre-refunded and intermediate-term securities), to the extent such securities are available. If necessary to invest fully the net proceeds of the offerings immediately, the Trust may also purchase, as temporary investments, short-term taxable investments of the type described under "Investment Objectives and Policies--Temporary and Defensive Investments" in the Prospectus, the income on which is subject to Federal income taxes. INVESTMENT OBJECTIVES AND POLICIES The Trust's Prospectus describes its investment objectives and investment policies. This SAI includes additional information concerning, among other things, the investment policies of the Trust and information about certain securities and investment techniques that are described or referred to in the Prospectus or in which the Trust expects to engage. Except as indicated under "Fundamental Investment Policies," the Trust's investment policies are not fundamental and the Trustees may change the policies without shareholder approval. FUNDAMENTAL INVESTMENT POLICIES The following fundamental restrictions are for the protection of the Trust's shareholders and cannot be changed without the approval of the holders of a "majority of the outstanding" Common Shares and Preferred Shares, including shares of Municipal Preferred, voting together as a single class, and of the holders of a "majority of the outstanding" Preferred Shares, including shares of Municipal Preferred, voting as a separate class. A "majority of the outstanding" shares means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares. The Trust may: (1) Issue senior securities or borrow money to the extent permitted by the 1940 Act; (2) Only own real estate acquired as a result of owning securities; (3) Purchase and sell futures contracts and related options; (4) Underwrite securities issued by others only when disposing of portfolio securities; (5) Make loans through lending of securities, through the purchase of debt instruments or similar evidences of indebtedness typically sold to financial institutions and through repurchase agreements; (6) Not concentrate more than 25% of its total assets in any one industry, or with respect to 50% of total assets purchase any security (other than obligations of the U.S. Government and cash items including receivables) if as a result more than 5% of its total assets would then be invested in securities of a single issuer or purchase the voting securities of an issuer if, as a result of such purchase, the Trust would own more than 10% of the outstanding voting shares of such issuer. (The Trust will treat each state and each separate political subdivision, agency, authority or instrumentality of such state, each multistate agency or authority, and each guarantor, if any, as separate issuers. In the utilities category, gas, electric, water and telephone companies will be considered as separate industries); B-2 49 (7) And will, under normal circumstances, invest at least 80% of its assets in tax-exempt bonds and tax-exempt notes. For the purpose of applying the limitation set forth above in subparagraph (6), an issuer shall be deemed the sole issuer of a security when its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly, in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity. Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank. When a Municipal Obligation is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer; instead, the issuer of such Municipal Obligation will be determined in accordance with the principles set forth above. The foregoing restrictions do not limit the percentage of the Trust's assets that may be invested in Municipal Obligations insured by any given insurer. The restrictions and other limitations set forth above will apply only at the time of purchase of securities and will not be considered violated unless an excess or deficiency occurs or exists immediately after and as a result of an acquisition of securities. OTHER INVESTMENT POLICIES As non-fundamental investment policies which may be changed by the Trust without a shareholder vote, the Trust may not: (1) Purchase securities on margin, but it may receive short-term credit to clear securities transactions and may make initial or maintenance margin deposits in connection with futures transactions; (2) Have a short securities position, unless the Trust owns, or owns rights (exercisable without payment) to acquire, an equal amount of such securities; (3) Own securities of any company if the Trust knows that officers and Trustees of the Trust or officers and directors of the Advisor who individually own more than 0.5% of such securities together own more than 5% of such securities; and (4) Invest in interests in oil, gas or other mineral exploration or development programs, including leases. Restrictions imposed by Moody's or Standard & Poor's, or both, on engaging in futures and options transactions as described under "Description of Municipal Preferred--Asset Maintenance," are not fundamental policies and may be changed by the Trust from time to time without shareholder approval; provided, however, that if Moody's or Standard & Poor's, or both, are rating the shares of Municipal Preferred, the Trust must receive written confirmation from Moody's or Standard & Poor's, or both, as appropriate, that any such change would not impair the ratings then assigned by Moody's and Standard & Poor's to shares of Municipal Preferred. See also "Description of Municipal Preferred--Rating Agency Guidelines" for a description of other rating agency restrictions, none of which is a fundamental policy of the Trust and which may be changed by the Trust from time to time without shareholder approval subject to the foregoing proviso. TRUST CHARGES AND EXPENSES Under the Trust's management agreement, the Trust pays the Advisor a monthly fee based on the average weekly net assets of the Trust for such month at the annual rate of 0.65%. B-3 50 RECENT FEES PAID TO THE ADVISOR AND STATE STREET BANK AND TRUST COMPANY (dollars in thousands)
YEAR ENDED NOVEMBER 30, ----------------------- 1998 1997 1996 ------ ------ ------ Management fee....................................... $1,353 $1,315 $1,311 Bookkeeping fee...................................... 55 54 53 Transfer agent fee................................... 65 91 105
BROKERAGE COMMISSIONS The Trust did not pay any brokerage commissions for the fiscal years ended November 30, 1998, 1997 and 1996. MANAGEMENT OF THE TRUST TRUSTEES AND OFFICERS The names and business addresses of the Trustees and officers of the Trust and their principal occupations and other affiliations during the past five years are set forth below.
NAME (AGE) POSITIONS AND PRINCIPAL OCCUPATIONS AND ADDRESS OFFICES WITH TRUST DURING PAST FIVE YEARS Robert J. Birnbaum (71) Trustee Consultant (formerly Special Counsel, 313 Bedford Road Dechert Price & Rhoads (law firm) Ridgewood, NJ 07450 from September, 1988 to December 1993; President, New York Stock Exchange from May, 1985 to June, 1988; President, American Stock Exchange, Inc. from 1977 to May, 1985). Tom Bleasdale (68) Trustee Retired (formerly Chairman of the 11 Carriage Way Board and Chief Executive Officer, Shore Danvers, MA 01923 Bank & Trust Company from 1992 to 1993); Director of The Empire Company since June, 1995. John V. Carberry* (51) Trustee Senior Vice President of Liberty Financial 56 Woodcliff Road Companies, Inc. (formerly Managing Director, Wellesley Hills, MA 02481 Salomon Brothers (investment banking) from January, 1988 to January, 1998). Lora S. Collins (63) Trustee Attorney (formerly Attorney, Kramer, Levin, 1175 Hill Road Naftalis & Frankel (law firm) from Southold, NY 11971 September, 1986 to November, 1996). James E. Grinnell (69) Trustee Private Investor since November, 1988. 22 Harbor Avenue Marblehead, MA 01945
B-4 51 Richard W. Lowry (62) Trustee Private Investor since August, 1987. 10701 Charleston Drive Vero Beach, FL 32963 Salvatore Macera (67) Trustee Private Investor (formerly Executive Vice 26 Little Neck Lane President of Itek Optical & Electronic New Seabury, MA 02649 Industries, Inc. (electronics) from ____ to ____). William E. Mayer* (58) Trustee Partner, Development Capital, LLC (venture 500 Park Avenue, 5th Floor capital) (formerly Dean, College of Business New York, NY 10022 and Management, University of Maryland from October, 1992 to November, 1996; Dean, Simon Graduate School of Business, University of Rochester from October, 1991 to July, 1992). James L. Moody, Jr. (67) Trustee Retired (formerly Chairman of the Board, 16 Running Tide Road Hannaford Bros. Co. (food retailer) Cape Elizabeth, ME 04107 from May, 1984 to May, 1997, and Chief Executive Officer, Hannaford Bros. Co. from May, 1973 to May, 1992). John J. Neuhauser (55) Trustee Dean, Boston College School of Management 140 Commonwealth Avenue since September, 1977. Chestnut Hill, MA 02167 Thomas E. Stitzel (58) Trustee Professor of Finance, College of Business, 2208 Tawny Woods Place Boise State University (higher education); Boise, ID 83706 Business consultant and author. Robert L. Sullivan (70) Trustee Retired (formerly Partner, KPMG Peat Marwick LLP, 45 Sankaty Avenue from ____ to ____). Siasconset, MA 02564 Anne-Lee Verville (53) Trustee Consultant (formerly General Manager, 359 Stickney Hill Road Global Education Industry from 1994 Hopkinton, NH 03229 to 1997, and President, Applications Solutions Division from 1991 to 1994, IBM Corporation (global education and global applications)).
B-5 52 Stephen E. Gibson (45) President President of the Trust and the Liberty Funds since June, 1998, Chairman of the Board since July, 1998, and Chief Executive Officer and President since December 1996; Director of the Advisor since 1996 (formerly Executive Vice President from July, 1996 to December, 1996); Director, Chief Executive Officer and President of Liberty Funds Group LLC (formerly known as COGRA, LLC) ("LFG" since December, 1998 (formerly Director, Chief Executive Officer and President of The Colonial Group, Inc. ("TCG") from December, 1996 to December, 1998); Assistant Chairman of Stein Roe & Farnham Incorporated ("SR&F") since August, 1998 (formerly Managing Director of Marketing of Putnam Investments from June, 1992 to July, 1996). J. Kevin Connaughton (34) Controller and Controller and Chief Accounting Officer of Chief the Trust and the Liberty Funds, except Accounting Liberty Funds Trust IX, since February, Officer 1998; Controller, Liberty Funds Trust IX, since December, 1998; Vice President of the Advisor since February, 1998 (formerly Senior Tax Manager Coopers & Lybrand, LLP from April, 1996 to January, 1998; Vice President, 440 Financial Group/First Data Investor Services Group from March, 1994 to April, 1996. Timothy J. Jacoby (45) Treasurer and Treasurer and Chief Financial Officer of the Chief Financial Trust and the Liberty Funds, except Liberty Officer Funds Trust IX, since October, 1996 (formerly Controller and Chief Accounting Officer from October, 1997 to February, 1998); Treasurer of Liberty Funds Trust IX since December, 1998; Senior Vice President of the Advisor since September, 1996; Vice President, Chief Financial Officer and Treasurer of LFG since December, 1998 (formerly Vice President, Chief Financial Officer and Treasurer of TCG from July, 1997 to December, 1998); Senior Vice President of SR&F since August, 1998 (formerly Senior Vice President, Fidelity Accounting and Custody Services from September, 1993 to September, 1996; Assistant Treasurer to the Fidelity Group of Trusts from August, 1990 to September, 1993).
B-6 53 Nancy L. Conlin (45) Secretary Secretary of the Trust and the Liberty Funds, except Liberty Funds Trust IX since April, 1998 (formerly Assistant Secretary from July, 1994 to April, 1998); Director, Senior Vice President, General Counsel, Clerk and Secretary of the Advisor since April, 1998 (formerly Vice President, Counsel, Assistant Secretary and Assistant Clerk from July, 1994 to April, 1998); Vice President, General Counsel and Secretary of LFG since December, 1998 (formerly Vice President, General Counsel and Clerk of TCG from April, 1998 to December, 1998; formerly Assistant Clerk from July, 1994 to April, 1998); (formerly Partner, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo (law firm) from June, 1990 to June, 1994).
* Denotes those Trustees who are "interested persons" (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of the Trust or the Advisor. Mr. Carberry is an "interested person" as defined in the 1940 Act because of his affiliation with Liberty Financial Companies, Inc., an indirect parent company of the Advisor. Mr. Mayer is an "interested person" as defined in the 1940 Act because he is a director of Hambrecht & Quist Incorporated, a registered broker-dealer. The business address of the officers of the Trust is One Financial Center, Boston, MA 02111. The Trustees of the Trust are also directors or trustees, as the case may be, of Liberty Funds Trust I, Liberty Funds Trust II, Liberty Funds Trust III, Liberty Funds Trust IV, Liberty Funds Trust V, Liberty Funds Trust VI, Liberty Funds Trust VII, Liberty Funds Trust VIII (formerly known as LFC Utilities Trust), Liberty Variable Investment Trust ("LVIT"), Colonial High Income Municipal Trust, Colonial Investment Grade Municipal Trust, Colonial Intermediate High Income Fund, and Colonial Intermarket Income Trust I, (collectively, each trust or any series thereof termed the "Liberty Funds"). At the next annual meeting of the Trust's shareholders, holders of outstanding shares of Municipal Preferred, voting together as one separate class, will elect two trustees, and holders of outstanding Common Shares and shares of Municipal Preferred, voting together as a single class, will elect five trustees. See "Description of Municipal Preferred--Voting Rights." The Trustees serve as trustees of all Liberty Funds for which each Trustee (except Mr. Carberry) receives an annual retainer of $45,000 and attendance fees of $8,000 for each regular joint meeting and $1,000 for each special joint meeting. Committee chairs and the lead Trustee receive an annual retainer of $5,000, and Committee chairs receive $1,000 for each special meeting attended on a day other than a regular joint meeting day. Committee members receive an annual retainer of $1,000 and $1,000 for each special meeting attended on a day other than a regular joint meeting day. Two-thirds of the Trustee fees are allocated among the Liberty Funds based on each Liberty Fund's relative net assets, and one-third of the fees are divided equally among the Liberty Funds. TRUSTEES AND TRUSTEES' FEES For the fiscal year ended November 30, 1998 and the calendar year ended December 31, 1998 the Trustees received the following compensation for serving as Trustees(a): B-7 54
Total Compensation From Aggregate Compensation From The Fund Complex Paid To The Trustee The Trust For The Fiscal Year Trustees For The Calendar Year Ended November 30, 1998 Ended December 31, 1998 (b) Robert J. Birnbaum (c) $ 1,564 $ 99,429 Tom Bleasdale (c) 1,812(d) 115,000(e) John V. Carberry (f)(g) N/A N/A Lora S. Collins (c) 1,534 97,429 James E. Grinnell (c) 1,621(h) 103,071 William D. Ireland, Jr. (i) 683 35,333 Richard W. Lowry (c) 1,545 98,214 Salvatore Macera (j) 0 25,250 William E. Mayer (c) 1,624 99,286 James L. Moody, Jr. (c) 1,665(k) 105,857(l) John J. Neuhauser (c) 1,658 105,323 George L. Shinn (i) 617 31,334 Thomas E. Stitzel (j) 0 25,250 Robert L. Sullivan (c) 1,654 104,100 Anne-Lee Verville (c)(f) 1,269(m) 23,445(n) Sinclair Weeks, Jr. (i) 668 34,333
(a) The Trust does not currently provide pension or retirement plan benefits to the Trustees. (b) At December 31, 1998, the complex consisted of 54 open-end and 5 closed-end management investment portfolios in the Liberty Funds (the "Fund Complex"). (c) Elected by the shareholders of LVIT on October 30, 1998. (d) Includes $795 payable in later years as deferred compensation. (e) Includes $52,000 payable in later years as deferred compensation. (f) Elected by the trustees of the closed-end Liberty Funds on June 18, 1998, and by the shareholders of the open-end Liberty Funds on October 30, 1998. (g) Does not receive compensation because he is an affiliated Trustee and employee of Liberty Financial Companies, Inc. ("Liberty Financial"). (h) Includes $12 payable in later years as deferred compensation. (i) Retired as a trustee of the Trust on April 24, 1998. (j) Elected by the shareholders of the open-end Liberty Funds on October 30, 1998, and by the trustees of the closed-end Liberty Funds on December 17, 1998. (k) Total compensation of $1,665 for the fiscal year ended November 30, 1998, will be payable in later years as deferred compensation. (l) Total compensation of $105,857 for the calendar year ended December 31, 1998, will be payable in later years as deferred compensation. (m) Total compensation of $1,269 for the fiscal year ended November 30, 1998, will be payable in later years as deferred compensation. (n) Total compensation of $23,445 for the calendar year ended December 31, 1998, will be payable in later years as deferred compensation. B-8 55 For the fiscal year ended December 31, 1998, certain of the Trustees received the following compensation in their capacities as Trustees or Directors of Liberty All-Star Equity Fund, Liberty All-Star Growth Fund, Inc. and Liberty Funds Trust IX (formerly known as LAMCO Trust I) (together, the "Liberty All-Star Funds"):
Total Compensation from Liberty All-Star Funds For The Calendar Trustee Year Ended December 31, 1998 (o) - ------- --------------------------------------- Robert J. Birnbaum $25,000 John V. Carberry (p)(q) N/A James E. Grinnell $25,000 Richard W. Lowry $25,000 William E. Mayer (r) $14,000 John J. Neuhauser (s) $25,000
(o) The Liberty All-Star Funds are advised by Liberty Asset Management Company ("LAMCO"). LAMCO is an indirect wholly-owned subsidiary of Liberty Financial (an intermediate parent of the Advisor). (p) Does not receive compensation because he is an affiliated Trustee and employee of Liberty Financial. (q) Elected by the trustees of the Liberty All-Star Equity Fund on April 22, 1998, and by the trustees of the Liberty All-Star Growth Fund, Inc. on December 17, 1998. (r) Elected by the shareholders of the Liberty All-Star Equity Fund on April 22, 1998, and by the trustees of the Liberty All-Star Growth Fund, Inc. on December 17, 1998. (s) Elected by the shareholders of the Liberty All-Star Funds on April 22, 1998. At _________ ___, 1999, the Trust's officers and Trustees as a group owned less than 1% of the outstanding Common Shares. At _________, 1999, ______________________, [Address], owned of record _________ shares, representing ____%, of the Trust's outstanding shares. In addition to the provisions discussed in the Prospectus under "Certain Provisions in the Agreement and Declaration of Trust," the Declaration provides that the obligations of the Trust are not binding upon the Trustees of the Trust individually, but only upon the assets and property of the Trust. The Declaration also provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust but that such indemnification will not relieve any officer or Trustee of any liability to the Trust or its shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of his or her duties. The Trust, at its expense, provides liability insurance for the benefit of its Trustees and officers. INVESTMENT ADVISOR Colonial Management Associates, Inc. (the "Advisor"), and/or its affiliate, Colonial Advisory Services, Inc. ("CASI"), has rendered investment advisory services to investment company, institutional and other clients since 1931. The Advisor currently serves as investment advisor, sub-advisor or administrator for 51 open-end and 5 closed-end management investment company portfolios. Trustees and officers of the Trust, who are also officers of the Advisor or its affiliates, will benefit from the advisory fees, sales commissions and agency fees paid or allowed by the Trust. More than 30,000 financial advisors have recommended the Liberty Funds to over 800,000 clients worldwide, representing more than $16.3 billion in assets. The Advisor is a subsidiary of Liberty Funds Group LLC ("LFG"), One Financial Center, Boston, MA 02111. LFG is an indirect wholly owned subsidiary of Liberty Financial Companies, Inc. ("Liberty Financial"), which in turn is a direct majority-owned subsidiary LFC Management Corporation, which in turn is a direct wholly-owned subsidiary of Liberty Corporate Holdings, Inc., which in turn is a direct wholly-owned subsidiary of LFC Holdings, Inc., which in turn is B-9 56 a direct wholly-owned subsidiary of Liberty Mutual Equity Corporation, which in turn is a direct wholly owned subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual"). Liberty Mutual is an underwriter of workers' compensation insurance and a property and casualty insurer in the United States. Liberty Financial's address is 600 Atlantic Avenue, Boston, MA 02210. Liberty Mutual's address is 175 Berkeley Street, Boston, MA 02117. Under a Management Agreement (the "Agreement"), the Advisor has contracted to furnish the Trust with investment research and recommendations or trust management, respectively, and accounting and administrative personnel and services, and with office space, equipment and other facilities. For these services and facilities, the Trust pays a monthly fee based on the average weekly net assets of the Trust for such month. Under the Agreement, any liability of the Advisor to the Trust and/or its shareholders is limited to situations involving the Advisor's own willful misfeasance, bad faith, gross negligence or reckless disregard of its duties. The Agreement may be terminated with respect to the Trust at any time on 60 days' written notice by the Advisor or by the Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Trust. The Agreement will automatically terminate upon any assignment thereof and shall continue in effect from year to year only so long as such continuance is approved at least annually (i) by the Trustees of the Trust or by a vote of a majority of the outstanding voting securities of the Trust and (ii) by vote of a majority of the Trustees who are not interested persons (as such term is defined in the 1940 Act) of the Advisor or the Trust, cast in person at a meeting called for the purpose of voting on such approval. The Advisor pays all salaries of officers of the Trust. The Trust pays all expenses not assumed by the Advisor, including, but not limited to, auditing, legal, custodial, investor servicing and shareholder reporting expenses. The Trust pays the cost of printing and mailing any Prospectuses sent to shareholders. The Advisor also provides the Trust with bookkeeping and pricing services, and for these services, the Trust pays the Advisor a monthly fee of $1,500 for the first $50 million of Trust assets, plus a monthly percentage fee at the following annual rates: 0.033% on the next $950 million; 0.016% on the next $1 billion; 0.010% on the next $1 billion; and 0.007% on the excess over $3 billion of the average net assets of the Trust for such month. The Advisor also acts as investment advisor to the other Liberty Funds (described under "Fund Charges and Expenses--Trustees' Fees"). The Advisor's affiliate, CASI, advises other institutional, corporate, fiduciary and individual clients for which CASI performs various services. Various officers and Trustees of the Trust also serve as officers, directors or trustees of other Liberty Funds and the other corporate or fiduciary clients of the Advisor. The other investment companies and clients advised by the Advisor may sometimes invest in securities and options in which the Trust will also invest. If the Trust, such other investment companies and such clients desire to buy or sell the same portfolio securities or options at about the same time, the purchases and sales will normally be made as nearly as practicable on a pro rata basis in proportion to the amounts desired to be purchased or sold by each. Although in some cases these practices may have a detrimental effect on the price or volume of the securities or options as far as the Trust is concerned, in most cases it is believed that these practices should produce better executions. It is the opinion of the Trustees that the desirability of retaining the Advisor as investment advisor to the Liberty Funds outweighs the disadvantages, if any, which might result from these practices. PORTFOLIO TRANSACTIONS The Advisor is responsible for decisions to buy and sell securities and other portfolio holdings for the Trust, the selection of brokers and dealers to effect the transactions and the negotiation of brokerage commissions, if any. Fixed-income securities are generally traded on a "net" basis with dealers acting as principals for their own accounts without a stated commission, although the price of the security will likely include a profit to the dealer. In underwritten offerings, securities are usually purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the underwriter's concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid. B-10 57 In placing orders for portfolio securities of the Trust, the Advisor is required to give primary consideration to obtaining the most favorable price and efficient execution. This means that the Advisor will seek to execute each transaction at a price and commission, if any, which provides the most favorable total cost or proceeds reasonably attainable under the circumstances. In seeking the most favorable price and execution, the Advisor, having in mind the Trust's best interests, will consider all factors it deems relevant, including, by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker-dealer involved and the quality of service rendered by the broker-dealer in other transactions. Though the Advisor generally seeks reasonably competitive spreads or commissions, the Trust will not necessarily be paying the lowest spread or commission available. Within the framework of the policy of obtaining the most favorable price and efficient execution, the Advisor will consider research and investment services provided by brokers and dealers who effect or are parties to portfolio transactions with the Trust, the Advisor or the Advisor's other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include statistical and economic data and research reports on particular issuers and industries. Such services are used by the Advisor in connection with all of its investment activities, and some of such services obtained in connection with the execution of transactions for the Trust may be used in managing other investment accounts. Conversely, brokers furnishing such services may be selected for the execution of transactions for such other accounts, and the services furnished by such brokers may be used by the Advisor in providing investment management for the Trust. Commission rates are established pursuant to negotiations based on the quality and quantity of execution services provided by the broker or dealer in light of generally prevailing rates. The management fee paid by the Trust will not be reduced because the Advisor and/or other clients receive such services. The allocation of orders and the commission rates paid by the Trust will be reviewed periodically by the Board of Trustees. As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Advisor may cause the Trust to pay a broker-dealer which provides "brokerage and research services" (as defined in the 1934 Act) to the Advisor, an amount of disclosed commission for effecting a securities transaction for the Trust in excess of the commission which another broker-dealer would have charged for effecting that transaction. For the fiscal years ended November 30, 1996, 1997 and 1998, the Trust paid no brokerage commissions for the execution of portfolio transactions. The rates of portfolio turnover for each of the fiscal years ended November 30, 1996, 1997 and 1998 were 22%, 15% and 34%, respectively. NET ASSET VALUE Net asset value of the Trust will be determined as of the close of regular trading on the New York Stock Exchange (the "Exchange") (generally 4:00 p.m. New York City time) on the last Business Day of each week (generally Friday), and at such other times as the Trust may authorize. The net asset value of the Trust equals the value of the Trust's assets less the Trust's liabilities. Portfolio securities for which market quotations are readily available are valued at current market value. Short-term investments maturing in 60 days or less are valued at amortized cost when the Advisor determines, pursuant to procedures adopted by the Board of Trustees, that such cost approximates current market value. All other securities and assets are valued at their fair value following procedures adopted by the Board of Trustees. In determining net asset value for the Trust, the Trust's custodian utilizes the valuations of portfolio securities furnished by a pricing service approved by the Board of Trustees. The pricing service values portfolio securities at the mean between the quoted bid and asked price or the yield equivalent when quotations are readily available. Securities for which quotations are not readily available (which will constitute a majority of the securities held by the Trust) are valued at fair value as determined by the pricing service using methods which include consideration of the following: yields or prices of municipal bonds of comparable quality, type of issue, coupon, maturity and rating; indications as to value from dealers; and general market conditions. The pricing service may employ electronic data processing techniques or a matrix system, or both, to determine valuations. The procedures of the pricing service and its valuations are reviewed by the officers of the Trust under the general supervision of the Board of Trustees. B-11 58 THE AUCTION GENERAL The Amended and Restated By-Laws of Colonial Municipal Income Trust, adopted by the Board of Trustees (the "By-Laws"), provide that the Applicable Rate for each Rate Period of Municipal Preferred after the Initial Rate Period therefor shall be equal to the rate per annum that the Auction Agent advises has resulted on the Business Day preceding the first day of such Subsequent Rate Period (an "Auction Date") from implementation of the auction procedures (the "Auction Procedures") set forth in the By-Laws and summarized below, in which persons determine to hold or offer to sell or, based on dividend rates bid by them, offer to purchase or sell such shares. Each periodic implementation of the Auction Procedures is referred to herein as an "Auction." The following summary is qualified by reference to the Auction Procedures set forth in the By-Laws. As used herein with respect to shares of Municipal Preferred, (i) "Applicable Rate" means the rate per annum at which dividends are payable on such shares for any Rate Period thereof, (ii) "Beneficial Owner" means a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of such shares, (iii) "Business Day" means a day on which the New York Stock Exchange is open for trading and is not a Saturday, Sunday or other day on which banks in New York City are authorized by law to close, (iv) "Date of Original Issue" means the date on which the Trust initially issued such shares, (v) "Dividend Payment Date" means any date on which dividends on such shares are payable as provided under "Description of Municipal Preferred--Dividends--General," (vi) "Dividend Period" means the period from and including the Date of Original Issue of such shares to but excluding the initial Dividend Payment Date for such shares and any period thereafter from and including one Dividend Payment Date for such shares to but excluding the next succeeding Dividend Payment Date for such shares, (vii) "Existing Holder" means a Broker-Dealer (or any such other Person as may be permitted by the Trust) that is listed on the records of the Auction Agent as a holder of such shares, (viii) "Initial Rate Period" means the period from and including the Date of Original Issue of such shares to but excluding the initial Dividend Payment Date for such shares, (ix) "Potential Beneficial Owner" means a customer of a Broker-Dealer that is not a Beneficial Owner of such shares that wishes to purchase such shares, or that is a Beneficial Owner that wishes to purchase additional such shares, (x) "Potential Holder" means a Broker-Dealer (or any such other Person as may be permitted by the Trust) that is not an Existing Holder of such shares or that is an Existing Holder of such shares that wishes to become the Existing Holder of additional such shares, (xi) "Rate Period" means the Initial Rate Period of such shares and any Subsequent Rate Period, including any Special Rate Period, of such shares, (xii) "Subsequent Rate Period" means any period from and including the first day following the Initial Rate Period of such shares to but excluding the next Dividend Payment Date for such shares and any period thereafter from and including one Dividend Payment Date for such shares to but excluding the next succeeding Dividend Payment Date for such shares; provided, however, that if any Subsequent Rate Period is also a Special Rate Period, such term shall mean the period commencing on the first day of such Special Rate Period and ending on the last day of the last Dividend Period thereof, (xiii) "Minimum Rate Period" means any Rate Period consisting of 7 Rate Period Days and (xiv) "Special Rate Period" means any Subsequent Rate Period commencing on the date designated by the Trust, as set forth under "Description of Municipal Preferred--Dividends--Designation of Special Rate Periods," and ending on the last day of the last Dividend Period thereof. Auction Agency Agreement. The Trust will enter into an agreement (the "Auction Agency Agreement") with ______________________________ (together with any successor bank or trust company or other entity entering into a similar agreement with the Trust, the "Auction Agent") which provides, among other things, that the Auction Agent will follow the Auction Procedures for purposes of determining the Applicable Rate for shares of Municipal Preferred so long as the Applicable Rate for such shares is to be based on the results of an Auction. Broker-Dealer Agreements. Each Auction requires the participation of one or more broker-dealers. The Auction Agent will enter into agreements with Salomon Smith Barney Inc. and ____________________, and may enter into similar agreements (collectively, the "Broker-Dealer Agreements") with one or more additional broker-dealers (collectively, the "Broker-Dealers") selected by the Trust, which provide for the participation of Broker-Dealers in Auctions. See "Broker-Dealers" below. B-12 59 Securities Depository. The Depository Trust Company ("DTC," together with any successor securities depository selected by the Trust, the "Securities Depository") will act as the Securities Depository for the Agent Members with respect to shares of Municipal Preferred. One certificate for all of the shares of Municipal Preferred will be registered in the name of Cede & Co. ("Cede"), as nominee of the Securities Depository. Such certificate will bear a legend to the effect that such certificate is issued subject to the provisions restricting transfers of shares of Municipal Preferred contained in the By-Laws. The Trust will also issue stop-transfer instructions to the transfer agent for shares of Municipal Preferred. Prior to the commencement of the right of holders of Preferred Shares to elect a majority of the Trust's trustees, as described below under "Description of Municipal Preferred--Voting Rights," Cede will be the holder of record of all shares of Municipal Preferred, and owners of shares of Municipal Preferred will not be entitled to receive certificates representing their ownership interest in such shares. DTC, a New York-chartered limited purpose trust company, performs services for its participants (including the Agent Members), some of whom (and/or their representatives) own DTC. DTC maintains lists of its participants and will maintain the positions (ownership interests) held by each such participant (the "Agent Member") in shares of Municipal Preferred, whether for its own account or as a nominee for another person. AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME The first Auction for shares of Series __ Municipal Preferred will be held on ________, __________, 1999, the Business Day preceding the Dividend Payment Date for the Initial Rate Period of Municipal Preferred. See "Description of Municipal Preferred--Dividends." Thereafter, Auctions will normally be held every ________, and each Subsequent Rate Period will normally begin on the following _______, unless the then-current Rate Period is a Special Rate Period or, in certain circumstances, the day that would normally be the Auction Date or the first day of such Subsequent Rate Period is not a Business Day. The Auction Date and the first day of the related Rate Period (also a Dividend Payment Date) must be Business Days but need not be consecutive days. See "Description of Municipal Preferred--Dividends" for information concerning the circumstances under which the first day of a Rate Period or the Auction Date, or both, may be moved to a date other than such specified days. Whenever the Trust intends to include any net capital gain or other income taxable for Federal income tax purposes in any dividend on shares of Municipal Preferred, the Trust shall, in the case of Minimum Rate Periods or Special Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any other Special Rate Period, notify the Auction Agent of the amount to be so included not later than the Dividend Payment Date next preceding the Auction Date on which the Applicable Rate for such dividend is to be established. Whenever the Auction Agent receives such notice from the Trust, it will be required in turn to notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance with its Broker-Dealer Agreement, will be required to notify its customers who are Beneficial Owners and Potential Beneficial Owners believed by it to be interested in submitting an Order in the Auction to be held on such Auction Date. See also "Description of Municipal Preferred--Dividends--Gross-up Payments" below. ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS Prior to the Submission Deadline (as defined under "Submission of Orders by Broker-Dealers to Auction Agent" below) on each Auction Date for shares of Municipal Preferred: (a) each Beneficial Owner of such shares may submit to its Broker-Dealer by telephone or otherwise a: (i) "Hold Order" -- indicating the number of outstanding shares of Municipal Preferred, if any, that such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for such shares for the next succeeding Rate Period; (ii) "Bid" -- indicating the number of outstanding shares of Municipal Preferred, if any, that such Beneficial Owner offers to sell if the Applicable Rate for such shares for the next succeeding Rate Period shall be less than the rate per annum specified by such Beneficial Owner in such bid; and/or B-13 60 (iii) "Sell Order" -- indicating the number of outstanding shares of Municipal Preferred, if any, that such Beneficial Owner offers to sell without regard to the Applicable Rate for such shares for the next succeeding Rate Period; and (b) Broker-Dealers shall contact customers who are Potential Beneficial Owners by telephone or otherwise to determine whether such customers desire to submit Bids, in which they will indicate the number of shares of Municipal Preferred that they offer to purchase if the Applicable Rate for such shares for the next succeeding Rate Period is not less than the rate per annum specified in such Bids. The communication to a Broker-Dealer of the foregoing information is herein referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a Potential Beneficial Owner placing an Order with its Broker-Dealer is herein referred to as a "Bidder" and collectively as "Bidders." The submission by a Broker-Dealer of an Order to the Auction Agent shall likewise be referred to herein as an "Order" and collectively as "Orders," and an Existing Holder or Potential Holder who places an Order with the Auction Agent or on whose behalf an Order is placed with the Auction Agent shall likewise be referred to herein as a "Bidder" and collectively as "Bidders." A Beneficial Owner may submit different types of Orders to its Broker-Dealer with respect to shares of Municipal Preferred then held by such Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher than the Applicable Rate determined in the Auction shall constitute an irrevocable offer to sell the shares subject thereto. A Beneficial Owner that submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate on the Auction Date thereof will be treated as having submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer prior to the Submission Deadline for shares of Municipal Preferred an Order or Orders covering all the outstanding shares of Municipal Preferred held by such Beneficial Owner will be deemed to have submitted a Hold Order to its Broker-Dealer covering the number of outstanding shares of Municipal Preferred held by such Beneficial Owner and not subject to Orders submitted to its Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to its Broker-Dealer prior to the Submission Deadline for shares of Municipal Preferred an Order or Orders covering all of the outstanding shares of Municipal Preferred held by such Beneficial Owner for an Auction relating to a Special Rate Period consisting of more than 28 Rate Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order to its Broker-Dealer covering the number of outstanding shares of Municipal Preferred held by such Beneficial Owner and not subject to Orders submitted to its Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the shares of Municipal Preferred subject thereto at a price per share equal to $25,000. A Beneficial Owner of shares of Municipal Preferred that offers to become the Beneficial Owner of additional shares of Municipal Preferred is, for purposes of such offer, a Potential Beneficial Owner. A Potential Beneficial Owner of shares of Municipal Preferred may submit to its Broker-Dealer Bids in which it offers to purchase shares of Municipal Preferred if the Applicable Rate for the next Rate Period is not less than the rate specified in such Bid. A Bid placed by a Potential Beneficial Owner specifying a rate not higher than the Maximum Rate shall constitute an irrevocable offer to purchase the number of shares of Municipal Preferred specified in such Bid if the rate determined in the Auction is equal to or greater than the rate specified in such Bid. As described more fully below under "Submission of Orders by Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves (unless otherwise permitted by the Trust) as Existing Holders in respect of shares subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of shares subject to Orders submitted to them by Potential Beneficial Owners. However, neither the Trust nor the Auction Agent will be responsible for a Broker-Dealer's failure to comply with the foregoing. Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a Potential Holder will be treated in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner, as described in the preceding paragraph. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of any shares of Municipal Preferred held by it or its customers who are Beneficial Owners will be treated in the same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order in respect of shares of Municipal Preferred held by it, as described in the B-14 61 second preceding paragraph. For information concerning the priority given to different types of Orders placed by Existing Holders, see "Submission of Orders by Broker-Dealers to Auction Agent" below. Neither the Trust nor an affiliate may submit an Order in any Auction, except that any Broker-Dealer that is an affiliate of the Trust may submit Orders in an Auction, but only if such Orders are not for its own account. The Auction Procedures include a pro rata allocation of shares for purchase and sale, which may result in an Existing Holder continuing to hold or selling, or a Potential Holder purchasing, a number of shares of Municipal Preferred that is fewer than the number of shares of Municipal Preferred specified in its Order. See "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below. To the extent the allocation procedures have that result, Broker-Dealers that have designated themselves as Existing Holders or Potential Holders in respect of customer Orders will be required to make appropriate pro rata allocations among their respective customers. Each purchase or sale shall be made for settlement on the Business Day next succeeding the Auction Date at a price per share equal to $25,000. See "Notification of Results; Settlement" below. As described above, any Bid specifying a rate higher than the Maximum Rate (as defined below) will (i) be treated as a Sell Order if submitted by a Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction Procedures establish the Maximum Rate as a maximum rate per annum that can result from an Auction. See "Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below. As used herein, "Maximum Rate," when used with respect to shares of Municipal Preferred on an Auction Date, means: (i) in the case of any Auction Date which is not the Auction Date immediately prior to the first day of any proposed Special Rate Period, the product of (1) the Reference Rate on such Auction Date for the next Rate Period and (2) the Rate Multiple on such Auction Date, unless such shares have or had a Special Rate Period (other than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction at which Sufficient Clearing Bids existed has not yet occurred for a Minimum Rate Period after such Special Rate Period, in which case the higher of: (A) the dividend rate on such shares for the then-ending Rate Period; and (B) the product of (x) the higher of (I) the Reference Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was more than 364 Rate Period Days, and (II) the Reference Rate on such Auction Date for a Rate Period equal in length to such Special Rate Period, if such Special Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in length to such Special Rate Period, if such Special Rate Period was more than 364 Rate Period Days and (y) the Rate Multiple on such Auction Date; or (ii) in the case of any Auction Date which is the Auction Date immediately prior to the first day of any proposed Special Rate Period, the product of (1) the highest of (x) the Reference Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in length to the then-ending Rate Period, if such then-ending Rate Period was more than 364 Rate Period Days, (y) the Reference Rate on such Auction Date for the Special Rate Period for which the Auction is being held if such Special Rate Period is 364 Rate Period Days or fewer or the Treasury Note Rate on such Auction Date for the Special Rate Period for which the Auction is being held if such Special Rate Period is more than 364 Rate Period Days, and (z) the Reference Rate on such Auction Date for Minimum Rate Periods and (2) the Rate Multiple on such Auction Date. B-15 62 As used herein, "Reference Rate" shall mean (i) the higher of the Taxable Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days. As used herein, "Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or fewer, shall mean 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the Kenny S&P 30 day High Grade Index or any successor index (the "Kenny Index") (provided, however, that any such successor index must be approved by Moody's (if Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred)), made available for the Business Day immediately preceding such date but in any event not later than 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation Services or any successor thereto, based upon 30-day yield evaluations at par of short-term bonds, the interest on which is excludable for regular Federal income tax purposes under the Code, of "high grade" component issuers selected by Kenny S&P Evaluation Services or any such successor from time to time in its discretion, which component issuers shall include, without limitation, issuers of general obligation bonds but shall exclude any bonds the interest on which constitutes an item of tax preference under Section 57(a)(5) of the Code, or successor provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income (in each case expressed as a decimal), whichever is greater; provided, however, that if the Kenny Index is not made so available by 8:30 A.M., New York City time, on such date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the most recent Kenny Index so made available for any preceding Business Day, divided by (B) 1.00 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income (in each case expressed as a decimal), whichever is greater. As used herein, "'AA' Composite Commercial Paper Rate," on any date for any Rate Period, means: (i) (A) in the case of any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period Days, the interest equivalent of the 30-day rate; provided, however, that if such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial Paper Rate is being used to determine the Applicable Rate when all of the outstanding shares of Municipal Preferred are subject to Submitted Hold Orders, then the interest equivalent of the seven-day rate, and (B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70 Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period Days, the arithmetic average of the interest equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but fewer than 120 Rate Period Days, the arithmetic average of the interest equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more but fewer than 162 Rate Period Days, the arithmetic average of the 120-day and 180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the interest equivalent of the 180-day rate, in each case on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by Standard & Poor's or the equivalent of such rating by Standard & Poor's or another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date; or (ii) in the event that the Federal Reserve Bank of New York does not make available any such rate, then the arithmetic average of such rates, as quoted on a discount basis or otherwise, by the Commercial Paper Dealers to the Auction Agent for the close of business on the Business Day next preceding such date. If any Commercial Paper Dealer does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or B-16 63 Substitute Commercial Paper Dealers selected by the Trust to provide such rate or rates not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if the Trust does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this definition, the "interest equivalent" of a rate stated on a discount basis (a "discount rate") for commercial paper of a given days' maturity shall be equal to the quotient (rounded upwards to the next higher one-thousandth (0.001) of 1%) of (A) the discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction the numerator of which shall be the product of the discount rate times the number of days in which such commercial paper matures and the denominator of which shall be 360. As used herein, "Commercial Paper Dealers" means ______________________ or, in lieu of any thereof, their respective affiliates or successors, if such entity is a commercial paper dealer. As used herein, "Substitute Commercial Paper Dealer" means _____________________ or their respective affiliates or successors, if such entity is a commercial paper dealer, provided that none of such entities shall be a Commercial Paper Dealer. As used herein, "Treasury Bill Rate," on any date for any Rate Period, means: (i) the bond equivalent yield, calculated in accordance with prevailing industry convention, of the rate on the most recently auctioned Treasury Bill with a remaining maturity closest to the length of such Rate Period, as quoted in The Wall Street Journal on such date for the Business Day next preceding such date; or (ii) in the event that any such rate is not published in The Wall Street Journal, then the bond equivalent yield, calculated in accordance with prevailing industry convention, as calculated by reference to the arithmetic average of the bid price quotations of the most recently auctioned Treasury Bill with a remaining maturity closest to the length of such Rate Period, as determined by bid price quotations as of the close of business on the Business Day immediately preceding such date obtained from the U.S. Government Securities Dealers to the Auction Agent. As used herein, "Treasury Note Rate," on any date for any Rate Period, means: (i) the yield on the most recently auctioned Treasury Note with a remaining maturity closest to the length of such Rate Period, as quoted in The Wall Street Journal on such date for the Business Day next preceding such date; or (ii) in the event that any such rate is not published in The Wall Street Journal, then the yield as calculated by reference to the arithmetic average of the bid price quotations of the most recently auctioned Treasury Note with a remaining maturity closest to the length of such Rate Period, as determined by bid price quotations as of the close of business on the Business Day immediately preceding such date obtained from the U.S. Government Securities Dealers to the Auction Agent. For purposes of the foregoing, "Treasury Bill" means a direct obligation of the U.S. government having a maturity at the time of issuance of 364 days or less, and "Treasury Note" means a direct obligation of the U.S. government having a maturity at the time of issuance of five years or less but more than 364 days. If any U.S. Government Securities Dealer does not quote a rate required to determine the Treasury Bill Rate or the Treasury Note Rate, such rate shall be determined on the basis of the quotation or quotations furnished by the remaining U.S. Government Securities Dealer or U.S. Government Securities Dealers and any Substitute U.S. Government Securities Dealers selected by the Trust to provide such rate or rates not being supplied by any U.S. Government Securities Dealer or U.S. Government Securities Dealers, as the case may be, or, if the Trust does not select any such Substitute U.S. Government Securities Dealer or Substitute U.S. Government Securities Dealers, by the remaining U.S. Government Securities Dealer or U.S. Government Securities Dealers. As used herein, "U.S. Government Securities Dealer" means ____________________ or their respective affiliates or successors, if such entity is a U.S. government securities dealer. As used herein, "Substitute U.S. Government Securities Dealer" shall mean ___________________or their respective affiliates or successors, if such entity is a U.S. government securities dealer, provided that none of such entities shall be a U.S. Government Securities Dealer. B-17 64 The applicable "AA" Composite Commercial Paper Rates, Taxable Equivalent of the Short-Term Municipal Bond Rates, Treasury Bill Rates and Treasury Note Rates will be the rates announced on such Auction Date for the Business Day immediately prior to such Auction Date. The "Rate Multiple" will be a percentage, determined as set forth below, based on the prevailing rating of shares of Municipal Preferred in effect at the close of business on the Business Day next preceding such Auction Date: PREVAILING RATING PERCENTAGE "aa3"/AA- or higher............................. 