As filed with the Securities and Exchange Commission on August 20, 2001
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 2
[_] Post-Effective Amendment No. [___________]
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 7
PIMCO Municipal Income Fund
(Exact Name of Registrant as Specified in Declaration of Trust)
c/o PIMCO Advisory Services
1345 Avenue of the Americas
New York, New York 10105
(Address of Principal Executive Offices)
(Number, Street, City, State, Zip Code)
(212) 739-3502
(Registrant's Telephone Number, including Area Code)
Stephen J. Treadway
c/o PIMCO Funds Distributors LLC
2187 Atlantic Street
Stamford, Connecticut 06902
(Name and Address (Number, Street, City, State, Zip Code) of Agent for Service)
Copies of Communications to:
Joseph B. Kittredge, Jr., Esq. Thomas A. Hale, Esq.
Ropes & Gray Skadden, Arps, Slate, Meagher & Flom (Illinois)
One International Place 333 West Wacker Drive
Boston, Massachusetts 02110 Chicago, Illinois 60606
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Approximate Date of Proposed Public Offering:
If any of the securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box. [_]
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
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Proposed Maximum Proposed Maximum
Amount Being Offering Price Per Aggregate Amount of
Title of Securities Being Registered Registered Unit Offering Price/1/ Registration Fee/2/
------------------------------------ ------------ ------------------ ---------------- ----------------
Preferred Shares, no par value 8,000 Shares $25,000 $200,000,000 $50,000
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/1/ Estimated solely for the purpose of calculating the registration fee.
/2/ $62.50 of which has already been paid.
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 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 dates as the Commission, acting pursuant to said Section 8(a), may determine.
PIMCO MUNICIPAL INCOME FUND
Cross Reference Sheet Pursuant to Rule 495(a) Under the Securities Act of 1933
PARTS A AND B OF PROSPECTUS*
Part A
Item No. Item Caption Prospectus Caption
------- ------------ -------------------
1. Outside Front Cover....................................... Outside Front Cover
2. Cover Pages; Other Offering Information................... Inside Front and Outside Back Cover Page;
Underwriting
3. Fee Table and Synopsis.................................... Prospectus Summary
4. Financial Highlights...................................... Not applicable
5. Plan of Distribution...................................... Underwriting
6. Selling Shareholders...................................... Not Applicable
7. Use of Proceeds........................................... Use of Proceeds
8. General Description of Registrant......................... Prospectus Summary; Management of the Fund;
The Fund; The Fund's Investments; Risks;
How the Fund Manages Risk; Description of
Capital Structure
9. Management................................................. Management of the Fund; Custodian and
Transfer Agents
10. Capital Stock, Long-Term Debt,
and Other Securities....................................... Capitalization; Description of APS;
Description of Capital Structure; Taxes;
Anti-Takeover and Other Provisions in the
Declaration of Trust; Repurchase of Common
Shares; Conversion to Open-End Fund; Rating
Agency Guidelines
11. Defaults and Arrears on Senior Securities.................. Not Applicable
12. Legal Proceedings.......................................... Not Applicable
13. Table of Contents of Statement of Additional Information... Table of Contents for the Statement of
Additional Information
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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 Policies................ Investment Objective and Policies; Investment
Restrictions
18. Management....................................... Management of the Fund; Trustees and Officers;
Investment Manager and Portfolio Manager
19. Control Persons and Principal
Holders of Securities............................ Management of the Fund
20. Investment Advisory and Other Services........... Management of the Fund; Investment Manager and
Portfolio Manager; Custodian, Transfer Agents and
Dividend Disbursing Agents; Independent Accountants
21. Brokerage Allocation and Other Practices......... Portfolio Transactions
22. Tax Status....................................... Tax Matters; Distributions
23. Financial Statements............................. Financial Statements
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The information required to be included in Part C is set forth under the appropriate item, so numbered, in Part C to this Registration Statement.
PROSPECTUS
August 20, 2001
$200,000,000
Investment Objective. The Fund is a recently organized, diversified, closed- end management investment company. The Fund's investment objective is to provide current income exempt from federal income tax. In pursuing this objective, the portfolio manager also seeks to preserve and enhance the value of the Fund's holdings relative to the municipal bond market generally, using proprietary analytical models that test and evaluate the sensitivity of those holdings to changes in interest rates and yield relationships.