110% "a3"/A-......................................... 125% "baa3"/BBB-..................................... 150% "ba3"/BB-....................................... 200% Below "ba3"/BB-................................. 250% provided, however, that in the event the Trust has notified the Auction Agent of its intent to allocate income taxable for Federal income tax purposes to shares of Municipal Preferred prior to the Auction establishing the Applicable Rate for such shares, the applicable percentage in the foregoing table shall be divided by the quantity 1 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income, whichever is greater. If the shares of Municipal Preferred are rated by only one rating agency, such rating will be the prevailing rating. For purposes of this definition, the "prevailing rating" of shares of Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's and A- or better by Standard & Poor's or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then "baa3"/BBB- if such shares have a rating of "baa3" or better by Moody's and BBB- or better by Standard & Poor's or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, (iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB- if such shares have a rating of "ba3" or better by Moody's and BB- or better by Standard & Poor's or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected as provided below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"/BBB-, or "ba3"/BB-, then Below "ba3"/BB-; provided, however, that if such shares are rated by only one rating agency, the prevailing rating shall be determined without reference to the rating of any other rating agency. The Trust will take all reasonable action necessary to enable either Standard & Poor's or Moody's to provide a rating for shares of Municipal Preferred. If neither Standard & Poor's nor Moody's shall make such a rating available, _______________________ or its successor shall select at least one nationally recognized statistical rating organization (as that term is used in the rules and regulations of the SEC under the Securities Exchange Act of 1934, as amended) to act as a substitute rating agency in respect of the shares of Municipal Preferred, and the Trust shall take all reasonable action to enable such rating agency to provide a rating for such shares. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT Prior to 1:30 P.M., New York City time, on each Auction Date, or such other time on the Auction Date specified by the Auction Agent (the "Submission Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all Orders obtained by it for the Auction to be conducted on such Auction Date, designating itself (unless otherwise permitted by the Trust) as the Existing Holder or Potential Holder, as the case may be, in respect of the shares of Municipal Preferred subject to such Orders. Any Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any Auction Date, shall be irrevocable. If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent will round such rate to the next highest one-thousandth (0.001) of 1%. B-18 65 If one or more Orders of an Existing Holder is submitted to the Auction Agent covering in the aggregate more than the number of outstanding shares of Municipal Preferred subject to an Auction held by such Existing Holder, such Orders will be considered valid in the following order of priority: (a) all Hold Orders will be considered valid, but only up to and including in the aggregate the number of shares of Municipal Preferred held by such Existing Holder, and, if the number of shares subject to such Hold Orders exceeds the number of shares held by such Existing Holder, the number of shares subject to each such Hold Order shall be reduced pro rata to cover the number of shares held by such Existing Holder; (b) (i) any Bid will be considered valid up to and including the excess of the number of shares of Municipal Preferred held by such Existing Holder over the number of shares of Municipal Preferred subject to any Hold Orders referred to in clause (a) above; (ii) subject to subclause (i), if more than one Bid of an Existing Holder is submitted to the Auction Agent with the same rate and the number of shares of Municipal Preferred subject to such Bids is greater than such excess, such Bids will be considered valid up to and including the amount of such excess, and the number of shares of Municipal Preferred subject to each Bid with the same rate will be reduced pro rata to cover the number of shares of Municipal Preferred equal to such excess; (iii) subject to subclauses (i) and (ii), if more than one Bid of an Existing Holder is submitted to the Auction Agent with different rates, such Bids shall be considered valid in the ascending order of their respective rates up to and including the amount of such excess; and (iv) in any such event, the number, if any, of such shares subject to any portion of Bids considered not valid in whole or in part under this clause (b) will be treated as the subject of a Bid by or on behalf of a Potential Holder at the rate specified therein; and (c) all Sell Orders will be considered valid up to and including the excess of the number of outstanding shares of Municipal Preferred held by such Existing Holder over the sum of shares of Municipal Preferred subject to valid Hold Orders referred to in clause (a) above and valid Bids referred to in clause (b) above. If more than one Bid of a Potential Holder for shares of Municipal Preferred is submitted to the Auction Agent by or on behalf of any Potential Holder, each Bid submitted will be a separate Bid with the rate and number of shares therein specified. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE Not earlier than the Submission Deadline on each Auction Date, the Auction Agent will assemble all valid Orders submitted or deemed submitted to it by the Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted or deemed submitted by a Broker-Dealer being herein referred to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and will determine the excess of the number of outstanding shares of Municipal Preferred over the number of outstanding shares of Municipal Preferred subject to Submitted Hold Orders (such excess being herein referred to as the "Available Municipal Preferred") and whether Sufficient Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will have been made if the number of outstanding shares of Municipal Preferred that are the subject of Submitted Bids of Potential Holders specifying rates not higher than the Maximum Rate equals or exceeds the number of outstanding shares of Municipal Preferred that are the subject of Submitted Sell Orders (including the number of shares subject to Bids of Existing Holders specifying rates higher than the Maximum Rate). If Sufficient Clearing Bids have been made, the Auction Agent will determine the lowest rate specified in the Submitted Bids (the "Winning Bid Rate") which, taking into account the rates in the Submitted Bids of Existing Holders, B-19 66 would result in Existing Holders continuing to hold an aggregate number of outstanding shares of Municipal Preferred which, when added to the number of outstanding shares of Municipal Preferred to be purchased by Potential Holders, based on the rates in their Submitted Bids, would equal not less than the Available Municipal Preferred. In such event, the Winning Bid Rate will be the Applicable Rate for the next Rate Period for all shares of Municipal Preferred. If Sufficient Clearing Bids have not been made (other than because all of the outstanding shares of Municipal Preferred are subject to Submitted Hold Orders), the Applicable Rate for the next Rate Period for all shares of Municipal Preferred will be equal to the Maximum Rate. If Sufficient Clearing Bids have not been made, Beneficial Owners that have submitted or that are deemed to have submitted Sell Orders may not be able to sell in the Auction all shares of Municipal Preferred subject to such Sell Orders but will continue to own shares of Municipal Preferred for the next Rate Period, dividends for which may include income taxable to such Beneficial Owners. See "The Auction--Auction Dates; Advance Notice of Allocation of Taxable Income" above and "Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares" below. If all of the outstanding shares of Municipal Preferred are subject to Submitted Hold Orders, the Applicable Rate for the next Rate Period will be the lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the product of (i) (1) the "AA" Composite Commercial Paper Rate on the Auction Date for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days; (2) the Treasury Bill Rate on such Auction Date for such Rate Period, if such Rate Period consists of more than 182 but fewer than 365 Rate Period Days; or (3) the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate Period is more than 364 Rate Period Days (the rate described in the foregoing clause (i)(1), (2) or (3) as applicable, being referred to herein as the "Benchmark Rate") and (ii) 1 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income, whichever is greater; provided, however, that if the Trust has notified the Auction Agent of its intent to allocate to shares of Municipal Preferred in such Rate Period any net capital gain or other income taxable for Federal income tax purposes ("Taxable Income"), the Applicable Rate for shares of Municipal Preferred for such Rate Period will be (A) if the Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the product of the Benchmark Rate multiplied by the factor set forth in the preceding clause (ii) and (y) the product of the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax applicable to ordinary income, whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing, "Taxable Yield Rate" means the rate determined by (a) dividing the amount of Taxable Income available for distribution per share of Municipal Preferred by the number of days in the Dividend Period in respect of which such Taxable Income is contemplated to be distributed, (b) multiplying the amount determined in (a) above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any other Dividend Period), and (c) dividing the amount determined in (b) above by $25,000. In calculating the "AA" Composite Commercial Paper Rate, the Treasury Bill Rate and the Treasury Note Rate for such purpose, the rates used will be the rates or yields specified in the applicable definitions of "AA" Composite Commercial Paper Rate, Treasury Bill Rate and Treasury Note Rate set forth under "The Auction--Orders by Existing Holders and Potential Holders." ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES Based on the determinations made under "Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the discretion of the Auction Agent to round and allocate certain shares as described below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in the order of priority set forth in the Auction Procedures, with the result that Existing Holders and Potential Holders of shares of Municipal Preferred will sell, continue to hold and/or purchase such shares as set forth below. Existing Holders that submitted or were deemed to have submitted Hold Orders (or on whose behalf Hold Orders were submitted or deemed to have been submitted) will continue to hold the shares of Municipal Preferred subject to such Hold Orders. If Sufficient Clearing Bids have been made: B-20 67 (a) Each Existing Holder that placed or on whose behalf was placed a Submitted Sell Order or Submitted Bid specifying any rate higher than the Winning Bid Rate will sell the outstanding shares of Municipal Preferred subject to such Submitted Sell Order or Submitted Bid; (b) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate lower than the Winning Bid Rate will continue to hold the outstanding shares of Municipal Preferred subject to such Submitted Bid; (c) Each Potential Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate lower than the Winning Bid Rate will purchase the number of outstanding shares of Municipal Preferred subject to such Submitted Bid; (d) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to the Winning Bid Rate will continue to hold the shares of Municipal Preferred subject to such Submitted Bid, unless the number of outstanding shares of Municipal Preferred subject to all such Submitted Bids is greater than the number of shares of Municipal Preferred in excess of the Available Municipal Preferred over the number of shares of Municipal Preferred accounted for in clauses (b) and (c) above, in which event each Existing Holder with such a Submitted Bid will continue to hold a number of outstanding shares of Municipal Preferred subject to such Submitted Bid determined on a pro rata basis based on the number of outstanding shares of Municipal Preferred subject to all such Submitted Bids of such Existing Holders; and (e) Each Potential Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to the Winning Bid Rate will purchase any shares of Available Municipal Preferred not accounted for in clauses (b) through (d) above on a pro rata basis based on the outstanding shares of Municipal Preferred subject to all such Submitted Bids. If Sufficient Clearing Bids have not been made (unless this results because all outstanding shares of Municipal Preferred are subject to Submitted Hold Orders): (a) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to or lower than the Maximum Rate will continue to hold the outstanding shares of Municipal Preferred subject to such Submitted Bid; (b) Each Potential Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate equal to or lower than the Maximum Rate will purchase the number of outstanding shares of Municipal Preferred subject to such Submitted Bid; and (c) Each Existing Holder that placed or on whose behalf was placed a Submitted Bid specifying a rate higher than the Maximum Rate or a Submitted Sell Order will sell a number of shares of Municipal Preferred determined on a pro rata basis based on the number of outstanding shares of Municipal Preferred subject to all such Submitted Bids and Submitted Sell Orders. If, as a result of the pro rata allocation described in clauses (d) or (e) of the second preceding paragraph or clause (c) of the next preceding paragraph, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of Municipal Preferred, the Auction Agent will, in such manner as, in its sole discretion, it will determine, round up or down to the nearest whole share the number of shares of Municipal Preferred being sold or purchased on such Auction Date so that the number of shares sold or purchased by each Existing Holder or Potential Holder will be whole shares of Municipal Preferred. If as a result of the pro rata allocation described in clause (e) of the second preceding paragraph, any Potential Holder would be entitled or required to purchase less than a whole share of Municipal Preferred, the Auction Agent will, in such manner as, in its sole discretion, it will determine, allocate shares of Municipal Preferred for purchase among Potential Holders so that only whole shares of Municipal B-21 68 Preferred are purchased by any such Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing shares of Municipal Preferred. NOTIFICATION OF RESULTS; SETTLEMENT The Auction Agent will be required to advise each Broker-Dealer that submitted an Order of the Applicable Rate for the next Rate Period and, if the Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole or in part, by telephone by approximately 3:00 P.M., New York City time, on each Auction Date. Each Broker-Dealer that submitted an Order for the account of a customer will then be required to advise such customer of the Applicable Rate for the next Rate Period and, if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or rejected, in whole or in part, will be required to confirm purchases and sales with each customer purchasing or selling shares of Municipal Preferred as a result of the Auction and will be required to advise each customer purchasing or selling shares of Municipal Preferred as a result of the Auction to give instructions to its Agent Member of the Securities Depository to pay the purchase price against delivery of such shares or to deliver such shares against payment therefor, as appropriate. The Auction Agent will be required to record each transfer of shares of Municipal Preferred on the registry of Existing Holders to be maintained by the Auction Agent. See "General" above. In accordance with the Securities Depository's normal procedures, on the Business Day after the Auction Date, the transactions described above will be executed through the Securities Depository and the accounts of the respective Agent Members at the Securities Depository will be debited and credited and shares delivered as necessary to effect the purchases and sales of shares of Municipal Preferred as determined in the Auction. Purchasers will make payment through their Agent Members in same-day funds to the Securities Depository against delivery through their Agent Members; the Securities Depository will make payment in accordance with its normal procedures, which now provide for payment against delivery by their Agent Members in same-day funds. The settlement procedures to be used with respect to Auctions for shares of Municipal Preferred are set forth in Appendix C hereto. If any Existing Holder selling shares of Municipal Preferred in an Auction fails to deliver such shares, the Broker-Dealer of any person that was to have purchased shares of Municipal Preferred in such Auction may deliver to such person a number of whole shares of Municipal Preferred that is less than the number of shares that otherwise was to be purchased by such person. In such event, the number of shares of Municipal Preferred to be so delivered shall be determined by such Broker-Dealer. Delivery of such lesser number of shares shall constitute good delivery. CONCERNING THE AUCTION AGENT The Auction Agent is acting as agent for the Trust in connection with Auctions. In the absence of bad faith or negligence on its part, the Auction Agent will not be liable for any action taken, suffered, or omitted or for any error of judgment made by it in the performance of its duties under the Auction Agency Agreement and will not be liable for any error of judgment made in good faith unless the Auction Agent will have been negligent in ascertaining the pertinent facts. The Auction Agent may rely upon, as evidence of the identities of the Existing Holders of shares of Municipal Preferred, a list of initial owners of such shares provided by the Trust, the results of Auctions, notices from any Broker-Dealer (or other Person, if permitted by the Trust) with respect to transfers described in the Prospectus under "The Auction--Secondary Market Trading and Transfer of Municipal Preferred" and notices from the Trust. The Auction Agent is not required to accept any such notice for an Auction unless it is received by the Auction Agent by 3:00 P.M., New York City time, on the Business Day preceding such Auction. The Auction Agent will be the transfer agent, registrar, dividend disbursing agent and redemption agent for shares of Municipal Preferred. The registrar for shares of Municipal Preferred will send notices to holders of shares of Municipal Preferred of any special meetings at which holders of Municipal Preferred have the right to elect trustees of the Trust. See "Description of Municipal Preferred--Voting Rights" below. B-22 69 The Auction Agent may terminate the Auction Agency Agreement upon notice to the Trust on a date no earlier than 45 days after such notice. If the Auction Agent should resign, the Trust will use its best efforts to enter into an agreement with a successor Auction Agent containing substantially the same terms and conditions as the Auction Agency Agreement. The Trust may remove the Auction Agent provided that prior to such removal the Trust shall have entered into such an agreement with a successor Auction Agent. BROKER-DEALERS The Auction Agent after each Auction for shares of Municipal Preferred will pay to each Broker-Dealer, from funds provided by the Trust, a service charge at the annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate Period of less than one year, or a percentage agreed to by the Trust and the Broker-Dealers in the case of any Auction immediately preceding a Rate Period of one year or longer, of the purchase price of shares of Municipal Preferred placed by such Broker-Dealer at such Auction. For the purposes of the preceding sentence, shares of Municipal Preferred will be placed by a Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have been submitted to the Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own account or were acquired by such Broker-Dealer for its customers who are Beneficial Owners or (ii) the subject of an Order submitted by such Broker-Dealer that is (A) a Submitted Bid of an Existing Holder that resulted in such Existing Holder continuing to hold such shares as a result of the Auction or (B) a Submitted Bid of a Potential Holder that resulted in such Potential Holder purchasing such shares as a result of the Auction or (C) a valid Hold Order. The Trust may request the Auction Agent to terminate one or more Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer Agreement is in effect after such termination. The Broker-Dealer Agreements provide that a Broker-Dealer (other than an affiliate of the Trust) may submit Orders in Auctions for its own account, unless the Trust notifies all Broker-Dealers that they may no longer do so, in which case Broker-Dealers may continue to submit Hold Orders and Sell Orders for their own accounts. Any Broker-Dealer that is an affiliate of the Trust may submit Orders in Auctions, but only if such Orders are not for its own account. If a Broker-Dealer submits an Order for its own account in any Auction, it might have an advantage over other Bidders because it would have knowledge of all Orders submitted by it in that Auction; such Broker-Dealer, however, would not have knowledge of Orders submitted by other Broker-Dealers in that Auction. The Broker-Dealers expect, but are not obligated, to maintain a secondary trading market in shares of Municipal Preferred outside of Auctions. There can be no assurance that a secondary trading market in shares of Municipal Preferred will develop or, if it does develop, that it will provide owners with liquidity of investment. The shares of Municipal Preferred will not be registered on any stock exchange or on the National Association of Securities Dealers Automated Quotations system. DESCRIPTION OF MUNICIPAL PREFERRED The descriptions of the shares of Municipal Preferred contained in the Prospectus and this Statement of Additional Information do not purport to be complete and are subject to and qualified in their entireties by reference to the Declaration and the By-Laws. Copies of the Declaration and the form of the By-Laws are filed as exhibits to the Registration Statement of which the Prospectus and this Statement of Additional Information are a part and may be inspected, and copies thereof may be obtained, as described under "Further Information" in the Prospectus. GENERAL The shares of Municipal Preferred will rank on a parity with each other and with shares of any other series of Preferred Shares as to the payment of dividends and the distribution of assets upon liquidation. B-23 70 DIVIDENDS General. The holders of shares of Municipal Preferred offered pursuant to the Prospectus will be entitled to receive, when, as and if declared by the Board of Trustees, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, cumulative cash dividends at the Applicable Rate thereof, determined as set forth below under "Determination of Dividend Rate," and no more (except as otherwise provided below under "Gross-up Payments"), payable on the respective dates determined as set forth below. No interest, or sum of money in lieu of interest, will be payable in respect of any dividend payment or payments on shares of Municipal Preferred which may be in arrears, and, except as otherwise provided herein, no additional sum of money will be payable in respect of any such arrearage. Dividends on shares of Municipal Preferred shall accumulate at the Applicable Rate from the Date of Original Issue and, except as provided below, shall be payable on ________, ________ __, 1999, and thereafter on each ______; provided, however, that (1) if the ________ on which dividends would otherwise be payable as set forth above is not a Business Day, then dividends shall be payable instead on the first Business Day that falls prior to such _________ and (2) the Trust in its discretion may establish Dividend Payment Dates in respect of any Special Rate Period of such shares consisting of more than 28 Rate Period Days that differ from those set forth above; provided, however, that such dates shall be set forth in the Notice of Special Rate Period relating to such Special Rate Period, as delivered to the Auction Agent and filed with the Secretary of the Trust; and further provided that (1) any such Dividend Payment Date shall be a Business Day and (2) the last Dividend Payment Date in respect of such Special Rate Period shall be the Business Day immediately following the last day thereof, as such last day is determined as set forth below under "Designation of Special Rate Periods." The amount of dividends per share payable on shares of Municipal Preferred on any date on which dividends shall be payable on such shares shall be computed by multiplying the Applicable Rate in effect for such Dividend Period or Dividend Periods or part thereof for which dividends have not been paid by a fraction, the numerator of which shall be the number of days in such Dividend Period or Dividend Periods or part thereof and the denominator of which shall be 365 if such Dividend Period consists of 7 Rate Period Days and 360 for all other Dividend Periods, and applying the rate obtained against $25,000. Any dividend payment made on shares of Municipal Preferred shall first be credited against the earliest accumulated but unpaid dividends due with respect to such shares. Each dividend on shares of Municipal Preferred will be paid on the Dividend Payment Date therefor to the holders of record as their names appear on the record books of the Trust on the Business Day next preceding such Dividend Payment Date. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the holders of record as their names appear on the record books of the Trust on such date, not exceeding 15 days preceding the payment date thereof, as may be fixed by the Board of Trustees. The Securities Depository, in accordance with its current procedures, is expected to credit on each Dividend Payment Date dividends received from the Trust to the accounts of the respective Agent Members in next-day funds. Each of the initial Broker-Dealers, however, has represented to the Trust that such Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, the Agent Member designated by such Broker-Dealer) will make such dividend payments available in same-day funds on each Dividend Payment Date to Beneficial Owners that use such Broker-Dealer or its designee as Agent Member. A Beneficial Owner of shares of Municipal Preferred that does not use one of the initial Broker-Dealers or a designee thereof as its Agent Member should contact the Agent Member used by such Beneficial Owner to determine whether such Agent Member will make dividend payments available to such Beneficial Owner in next-day or same-day funds. If any Agent Member does not make such dividends available in same-day funds to a Beneficial Owner, such Beneficial Owner who uses such Agent Member would not have same-day funds available to it until the next Business Day, which, in the case of a Dividend Payment Date that is a ________, would be the following ________ if it is a Business Day. Determination of Dividend Rate. The dividend rates on shares of Municipal Preferred offered pursuant to the Prospectus during the period from and after the Date of Original Issue thereof to and including the last day of the Initial Rate Period therefor will be equal to the rate per annum set forth with respect to such shares on the cover page of the Prospectus. For each Subsequent Rate Period thereafter, the dividend rate on such shares will be equal to the rate per annum that results from an Auction on the Auction Date next preceding such Subsequent Rate Period; provided, however, if: B-24 71 (i) an Auction for any Subsequent Rate Period is not held for any reason other than as described below, the dividend rate on such shares for such Subsequent Rate Period will be the Maximum Rate on the Auction Date therefor; (ii) any Failure to Deposit shall have occurred with respect to shares of Municipal Preferred during any Rate Period thereof (other than any Special Rate Period of more than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period of more than 364 Rate Period Days during which a Failure to Deposit occurred that has not been cured), but, prior to 12:00 Noon, New York City time, on the third Business Day next succeeding the date on which such Failure to Deposit occurred, such Failure to Deposit shall have been cured in accordance with the next succeeding paragraph and the Trust shall have paid to the Auction Agent a late charge ("Late Charge") equal to the sum of (1) if such Failure to Deposit consisted of the failure timely to pay to the Auction Agent the full amount of dividends with respect to any Dividend Period of such shares, an amount computed by multiplying (x) 200% of the Reference Rate for the Rate Period during which such Failure to Deposit occurs on the Dividend Payment Date for such Dividend Period by (y) a fraction, the numerator of which shall be the number of days for which such Failure to Deposit has not been cured in accordance with the next succeeding paragraph (including the day such Failure to Deposit occurs and excluding the day such Failure to Deposit is cured) and the denominator of which shall be 360, and applying the rate obtained against the aggregate Liquidation Preference of the outstanding shares of Municipal Preferred and (2) if such Failure to Deposit consisted of the failure timely to pay to the Auction Agent the Redemption Price of the shares of Municipal Preferred, if any, for which Notice of Redemption has been mailed by the Trust, an amount computed by multiplying (x) 200% of the Reference Rate for the Rate Period during which such Failure to Deposit occurs on the redemption date by (y) a fraction, the numerator of which shall be the number of days for which such Failure to Deposit is not cured in accordance with the next succeeding paragraph (including the day such Failure to Deposit occurs and excluding the day such Failure to Deposit is cured) and the denominator of which shall be 360, and applying the rate obtained against the aggregate Liquidation Preference of the outstanding shares of Municipal Preferred to be redeemed, no Auction will be held in respect of shares of Municipal Preferred for the Subsequent Rate Period thereof and the dividend rate for such Subsequent Rate Period will be the Maximum Rate on the Auction Date for such Subsequent Rate Period; (iii) any Failure to Deposit shall have occurred with respect to shares of Municipal Preferred during any Rate Period thereof (other than any Special Rate Period of more than 364 Rate Period Days or any Rate Period succeeding any Special Rate Period of more than 364 Rate Period Days during which a Failure to Deposit occurred that has not been cured), and, prior to 12:00 Noon, New York City time, on the third Business Day next succeeding the date on which such Failure to Deposit occurred, such Failure to Deposit shall not have been cured in accordance with the next succeeding paragraph or the Trust shall not have paid the applicable Late Charge to the Auction Agent, no Auction will be held in respect of Municipal Preferred for the first Subsequent Rate Period thereof thereafter (or for any Rate Period thereafter to and including the Rate Period during which (1) such Failure to Deposit is cured in accordance with the next succeeding paragraph and (2) the Trust pays the applicable Late Charge to the Auction Agent (the condition set forth in this clause (2) to apply only in the event Moody's is rating such shares at the time the Trust cures such Failure to Deposit), in each case no later than 12:00 Noon, New York City time, on the fourth Business Day prior to the end of such Rate Period), and the dividend rate for shares of Municipal Preferred for each such Subsequent Rate Period will be a rate per annum equal to the Maximum Rate on the Auction Date for such Subsequent Rate Period (but with the prevailing rating for such shares, for purposes of determining such Maximum Rate, being deemed to be "Below "ba3"/BB-"); or (iv) any Failure to Deposit shall have occurred with respect to shares of Municipal Preferred during a Special Rate Period thereof of more than 364 Rate Period Days, or during any Rate Period thereof succeeding any Special Rate Period of more than 364 Rate Period Days during which a Failure to Deposit occurred that has not been cured, and, prior to 12:00 Noon, New York City time, on the fourth Business Day preceding the Auction Date for the Rate Period subsequent to such Rate Period, such Failure to Deposit shall not have been cured in accordance with the next succeeding paragraph or, in the event Moody's is then rating such shares, the Trust shall not have paid the applicable Late Charge to the Auction Agent (such Late Charge, for purposes of this subparagraph (iv), to be calculated by using, as the Reference Rate, the Reference Rate applicable to a Rate Period (x) consisting of more B-25 72 than 182 Rate Period Days but fewer than 365 Rate Period Days and (y) commencing on the date on which the Rate Period during which Failure to Deposit occurs commenced), no Auction will be held in respect of shares of Municipal Preferred for such Subsequent Rate Period (or for any Rate Period thereafter to and including the Rate Period during which (1) such Failure to Deposit is cured in accordance with the next succeeding paragraph and (2) the Trust pays the applicable Late Charge to the Auction Agent (the condition set forth in this clause (2) to apply only in the event Moody's is rating such shares at the time the Trust cures such Failure to Deposit), in each case no later than 12:00 Noon, New York City time, on the fourth Business Day prior to the end of such Rate Period), and the dividend rate for shares of Municipal Preferred for each such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on the Auction Date for such Subsequent Rate Period (but with the prevailing rating for such shares, for purposes of determining such Maximum Rate, being deemed to be "Below "ba3"/BB-") (the rate per annum at which dividends are payable on shares of Municipal Preferred for any Rate Period being herein referred to as the "Applicable Rate" for such shares). A Failure to Deposit with respect to shares of Municipal Preferred shall have been cured (if such Failure to Deposit is not solely due to the willful failure of the Trust to make the required payment to the Auction Agent) with respect to any Rate Period if, within the respective time periods described immediately above, the Trust shall have paid to the Auction Agent (i) all accumulated and unpaid dividends on the shares of Municipal Preferred and (ii) without duplication, the Redemption Price for the shares of Municipal Preferred, if any, for which Notice of Redemption has been mailed; provided, however, that the foregoing clause (ii) shall not apply to the Trust's failure to pay the Redemption Price in respect of shares of Municipal Preferred when the related Notice of Redemption provides that redemption of such shares is subject to one or more conditions precedent and any such condition precedent shall not have been satisfied at the time or times and in the manner specified in such Notice of Redemption. Gross-up Payments. Holders of shares of Municipal Preferred shall be entitled to receive, when, as and if declared by the Board of Trustees, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, dividends in an amount equal to the aggregate Gross-up Payment in accordance with the following: If, in the case of any Minimum Rate Period or any Special Rate Period of 28 Rate Period Days or fewer, the Trust allocates any net capital gain or other income taxable for Federal income tax purposes to a dividend paid on shares of Municipal Preferred without having given advance notice thereof to the Auction Agent as described above under "The Auction--Auction Dates; Advance Notice of Allocation of Taxable Income" (such allocation is referred to herein as a "Taxable Allocation") solely by reason of the fact that such allocation is made retroactively as a result of the redemption of all or a portion of the outstanding shares of Municipal Preferred or the liquidation of the Trust, the Trust will, prior to the end of the calendar year in which such dividend was paid, provide notice thereof to the Auction Agent and direct the Trust's dividend disbursing agent to send such notice with a Gross-up Payment to each holder of shares (initially Cede & Co., as nominee of the Securities Depository) that was entitled to such dividend payment during such calendar year at such holder's address as the same appears or last appeared on the record books of the Trust. If, in the case of any Special Rate Period of more than 28 Rate Period Days, the Trust makes a Taxable Allocation to a dividend paid on shares of Municipal Preferred, the Trust shall, prior to the end of the calendar year in which such dividend was paid, provide notice thereof to the Auction Agent and direct the Trust's dividend disbursing agent to send such notice with a Gross-up Payment to each holder of shares that was entitled to such dividend payment during such calendar year at such holder's address as the same appears or last appeared on the record books of the Trust. The Trust shall not be required to make Gross-up Payments with respect to any net capital gain or other taxable income determined by the Internal Revenue Service to be allocable in a manner different from that allocated by the Trust. A "Gross-up Payment" in respect of any dividend means payment to a holder of shares of Municipal Preferred of an amount which, giving effect to the Taxable Allocations made with respect to such dividend, would cause such holder's after-tax returns (taking into account both the Taxable Allocations and the Gross-up Payment) to be equal to the after-tax return the holder would have received if no such Taxable Allocations had occurred. Such Gross-up Payment shall be calculated: (i) without consideration being given to the time value of money; (ii) assuming that no holder of shares of Municipal Preferred is B-26 73 subject to the Federal alternative minimum tax with respect to dividends received from the Trust; and (iii) assuming that each holder of shares of Municipal Preferred is taxable at the maximum marginal regular Federal individual income tax rate applicable to ordinary income or net capital gain, as applicable, or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income or net capital gain, as applicable, whichever is greater, in effect at the time such Gross-up Payment is made. Restrictions on Dividends and Other Payments. Under the 1940 Act, the Board of Trustees may not declare any dividend (except a dividend payable in Common Shares), or declare any other distribution, upon Common Shares, or purchase Common Shares, unless in every such case the Preferred Shares, including the shares of Municipal Preferred, have, at the time of any such declaration or purchase (and after giving effect thereto), an asset coverage (as defined in and determined pursuant to the 1940 Act) of at least 200% (or such other percentage as may in the future be required by law). In addition, for so long as any shares of Municipal Preferred are outstanding, except as set forth in the following paragraph or otherwise described herein, (A) the Trust may not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or in options, warrants or rights to subscribe for or purchase, Common Shares or other shares, if any, ranking junior to the shares of Municipal Preferred as to the payment of dividends and the distribution of assets upon liquidation) in respect of Common Shares or any other shares of the Trust ranking junior to or on a parity with the shares of Municipal Preferred as to the payment of dividends or the distribution of assets upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares or any other such junior shares (except by conversion into or exchange for shares of the Trust ranking junior to the shares of Municipal Preferred as to the payment of dividends and the distribution of assets upon liquidation), or any such parity shares (except by conversion into or exchange for shares of the Trust ranking junior to or on a parity with the shares of Municipal Preferred as to payment of dividends and the distribution of assets upon liquidation), unless (1) full cumulative dividends on shares of Municipal Preferred through their most recently ended Dividend Period shall have been paid or shall have been declared and sufficient funds for the payment thereof deposited with the Auction Agent and (2) the Trust has redeemed the full number of shares of Municipal Preferred required to be redeemed by any provision for mandatory redemption pertaining thereto and (B) if either Moody's or Standard & Poor's is rating the shares of Municipal Preferred, the Trust may not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or in options, warrants or rights to subscribe for or purchase, Common Shares or other shares, if any, ranking junior to shares of Municipal Preferred as to the payment of dividends and the distribution of assets upon liquidation) in respect of Common Shares or any other shares of the Trust ranking junior to shares of Municipal Preferred as to the payment of dividends or the distribution of assets upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares or any other such junior shares (except by conversion into or exchange for shares of the Trust ranking junior to the shares of Municipal Preferred as to the payment of dividends or the distribution of assets upon liquidation), unless immediately after such transaction the Discounted Value of Moody's Eligible Assets or Standard & Poor's Eligible Assets, or both, as the case may be, would at least equal the Municipal Preferred Basic Maintenance Amount (see "Description of Municipal Preferred--Rating Agency Guidelines" and "--Redemption"). Except as set forth in the next sentence, no dividends shall be declared or paid or set apart for payment on any class or series of shares of beneficial interest of the Trust ranking, as to the payment of dividends, on a parity with shares of Municipal Preferred for any period unless full cumulative dividends have been or contemporaneously are declared and paid on the shares of Municipal Preferred through their most recent Dividend Payment Date. When dividends are not paid in full upon the shares of Municipal Preferred through their most recent Dividend Payment Date or upon any other class or series of shares ranking on a parity as to the payment of dividends with shares of Municipal Preferred through their most recent respective dividend payment dates, all dividends declared upon shares of Municipal Preferred and any other such class or series of shares ranking on a parity as to the payment of dividends with shares of Municipal Preferred shall be declared pro rata so that the amount of dividends declared per share on shares of Municipal Preferred and such other class or series of shares shall in all cases bear to each other the same ratio that accumulated dividends per share on the shares of Municipal Preferred and such other class or series of shares bear to each other (for purposes of this sentence, the amount of dividends declared per share of Municipal Preferred shall be based on the Applicable Rate for such share for the Dividend Periods during which dividends were not paid in full). B-27 74 Under the Code, the Trust must, among other things, distribute at least 90% of the sum of its net investment income (including the excess, if any, of net short-term capital gain over net long-term capital loss) and its net tax-exempt income each year in order to maintain its qualification for tax treatment as a regulated investment company. The foregoing limitations on dividends, distributions and purchases may under certain circumstances impair the Trust's ability to maintain such qualification. See "Tax Matters--Federal Income Tax Matters." Designation of Special Rate Periods. The Trust, at its option, may designate any succeeding Subsequent Rate Period of shares of Municipal Preferred as a Special Rate Period consisting of a specified number of Rate Period Days evenly divisible by seven and not more than 1,820 (approximately 5 years), subject to adjustment as described below. A designation of a Special Rate Period shall be effective only if (i) notice thereof shall have been given as provided herein, (ii) an Auction for such shares shall have been held on the Auction Date immediately preceding the first day of such proposed Special Rate Period and Sufficient Clearing Bids for such shares shall have existed in such Auction and (iii) if the Trust shall have mailed a notice of redemption with respect to any shares of Municipal Preferred, as described under "Redemption--Notice of Redemption" below, the Redemption Price with respect to such shares shall have been deposited with the Auction Agent. In the event the Trust wishes to designate any succeeding Subsequent Rate Period for shares of Municipal Preferred as a Special Rate Period consisting of more than 28 Rate Period Days, the Trust shall notify Standard & Poor's (if Standard & Poor's is then rating such shares) and Moody's (if Moody's is then rating such shares) in advance of the commencement of such Subsequent Rate Period that the Trust wishes to designate such Subsequent Rate Period as a Special Rate Period and shall provide Standard & Poor's (if Standard & Poor's is then rating such shares) and Moody's (if Moody's is then rating such shares) with such documents as either may request. In the event the Trust wishes to designate a Subsequent Rate Period of shares of Municipal Preferred as a Special Rate Period, but the day following what would otherwise be the last day of such Special Rate Period is not a _______ that is a Business Day, then the Trust shall designate such Subsequent Rate Period as a Special Rate Period consisting of the period commencing on the first day following the end of the immediately preceding Rate Period and ending on the first ________ that is followed by a ________ that is a Business Day preceding what would otherwise be such last day. If the Trust proposes to designate any succeeding Subsequent Rate Period of shares of Municipal Preferred as a Special Rate Period, not less than 20 (or such lesser number of days as may be agreed to from time to time by the Auction Agent) nor more than 30 days prior to the date the Trust proposes to designate as the first day of such Special Rate Period (which shall be such day that would otherwise be the first day of a Minimum Rate Period), notice shall be (i) published or caused to be published by the Trust in a newspaper of general circulation to the financial community in The City of New York, New York, which carries financial news, and (ii) mailed by the Trust by first-class mail, postage prepaid, to the holders of shares of Municipal Preferred. Each such notice shall state (A) that the Trust may exercise its option to designate a succeeding Subsequent Rate Period of shares of Municipal Preferred as a Special Rate Period, specifying the first day thereof and (B) that the Trust will, by 11:00 A.M., New York City time, on the second Business Day next preceding such date (or by such later time or date, or both, as may be agreed to by the Auction Agent), notify the Auction Agent of either (x) its determination, subject to certain conditions, to exercise such option, in which case the Trust shall specify the Special Rate Period designated, or (y) its determination not to exercise such option. No later than 11:00 A.M., New York City time, on the second Business Day next preceding the first day of any proposed Special Rate Period as to which notice has been given as set forth in the preceding paragraph (or such later time or date, or both, as may be agreed to by the Auction Agent), the Trust shall deliver to the Auction Agent either: (i) a notice ("Notice of Special Rate Period") stating (A) that the Trust has determined to designate the next succeeding Rate Period of shares of Municipal Preferred as a Special Rate Period, specifying the same and the first day thereof, (B) the Auction Date immediately prior to the first day of such Special Rate Period, (C) that such Special Rate Period shall not commence if (1) an Auction for such shares shall not be held on such Auction Date for any reason or (2) an Auction for such shares shall be held on such Auction Date but Sufficient Clearing Bids for such shares shall not exist in such Action, (D) the scheduled Dividend Payment Dates for such shares during such Special Rate Period and (E) the Special Redemption Provisions, if any, applicable to such shares in respect of such Special Rate Period; such notice to be accompanied by a Municipal Preferred Basic Maintenance Report showing B-28 75 that, as of the third Business Day next preceding such proposed Special Rate Period, Moody's Eligible Assets (if Moody's is then rating such shares) and Standard & Poor's Eligible Assets (if Standard & Poor's is then rating such shares) each have an aggregate Discounted Value at least equal to the Municipal Preferred Basic Maintenance Amount as of such Business Day (assuming for purposes of the foregoing calculation that (a) the Maximum Rate is the Maximum Rate on such Business Day as if such Business Day were the Auction Date for the proposed Special Rate Period, and (b) the Moody's Discount Factors applicable to Moody's Eligible Assets will be determined by reference to the first Moody's Exposure Period longer than the Moody's Exposure Period then applicable to the Trust); or (ii) a notice stating that the Trust has determined not to exercise its option to designate a Special Rate Period of shares of Municipal Preferred and that the next succeeding Rate Period shall be a Minimum Rate Period. If the Trust fails to deliver either such notice (and, in the case of the notice described in clause (i) above, a Municipal Preferred Basic Maintenance Report to the effect set forth in clause (i) (if either Moody's or Standard & Poor's is then rating the shares of Municipal Preferred)) with respect to any designation of any proposed Special Rate Period to the Auction Agent by 11:00 A.M., New York City time, on the second Business Day next preceding the first day of such proposed Special Rate Period (or by such later time or date, or both, as may be agreed to by the Auction Agent), the Trust shall be deemed to have delivered a notice to the Auction Agent with respect to such Special Rate Period to the effect set forth in clause (ii) above. In the event the Trust delivers to the Auction Agent a notice described in clause (i) above, it shall file a copy of such notice with the Secretary of the Trust, and the contents of such notice shall be binding on the Trust. In the event the Trust delivers to the Auction Agent a notice described in clause (ii) above, the Trust will provide Moody's (if Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred) a copy of such notice. VOTING RIGHTS Holders of shares of Municipal Preferred are entitled to vote on certain matters as described herein under "Investment Objectives and Policies--Fundamental Investment Policies" and in the Prospectus under "Description of Municipal Preferred--Voting Rights" and "Certain Provisions in the Agreement and Declaration of Trust." In connection with the election of the Trust's trustees, holders of outstanding Preferred Shares, including shares of Municipal Preferred, voting together as one separate class, shall be entitled to elect two of the Trust's trustees, and the remaining trustees will be elected by holders of Common Shares and Preferred Shares, including shares of Municipal Preferred, voting together as a single class. In addition, if at any time dividends (whether or not earned or declared) on outstanding Preferred Shares, including shares of Municipal Preferred, shall be due and unpaid in an amount equal to two full years' dividends thereon, and sufficient cash or specified securities shall not have been deposited with the Auction Agent for the payment of such dividends, then, as the sole remedy of holders of outstanding Preferred Shares, including shares of Municipal Preferred, the number of trustees constituting the Board of Trustees shall be automatically increased by the smallest number that, when added to the two trustees elected exclusively by the holders of Preferred Shares, including shares of Municipal Preferred, as described above, would constitute a majority of the Board of Trustees as so increased by such smallest number; and at a special meeting of shareholders which will be called and held as soon as practicable, and at all subsequent meetings at which trustees are to be elected, the holders of Preferred Shares, including shares of Municipal Preferred, voting as a separate class, will be entitled to elect the smallest number of additional trustees that, together with the two trustees which such holders will be in any event entitled to elect, constitutes a majority of the total number of trustees of the Trust as so increased. The terms of office of the persons who are trustees at the time of that election will continue. If the Trust thereafter shall pay, or declare and set apart for payment, in full all dividends payable on all outstanding Preferred Shares, including shares of Municipal Preferred, the voting rights stated in the preceding sentence shall cease, and the terms of office of all of the additional trustees elected by the holders of Preferred Shares, including shares of Municipal Preferred (but not of the trustees with respect to whose election the holders of Common Shares were entitled to vote or the two trustees the holders of Preferred Shares have the right to elect in any event), will terminate automatically. B-29 76 The Trust may not, without the affirmative vote of the holders of at least a majority of the shares of Municipal Preferred outstanding at the time, voting together as one separate class: (a) authorize, create or issue additional shares of Municipal Preferred or classes or series of Preferred Shares ranking prior to or on a parity with shares of Municipal Preferred with respect to the payment of dividends or the distribution of assets upon liquidation (except that (i) the Trust may, without the vote of the holders of shares of Municipal Preferred, authorize, create or issue additional shares of Municipal Preferred or classes or series of Preferred Shares ranking on a parity with shares of Municipal Preferred with respect to the payment of dividends and the distribution of assets upon liquidation if, after giving effect thereto, the aggregate liquidation preference of all Preferred Shares then outstanding, exclusive of accumulated and unpaid dividends, would not exceed $__________; provided, however, that the Trust obtains written confirmation from Moody's (if Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred) that the issuance of any such additional shares or class or series of shares would not impair the rating then assigned by such rating agency to shares of Municipal Preferred, and (ii) so long as either at least one of Moody's or Standard & Poor's is rating the shares of Municipal Preferred, the Trust may, without the vote of the holders of shares of Municipal Preferred, authorize, create or issue additional shares of Municipal Preferred or classes or series of Preferred Shares ranking on a parity with the shares of Municipal Preferred with respect to the payment of dividends and the distribution of assets upon liquidation notwithstanding that, after giving effect thereto, the aggregate liquidation preference of all Preferred Shares then outstanding would exceed $__________; provided, however, that the Trust obtains written confirmation from Moody's (if Moody's is then rating the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating the shares of Municipal Preferred) that the issuance of any such additional shares or class or series of shares would not impair the rating then assigned by such rating agency to shares of Municipal Preferred) or (b) amend, alter or repeal the provisions of the Declaration or the By-Laws, whether by merger, consolidation or otherwise, so as to affect any preference, right or power of the shares of Municipal Preferred or the holders thereof (provided, however, that a division of a share of Municipal Preferred shall be deemed to affect any such preference, right or power only if the terms of such division adversely affect the holders of any shares of Municipal Preferred); provided, however, that (i) none of the actions permitted by the exception to (a) above will be deemed to affect such preferences, rights or powers and (ii) the authorization, creation and issuance of classes or series of shares ranking junior to the Municipal Preferred with respect to the payment of dividends and the distribution of assets upon liquidation will be deemed to affect such preferences, rights or powers only if at least one of Moody's or Standard & Poor's is then rating the shares of Municipal Preferred and such issuance would, at the time thereof, cause the Trust not to satisfy the 1940 Act Municipal Preferred Asset Coverage or the Municipal Preferred Basic Maintenance Amount. So long as any shares of Municipal Preferred are outstanding, the Trust may not, without the affirmative vote of the holders of at least 66 2/3% of the shares of Municipal Preferred outstanding at the time, voting as a separate class, file a voluntary application for relief under Federal bankruptcy law or any similar application under state law for so long as the Trust is solvent and does not foresee becoming insolvent. If any action set forth in this paragraph would adversely affect the rights of one or more series (the "Affected Series") of Municipal Preferred in a manner different from any other series of Municipal Preferred, the Trust will not approve any such action without the affirmative vote of the holders of at least a majority of the shares of each such Affected Series outstanding at the time (each such Affected Series voting as a separate class). Voting provisions will not apply with respect to shares of Municipal Preferred if, at or prior to the time when a vote is required, such shares shall have been (i) redeemed or (ii) called for redemption and sufficient funds shall have been deposited in trust to effect such redemption. The Board of Trustees may, without shareholder approval, amend, alter or repeal any or all of the definitions and related provisions required to be contained in the By-Laws by the rating agencies in the event the Trust receives written confirmation from Moody's or Standard & Poor's, or both, as appropriate, that any such amendment, alteration or repeal would not impair the ratings then assigned by Moody's and Standard & Poor's to shares of Municipal Preferred. B-30 77 RATING AGENCY GUIDELINES The Trust intends that, so long as shares of Municipal Preferred are outstanding, the composition of its portfolio will reflect guidelines established by at least one of Moody's or Standard & Poor's in connection with the Trust's receipt on the Date of Original Issue of the shares of Municipal Preferred of ratings of "aaa" from Moody's or AAA from Standard & Poor's. Moody's and Standard & Poor's, nationally recognized independent rating agencies, issue ratings for various securities reflecting their perceived creditworthiness of such securities. The guidelines described below have been developed by Moody's and Standard & Poor's in connection with other issuances of asset-backed and similar securities, including debt obligations and adjustable rate preferred shares, generally on a case-by-case basis through discussions with the issuers of those securities. The guidelines are designed to ensure that assets underlying outstanding debt or preferred shares will be sufficiently varied and will be of sufficient quality and amount to justify investment grade ratings. The guidelines do not have the force of law, but have been adopted by the Trust in order to satisfy current requirements necessary for Moody's or Standard & Poor's, or both, to issue the above-described ratings for shares of Municipal Preferred, which ratings are generally relied upon by investors in purchasing such securities. In the context of a closed-end investment company such as the Trust, therefore, the guidelines provide a set of tests for portfolio composition and asset coverage that supplement (and in some cases are more restrictive than) the applicable requirements under the 1940 Act. A rating agency's guidelines will apply to shares of Municipal Preferred only so long as such rating agency is rating such shares. The Board of Trustees may, without shareholder approval, amend, alter or repeal any or all of the definitions and related provisions which have been adopted by the Trust pursuant to the rating agency guidelines in the event the Trust receives written confirmation from Moody's or Standard & Poor's, or both, as appropriate, that any such change would not impair the ratings then assigned by Moody's and Standard & Poor's to shares of Municipal Preferred. So long as either Standard & Poor's or Moody's, or both, are rating the shares of Municipal Preferred, the Trust may not, among other things, (1) engage in futures or options transactions, except in accordance with the then-current guidelines of such rating agencies, (2) borrow money, except that the Trust may, without obtaining the written confirmation described below, borrow money for the purpose of clearing securities transactions if the Municipal Preferred Basic Maintenance Amount would continue to be satisfied after giving effect to such borrowing and certain other conditions are met, (3) issue additional shares of Municipal Preferred or any class or series of shares ranking on a parity with the shares of Municipal Preferred with respect to the payment of dividends or the distribution of assets upon liquidation of the Trust, (4) engage in any short sales of securities, (5) lend any securities, (6) merge or consolidate into or with any corporation or (7) enter into reverse repurchase agreements, unless in each case (except as described above) it has received written confirmation from Standard & Poor's or Moody's, or both, as appropriate, that any such action would not impair the rating then assigned by such rating agency to shares of Municipal Preferred. While the Trust does not presently intend to borrow, and while the Trust is restricted under the 1940 Act from borrowing in excess of 33 1/3% of its total assets and is otherwise restricted from borrowing pursuant to rating agency guidelines, under certain circumstances and notwithstanding adverse interest rate or market conditions, the Trust is permitted to borrow for temporary or emergency purposes (e.g., to make required distributions or pay dividends) or to repurchase shares when such borrowing is deemed to be in the best interest of the common shareholders. See "Repurchase of Common Shares" herein and "Repurchase of Common Shares; Conversion to Open-End Fund" in the Prospectus for the circumstances under which the Trust may purchase Common Shares and incur indebtedness in connection therewith. Should the Trust borrow, the Trust would be required to pay when due the interest obligation on any debt incurred by the Trust before it would be able to pay dividends on shares of Municipal Preferred, and it is likely that the Trust would be required to pay the principal amount of any such debt prior to meeting the liquidation preference of the shares of Municipal Preferred. Because the interest expense on borrowings by the Trust will reduce the Trust's net investment earnings available to pay dividends on shares of Municipal Preferred, borrowing may impair the Trust's ability to pay such dividends on shares of Municipal Preferred. This risk is heightened in the event the Trust incurs variable rate debt, the interest rate on which may increase with increases in prevailing market rates. ASSET MAINTENANCE 1940 Act Municipal Preferred Asset Coverage. The Trust will be required under rating agency guidelines to maintain, as of the last Business Day of each month on which any shares of Municipal Preferred are outstanding, asset coverage of at least 200% with respect to such shares (or such other asset coverage as may in the future be specified in or B-31 78 under the 1940 Act as the minimum asset coverage for senior securities which are shares of a closed-end investment company as a condition of declaring dividends on its common shares). If the Trust fails to maintain such asset coverage in accordance with the requirements of the rating agency or agencies then rating the shares of Municipal Preferred ("1940 Act Municipal Preferred Asset Coverage") and such failure is not cured as of the last Business Day of the following month (the "1940 Act Cure Date"), the Trust will be required under certain circumstances to redeem certain of the shares of Municipal Preferred. See "Redemption" below. Municipal Preferred Basic Maintenance Amount. The Trust will be required under rating agency guidelines to maintain, as of each Business Day (a "Valuation Date") on which shares of Municipal Preferred are outstanding, assets having in the aggregate a Discounted Value at least equal to the Municipal Preferred Basic Maintenance Amount established by the rating agency or agencies then rating the shares of Municipal Preferred. If the Trust fails to meet such requirement on any Valuation Date and such failure is not cured on or before the seventh Business Day after such Valuation Date (the "Municipal Preferred Basic Maintenance Cure Date"), the Trust will be required under certain circumstances to redeem certain of the shares of Municipal Preferred. See "Redemption" below. The "Municipal Preferred Basic Maintenance Amount" as of any Valuation Date is defined as the dollar amount equal to the sum of: (A) (i) the product of the number of shares of Municipal Preferred outstanding on such date multiplied by $25,000, plus any redemption premium applicable to shares of Municipal Preferred then subject to redemption; (ii) the aggregate amount of dividends that will have accumulated at the Applicable Rate (whether or not earned or declared) to (but not including) the first Dividend Payment Date for each share of Municipal Preferred outstanding that follows such Valuation Date; (iii) subject to certain exceptions, the aggregate amount of dividends that would accumulate on shares of Municipal Preferred outstanding from such first Dividend Payment Date through the 49th day after such Valuation Date, at the Maximum Rate (calculated as if such Valuation Date were the Auction Date for the Rate Period commencing on such Dividend Payment Date) for a Minimum Rate Period thereof to commence on such Dividend Payment Date, assuming, solely for purposes of the foregoing, that if on such Valuation Date the Trust shall have delivered a Notice of Special Rate Period to the Auction Agent with respect to such shares, such Maximum Rate shall be the higher of (a) the Maximum Rate for the Special Rate Period of such shares to commence on such Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate Period of such shares to commence on such Dividend Payment Date, multiplied by the Volatility Factor applicable to a Minimum Rate Period, or, in the event the Trust shall have delivered a Notice of Special Rate Period to the Auction Agent with respect to such shares designating a Special Rate Period consisting of 49 Rate Period Days or more, the Volatility Factor applicable to a Special Rate Period of that length; (iv) the amount of anticipated Trust expenses for the 90 days subsequent to such Valuation Date; (v) the amount of the Trust's Maximum Potential Gross-up Payment Liability as of such Valuation Date; and (vi) any current liabilities as of such Valuation Date to the extent not reflected in any of (A)(i) through (A)(v) (including, without limitation, any payables for Municipal Obligations purchased as of such Valuation Date and any liabilities incurred for the purpose of clearing securities transactions) less (B) the value of any Trust assets irrevocably deposited by the Trust for the payment of any of (A)(i) through (A)(vi), all as calculated in accordance with the requirements of the rating agency or agencies then rating the shares of Municipal Preferred. B-32 79 For purposes of the foregoing, "Maximum Potential Gross-up Payment Liability," as of any Valuation Date, means the aggregate amount of Gross-up Payments that would be due if the Trust were to make Taxable Allocations, with respect to any taxable year, estimated based upon dividends paid and the amount of undistributed realized net capital gain and other taxable income earned by the Trust, as of the end of the calendar month immediately preceding such Valuation Date, and assuming such Gross-up Payments are fully taxable. In managing the Trust's portfolio, the Advisor will not alter the composition of the Trust's portfolio if, in the reasonable belief of the Advisor, the effect of any such alteration would be to cause the Trust to have Eligible Assets with an aggregate Discounted Value, as of the immediately preceding Valuation Date, less than the Municipal Preferred Basic Maintenance Amount as of such Valuation Date; provided, however, that in the event that, as of the immediately preceding Valuation Date, the aggregate Discounted Value of the Trust's Eligible Assets exceeded the Municipal Preferred Basic Maintenance Amount by 5% or less, the Advisor will not alter the composition of the Trust's portfolio in a manner reasonably expected to reduce the aggregate Discounted Value of the Trust's Eligible Assets unless the Trust shall have confirmed that, after giving effect to such alteration, the aggregate Discounted Value of the Trust's Eligible Assets would exceed the Municipal Preferred Basic Maintenance Amount. Upon any failure to maintain the required Discounted Value, the Trust will seek to alter the composition of its portfolio to reattain the Municipal Preferred Basic Maintenance Amount on or prior to the Municipal Preferred Basic Maintenance Cure Date, thereby incurring additional transaction costs and possible losses and/or gains on dispositions of portfolio securities. On or before the third Business Day after a Valuation Date on which the Trust fails to meet the Municipal Preferred Basic Maintenance Amount, and on the third Business Day after the Municipal Preferred Basic Maintenance Cure Date with respect to such Valuation Date, the Trust is required to deliver to the Auction Agent (so long as either Moody's or Standard & Poor's is rating the shares of Municipal Preferred) a report with respect to the calculation of the Municipal Preferred Basic Maintenance Amount and the value of its portfolio holdings as of the date of such failure or such cure date, as the case may be (a "Municipal Preferred Basic Maintenance Report"). The Trust will also deliver, as required, a Municipal Preferred Basic Maintenance Report as of (i) the fifteenth day of each month (or, if such day is not a Business Day, the next succeeding Business Day) and (ii) the last Business Day of each month, in each case on or before the third Business Day after such day. Within ten Business Days after delivery of such report relating to the last Business Day of each of February, May, August and November of each year, commencing _________ ___, 1999, the Trust will deliver a letter prepared by the Trust's independent accountants regarding the accuracy of the calculations made by the Trust in its most recent Municipal Preferred Basic Maintenance Report. If any such letter prepared by the Trust's independent accountants shows that an error was made in the most recent Municipal Preferred Basic Maintenance Report, the calculation or determination made by the Trust's independent accountants will be conclusive and binding on the Trust. The Discount Factors and guidelines for determining the market value of the Trust's portfolio holdings, described below, have been based by the rating agencies on criteria such as the sensitivity of the market value of the relevant asset to changes in interest rates, the liquidity and depth of the market for the relevant asset, the credit quality of the relevant asset (for example, the lower the rating of a debt obligation, the higher the related discount factor) and the frequency with which the relevant asset is marked to market. The ratings may be changed, suspended or withdrawn as a result of changes in, or the unavailability of, such information. Standard & Poor's AAA Rating Guidelines. For purposes of calculating the Discounted Value of the Trust's portfolio under current Standard & Poor's guidelines, the fair market value of Municipal Obligations eligible for consideration under such guidelines ("Standard & Poor's Eligible Assets") must be discounted by certain discount factors set forth in the table below ("Standard & Poor's Discount Factors"). The Discounted Value of a Municipal Obligation under Standard & Poor's guidelines is the fair market value thereof divided by the Standard & Poor's Discount Factor. The Standard & Poor's Discount Factor used to discount a particular Municipal Obligation will be determined by reference to the "Standard & Poor's Exposure Period" (currently, three Business Days) and the Standard & Poor's rating on such Municipal Obligation. Standard & Poor's Discount Factors for a range of exposure periods are set forth below: B-33 80
Standard & Poor's Discount Factors Rating Category Exposure Period AAA AA A BBB ---------------- --- -- - --- 45 Business Days.............................. 190% 195% 210% 250% 22 Business Days.............................. 170 175 190 230 10 Business Days.............................. 155 160 175 215 7 Business Days............................... 150 155 170 210 3 Business Days............................... 130 135 150 190
Since the Standard & Poor's Exposure Period currently applicable to the Trust is three Business Days, the Standard & Poor's Discount Factors currently applicable to Standard & Poor's Eligible Assets will be determined by reference to the factors set forth opposite the line entitled "3 Business Days." Notwithstanding the foregoing, (i) the Standard & Poor's Discount Factor for short-term Municipal Obligations will be 115%, so long as such Municipal Obligations are rated A-1+ or SP-1+ by Standard & Poor's and mature or have a demand feature exercisable within 30 days or less, or 125% if such Municipal Obligations are not rated by Standard & Poor's but are rated VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any such Moody's-rated short-term Municipal Obligations which have demand features exercisable within 30 days or less must be backed by a letter of credit, liquidity facility or guarantee from a bank or other financial institution with a short-term rating of at least A-1+ from Standard & Poor's; and further provided that such Moody's-rated short-term Municipal Obligations may comprise no more than 50% of short-term Municipal Obligations that qualify as Standard & Poor's Eligible Assets; (ii) no Standard & Poor's Discount Factor will be applied to cash or to Receivables for Municipal Obligations Sold; and (iii) except as set forth in clause (i) above, in the case of any Municipal Obligation that is not rated by Standard & Poor's but qualifies as a Standard & Poor's Eligible Asset pursuant to clause (1)(c) of the following paragraph, such Municipal Obligation will be deemed to have a Standard & Poor's rating one full rating category lower than the Standard & Poor's rating category that is the equivalent of the rating category in which such Municipal Obligation is placed by Moody's. For purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not rated by Standard & Poor's, rated MIG-1 or VMIG-1 by Moody's, which do not mature or have a demand feature at par exercisable in 30 days and which do not have a long-term rating, will be considered to be short-term Municipal Obligations. "Receivables for Municipal Obligations Sold," for purposes of calculating Standard & Poor's Eligible Assets as of any Valuation Date, means the book value of receivables for Municipal Obligations sold as of or prior to such Valuation Date if such receivables are due within five business days of such Valuation Date. The Standard & Poor's guidelines impose certain minimum issue size, issuer, geographical diversification and other requirements for purposes of determining Standard & Poor's Eligible Assets: (1) In order to be considered Standard & Poor's Eligible Assets, Municipal Obligations owned by the Trust must: (a) be interest bearing and pay interest at least semi-annually; (b) be payable in U.S. dollars; (c) be publicly rated BBB or higher by Standard & Poor's or, if not rated by Standard & Poor's but rated by another nationally recognized credit rating agency, be publicly rated A or higher by such agency; (d) not be private placements; and (e) be part of an issue with an original issue size of at least $20 million or, if of an issue with an original issue size below $20 million (but in no event lower than $10 million), be issued by an issuer with a total of at least $50 million of securities outstanding. B-34 81 (2) Municipal Obligations (excluding Escrowed Bonds) of any one issuer or guarantor (excluding bond insurers) will be considered Standard & Poor's Eligible Assets only to the extent the fair market value of such Municipal Obligations does not exceed 10% of the aggregate fair market value of Standard & Poor's Eligible Assets, provided that 2% is added to the applicable Standard & Poor's Discount Factor for every 1% by which the fair market value of such Municipal Obligations exceeds 5% of the aggregate fair market value of Standard & Poor's Eligible Assets. (3) Municipal Obligations rated by another nationally recognized credit rating agency but not rated by Standard & Poor's will be considered Standard & Poor's Eligible Assets only to the extent the fair market value of such Municipal Obligations does not exceed 50% of the aggregate fair market value of Standard & Poor's Eligible Assets. (4) Long-term Municipal Obligations (excluding Escrowed Bonds) issued by issuers in any one state or territory will be considered Standard & Poor's Eligible Assets only to the extent the fair market value of such Municipal Obligations does not exceed 20% of the aggregate fair market value of Standard & Poor's Eligible Assets. Moody's "aaa" Rating Guidelines. For purposes of calculating the Discounted Value of the Trust's portfolio under current Moody's guidelines, Municipal Obligations eligible for consideration under such guidelines ("Moody's Eligible Assets") must be discounted by certain discount factors set forth in the table below ("Moody's Discount Factors"). The Discounted Value of a Municipal Obligation under Moody's guidelines is, as of any Valuation Date, (i) with respect to a Moody's Eligible Asset that is not currently callable as of such Valuation Date at the option of the issuer thereof, the quotient of the market value thereof divided by the applicable Moody's Discount Factor, or (ii) with respect to a Moody's Eligible Asset that is currently callable as of such Valuation Date at the option of the issuer thereof, the quotient of (a) the lesser of the market value or call price thereof, including any call premium, divided by (b) the applicable Moody's Discount Factor. The Moody's Discount Factor used to discount a particular Municipal Obligation will be determined by reference to the "Moody's Exposure Period" (currently, the period commencing on a given Valuation Date and ending 49 days thereafter) and the Moody's rating on such Municipal Obligation. Moody's Discount Factors for a range of exposure periods for bonds with 10 years to maturity are set forth below:
MOODY'S DISCOUNT FACTORS RATING CATEGORY --------------------------------------------------------------------------------- EXPOSURE PERIOD AAA Aa A Baa OTHER* (V)MIG-1** SP-1+ Unrated 7 weeks 151% 159% 166% 173% 187% 136% 148% 225% 8 weeks or less but greater than 7 weeks 154 161 168 176 190 137 149 231 9 weeks or less but greater than 8 weeks 156 163 170 177 192 138 150 240
- -------------- * Municipal Obligations not rated by Moody's but rated BBB by Standard & Poor's. ** Municipal Obligations rated MIG-1 or VMIG-1 or, if not rated by Moody's, rated SP-1+ by Standard & Poor's, which do not mature or have a demand feature at par exercisable in 30 days and which do not have a long-term rating. *** Municipal Obligations not rated by Moody's or Standard & Poor's. Since the Moody's Exposure Period currently applicable to the Trust is 49 days, the Moody's Discount Factors currently applicable to Moody's Eligible Assets will be determined by reference to the factors set forth opposite the line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's Discount Factor for short-term Municipal Obligations will be 115%, so long as such Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or have a demand feature at par exercisable in 30 days or less or 125% so long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by Standard & Poor's and mature or have a demand feature at par exercisable in 30 days or less and (ii) no Moody's Discount Factor will be applied to cash or to Receivables for Municipal Obligations Sold. "Receivables for Municipal Obligations Sold," for purposes of calculating Moody's Eligible Assets as of any Valuation Date, means no more than the aggregate of the following: (i) the book value of receivables for Municipal Obligations sold as of or prior to B-35 82 such Valuation Date if such receivables are due within five business days of such Valuation Date, and if the trades which generated such receivables are (x) settled through clearing house firms with respect to which the Trust has received prior written authorization from Moody's or (y) with counterparties having a Moody's long-term debt rating of at least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations sold as of or prior to such Valuation Date which generated receivables, if such receivables are due within five business days of such Valuation Date but do not comply with either of conditions (x) or (y). The Moody's guidelines impose certain minimum issue size, issuer, geographical diversification and other requirements for purposes of determining Moody's Eligible Assets, as set forth in the table below:
Minimum Maximum Maximum Issue Size Underlying State or Territory Rating ($ Millions) Obligor (%) Concentration (%) ------ ------------ ----------- ----------------- Aaa................................ 10 100 100 Aa................................. 10 20 60 A.................................. 10 10 40 Baa................................ 10 6 20 Other*............................. 10 4 12
- -------------- * Municipal Obligations not rated by Moody's but rated BBB by Standard & Poor's. The percentages set forth in the preceding table are based upon Moody's Eligible Assets calculated excluding cash. Current Moody's guidelines also require that Municipal Obligations constituting Moody's Eligible Assets pay interest in cash, be publicly rated Baa or higher by Moody's or, if not rated by Moody's but rated by Standard & Poor's, that they be rated at least BBB by Standard & Poor's, and that they not have suspended ratings. For purposes of determining the Moody's Discount Factors applicable to such Standard & Poor's-rated Municipal Obligations, any such Municipal Obligation (excluding short-term Municipal Obligations) will be deemed to have a Moody's rating which is one full rating category lower than its Standard & Poor's rating. For purposes of applying the foregoing requirements, Municipal Obligations rated MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by Standard & Poor's, will be considered to have a long-term rating of A. The Trust will enter into futures and options transactions only for bona fide hedging purposes and not for leveraging or speculative purposes. So long as either Standard & Poor's or Moody's is rating the Municipal Preferred, the Trust will only engage in futures or options transactions in accordance with the then-current guidelines of such ratings agencies, and only after it has received written confirmation from Standard & Poor's or Moody's, as appropriate, that such transactions would not impair the ratings then assigned by such rating agency to shares of Municipal Preferred. REDEMPTION B-36 83 Optional Redemption. Except as described below, (i) shares of Municipal Preferred are redeemable, at the option of the Trust, as a whole or from time to time in part, on the second Business Day preceding any Dividend Payment Date therefor, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, at a redemption price per share equal to the sum of $25,000 plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) to (but not including) the date fixed for redemption; provided, however, that (1) shares of Municipal Preferred may not be redeemed in part if after such partial redemption fewer than 500 shares remain outstanding; (2) unless otherwise provided in the By-laws, shares of Municipal Preferred are redeemable by the Trust during the Initial Rate Period thereof only on the second Business Day next preceding the last Dividend Payment Date for such Initial Rate Period; and (3) subject to the next succeeding sentence, the Notice of Special Rate Period relating to a Special Rate Period of shares of Municipal Preferred, as delivered to the Auction Agent and filed with the Secretary of the Trust, may provide that such shares shall not be redeemable during the whole or any part of such Special Rate Period (except as provided in (ii) below) or shall be redeemable during the whole or any part of such Special Rate Period only upon payment of such redemption premium or premiums as shall be specified therein ("Special Redemption Provisions"); and (ii) shares of Municipal Preferred are redeemable, at the option of the Trust, as a whole but not in part, out of funds legally available therefor in accordance with the Declaration, the By-Laws and applicable law, on the first day following any Dividend Period thereof included in a Rate Period of more than 364 Rate Period Days if, on the date of determination of the Applicable Rate for such shares for such Rate Period, such Applicable Rate equaled or exceeded on such date of determination the Treasury Note Rate for such Rate Period, at a redemption price of $25,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) to (but not including) the date fixed for redemption. A Notice of Special Rate Period relating to shares of Municipal Preferred for a Special Rate Period may contain Special Redemption Provisions only if the Board of Trustees, after consultation with the Broker-Dealer or Broker-Dealers for such Special Rate Period of such shares, determines that such Special Redemption Provisions are in the best interest of the Trust. If fewer than all of the outstanding shares of Municipal Preferred are to be redeemed as set forth above, the number of shares to be redeemed shall be determined by the Board of Trustees, and such shares shall be redeemed pro rata from the holders of record of shares of such series (initially Cede & Co. as nominee of the Securities Depository) in proportion to the number of such shares held by such holders. Since the nominee of the Securities Depository is the only record holder of shares of Municipal Preferred, the Securities Depository will determine the number of shares to be redeemed from the accounts of the Agent Members. The Agent Members, in turn, may determine to redeem shares from some persons listed on their records as beneficial owners (which may include an Agent Member holding shares for its own account) without redeeming shares from the accounts of other persons listed on their records as beneficial owners. The Trust may not mail a Notice of Redemption relating to an optional redemption as described above on any date unless on such date (a) the Trust has available certain Deposit Securities with maturity or tender dates not later than the day preceding the applicable redemption date and having a value not less than the amount (including any applicable premium) due to holders of shares of Municipal Preferred by reason of the redemption of such shares on such redemption date and (b) the Discounted Value of Moody's Eligible Assets (if Moody's is then rating the shares of Municipal Preferred) and the Discounted Value of Standard & Poor's Eligible Assets (if Standard & Poor's is then rating the shares of Municipal Preferred) each at least equal the Municipal Preferred Basic Maintenance Amount and would at least equal the Municipal Preferred Basic Maintenance Amount immediately subsequent to such redemption if such redemption were to occur on such date. For purposes of determining in clause (b) of the preceding sentence whether the Discounted Value of Moody's Eligible Assets at least equals the Municipal Preferred Basic Maintenance Amount, the Moody's Discount Factors applicable to Moody's Eligible Assets will be determined by reference to the first Moody's Exposure Period longer than the Moody's Exposure Period then applicable to the Trust. B-37 84 Mandatory Redemption. The Trust will be required to redeem, at a redemption price equal to $25,000 per share plus accumulated but unpaid dividends thereon (whether or not earned or declared) to (but not including) the date fixed by the Board of Trustees for redemption (such amount, together with the redemption prices described above under "Optional Redemption," being herein referred to as the "Redemption Price"), certain of the shares of Municipal Preferred to the extent permitted under the 1940 Act, the Declaration, the By-Laws and any applicable law, if the Trust fails to maintain the Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage in accordance with the requirements of the rating agency or rating agencies then rating the shares of Municipal Preferred and such failure is not cured on or before the Municipal Preferred Basic Maintenance Cure Date or the 1940 Act Cure Date (herein respectively referred to as a "Cure Date"), as the case may be. The number of shares of Municipal Preferred to be redeemed will be equal to the lesser of (a) the minimum number of shares of Municipal Preferred, together with all other Preferred Shares subject to redemption or retirement, the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Cure Date, would have resulted in the satisfaction of the Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be, on such Cure Date (provided, however, that, if there is no such minimum number of shares of Municipal Preferred and other Preferred Shares the redemption or retirement of which would have had such result, all shares of Municipal Preferred and Preferred Shares then outstanding will be redeemed), and (b) the maximum number of shares of Municipal Preferred, together with all other Preferred Shares subject to redemption or retirement, that can be redeemed out of funds expected to be legally available therefor. In determining the shares of Municipal Preferred required to be redeemed in accordance with the foregoing, the Trust will allocate the number of shares required to be redeemed to satisfy the Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be, pro rata among shares of Municipal Preferred and any other Preferred Shares subject to redemption or retirement. The Trust is required to effect such a mandatory redemption not earlier than 20 days and not later than 40 days after such Cure Date, except that if the Trust does not have funds legally available under the Declaration, the By-Laws and applicable law for the redemption of all of the required number of shares of Municipal Preferred and other Preferred Shares which are subject to mandatory redemption or retirement or the Trust otherwise is unable to effect such redemption on or prior to 40 days after such Cure Date, the Trust will redeem those shares of Municipal Preferred and other Preferred Shares which it was unable to redeem on the earliest practicable date on which it is able to effect such redemption. If fewer than all of the outstanding shares of Municipal Preferred are to be redeemed pursuant to a mandatory redemption, the number of shares to be redeemed shall be redeemed pro rata from the holders of such shares in proportion to the number of such shares held by such holders, in the same manner as described above in respect of optional redemptions of fewer than all outstanding shares of Municipal Preferred. Notice of Redemption. Notice of redemption shall be given by mailing the same to each holder of the shares to be redeemed (initially Cede & Co. as nominee of the Securities Depository), not less than 20 nor more than 45 days prior to the date fixed for redemption thereof, to the respective addresses of such holders as the same shall appear on the record books of the Trust ("Notice of Redemption"). Each such notice shall state (i) the redemption date; (ii) the number of shares of Municipal Preferred to be redeemed; (iii) the CUSIP number for such shares; (iv) the Redemption Price; (v) the place or places where certificate(s) for such shares (properly endorsed or assigned for transfer, if the Board of Trustees shall so require and the notice shall so state) are to be surrendered for payment of the Redemption Price; (vi) that dividends on the shares to be redeemed will cease to accumulate on such redemption date; and (vii) the provisions of the By-Laws under which such redemption is made. If fewer than all shares of Municipal Preferred held by any holder are to be redeemed, the notice mailed to such holder shall also specify the number of shares to be redeemed from such holder. The Trust may provide in any Notice of Redemption relating to an optional redemption that such redemption is subject to one or more conditions precedent and that the Trust shall not be required to effect such redemption unless each such condition shall have been satisfied at the time or times and in the manner specified in such Notice of Redemption. Other Redemption Procedures. To the extent that any redemption for which notice of redemption has been mailed is not made by reason of the absence of legally available funds therefor, such redemption will be made as soon as practicable to the extent such funds become available. Failure to redeem shares of Municipal Preferred will be deemed to exist at any time after the date specified for redemption in a notice of redemption when the Trust shall have failed, for any reason whatsoever, to deposit with the Auction Agent the Redemption Price with respect to any shares for which such notice of redemption has B-38 85 been mailed. Notwithstanding the fact that the Trust may not have redeemed shares of Municipal Preferred for which a notice of redemption has been mailed, dividends may be declared and paid on shares of Municipal Preferred and will include those shares of Municipal Preferred for which notice of redemption has been mailed. The first two sentences of this paragraph shall not apply in the event the Trust provides in any Notice of Redemption relating to an optional redemption that such redemption is subject to one or more conditions precedent and any such condition precedent shall not have been satisfied at the time or times and in the manner specified in such Notice of Redemption. Provided a Notice of Redemption has been mailed as described above, upon the deposit with the Auction Agent (on the Business Day next preceding the date fixed for redemption thereby, in funds