Portfolio Contents. Under normal market conditions, the Fund will invest in a portfolio of municipal bonds the interest from which is exempt from federal income taxes. Under normal market conditions, the Fund expects to be fully invested (at least 90% of its total assets) in tax-exempt municipal bonds. The Fund will seek to avoid bonds generating interest potentially subjecting individuals to the alternative minimum tax. The Fund will invest at least 80% of its net assets in investment grade quality municipal bonds, including bonds that are unrated but judged to be of investment grade quality by the Fund's portfolio manager. The Fund may invest up to 20% of its net assets in municipal bonds that are rated Ba/BB or B or that are unrated but judged to be of comparable quality by the Fund's portfolio manager. The Fund cannot assure you that it will achieve its investment objective.
Certain capitalized terms used in this Prospectus are defined in the Glossary that appears at the end of this Prospectus.
Before buying any preferred shares you should read the discussion of the material risks of investing in the Fund in "Risks" beginning on page 18. These risks are summarized in "Special Risk Considerations" beginning on page 3.
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.
Proceeds
Price to Public Sales Load to Fund (1)
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Per Share $ 25,000 $ 250 $ 24,750
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Total $200,000,000 $2,000,000 $198,000,000
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(1)Plus accumulated dividends, if any, from the date the Auction Preferred Shares are issued, but before offering expenses payable by the Fund estimated to be $275,000.
Auction Preferred Shares, Series A, Auction Preferred Shares, Series B, Auction Preferred Shares, Series C, Auction Preferred Shares, Series D and Auction Preferred Shares, Series E (together, "APS") are being offered by the underwriters subject to certain conditions. The underwriters reserve the right to withdraw, cancel or modify the offering in whole or in part. It is expected that the APS will be delivered to the nominee of The Depository Trust Company on or about August 23, 2001.
UBS Warburg
A.G. Edwards & Sons, Inc.
Merrill Lynch & Co.
Investors in APS will be entitled to receive cash dividends at an annual rate that may vary for the successive dividend periods for such shares. The dividend rate on the Series A APS for the initial period from and including the date of issue to, but excluding, September 4, 2001, will be % per year. The dividend rate on the Series B APS for the initial period from and including the date of issue to, but excluding, September 5, 2001, will be % per year. The dividend rate on the Series C APS for the initial period from and including the date of issue to, but excluding, September 6, 2001, will be % per year. The dividend rate on the Series D APS for the initial period from and including the date of issue to, but excluding, September 7, 2001, will be % per year. The dividend rate on the Series E APS for the initial period from and including the date of issue to, but excluding, September 10, 2001, will be % per year. For each subsequent period, the auction agent will determine the dividend rate for a particular period by an auction conducted in accordance with the procedures described in this Prospectus and, in further detail, in Appendix C to the Statement of Additional Information (each an "Auction").
The APS, which have no history of public trading, will not be listed on an exchange or automated quotation system. Broker-Dealers may maintain a secondary trading market in the APS outside of Auctions; however, they have no obligation to do so, and there can be no assurance that a secondary market for the APS will develop or, if it does develop, that it will provide holders with a liquid trading market (i.e., trading will depend on the presence of willing buyers and sellers and the trading price is subject to variables to be determined at the time of the trade by such Broker-Dealers). A general increase in the level of interest rates may have an adverse effect on the secondary market price of the APS, and a selling shareholder that sells APS between Auctions may receive a price per share of less than $25,000. The Fund may redeem APS as described under "Description of APS--Redemption."
The APS will be senior in liquidation and distribution rights to the Fund's outstanding common shares. The Fund's common shares are traded on the New York Stock Exchange under the symbol "PMF." This offering is conditioned upon the APS receiving a rating of "Aaa" from Moody's.
You should read this Prospectus, which contains important information about the Fund, before deciding whether to invest and retain it for future reference. A Statement of Additional Information, dated August 20, 2001, containing additional information about the Fund, has been filed with the Securities and Exchange Commission and is incorporated by reference in its entirety into this Prospectus, which means that it is part of the Prospectus for legal purposes. You can review the table of contents of the Statement of Additional Information on page 57 of this Prospectus. You may request a free copy of the Statement of Additional Information by calling (877) 819-2224 or by writing to the Fund, or obtain a copy (and other information regarding the Fund) from the Securities and Exchange Commission web site (http://www.sec.gov).
The APS do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
You should rely only on the information contained or incorporated by reference in this Prospectus. The Fund has not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The Fund is not, and the underwriters are not, making an offer of the APS in any state where the offer is not permitted. You should not assume that the information contained in this Prospectus is accurate as of any date other than the date on the front of this Prospectus. The Fund's business, financial condition, results of operations and prospects may have changed since that date.