available on the next Business Day in The City of New York, New York) of funds sufficient to redeem the shares of Municipal Preferred that are the subject of such notice, dividends on such shares will cease to accumulate and such shares will no longer be deemed outstanding for any purpose, and all rights of the holders of the shares so called for redemption will cease and terminate, except the right of the holders thereof to receive the Redemption Price, but without any interest or other additional amount, except as otherwise provided above under "Dividends--Determination of Dividend Rate" and "--Gross-up Payments." Upon surrender in accordance with the notice of redemption of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Trustees shall so require and the notice shall so state), the Redemption Price shall be paid by the Auction Agent to the holders of shares of Municipal Preferred subject to redemption. In the case that fewer than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued, representing the unredeemed shares, without cost to the holder thereof. The Trust will be entitled to receive from the Auction Agent, promptly after the date fixed for redemption, any cash deposited with the Auction Agent in excess of (i) the aggregate Redemption Price of the shares of Municipal Preferred called for redemption on such date and (ii) all other amounts to which holders of shares of Municipal Preferred called for redemption may be entitled. Any funds so deposited that are unclaimed at the end of 90 days from such redemption date will, to the extent permitted by law, be repaid to the Trust, after which time the holders of shares of Municipal Preferred so called for redemption may look only to the Trust for payment of the Redemption Price and all other amounts to which they may be entitled. The Trust will be entitled to receive, from time to time after the date fixed for redemption, any interest on the funds so deposited. Notwithstanding the foregoing, if any dividends on shares of Municipal Preferred (whether or not earned or declared) are in arrears, no shares of Municipal Preferred shall be redeemed unless all outstanding shares of Municipal Preferred are simultaneously redeemed, and the Trust shall not purchase or otherwise acquire any shares of Municipal Preferred; provided, however, that the foregoing shall not prevent the purchase or acquisition of all outstanding shares of Municipal Preferred pursuant to the successful completion of an otherwise lawful purchase or exchange offer made on the same terms to, and accepted by, holders of all outstanding shares of Municipal Preferred. Except as described above with respect to redemptions and under "The Auction--Orders by Existing Holders and Potential Holders," the Declaration and the By-Laws do not prohibit the Trust or any affiliate of the Trust from purchasing or otherwise acquiring any shares of Municipal Preferred. The Trust has the right to arrange for third parties to purchase from the holders thereof shares of Municipal Preferred which are to be redeemed as described above. LIQUIDATION Upon a liquidation of the Trust, whether voluntary or involuntary, the holders of shares of Municipal Preferred then outstanding will be entitled to receive and to be paid out of the assets of the Trust available for distribution to its shareholders, before any payment or distribution shall be made on the Common Shares or on any other class of shares of the Trust ranking junior to the Municipal Preferred upon liquidation, an amount equal to the liquidation preference with respect to such shares. The liquidation preference for shares of Municipal Preferred shall be $25,000 per share, plus an amount equal to all dividends thereon (whether or not earned or declared) accumulated but unpaid to (but not including) the date of final distribution in same-day funds, together with any applicable Gross-up Payments in connection with the liquidation of the Trust. After the payment to the holders of the shares of Municipal Preferred of the full preferential amounts provided for as described herein, the holders of Municipal Preferred as such shall have no right or claim to any of the remaining assets of the Trust. In the event the assets of the B-39 86 Trust available for distribution to the holders of shares of Municipal Preferred, upon any liquidation of the Trust, whether voluntary or involuntary, shall be insufficient to pay in full all amounts to which such holders are entitled, no such distribution shall be made on account of any other class or series of Preferred Shares ranking on a parity with the shares of Municipal Preferred upon such liquidation unless proportionate distributive amounts shall be paid on account of the shares of Municipal Preferred, ratably, in proportion to the full distributable amounts for which holders of all such parity shares are respectively entitled upon such liquidation. Subject to the rights of the holders of any series or class or classes of shares ranking on a parity with the shares of Municipal Preferred with respect to the distribution of assets upon liquidation of the Trust, after payment shall have been made in full to the holders of the shares of Municipal Preferred as described herein, but not prior thereto, any other series or class or classes of shares ranking junior to the shares of Municipal Preferred with respect to the distribution of assets upon liquidation shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the shares of Municipal Preferred shall not be entitled to share therein. Neither the sale of all or substantially all the property or business of the Trust, nor the merger or consolidation of the Trust into or with any Massachusetts business trust or corporation nor the merger or consolidation of any Massachusetts business trust or corporation into or with the Trust shall be a liquidation, whether voluntary or involuntary, for the purposes of the foregoing paragraph. REPURCHASE OF COMMON SHARES The Trust is a closed-end investment company and as such its shareholders will not have the right to cause the Trust to redeem their shares. Common Shares trade in the open market at a price that is a function of several factors, including net asset value and yield. Although the common shares of a closed-end investment company such as the Trust that invests substantially all of its assets in investment grade municipal obligations have generally traded at a premium to net asset value, such shares have occasionally traded at a discount to net asset value. The Board of Trustees has currently determined that, at least annually, it will consider action that might be taken to reduce or eliminate any material discount from net asset value in respect of Common Shares, which may include the repurchase of such shares in the open market or in private transactions, the making of a tender offer for such shares at net asset value, or the conversion of the Trust to an open-end investment company. There can be no assurance, however, that the Board of Trustees will decide to take any of these actions, or that share repurchases or tender offers, if undertaken, will reduce market discount. In addition, see "Description of Municipal Preferred--Dividends--Restrictions on Dividends and Other Payments" for a discussion of the limitations on the Trust's ability to engage in certain transactions. The staff of the SEC currently requires that any tender offer made by a closed-end investment company for its shares must be at a price equal to the net asset value of such shares on the close of business on the last day of the tender offer. Any service fees incurred in connection with any tender offer made by the Trust will be borne by the Trust and will not reduce the stated consideration to be paid to tendering shareholders. Subject to its investment limitations, the Trust may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Trust in anticipation of share repurchases or tenders will reduce the Trust's net income. Any share repurchase, tender offer or borrowing that might be approved by the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder. Although the decision to take action in response to a discount from net asset value will be made by the Board of Trustees at the time it considers such issue, it is the Board's present policy, which may be changed by the Board, not to authorize repurchases of the Trust's Common Shares or a tender offer for such shares if (1) such transactions, if consummated, would (a) result in the delisting of the Common Shares from the New York Stock Exchange (the "Exchange"), 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 as a registered closed-end investment company under the 1940 Act; (2) the Trust would not be able to liquidate portfolio securities in an orderly manner and consistent with the Trust's investment objectives and policies in order to repurchase shares; or (3) there is, in the Board's judgment, any (a) material legal action or proceeding instituted or B-40 87 threatened challenging such transactions or otherwise materially adversely affecting the Trust, (b) general suspension of or limitation on prices for trading securities on the Exchange, (c) declaration of a banking moratorium by Federal or state authorities or any suspension of payment by United States or New York State banks in which the Trust invests, (d) material limitation affecting the Trust or the issuers of its portfolio securities by Federal or state authorities on the extension of credit by lending institutions or on the exchange of foreign currency, (e) commencement of war, armed hostilities or other international or national calamity directly or indirectly involving the United States, or (f) other event or condition which would have a material adverse effect (including any adverse tax effect) on the Trust or its shareholders if shares were repurchased. The Board of Trustees may in the future modify these conditions in light of experience. Before deciding whether to take any action in response to a discount from net asset value, the Board of Trustees would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Trust's portfolio, the impact of any action that might be taken on the Trust or its shareholders, and market considerations. Based on these considerations, even if the Trust's Common Shares should trade at a discount, the Board may determine that, in the interest of the Trust and its shareholders, no action should be taken. MISCELLANEOUS INVESTMENT PRACTICES SHORT-TERM TRADING In seeking the Trust's objective, the Advisor will buy or sell portfolio securities whenever the Advisor believes it appropriate to do so. In deciding whether to sell a portfolio security, the Advisor does not consider how long the Trust has owned the security. From time to time the Trust will buy securities intending to seek short-term trading profits. A change in the securities held by the Trust is known as "portfolio turnover" and generally involves some expense to the Trust. This expense may include brokerage commissions or dealer markups and other transaction costs on both the sale of securities and the reinvestment of the proceeds in other securities. If sales of portfolio securities cause the Trust to realize net short-term capital gain, such gain generally will be taxable as ordinary income. As a result of the Trust's investment policies, under certain market conditions the Trust's portfolio turnover rate may be higher than that of other investment companies. Portfolio turnover rate for a fiscal year is the ratio of the lesser of purchases or sales of portfolio securities to the monthly average of the value of portfolio securities -- excluding securities whose maturities at acquisition were one year or less. The Trust's portfolio turnover rate is not a limiting factor when the Advisor considers a change in the Trust's portfolio. LOWER-RATED SECURITIES The Trust may invest in lower-rated securities (commonly known as "high yield," high risk securities or "junk bonds"). The lower ratings of certain securities held by the Trust reflect a greater possibility that adverse changes in the financial condition of the issuer or in general economic conditions, or both, or an unanticipated rise in interest rates, may impair the ability of the issuer to make payments of interest and principal. The inability (or perceived inability) of issuers to make timely payments of interest and principal would likely make the values of securities held by the Trust more volatile and could limit the Trust's ability to sell its securities at prices approximating the values the Trust had placed on such securities. In the absence of a liquid trading market for securities held by it, the Trust at times may be unable to establish the fair value for such securities. Securities ratings are based largely on the issuer's historical financial condition and the rating agencies' analysis at the time of rating. Consequently, the rating assigned to any particular security is not necessarily a reflection of the issuer's current financial condition, which may be better or worse than the rating would indicate. In addition, the rating assigned to a security by Moody's or Standard & Poor's (or by any other nationally recognized securities rating organization) does not reflect an assessment of the volatility of the security's market value or the liquidity of an investment in the security. See Appendix A for a description of security ratings. Like those of other fixed-income securities, the values of lower-rated securities fluctuate in response to changes in interest rates. A decrease in interest rates will generally result in an increase in the value of the Trust's assets. Conversely, during periods of rising interest rates, the value of the Trust's assets will generally decline. The values of lower-rated B-41 88 securities may often be affected to a greater extent by changes in general economic conditions and business conditions affecting the issuers of such securities and their industries. Negative publicity or investor perceptions may also adversely affect the values of lower-rated securities. Changes by recognized rating services in their ratings of any fixed-income security and changes in the ability of an issuer to make payments of interest and principal may also affect the value of these investments. Changes in the value of portfolio securities generally will not affect income derived from these securities, but will affect the Trust's net asset value. The Trust will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, the Advisor will monitor the investment to determine whether its retention will assist in meeting the Trust's investment objective. Issuers of lower-rated securities are often highly leveraged, so that their ability to service their debt obligations during an economic downturn or during sustained periods of rising interest rates may be impaired. Such issuers may not have more traditional methods of financing available to them and may be unable to repay outstanding obligations at maturity by refinancing. The risk of loss due to default in payment of interest or repayment of principal by such issuers is significantly greater because such securities frequently are unsecured and subordinated to the prior payment of senior indebtedness. At times, a substantial portion of the Trust's assets may be invested in securities as to which the Trust, by itself or together with other Trusts and accounts managed by the Advisor and its affiliates, holds all or a major portion of the securities outstanding. Although the Advisor generally considers such securities to be liquid because of the availability of an institutional market for such securities, it is possible that, under adverse market or economic conditions or in the event of adverse changes in the financial condition of the issuer, the Trust could find it more difficult to sell these securities when the Advisor believes it advisable to do so or may be able to sell the securities only at prices lower than if they were more widely held. Under these circumstances, it may also be more difficult to determine the fair value of such securities for purposes of computing the Trust's net asset value. In order to enforce its rights in the event of a default under such securities, the Trust may be required to participate in various legal proceedings or take possession of and manage assets securing the issuer's obligations on such securities. This could increase the Trust's operating expenses and adversely affect the Trust's net asset value. Certain securities held by the Trust may permit the issuer at its option to "call," or redeem, its securities. If an issuer were to redeem securities held by the Trust during a time of declining interest rates, the Trust might not be able to reinvest the proceeds in securities providing the same investment return as the securities redeemed. The Trust may invest without limit in such bonds. Zero-coupon bonds are issued at a significant discount from their principal amount in lieu of paying interest periodically. Payment-in-kind bonds allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional bonds. Because zero coupon and payment-in-kind bonds do not pay current interest in cash, their value is subject to greater fluctuation in response to changes in market interest rates than bonds that pay interest currently. Both zero coupon and payment-in-kind bonds allow an issuer to avoid the need to generate cash to meet current interest payments. Accordingly, such bonds may involve greater credit risks than bonds paying interest currently in cash. The Trust is required to accrue interest income on such investments and to distribute such amounts at least annually to shareholders even though such bonds do not pay current interest in cash. Thus, it may be necessary at times for the Trust to liquidate investments in order to satisfy its dividend distribution requirements. To the extent the Trust invests in securities in the lower rating categories, the achievement of the Trust's goals is more dependent on the Advisor's investment analysis than would be the case if the Trust were investing in securities in the higher rating categories. PRIVATE PLACEMENTS The Trust may invest in securities that are purchased in private placements and, accordingly, are subject to restrictions on resale as a matter of contract or under federal securities laws. Because there may be relatively few potential purchasers for such investments, especially under adverse market or economic conditions or in the event of adverse changes B-42 89 in the financial condition of the issuer, the Trust could find it more difficult to sell such securities when the Advisor believes it advisable to do so or may be able to sell such securities only at prices lower than if such securities were more widely held. At times, it may also be more difficult to determine the fair value of such securities for purposes of computing the Trust's net asset value. STEP COUPON BONDS (STEPS) The Trust may invest in debt securities which do not pay interest for a stated period of time and then pay interest at a series of different rates for a series of periods. In addition to the risks associated with the credit rating of the issuers, these securities are subject to the volatility risk of zero coupon bonds for the period when no interest is paid. TENDER OPTION BONDS A tender option bond is a municipal security (generally held pursuant to a custodial arrangement) having a relatively long maturity and bearing interest at a fixed rate substantially higher than prevailing short-term tax-exempt rates that has been coupled with the agreement of a third party, such as a bank, broker-dealer or other financial institution, pursuant to which such institution grants the security holders the option, at periodic intervals, to tender their securities to the institution and receive the face value thereof. As consideration for providing the option, the financial institution receives periodic fees equal to the difference between the municipal security's fixed coupon rate and the rate, as determined by a remarketing or similar agent at or near the commencement of such period, that would cause the securities, coupled with the tender option, to trade at par on the date of such determination. Thus, after payment of this fee, the security holder effectively holds a demand obligation that bears interest at the prevailing short-term tax-exempt rate. The Advisor will consider on an ongoing basis the creditworthiness of the issuer of the underlying municipal securities, of any custodian, and of the third-party provider of the tender option. In certain instances and for certain tender option bonds, the option may be terminable in the event of a default in payment of principal or interest on the underlying municipal securities and for other reasons. PAY-IN-KIND (PIK) SECURITIES The Trust may invest in securities which pay interest either in cash or additional securities at the issuer's option. These securities are generally high yield securities and in addition to the other risks associated with investing in high yield securities are subject to the risks that the interest payments, which consist of additional securities, will also be subject to the risks of high yield securities. MONEY MARKET INSTRUMENTS The Trust may invest in short-term money market instruments as follows: Government obligations are issued by the U.S. or foreign governments, their subdivisions, agencies and instrumentalities. Supranational obligations are issued by supranational entities and are generally designed to promote economic improvements. Certificates of deposit are issued against deposits in a commercial bank with a defined return and maturity. Banker's acceptances are used to finance the import, export or storage of goods and are "accepted" when guaranteed at maturity by a bank. Commercial paper is promissory notes issued by businesses to finance short-term needs (including those with floating or variable interest rates, or including a frequent interval put feature). Short-term corporate obligations are bonds and notes (with one year or less to maturity at the time of purchase) issued by businesses to finance long-term needs. FORWARD COMMITMENTS The Trust may enter into contracts to purchase securities for a fixed price at a future date beyond customary settlement time ("forward commitments") if the Trust sets aside, on the books and records of its custodian, liquid assets in an amount sufficient to meet the purchase price, or if the Trust enters into offsetting contracts for the forward sale of other securities it owns. In the case of to-be-announced ("TBA") purchase commitments, the unit price and the estimated principal amount are established when the Trust enters into a contract, with the actual principal amount being within a specified range of the estimate. Forward commitments may be considered securities in themselves, and involve a risk of loss if the value of B-43 90 the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Trust's other assets. Where such purchases are made through dealers, the Trust relies on the dealer to consummate the sale. The dealer's failure to do so may result in the loss to the Trust of an advantageous yield or price. Although the Trust will generally enter into forward commitments with the intention of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the Trust may dispose of a commitment prior to settlement if the Advisor deems it appropriate to do so. The Trust may realize short-term profits or losses on the sale of forward commitments. The Trust may enter into TBA sale commitments to hedge its portfolio positions or to sell securities it owns under delayed delivery arrangements. Proceeds of TBA sale commitments are not received until the contractual settlement date. During the time a TBA sale commitment is outstanding, equivalent deliverable securities, or an offsetting TBA purchase commitment deliverable on or before the sale commitment date, are held as "cover" for the transaction. Unsettled TBA sale commitments are valued at current market value of the underlying securities. If the TBA sale commitment is closed through the acquisition of an offsetting purchase commitment, the Trust realizes a gain or loss on the commitment without regard to any unrealized gain or loss on the underlying security. If the Trust delivers securities under the commitment, the Trust realizes a gain or loss from the sale of the securities based upon the unit price established at the date the commitment was entered into. REPURCHASE AGREEMENTS The Trust may enter into repurchase agreements. A repurchase agreement is a contract under which the Trust acquires a security for a relatively short period (usually not more than one week), subject to the obligation of the seller to repurchase and the Trust to resell such security at a fixed time and price (representing the Trust's cost plus interest). It is the Trust's present intention to enter into repurchase agreements only with commercial banks and registered broker-dealers and only with respect to obligations of the U.S. government or its agencies or instrumentalities. Repurchase agreements may also be viewed as loans made by the Trust which are collateralized by the securities subject to repurchase. The Advisor will monitor such transactions to ensure that the value of the underlying securities will be at least equal at all times to the total amount of the repurchase obligation, including the interest factor. If the seller defaults, the Trust could realize a loss on the sale of the underlying security to the extent that the proceeds of sale, including accrued interest, are less than the resale price provided in the agreement, including interest. In addition, if the seller should be involved in bankruptcy or insolvency proceedings, the Trust may incur delay and costs in selling the underlying security or may suffer a loss of principal and interest if the Trust is treated as an unsecured creditor and required to return the underlying collateral to the seller's estate. Pursuant to an exemptive order issued by the Securities and Exchange Commission, the Trust may transfer uninvested cash balances into a joint account, along with cash of other Liberty Funds and certain other accounts. These balances may be invested in one or more repurchase agreements and/or short-term money market instruments. OPTIONS ON SECURITIES WRITING COVERED OPTIONS. The Trust may write covered call options and covered put options on optionable securities held in its portfolio, when in the opinion of the Advisor such transactions are consistent with the Trust's investment objective and policies. Call options written by the Trust give the purchaser the right to buy the underlying securities from the Trust at a stated exercise price; put options give the purchaser the right to sell the underlying securities to the Trust at a stated price. The Trust may write only covered options, which means that, so long as the Trust is obligated as the writer of a call option, it will own the underlying securities subject to the option (or comparable securities satisfying the cover requirements of securities exchanges). In the case of put options, the Trust will hold cash and/or high-grade short-term debt obligations equal to the price to be paid if the option is exercised. In addition, the Trust will be considered to have covered a put or call option if and to the extent that it holds an option that offsets some or all of the risk of the option it has written. The Trust may write combinations of covered puts and calls on the same underlying security. B-44 91 The Trust will receive a premium from writing a put or call option, which increases the Trust's return on the underlying security in the event the option expires unexercised or is closed out at a profit. The amount of the premium reflects, among other things, the relationship between the exercise price and the current market value of the underlying security, the volatility of the underlying security, the amount of time remaining until expiration, current interest rates and the effect of supply and demand in the options market and in the market for the underlying security. By writing a call option, the Trust limits its opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option but continues to bear the risk of a decline in the value of the underlying security. By writing a put option, the Trust assumes the risk that it may be required to purchase the underlying security for an exercise price higher than its then-current market value, resulting in a potential capital loss unless the security subsequently appreciates in value. The Trust may terminate an option that it has written prior to its expiration by entering into a closing purchase transaction in which it purchases an offsetting option. The Trust realizes a profit or loss from a closing transaction if the cost of the transaction (option premium plus transaction costs) is less or more than the premium received from writing the option. If the Trust writes a call option but does not own the underlying security, and when it writes a put option, the Trust may be required to deposit cash or securities with its broker as "margin," or collateral, for its obligation to buy or sell the underlying security. As the value of the underlying security varies, the Trust may have to deposit additional margin with the broker. Margin requirements are complex and are fixed by individual brokers, subject to minimum requirements currently imposed by the Federal Reserve Board and by stock exchanges and other self-regulatory organizations. PURCHASING PUT OPTIONS. The Trust may purchase put options to protect its portfolio holdings in an underlying security against a decline in market value. Such protection is provided during the life of the put option since the Trust, as holder of the option, is able to sell the underlying security at the put exercise price regardless of any decline in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decline sufficiently below the exercise price to cover the premium and transaction costs. By using put options in this manner, the Trust will reduce any profit it might otherwise have realized from appreciation of the underlying security by the premium paid for the put option and by transaction costs. PURCHASING CALL OPTIONS. The Trust may purchase call options to hedge against an increase in the price of securities that the Trust wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Trust, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. RISK FACTORS IN OPTIONS TRANSACTIONS The successful use of the Trust's options strategies depends on the ability of the Advisor to forecast interest rate and market movements correctly. For example, if the Trust were to write a call option based on the Advisor's expectation that the price of the underlying security would fall, but the price were to rise instead, the Trust could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Trust were to write a put option based on the Advisor's expectation that the price of the underlying security would rise, but the price were to fall instead, the Trust could be required to purchase the security upon exercise at a price higher than the current market price. When the Trust purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Trust exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Trust will lose part or all of its investment in the option. This contrasts with an investment by the Trust in the underlying security, since the Trust will not realize a loss if the security's price does not change. The effective use of options also depends on the Trust's ability to terminate option positions at times when the Advisor deems it desirable to do so. There is no assurance that the Trust will be able to effect closing transactions at any particular time or at an acceptable price. B-45 92 If a secondary market in options were to become unavailable, the Trust could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability --were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unavailable, the Trust as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Trust, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Trust could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Trust as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, the Options Clearing Corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Trust as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If the Options Clearing Corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Trust, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. FUTURES CONTRACTS AND RELATED OPTIONS Subject to applicable law, the Trust may invest without limit in the types of futures contracts and related options identified in the Prospectus for hedging and non-hedging purposes, such as to manage the effective duration of the Trust's portfolio or as a substitute for direct investment. A financial futures contract sale creates an obligation by the seller to deliver the type of financial instrument called for in the contract in a specified delivery month for a stated price. A financial futures contract purchase creates an obligation by the purchaser to take delivery of the type of financial instrument called for in the contract in a specified delivery month at a stated price. The determination is made in accordance with the rules of the exchange on which the futures contract sale or purchase was made. Futures contracts are traded in the United States only on commodity exchanges or boards of trade -- known as "contract markets" -- approved for such trading by the Commodity Futures Trading Commission (the "CFTC"), and must be executed through a futures commission merchant or brokerage firm which is a member of the relevant contract market. Although futures contracts (other than index futures) by their terms call for actual delivery or acceptance of commodities or securities, in most cases the contracts are closed out before the settlement date without the making or taking of delivery. Closing out a futures contract sale is effected by purchasing a futures contract for the same aggregate amount of the specific type of financial instrument or commodity with the same delivery date. If the price of the initial sale of the futures contract exceeds the price of the offsetting purchase, the seller is paid the difference and realizes a gain. Conversely, if the price of the offsetting purchase exceeds the price of the initial sale, the seller realizes a loss. If the Trust is unable to enter into a closing transaction, the amount of the Trust's potential loss is unlimited. The closing out of a futures contract purchase is effected by the purchaser's entering into a futures contract sale. If the offsetting sale price exceeds the purchase price, the purchaser realizes a gain, and if the purchase price exceeds the offsetting sale price, the purchaser realizes a loss. In general, 40% of the gain or loss arising from the closing out of a futures contract traded on an exchange approved by the CFTC is treated as short-term gain or loss, and 60% is treated as long-term gain or loss. Unlike when the Trust purchases or sells a security, no price is paid or received by the Trust upon the purchase or sale of a futures contract. Upon entering into a contract, the Trust is required to deposit with its custodian in a segregated account in the name of the futures broker an amount of liquid assets. This amount is known as "initial margin." The nature B-46 93 of initial margin in futures transactions is different from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds to finance the transactions. Rather, initial margin is similar to a performance bond or good faith deposit which is returned to the Trust upon termination of the futures contract, assuming all contractual obligations have been satisfied. Futures contracts also involve brokerage costs. Subsequent payments, called "variation margin" or "maintenance margin," to and from the broker (or the custodian) are made on a daily basis as the price of the underlying security or commodity fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as "marking to the market." For example, when the Trust has purchased a futures contract on a security and the price of the underlying security has risen, that position will have increased in value and the Trust will receive from the broker a variation margin payment based on that increase in value. Conversely, when the Trust has purchased a security futures contract and the price of the underlying security has declined, the position would be less valuable and the Trust would be required to make a variation margin payment to the broker. The Trust may elect to close some or all of its futures positions at any time prior to their expiration in order to reduce or eliminate a position then currently held by the Trust. The Trust may close its positions by taking opposite positions which will operate to terminate the Trust's position in the futures contracts. Final determinations of variation margin are then made, additional cash is required to be paid by or released to the Trust, and the Trust realizes a loss or a gain. Such closing transactions involve additional commission costs. The Trust does not intend to purchase or sell futures or related options for other than hedging purposes if, as a result, the sum of the initial margin deposits on the Trust's existing futures and related options positions and premiums paid for outstanding options on futures contracts would exceed 5% of the Trust's net assets. OPTIONS ON FUTURES CONTRACTS. The Trust may purchase and write call and put options on futures contracts and it may buy or sell and enter into closing transactions with respect to such options to terminate existing positions. Options on futures contracts give the purchaser the right, in return for the premium paid, to assume a position in a futures contract at the specified option exercise price at any time during the period of the option. The Trust may use options on futures contracts in lieu of writing or buying options directly on the underlying securities or purchasing and selling the underlying futures contracts. For example, to hedge against a possible decrease in the value of its portfolio securities, the Trust may purchase put options or write call options on futures contracts rather than selling futures contracts. Similarly, the Trust may purchase call options or write put options on futures contracts as a substitute for the purchase of futures contracts to hedge against a possible increase in the price of securities which the Trust expects to purchase. Such options generally operate in the same manner as options purchased or written directly on the underlying investments. As with options on securities, the holder or writer of an option may terminate his position by selling or purchasing an offsetting option. There is no guarantee that such closing transactions can be effected. The Trust will be required to deposit initial margin and maintenance margin with respect to put and call options on futures contracts written by it pursuant to brokers' requirements, similar to those described above in connection with the discussion of futures contracts. RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. Successful use of futures contracts by the Trust is subject to the Advisor's ability to predict movements in various factors affecting securities markets, including interest rates. 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 the 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, such as when there is no movement in the prices of the hedged investments. The writing of an option on a futures contract involves risks similar to those risks relating to the sale of futures contracts. B-47 94 The use of options and futures strategies also involves the risk of imperfect correlation among movements in the prices of the securities underlying the futures and options purchased and sold by the Trust, of the options and futures contracts themselves, and, in the case of hedging transactions, of the securities which are the subject of a hedge. There is no assurance that higher than normal trading activity or other unforeseen events might not, at times, render certain market clearing facilities inadequate, and thereby result in the institution by exchanges of special procedures which may interfere with the timely execution of customer orders. To reduce or eliminate a position held by the Trust, the Trust may seek to close out such position. The ability to establish and close out positions will be subject to the development and maintenance of a liquid secondary market. It is not certain that this market will develop or continue to exist for a particular futures contract or option. Reasons for the absence of a liquid secondary market on an exchange include the following: (i) there may be insufficient trading interest in certain contracts or options, (ii) restrictions may be imposed by an exchange on opening transactions or closing transactions or both, (iii) trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of contracts or options, or underlying securities, (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange, (v) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume, or (vi) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of contracts or options (or a particular class or series of contracts or options), in which event the secondary market on that exchange for such contracts or options (or in the class or series of contracts or options) would cease to exist, although outstanding contracts or options on the exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. U.S. TREASURY SECURITY FUTURES CONTRACTS AND OPTIONS. U.S. Treasury security futures contracts require the seller to deliver, or the purchaser to take delivery of, the type of U.S. Treasury security called for in the contract at a specified date and price. Options on U.S. Treasury security futures contracts give the purchaser the right, in return for the premium paid, to assume a position in a U.S. Treasury security futures contract at the specified option exercise price at any time during the period of the option. Successful use of U.S. Treasury security futures contracts by the Trust is subject to the Advisor's ability to predict movements in the direction of interest rates and other factors affecting markets for debt securities. For example, if the Trust has sold U.S. Treasury security futures contracts in order to hedge against the possibility of an increase in interest rates which would adversely affect securities held in its portfolio, and the prices of the Trust's securities increase instead as a result of a decline in interest rates, the Trust would be likely to lose part or all of the benefit of the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Trust has insufficient cash, it may have to sell securities to meet daily maintenance margin requirements at a time when it may be disadvantageous to do so. There is also a risk that price movements in U.S. Treasury security futures contracts and related options will not correlate closely with price movements in markets for particular securities. For example, if the Trust has hedged against a decline in the values of high yield corporate securities held by it by selling Treasury security futures and the values of Treasury securities subsequently increase while the values of its high yield corporate securities decrease, the Trust would incur losses on both the Treasury security futures contracts written by it and the high yield corporate securities held in its portfolio. INDEX FUTURES CONTRACTS. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. Entering into a contract to buy units of an index is commonly referred to as buying or purchasing a contract or holding a long position in the index. Entering into a contract to sell units of an index is commonly referred to as selling a contract or holding a short position. A unit is the current value of the index. The Trust may enter into stock index futures contracts, debt index futures contracts, or other index futures contracts appropriate to its objective. The Trust may also purchase and sell options on index futures contracts. B-48 95 There are several risks in connection with the use by the Trust of index futures. One risk arises because of the imperfect correlation between movements in the prices of the index futures and movements in the prices of securities which are the subject of the hedge. The Advisor will, however, attempt to reduce this risk by buying or selling, to the extent possible, futures on indices the movements of which will, in its judgment, have a significant correlation with movements in the prices of the securities sought to be hedged. Successful use of index futures by the Trust is also subject to the Advisor's ability to predict movements in the direction of the market. For example, it is possible that, where the Trust has sold futures to hedge its portfolio against a decline in the market, the index on which the futures are written may advance and the value of securities held in the Trust's portfolio may decline. If this occurred, the Trust would lose money on the futures and also experience a decline in value in its portfolio securities. It is also possible that, if the Trust has hedged against the possibility of a decline in the market adversely affecting securities held in its portfolio and securities prices increase instead, the Trust will lose part or all of the benefit of the increased value of those securities it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Trust has insufficient cash, it may have to sell securities to meet daily variation margin requirements at a time when it is disadvantageous to do so. In addition to the possibility that there may be an imperfect correlation, or no correlation at all, between movements in the index futures and the portion of the portfolio being hedged, the prices of index futures may not correlate perfectly with movements in the underlying index due to certain market distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions which could distort the normal relationship between the index and futures markets. Second, margin requirements in the futures market are less onerous than margin requirements in the securities market, and as a result the futures market may attract more speculators than the securities market does. Increased participation by speculators in the futures market may also cause temporary price distortions. Due to the possibility of price distortions in the futures market and also because of the imperfect correlation between movements in the index and movements in the prices of index futures, even a correct forecast of general market trends by the Advisor may still not result in a profitable position over a short time period. OPTIONS ON INDEX FUTURES. Options on index futures are similar to options on securities except that options on index futures give the purchaser the right, in return for the premium paid, to assume a position in an index 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 period 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 will be 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 index futures contract, at 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 index future. If an option is exercised on the last trading day prior to its expiration date, the settlement will be made entirely in cash equal to the difference between the exercise price of the option and the closing level of the index on which the future is based on the expiration date. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the premium paid. OPTIONS ON INDICES As an alternative to purchasing call and put options on index futures, the Trust may purchase and sell call and put options on the underlying indices themselves. Such options would be used in a manner identical to the use of options on index futures. INDEX WARRANTS The Trust may purchase put warrants and call warrants whose values vary depending on the change in the value of one or more specified securities indices ("index warrants"). Index warrants are generally issued by banks or other financial institutions and give the holder the right, at any time during the term of the warrant, to receive upon exercise of the warrant a cash payment from the issuer based on the value of the underlying index at the time of exercise. In general, if the value of the underlying index rises above the exercise price of the index warrant, the holder of a call warrant will be entitled to B-49 96 receive a cash payment from the issuer upon exercise based on the difference between the value of the index and the exercise price of the warrant. If the value of the underlying index falls, the holder of a put warrant will be entitled to receive a cash payment from the issuer upon exercise based on the difference between the exercise price of the warrant and the value of the index. The holder of a warrant would not be entitled to any payments from the issuer at any time when, in the case of a call warrant, the exercise price is greater than the value of the underlying index, or, in the case of a put warrant, the exercise price is less than the value of the underlying index. If the Trust were not to exercise an index warrant prior to its expiration, then the Trust would lose the amount of the purchase price paid by it for the warrant. The Trust will normally use index warrants in a manner similar to its use of options on securities indices. The risks of the Trust's use of index warrants are generally similar to those relating to its use of index options. Unlike most index options, however, index warrants are issued in limited amounts and are not obligations of a regulated clearing agency, but are backed only by the credit of the bank or other institution which issues the warrant. Also, index warrants generally have longer terms than index options. Although the Trust will normally invest only in exchange-listed warrants, index warrants are not likely to be as liquid as certain index options backed by a recognized clearing agency. In addition, the terms of index warrants may limit the Trust's ability to exercise the warrants at such time, or in such quantities, as the Trust would otherwise wish to do. ZERO COUPON SECURITIES (ZEROS) The Trust may invest in zero coupon securities, which are securities issued at a significant discount from face value and pay interest only at maturity rather than at intervals during the life of the security and in certificates representing undivided interests in the interest or principal of mortgage-backed securities (interest only/principal only), which tend to be more volatile than other types of securities. The Trust will accrue and distribute income from zero coupon and stripped securities and certificates on a current basis and may have to sell securities to generate cash for distributions. INVERSE FLOATERS Inverse floaters are derivative securities whose interest rates vary inversely to changes in short-term interest rates and whose values fluctuate inversely to changes in long-term interest rates. The value of certain inverse floaters will fluctuate substantially more in response to a given change in long-term rates than would a traditional debt security. These securities have investment characteristics similar to leverage, in that interest rate changes have a magnified effect on the value of inverse floaters. TAX MATTERS FEDERAL INCOME TAX MATTERS Federal Taxation of the Trust The ability of the Trust to qualify for taxation as a regulated investment company under Subchapter M of the Code requires, among other things, that the Trust distribute to its shareholders with respect to each year at least 90% of the sum of (1) its net tax-exempt interest income and (2) its taxable net investment income (including, generally, taxable interest, dividends and certain other income, less certain expenses, and the excess, if any, of net short-term capital gain over net long-term capital loss) (the "Distribution Requirement"). In addition to satisfying the Distribution Requirement for each taxable year, a regulated investment company must derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, gains from the sale or other disposition of stock or securities or foreign currencies (to the extent such currency gains are directly related to the regulated investment company's principal business of investing in stock or securities) and other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies (the "Income Requirement"). B-50 97 Further, the Trust must satisfy an asset diversification test in order to qualify as a regulated investment company. Under this test, at the close of each quarter of the Trust's taxable year, at least 50% of the value of the Fund's assets must consist of cash and cash items, U.S. Government securities, securities of other regulated investment companies, and securities of other issuers (as to which the Trust has not invested more than 5% of the value of the Trust's total assets in securities of such issuer and as to which the Trust does not hold more than 10% of the outstanding voting securities of such issuer), and no more than 25% of the value of its total assets may be invested in the securities of any one issuer (other than U.S. Government securities and securities of other regulated interment companies), or in two or more issuers which the Trust controls and which are engaged in the same or similar trades or businesses. A 4% non-deductible excise tax is imposed on a regulated investment company that fails to distribute in each calendar year an amount equal to 98% of ordinary taxable income for the calendar year and 98% of capital gain net income for the one-year period ended on October 31 of such calendar year (or, at the election of a regulated investment company having a taxable year ending November 30 or December 31, for its taxable year). The balance of such income must be distributed during the next calendar year. For the foregoing purposes, a regulated investment company is treated as having distributed any amount on which it is subject to income tax for any taxable year ending in such calendar year. The Trust generally intends to make sufficient distributions or deemed distributions of its ordinary taxable income and capital gain net income prior to the end of each calendar year to avoid liability for the excise tax. However, investors should note that the Trust may in certain circumstances be required to liquidate portfolio investments to make sufficient distributions to avoid excise tax liability. If the Trust does not qualify for taxation as a regulated investment company for any taxable year, the Trust's income will be taxed at the Trust level, and all distributions from earnings and profits, including distributions of net exempt-interest income and net capital gain (i.e., the excess, if any, of net long-term capital gain over net short-term capital loss), will be taxable to shareholders as ordinary income. In addition, in order to requalify for taxation as a regulated investment company, the Trust may be required to recognize unrealized gains, pay substantial taxes and interest, and make certain distributions. If at any time when shares of Municipal Preferred 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 requisite asset coverage is restored. Any such suspension may cause the Trust to pay a 4% Federal excise tax (imposed on regulated investment companies that fail to distribute for a given calendar year substantially all of their taxable net investment income for such year and substantially all of their capital gain net income for the one-year period ending October 31 of such year) and may prevent the Trust from satisfying the Distribution Requirement. The Trust may redeem shares of Municipal Preferred in an effort to comply with the Distribution Requirement and to avoid the excise tax. See "Description of Municipal Preferred--Dividends." Federal Taxation of Shareholders Dividends and Other Distributions. In order for any distributions to holders of shares of Municipal Preferred to be eligible to be treated as exempt-interest dividends, the shares of Municipal Preferred must be treated as equity for Federal income tax purposes. Based in part on certain representations made by the Trust to Ropes & Gray relating to the lack of any present intention to redeem or purchase shares of Municipal Preferred at any time in the future, it is the opinion of Ropes & Gray that the shares of Municipal Preferred will constitute equity for Federal income tax purposes. This opinion relies in B-51 98 part on a published ruling of the Internal Revenue Service stating that certain auction rate preferred stock similar in many material respects to the Municipal Preferred represents equity. The opinion of Ropes & Gray represents only its best legal judgment and is not binding on the Internal Revenue Service or the courts. If the Internal Revenue Service were successfully to assert that variable rate preferred stock such as the Municipal Preferred should be treated as debt for Federal income tax purposes, dividends on shares of Municipal Preferred would be treated as taxable interest for Federal income tax purposes. In such event, dividends on shares of Municipal Preferred would not be increased by the Trust and holders of shares of Municipal Preferred would not be entitled to any additional distributions from the Trust (including any Gross-up Payments) to offset the effect of paying Federal income tax on Trust distributions so recharacterized as interest. Ropes & Gray has advised the Trust that, should the Internal Revenue Service pursue in court the position that the shares of Municipal Preferred should be treated as debt for Federal income tax purposes, the Internal Revenue Service would be unlikely to prevail. Prior proposed legislation that was ultimately not enacted would have reinstated a deductible tax (the "Environmental Tax"), imposed through tax years beginning before January 1, 1996, at a rate of 0.12% on a corporation's alternative minimum taxable income (computed without regard to the alternative minimum tax net operating loss deduction) in excess of $2 million. If the Environmental Tax is reinstated, exempt-interest dividends paid by the Trust that are included in a corporate shareholder's alternative minimum taxable income may subject such shareholder to the Environmental Tax. It is not possible for the Trust to predict whether similar legislation might be proposed and enacted in the future. Corporate shareholders should consult with their own tax advisors regarding the likelihood of such legislation and its effect on them. As discussed in the Prospectus, exempt-interest dividends attributable to interest received on certain private activity bonds and certain industrial development bonds will not be tax-exempt to any shareholders who are, within the meaning of Section 147(a) of the Code, "substantial users" of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users. In general, a "substantial user" of a facility includes a "non-exempt person who regularly uses a part of such facility in his trade or business." "Related persons" are in general defined to include persons among whom there exists a relationship, either by family or business, which would result in a disallowance of losses in transactions among them under various provisions of the Code (or if they are members of the same controlled group of corporations under the Code), including a partnership and each of its partners (and their spouses and minor children), an S corporation and each of its shareholders (and their spouses and minor children) and various combinations of these relationships. The foregoing is not a complete statement of all of the provisions of the Code covering the definitions of "substantial user" and "related person." For additional information, investors should consult their tax advisors before investing in Municipal Preferred. All or a portion of interest on indebtedness incurred or continued by a shareholder to purchase or carry Trust shares may not be deductible by the shareholder. The portion of interest that is not deductible is equal to the total interest paid or accrued on the indebtedness multiplied by the percentage of the Trust's total distributions (not including distributions of net capital gain) paid to the shareholder that are exempt-interest dividends. Under rules used by the Internal Revenue Service for determining when borrowed funds are considered to have been used for the purpose of purchasing or carrying particular assets, the purchase of shares of Municipal Preferred may be considered to have been made with borrowed funds even though such funds are not directly traceable to the purchase of shares. Under Federal tax law in effect at the date of this Prospectus, a shareholder's interest deduction generally will not be disallowed if the average adjusted basis of the shareholder's tax-exempt obligations (including shares of Municipal Preferred) does not exceed two percent of the average adjusted basis of the shareholder's trade or business assets (in the case of most corporations and some individuals) and portfolio investments (in the case of individuals). Prior proposed legislation that was ultimately not enacted would have further limited or repealed this two-percent de minimis exception, which could reduce the total after-tax yield of the Municipal Preferred to investors to whom the de minimis exception would otherwise apply. It is not possible for the Trust to predict whether similar legislation might be proposed and enacted in the future. Shareholders should consult with their own tax advisors regarding the likelihood of such legislation and its effect on them. Sales or Redemptions of Shares. From time to time the Trust may make a tender or repurchase offer for its Common Shares. It is expected that the terms of any such offer will require a tendering shareholder to tender all Common Shares, and dispose of all shares of Municipal Preferred, held or considered under Code rules to be held by such shareholder. Shareholders who tender all Common Shares and dispose of all shares of Municipal Preferred held, or considered held, by B-52 99 them will be treated as having sold such shares and generally will realize a capital gain or loss. If, however, a shareholder tenders fewer than all of its Common Shares, or retains a substantial portion of its Municipal Preferred, such shareholder may be treated as having received a taxable dividend upon the tender of its Common Shares. In such a case, there is a remote risk that non-tendering shareholders (including holders of Municipal Preferred) will be treated as having received taxable distributions from the Trust. Likewise, if the Trust redeems some but not all of the Municipal Preferred held by a holder of Municipal Preferred and such holder of Municipal Preferred is treated as having received a taxable dividend upon such redemption, there is a remote risk that holders of Common Shares and non-redeeming holders of Municipal Preferred will be treated as having received taxable distributions from the Trust. Backup Withholding. The Trust generally is required to withhold and remit to the U.S. Treasury 31% of the taxable dividends and other distributions paid to non-corporate shareholders who fail to furnish the Trust with a correct taxpayer identification number, who have underreported dividends or interest income, or who fail to certify to the Trust that they are not subject to such withholding. An individual's taxpayer identification number is his or her social security number. Foreign Investors. Non-resident alien individuals, foreign corporations and certain other foreign entities generally will be subject to a U.S. withholding tax at a rate of 30% on the Trust's distributions from its ordinary income and the excess of its net short-term capital gain over its net long-term capital loss, unless the tax is reduced or eliminated by an applicable tax treaty. Distributions from the excess of the Trust's net capital gain received by such shareholders and any gain from the sale or other disposition of shares of the Trust generally will not be subject to U.S. Federal income taxation, provided that non-resident alien status has been certified by the shareholder. Different U.S. tax consequences may result if the shareholder is engaged in a trade or business in the United States, is present in the United States for a sufficient period of time during a taxable year to be treated as a U.S. resident, or fails to provide any required certifications regarding status as a non-resident alien investor. Foreign shareholders should consult their tax advisors regarding the U.S. and foreign tax consequences of an investment in the Trust. The Internal Revenue Service recently revised its regulations affecting the application to foreign investors of the back-up withholding and withholding tax rules described above. The new regulations will generally be effective for payments made after December 31, 1999 (although transition rules will apply). In some circumstances, the new rules will increase the certification and filing requirements imposed on foreign investors in order to qualify for exemption from the 31% back-up withholding tax and for reduced withholding tax rates under income tax treaties. Foreign investors in the Trust should consult their tax advisors with respect to the potential application of these new regulations. The foregoing is a general, abbreviated summary of the provisions of the Code and regulations thereunder presently in effect as they directly govern the taxation of the Trust and owners of shares of Municipal Preferred. These provisions are subject to change by legislative or administrative action, and any such change may be retroactive with respect to Trust transactions. Owners of shares of Municipal Preferred are advised to consult with their own tax advisors for more detailed information concerning Federal income tax matters. FOREIGN, STATE AND LOCAL TAX MATTERS The exemption from Federal income tax for exempt-interest dividends does not necessarily result in exemption for such dividends under the income or other tax laws of any foreign, state or local taxing authority. Some states exempt from state income tax that portion of any exempt-interest dividend that is derived from interest received by a regulated investment company on its holdings of securities of that state and its political subdivisions and instrumentalities. Therefore, the Trust will report annually to its shareholders the percentage of interest income earned by the Trust during the preceding year on tax-exempt obligations indicating, on a state-by-state basis, the source of such income. Holders of shares of Municipal Preferred are advised to consult with their own tax advisors about foreign, state and local tax matters. B-53 100 SHAREHOLDER LIABILITY Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However, the Declaration disclaims shareholder liability for acts or obligations of the Trust and requires that a notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Trust or the Trustees. The Declaration provides for indemnification out of Trust property for all loss and expense of any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder's incurring financial loss on account of shareholder liability is limited to circumstances (which are considered remote) in which the Trust would be unable to meet its obligations and the disclaimer was inoperative. CUSTODIAN The Chase Manhattan Bank, located at 270 Park Avenue, New York, New York 10017-0270, is the Trust's custodian. The custodian is responsible for safeguarding the Trust's cash and securities, receiving and delivering securities and collecting the Trust's interest and dividends. INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP are the Trust's independent accountants, providing audit and tax return preparation services and assistance and consultation in connection with the review of various Securities and Exchange Commission filings. The address of PricewaterhouseCoopers LLP is 160 Federal Street, Boston, Massachusetts 02110. The financial statements included in this SAI have been so included, and the financial highlights included in the Prospectus have been so included, in reliance upon the report of PricewaterhouseCoopers LLP given on the authority of said firm as experts in accounting and auditing. REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND THE TRUSTEES OF COLONIAL MUNICIPAL INCOME TRUST In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Colonial Municipal Income Trust at November 30, 1998, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and the financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of portfolio positions at December 31, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts January 13, 1999 B-54 101 FINANCIAL STATEMENTS INVESTMENT PORTFOLIO NOVEMBER 30, 1998 (IN THOUSANDS) MUNICIPAL BONDS - 98.1% PAR VALUE - ------------------------------------------------------------------------------- EDUCATION - 3.1% EDUCATION - 2.1% CA Statewide Communities Development Authority, Crossroads School for Arts & Sciences, Series 1998, 6.000% 08/01/28 (a) $ 1,200 $ 1,215 IL State Development Finance Authority, Latin School of Chicago, Series 1998: 5.600% 08/01/18 250 254 5.650% 08/01/28 500 507 MA State Industrial Finance Agency, St. John's High School, Series 1998, 5.350% 06/01/28 300 299 MI Southfield Economic Development Corp., Lawrence University, Series 1998-A, 5.400% 02/01/18 1,000 1,003 VT State Educational & Health Buildings Finance Agency, Norwich University, Series 1998, 5.500% 07/01/21 1,000 1,011 -------- 4,289 -------- STUDENT LOAN - 1.0% SD State Student Loan Finance Corp., Series 1996-E, 6.550% 08/01/20 2,000 2,198 -------- - ------------------------------------------------------------------------------- HEALTHCARE - 31.7% HEALTH SERVICES - 0.1% IL State Health Facilities Authority, Midwest Physician Group, Ltd., Series 1998, 5.500% 11/15/19 325 319 -------- B-55 102 HOSPITALS - 9.9% AL Alabama Special Care Facilities Authority, Montgomery Healthcare, Series 1989, 11.000% 10/01/19 2,250 2,284 CO State Health Care Facilities Authority, National Jewish Medical & Research Center, Series 1998, 5.375% 01/01/23 840 837 GA Baldwin County Hospital Authority, Oconee Regional Medical Center, Series 1998, 5.250% 12/01/22 500 489 GA Clayton Hospital Authority, The Woodlands Foundation, Inc., Series 1991-A, 9.750% 05/01/21 (b) 1,500 975 GA Forsyth County Hospital Authority, Georgia Baptist Heathcare System, Series 1998, 6.000% 10/01/08 1,000 996 IL Health Facilities Authority, Thorek Hospital & Medical Center, 5.375% 08/15/28 500 497 LA State Public Facilities Authority, Pendleton Memorial Methodist Hospital, Series 1998, 5.250% 06/01/17 500 487 MA State Health & Educational Facilities Authority, Milford-Whitinsville Regional Hospital, Series C, 5.250% 07/15/18 500 494 MI Flint Hospital Building Authority, Hurley Medical Center, Series 1998-A, 5.375% 07/01/20 625 621 MN St. Paul Housing & Redevelopment Authority, Healtheast Project, Series A, 5.700% 11/01/15 2,000 2,046 MN Washington County Housing & Redevelopment Authority, Healtheast, Inc., Series 1998, 5.250% 11/15/12 1,250 1,229 MO State Housing Development Commission, Freeman Health Systems, Series 1998, 5.250% 02/15/18 750 740 B-56 103 MS State Business Finance Corp., Medical Foundation, Inc., Series 1998, 5.625% 07/01/23 1,150 1,156 NH State Higher Educational & Health Facilities Authority, Littleton Hospital Assoc., Inc.: Series 1998-A, 5.900% 05/01/28 675 670 6.000% 05/01/28 625 632 OH Belmont County, East Ohio Regional Hospital, Series 1998, 5.700% 01/01/13 1,500 1,481 OH Sandusky County, Memorial Hospital, Series 1998, 5.150% 01/01/08 270 276 PA Allegheny County Hospital Development, Ohio Valley General Hospital, Series 1998-A, 5.450% 01/01/28 1,050 1,050 PA Pottsville Hospital Authority, Pottsville Hospital & Warner Clinic, Series 1998, 5.625% 07/01/24 755 759 TX Lufkin Health Facilities Development Corp., Memorial Health Systems of East Texas, Series 1998, 5.700% 02/15/28 750 760 VT State Educational & Health Buildings Finance Agency, Springfield Hospital, Series A, 7.750% 01/01/13 1,040 1,172 VT State Educational & Health Buildings Finance Agency, Brattleboro Memorial Hospital, 5.375% 03/01/28 1,000 985 -------- 20,636 -------- INTERMEDIATE CARE FACILITIES - 1.4% MA State Health & Educational Facilities Authority, Corp. for Independent Living, 8.100% 07/01/18 680 761 PA State Economic Development Financing Authority, Northwestern Human Services, Inc., B-57 104 Series 1998-A, 5.250% 06/01/14 2,150 2,105 -------- 2,866 -------- LIFECARE - 3.7% CO Health Care Facilities Authority, National Benevolent Association: Series 1998-A, 5.250% 01/01/27 430 423 Series 1998-B, 5.250% 02/01/18 1,000 984 KY State Economic Development Finance Authority, Christian Church Homes of Kentucky, Inc., Series 1998, 5.500% 11/15/30 750 751 MI State Strategic Fund, Holland Home, Series 1998, 5.750% 11/15/18 1,250 1,234 MN Columbia Heights, Crest View Corp., Series 1998, 6.000% 03/01/33 745 746 NH State Higher Educational & Health Facilities Authority, Rivermead at Peterborough, Series 1998, 5.750% 07/01/28 500 496 PA Philadelphia Authority for Industrial Development, Baptist Home of Philadelphia, Series 1998-A: 5.500% 11/15/18 360 355 5.600% 11/15/28 570 554 TN Metropolitan Government, Nashville & Davidson County, Blakeford at Green Hills, Series 1998, 5.650% 07/01/24 575 563 TX Abilene Health Facilities Development Corp., Sears Methodist Retirement Obligation Group, Series 1998-A, 5.900% 11/15/25 750 742 WI State Health & Educational Facilities Authority, Attic Angel Obligated Group, 5.750% 11/15/27 875 853 B-58 105 -------- 7,701 -------- NURSING HOMES - 16.6% CO State Health Facilities Authority, American Housing Foundation, Inc., Series 1990-A, 10.250% 12/01/20 1,500 1,500 CO State Health Facilities Authority, Volunteers of America Care Facilities, Inc., Series 1998-A: 5.450% 07/01/08 250 250 5.750% 07/01/20 700 688 DE State Economic Development Authority, Georgetown Health Center, 12.000% 04/01/25 2,225 2,398 DE Sussex County, Healthcare Facility, Delaware Health Corp., Series 1994-A, 7.600% 01/01/24 1,000 1,059 IA State Finance Authority, Care Initiatives Project: Series 1996, 9.250% 07/01/25 1,000 1,335 Series 1998-B: 5.750% 07/01/18 550 549 5.750% 07/01/28 1,475 1,462 IN Gary Industrial Economic Development, West Side Health Care Center, Series 1987-A, 11.500% 10/01/17 2,435 2,516 IN Michigan City Health Facilities, Metro Health Foundation, Inc. Project, 10.000% 11/01/22 4,500 4,500 KS Halstead Industrial Kansas Health Care Project, 10.250% 08/01/13 (b) 1,330 452 KY Jefferson County First Mortgage AHF Kentucky Iowa, Inc. Project, Series 1990, 10.250% 01/01/20 960 1,001 KY Lexington-Fayette Urban County Government, First Mortgage, AHF Kentucky-Iowa, Inc. Project, Series 1990, 10.250% 01/01/20 960 1,001 B-59 106 MA Boston, St. Joseph Nursing Care Center, Inc., Series 1990, 10.000% 01/01/20 (c) 1,915 2,059 MA State Industrial Finance Agency: American Health Foundation, Inc., Series 1989, 10.125% 03/01/19 (b) 475 356 GF/Massachusetts, Inc., Series 1994, 8.300% 07/01/23 970 1,089 MI Cheboygan County Economic Development Corp., Metro Health Foundation Project, Series 1993, 10.000% 11/01/22 2,440 2,440 MN Duluth Economic Development Authority, BSM Properties, Series 1998-A, 5.875% 12/01/28 250 249 MN Minneapolis, Walker Methodist Senior Services Group, Series 1998-A, 6.000% 11/15/28 (d) 1,000 998 MO Springfield Industrial Development Authority, 10.250% 12/01/10 1,125 1,130 NJ Economic Development Authority Geriatric and Medical Service, Inc., Series A, 10.500% 05/01/04 650 689 NM State Hospital Equipment Loan Council, Memorial Medical Center, Series 1998, 5.500% 06/01/28 1,000 979 OH Montgomery County, Grafton Oaks Limited Partners, Series 1986, 9.750% 12/01/16 1,480 1,406 OK Muskogee County Economic Development Authority Health Facilities, Heartway Corp.: Series A, 9.500% 03/01/19 1,545 1,576 Series B, (e) 03/01/19 250 63 TN New Tazewell Health Education and Housing Facilities Board, New Tazewell, Series 1987, 10.000% 06/01/17 1,585 1,587 B-60 107 TX Kirbyville Health Facilities Development Corp., Heartway III Project: Series 1997-A, 10.000% 03/20/18 591 593 Series 1997-B, (e) 03/20/04 100 54 WA Kitsap County Housing Authority, Martha & Mary Nursing Home, 7.100% 02/20/36 643 764 -------- 34,743 -------- HOUSING - 13.5% ASSISTED LIVING/SENIOR - 4.8% IL Clarendon Hills Residential Facilities, Churchill Estate, Series 1998 A: 6.750% 03/01/24 1,050 1,067 6.750% 03/01/31 1,365 1,387 IL State Development Finance Authority, Care Institute, Inc., 8.250% 06/01/25 1,500 1,688 MA Boston Industrial Development Finance Authority, Springhouse, Inc., Series 1988, 5.875% 07/01/20 500 497 MN Roseville, Care Institute, Inc., Series 1993, 7.750% 11/01/23 1,610 1,626 PA Montgomery County Industrial Development Authority, Assisted Living Facility, Series 1993-A, 8.250% 05/01/23 800 887 TX Bell County Health Facilities Development Corp., Care Institute, Inc., 9.000% 11/01/24 1,500 1,719 WI State Health & Educational Facilities Authority, United Lutheran Program for Aging, Inc., 5.700% 03/01/28 750 740 WI State Health & Educational Facilities Authority, Clement Manor, Series 1998, 5.750% 08/15/24 450 435 -------- B-61 108 10,046 -------- MULTI-FAMILY - 7.9% DE Wilmington, Electra Arms Senior Association Project, 6.250% 06/01/28 1,000 977 FL State Housing Finance Agency, Windsong Apartments, Series 1993-C, 9.250% 01/01/19 830 747 IL Chicago, Michigan Boulevard Garden Apartment Rehabilitation Project, Series 1985, 12.000% 01/01/00 185 166 MN Washington County Housing & Redevelopment Authority, Cottages of Aspen, Series 1992, 9.250% 06/01/22 1,070 1,181 MN White Bear Lake, Birch Lake Townhomes Project: Series 1989-A, 10.250% 07/15/19 1,770 1,797 Series 1989-B, (e) 07/15/19 (f) 671 201 NC Eastern Carolina Regional Housing Authority, New River Apartments Jacksonville, Series 1994, 8.250% 09/01/14 1,850 2,000 Resolution Trust Corp., Pass Through Certificates, Series 1993-A, 9.500% 12/01/16 (g) 4,248 4,381 SC State Housing Finance and Development Multi-Family Housing Finance Revenue, Westbridge Apartments, Series A, 9.500% 09/01/20 2,143 2,202 TN Franklin Industrial Board, Landings Apartment Project, Series 1996-B, 8.750% 04/01/27 785 803 TX Galveston Health Facilities Center, Driftwood Apartments, 8.000% 08/01/23 1,000 1,074 VA Alexandria Redevelopment & Housing Authority, Courthouse Commons Apartments, Series 1990-A, 10.000% 01/01/21 1,000 1,020 B-62 109 -------- 16,549 -------- SINGLE FAMILY - 0.8% AK State Housing Finance Corp., Series 1996-A, 6.050% 12/01/17 800 857 KY Kentucky Counties Single-Family Mortgage Revenue, Class A, 9.000% 09/01/16 30 30 PA Allegheny County, Residential Financial Authority, Single Family Mortgage, Series 1987-G, 9.500% 12/01/18 660 667 -------- 1,554 -------- - ------------------------------------------------------------------------------- OTHER - 13.0% OTHER - 2.0% IN Hammond, American Maize Products Co., Series 1994, 8.000% 12/01/24 2,000 2,338 LA Port New Orleans Industrial Development, Continental Grain Co., Series 1993, 7.500% 07/01/13 1,000 1,061 MD Baltimore, Park Charles Project, Series 1986, 8.000% 01/01/10 755 812 -------- 4,211 -------- REFUNDED/ESCROWED (H) - 11.0% CA San Joaquin Hills Transportation Corridor Agency, Series 1993, (e) 01/01/25 (i) 10,000 2,705 FL Clearwater Housing Authority, Hampton Apartments, Series 1994, 8.250% 05/01/24 2,500 3,081 ID State Health Facilities Authority, IHC Hospitals, Inc., 8.700% 02/15/21 2,750 3,385 B-63 110 IL Health Facilities Authority, Edgewater Medical Center, Series A, 9.250% 07/01/24 2,235 2,840 MA State Industrial Finance Agency, Tunnel Revenue, Series 1990, 9.000% 10/01/20 920 1,026 MN Mille Lacs Capital Improvement Authority, Mille Lacs Band of Chippewa, Series 1992-A, 9.250% 11/01/12 1,015 1,241 NC Lincoln County, Lincoln County Hospital, 9.000% 05/01/07 470 568 NM City of Clovis, Retirement Ranches Project: 10.750% 04/01/19 1,920 2,024 10.750% 04/01/19 190 200 PA Delaware County Authority, Health Facility Mercy Health Corp. Project, Series 1996: 6.000% 12/15/16 1,400 1,568 6.000% 12/15/26 500 562 TN Shelby County, Health, Education, & Housing Facilities Board, Open Arms Development Center: Series 1992-A, 9.750% 08/01/19 505 716 Series 1992-C, 9.750% 08/01/19 515 730 WA State Health Care Facilities Authority, Grays Harbor Community Hospital, Series 1993: 7.200% 07/01/03 330 353 8.025% 07/01/20 1,770 1,956 -------- 22,955 -------- - ------------------------------------------------------------------------------- OTHER REVENUE - 10.4% CHEMICALS - 1.1% LA St. Charles Parish, Union Carbide Corp., Series 1992, B-64 111 7.350% 11/01/22 2,000 2,199 -------- INDUSTRIAL - 6.2% CO Mesa County Industrial Development Joy Technologies, Inc., Series 1992, 8.500% 09/15/06 1,500 1,671 IL State Development Finance Authority, Armstrong World Industries, Inc. Project, 5.950% 12/01/24 1,000 1,119 IL Will-Kankakee Regional Development Authority, Flanders Corp./Precisionaire Project, Series 1997, 6.500% 12/15/17 975 1,031 LA Southern Louisiana Port Commission, Cargill, Inc. Project, 5.850% 04/01/17 500 536 MA State Industrial Finance Agency, House of Bianchi, Inc., 8.750% 06/01/18 280 288 MI State Strategic Fund, Michigan Sugar Co., Sebewang Project, Series 1998-A, 6.250% 11/01/15 1,000 996 MN Brooklyn Park, TL Systems Corp., Series 1991, 10.000% 09/01/16 770 938 NV Henderson Public Improvement Trust, Dongsung America Co., Inc., Series 1998, 7.000% 11/01/10 500 501 OH Cuyahoga County, Joy Technologies, Inc., Series 1992, 8.750% 09/15/07 550 617 TX Trinity River Authority, Texas Instruments Project, Series 1996, 6.200% 03/01/20 750 818 VA Halifax County Industrial Development, Craddock-Terry, Inc., Series 1989, 10.000% 12/01/19 (b) 677 203 VA Pittsylvania County Industrial Development, Craddock-Terry, Inc., Series 1989, 10.000% 12/01/19 (b) 533 219 VA Prince Edward County Industrial B-65 112 Development, Craddock-Terry, Inc., Series 1989, 10.000% 12/01/19 (b) 1,610 966 WA Pilchuck Public Development Corp., Goodrich (B.F.) Co. Tramco Project, Series 1993, 6.000% 08/01/23 3,000 3,096 -------- 12,999 -------- OIL & GAS - 0.7% WA Pierce County Economic Development Corp., Occidental Petroleum Co., 5.800% 09/01/29 1,500 1,517 -------- PAPER PRODUCTS - 1.0% SC Darlington County, Industrial Development Authority, Sonoco Products Co. Project, 6.125% 06/01/25 2,000 2,140 -------- RECREATION - 0.5% NM Red River Sports, 6.450% 06/01/07 1,000 1,005 -------- RETAIL - 0.9% NJ State Economic Development Authority, Glimcher Properties L.P. Project, 6.000% 11/01/28 1,000 1,001 OH Lake County, North Madison Properties, Series 1993, 8.819% 09/01/11 710 815 -------- 1,816 -------- RESOURCE RECOVERY - 3.7% DISPOSAL - 2.7% CT State Development Authority, Sewer Sludge Disposal Facilities, Series 1996, 8.250% 12/01/06 1,250 1,417 GA Fulton County Development B-66 113 Authority, Very, Inc., 10.500% 12/01/07 1,120 1,185 MA Boston Industrial Development Finance Authority, Jet-A-Way, Inc., 10.500% 01/01/11 1,000 1,114 MA State Industrial Finance Agency: Massachusetts Environmental Services, Series 1994-A, 8.750% 11/01/21 (b) 975 780 Peabody Monofill Associates, Inc., Series 1995, 9.000% 09/01/05 1,025 1,134 -------- 5,630 -------- RESOURCE RECOVERY - 1.0% MA State Industrial Finance Agency, Ogden Haverhill Project, Series 1998-A, 5.500% 12/01/13 1,000 1,014 PA Delaware County Industrial Development Authority, Series A, 6.200% 07/01/19 1,000 1,071 -------- 2,085 -------- - ------------------------------------------------------------------------------- TAX-BACKED - 6.7% LOCAL APPROPRIATED - 0.5% CA Compton, Civic Center Project, 5.500% 09/01/15 1,000 1,023 -------- LOCAL GENERAL OBLIGATIONS - 1.3% LA New Orleans, Series 1991, (e) 09/01/15 4,000 1,720 TX Irving Independent School District, Series 1997: (e) 02/15/15 1,500 679 (e) 02/15/16 1,000 427 -------- 2,826 B-67 114 -------- SPECIAL NON-PROPERTY TAX - 3.4% IL Metropolitan Pier & Exposition Authority, Series 1996-A, (e) 12/15/13 (i) 5,000 2,407 IL Metropolitan Pier & Exposition Authority, McCormick Project: (e) 06/15/14 (i) 5,000 2,331 (e) 06/15/15 3,000 1,321 IL State Development Finance Authority, City of Marion Project, Series 1991, 9.625% 09/15/21 1,445 1,084 -------- 7,143 -------- SPECIAL PROPERTY TAX - 1.5% CA Poway Community Facilities District, No. 88-1 Parkway Business Center, Series 1998, 6.750% 08/15/15 575 629 CA Riverside County Public Financing Authority Redevelopment Projects, Series A, 5.500% 10/01/22 650 663 CA Yorba Linda Redevelopment Agency, Series 1998-A, (e) 09/01/24 1,325 356 FL Lexington Oaks Community Development District, Series 1998-A, 6.125% 05/01/19 800 805 FL Orlando, Conroy Road Interchange Project, Series 1998-A: 5.500% 05/01/10 (d) 125 124 5.800% 05/01/26 (d) 500 492 -------- 3,069 -------- - ------------------------------------------------------------------------------- TRANSPORTATION - 4.8% AIR TRANSPORTATION - 3.9% IN Indianapolis Airport Authority: Federal Express Corp., Series 1994, B-68 115 7.100% 01/15/17 2,000 2,227 United Airlines Project, Series A, 6.500% 11/15/31 2,000 2,142 KY Kenton County Airport Board, Delta Airlines, Inc., Series 1992-A, 7.500% 02/01/20 2,500 2,737 TX Alliance Airport Authority, Federal Express Corp., Series 1996, 6.375% 04/01/21 1,000 1,078 -------- 8,184 -------- AIRPORT - 0.3% OH Toledo-Lucas County Port Authority, Series 1998, 5.500% 05/15/20 585 573 ----------- TOLL FACILITIES - 0.6% CA San Joaquin Hills Transportation Corridor Agency, Series A, (e) 01/15/15 3,000 1,361 ----------- - ------------------------------------------------------------------------------ UTILITY - 11.2% INDIVIDUAL POWER PRODUCER - 3.9% FL Martin County Industrial Development Authority, Indiantown Cogeneration Project, Series 1994-A, 7.875% 12/15/25 1,000 1,153 NY Port Authority of New York & New Jersey, KIAC Partners, Series 1996-IV, 6.750% 10/01/11 2,000 2,242 PA Economic Development Finance Authority, Colver Project, Series D: 7.125% 12/01/15 500 555 7.150% 12/01/18 3,750 4,174 -------- 8,124 -------- B-69 116 INVESTOR OWNED - 2.9% AZ Pima County Industrial Development Authority, Tucson Electric Power Co., Series A, 6.100% 09/01/25 750 757 CT State Development Authority, Connecticut Light & Power Co., Series 1993-B, 5.950% 09/01/28 300 301 IL Bryant Pollution Control Revenue, Central Illinois Light Co., Series 1993, 5.900% 08/01/23 2,000 2,080 MS State Business Finance Corp., Systems Energy Resources Project, Series 1998, 5.875% 04/01/22 1,500 1,494 NM Farmington, San Juan Public Service Co. Project, Series D, 6.375% 04/01/22 1,250 1,342 -------- 5,974 -------- MUNICIPAL ELECTRIC - 2.1% TX Austin Utility System Revenue, Series 1994: (e) 05/15/17 (i) 6,600 2,629 (e) 05/15/18 (i) 5,000 1,884 -------- 4,513 -------- WATER & SEWER - 2.3% LA Public Facility Belmont Water Authority, 9.000% 03/15/24 (j) 730 657 MS Five Lakes Utility District, 8.250% 07/15/24 500 400 NJ State Economic Development Authority, Hills Development Co., 10.500% 09/01/08 2,100 2,155 TX Houston Water & Sewer System, Series C, (e) 12/01/12 (i) 3,000 1,555 -------- B-70 117 4,767 -------- TOTAL MUNICIPAL BONDS (cost of $196,856)(k) 205,015 -------- SHORT-TERM OBLIGATIONS - 1.0% - ------------------------------------------------------------------------------ VARIABLE RATE DEMAND NOTES (l) CA Irvine Improvement Bond Act of 1915: Series 1997, 3.250% 09/02/22 300 300 Series 1998, 3.250% 09/02/23 200 200 CA State Health Facilities Financing Authority, Sutter Health, Series A, 3.250% 03/01/20 700 700 MI Flint Hospital Building Authority, Hurley Medical Center, Series 1995-B, 3.400% 07/01/15 200 200 MS Perry County, Leaf River Forest Project, 3.250% 03/01/02 300 300 NM Farmington, Arizona Public Service Co., Four Corners Project, Series 1994-B, 3.250% 09/01/24 200 200 NY New York City Municipal Water Finance Authority, Series 1995-A, 3.750% 06/15/25 200 200 -------- TOTAL SHORT-TERM OBLIGATIONS 2,100 -------- OTHER ASSETS & LIABILITIES, NET - 0.9% 1,816 - ------------------------------------------------------------------------------ NET ASSETS - 100% $208,931 -------- NOTES TO INVESTMENT PORTFOLIO: - ------------------------------------------------------------------------------ B-71 118 (a) This is a restricted security which was acquired on August 21, 1998 and August 31, 1998 at an aggregate cost of $1,200. This security represents 0.6% of the Fund's net assets as of November 30, 1998. (b) This issuer is in default of certain debt covenants. Income is not being accrued. (c) This is a restricted security which was acquired on April 25, 1990 at a cost of $1,921. This security represents 1.0% of the Fund's net assets at November 30, 1998. (d) This security has been purchased on a delayed delivery basis for settlement at a future date beyond the customary settlement date. (e) Zero coupon bond. (f) Accrued interest accumulates in the value of the security and is payable at redemption. The value of this security represents fair value as determined under procedures approved by the Trustees. (g) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions exempt from registration, normally to qualified institutional buyers. At November 30, 1998, the value of this security amounted to $4,381 or 2.1% of net assets. (h) The Fund has been informed that each issuer has placed direct obligations of the U.S. Government in an irrevocable trust, solely for the payment of the interest and principal. (i) These securities, or a portion thereof, with a total market value of $12,192, are being used to collateralize the delayed delivery purchases indicated in note (d) above and open future contracts. (j) This is a restricted security which was acquired on March 22, 1994 at a cost of $730. This security represents 0.3% of the Fund's net assets as of November 30, 1998. (k) Cost for federal income tax purposes is $196,921. (l) Variable rate demand notes are considered short-term obligations. Interest rates change periodically on specified dates. These securities are payable on demand and are secured by either letters of credit or other credit support agreements from banks. The rates listed are as of November 30, 1998. Short futures contracts open at November 30, 1998:
Unrealized Par value Expiration depreciation Type covered by contracts month at 11/30/98
B-72 119 - -------------------------------------------------------------------------------- Treasury Bond $200 March $ 5
See notes to financial statements. STATEMENT OF ASSETS & LIABILITIES NOVEMBER 30, 1998
(in thousands except for per share amount) ASSETS Investments at value (cost $196,856) $205,015 Short-term obligations 2,100 -------- 207,115 Receivable for: Interest $ 4,262 Investments sold 330 Other 12 4,604 ------- -------- Total Assets 211,719 LIABILITIES Payable for: Investments purchased 1,615 Distributions 1,131 Payable due to custodian bank 18 Variation margin on futures 3 Accrued: Deferred Trustees fees 2 Other 19 ------- Total Liabilities 2,788 -------- NET ASSETS at value for 27,590 shares of beneficial interest outstanding $208,931 -------- Net asset value per share $ 7.57 -------- COMPOSITION OF NET ASSETS Capital paid in $244,568 Overdistributed net investment income (96) Accumulated net realized loss (43,695) Net unrealized appreciation (depreciation) on:
B-73 120 Investments 8,159 Open futures contracts (5) -------- $208,931 --------
See notes to financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1998
(in thousands) INVESTMENT INCOME Interest $ 14,607 EXPENSES Management fee $ 1,353 Transfer agent 65 Bookkeeping fee 55 Trustees fee 14 Custodian fee 4 Audit fee 32 Legal fee 100 Reports to shareholders 12 Other 65 1,700 ------- -------- Net Investment Income 12,907 -------- NET REALIZED & UNREALIZED GAIN (LOSS) ON PORTFOLIO POSITIONS Net realized gain 4,942 Net change in unrealized appreciation (depreciation) during the period on: Investments 64 Open futures contracts (38) ------- Net unrealized appreciation 26 -------- Net Gain 4,968 -------- Increase in Net Assets from Operations $ 17,875 --------
B-74 121 See notes to financial statements. STATEMENT OF CHANGES IN NET ASSETS
(in thousands) Year ended November 30 -------------------------- INCREASE (DECREASE) IN NET ASSETS 1998 1997 Operations: Net investment income $ 12,907 $ 13,806 Net realized gain (loss) 4,942 (7,104) Net unrealized appreciation 26 7,312 -------- -------- Net Increase from Operations 17,875 14,014 Distributions: From net investment income (13,417) (13,887) In excess of net investment income (124) -- -------- -------- 4,334 127 Fund Share Transactions: Value of distributions reinvested 1,064 613 -------- -------- Total Increase 5,398 740 NET ASSETS Beginning of period 203,533 202,793 -------- -------- End of period (net of overdistributed and including undistributed net investment income of $96 and $510, respectively) $208,931 $203,533 -------- -------- NUMBER OF FUND SHARES Issued for distributions reinvested 141 82 Outstanding at Beginning of period 27,449 27,367 -------- --------
B-75 122 End of period 27,590 27,449 -------- --------
See notes to financial statements. NOTES TO FINANCIAL STATEMENTS NOVEMBER 30, 1998 NOTE 1. ACCOUNTING POLICIES - -------------------------------------------------------------------------------- ORGANIZATION: Colonial Municipal Income Trust (the Trust) is a Massachusetts business trust, registered under the Investment Company Act of 1940, as amended, as a diversified closed-end, management investment company. The Trust's primary investment objective is to provide high current income, generally exempt from federal income taxes, by investing primarily in medium and lower quality municipal securities. The Trust's secondary objective is to preserve its capital. The trust authorized an unlimited number of shares. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies that are consistently followed by the Trust in the preparation of its financial statements. SECURITY VALUATION AND TRANSACTIONS: Debt securities generally are valued by a pricing service based upon market transactions for normal, institutional-size trading units of similar securities. When management deems it appropriate, an over-the-counter or exchange bid quotation is used. Futures contracts are valued based on the difference between the last sale price and the opening price of the contract. Options are valued at the last reported sale price, or in the absence of a sale, the mean between the last quoted bid and asking price. Short-term obligations with a maturity of 60 days or less are valued at amortized cost. Portfolio positions for which market quotations are not readily available are valued at fair value under procedures approved by the Trustees. B-76 123 Security transactions are accounted for on the date the securities are purchased, sold or mature. Cost is determined and gains (losses) are based upon the specific identification method for both financial statement and federal income tax purposes. The Trust may trade securities on other than normal settlement terms. This may increase the risk if the other party to the transaction fails to deliver and causes the Trust to subsequently invest at less advantageous prices. FEDERAL INCOME TAXES: Consistent with the Trust's policy to qualify as a regulated investment company and to distribute all of its taxable and tax-exempt income, no federal income tax has been accrued. INTEREST INCOME, DEBT DISCOUNT AND PREMIUM: Interest income is recorded on the accrual basis. Original issue discount is accreted to interest income over the life of a security with a corresponding increase in the cost basis; market discount is not accreted. Premium is amortized against interest income with a corresponding decrease in the cost basis. DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are recorded on the ex-date. The amount and character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Reclassifications are made to the Trust's capital accounts to reflect income and gains available for distribution (or available capital loss carryforwards) under income tax regulations. NOTE 2. FEES AND COMPENSATION PAID TO AFFILIATES - -------------------------------------------------------------------------------- MANAGEMENT FEE: Colonial Management Associates, Inc. (the Advisor) is the investment Advisor of the Trust and furnishes accounting and other services and office facilities for a monthly fee equal to 0.65% annually of the Trust's average weekly net assets. BOOKKEEPING FEE: The Advisor provides bookkeeping and pricing services for $18,000 per year plus 0.0233% of the Trust's average net assets over $50 million. OTHER: The Trust pays no compensation to its officers, all of whom are employees B-77 124 of the Advisor. The Trust's Trustees may participate in a deferred compensation plan which may be terminated at any time. Obligations of the plan will be paid solely out of the Trust's assets. NOTE 3. PORTFOLIO INFORMATION - -------------------------------------------------------------------------------- INVESTMENT ACTIVITY: During the year ended November 30, 1998, purchases and sales of investments, other than short-term obligations, were $69,789,070 and $68,432,873, respectively. Unrealized appreciation (depreciation) at November 30, 1998, based on cost of investments for federal income tax purposes was approximately: Gross unrealized appreciation $13,775,000 Gross unrealized depreciation (5,681,000) ----------- Net unrealized appreciation $ 8,094,000 -----------
CAPITAL LOSS CARRYFORWARDS: At November 30, 1998, capital loss carryforwards available (to the extent provided in regulations) to offset future realized gains were approximately as follows:
Year of Capital loss expiration carryforward ---------- ------------ 1999 6,352,000 2000 9,103,000 2001 7,979,000 2002 5,301,000 2003 7,499,000 2004 4,000 2005 7,197,000 ----------- $43,435,000 -----------
Expired capital loss carryforwards, if any, are recorded as a reduction of capital paid in. To the extent loss carryforwards are used to offset any future realized gains, it is unlikely that such gains would be distributed since they may be taxable to shareholders as ordinary income. OTHER: There are certain risks arising from geographic concentration in B-78 125 any state. Certain revenue or tax related events in a state may impair the ability of certain issuers of municipal securities to pay principal and interest on their obligations. The Trust may focus its investments in certain industries, subjecting it to greater risk than a trust that is more diversified. The Trust may purchase or sell municipal and Treasury bond futures contracts and purchase and write options on futures. The Trust will invest in these instruments to hedge against the effects of changes in the value of portfolio securities due to anticipated changes in interest rates and/or market conditions, for duration management, or when the transactions are economically appropriate to the reduction of risk inherent in the management of the Trust and not for trading purposes. The use of futures contracts and options involves certain risks which include (1) imperfect correlation between the price movement of the instruments and the underlying securities, (2) inability to close out a position due to different trading hours, or the temporary absence of a liquid market for either the instrument or the underlying securities or (3) an inaccurate prediction by the Advisor of the future direction of interest rates. Any of these risks may involve amounts exceeding the variation margin recorded in the Trust's Statement of Assets and Liabilities at any given time. FINANCIAL HIGHLIGHTS Selected per share data, total return, ratios and supplemental data throughout each period are as follows:
Year ended November 30 ---------------------------------------- 1998 1997 1996 Net asset value - Beginning of period $ 7.410 $ 7.410 $ 7.480 ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income 0.469 0.509 0.508 Net realized and unrealized gain (loss) 0.183 (0.002) (0.068) ------- ------- ------- Total from Investment Operations 0.652 0.507 0.440
B-79 126 ------- ------- ------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS: From net investment income (0.487) (0.507) (0.510) In excess of net investment income (0.005) - - ------- ------- ------- Total Distributions Declared to Shareholders (0.492) (0.507) (0.510) ------- ------- ------- Net asset value - End of period $ 7.570 $ 7.410 $ 7.410 ------- ------- ------- Market price per share - End of period $ 8.125 $ 7.560 $ 7.250 ------- ------- ------- Total return - based on net asset value (a) 8.99% 7.07% 6.38% ------- ------- ------- Total return - based on market value (b) 14.57% 11.67% 15.36% ------- ------- ------- RATIOS TO AVERAGE NET ASSETS Expenses 0.82% (c) 0.86% (c) 0.91% (c) Net investment income 6.20% (c) 6.83% (c) 6.87% (c) Portfolio turnover 34% 15% 22% Net assets at end of period (000) $208,931 $203,533 $202,793
(a) Total return at net asset value assuming all distributions reinvested. (b) Total return at market value assuming all distributions reinvested and excluding brokerage commissions. (c) The benefits derived from custody credits and directed brokerage arrangements had no impact. Prior years' ratios are net of benefits received, if any. FINANCIAL HIGHLIGHTS - CONT.