Until September 15, 2001 (25 days after the date of this Prospectus), all dealers that buy, sell or trade the APS, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Prospectus summary......... 1 The Fund................... 12 Use of proceeds............ 12 Capitalization............. 12 Portfolio composition...... 13 The Fund's investments..... 14 Risks...................... 18 How the Fund manages risk.. 21 Rating agency guidelines... 23 Description of APS......... 24 Management of the Fund..... 46 Net asset value............ 48 |
Taxes................................. 48 Description of capital structure...... 51 Anti-takeover and other provisions in the Declaration of Trust............ 52 Repurchase of Common Shares; conversion to open-end fund......... 54 Underwriting.......................... 55 Custodian and transfer agents......... 55 Legal matters......................... 56 Table of contents for the Statement of Additional Information.............. 57 Glossary.............................. 58 |
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Prospectus summary
This is only a summary. You should review the more detailed information contained in this Prospectus. Certain capitalized terms used in this Prospectus are defined in the Glossary that appears at the end of this Prospectus.
THE FUND
PIMCO Municipal Income Fund (the "Fund") is a recently organized, diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"). See "The Fund." The Fund's common shares ("Common Shares") are traded on the New York Stock Exchange under the symbol "PMF." As of August 3, 2001, the Fund had 23,696,667 Common Shares outstanding and net assets of $348,069,087.
THE OFFERING
The Fund is offering an aggregate of 1,600 Series A APS, 1,600 Series B APS, 1,600 Series C APS, 1,600 Series D APS and 1,600 Series E APS, each at a purchase price of $25,000 per share plus accumulated dividends, if any, from the date of original issue. The APS are being offered through a group of underwriters led by UBS Warburg LLC (collectively, the "Underwriters"). See "Underwriting."
The APS will entitle their holders to receive cash dividends at an annual rate that may vary for successive Dividend Periods. In general, except as described under "Description of APS--Dividends," each Dividend Period will be seven days. The Auction Agent will determine the Applicable Rate for a particular period by an Auction conducted on the Business Day immediately prior to the start of that Dividend Period.
The APS are not listed on an exchange. Instead, investors may buy or sell APS at an auction that normally is held weekly, by submitting orders to Broker- Dealers that have entered into an agreement with the Auction Agent and the Fund or to certain other Broker-Dealers. Bankers Trust Company, the Auction Agent, reviews orders from Broker-Dealers on behalf of Existing Holders that wish to sell, or hold at the auction rate, or hold only at a specified Applicable Rate, and on behalf of Potential Holders that wish to buy, APS. The Auction Agent then determines the lowest Applicable Rate that will result in all of the outstanding APS continuing to be held. The first Auction Date for Series A APS will be August 31, 2001, for Series B APS will be September 4, 2001, for Series C APS will be September 5, 2001, for Series D APS will be September 6, 2001 and for Series E APS will be September 7, 2001, each being the Business Day before the Initial Dividend Payment Date for the Initial Dividend Period for the relevant series of APS (September 4, 2001 for Series A, September 5, 2001 for Series B, September 6, 2001 for Series C, September 7, 2001 for Series D and September 10, 2001 for Series E). The auction day for Series A APS generally will be Monday, for Series B APS generally will be Tuesday, for Series C APS generally will be Wednesday, for Series D APS generally will be Thursday and for Series E APS generally will be Friday, unless the then-current Dividend Period is a Special Dividend Period, or the day that normally would be the Auction Date or the first day of the subsequent Dividend Period is not a Business Day.
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide current income exempt from federal income tax. In pursuing this objective, the portfolio manager also seeks to preserve and enhance the value of the Fund's holdings relative to the municipal bond market generally, using proprietary analytical models that test and evaluate the sensitivity of those holdings to changes in interest rates and yield relationships. Under normal market conditions, the Fund expects to be fully invested (at least 90% of its total assets) in a portfolio of municipal bonds the interest from which is exempt from federal income taxes. The Fund will seek to avoid bonds generating interest potentially subjecting individuals
to the alternative minimum tax. The Fund will invest at least 80% of its net assets in municipal bonds that at the time of investment are investment grade quality. Investment grade quality bonds are bonds rated within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch), or bonds that are unrated but judged to be of comparable quality by the Fund's portfolio manager. The Fund may invest up to 20% of its net assets in municipal bonds that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by the Fund's portfolio manager. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal, and are commonly referred to as "junk bonds." Bonds in the lowest investment grade category may also be considered to possess some speculative characteristics.
The Fund may invest in "structured" notes, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market, such as selected securities or an index of securities, or the differential performance of two assets or markets, such as indices reflecting taxable and tax-exempt bonds. The Fund currently intends that any use of structured notes will be for the purpose of reducing the interest rate sensitivity of the Fund's portfolio (and thereby decreasing the Fund's exposure to interest rate risk) and, in any event, that the interest income on the notes will normally be exempt from federal income tax.
The Fund cannot assure you that it will attain its investment objective. See "The Fund's investments."
INVESTMENT MANAGER
PIMCO Advisors L.P. ("PIMCO Advisors") serves as the investment manager of the Fund. Subject to the supervision of the Board of Trustees, PIMCO Advisors is responsible for managing, either directly or through others selected by it, the investment activities of the Fund and the Fund's business affairs and other administrative matters. PIMCO Advisors is located at 1345 Avenue of the Americas, New York, New York 10105. Organized in 1987, PIMCO Advisors provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. As of June 30, 2001, PIMCO Advisors and its subsidiary partnerships had approximately $276 billion in assets under management.
PIMCO Advisors has retained its affiliate, Pacific Investment Management Company LLC ("PIMCO"), as a sub-adviser to manage the Fund's portfolio investments. See "Portfolio Manager" below.
PORTFOLIO MANAGER
PIMCO serves as the Fund's sub-adviser responsible for managing the Fund's portfolio investments, and is sometimes referred to herein as the "portfolio manager." Subject to the supervision of PIMCO Advisors, PIMCO has full investment discretion and makes all determinations with respect to the investment of the Fund's assets.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660. Organized in 1971, PIMCO provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. As of June 30, 2001, PIMCO had approximately $222 billion in assets under management.
PIMCO Advisors (and not the Fund) will pay a portion of the fees it receives to PIMCO in return for PIMCO's services.
LEVERAGE
The Fund utilizes financial leverage on an ongoing basis for investment purposes. After completion of the offering of APS, the Fund anticipates its total leverage from the issuance of APS will be approximately 37%. This amount may change, but total leverage will not exceed 50% of the Fund's total assets. Although the Fund may in the future offer other Preferred Shares, the Fund does not currently intend to offer Preferred Shares other than Series A APS, Series B APS, Series C APS, Series D APS and Series E APS. The Fund may also invest in RIBS and other derivative instruments, each of which may amplify the effects of leverage in the Fund's portfolio.
The Fund generally will not utilize leverage if it anticipates that it would result in a lower return to Common Shareholders over time. Use of financial leverage creates an opportunity for increased income for Common Shareholders, but, at the same time, creates the possibility for greater loss (including the likelihood of greater volatility of net asset value and market price of the shares and of dividends), and there can be no assurance that a leveraging strategy will be successful during any period in which it is employed. Because the fees paid to PIMCO Advisors and PIMCO will be calculated on the basis of the Fund's managed assets, the fees will be higher when leverage is utilized, giving PIMCO Advisors and PIMCO an incentive to utilize leverage. See "Risks-- Leverage Risk."
SPECIAL RISK CONSIDERATIONS
Risks of investing in APS include:
Auction Risk
You may not be able to sell your APS at an Auction if the Auction fails; that is, if there are more APS offered for sale than there are buyers for those shares. As a result, your investment in APS may be illiquid. Neither the Broker-Dealers nor the Fund are obligated to purchase APS in an Auction or otherwise, nor is the Fund required to redeem APS in the event of a failed Auction.
Ratings and Asset Coverage Risk
A Rating Agency could downgrade the APS, which could affect their liquidity and value. In addition, the Fund may be forced to redeem your APS to meet regulatory or Rating Agency requirements. The Fund may also voluntarily redeem APS under certain circumstances.
Secondary Market Risk
You could receive less than the price you paid for your APS if you sell them outside of an Auction, especially when market interest rates are rising. Although the Broker-Dealers may maintain a secondary trading market in the APS outside of Auctions, they are not obligated to do so and no secondary market may develop or exist at any time for the APS.
General risks of investing in the Fund include:
Limited Operating History
The Fund is a recently organized, diversified, closed-end management investment company which has been operational for less than two months.
Interest Rate Risk
Interest rate risk is the risk that the municipal bonds in the Fund's portfolio will decline in value because of increases in market interest rates. The prices of longer-term bonds generally fluctuate more than prices of shorter-term bonds as interest rates change. Because the Fund will invest primarily in long-term bonds, the Fund's net asset value will fluctuate more in response to changes in market
interest rates than if the Fund invested primarily in shorter-term bonds. If long-term rates rise, the value of the Fund's investment portfolio may decline, reducing asset coverage on the APS.
Credit Risk
Credit risk is the risk that one or more municipal bonds in the Fund's portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the bond experiences a decline in its financial status. Any default by an issuer of a municipal bond could have a negative impact on the Fund's ability to pay dividends on the APS and could result in the redemption of some or all of the APS.