Year ended November 30
B-80 127
---------------------- 1995 1994 $ 7.150 $ 7.830 ------- ------- 0.547 0.609 0.335 (0.707) ------- ------- 0.882 (0.098) ------- ------- (0.552) (0.582) - - ------- ------- (0.552) (0.582) ------- ------- $ 7.480 $ 7.150 ------- ------- $ 6.750 $ 6.750 ------- ------- 12.96% (0.42)% ------- ------- 8.04% (10.06)% ------- ------- 0.98% (c) 0.90% 7.47% (c) 8.12% 24% 24% $204,666 $195,444
------------------------------------------------------------------- Federal income tax information (unaudited) All of the distributions will be treated as exempt income for federal income tax purposes. ------------------------------------------------------------------- B-81 128 GLOSSARY "'AA' Composite Commercial Paper Rate" has the meaning set forth on pages B-16 to B-17 of this Statement of Additional Information. "Advisor" means Colonial Management Associates, Inc. "Affected Series" has the meaning set forth on page B-30 of this Statement of Additional Information. "Affiliate" means, for purposes of the definition of "Outstanding," any Person known to the Auction Agent to be controlled by, in control of or under common control with the Trust; provided, however, that no Broker-Dealer controlled by, in control of or under common control with the Trust shall be an Affiliate nor shall any corporation or any Person controlled by, in control of or under common control with such corporation one of the directors, trustees or executive officers of which is a trustee of the Trust be an Affiliate solely because such director, trustee or executive officer is also a trustee of the Trust. "Agent Member" means a member of or participant in the Securities Depository that will act on behalf of a Bidder. "Anticipation Notes" means the following obligations: Tax Anticipation Notes (TANs), Revenue Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant Anticipation Notes (GANs) that are rated by Standard & Poor's and Bond Anticipation Notes (BANs) that are rated by Standard & Poor's. "Applicable Rate" has the meaning set forth on page B-12 of this Statement of Additional Information. "Auction" means each periodic implementation of the Auction Procedures. "Auction Agency Agreement" has the meaning set forth on page B-12 of this Statement of Additional Information. "Auction Agent" means the entity appointed as such by a resolution of the Board of Trustees. "Auction Date," with respect to any Rate Period, means the Business Day next preceding the first day of such Rate Period. "Auction Procedures" means the procedures for conducting Auctions as described in this Statement of Additional Information, including Appendix B hereto. "Available Municipal Preferred" has the meaning set forth on page B-19 of this Statement of Additional Information. "Benchmark Rate" has the meaning set forth on page B-20 of this Statement of Additional Information. "Beneficial Owner" has the meaning set forth on page B-12 of this Statement of Additional Information. "Bid" has the meaning set forth on page B-13 of this Statement of Additional Information. "Bidder" and "Bidders" have the respective meanings set forth on page B-14 of this Statement of Additional Information. "Board of Trustees" or "Board" means the Board of Trustees of the Trust or any duly authorized committee thereof. "Broker-Dealer" means any broker-dealer, commercial bank or other entity permitted by law to perform the functions required of a Broker-Dealer, that is a member of, or a participant in, the Securities Depository or is an affiliate of B-82 129 such member or participant, has been selected by the Trust and has entered into a Broker-Dealer Agreement that remains effective. "Broker-Dealer Agreement" means an agreement among the Trust, the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in the By-Laws, the Prospectus and this Statement of Additional Information. "Business Day" has the meaning set forth on page B-12 of this Statement of Additional Information. "By-Laws" means the Amended and Restated By-Laws of Colonial Municipal Income Trust on file with the Secretary of State of the Commonwealth of Massachusetts. "Cede" means Cede & Co., the nominee of DTC in whose name the shares of Municipal Preferred initially will be registered. "CFTC" has the meaning set forth on page B-46 of this Statement of Additional Information. "Code" means the Internal Revenue Code of 1986, as amended. "Commercial Paper Dealers" has the meaning set forth on page B-17 of this Statement of Additional Information. "Common Shares" means the common shares of beneficial interest, without par value, of the Trust. "Cure Date" means the Municipal Preferred Basic Maintenance Cure Date or the 1940 Act Cure Date, as the case may be. "Date of Original Issue" has the meaning set forth on page B-12 of this Statement of Additional Information. "Declaration" means the Agreement and Declaration of Trust of Colonial Municipal Income Trust, as amended, on file with the Secretary of State of the Commonwealth of Massachusetts. "Deposit Securities" has the meaning set forth on page B-36 of this Statement of Additional Information. "Discount Factor" means a Moody's Discount Factor or a Standard & Poor's Discount Factor, as the case may be. "Discounted Value" means, as of any Valuation Date, (i) with respect to a Standard & Poor's Eligible Asset, the quotient of the market value thereof divided by the applicable Standard & Poor's Discount Factor and (ii)(a) with respect to a Moody's Eligible Asset that is not currently callable as of such Valuation Date at the option of the issuer thereof, the quotient of the market value thereof divided by the applicable Moody's Discount Factor, or (b) with respect to a Moody's Eligible Asset that is currently callable as of such Valuation Date at the option of the issuer thereof, the quotient of (1) the lesser of the market value or call price thereof, including any call premium, divided by (2) the applicable Moody's Discount Factor. "Dividend Payment Date" has the meaning set forth on page B-12 of this Statement of Additional Information. "Dividend Period" has the meaning set forth on page B-12 of this Statement of Additional Information. "DTC" has the meaning set forth on page B-13 of this Statement of Additional Information. B-83 130 "Eligible Assets" means Moody's Eligible Assets or Standard & Poor's Eligible Assets, as the case may be. "Escrowed Bonds" means Municipal Obligations that (i) have been determined to be legally defeased in accordance with Standard & Poor's legal defeasance criteria, (ii) have been determined to be economically defeased in accordance with Standard & Poor's economic defeasance criteria and assigned a rating of AAA by Standard & Poor's, (iii) are not rated by Standard & Poor's but have been determined to be legally defeased by Moody's, or (iv) have been determined to be economically defeased by Moody's and assigned a rating no lower than the rating that is Moody's equivalent of Standard & Poor's AAA rating. "Exchange" has the meaning set forth on page B-40 of this Statement of Additional Information. "Existing Holder" has the meaning set forth on page B-12 of this Statement of Additional Information. "Failure to Deposit," with respect to shares of Municipal Preferred, means a failure by the Trust to pay to the Auction Agent, not later than 12:00 noon, New York City time, (A) on the Business Day next preceding any Dividend Payment Date for such shares, in funds available on such Dividend Payment Date in The City of New York, New York, the full amount of any dividend (whether or not earned or declared) to be paid on such Dividend Payment Date on any share or (B) on the Business Day next preceding any redemption date in funds available on such redemption date for such shares in The City of New York, New York, the Redemption Price to be paid on such redemption date for any share after notice of redemption is mailed as set forth in the By-Laws, the Prospectus or this Statement of Additional Information; provided, however, that the foregoing clause (B) shall not apply to the Trust's failure to pay the Redemption Price in respect of shares of Municipal Preferred when the related notice of redemption provides that redemption of such shares is subject to one or more conditions precedent and any such condition precedent shall not have been satisfied at the time or times and in the manner specified in such notice of redemption. "Gross-up Payment" has the meaning set forth on pages B-26 to B-27 of this Statement of Additional Information. "Hold Order" has the meaning set forth on page B-13 of this Statement of Additional Information. "Holder" means the registered holder of shares of Municipal Preferred as the same appears on the record books of the Trust. "Initial Rate Period" has the meaning set forth on page B-12 of this Statement of Additional Information. "IRS" means the Internal Revenue Service. "Kenny Index" has the meaning set forth on page B-16 of this Statement of Additional Information. "Late Charge" has the meaning set forth on page B-25 of this Statement of Additional Information. "Liquidation Preference," with respect to a given number of shares of Municipal Preferred, means $25,000 times that number. "Maximum Potential Gross-up Payment Liability" has the meaning set forth on page B-33 of this Statement of Additional Information. "Maximum Rate" has the meaning set forth on page B-15 of this Statement of Additional Information. "Minimum Rate Period" means any Rate Period consisting of 7 Rate Period Days. B-84 131 "Moody's" means Moody's Investors Service, Inc. "Moody's Discount Factors" has the meaning set forth on page B-35 of this Statement of Additional Information. "Moody's Eligible Assets" has the meaning set forth on page B-35 of this Statement of Additional Information. "Moody's Exposure Period" has the meaning set forth on page B-35 of this Statement of Additional Information. "Moody's Volatility Factor" means, as of any Valuation Date, (i) in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more, a multiplicative factor equal to 275%, except as otherwise provided in the last sentence of this definition; (ii) in the case of any Special Rate Period of more than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to 203%; (iii) in the case of any Special Rate Period of more than 35 but fewer than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the case of any Special Rate Period of more than 42 but fewer than 50 Rate Period Days, a multiplicative factor equal to 226%; and (v) in the case of any Special Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative factor equal to 235%. If, as a result of the enactment of changes to the Code, the greater of the maximum marginal Federal individual income tax rate applicable to ordinary income and the maximum marginal Federal corporate income tax rate applicable to ordinary income will increase, such increase being rounded up to the next five percentage points, until the effective date of such increase, the Moody's Volatility Factor in the case of any Rate Period described in (i) above in this definition instead shall be determined by reference to the following table: Federal Volatility Tax Rate Increase Factor 5% 295% 10% 317% 15% 341% 20% 369% 25% 400% 30% 436% 35% 477% 40% 525% "Municipal Preferred" means the Municipal Auction Rate Cumulative Preferred Shares, without par value, liquidation preference $25,000 per share, of the Trust. "Municipal Preferred Basic Maintenance Amount" has the meaning set forth on pages B-32 to B-33 of this Statement of Additional Information. "Municipal Preferred Basic Maintenance Cure Date" has the meaning set forth on page B-32 of this Statement of Additional Information. "Municipal Preferred Basic Maintenance Report" has the meaning set forth on page B-33 of this Statement of Additional Information. "1940 Act" means the Investment Company Act of 1940, as amended. "1940 Act Cure Date" has the meaning set forth on page B-32 of this Statement of Additional Information. B-85 132 "1940 Act Municipal Preferred Asset Coverage" has the meaning set forth on page B-31 of this Statement of Additional Information. "Notice of Redemption" has the meaning set forth on page B-38 of this Statement of Additional Information. "Notice of Special Rate Period" has the meaning set forth on page B-28 of this Statement of Additional Information. "Order" and "Orders" have the respective meanings set forth on page B-14 of this Statement of Additional Information. "Outstanding" means, as of any Auction Date with respect to shares of Municipal Preferred, the number of such shares theretofore issued by the Trust except, without duplication, (i) any shares of Municipal Preferred theretofore canceled or delivered to the Auction Agent for cancellation or redeemed by the Trust, (ii) any shares of Municipal Preferred as to which the Trust or any Affiliate thereof shall be an Existing Holder, and (iii) any shares of Municipal Preferred represented by any certificate in lieu of which a new certificate has been executed and delivered by the Trust. "Person" means and includes an individual, a partnership, a corporation, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof. "Potential Beneficial Owner" has the meaning set forth on page B-12 of this Statement of Additional Information. "Potential Holder" has the meaning set forth on page B-12 of this Statement of Additional Information. "Preferred Shares" means the preferred shares of beneficial interest, without par value of the Trust, and includes the Municipal Preferred. "Rate Multiple" has the meaning set forth on page B-18 of this Statement of Additional Information. "Rate Period" has the meaning set forth on page B-12 of this Statement of Additional Information. "Rate Period Days," for any Rate Period or Dividend Period, means the number of days that would constitute such Rate Period or Dividend Period but for the application of the second paragraph under "Description of Municipal Preferred--Dividends--General" or the second paragraph under "Description of Municipal Preferred--Dividends--Designation of Special Rate Periods." "Receivables for Municipal Obligations Sold," for purposes of calculating Moody's Eligible Assets or Standard & Poor's Eligible Assets, as the case may be, has the meaning set forth on pages B-35 to B-36 and B-34 of this Statement of Additional Information, respectively. "Redemption Price" has the meaning set forth on page B-38 of this Statement of Additional Information. "Reference Rate" has the meaning set forth on page B-16 of this Statement of Additional Information. "SEC" means the Securities and Exchange Commission. "Securities Depository" means The Depository Trust Company and its successors and assigns or any other securities depository selected by the Trust which agrees to follow the procedures required to be followed by such securities depository in connection with shares of Municipal Preferred. "Sell Order" has the meaning set forth on page B-14 of this Statement of Additional Information. "Special Rate Period" has the meaning set forth on page B-12 of this Statement of Additional Information. B-86 133 "Special Redemption Provisions" has the meaning set forth on page B-37 of this Statement of Additional Information. "Standard & Poor's" means Standard & Poor's Ratings Group. "Standard & Poor's Discount Factors" has the meaning set forth on pages B-33 to B-34 of this Statement of Additional Information. "Standard & Poor's Eligible Assets" has the meaning set forth on page B-33 of this Statement of Additional Information. "Standard & Poor's Exposure Period" has the meaning set forth on page B-33 of this Statement of Additional Information. "Standard & Poor's Volatility Factor" means, as of any Valuation Date, a multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the case of any Special Rate Period of more than 28 Rate Period Days but fewer than 183 Rate Period Days, and (iii) 204% in the case of any Special Rate Period of more than 182 Rate Period Days. "Submission Deadline" means 1:30 P.M., New York City time, on any Auction Date or such other time on any Auction Date by which Broker-Dealers are required to submit Orders to the Auction Agent as specified by the Auction Agent from time to time. "Submitted Bid" has the meaning set forth on page B-19 of this Statement of Additional Information. "Submitted Hold Order" has the meaning set forth on page B-19 of this Statement of Additional Information. "Submitted Order" has the meaning set forth on page B-19 of this Statement of Additional Information. "Submitted Sell Order" has the meaning set forth on page B-19 of this Statement of Additional Information. "Subsequent Rate Period" has the meaning set forth on page B-12 of this Statement of Additional Information. "Substitute Commercial Paper Dealer" has the meaning set forth on page B-17 of this Statement of Additional Information. "Substitute U.S. Government Securities Dealer" has the meaning set forth on page B-17 of this Statement of Additional Information. "Sufficient Clearing Bids" has the meaning set forth on page B-19 of this Statement of Additional Information. "Taxable Allocation" has the meaning set forth on page B-26 of this Statement of Additional Information. "Taxable Equivalent of the Short-Term Municipal Bond Rate" has the meaning set forth on page B-16 of this Statement of Additional Information. "Taxable Income" has the meaning set forth on page B-20 of this Statement of Additional Information. "Taxable Yield Rate" has the meaning set forth on page B-20 of this Statement of Additional Information. "Treasury Bill" has the meaning set forth on page B-17 of this Statement of Additional Information. "Treasury Bill Rate" has the meaning set forth on page B-17 of this Statement of Additional Information. B-87 134 "Treasury Note" has the meaning set forth on page B-17 of this Statement of Additional Information. "Treasury Note Rate" has the meaning set forth on page B-17 of this Statement of Additional Information. "Trust" means Colonial Municipal Income Trust, a Massachusetts business trust, which is the issuer of the shares of Municipal Preferred. "U.S. Government Securities Dealer" has the meaning set forth on page B-17 of this Statement of Additional Information. "Valuation Date" has the meaning set forth on page B-32 of this Statement of Additional Information. "Volatility Factor" means, as of any Valuation Date, the greater of the Moody's Volatility Factor and the Standard & Poor's Volatility Factor. "Winning Bid Rate" has the meaning set forth on pages B-19 to B-20 of this Statement of Additional Information. B-88 135 APPENDIX A RATINGS OF INVESTMENTS STANDARD & POOR'S CORPORATION -- A brief description of the applicable Standard & Poor's Corporation ("S&P") rating symbols and their meanings (as published by S&P) follows: LONG TERM DEBT An S&P corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell, or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. The ratings are based, in varying degrees, on the following considerations: 1. Likelihood of default-capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; 2. Nature of and provisions of the obligation; 3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. INVESTMENT GRADE AAA Debt rated 'AAA' has the highest rating assigned by 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 in higher rated categories. SPECULATIVE GRADE RATING Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. 'BB' indicates the least degree of speculation and 'C' the highest. While such debt will likely have some quality and protective characteristics, these are outweighed by major uncertainties or major exposures to adverse conditions. B-89 136 BB Debt rated 'BB' has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to inadequate capacity to meet timely interest and principal payments. The 'BB' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'BBB-' rating. B Debt rated 'B' has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse business, financial, or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The 'B' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-' rating. CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business, financial, or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The 'CCC' rating category is also used for debt subordinated to senior debt that is assigned an actual or implied 'B' or 'B-' rating. CC The rating 'CC' typically is applied to debt subordinated to senior debt that is assigned an actual or implied 'CCC' debt rating. C The rating 'C' typically is applied to debt subordinated to senior debt which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. CI The rating 'CI' is reserved for income bonds on which no interest is being paid. D Debt rated 'D' is in payment default. The 'D' rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. PLUS (+) OR MINUS (-): The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. PROVISIONAL RATINGS: The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise judgment with respect to such likelihood and risk. L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is federally insured and interest is adequately collateralized.* In the case of certificates of deposit the letter 'L' indicates that the deposit, combined with other deposits being held in the same right and capacity, will be honored for principal and accrued pre-default interest up to the federal insurance limits within 30 days after closing of the insured institution or, in the event that the deposit is assumed by a successor insured institution, upon maturity. * Continuance of the rating is contingent upon S&P's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flow. B-90 137 NR Indicates no rating has been requested, that there is insufficient information on which to base a rating, or that S&P does not rate a particular type of obligation as a matter of policy. MUNICIPAL NOTES An S&P note rating reflects the liquidity concerns and market access risks unique to notes. Notes due in 3 years or less will likely receive a note rating. Notes maturing beyond 3 years will most likely receive a long-term debt rating. The following criteria will be used in making that assessment: -- Amortization schedule (the larger the final maturity relative to other maturities, the more likely it will be treated as a note). -- Source of payment (the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note). NOTE RATING SYMBOLS ARE AS FOLLOWS: SP-1 Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2 Satisfactory capacity to pay principal and interest. SP-3 Speculative capacity to pay principal and interest. A note rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances. COMMERCIAL PAPER An S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into several categories, ranging from "A-1" for the highest quality obligations to "D" for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus sign (+) designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-l." A-3 Issues carrying this designation have adequate capacity for timely payment. They are, however, more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. B Issues rated "B" are regarded as having only speculative capacity for timely payment. C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. B-91 138 D Debt rated "D" is in payment default. The "D" rating category is used when interest payments or principal payments are not made on the date due, even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. A commercial paper rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances. MOODY'S INVESTORS SERVICE, INC.-- A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows: MUNICIPAL BONDS 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. Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. Ca Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. B-92 139 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. NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes possess the strongest investment attributes are designated by the symbols Aal, Al, Baal, Bal and Bl. SHORT-TERM LOANS MIG 1/VMIG 1 This designation denotes best quality. There is present strong protection by established cash flows, superior liquidity support or demonstrated broadbased access to the market for refinancing. MIG 2/VMIG 2 This designation denotes high quality. Margins of protection are ample although not so large as in the preceding group. MIG 3/VMIG 3 This designation denotes favorable quality. All security elements are accounted for but there is lacking the undeniable strength of the preceding grades. Liquidity and cash flow protection may be narrow and market access for refinancing is likely to be less well established. MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly regarded as required of an investment security is present and although not distinctly or predominantly speculative, there is specific risk. S.G. This designation denotes speculative quality. Debt instruments in this category lack margins of protection. COMMERCIAL PAPER Issuers rated PRIME-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: --Leading market positions in well established industries. --High rates of return on funds employed. --Conservative capitalization structures with moderate reliance on debt and ample asset protection. --Broad margins in earnings coverage of fixed financial charges and high internal cash generation. --Well established access to a range of financial markets and assured sources of alternate liquidity. Issuers rated PRIME-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Issuers rated PRIME-3 (or related supporting institutions) have an acceptable capacity for repayment of short-term promissory obligations. The effect of industry characteristics and market composition may be more pronounced. Variability in earnings and profitability may result in changes in the level of debt protection measurements and the requirement for relatively high financial leverage. Adequate alternate liquidity is maintained. B-93 140 Issuers rated NOT PRIME do not fall within any of the Prime rating categories. B-94 141 APPENDIX B AUCTION PROCEDURES The following procedures will be set forth as Section 1 through 8 of Part II of Section 12.1 of the Amended and Restated By-Laws of the Trust. The terms not defined below are defined in the Glossary or in the Prospectus or this Statement of Additional Information. 1. ORDERS. (a) Prior to the Submission Deadline on each Auction Date for shares of a series of Municipal Preferred: (i) each Beneficial Owner of shares of such series may submit to its Broker-Dealer by telephone or otherwise information as to: (A) the number of Outstanding shares, if any, of such series held by such Beneficial Owner which such Beneficial Owners desires to continue to hold without regard to the Applicable Rate for shares of such series for the next succeeding Rate Period of such shares; (B) the number of Outstanding shares, if any, of such series held by such Beneficial Owner offers to sell if the Applicable Rate for shares of such series for the next succeeding Rate Period of shares of such series shall be less than the rate per annum specified by such Beneficial Owner; and/or (C) the number of Outstanding shares, if any, of such series held by such Beneficial Owners which such Beneficial Owner offers to sell without regard to the Applicable Rate for shares of such series for the next Rate Period of shares of such series; and (ii) one or more Broker-Dealers, using lists of Potential Beneficial Owners, shall in good faith for the purpose of conducting a competitive Auction in a commercially reasonable manner, contact Potential Beneficial Owners (by telephone or otherwise), including Persons that are not Beneficial Owners, on such lists to determine the number of shares, if any, of such series which each such Potential Beneficial Owner offers to purchase if the Applicable Rate for shares of such series for the next B-95 142 succeeding Rate Period of shares of such series shall not be less than the rate per annum specified by such Potential Beneficial Owner. For purposes hereof, the communication by a Beneficial Owner or Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction Agent, of information referred to in clause (i)(a), (i)(B), (i)(C), or (ii) of this paragraph (a) is hereinafter referred to as an "order" and collectively as "Orders" and each Beneficial Owner and each Potential Beneficial Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an Order with the Auction Agent, is hereinafter referred to as a "Bidder" and collectively as "Bidders"; an Order containing the information referred to in clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order" and collectively as "Hold Orders"; an Order containing the information referred to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids"; and an Order containing the information referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as "Sell Orders." (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a series of Municipal Preferred subject to an Auction on any Auction Date shall constitute an irrevocable offer to sell: (A) the number of Outstanding shares of such series specified in such Bid if the Applicable Rate for shares of such series determined on such Auction Date shall be less than the rate specified therein; (B) such number or a lesser number of Outstanding shares of such series to be determined as set forth in clause (iv) of paragraph (a) of Section 4 of this Part II if the Applicable Rate for shares of such series determined on such Auction Date shall be equal to the rate specified therein; or (C) the number of Outstanding shares of such series specified in such Bid if the rate specified therein shall be higher than the Maximum Rate for shares of such series, or such number or a lesser number of Outstanding shares of such series to be determined as set forth in clause (iii) of paragraph (b) of Section 4 of this Part II if the rate specified therein shall be higher than the Maximum Rate for shares of such series and Sufficient Clearing Bids for shares of such series do not exist. (ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of a series of Municipal Preferred subject to an Auction on any Auction Date shall constitute an irrevocable offer to sell: B-96 143 (A) the number of Outstanding shares of such series specified in such Sell Order; or (B) such number or a lesser number of Outstanding shares of such series as set forth in clause (iii) of paragraph (b) of Section 4 of this Part II if Sufficient Clearing Bids for shares of such series do not exist; provided, however, that a Broker-Dealer that is an Existing Holder with respect to shares of a series of Municipal Preferred shall not be liable to any Person for failing to sell such shares pursuant to a Sell Order described in the proviso to paragraph (c) of Section 2 of this Part II if (1) such shares were transferred by the Beneficial Owner thereof without compliance by such Beneficial Owner or its transferee Broker-Dealer (or other transferee person, if permitted by the Trust) with the provisions of Section 7 of this Part II or (2) such Broker-Dealer has informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement that, according to such Broker-Dealer's records, such Broker-Dealer believes it is not the Existing Holder of such shares. (iii) A Bid by a Potential Beneficial Holder or a Potential Holder of shares of a series of Municipal Preferred subject to an Auction on any Auction Date shall constitute an irrevocable offer to purchase: (A) the number of Outstanding shares of such series specified in such Bid if the Applicable Rate for shares of such series determined on such Auction Date shall be higher than the rate specified therein; or (B) such number or a lesser number of Outstanding shares of such series as set forth in clause (v) of paragraph (a) of Section 4 of this Part II if the Applicable Rate for shares of such series determined on such Auction Date shall be equal to the rate specified therein. (c) No Order for any number of shares of Municipal Preferred other than whole shares shall be valid. 2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT. (a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders for shares of Municipal Preferred of a series subject to an Auction on such Auction Date obtained by such Broker-Dealer, designating itself (unless otherwise permitted by the Trust) as an Existing Holder in respect of shares subject to Orders submitted or deemed submitted to it by Beneficial Owners and as a Potential Holder in respect of shares subject to Orders submitted to it by Potential Beneficial Owners, and shall specify with respect to each Order for such shares: B-97 144 (i) the name of the Bidder placing such Order (which shall be the Broker-Dealer unless otherwise permitted by the Trust); (ii) the aggregate number of shares of such series that are the subject of such Order; (iii) to the extent that such Bidder is an Existing Holder of shares of such series: (A) the number of shares, if any, of such series subject to any Hold Order of such Existing Holder; (B) the number of shares, if any, of such series subject to any Bid of such Existing Holder and the rate specified in such Bid; and (C) the number of shares, if any, of such series subject to any Sell Order of such Existing Holder; and (iv) to the extent such Bidder is a Potential Holder of shares of such series, the rate and number of shares of such series specified in such Potential Holder's Bid. (b) If any rate specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one thousandth (.001) of 1%. (c) If an Order or Orders covering all of the Outstanding shares of Municipal Preferred of a series held by any Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order to have been submitted by or on behalf of such Existing Holder covering the number of Outstanding shares of such series held by such Existing Holder and not subject to Orders submitted to the Auction Agent; provided, however, that if an Order or Orders covering all of the Outstanding shares of such series held by any Existing Holder is not submitted to the Auction Agent prior to the Submission Deadline for an Auction relating to a Special Rate Period consisting of more than 28 Rate Period Days, the Auction Agent shall deem a Sell Order to have been submitted by or on behalf of such Existing Holder covering the number of outstanding shares of such series held by such Existing Holder and not subject to Orders submitted to the Auction Agent. (d) If one or more Orders of an Existing Holder is submitted to the Auction Agent covering in the aggregate more than the number of Outstanding shares of B-98 145 Municipal Preferred of a series subject to an Auction held by such Existing Holder, such Orders shall be considered valid in the following order of priority: (i) all Hold Orders for shares of such series shall be considered valid, but only up to and including in the aggregate the number of Outstanding shares of such series held by such Existing Holder, and if the number of shares of such series subject to such Hold Orders exceeds the number of Outstanding shares of such series held by such Existing Holder, the number of shares subject to each such Hold Order shall be reduced pro rata to cover the number of Outstanding shares of such series held by such Existing Holder; (ii) (A) any Bid for shares of such series shall be considered valid up to and including the excess of the number of Outstanding shares of such series held by such Existing Holder over the number of shares of such series subject to any Hold Orders referred to in clause (i) above; (B) subject to subclause (A), if more than one Bid of an Existing Holder for shares of such series is submitted to the Auction Agent with the same rate and the number of Outstanding shares of such series subject to such Bids is greater than such excess, such Bids shall be considered valid up to and including the amount of such excess, and the number of shares of such series subject to each Bid with the same rate shall be reduced pro rata to cover the number of shares of such series equal to such excess; (C) subject to subclauses (A) and (B), if more than one Bid of an Existing Holder for shares of such series is submitted to the Auction Agent with different rates, such Bids shall be considered valid in the ascending order of their respective rates up to and including the amount of such excess; and (D) in any such event, the number, if any, of such Outstanding shares of such series subject to any portion of Bids considered not valid in whole or in part under this clause (ii) shall be treated as the subject of a Bid for shares of such series by or on behalf of a Potential Holder at the rate therein specified; and (iii) all Sell Orders for shares of such series shall be considered valid up to and including the excess of the number of Outstanding shares of such series held by such Existing Holder over the sum of shares of such series subject to valid Hold Orders referred to in clause (i) above and valid Bids referred to in clause (ii) above. B-99 146 (e) If more than one Bid for one or more shares of a series of Municipal Preferred is submitted to the Auction Agent by or on behalf of any Potential Holder, each such Bid submitted shall be a separate Bid with the rate and number of shares therein specified. (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any Auction Date, shall be irrevocable. 3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE. (a) Not earlier than the Submission Deadline on each Auction Date for shares of a series of Municipal Preferred, the Auction Agent shall assemble all valid Orders submitted or deemed submitted to it by the Broker-Dealers in respect of shares of such series (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Holder Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders") and shall determine for such series: (i) the excess of the number of Outstanding shares of such series over the number of Outstanding shares of such series subject to Submitted Hold Orders (such excess being hereinafter referred to as the "Available Municipal Preferred" of such series); (ii) from the Submitted Orders for shares of such series whether: (A) the number of Outstanding shares of such series subject to Submitted Bids of Potential Holders specifying one or more rates equal to or lower than the Maximum Rate for shares of such series; exceeds or is equal to the sum of: (B) the number of Outstanding shares of such series subject to Submitted Bids of Existing Holders specifying one or more rates higher than the Maximum Rate for shares of such series; and (C) the number of Outstanding shares of such series subject to Submitted Sell Orders B-100 147 (in the event such excess or such equality exists (other than because the number of shares of such series in subclauses (B) and (C) above is zero because all of the Outstanding shares of such series are subject to Submitted Hold Orders), such Submitted Bids in subclause (A) above being hereinafter referred to collectively as A Sufficient Clearing Bids@ for shares of such series) which if: (iii) if Sufficient Clearing Bids for shares of such series exist, the lowest rate specified in such Submitted Bids (the "Winning Bid Rate" for shares of such series) which if: (A) (I) each such Submitted Bid of Existing Holders specifying such lowest rate and (II) all other such Submitted Bids of Existing Holders specifying lower rates were rejected, thus entitling such Existing Holders to continue to hold the shares of such series that are subject to such Submitted Bids; and (B) (I) each such Submitted Bid of Potential Holders specifying such lowest rate and (II) all other such Submitted Bids of Potential Holders specifying lower rates were accepted; would result in such Existing Holders described in subclause (A) above continuing to hold an aggregate number of Outstanding shares of such series which, when added to the number of Outstanding shares of such series to be purchased by such Potential Holders described in subclause (B) above, would equal not less than the Available Municipal Preferred of such series. (b) Promptly after the Auction Agent has made the determinations pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise the Trust of the Maximum Rate for shares of the series of Municipal Preferred for which an Auction is being held on the Auction Date and, based on such determination, the Applicable Rate for shares of such series for the next succeeding Rate Period thereof as follows: (i) if Sufficient Clearing Bids for shares of such series exist, that the Applicable Rate for all shares of such series for the next succeeding Rate Period thereof shall be equal to the Winning Bid Rate for shares of such series so determined; (ii) if Sufficient Clearing Bids for shares of such series do not exist (other than because all of the Outstanding shares of such series are subject to Submitted Hold Orders), that the Applicable Rate for all shares of such series for the next succeeding Rate Period thereof shall be equal to the Maximum Rate for shares of such series; or B-101 148 (iii) if all of the Outstanding shares of such series are subject to Submitted Hold Orders, that the Applicable Rate for all shares of such series for the next succeeding Rate Period thereof shall be as set forth in paragraph (c) of this Section 3. (c) For purposes of subparagraph (b)(iii) of this Section 3, the Applicable Rate for shares of such series for the next succeeding Rate Period of shares of such series shall be equal to the lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the product of (A) (I) the "AA" Composite Commercial Paper Rate on such Auction Date for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days; (II) the Treasury Bill Rate on such Auction Date for such Rate Period, if such Rate Period consists of more than 182 but fewer than 365 Rate Period Days; or (III) the Treasury Note Rate on such Auction Date for such Rate Period, if such Rate Period is more than 364 Rate Period Days (the rate described in the foregoing clause (A)(I), (II) or (III), as applicable, being referred to herein as the "Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax rate applicable to ordinary income, whichever is greater; provided, however, that if the Trust has notified the Auction Agent of its intent to allocate to shares of such series in such Rate Period any net capital gains or other income taxable for Federal income tax purposes ("Taxable Income"), the Applicable Rate for shares of such series for such Rate Period will be (i) if the Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the product of the Benchmark Rate multiplied by the factor set forth in the preceding clause (B) and (y) the product of the maximum marginal regular Federal individual income tax rate applicable to ordinary income or the maximum marginal regular Federal corporate income tax applicable to ordinary income, whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate means the rate determined by (a) dividing the amount of Taxable Income available for distribution per such share of Municipal Preferred by the number of days in the Dividend Period in respect of which such Taxable Income is contemplated to be distributed, (b) multiplying the amount determined in (a) above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any other Dividend Period), and (c) dividing the amount determined in (b) above by $25,000. 4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of Municipal Preferred B-102 149 that are subject to Submitted Hold Orders, and, based on the determinations made pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted Sell Orders shall be accepted or rejected by the Auction Agent and the Auction Agent shall take such other action as set forth below: (a) If Sufficient Clearing Bids for shares of a series of Municipal Preferred have been made, all Submitted Sell Orders with respect to shares of such series shall be accepted and, subject to the provisions of paragraphs (d) and (e) of this Section 4, Submitted Bids with respect to shares of such series shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids with respect to shares of such series shall be rejected: (i) Existing Holders' Submitted Bids for shares of such series specifying any rate that is higher than the Winning Bid Rate for shares of such series shall be accepted, thus requiring each such Existing Holder to sell the shares of Municipal Preferred subject to such Submitted Bids; (ii) Existing Holders' Submitted Bids for shares of such series specifying any rate that is lower than the Winning Bid Rate for shares of such series shall be rejected, thus entitling each such Existing Holder to continue to hold the shares of Municipal Preferred subject to such Submitted Bids; (iii) Potential Holders' Submitted Bids for shares of such series specifying any rate that is lower than the Winning Bid Rate for shares of such series shall be accepted; (iv) each Existing Holders' Submitted Bid for shares of such series specifying a rate that is equal to the Winning Bid Rate for shares of such series shall be rejected, thus entitling such Existing Holder to continue to hold the share of Municipal Preferred subject to such Submitted Bid, unless the number of Outstanding shares of Municipal Preferred subject to all such Submitted Bids shall be greater than the number of shares of Municipal Preferred ("remaining shares") in the excess of the Available Municipal Preferred of such series over the number of shares of Municipal Preferred subject to Submitted Bids described in clauses (ii) and (iii) of this paragraph (a), in which event such Submitted Bid of such Existing Holder shall be rejected in part, and such Existing Holder shall be entitled to continue to hold shares of Municipal Preferred subject to such Submitted Bid, but only in an amount equal to the number of shares of Municipal Preferred of such series obtained by multiplying the number of remaining shares by a fraction, the numerator of which shall be the number of Outstanding shares of Municipal Preferred held by such Existing Holder subject to such Submitted Bid and the denominator of B-103 150 which shall be the aggregate number of Outstanding shares of Municipal Preferred subject to such Submitted Bids may be all such Existing Holders that specified a rate equal to the Winning Bid Rate for shares of such series; and (v) each Potential Holder's Submitted Bid for shares of such series specifying a rate that is equal to the Winning Bid Rate of shares of such series shall be accepted but only in an amount equal to the number of shares of such series obtained by multiplying the number of shares in the excess of the Available Municipal Preferred of such series over the number of shares of Municipal Preferred subject to Submitted Bids described in clauses (ii) through (iv) of this paragraph (a) by a fraction, the numerator of which shall be the number of Outstanding shares Municipal Preferred subject to such Submitted Bids made by all such Potential Holders that specified a rate equal to the Winning Bid Rate for shares of such series. (b) If Sufficient Clearing Bids for shares of a series of Municipal Preferred have not been made (other than because all of the Outstanding shares of such series are subject to Submitted Hold Orders), subject to the provisions of paragraph (d) of this Section 4, Submitted Orders for shares of such series shall be accepted or rejected as follows in the following orders of priority and all other Submitted Bids for shares of such series shall be rejected: (i) Existing Holder's Submitted Bids for shares of such series specifying any rate that is equal to or lower than the Maximum Rate for shares of such series shall be rejected, thus entitling such Existing Holders to continue to hold the shares of Municipal Preferred subject to such Submitted Bids; (ii) Potential Holders' Submitted Bids for shares of such series specifying any rate that is equal to or lower than the Maximum Rate for shares of such series shall be accepted; and (iii) Each Existing Holder's Submitted Bid for shares of such series specifying any rate that is higher than the Maximum Rate for shares of such series and the Submitted Sell Orders for shares of such series of each Existing Holder shall be accepted, thus entitling each Existing Holder that submitted or on whose behalf was submitted any such Submitted Bid or Submitted Sell Order to sell the shares of such series subject to such Submitted Bid or Submitted Sell Order, but in both cases only in an amount equal to the number of shares of such series obtained by multiplying the number of shares of such series subject to Submitted Bids described in clause (ii) of this paragraph (b) by a fraction, the B-104 151 numerator of which shall be the number of Outstanding shares of such series held by such Existing Holder subject to such Submitted Bid or Submitted Sell Order and the denominator of which shall be the aggregate number of Outstanding shares of such series subject to all such Submitted Bids and Submitted Sell Orders. (c) If all of the Outstanding shares of a series of Municipal Preferred are subject to Submitted Hold Orders, all Submitted Bids for shares of such series shall be rejected. (d) If, as a result of the procedures described in clause (iv) or (v) of paragraph (a) or clauses (iii) of paragraph (b) of this Section 4, any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of a series of Municipal Preferred on any Auction Date, the Auction Agent shall, in such manner as it shall determine in its sole discretion, round up or down the number of shares of Municipal Preferred of such series to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date as a result of such procedures so that the number of shares so purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be whole shares of Municipal Preferred. (e) If, as a result of the procedures described in clause (v) of paragraph (a) of this Section 4, any Potential Holder would be entitled or required to purchase less than a whole share of series of Municipal Preferred on any Auction Date, the Auction Agent shall, in such manner as it shall determine in its sole discretion, allocate shares of Municipal Preferred of such series for purchase among Potential Holders so that only whole shares of Municipal Preferred of such series are purchased on such Auction Date as a result of such procedures by any Potential Holder, even if such allocation results in one or more Potential Holders not purchasing shares of Municipal Preferred of such series on such Auction Date. (f) Based on the results of each Auction for shares of a series of Municipal Preferred, the Auction Agent shall determine the aggregate of shares of such series to be purchased and the aggregate number of shares of such series to be sold by Potential Holders and Existing Holders and, with respect to each Potential Holder and Existing Holder, to the extent that such aggregate number of shares to be purchased and such aggregate number of shares to be sold differ, determine to which other Potential Holder(s) or Existing Holder(s) they shall deliver, or from which other Potential Holder(s) or Existing Holder(s) they shall receive, as the case may be, shares of Municipal Preferred of such series. Notwithstanding any provision of the Auction procedures or the Settlement Procedures to the contrary, in the event an Existing Holder or Beneficial Owner of shares of a series of Municipal Preferred with respect to whom a Broker- B-105 152 Dealer submitted a Bid to the Auction Agent for such shares that was accepted in whole or in part, or submitted or is deemed to have submitted a Sell Order for such shares that was accepted in whole or in part, fails to instruct its Agent Member to deliver such shares against payment therefor, partial deliveries of shares of Municipal Preferred that have been made in respect of Potential Holders' or Potential Beneficial Owners' Submitted Bids for shares of such series that have been accepted in whole or in part shall constitute good delivery to such Potential Holders and Potential Beneficial Owners. (g) Neither the Trust nor the Auction Agent nor any affiliate of either shall have any responsibility or liability with respect to the failure of an Existing Holder, a Potential Holder, a Benefit Owner, a Potential Beneficial Owner or its respective Agent Member to deliver shares of Municipal Preferred of any series or to pay for shares of Municipal Preferred of any series sold or purchased pursuant to the Auction Procedures or otherwise. 5. NOTIFICATION OF ALLOCATIONS. Whenever the Trust intends to include any net capital gain or other income taxable for Federal income tax purposes in any dividend on shares of Municipal Preferred, the Trust shall, in the case of a Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer, and may, in the case of any other Special Rate Period, notify the Auction Agent of the amount to be so included not later than the Dividend Payment Date next preceding the Auction Date on which the Applicable Rate for such dividend is to be established. Whenever the Auction Agent receives such notice from the Trust, it will be required in turn to notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance with its Broker-Dealer Agreement, will be required to notify its Beneficial Owners and Potential Beneficial Owners of shares of Municipal Preferred believed by it to be interested in submitting an Order in the Auction to be held on such Auction Date. 6. AUCTION AGENT. For so long as any shares of Municipal Preferred are outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be in each case a commercial bank, trust company or other financial institution independent of the Trust and its affiliates (which however, may engage or have engaged in business transactions with the Trust or its affiliates) and at no time shall the Trust or any of its affiliates act as the Auction Agent in connection with the Auction Procedures. If the Auction Agent resigns or for any reason its appointment is terminated during any period that any shares of Municipal Preferred are outstanding, the Board of Trustees shall use its best efforts promptly thereafter to appoint another qualified commercial bank, trust company or financial institution to act as the Auction Agent. The Auction Agent's registry of Existing Holders of shares of a series of Municipal Preferred shall be conclusive and binding on the Broker-Dealers. A Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on the Business Day preceding an Auction for shares of a series of Municipal Preferred and 9:30 a.m. on the Auction Date for such Auction to ascertain B-106 153 the number of shares of a series in respect of which the Auction Agent has determined such Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is the Existing Holder of fewer shares of such series than specified by the Auction Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer may so inform the Auction Agent of that believe. Such Broker-Dealer shall not, in its capacity as Existing Holder of shares of such series, submit Orders in such Auction in respect of shares of such series covering in the aggregate more than the number of shares of such series specified by the Auction Agent in response to such Broker-Dealer's inquiry. 7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED. Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose of shares of Municipal Preferred only in whole shares and only pursuant to a Bid or Sell Order placed with the Auction Agent in accordance with the procedures described in this Part II or to a Broker-Dealer; provided, however, that (a) a sale, transfer or other disposition of shares of Municipal Preferred from a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer as the holder of such shares to that Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to be a sale, transfer or other disposition for purposes of this Section 7 if such Broker-Dealer remains the Existing Holder of the shares so sold, transferred or disposed of immediately after such sale, transfer or disposition and (b) in the case of all transfers other than pursuant to Auctions, the Broker-Dealer (or other Person, if permitted by the Trust) to whom such transfer is made shall advice the Auction Agent of such transfer. 8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period, (i) all of the shares of a series of Municipal Preferred outstanding from time to time shall be represented by one global certificate registered in the name of the Securities Depository or its nominee and (ii) books of the Trust to any Person other than the Securities Depository or its nominee. B-107 154 APPENDIX C SETTLEMENT PROCEDURES Capitalized terms used herein have the respective meanings specified in the forepart of the Prospectus or the Glossary included in the Prospectus, as the case may be. (a) On each Auction Date for shares of Municipal Preferred, the Auction Agent shall notify by telephone the Broker-Dealers that participated in the Auction held on such Auction Date and submitted an Order to the Auction Agent as or on behalf of an Existing Holder or Potential Holder of: (i) the Applicable Rate fixed for the next Rate Period; (ii) whether Sufficient Clearing Bids existed for the determination of the Applicable Rate; (iii) if such Broker-Dealer submitted a Bid or a Sell Order to the Auction Agent as or on behalf of an Existing Holder, whether such Bid or Sell Order was accepted or rejected, in whole or in part, and the number of shares, if any, of Municipal Preferred then outstanding to be sold by such Existing Holder; (iv) if such Broker-Dealer submitted a Bid to the Auction Agent as or on behalf of a Potential Holder, whether such Bid was accepted or rejected, in whole or in part, and the number of shares, if any, of Municipal Preferred to be purchased by such Potential Holder; (v) if the aggregate number of shares of Municipal Preferred to be sold by all Existing Holders with respect to whom such Broker-Dealer submitted Bids or Sell Orders to the Auction Agent is different than the aggregate number of shares of Municipal Preferred to be purchased by all Potential Holders with respect to whom such Broker-Dealer submitted Bids to the Auction Agent, the name or names of one or more other Broker-Dealers (and the Agent Member, if any, of each such other Broker-Dealer) and the number of shares of Municipal Preferred to be (x) purchased from one or more Existing Holders with respect to whom such other Broker-Dealers submitted Bids or Sell Orders to the Auction Agent, or (y) sold to one or more Potential Holders with respect to whom such other Broker-Dealers submitted Bids to the Auction Agent; and (vi) the scheduled Auction Date of the next succeeding Auction for shares of Municipal Preferred. (b) On each Auction Date for shares of Municipal Preferred, each Broker-Dealer that submitted an Order to the Auction Agent as or on behalf of any Existing Holder or Potential Holder shall: (i) advise each Existing Holder and Potential Holder (and each Beneficial Owner and Potential Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid or Sell Order to the Auction Agent whether such Bid or Sell Order was accepted or rejected, in whole or in part; (ii) instruct each Potential Holder (and each Potential Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid to the Auction Agent that was accepted, in whole or in part, to instruct such Bidder's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the number of shares of Municipal Preferred to be purchased pursuant to such Bid against receipt of such shares; (iii) instruct each Existing Holder (and each Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid to the Auction Agent that was accepted, in whole or in part, or a Sell Order that was accepted, in whole or in part, to instruct such Bidder's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the number of shares of Municipal Preferred to be sold pursuant to such Bid or Sell Order against payment therefor; B-108 155 (iv) advise each Existing Holder (and each Beneficial Owner) with respect to whom such Broker-Dealer submitted an Order to the Auction Agent and each Potential Holder (and each Potential Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid to the Auction Agent of the Applicable Rate for the next succeeding Rate Period; (v) advise each Existing Holder (and each Beneficial Owner) with respect to whom such Broker-Dealer submitted an Order to the Auction Agent of the Auction Date of the next succeeding Auction; and (vi) advise each Potential Holder (and each Potential Beneficial Owner) with respect to whom such Broker-Dealer submitted a Bid to the Auction Agent that was accepted, in whole or in part, of the Auction Date of the next succeeding Auction for Municipal Preferred. (c) On the basis of the information provided to it pursuant to paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order to the Auction Agent for any shares of Municipal Preferred shall allocate any funds received by it (or its Agent Member) in respect of such shares pursuant to paragraph (b)(ii) above and any shares of Municipal Preferred received by it (or its Agent Member) pursuant to paragraph (b)(iii) above among the Potential Holders and Potential Beneficial Owners, if any, with respect to whom such Broker-Dealer submitted Bids to the Auction Agent for such shares, the Existing Holders and Beneficial Owners, if any, with respect to whom such Broker-Dealer submitted Bids or Sell Orders to the Auction Agent for such shares, and any Broker-Dealers identified to it by the Auction Agent pursuant to paragraph (a)(v) above. (d) On the Business Day after the Auction Date, the Securities Depository shall execute the transactions described above, debiting and crediting the accounts of the respective Agent Members as necessary to effect the purchases and sales of shares of Municipal Preferred as determined in the Auction for shares of Municipal Preferred. B-109 156 PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits (1) Financial Statements: Included in Part A Financial Highlights Included in Part B Included in Part B are the financial statements contained in the Registrant's Annual Report dated November 30, 1998 (which were previously filed electronically pursuant to Section 30(b)(2) of the Investment Company Act of 1940 - Accession Number: 0000950156-99-000076): The Financial Statements contained in Part B are as follows: Investment portfolio, November 30, 1998 Statement of assets and liabilities, November 30, 1998; Statement of operations, November 30, 1998 Statement of changes in net assets, Years ended November 30, 1997 & 1998; Notes to Financial Statements; Financial Highlights; Report of Independent Accountants (2) Exhibits (a)(1) Agreement and Declaration of Trust (a)(2) Amendment No. 1 to Agreement and Declaration of Trust (b)(1) By-Laws, as amended (b)(2) Amended and Restated By-Laws(1) (c) Not applicable (d)(1) To be filed under amendment (d)(2) Form of specimen for the municipal auction rate cumulative preferred shares(1) (e) Dividend Reinvestment and Cash Purchase Plan (f) Not applicable (g) Management Agreement with Colonial Management Associates, Inc. (h) Form of Underwriting Agreement with Salomon Smith Barney, Inc. (1) (i) Not applicable (j)(1) Global Custody Agreement with The Chase Manhattan Bank (incorporated herein by reference to Item 24. Exhibit No. 8 to Post-Effective Amendment No. 13 to the Registration Statement of Colonial Trust VI, Registration Nos. 33-45117 & 811-6529, filed with the Commission on or about October 24, 1997) (j)(2) Amendment No. 3 to Schedule A of Global Custody Agreement with The Chase Manhattan Bank (incorporated herein by reference to Exhibit (g) (2) to the Registration Statement of Colonial Trust I, Registration Nos. 2-41251 and 811-2214 filed with the Commission on March 18, 1999) (k)(1) Form of Auction Agreement (1) (k)(2) Form of Broker-Dealer Agreement (1) (k)(3) Agreement for Stock Transfer Services between the Registrant and The First National Bank of Boston (1) (k)(4) Service Contract with Colonial Management Associates, Inc. (1) (k)(5) Amendment to Service Contract with Colonial 157 Management Associates, Inc. (1) (1) Opinion and consent of Ropes & Gray, counsel to Registrant (1) (m) Not applicable (n)(1) Consent of independent accountants (1) (n)(2) Consent of Standard & Poor's Ratings Group (1) (n)(3) Consent of Moody's Investors Service, Inc. (1) (o) Not applicable (p) Not applicable (q) Not applicable (r) Financial Data Schedule - ---------------------------------- A copy of the Power of Attorney for each of Robert J. Birnbaum, Tom Bleasdale, John V. Carberry, Lora S. Collins, James E. Grinnell, Richard W. Lowry, Salvatore Macera, William E. Mayer, James L. Moody, Jr., John J. Neuhauser, Robert L. Sullivan and Anne-Lee Verville is incorporated herein by reference to Post-Effective Amendment No. 50 to the Registration Statement of Colonial Trust IV, Registration Nos. 2-62492 and 811-2865, filed with the Commission on or about November 6, 1998. (1) To be filed by Amendment. Item 25. Marketing Arrangements. See Sections ________________ of Exhibit (h) of Item 24(2) of this Registration Statement. Item 26. Other Expenses of Issuance and Distribution. The following table sets forth the expenses to be incurred in connection with the Offer described in this Registration Statement: Registration fees (2) Printing (2) Accounting fees and expenses (2) Legal fees and expenses (2) Underwriters expense reimbursement (2) Auction Agent fees and expenses (2) Rating Agency fees and expenses (2) Miscellaneous (2) -------- Total(2) $ ======== (2) To be filed by Amendment. Item 27. Persons Controlled by or under Common Control with Registrant. None. Item 28. Number of Holders of Securities Number of Record Holders Title of Class as of April 26, 1999 -------------- ------------------------ Shares of Beneficial Interest Municipal Auction Rate Cumulative 3,541 Preferred Shares -0- Item 29. Indemnification. The Agreement and Declaration of Trust, as amended, 158 filed as Exhibit(a)(1) and (a)(2) to this Registration Statement provides for indemnification of each of the Registrant's Trustees and officers against all liabilities and expenses incurred in acting as Trustee or officer, except in the case of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Trustees and officers. The Underwriting Agreement to be filed as Exhibit (h) by amendment to this Registration Statement is expected to provide for indemnification by the Registrant and Colonial Management Associates, Inc. (the "Advisor") of Salomon Smith Barney, Inc. (the "Underwriter") and its controlling persons and by the Underwriter of the Registrant, the Advisor and their respective Trustees, directors, officers and controlling persons against certain liabilities, including liabilities under the Securities Act of 1933, as amended, under certain circumstances. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question 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, Colonial Management Associates, Inc. and their respective trustees, directors and officers are insured by a directors and officers/errors and omissions liability policy. Item 30. Business and Other Connections of Investment Adviser. The description of the business of Colonial Management Associates, Inc., the Registrant's Investment Advisor, is set forth under the caption "The Advisor" in the Prospectus forming part of this Registration Statement. The following sets forth business and other connections of each director and officer of Colonial Management Associates, Inc. Registrant's investment adviser/administrator, Colonial Management Associates, Inc. ("Colonial"), is registered as an investment adviser under the Investment Advisers Act of 1940 (1940 Act). Colonial Advisory Services, Inc. (CASI), an affiliate of Colonial, is also registered as an investment 159 adviser under the 1940 Act. As of the end of the fiscal year, December 31, 1998, CASI had four institutional, corporate or other account under management or supervision, the market value of which was approximately $227 million. As of the end of the fiscal year, December 31, 1998, Colonial was the investment adviser, sub-adviser and/or administrator to 57 mutual funds, including funds sub-advised by Colonial, the market value of which investment companies was approximately $18,950.90 million. Liberty Funds Distributor, Inc., a subsidiary of Colonial Management Associates, Inc., is the principal underwriter and the national distributor of all of the funds in the Liberty Mutual Funds complex, including the Registrant. The following sets forth the business and other connections of each director and officer of Colonial Management Associates, Inc.:
(1) (2) (3) (4) Name and principal business addresses* Affiliation of officers and with Period is through 2/26/99. Other directors of investment business, profession, vocation or investment adviser adviser employment connection Affiliation - ------------------ ---------- -------------------------------- ----------- > Allard, Laurie V.P. Archer, Joseph A. V.P. Ballou, William J. V.P., Colonial Trusts I through VII Asst. Sec. Asst. Colonial High Income Sec., Municipal Trust Asst. Sec. Counsel Colonial InterMarket Income Trust I Asst. Sec. Colonial Intermediate High Income Fund Asst. Sec. Colonial Investment Grade Municipal Trust Asst. Sec. Colonial Municipal Income Trust Asst. Sec. LFC Utilities Trust Asst. Sec. AlphaTrade Inc. Asst. Clerk Liberty Funds Distributor, Inc. Asst. Clerk Liberty Financial Advisers, Inc. Asst. Sec. Liberty Funds Group LLC Asst. Sec. Liberty Variable Investment Trust Asst. Sec. Liberty All-Star Equity Fund Asst. Sec. Liberty All-Star Growth Fund, Inc. Asst. Sec. LAMCO Trust I Asst. Sec. Barron, Suzan M. V.P., Colonial Trusts I through VII Asst. Sec.