Municipal Bond Market Risk
The amount of public information available about the municipal bonds in the Fund's portfolio is generally less than that for corporate equities or bonds, and the investment performance of the Fund may therefore be more dependent on the analytical abilities of PIMCO than would be a stock fund or taxable bond fund. The secondary market for municipal bonds, particularly the below investment grade bonds in which the Fund may invest, also tends to be less well-developed and less liquid than many other securities markets, which may adversely affect the Fund's ability to sell its bonds at attractive prices.
Reinvestment Risk
Income from the Fund's municipal bond portfolio will decline if and when the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the portfolio's current earnings rate. This could impact the Fund's net asset value and reduce asset coverage on the APS.
Inflation Risk
As inflation increases, the real value of the APS and distributions, as well as the value of the Fund's portfolio, could decline.
Leverage Risk
The Fund utilizes financial leverage for investment purposes. Leverage risk includes the risk associated with the issuance of APS to leverage the fund's Common Shares. The Fund may also invest in RIBS and other derivative instruments, which will amplify the effects of leverage. If the dividend rate on the APS exceeds the net rate of return on the Fund's portfolio, the leverage will result in a lower net asset value than if the Fund were not leveraged, and the Fund's ability to pay dividends and to meet its asset coverage requirements on the APS would be reduced.
Because the fees received by PIMCO Advisors and PIMCO are based on Fund's managed assets, the fees will be higher when leverage is utilized, giving PIMCO Advisors and PIMCO an incentive to utilize leverage.
Anti-Takeover Provisions
The Fund's Declaration of Trust and Amended By-Laws include provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of the Board of Trustees.
Certain Affiliations
Because certain broker-dealers may be considered affiliated persons of the Fund, PIMCO Advisors and/or PIMCO, the Fund's ability to utilize such broker- dealers is subject to restrictions and, in some cases, is prohibited. This could limit the Fund's ability to engage in securities transactions and take advantage of market opportunities.
For additional information about the risks of investing in APS and in the Fund, see "Risks" below.
DIVIDENDS ON APS
The APS will entitle their holders to receive cash dividends at a rate per annum that may vary for the successive Dividend Periods for such shares. In general, except as described below, each Dividend Period for each series of APS subsequent to the Initial Dividend Period will be seven days in length. The Applicable Rate for a particular Dividend Period will be determined by an Auction conducted on the Business Day next preceding the start of such Dividend Period.
Through their Broker-Dealers, Beneficial Owners and Potential Beneficial Owners of APS may participate in Auctions, although, except in the case of Special Dividend Periods of longer than 91 days, Beneficial Owners desiring to continue to hold all of their APS regardless of the Applicable Rate resulting from Auctions need not participate. For an explanation of Auctions and the method of determining the Applicable Rate, see "Description of APS--The Auction."
Except as described herein, investors in APS will not receive certificates representing ownership of their shares. Ownership of APS will be maintained in book-entry form by the Securities Depository or its nominee for the account of the investor's Agent Member. The investor's Agent Member, in turn, will maintain records of such investor's beneficial ownership of APS. Accordingly, references herein to an investor's investment in or purchase, sale or ownership of APS are to purchases, sales or ownership of those shares by Beneficial Owners.
After the Initial Dividend Period, each Subsequent Dividend Period for each series of APS will generally consist of seven days (a "7-day Dividend Period"); provided, however, that prior to any Auction, the Fund may elect, subject to certain limitations described herein, upon giving notice to holders thereof, a Special Dividend Period for either or both series. A "Special Dividend Period" is a Dividend Period consisting of a specified number of days, evenly divisible by seven and not fewer than fourteen nor more than 364 (a "Short Term Dividend Period") or a Dividend Period consisting of a specified period of one whole year or more but not greater than five years (a "Long Term Dividend Period"). Dividends on the APS offered hereby are cumulative from the Date of Original Issue and are payable when, as and if declared by the Board of Trustees of the Fund, out of funds legally available therefor, commencing on the Initial Dividend Payment Date. In the case of Dividend Periods that are not Special Dividend Periods, dividends will be payable generally on each succeeding Tuesday for Series A APS, on each succeeding Wednesday for Series B APS, on each succeeding Thursday for Series C APS, on each succeeding Friday for Series D APS and on each succeeding Monday for Series E APS, subject to certain exceptions.
Dividends for the APS will be paid through the Securities Depository on each Dividend Payment Date. The Securities Depository's normal procedures provide for it to distribute dividends in same-day funds to Agent Members, who are in turn expected to distribute such dividends to the person for whom they are acting as agent in accordance with the instructions of such person. See "Description of APS--Dividends."
For each Subsequent Dividend Period, the cash dividend rate on each series of APS will be the Applicable Rate that the Auction Agent advises the Fund has resulted from an Auction. See "Description of APS--Dividends." The first Auction for each series of the APS is scheduled to be held on the ending date for the Initial Dividend Period as set forth above.
The Amended By-Laws provide that until the Fund gives a Request for Special Dividend Period and the related Notice of Special Dividend Period, only 7-Day Dividend Periods will be applicable to each series of APS. While the Fund does not currently intend to give a Request for Special Dividend Period with
respect to either series of APS, it may so elect in the future subject to, and on, the conditions discussed under "Description of the APS--Dividends-- Notification of Dividend Period."
A Special Dividend Period will not be effective for a series of APS unless
Sufficient Clearing Bids exist at the Auction in respect of such Special
Dividend Period. If Sufficient Clearing Bids do not exist at such Auction, the
Dividend Period commencing on the Business Day succeeding such Auction will be
a 7-Day Dividend Period, and the holders of the APS outstanding immediately
prior to such Auction will be required to continue to hold some or all of such
shares for such Dividend Period. In addition, the Fund may not give a Notice of
Special Dividend Period with respect to the APS, or if the Fund has given a
Notice of Special Dividend Period for the APS, the Fund will be required to
give a Notice of Revocation in respect thereof, if (i) either the 1940 Act APS
Asset Coverage is not satisfied or the Fund fails to maintain Moody's Eligible
Assets with an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, in each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the related Auction Date for the APS or
(ii) sufficient funds for the payment of dividends payable on the immediately
succeeding Dividend Payment Date have not been irrevocably deposited with the
Auction Agent by the close of business on the third Business Day preceding the
related Auction Date. In such event, the next succeeding Dividend Period will
be a 7-Day Dividend Period.
ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF TAXABLE INCOME IN DIVIDENDS
Dividends paid by the Fund, to the extent paid from tax-exempt income earned on municipal bonds, will be exempt from federal income tax, although a portion of those dividends may be a tax preference item for individuals for purposes of the federal alternative minimum tax. In addition, for corporations, interest on all tax-exempt obligations is taken into account in the computation of income subject to the federal alternative minimum tax. Although the Fund will seek to avoid portfolio investments that pay interest that is taxable to individuals under the federal alternative minimum tax, the Fund may not succeed in this regard. The Fund is required to allocate net capital gains and other income subject to federal income tax, if any, proportionately among the Fund's Common Shares and APS. Except as noted below and under "Description of APS--Auction Procedures," whenever the Fund is aware that it will include any net capital gains or other income subject to federal income tax, but not including for this purpose the alternative minimum tax ("Taxable Income"), in any dividend on the APS, the Fund will notify the Auction Agent prior to the Auction establishing the Applicable Rate for such dividend. The Auction Agent in turn will notify each Broker-Dealer whenever it receives any such notice from the Fund, and each Broker-Dealer will notify its Beneficial Owners and Potential Beneficial Owners, as provided in its Broker-Dealer Agreement. In the alternative, the Fund also may include such Taxable Income in a dividend on the APS without giving advance notice thereof if it increases the dividend by an amount sufficient to offset substantially the tax effect thereof or, in certain circumstances, makes a Gross-up Dividend, as described in the next section. The amount of Taxable Income otherwise allocable to the APS will depend upon the amount of such income realized by the Fund and other factors, but generally is not expected to be significant. See "Taxes" and "Description of APS--Auction Procedures--Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable Income in Dividends."
GROSS-UP DIVIDENDS
The Fund may retroactively allocate any net capital gains or other Taxable Income to the APS without giving the advance notice described in the preceding section. If the Fund does so solely by reason of the fact that such allocation is made as a result of the redemption of all or a portion of the outstanding APS or the liquidation of the Fund, the Fund will make certain payments to holders of the APS to which such
allocation was made to offset substantially the tax effect thereof. Otherwise, the Fund does not expect to make payments to holders of the APS to offset the tax effect of any reallocation of net capital gains or other taxable income. See "Description of APS--Dividends--Gross-up Dividends" and "Taxes."