160
Asst. Colonial High Income Sec., Municipal Trust Asst. Sec. Counsel Colonial InterMarket Income Trust I Asst. Sec. Colonial Intermediate High Income Fund Asst. Sec. Colonial Investment Grade Municipal Trust Asst. Sec. Colonial Municipal Income Trust Asst. Sec. LFC Utilities Trust Asst. Sec. AlphaTrade Inc. Asst. Clerk Liberty Funds Distributor, Inc. Asst. Clerk Liberty Financial Advisers, Inc. Asst. Sec. Liberty Funds Group LLC Asst. Sec. Liberty Variable Investment Trust Asst. Sec. Liberty All-Star Equity Fund Asst. Sec. Liberty All-Star Growth Fund, Inc. Asst. Sec. LAMCO Trust I Asst. Sec. Berliant, Allan V.P. Boatman, Bonny E. Sr.V.P.; Colonial Advisory Services, Inc. Exec. V.P. IPC Mbr. Bunten, Walter V.P. Campbell, Kimberly V.P. Carnabucci, Dominick V.P. Carome, Kevin Sr.V.P.; Liberty Funds Distributor, IPC Mbr. Inc. Assistant Clerk Liberty Funds Group LLC Sr. V.P. Stein Roe & Farnham Incorporated General Counsel Carroll, Sheila A. Sr.V.P. Citrone, Frank V.P. Conlin, Nancy L. Sr. V.P.; Colonial Trusts I through VII Secretary Sec.; Clerk Colonial High Income IPC Mbr.; Municipal Trust Secretary Dir; Gen. Colonial InterMarket Income Counsel Trust I Secretary Colonial Intermediate High Income Fund Secretary
161
Colonial Investment Grade Municipal Trust Secretary Colonial Municipal Income Trust Secretary LFC Utilities Trust Secretary Liberty Funds Distributor, Inc. Dir.; Clerk Liberty Funds Services, Inc. Clerk; Dir. Liberty Funds Group LLC V.P.; Gen. Counsel and Secretary Liberty Variable Investment Trust Secretary Colonial Advisory Services, Inc. Dir.; Clerk AlphaTrade Inc. Dir.; Clerk Liberty Financial Advisors, Inc. Dir.; Sec. Liberty All-Star Equity Fund Secretary Liberty All-Star Growth Fund, Inc. Secretary LAMCO Trust I Secretary Connaughton, V.P. Colonial Trust I through VII CAO; Controller J. Kevin LFC Utilities Trust CAO; Controller Colonial High Income Municipal Trust CAO; Controller Colonial Intermarket Income Trust I CAO; Controller Colonial Intermediate High Income Fund CAO; Controller Colonial Investment Grade Municipal Trust CAO; Controller Colonial Municipal Income Trust CAO; Controller Liberty Variable Investment Trust CAO; Controller Liberty All-Star Equity Fund Controller Liberty All-Star Growth Fund, Inc. Controller LAMCO Trust I Controller Daniszewski, V.P. Joseph J. Desilets, Marian H. V.P. Liberty Funds Distributor, Inc. V.P. Colonial Trust I through VII Asst. Sec. LFC Utilities Trust Asst. Sec.
162
Colonial High Income Municipal Trust Asst. Sec. Colonial Intermarket Income Trust I Asst. Sec. Colonial Intermediate High Income Fund Asst. Sec. Colonial Investment Grade Municipal Trust Asst. Sec. Colonial Municipal Income Trust Asst. Sec. Liberty Variable Investment Trust Asst. Sec. Liberty All-Star Equity Fund Asst. Sec. Liberty All-Star Growth Fund, Inc. Asst. Sec. LAMCO Trust I Asst. Sec. DiSilva-Begley, V.P. Colonial Advisory Services, Compliance Linda IPC Mbr. Inc. Officer Eckelman, Marilyn Sr.V.P. Ericson, Carl C. Sr.V.P. Colonial Intermediate High IPC Mbr. Income Fund V.P. Colonial Advisory Services, Pres.; CEO Inc. and CIO Evans, C. Frazier Sr.V.P. Liberty Funds Distributor, Inc. Mng. Director Feloney, Joseph L. V.P. Colonial Advisory Services, Asst. Tres. Inc. Asst. Treas. Liberty Funds Group LLC Asst. Treas. Finnemore, V.P. Colonial Advisory Services, Leslie W. Inc. Sr. V.P. Franklin, Fred J. Sr. V.P. AlphaTrade Inc. President IPC Mbr. Liberty Financial Companies, Chief Inc. Compliance Ofcr Gibson, Stephen E. Dir.; Pres.; Liberty Funds Group LLC Dir.; CEO; Pres.; CEO; Chairman of Exec. Cmte. the Board; Mbr.; Chm. IPC Mbr. Liberty Funds Distributor, Inc. Dir.; Chm. Colonial Advisory Services, Inc. Dir.; Chm. Liberty Funds Services, Inc. Dir.; Chm. AlphaTrade Inc. Dir. Colonial Trusts I through VII President
163
Colonial High Income Municipal Trust President Colonial InterMarket Income Trust I President Colonial Intermediate High Income Fund President Colonial Investment Grade Municipal Trust President Colonial Municipal Income Trust President LFC Utilities Trust President Liberty Financial Advisors, Inc. Director Stein Roe & Farnham Incorporated Asst. Chairman Liberty Variable Investment Trust President Hanson, Loren Sr. V.P.; IPC Mbr. Harasimowicz, V.P. Stephen Harris, David V.P. Stein Roe Global Capital Mngmt Principal Hartford, Brian V.P. Haynie, James P. V.P. Colonial Advisory Services, Inc. Sr. V.P. Hernon, Mary V.P. Hill, William V.P. Colonial Advisory Services, V.P. Inc. Iudice, Jr. V.P.; Liberty Funds Group LLC Controller, Philip J. Controller CAO, Asst. Asst. Treas. Treasurer Liberty Funds Distributor, CFO, Inc. Treasurer Colonial Advisory Services, Controller; Inc. Asst. Treas. AlphaTrade Inc. CFO, Treas. Liberty Financial Advisors, Inc. Asst. Treas. Jacoby, Timothy J. Sr. V.P.; Liberty Funds Group LLC V.P., Treasr., CFO; CFO Treasurer Colonial Trusts I through VII Treasr.,CFO Colonial High Income Municipal Trust Treasr.,CFO Colonial InterMarket Income Trust I Treasr.,CFO
164
Colonial Intermediate High Income Fund Treasr.,CFO Colonial Investment Grade Municipal Trust Treasr.,CFO Colonial Municipal Income Trust Treasr.,CFO LFC Utilities Trust Treasr.,CFO Colonial Advisory Services, Inc. CFO, Treasr. Liberty Financial Advisors, Inc. Treasurer Stein Roe & Farnham Incorporated Snr. V.P. Liberty Variable Investment Trust Treasurer, CFO Liberty All-Star Equity Fund Treasurer Liberty All-Star Growth Fund, Inc. Treasurer LAMCO Trust I Treasurer Johnson, Gordon V.P. Knudsen, Gail E. V.P. Colonial Trusts I through VII Asst. Treas. Colonial High Income Municipal Trust Asst. Treas. Colonial InterMarket Income Trust I Asst. Treas. Colonial Intermediate High Income Fund Asst. Treas. Colonial Investment Grade Municipal Trust Asst. Treas. Colonial Municipal Income Trust Asst. Treas. LFC Utilities Trust Asst. Treas. Liberty Variable Investment Trust Asst. Treas. Liberty All-Star Equity Fund Asst. Treas. Liberty All-Star Growth Fund, Inc. Asst. Treas. LAMCO Trust I Asst. Treas. Lapointe, Thomas V.P. Lasher, Bennett V.P. Lennon, John E. V.P. Colonial Advisory Services, Inc. V.P. Lenzi, Sharon V.P. Lessard, Kristen V.P. Loring, William C., Jr. V.P.
165
MacKinnon, Donald S. Sr.V.P. Marcus, Harold V.P. Muldoon, Robert V.P. Newman, Maureen V.P. O'Brien, David V.P. Ostrander, Laura V.P. Colonial Advisory Services, Inc. V.P. Palombo, Joseph R. Dir. Colonial Advisory Services, Exe.V.P.; Inc. Dir. IPC Mbr.; Colonial High Income Municipal Trust V.P. Colonial InterMarket Income Trust I V.P. Colonial Intermediate High Income Fund V.P. Colonial Investment Grade Municipal Trust V.P. Colonial Municipal Income Trust V.P. Colonial Trusts I through VII V.P. LFC Utilities Trust V.P. Liberty Funds Services, Inc. Director Liberty Funds Group LLC CIO; Ex. V.P. Liberty Funds Distributor, Inc. Director AlphaTrade Inc. Director Liberty Financial Advisors, Inc. Director Stein Roe & Farnham Incorporated Exec. V.P. Liberty Variable Investment Trust V.P. Liberty All-Star Equity Fund V.P. Liberty All-Star Growth Fund, Inc. V.P. LAMCO Trust I V.P. Peterson, Ann T. V.P. Colonial Advisory Services, Inc. V.P. Rao, Gita V.P. Reading, John V.P.; Liberty Funds Services, Inc. Asst. Clerk Asst. Liberty Funds Group LLC Asst. Sec. Sec.; Colonial Advisory Services, Asst. Inc. Asst. Clerk Clerk and Liberty Funds Distributor, Counsel Inc. Asst. Clerk AlphaTrade Inc. Asst. Clerk Colonial Trusts I through VII Asst. Sec. Colonial High Income Municipal Trust Asst. Sec. Colonial InterMarket Income Trust I Asst. Sec.
166
Colonial Intermediate High Income Fund Asst. Sec. Colonial Investment Grade Municipal Trust Asst. Sec. Colonial Municipal Income Trust Asst. Sec. LFC Utilities Trust Asst. Sec. Liberty Financial Advisors, Inc. Asst. Sec. Liberty Variable Investment Trust Asst. Sec. Liberty All-Star Equity Fund Asst. Sec. Liberty All-Star Growth Fund, Inc. Asst. Sec. LAMCO Trust I Asst. Sec. Rega, Michael V.P. Colonial Advisory Services, Inc. V.P. Schermerhorn, Scott Sr. V.P. Seibel, Sandra L. V.P. Colonial Advisory Services, Inc. V.P. Spanos, Gregory J. Sr. V.P. Colonial Advisory Services, Inc. Exec. V.P. Stevens, Richard V.P. Colonial Advisory Services, Inc. V.P. Stoeckle, Mark V.P. Colonial Advisory Services, Inc. V.P. Swayze, Gary V.P. Thomas, Ronald V.P. Wallace, John V.P. Colonial Advisory Services, Asst.Tres. Inc. Asst. Treas. Liberty Funds Group LLC Asst. Treas. Ware, Elizabeth M. V.P.
- ------------------------------------------------ *The principal address of all of the officers and directors of the investment adviser is One Financial Center, Boston, MA 02111. Item 31. Location of Accounts and Records: Registrant: Colonial Municipal Income Trust One Financial Center Boston, Massachusetts 02111-2621 Investment Adviser: Colonial Management Associates, Inc. One Financial Center Boston, Massachusetts 02111-2621 Custodian: The Chase Manhattan Bank 167 270 Park Avenue New York, New York 10017-2070 Transfer Agent: Boston Equiserve 150 Royall Street Canton, Massachusetts 02021 Item 32. Management Services. Not applicable. Item 33. Undertakings. The undersigned Registrant hereby undertakes: (1) To suspend the offering of its preferred shares until it amends its prospectus contained herein if (i) subsequent to the effective date of this Registration Statement, its net asset value per share of beneficial interest declines more than 10 percent from its net asset value per share of beneficial interest as of the effective date of this Registration Statement, or (ii) its net asset value per share of beneficial interest increases to an amount greater than its net proceeds as stated in the prospectus contained herein. (2) Not applicable. (3) Not applicable. (4) Not applicable. (5)(a) That, for the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as a part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be a part of this Registration Statement as of the time it was declared effective; and (b) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering thereof. (6) To send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, the Statement of Additional Information. 168 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement on Form N-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on the 28th day of April, 1999. COLONIAL MUNICIPAL INCOME TRUST By: /s/ STEPHEN E. GIBSON ----------------------- Stephen E. Gibson President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement on Form N-2 has been signed below by the following persons in their capacities as officers and Trustees of the Registrant. SIGNATURES TITLE DATE - ---------- ----- ---- /s/ STEPHEN E. GIBSON President (chief April 28, 1999 - --------------------- executive officer) Stephen E. Gibson /s/ J. KEVIN CONNAUGHTON Controller and Chief April 28, 1999 - ------------------------ Accounting Officer J. Kevin Connaughton /s/ TIMOTHY J. JACOBY Treasurer and Chief April 28, 1999 - --------------------- Financial Officer Timothy J. Jacoby /s/ ROBERT J. BIRNBAUM* - ----------------------- Trustee Robert J. Birnbaum /s/ TOM BLEASDALE* - ------------------ Trustee Tom Bleasdale /s/ JOHN V. CARBERRY* - --------------------- Trustee John V. Carberry /s/ LORA S. COLLINS* - -------------------- Trustee Lora S. Collins 169 /s/ JAMES E. GRINNELL* - ---------------------- Trustee James E. Grinnell /s/ RICHARD W. LOWRY* - --------------------- Trustee */s/ WILLIAM J. BALLOU Richard W. Lowry By William J. Ballou Attorney-in-fact For each Trustee /s/ SALVATORE MACERA* April 28, 1999 - --------------------- Trustee Salvatore Macera /s/ WILLIAM E. MAYER* - --------------------- Trustee William E. Mayer /s/ JAMES L. MOODY, JR.* - ----------------------- Trustee James L. Moody, Jr. /s/ JOHN J. NEUHAUSER* - ---------------------- Trustee John J. Neuhauser /s/ THOMAS E. STITZEL* - ---------------------- Trustee Thomas E. Stitzel /s/ ROBERT L. SULLIVAN* - ----------------------- Trustee Robert L. Sullivan /s/ ANNE-LEE VERVILLE* - ---------------------- Trustee Anne-Lee Verville EXHIBIT INDEX (a)(1) Agreement and Declaration of Trust (a)(2) Amendment No. 1 to the Agreement and Declaration of Trust (b) By-Laws, as amended (e) Dividend Reinvestment Plan (g) Management Agreement with Colonial Management Associates, Inc. (r) Financial Data Schedule EX-99.2(A)(1) 2 AGREEMENT AND DECLARATION TRUST 1 EXHIBIT (a)(1) COLONIAL MUNICIPAL INCOME TRUST AGREEMENT AND DECLARATION OF TRUST January 22, 1987 COLONIAL MUNICIPAL INCOME TRUST AGREEMENT AND DECLARATION OF TRUST AGREEMENT AND DECLARATION OF TRUST made at Boston, Massachusetts, this 22nd day of January, 1987, by the Trustees hereunder, and by the holders of shares of beneficial interest to be issued hereunder as hereinafter provided. WITNESSETH that WHEREAS, this Trust has been formed to carry on the business of an investment company; and WHEREAS, the Trustees have agreed to manage all property coming into their hands as trustees of a Massachusetts business trust in accordance with the provisions hereinafter set forth. NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities and other assets, which they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the pro rata benefit of the holders from time to time of Shares in this Trust as hereinafter set forth. ARTICLE I NAME AND DEFINITIONS Name Section 1. This Trust shall be known as "Colonial Municipal Income Trust" and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine. Definitions Section 2. Whenever used herein, unless otherwise required by the context or specifically provided: (a) The "Trust" refers to the Massachusetts business trust established by this Agreement and Declaration of Trust, as amended from time to time; 2 (b) "Trustees" refers to the Trustees of the Trust named herein or elected in accordance with Article IV; (c) "Shares" mean the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time; (d) "Shareholder" means a record owner of Shares; (e) The "1940 Act" refers to the Investment Company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time; (f) The terms "Affiliated Person", "Assignment", "Commission", "Interested Person", "Principal Underwriter" and "Majority Shareholder Vote" (the 67% or 50% requirement of the third sentence of Section 2(a) (42) of the 1940 Act, whichever may be applicable) shall have the meanings given them in the 1940 Act; (g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust as amended or restated from time to time; and (h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time. ARTICLE II PURPOSE The purpose of the Trust is to provide investors a managed investment primarily in securities, commodities and debt instruments. ARTICLE III SHARES Division of Beneficial Interest Section 1. The beneficial interest in the Trust shall at all times be divided into Shares of a single series, without par value, each of which shall represent an equal proportionate interest in the Trust with each other Share, none having priority or preference over another. The number of Shares authorized shall be unlimited, and the Shares so authorized may be represented in part by fractional shares. The Trustees may from time to time divide or combine the Shares into a greater or lesser number without thereby changing the proportionate beneficial interests in the Trust. Ownership of Shares Section 2. The ownership of Shares shall be recorded on the books of the Trust or its transfer or similar agent. No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the issuance of Share certificates, the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent of the Trust, as the case may be, shall be conclusive as to who are the Shareholders and as to the number of Shares held from time to time by each Shareholder. 3 Investments in the Trust Section 3. The Trustees shall accept investments in the Trust from such persons and on such terms and, subject to any requirements of law, for such consideration, which may consist of cash or tangible or intangible property or a combination thereof, as they from time to time authorize. No Preemptive Rights Section 4. Shareholders shall have no preemptive or other right to receive, purchase or subscribe for any additional Shares or other securities issued by the Trust. Status of Shares and Limitation of Personal Liability Section 5. Shares shall be deemed to be personal property giving only the rights provided in this instrument. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof and to have become a party hereto. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the same nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but only to the rights of said decedent under this Trust. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders partners. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust, shall have any power to bind personally any Shareholder, nor except as specifically provided herein to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay. ARTICLE IV THE TRUSTEES Number of Trustees and Term of Office Section 1. The number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than three (3) nor more than fifteen (15). No reduction in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term unless the Trustee is specifically removed pursuant to 4 Section 2 of this Article at the time of the decrease. The Board of Trustees shall be divided into three classes. Within the limits above specified, the number of Trustees in each class shall be determined by resolution of the Board of Trustees. The initial Trustees, each of whom shall serve until the first meeting of Shareholders at which Trustees are elected and until his or her successor is elected and qualified, or until he or she sooner dies, resigns or is removed, shall be John A. McNeice, Jr. and such other persons as the Trustee or Trustees then in office shall, prior to any sale of Shares pursuant to a public offering, appoint. The term of office of all of the initial Trustees shall expire on the date of the first annual meeting of shareholders or special meeting in lieu thereof, which annual or special meeting shall be called to be held not more than one year after Shares are first sold pursuant to a public offering. The term of office of the first class shall expire on the date of the second annual meeting of shareholders or any special meeting in lieu thereof. The term of office of the second class shall expire on the date of the third annual meeting of shareholders or any special meeting in lieu thereof. The term of office of the third class shall expire on the date of the fourth annual meeting of shareholders or any special meeting in lieu thereof. Upon expiration of the term of office of each class as set forth above, the number of Trustees in such class, as determined by the Board of Trustees, shall be elected for a term expiring on the date of the third annual meeting of shareholders or any special meeting in lieu thereof following such expiration to succeed the Trustees whose terms of office expire. The Trustees shall be elected at an annual meeting of the shareholders or a special meeting in lieu thereof, except as provided in Section 2 of this Article. Vacancies; Removal Section 2. Any vacancies occurring in the Board of Trustees may be filled by the Trustees if, immediately after filling any such vacancy, at least two-thirds of the Trustees then holding office shall have been elected to such office by the Shareholders. In the event that at any time less than a majority of the Trustees then holding office were elected to such office by the Shareholders, the Trustees shall call a meeting of Shareholders for the purpose of electing Trustees. At any meeting called for such purpose, a Trustee may be removed, with or without cause, by vote of a majority of the outstanding shares. By vote of a majority of the Trustees then in office, the Trustees may remove a Trustee with or without cause. Effect of Death, Resignation, etc. of a Trustee Section 3. The death, declination, resignation, retirement, removal, or incapacity of the Trustees, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. 5 Powers Section 4. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Trustees, and they shall have all powers necessary or convenient to carry out that responsibility. Without limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration of Trust providing for the conduct of the business of the Trust and may amend and repeal them to the extent that such By-Laws do not reserve that right to the Shareholders; they may fill vacancies in their number, including vacancies resulting from increases in their number, and may elect and remove such officers and appoint and terminate such agents as they consider appropriate; they may appoint from their own number, and terminate, any one or more committees consisting of two or more Trustees, including an executive committee which may, when the Trustees are not in session, exercise some or all of the power and authority of the Trustees as the Trustees may determine; they may appoint an advisory board, the members of which shall not be Trustees and need not be Shareholders; they may employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities, retain a transfer agent or a Shareholder services agent, or both, provide for the distribution of Shares by the Trust, through one or more principal underwriters or otherwise, set record dates for the determination of Shareholders with resect to various matters, and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian or underwriter. Without limiting the foregoing, the Trustees shall have power and authority: (a) To invest and reinvest cash, and to hold cash uninvested; (b) To sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all of the assets of the Trust; (c) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; 6 (d) To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities; (e) To hold any security or property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in the name of the Trustees or of the Trust or in the name of a custodian, subcustodian or other depository or a nominee or nominees or otherwise; (f) To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer, any security of which is or was held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer, and to pay calls or subscriptions with respect to any security held in the Trust; (g) To join with other security holders in acting through a committee, depositary, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depositary or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depositary or trustee as the Trustees shall deem proper; (h) To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust on any matter in controversy, including but not limited to claims for taxes; (i) To enter into joint ventures, general or limited partnerships and any other combinations or associations; (j) To borrow funds; (k) To endorse or guarantee the payment of any notes or other obligations of any person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; and to mortgage and pledge the Trust property or any part thereof to secure any of or all of such obligations; (1) To purchase and pay for entirely out of Trust property such insurance as they may deem necessary or appropriate for the conduct of the business, including, without limitation, insurance policies insuring the assets of the Trust and payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, investment advisers or managers, principal underwriters, or independent contractors of the Trust individually against all claims and liabilities of every nature arising by reason of holding, being or 7 having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such person as Shareholder, Trustee, officer, employee, agent, investment adviser or manager, principal underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such person against such liability; and (m) To pay pensions for faithful service, as deemed appropriate by the Trustees, and to adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust. The Trustees shall not in any way be bound or limited by any present or future law or custom in regard to investments by Trustees. Except as otherwise provided herein or from time to time in the By-Laws, any action to be taken by the Trustees may be taken by a majority of the Trustees present at a meeting of the Trustees (a quorum being present), within or without Massachusetts, including any meeting held by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting, or by written consents of a majority of the Trustees then in office. Payment of Expenses by Trust Section 5. The Trustees are authorized to pay or to cause to be paid out of the principal or income of the Trust, or partly out of principal and partly out of income, as they deem fair, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, investment adviser or manager, principal underwriter, auditor, counsel, custodian, transfer agent, Shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur. Ownership of Assets of the Trust Section 6. Title to all of the assets of the Trust shall at all times be considered as vested in the Trustees. 8 Advisory, Management and Distribution Section 7. Subject to a favorable Majority Shareholder Vote, the Trustees may, at any time and from time to time, contract for exclusive or nonexclusive advisory and/or management services with Colonial Management Associates, Inc., a Massachusetts corporation, or any other corporation, trust, association or other organization (the "Adviser"), every such contract to comply with such requirements and restrictions as may be set forth in the By-Laws; and any such contract may contain such other terms interpretive of or in addition to said requirements and restrictions as the Trustees may determine, including, without limitation, authority to determine from time to time what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held uninvested and to make changes in the Trust's investments. The Trustees may also, at any time and from time to time, contract with the Adviser or any other corporation, trust, association or other organization, appointing it exclusive or nonexclusive distributor or principal underwriter for the Shares, every such contract to comply with such requirements and restrictions as may be set forth in the By-Laws; and any such contract may contain such other terms interpretive of or in addition to said requirements and restrictions as the Trustees may determine. The fact that: (i) any of the Shareholders, Trustees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, adviser, principal underwriter, or distributor or agent of or for any corporation, trust, association, or other organization, or of or for any parent or affiliate of any organization, with which an advisory or management contract, or principal underwriter's or distributor's contract, or transfer, shareholder services or other agency contract may have been or may hereafter be made, or that any organization, or any parent or affiliate thereof, is a Shareholder or has an interest in the Trust, or that (ii) any corporation, trust, association or other organization with which an advisory or management contract or principal underwriter's or distributor's contract, or transfer, Shareholder services or other agency contract may have been or may hereafter be made also has an advisory or management contractor principal underwriter's or distributor's contract, or transfer, shareholder services or other agency contract with one or more other corporations, trusts, associations, or other organizations, or has other business or interests shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same or create any liability or accountability to the Trust or its Shareholders. 9 ARTICLE V SHAREHOLDERS' VOTING POWERS AND MEETINGS Voting Powers Section 1. The Shareholders shall have power to vote only (i) for the election or removal of Trustees as provided in Article IV, Section 1, (ii) with respect to any Adviser as provided in Article IV, Section 7, (iii) with respect to any termination of this Trust to the extent and as provided in Article IX, Section 4, (iv) with respect to any amendment of this Declaration of Trust to the extent and as provided in Article IX, Section 7, (v) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, (vi) with respect to such additional matters relating to the Trust as may be required by law, this Declaration of Trust, the By-Laws or any registration of the Trust with the Securities and Exchange Commission (or any successor agency) or any state, or as the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Declaration of Trust or the By-Laws to be taken by Shareholders. Voting Power and Meetings Section 2. There shall be an annual meeting of the Shareholders on the date fixed in the By-Laws at the office of the Trust in Boston, Massachusetts, or at such other place as may be designated in the call thereof, which call shall be made by the Trustees. In the event that such meeting is not held in any year on the date fixed in the By-Laws, whether the omission be by oversight or otherwise, a subsequent special meeting in may be called by the Trustees and held in lieu of the annual meeting with the same effect as though held on such date. Special meetings may also be called by the Trustees from time to time for 10 the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided or upon any other matter deemed by the Trustees to be necessary or desirable. Written notice of any meeting of Shareholders shall be given or caused to be given by the Trustees by mailing such notice at least seven days before such meeting, postage prepaid, stating the time, place and purpose of the meeting, to each Shareholder at the Shareholder's address as it appears on the records of the Trust. If the Trustees shall fail to call or give notice of any meeting of Shareholders for a period of 30 days after written application by Shareholders holding at least 10% of the Shares then outstanding requesting a meeting to be called for a purpose requiring action by the Shareholders as provided herein or in the By-Laws, then Shareholders holding at least 10% of the Shares then outstanding may call and give notice of such meeting, and thereupon the meeting shall be held in the manner provided for herein in case of call thereof by the Trustees. Quorum and Required Vote Section 3. Thirty per cent (30%) of the Shares entitled to vote shall be a quorum for the transaction of business at a Shareholders' meeting. Any lesser number, however, shall be sufficient for adjournments. Any adjourned session or sessions may be held within a reasonable time after the date set for the original meeting without the necessity of further notice. Except when a larger vote is required by any provision of this Declaration of Trust or the By-Laws, a majority of the Shares voted shall decide any questions and a plurality shall elect a Trustee. Conversion Section 4. Notwithstanding any other provision of this Declaration of Trust, the conversion of the Trust from a "closed-end company" to an "open-end company," as those terms are defined in Sections 5(a)(2) and 5(a)(1), respectively, of the 1940 Act as in effect on January 1, 1987, shall require the affirmative vote or consent of the holders of at least 66 2/3% of the Shares entitled to vote. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the Shares otherwise required by law or by any agreement between the Trust and any national securities exchange. Action by Written Consent Section 5. Any action taken by Shareholders may be taken without a meeting if a majority of Shareholders entitled to vote on the matter (or such larger proportion thereof as shall be required by any express provision of this Declaration of Trust or the By-Laws) consent to the action in writing and such written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. 11 Additional Provisions Section 6. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters. ARTICLE VI DISTRIBUTIONS AND DETERMINATION OF NET ASSET VALUE Distributions Section 1. The Trustees may, but need not, each year distribute to the Shareholders such income and gains, accrued or realized, as the Trustees may determine, after providing for actual and accrued expenses and liabilities (including such reserves as the Trustees may establish) determined in accordance with good accounting practices. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital and their determination shall be binding upon the Shareholders. Distributions of each year's income, if any be made, may be made in one or more payments, which shall be in Shares, in cash or otherwise and on a date or dates and as of a record date or dates determined by the Trustees. At any time and from time to time in their discretion, the Trustees may distribute to the Shareholders as of a record, date or dates determined by the Trustees, in Shares, in cash or otherwise, all or part of any gains realized on the sale or disposition of property or otherwise, or all or part of any other principal of the Trust. Each distribution pursuant to this Section 1 shall be made ratably according to the number of Shares held by the several Shareholders on the applicable record date thereof, provided that no distribution need be made on Shares purchased pursuant to orders received, or for which payment is made, after such time or times as the Trustees may determine. Any such distribution paid in Shares will be paid at the net asset value thereof as determined in accordance with Section 2 of this Article VII, or at such other value as may be specified by the By-Laws or as the Trustees may from time to time determine, subject to applicable laws and regulations then in effect. Determination of Net Asset Value Section 2. The term "net asset value" of the Shares shall mean: (i) the value of all the assets of the Trust; (ii) less total liabilities of the Trust; (iii) divided by the number of Shares outstanding, in each case at the time of each determination. Any fractions involved in the computation of net asset value per share shall be adjusted to the nearer cent unless the Trustees shall determine to adjust such fractions to a fraction of a cent. 12 The Trustees, or any officer or officers or agent of this Trust designated for the purpose by the Trustees, shall determine the net asset value of the Shares, and the Trustees shall fix the times as of which the net asset value of the Shares shall be determined and shall fix the periods during which any such net asset value shall be effective as to sales and other transactions in the Shares, except as such times and periods for any such transaction may be fixed by other provisions of this Declaration of Trust or by the By-Laws. In valuing the portfolio investments for determination of net asset value per share, securities for which market quotations are readily available shall be valued at prices which, in the opinion of the Trustees, or any officer or officers or agent of the Trust designated for the purpose by the Trustees, most nearly represent the market value of such securities, which may, but need not, be the most recent bid price obtained from one or more of the market makers for such securities; other securities and assets shall be valued at fair value as determined by or pursuant to the direction of the Trustees. Notwithstanding the foregoing short-term debt obligations, commercial paper, and repurchase agreements may be, but need not be, valued on the basis of quoted yields for securities of comparable maturity, quality and type, or on the basis of amortized cost. In determination of net asset value, dividends receivable and accounts receivable for investments sold and for Shares sold shall be stated at the amounts to be received therefor; and income receivable accrued daily on bonds and notes owned shall be stated at the amount to be received. Any other assets shall be stated at fair value as determined by the Trustees or such officer, officers or agent pursuant to the Trustees' authority, except that no value shall be assigned to good will, furniture, lists, reports, statistics or other noncurrent assets other than real estate. Liabilities for accounts payable for investments purchased shall be stated at the amounts payable therefor. In determining net asset value of the Trust, the person or persons making such determination on behalf of the Trust may include in liabilities such reserves, estimated accrued expenses and contingencies as such person or persons may in its, his or their best judgment deem fair and reasonable under the circumstances. Any income dividends and gains distributions payable by the Trust shall be deducted as of such time or times on the record date therefor as the Trustees shall determine. The manner of determining the net assets of the Trust or of determining the net asset value of the Shares may from time to time be altered as necessary or desirable in the judgment of the Trustees to conform to any other method prescribed or permitted by any applicable law or regulation. 13 Determinations under this Section 2 made in good faith and in accordance with the provisions of the 1940 Act shall be binding on all parties concerned. ARTICLE VII COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES Compensation Section 1. The Trustees as such shall be entitled to reasonable compensation from the Trust; they may fix the amount of their compensation. Nothing herein shall in any way prevent the employment of any Trustee for advisory, management, legal, accounting, investment banking or other services and payment for the same by the Trust. Limitation of Liability Section 2. The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, adviser or principal underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, but nothing herein contained shall protect any Trustee against any liability to which he or she would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Every note, bond, contract, instrument, certificate, Share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon. ARTICLE VIII INDEMNIFICATION Trustees, Officers, etc. Section 1. The Trust shall indemnify each of its Trustees and officers (including persons who serve at the Trust's request as directors, officers or trustees of another organization in which the Trust has any interest as a shareholder, creditor or otherwise) (hereinafter referred to as a "Covered Person") against all liabilities and expenses, including but not limited to amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by any Covered Person in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, before any court or administrative or legislative body, in which such Covered Person may be or may have been involved as a party or otherwise or with which such person may be or may 14 have been threatened, while in office or thereafter, by reason of being or having been such a Trustee or officer, except with respect to any matter as to which such Covered Person shall have been finally adjudicated in a decision on the merits in any such action, suit or other proceeding not to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust and except that no Covered Person shall be indemnified against any liability to the Trust or its Shareholders to which such Covered Person would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office. Expenses, including counsel fees so incurred by any such Covered Person (but excluding amounts paid in satisfaction of judgments, in compromise or as fines or penalties), may be paid from time to time by the Trust in advance of the final disposition of any such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Covered Person to repay amounts so paid to the Trust if it is ultimately determined that indemnification of such expenses is not authorized under this Article, provided that (a) such Covered Person shall provide security for his undertaking, (b) the Trust shall be insured against losses arising by reason of such Covered Person's failure to fulfill his undertaking, or (c) a majority of the Trustees who are disinterested persons and who are not Interested Persons (provided that a majority of such Trustees then in office act on the matter), or independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (but not a full trial-type inquiry), that there is reason to believe such Covered Person ultimately will be entitled to indemnification. Compromise Payment Section 2. As to any matter disposed of (whether by a compromise payment, pursuant to a consent decree or otherwise) without an adjudication in a decision on the merits by a court, or by any other body before which the proceeding was brought, that such Covered Person either (a) did not act in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust or (b) is liable to the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office, indemnification shall be provided if (a) approved as in the best interest of the Trust, after notice that it involves such indemnification, by at least a majority of the Trustees who are disinterested persons and are not Interested Persons (provided that a majority of such Trustees then in office 15 act on the matter), upon a determination, based upon a review of readily available facts (but not a full trial-type inquiry) that such Covered Person acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust and is not liable to the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office, or (b) there has been obtained an opinion in writing of independent legal counsel, based upon a review of readily available facts (but not a full-trial type inquiry) to the effect that such Covered Person appears to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust and that such indemnification would not protect such Covered Person against any liability to the Trust to which such Covered Person would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Any approval pursuant to this Section shall not prevent the recovery from any Covered Person of any amount paid to such Covered Person in accordance with this Section as indemnification if such Covered Person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust or to have been liable to the Trust or its Shareholders by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office. Indemnification Not Exclusive Section 3. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any such Covered Person may be entitled. As used in this Article VIII, the term "Covered Person" shall include such person's heirs, executors and administrators, and a "disinterested person" is a person against whom none of the actions, suits or other proceedings in question or another action, suit, or other proceeding on the same or similar grounds is then or has been pending. Nothing contained in this article shall affect any rights to indemnification to which personnel of the Trust, other than Trustees and officers, and other persons may be entitled by contract or otherwise under law, nor the power of the Trust to purchase and maintain liability insurance on behalf of such person. Shareholders Section 4. In case any Shareholder or former Shareholder shall be held to be personally liable solely by reason of his or her being or having been a 16 Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or in the case of a corporation or other entity, its corporate or other general successor) shall be entitled to be held harmless from and indemnified against all loss and expense arising from such liability. ARTICLE IX MISCELLANEOUS Trustees, Shareholders, etc. Not Personally Liable: Notice Section 1. All persons extending credit to, contracting with or having any claim against the Trust shall look only to the assets of the Trust for payment under such credit, contract or claim; and neither the Shareholders nor the Trustees, nor any of the Trust's officers, employees or agents, whether past, present or future, shall be personally liable therefor. Nothing in this Declaration of Trust shall protect any Trustee against any liability to which such Trustee would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee. Every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers or officer shall give notice that this Declaration of Trust is on file with the Secretary of State of The Commonwealth of Massachusetts and shall recite that the same was executed or made by or on behalf of the Trust or by them as Trustees or Trustee or as officers or officer and not individually and that the obligations of such instrument are not binding upon any of them or the Shareholders individually but are binding only upon the assets and property of the Trust, and may contain such further recital as he or she or they may deem appropriate, but the omission thereof shall not operate to bind any Trustees or officers or officer or Shareholders or Shareholder individually. Trustee's Good Faith Action, Expert Advice, No Bond or Surety Section 2. The exercise by the Trustees of their powers and discretions hereunder shall be binding upon everyone interested. A Trustee shall be liable for his or her own wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and shall be under no liability for any act or omission in accordance with such advice or for 17 failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required. Liability of Third Persons Dealing with Trustees Section 3. No person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order. Duration and Termination of Trust Section 4. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be terminated at any time by vote of Shareholders holding at least 66 2/3% of the Shares entitled to vote or by the Trustees by written notice to the Shareholders. Upon termination of the Trust, after paying or otherwise providing for all charges, taxes, expenses and liabilities, whether due or accrued or anticipated as may be determined by the Trustees, the Trust shall in accordance with such procedures as the Trustees consider appropriate reduce the remaining assets to distributable form in cash or shares or other securities, or any combination thereof, and distribute the proceeds to the Shareholders, ratably according to the number of Shares held by the several Shareholders on the date of termination. Filing of Copies, References, Headings Section 5. The original or a copy of this instrument and of each amendment hereto shall be kept at the office of the Trust where it may be inspected by any Shareholder. A copy of this instrument and of each amendment hereto shall be filed by the Trust with the Secretary of The Commonwealth of Massachusetts and with the Clerk of the City of Boston, as well as any other governmental office where such filing may from time to time be required. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to whether or not any such amendments have been made and as to any matters in connection with the Trust hereunder; and, with the same effect as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this instrument or of any such amendments. In this instrument and in any such amendment, references to this instrument, and all expressions like "herein", "hereof", and "hereunder",. shall be deemed to refer to this instrument as amended or affected by any such amendments. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. This instrument may be executed in any number of counterparts, each of which shall be deemed an original. 18 Applicable Law Section 6. This Declaration of Trust is made in The Commonwealth of Massachusetts, and it is created under and is to be governed by and construed and administered according to the laws of said Commonwealth. The Trust shall be of the type commonly called a Massachusetts business trust, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a trust. Amendments Section 7. (a) Except as provided in paragraph (b) of this Sec ion 7, this Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the then Trustees when authorized so to do by a vote of Shareholders holding a majority of the Shares entitled to vote. Amendments having the purpose of changing the name of the Trust or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision contained herein shall not require authorization by Shareholder vote. (b) No amendment may be made under this Section 7 which shall amend, alter, change or repeal any of the provisions of Article IV, Section 1, Article V, Section 4 or this paragraph (b) unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote or consent of at least 66 2/3% of the Shares entitled to vote. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of Shares otherwise required by law or by the terms of any agreement between the Trust and any national securities exchange. IN WITNESS WHEREOF, all of the Trustees as aforesaid do hereto set their hands this 22nd day of January, 1987. John A. McNeice, Jr. COMMONWEALTH OF MASSACHUSETTS ) ) COUNTY OF SUFFOLK )ss. Then personally appeared before me John A. McNeice, Jr., who acknowledged the foregoing instrument to be his free act and deed. Evelyn A. Mellan Notary Public My commission expires on: January 7, 1988 January 22, 1987 EX-99.2(A)(2) 3 AMENDMENT NO. 1 TO AGREEMENT AND DECLARATION 1 AMENDMENT NO. 1 to the AGREEMENT AND DECLARATION OF TRUST of COLONIAL MUNICIPAL INCOME TRUST WHEREAS, Article IX, Section 7 of the Agreement and Declaration of Trust (the "Declaration of Trust") of Colonial Municipal Income Trust (the "Trust") dated January 22, 1987 provides that the Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the then Trustees when authorized so to do by a vote of Shareholders holding a majority of the Shares entitled to vote, except that no amendment may be made under such Section 7 which shall amend, alter, change or repeal any of the provisions of Article IV, Section 1, Article V, Section IV or paragraph (b) of Article IX, Section 7 unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote or consent of at least 66 2/3% of the Shares entitled to vote; and WHEREAS, the holders of at least 66 2/3% of the Shares entitled to vote have authorized this amendment to the Declaration of Trust; NOW, THEREFORE, the undersigned, being a majority of the Trustees of the Trust, do hereby amend the Declaration of Trust as follows: Subsection (c) of Section 2 of Article I of the Declaration of Trust is amended to read in its entirety as follows: (c) "Shares" means the equal proportionate transferable units of interest into which the beneficial interest in the Trust shall be divided from time to time or, if more than one class or series of Shares is authorized by the Trustees, the equal proportionate transferable units into which each class or series of Shares shall be divided from time to time; Subsections (g) and (h) of Section 2 of Article I of the Declaration of Trust are amended to read in their entirety, and new subsections (i) and (j) are added immediately thereafter, as follows: (g) "Declaration of Trust" shall mean this Agreement and Declaration of Trust as amended or restated from time to time; (h) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time; 2 (i) The term "class" or "class of Shares" refers to the division of Shares into two or more classes as provided in Article III, Section 1 hereof; and (j) The term "series" or "series of Shares" refers to the division of Shares representing any class into two or more series as provided in Article III, Section 1 hereof. Sections 1 and 2 of Article III of the Declaration of Trust are amended to read in their entirety as follows: Division of Beneficial Interest Section 1. The Trustees may, without Shareholder approval, authorize one or more classes of Shares (which classes may be divided into two or more series), Shares of each such class or series having such preferences, voting powers, terms of redemption, if any, and special or relative rights or privileges (including conversion rights, if any) as the Trustees may determine and as shall be set forth in the By-Laws. The number of Shares of each class or series authorized shall be unlimited, except as the By-Laws may otherwise provide, and the Shares so authorized may be represented in part by fractional shares. The Trustees may from time to time divide or combine the Shares of any class or series into a greater or lesser number without thereby changing the proportionate beneficial interest in the class or series. Ownership of Shares Section 2. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent. No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the issuance of Share certificates, the transfer of Shares and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to who are the Shareholders of each class or series and as to the number of Shares of each class or series held from time to time by each Shareholder. Sections 1 and 2 of Article IV of the Declaration of Trust are amended to read in their entirety as follows: Number of Trustees and Term of Office Section 1. Subject to the voting powers of one or more classes or series of Shares set forth in the By-Laws, the number of Trustees shall be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees, provided, however, that the number of Trustees shall in no event be less than three (3). No reduction in the number of 3 Trustees shall have the effect of removing any Trustee from office prior to the expiration of his term unless the Trustee is specifically removed pursuant to Section 2 of this Article at the time of the decrease. The Board of Trustees shall be divided into three classes. The number of Trustees in each class shall be determined by resolution of the Board of Trustees. The initial Trustees, each of whom shall serve until the first meeting of Shareholders at which Trustees are elected and until his or her successor is elected and qualified, or until he or she sooner dies, resigns or is removed, shall be John A. McNeice, Jr. and such other persons as the Trustee or Trustees then in office shall, prior to any sale of Shares pursuant to a public offering, appoint. The term of office of all of the initial Trustees shall expire on the date of the first annual meeting of Shareholders or special meeting in lieu thereof, which annual or special meeting shall be called to be held not more than one year after Shares are first sold pursuant to a public offering. The term of office of the first class shall expire on the date of the second annual meeting of Shareholders or any special meeting in lieu thereof. The term of office of the second class shall expire on the date of the third annual meeting of Shareholders or any special meeting in lieu thereof. The term of office of the third class shall expire on the date of the fourth annual meeting of Shareholders or any special meeting in lieu thereof. Upon expiration of the term of office of each class as set forth above, the number of Trustees in such class, as determined by the Board of Trustees, shall be elected for a term expiring on the date of the third annual meeting of Shareholders or any special meeting in lieu thereof following such expiration to succeed the Trustees whose terms of office expire. The Trustees shall be elected at an annual meeting of the Shareholders or a special meeting in lieu thereof, except as provided in Section 2 of this Article. Vacancies; Removal Section 2. Subject to the voting powers of one or more classes or series of Shares as set forth in the By-Laws, any vacancies occurring in the Board of Trustees may be filled by the Trustees if, immediately after filling any such vacancy, at least two-thirds of the Trustees then holding office shall have been elected to such office by the Shareholders. In the event that at any time less than a majority of the Trustees then holding office were elected to such office by the Shareholders, the Trustees shall call a meeting of Shareholders for the purpose of electing Trustees. At any meeting called for such purpose and subject to the voting powers of one or more classes or series of Shares as set forth in the By-Laws, a Trustee may be removed, with or without cause, by vote of the holders of a majority of the outstanding 4 Shares of the classes or series entitled to vote for the election of such Trustee. By vote of a majority of the Trustees then in office, the Trustees may remove a Trustee with or without cause. The first paragraph of Section 4 of Article IV of the Declaration of Trust is amended to read in its entirety as follows: Powers Section 4. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Trustees, and they shall have all powers necessary or convenient to carry out that responsibility. Without limiting the foregoing, the Trustees may adopt By-Laws not inconsistent with this Declaration of Trust providing for the conduct of the business of the Trust and may amend and repeal them to the extent that such By-Laws do not reserve that right to the Shareholders of one or more classes or series. Subject to the voting power of one or more classes or series of Shares as set forth in the By-Laws, the Trustees may fill vacancies in or add to their number, and may elect and remove such officers and appoint and terminate such agents as they consider appropriate; they may appoint from their own number, and terminate, any one or more committees consisting of two or more Trustees, including an executive committee which may, when the Trustees are not in session, exercise some or all of the power and authority of the Trustees as the Trustees may determine; they may employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities, retain a transfer agent or a Shareholder services agent, or both, provide for the distribution of Shares by the Trust, through one or more principal underwriters or otherwise, set record dates for the determination of Shareholders with respect to various matters, and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian or underwriter. Sections 1, 2, 3 and 4 of Article V of the Declaration of Trust are amended to read in their entirety as follows: Voting Powers Section 1. Subject to the voting powers of one or more classes or series of Shares as set forth in the By-Laws, the Shareholders shall have power to vote only (i) for the election or removal of Trustees as provided in Article IV, Section 1, (ii) with respect to any Adviser as provided in Article IV, Section 7, (iii) with respect to any termination of this Trust to the 5 extent and as provided in Article IX, Section 4, (iv) with respect to any amendment of this Declaration of Trust to the extent and as provided in Article IX, Section 7, (v) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or the Shareholders, (vi) with respect to such additional matters relating to the Trust as may be required by law, this Declaration of Trust, the By-Laws or any registration of the Trust with the Securities and Exchange Commission (or any successor agency) or any state, or as the Trustees may consider necessary or desirable. Each whole Share shall be entitled to one vote as to any matter on which it is entitled to vote and each fractional Share shall be entitled to a proportionate fractional vote, except as otherwise provided in the By-Laws. Notwithstanding any other provision of this Declaration of Trust, on any matter submitted to a vote of Shareholders, all Shares of the Trust then entitled to vote shall, except as otherwise provided in the By-Laws or required by law, be voted in the aggregate as a single class without regard to classes or series of Shares. There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Until Shares of a particular class or series are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Declaration of Trust or the By-Laws to be taken by Shareholders as to such class or series. Voting Power and Meetings Section 2. There shall be an annual meeting of the Shareholders on the date fixed in the By-Laws at the office of the Trust in Boston, Massachusetts, or at such other place as may be designated in the call thereof, which call shall be made by the Trustees. In the event that such meeting is not held in any year on the date fixed in the By-Laws, whether the omission be by oversight or otherwise, a subsequent special meeting may be called by the Trustees and held in lieu of the annual meeting with the same effect as though held on such date. Special meetings of Shareholders of any or all classes or series may also be called by the Trustees from time to time for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders of such 6 class or series as herein provided or upon any other matter deemed by the Trustees to be necessary or desirable. Written notice of any meeting of Shareholders shall be given or caused to be given by the Trustees by mailing such notice at least seven days before such meeting, postage prepaid, stating the time, place and purpose of the meeting, to each Shareholder entitled to vote at such meeting at the Shareholder's address as it appears on the records of the Trust. If the Trustees shall fail to call or give notice of any meeting of Shareholders for a period of 30 days after written application by Shareholders holding at least 10% of the then outstanding Shares of all classes and series entitled to vote at such meeting requesting a meeting to be called for a purpose requiring action by the Shareholders as provided herein or in the By-Laws, then Shareholders holding at least 10% of the then outstanding Shares of all classes and series entitled to vote at such meeting may call and give notice of such meeting, and thereupon the meeting shall be held in the manner provided for herein in case of call thereof by the Trustees. Quorum and Required Vote Section 3. Thirty percent (30%) of the Shares entitled to vote on a particular matter shall be a quorum for the transaction of business on that matter at a Shareholders' meeting, except that where the By-Laws require that holders of any class or series shall vote as an individual class or series, then thirty percent (30%) of the aggregate number of Shares of that class or series entitled to vote shall be necessary to constitute a quorum for the transaction of business by that class or series. Any lesser number shall be sufficient for adjournments. Any adjourned session or sessions may be held, within a reasonable time after the date set for the original meeting, without the necessity of further notice. Except when a larger vote is required by any provision of this Declaration of Trust or the By-Laws, a majority of the Shares voted shall decide any questions and a plurality shall elect a Trustee, provided that where the By-Laws require that the holders of any class or series shall vote as an individual class or series a majority of the Shares of that class or series voted on the matter (or a plurality with respect to the election of a Trustee) shall decide that matter insofar as that class or series is concerned. Conversion Section 4. Notwithstanding any other provision of this Declaration of Trust, the conversion of the Trust from a "closed-end company" to an "open-end company," as those terms are defined in Sections 5(a)(2) and 5(a)(1), respectively, of the 1940 Act as in effect on January 1, 1987, shall require the affirmative vote or consent of the holders of at least 66 2/3% of the 7 Shares of each class entitled to vote. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of the Shares otherwise required by law or by any agreement between the Trust and any national securities exchange. Section 1 of Article VI of the Declaration of Trust is amended to read in its entirety as follows: Distributions Section 1. The Trustees may, but need not, each year distribute to the Shareholders of any or all classes or series such income and gains, accrued or realized, as the Trustees may determine, after providing for actual and accrued expenses and liabilities (including such reserves as the Trustees may establish) determined in accordance with good accounting practices and subject to the preferences, special or relative rights and privileges of the various classes or series of Shares. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital and their determination shall be binding upon the Shareholders. Distributions of each year's income, if any be made, may be made in one or more payments, which shall be in Shares, in cash or otherwise and on a date or dates and as of a record date or dates determined by the Trustees. At any time and from time to time in their discretion, the Trustees may distribute to the Shareholders as of a record date or dates determined by the Trustees, in Shares, in cash or otherwise, all or part of any gains realized on the sale or disposition of property or otherwise, or all or part of any other principal of the Trust. Each distribution pursuant to this Section 1 to the Shareholders of a particular class or series shall be made ratably according to the number of Shares of such class or series on the applicable record date thereof, provided that no distribution need be made on Shares purchased pursuant to orders received, or for which payment is made, after such time or times as the Trustees may determine. Any such distribution paid in Shares will be paid at the net asset value thereof as determined in accordance with Section 2 of this Article VI, or at such other value as may be specified by the By-Laws or as the Trustees may from time to time determine, subject to applicable laws and regulations then in effect. The first paragraph of Section 2 of Article VI of the Declaration of Trust is amended to read in its entirety as follows: Determination of Net Asset Value Section 2. At such times as the Trust shall have outstanding only one class or series of Shares, the term "net asset value" of the Shares shall mean: 8 (i) the value of all the assets of the Trust; (ii) less total liabilities of the Trust; (iii) divided by the number of Shares outstanding, in each case at the time of each determination. Any fractions involved in the computation of net asset value per share shall be adjusted to the nearer cent unless the Trustees shall determine to adjust such fractions to a fraction of a cent. At such times as the Trust shall have outstanding more than one class or series of Shares, the term "net asset value" of the Shares shall have such meaning, with respect to the Shares of any particular class or series of Shares, as shall from time to time be specified in the By-Laws. Section 4 of Article IX of the Declaration of Trust is amended to read in its entirety as follows: Duration and Termination of Trust Section 4. Unless terminated as provided herein, the Trust shall continue without limitation of time. Subject to the voting powers of one or more classes or series of Shares as set forth in the By-Laws, the Trust may be terminated at any time by vote of Shareholders holding at least 66 2/3% of the Shares entitled to vote or by the Trustees by written notice to the Shareholders. Upon termination of the Trust, after paying or otherwise providing for all charges, taxes, expenses and liabilities, whether due or accrued or anticipated, of the Trust as may be determined by the Trustees, the Trust shall in accordance with such procedures as the Trustees consider appropriate reduce the remaining assets to distributable form in cash or shares or other property, or any combination thereof, and distribute the proceeds to the Shareholders, ratably according to the number of Shares held by the several Shareholders on the date of termination, except to the extent otherwise required or permitted by the preferences and special or relative rights and privileges of any classes or series of Shares. Section 7 of Article IX of the Declaration of Trust is amended to read in its entirety as follows: Amendments Section 7. (a) Except to the extent that the By-Laws or applicable law may require a higher vote or the separate vote of one or more classes or series of Shares, and except as provided in paragraph (b) of this Section 7, this Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the then Trustees (1) when authorized so to do by a vote of Shareholders holding a majority of the Shares entitled to vote or (2) without Shareholder approval as may be necessary or desirable in order to authorize one 9 or more classes or series of Shares as provided in Section 1 of Article III. Amendments having the purpose of changing the name of the Trust or of supplying any omission, curing any ambiguity or curing, correcting or supplementing any defective or inconsistent provision contained herein shall not require authorization by Shareholder vote. (b) Except to the extent that the By-Laws or applicable law may require a higher vote or the separate vote of one or more classes or series of Shares, no amendment may be made under this Section 7 which shall amend, alter, change or repeal any of the provisions of Article IV, Section 1, Article V, Section 4 or this paragraph (b) unless the amendment effecting such amendment, alteration, change or repeal shall receive the affirmative vote or consent of at least 66 2/3% of the Shares entitled to vote. Such affirmative vote or consent shall be in addition to the vote or consent of the holders of Shares otherwise required by law or by the terms of any agreement between the Trust and any national securities exchange. The foregoing amendment shall become effective as of the time this instrument is filed with the Secretary of State of The Commonwealth of Massachusetts. IN WITNESS WHEREOF, the undersigned have hereunder set their hands in Boston, Massachusetts, this 4th day of August, 1989. William D. Ireland, Jr. John J. Neuhauser John A. McNeice, Jr. Robert L. Sullivan James L. Moody, Jr. Commonwealth of Massachusetts) )ss. County of Suffolk ) Then personally appeared the above named Trustees and executed the attached Amendment No. 1 to the Agreement and Declaration of Trust of Colonial Municipal Income Trust, as their free act and deed, before me, this 4th day of August, 1989. Diane M. Joyce Notary Public My commission expires: March 2, 1995 10 EXHIBIT (b) Amended Sec. 4.3: 5/24/87 Sec. 3.1: 1/22/88 Amended Sec. 2.5 & Retyped: 10/12/90 Amended Sec. 8: 12/31/91 Amended Sec. 11: 10/9/92 Amended Section 3.1, paragraph 2: 2/16/96 BY-LAWS OF COLONIAL MUNICIPAL INCOME TRUST Section 1 Agreement and Declaration of Trust and Principal Office 1.1 Agreement and Declaration of Trust. These By-Laws shall be subject to the Agreement and Declaration of Trust, as from time to time in effect (the "Declaration of Trust"), of Colonial Municipal Income Trust, a Massachusetts business Trust established by the Declaration of Trust (the "Trust"). 1.2 Principal Office of the Trust. The principal office of the Trust shall be located in Boston, Massachusetts. Section 2 Shareholders 2.1 Shareholder Meetings. The annual meeting of the shareholders of the Trust shall be held between April 1 and April 30 in each year, beginning in 1988, on a date and at a time within that period set by the Trustees. A special meeting of the shareholders of the Trust may be called at any time by the Trustees, by the president or, if the Trustees and the president shall fail to call any meeting of shareholders for a period of 30 days after written application of one or more shareholders who hold at least 10% of all outstanding shares of the Trust, then such shareholders may call such meeting. Each call of a meeting shall state the place, date, hour and purposes of the meeting. 2.2 Place of Meetings. All meetings of the shareholders shall be held at the principal office of the Trust, or, to the extent permitted by the Declaration of Trust, at such other place within the United States as shall be designated by the Trustees or the president of the Trust. 2.3 Notice of Meetings. A written notice of each meeting of shareholders, stating the place, date and hour and the purposes of the meeting, shall be given at least seven days before the meeting to each shareholder entitled to vote thereat by leaving such notice with him or at his residence or usual place of business or by mailing it, postage prepaid, and addressed to 11 such shareholder at his address as it appears in the records of the Trust. Such notice shall be given by the secretary or an assistant secretary or by an officer designated by the Trustees. No notice of any meeting of shareholders need be given to a shareholder if a written waiver of notice, executed before or after the meeting by such shareholder or his attorney thereunto duly authorized, is filed with the records of the meeting. 2.4 Ballots. No ballot shall be required for any election unless requested by a shareholder present or represented at the meeting and entitled to vote in the election. 2.5 Proxies. Shareholders entitled to vote may vote either in person or by proxy in writing dated not more than six months before the meeting named therein, which proxies shall be filed with the secretary or other person responsible to record the proceedings of the meeting before being voted. Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. The placing of a shareholder's name on a proxy pursuant to telephonic or electronically transmitted instructions obtained pursuant to procedures reasonably designed to verify that such instruction have been authorized by such shareholder shall constitute execution of such proxy by or on behalf of such shareholder. Section 3 Trustees 3.1 Committees and Advisory Board. The Trustees may appoint from their number an executive committee and other committees. Except as the Trustees may otherwise determine, any such committee may make rules for conduct of its business. The Trustees may appoint an advisory board to consist of not less than two nor more than five members. The members of the advisory board shall be compensated in such manner as the Trustees may determine and shall confer with and advise the Trustees regarding the investments and other affairs of the Trust. Each member of the advisory board shall hold office until the first meeting of the Trustees following the next meeting of the shareholders and until his successor is elected and qualified, or until he sooner dies, resigns, is removed, or becomes disqualified, or until the advisory board is sooner abolished by the Trustees. In addition, the Trustees may appoint a Dividend Committee of not less than three persons, who may (but need not) be Trustees. No special compensation shall be payable to members of the Dividend Committee. Each member of the Dividend Committee will hold office until the successors are elected and qualified or until the member dies, resigns, is removed, becomes disqualified or until the Committee is abolished by the Trustees. 12 3.2 Regular Meetings. Regular meetings of the Trustees may be held without call or notice at such places and at such times as the Trustees may from time to time determine, provided that notice of the first regular meeting following any such determination shall be given to absent Trustees. 3.3 Special Meetings. Special meeting of the Trustees may be held at any time and at any place designated in the call of the meeting, when called by the president or the treasurer or by two or more Trustees, sufficient notice thereof being given to each Trustee by the secretary or an assistant secretary or by the officer or one of the Trustees calling the meeting. 3.4 Notice. It shall be sufficient notice to a Trustee to send notice by mail at least forty-eight hours or by telegram at least twenty-four hours before the meeting addressed to the Trustee at his or her usual or last known business or residence address or to give notice to him or her in person or by telephone at least twenty-four hours before the meeting. Notice of a meeting need not be given to any Trustee if a written waiver of notice, executed by him or her before or after the meeting, is filed with the records of the meeting, or to any Trustee who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him or her. Neither notice of a meeting nor a waiver of a notice need specify the purposes of the meeting. 3.5 Quorum. At any meeting of the Trustees one-third of the Trustees then in office shall constitute a quorum; provided, however, a quorum shall not be less than two. Any meeting may be adjourned from time to time by a majority of the votes cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. Section 4 Officers and Agents 4.1 Enumeration; Qualification. The officers of the Trust shall be a president, a treasurer, a secretary and such other officers, if any, as the Trustees from time to time may in their discretion elect or appoint. The Trust may also have such agents, if any, as the Trustees from time to time may in their discretion appoint. Any officer may be but none need be a Trustee or shareholder. Any two or more offices may be held by the same person. 4.2 Powers. Subject to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers herein and in the Declaration of Trust set forth, such duties and powers as are commonly incident to his or her office as if the Trust were organized as a Massachusetts business corporation and such other duties and powers as the Trustees may from time to time designate, including without limitation the power to make 13 purchases and sales of portfolio securities of the Trust pursuant to recommendations of the Trust's investment adviser in accordance with the policies and objectives of the Trust set forth in its prospectus and with such general or specific instructions as the Trustees may from time to time have issued. 4.3 Election. The president, the treasurer and the secretary shall be elected annually by the Trustees at their first meeting following the annual meeting of the shareholders. Other elected officers are elected by the Trustees. Assistant officers are appointed by the elected officers. 4.4 Tenure. The president, the treasurer and the secretary shall hold office until their respective successors are chosen and qualified, or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Each other officer shall hold office at the pleasure of the Trustees. Each agent shall retain his or her authority at the pleasure of the Trustees. 4.5 President and Vice Presidents. The president shall be the chief executive officer of the Trust. The president shall preside at all meetings of the shareholders and of the Trustees at which he or she is present, except as otherwise voted by the Trustees. Any vice president shall have such duties and powers as shall be designated from time to time by the Trustees. 4.6 Treasurer and Controller. The treasurer shall be the chief financial officer of the Trust and subject to any arrangement made by the Trustees with a bank or trust company or other organization as custodian or transfer or shareholder services agent, shall be in charge of its valuable papers and shall have such duties and powers as shall be designated from time to time by the Trustees or by the president. Any assistant treasurer shall have such duties and powers as shall be designated from time to time by the Trustees. The Controller shall be the chief accounting officer of the Trust and shall be in charge of its books of account and accounting records. The Controller shall be responsible for preparation of financial statements of the Trust and shall have such other duties and powers as may be designated from time to time by the Trustees or the President. 4.7 Secretary and Assistant Secretaries. The secretary shall record all proceedings of the shareholders and the Trustees in books to be kept therefor, which books shall be kept at the principal office of the Trust. In the absence of the secretary from any meeting of shareholders or Trustees, an assistant secretary, or if there be none or he or she is absent, a temporary clerk chosen at the meeting shall record the proceedings thereof in the aforesaid books. 14 Section 5 Resignations and Removals Any Trustee, officer or advisory board member may resign at any time by delivering his or her resignation in writing to the president, the treasurer or the secretary or to a meeting of the Trustees. The Trustees may remove any officer elected by them with or without cause by the vote of a majority of the Trustees then in office. Except to the extent expressly provided in a written agreement with the Trust, no Trustee, officer, or advisory board member resigning, and no officer or advisory board member removed shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages on account of such removal. Section 6 Vacancies A vacancy in any office may be filled at any time. Each successor shall hold office for the unexpired term, and in the case of the president, the treasurer and the secretary, until his or her successor is chosen and qualified, or in each case until he or she sooner dies, resigns, is removed or becomes disqualified. Section 7 Shares of Beneficial Interest 7.1 Share Certificates. Each shareholder shall be entitled to a certificate stating the number of shares owned by him or her, in such form as shall be prescribed from time to time by the Trustees. Such certificate shall be signed by the president or a vice president and by the treasurer or an assistant treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent or by a registrar, other than a Trustee, officer or employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Trust with the same effect as if he or she were such officer at the time of its issue. In lieu of issuing certificates for shares, the Trustees or the transfer agent may either issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such shares, who shall in either case be deemed, for all purposes hereunder, to be the holders of certificates for such shares as if they had accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. 7.2 Loss of Certificates. In the case of the alleged loss or destruction or the mutilation of a share certificate, a duplicate certificate may be issued in place thereof, upon such terms as the Trustees may prescribe. 15 7.3 Discontinuance of Issuance of Certificates. The Trustees may at any time discontinue the issuance of share certificates and may, by written notice to each shareholder, require the surrender of share certificates to the Trust for cancellation. Such surrender and cancellation shall not affect the ownership of shares in the Trust. Section 8 Record Date and Closing Transfer Books The Trustees may fix in advance a time, which shall not be more than 90 days before the date of any meeting of shareholders or the date for the payment of any dividend or making of any other distribution to shareholders, as the record date for determining the shareholders having the right to notice and to vote at such meeting and any adjournment thereof or the right to receive such dividend or distribution, and in such case only shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Trust after the record date; or without fixing such record date the Trustees may for any of such purposes close the transfer books for all or any part of such period. Section 9 Seal The seal of the Trust shall, subject to alteration by the Trustees, consist of a flat-faced circular die with the word "Massachusetts" together with the name of the Trust and the year of its organization, cut or engraved thereon; but, unless otherwise required by the Trustees, the seal shall not be necessary to be placed on, and its absence shall not impair the validity of, any document, instrument or other paper executed and delivered by or on behalf of the Trust. Section 10 Execution of Papers Except as the Trustees may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the Trust shall be signed, and all transfers of securities standing in the name of the Trust shall be executed, by the president or by one of the vice presidents or by the treasurer or by whomsoever else shall be designated for that purpose by the vote of the Trustees and need not bear the seal of the Trust. Section 11 Fiscal Year Except as from time to time otherwise provided by the Trustees, President, Secretary, Controller or Treasurer, the fiscal year of the Trust shall end on November 30. 16 Section 12 Amendments These By-Laws may be amended or repealed, in whole or in part, by a majority of the Trustees then in office at any meeting of the Trustees, or by one or more writings signed by such a majority. EX-99.2(E) 4 DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 1 EXHIBIT (e) DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 1. You, State Street Bank and Trust Company, will act as Agent for me, and will open an account for me under the Dividend Reinvestment and Cash Purchase Plan (the "Plan") in the same name as my present shares are registered, and put into effect for me the dividend reinvestment option of the Plan as of the first record date for a dividend or capital gain distribution (separately or collectively "distribution") and the cash purchase option of the Plan as of the next appropriate date as provided in paragraph 7 below after you receive the Authorization duly executed by me. 2. Whenever Colonial Municipal Income Trust (the "Trust") declares a distribution payable in shares of beneficial interest ("shares"), or cash at the option of the shareholder, I hereby elect to take such distribution entirely in shares, subject to the terms of the Plan. If on the valuation date the Trust's net asset value per share is less than the market price (including estimated brokerage commissions), you shall on the payable date automatically receive for my account from the Trust that number of newly-issued shares that the cash otherwise receivable by me would purchase if the purchase price per share equaled the higher of: (a) net asset value per share on the valuation date, and (b) 95% of market price (not including estimated brokerage commissions) on the payable date; except if the market price (not including estimated brokerage commissions) on the payable date is less than 95% of the net asset value per share on the valuation date, you shall receive a distribution of cash from the Trust and shall apply the amount of such distribution to the purchase in the open market of shares for my account, commencing on the first business day after the payable date, subject to the condition that such purchases must be made at a "discount" during the remainder of the "buying period". "Discount" is defined as a market price per share (including estimated brokerage commissions) which is lower than the most recently determined net asset value per share (as calculated from time to time). "Buying period" shall mean the period commencing the first business day after the valuation date and ending at the close of business on the business day preceding the "ex" date for the next distribution. The valuation date will be the last business day of the week preceding the week of the payable date. 2 3. Should the Trust's net asset value per share exceed the market price (including estimated brokerage commissions) on the valuation date for a distribution, you shall receive for my account a distribution in cash from the Trust and shall apply the amount of such distribution on my shares to the purchase in the open market of shares for my account commencing on the first business day after the valuation date, subject to the condition that such purchases must be made at a discount during the buying period. 4. In the event you are instructed to purchase shares in the open market, pursuant to paragraph 2 or 3 hereof, and you are unable for any reason to invest the full amount of the distribution in shares acquired in open-market purchases at a discount during the buying period, you will invest the uninvested portion of such distribution in newly-issued shares at the close of business at the end of such buying period at the higher of: (a) net asset value determined at such close, and (b) 95% of the market price (not including estimated brokerage commissions) at such close. 5. You may not acquire newly-issued shares after the valuation date unless you have received a legal opinion that registration of such shares is not required under the Securities Act of 1933, as amended, or unless the shares to be issued are registered under such Act. 6. For all purposes of the Plan: (a) the market price of the shares on a particular date shall be the last sales price on the New York Stock Exchange on that date, or if there is no sale on such Exchange on that date, then the mean between the closing bid and asked quotations for such shares on such Exchange on such date (in either case including or not including estimated brokerage commissions as provided above), and (b) net asset value per share of the shares on a particular date shall be as determined by or on behalf of the Trust. 7. I understand that semi-annually I have the option of sending additional funds, in any amount from $100 to $500, for the purchase on the open market of shares for my account. Voluntary payments will be invested on or 3 shortly after the 15th of February and August and in no event more than 45 days after such dates except where temporary curtailment or suspension of purchases is necessary to comply with applicable provisions of federal securities law. Funds received more than 30 business days before the investment date or less than 5 business days prior to the investment date, will be returned uninvested. I may withdraw my entire voluntary cash payment by written notice received by you not less than 48 hours before such payment is to be invested. 8. Investments of voluntary cash payments and other open-market purchases provided for above may be made on any securities exchange where the shares are traded, in the over-the-counter market or in negotiated transactions and may be on such terms as to price, delivery and otherwise as you shall determine. My funds held by you uninvested will not bear interest, and it is understood that, in any event, you shall have no liability in connection with any inability to purchase shares within 45 days after the initial date of such purchase as herein provided, or with the timing of any purchases effected. You shall have no responsibility as to the value of the shares acquired for my account. For the purposes of open-market purchases you may commingle my funds with those of other shareholders of the Trust for whom you similarly act as Agent, and the average price (including brokerage commissions) of all shares purchased by you as Agent shall be the price per share allocable to me in connection therewith. 9. You may hold my shares acquired pursuant to my Authorization, together with the shares of other shareholders of the Trust acquired pursuant to similar authorizations, in non-certificated form in your name or that of your nominee. You will forward to me any proxy solicitation material and will vote any shares so held for me only in accordance with the proxy returned by me to the Trust. Upon my written request, you will deliver to me, without charge, a certificate or certificates for the full shares. 10. You will confirm to me each acquisition made for my account as soon as practicable but not later than 60 days after the date thereof. Although I may from time to time have an undivided fractional interest (computed to three decimal places) in a share, no certificates for a fractional share will be issued. However, dividends and distributions on fractional shares will be credited to my account. In the event of termination of my account under the Plan, you will adjust for any such dividend fractional interest in cash at the market value of the shares at the time of termination less the pro rata expense of any sale required to make such an adjustment. 4 11. Any stock dividends or split shares distributed by the Trust on shares held by you for me will be credited to my account. In the event that the Trust makes available to its shareholders rights to purchase additional shares or other securities, the shares held for me under the Plan will be added to other shares held by me in calculating the number of rights to be issued to me. 12. Your service fee for handling distributions will be paid by the Trust. I will be charged a $0.75 service fee for each voluntary cash investment. 13. I may terminate my account under the Plan by notifying you in writing. Such termination will be effective immediately if my notice is received by you not less than ten days prior to any dividend or distribution record date; otherwise such termination will be effective shortly after the investment of such dividend distributions with respect to any subsequent dividend or distribution. The Plan may be terminated by you or the Trust upon notice in writing mailed to me at least 90 days prior to any record date for the payment of any dividend or distribution by the Trust. Upon any termination you will cause a certificate or certificates for the full shares held for me under the Plan and cash adjustment for any fraction to be delivered to me without charge. If I elect by notice to you in writing in advance of such termination to have you sell part or all of my shares and remit the proceeds to me, you are authorized to deduct a $2.50 fee plus brokerage commission for this transaction from the proceeds. 14. These terms and conditions may be amended or supplemented by you or the Trust at any time or times but, except when necessary or appropriate to comply with applicable law or the rules or policies of the Securities and Exchange Commission or any other regulatory authority, only by mailing to me appropriate written notice at least 30 days prior to the effective date thereof. The amendment or supplement shall be deemed to be accepted by me unless, prior to the effective date thereof, you receive written notice of the termination of my account under the Plan. Any such amendment may include an appointment by you in your place and stead of a successor Agent under these terms and conditions, with full power and authority to perform all or any of the acts to be performed by the Agent under these terms and conditions. Upon any such appointment of any Agent for the purpose of receiving dividends and distributions, the Trust will be authorized to pay to such successor Agent, for my account, all dividends and distributions payable on shares held in my name or under the Plan for retention or application by such successor Agent as provided in these terms and conditions. 5 15. You shall at all times act in good faith and agree to use your best efforts within reasonable limits to insure the accuracy of all services performed under this Agreement and to comply with applicable law, but assume no responsibility and shall not be liable for loss or damage due to errors unless such error is caused by your negligence, bad faith, or willful misconduct or that of your employees. 16. These terms and conditions shall be governed by the laws of the Commonwealth of Massachusetts. EX-99.2(G) 5 MANAGEMENT AGREEMENT WITH CMA 1 EXHIBIT (g) MANAGEMENT AGREEMENT AGREEMENT dated as of March 27, 1995, between COLONIAL MUNICIPAL INCOME TRUST, a Massachusetts business trust (Fund), and COLONIAL MANAGEMENT ASSOCIATES, INC., a Massachusetts corporation (Adviser). In consideration of the promises and covenants herein, the parties agree as follows: 1. The Adviser will manage the investment of the assets of the Fund in accordance with its investment policies and will perform the other services herein set forth, subject to the supervision of the Board of Trustees of the Fund. 2. In carrying out its investment management obligations, the Adviser shall: (a) evaluate such economic, statistical and financial information and undertake such investment research as it shall believe advisable; (b) purchase and sell securities and other investments for the Fund in accordance with the procedures approved by the Board of Trustees; and (c) report results to the Board of Trustees. 3. The Adviser shall furnish at its expense the following: (a) office space, supplies, facilities and equipment; (b) executive and other personnel for managing the affairs of the Fund (including preparing financial information of the Fund and reports and tax returns required to be filed with public authorities, but exclusive of those related to custodial, transfer, dividend and plan agency services, determination of net asset value and maintenance of records required by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules thereunder (1940 Act)); and 2 (c) compensation of Trustees who are directors, officers, partners or employees of the Adviser or its affiliated persons (other than a registered investment company). 4. The Adviser shall be free to render similar services to others so long as its services hereunder are not impaired thereby. 5. The Fund shall pay the Adviser monthly a fee at the annual rate of 0.65% of the average weekly net assets of the Fund. 6. If the operating expenses of the Fund for any fiscal year exceed the most restrictive applicable expense limitation for any state in which shares are sold, the Adviser's fee shall be reduced by the excess but not to less than zero. Operating expenses shall not include brokerage, interest, taxes, deferred organization expenses and extraordinary expenses, if any. The Adviser may waive its compensation (and, bear expenses of the Fund) to the extent that expenses of the Fund exceed any expense limitation the Adviser declares to be effective. 7. This Agreement shall become effective as of the date of its execution, and (a) unless otherwise terminated, shall continue until two years from its date of execution and from year to year thereafter so long as approved annually in accordance with the 1940 Act; (b) may be terminated without penalty on sixty days' written notice to the Adviser either by vote of the Board of Trustees of the Fund or by vote of a majority of the outstanding voting securities of the Fund; (c) shall automatically terminate in the event of its assignment; and (d) may be terminated without penalty by the Adviser on sixty days' written notice to the Fund. 8. This Agreement may be amended in accordance with the 1940 Act. 9. For the purpose of the Agreement, the terms "vote of a majority of the outstanding voting securities", "affiliated person" and "assignment" shall have their respective meanings defined in the 1940 Act and exemptions and interpretations issued by the Securities and Exchange Commission under the 1940 Act. 10. In the absence of willful misfeasance, bad faith or gross negligence on the part of the Adviser, or reckless disregard of its obligations and duties hereunder, the Adviser shall not be subject to any liability to the Fund, to any shareholder of the Fund or to any other person, firm or organization, for any act or omission in the course of, or connected with, rendering services hereunder. 3 COLONIAL MUNICIPAL INCOME TRUST By: Peter L. Lydecker Title: Controller COLONIAL MANAGEMENT ASSOCIATES, INC. By: Arthur O. Stern Title: Executive Vice President A copy of the document establishing the Fund is filed with the Secretary of The Commonwealth of Massachusetts. This Agreement is executed by officers not as individuals and is not binding upon any of the Trustees, officers or shareholders of the Fund individually but only upon the assets of the Fund. EX-27 6 FINANCIAL DATA SCHEDULE
6 0000809844 COLONIAL MUNICIPAL INCOME TRUST 1 CMITA 1,000 12-MOS NOV-30-1998 DEC-01-1997 NOV-30-1998 196,856 205,015 4,592 12 0 4,604 1,615 0 1,173 2,788 0 244,568 27,590 27,449 0 96 0 43,695 8,154 208,931 0 14,607 0 1,700 12,907 4,942 26 17,875 0 13,541 0 0 0 0 141 5,398 510 0 0 50,041 1,353 0 1,700 208,089 7.410 .469 .183 .492 0 0 7.570 .82 0 0
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