DETERMINATION OF MAXIMUM APPLICABLE RATES
Except during a Non-Payment Period, the Applicable Rate for any Dividend Period
for APS will not be more than the Maximum Applicable Rate applicable to such
shares. The Maximum Applicable Rate for each series of APS will depend on the
credit rating assigned to such shares and on the duration of the Dividend
Period. The Maximum Applicable Rate will be the Applicable Percentage of the
Reference Rate. The Reference Rate is (i) with respect to any 7-Day Dividend
Period or any Short Term Dividend Period having 28 or fewer days, the higher of
the applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent
of the Short-Term Municipal Obligation Rate, (ii) with respect to any Short
Term Dividend Period having more than 28 but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any
Short Term Dividend Period having 183 or more but fewer than 364 days, the
applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate. The Applicable
Percentage will be determined based on (i) the credit rating assigned on such
date to the APS by Moody's (or, if Moody's shall not make such rating
available, the equivalent of such rating by a Substitute Rating Agency) and
(ii) whether the Fund has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on the APS, as
follows:
Applicable Applicable
Percentage of Percentage of
Reference Rate-- Reference Rate--
Moody's Credit Ratings on APS No Notification Notification
--------------------------------------------------------------------------------
aa3 or higher................................. 110% 150%
a............................................. 125 160
baa........................................... 150 250
Below baa..................................... 200 275
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There is no minimum Applicable Rate in respect of any Dividend Period. The Applicable Rate for any Dividend Period commencing during any Non-Payment Period, and the rate used to calculate the late charge described under "Description of APS--Dividends--Non-Payment Period; Late Charge," initially will be 200% of the Reference Rate (or 275% of such rate if the Fund has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend on APS).
AUCTION PROCEDURES
Separate Auctions will be conducted for each series of APS. Unless otherwise permitted by the Fund, Beneficial Owners and Potential Beneficial Owners of APS may only participate in Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves as Existing Holders in respect of shares subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of shares subject to Orders submitted to them by Potential Beneficial Owners. On or prior to each Auction Date for the APS (the Business Day next preceding the first day of each Dividend Period), each Beneficial Owner may submit Orders to its Broker-Dealer as follows:
. Hold Order--indicating its desire to hold the APS without regard to the Applicable Rate for the next Dividend Period for such shares.
. Bid--indicating its desire to hold the APS, provided that the Applicable Rate for the next Dividend Period for such shares is not less than the rate per annum specified in such Bid.
. Sell Order--indicating its desire to sell the APS without regard to the Applicable Rate for the next Dividend Period for such shares.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer with respect to the APS then held by such Beneficial Owner, provided that the total number of APS covered by such Orders does not exceed the number of APS held by such Beneficial Owner. If, however, a Beneficial Owner offers through its Broker-Dealer to purchase additional APS in such Auction, such Beneficial Owner, for purposes of such offer to purchase additional shares, will be treated as a Potential Beneficial Owner as described below. Bids by Beneficial Owners through their Broker-Dealers with rates per annum higher than the Maximum Applicable Rate will be treated as Sell Orders. A Hold Order (in the case of an Auction relating to a Dividend Period of 91 days or less) or a Sell Order (in the case of an Auction relating to a Special Dividend Period of longer than 91 days) shall be deemed to have been submitted on behalf of a Beneficial Owner if an Order with respect to the APS then held by such Beneficial Owner is not submitted on behalf of such Beneficial Owner for any reason, including the failure of a Broker-Dealer to submit such Beneficial Owner's Order to the Auction Agent.
Potential Beneficial Owners of APS may submit Bids through their Broker-Dealers in which they offer to purchase APS, provided that the Applicable Rate for the next Dividend Period for such shares is not less than the rate per annum specified in such Bid. A Bid by a Potential Beneficial Owner with a rate per annum higher than the Maximum Applicable Rate will not be considered.
Neither the Fund nor the Auction Agent will be responsible for a Broker- Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with any of the foregoing.
A Broker-Dealer also may hold APS for its own account as a Beneficial Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of any APS 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 APS held by it, as described above. Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder or a Potential Holder only to represent the interests of a Beneficial Owner or Potential Beneficial Owner, whether it be a customer or itself, all discussion herein relating to the consequences of an Auction for Existing Holders and Potential Holders also applies to the underlying beneficial ownership interests represented thereby.
If Sufficient Clearing Bids exist in an Auction for a series of APS (that is, in general, the number of APS subject to Bids by Potential Holders with rates equal to or lower than the Maximum Applicable Rate is at least equal to the number of APS subject to Sell Orders by Existing Holders), the Applicable Rate will be the lowest rate per annum specified in the Submitted Bids which, taking into account such rate per annum and all lower rates per annum bid by Existing Holders and Potential Holders, would result
in Existing Holders and Potential Holders owning all of the APS available for purchase in the Auction. If Sufficient Clearing Bids do not exist, the Dividend Period next following the Auction automatically will be a 7-Day Dividend Period and the Applicable Rate will be the Maximum Applicable Rate, and in such event, Existing Holders that have submitted Sell Orders will not be able to sell in the Auction all, and may not be able to sell any, APS subject to such Sell Orders. Thus, in certain circumstances, Existing Holders and, thus, the Beneficial Owners they represent may not have liquidity of investment. If all Existing Holders submit (or are deemed to have submitted) Hold Orders in an Auction, the Dividend Period next following the Auction automatically shall be the same length as the immediately preceding Dividend Period, and the Applicable Rate will be 40% of the Reference Rate (as defined under "Determination of Maximum Applicable Rates" above) in effect on the date of the Auction (or 60% of such rate if the Fund has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend on APS).
The Auction Procedures include a pro rata allocation of shares for purchase and sale, which may result in an Existing Holder selling or holding, or a Potential Holder purchasing, a number of APS that is less than the number of APS specified in its Order. To the extent the allocation has this result, a Broker- Dealer will be required to make appropriate pro rata allocations among its customers and itself.
A Sell Order by an Existing Holder will constitute an irrevocable offer to sell the APS subject thereto, and a Bid placed by an Existing Holder also will constitute an irrevocable offer to sell the APS subject thereto if the rate per annum specified in the Bid is higher than the Applicable Rate determined in the Auction, in each case at a price per share equal to $25,000. A Bid placed by a Potential Holder will constitute an irrevocable offer to purchase the APS subject thereto at a price per share equal to $25,000 if the rate per annum specified in such Bid is less than or equal to the Applicable Rate determined in the Auction. Settlement of purchases and sales will be made on the next Business Day (also 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 by book-entry to their Agent Members. The Securities Depository will make payment to the sellers' Agent Members in accordance with the Securities Depository's normal procedures, which now provide for payment in same-day funds. See "Description of APS--The Auction."
ASSET MAINTENANCE
Under the Amended By-Laws, the Fund must maintain (i) Moody's Eligible Assets having in the aggregate a Discounted Value at least equal to the APS Basic Maintenance Amount and (ii) 1940 Act APS Asset Coverage of at least 200%. See "Description of APS--Asset Maintenance."
The Fund estimates that, based on the composition of its portfolio at August 3, 2001, 1940 Act APS Asset Coverage with respect to APS would be approximately 273% immediately after the issuance of the APS offered hereby in an amount representing approximately 37% of the Fund's capital (including the capital attributable to the APS).
The Discount Factors and guidelines for calculating the Discounted Value of the Fund's portfolio for purposes of determining whether the APS Basic Maintenance Amount has been satisfied have been established by Moody's in connection with the Fund's receipt of a rating of "Aaa" on the APS on their Date of Original Issue. See "Rating Agency Guidelines."
MANDATORY REDEMPTION
If the APS Basic Maintenance Amount or the 1940 Act APS Asset Coverage is not maintained or restored as specified herein, the APS will be subject to mandatory redemption, out of funds legally available therefor, at the Mandatory Redemption Price of $25,000 per share plus an amount equal to dividends thereon (whether or not earned or declared) accumulated but unpaid to the date fixed for redemption. In addition, holders of APS may be entitled to receive Gross-up Dividends in the event of redemption of such APS as described herein. See "Description of APS--Dividends--Gross-up Dividends." Any such redemption will be limited to the minimum number of APS necessary to restore the APS Basic Maintenance Amount or the 1940 Act APS Asset Coverage, as the case may be. The Fund's ability to make such a mandatory redemption may be restricted by the provisions of the 1940 Act. See "Description of APS--Redemption--Mandatory Redemption."
OPTIONAL REDEMPTION
The APS are redeemable at the option of the Fund, as a whole or in part, on any Dividend Payment Date (except during the Initial Dividend Period or a Non-Call Period) at the Optional Redemption Price of $25,000 per share, plus an amount equal to dividends thereon (whether or not earned or declared) accumulated but unpaid to the date fixed for redemption plus the premium, if any, resulting from the designation of a Premium Call Period. See "Description of APS-- Redemption--Optional Redemption." In addition, holders of APS may be entitled to receive Gross-up Dividends in the event of redemption of such APS as described herein. See "Description of APS--Dividends--Gross-up Dividends."
LIQUIDATION PREFERENCE
The liquidation preference of the APS will be $25,000 per share, plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared). See "Description of APS--Liquidation Rights." In addition, holders of APS may be entitled to receive Gross-up Dividends in the event of the liquidation of the Fund as provided herein. See "Description of APS--Dividends--Gross-up Dividends."
RATING
It is a condition to their issuance that the APS be issued with a credit quality rating of "Aaa" from Moody's. The Fund may at some future time seek to have the APS rated by an additional or Substitute Rating Agency. See "Rating Agency Guidelines."
VOTING RIGHTS
The 1940 Act requires that the holders of APS and any other Preferred Shares, voting as a class, have the right to elect at least two trustees at all times and to elect a majority of the trustees at any time when two years' dividends on the APS or any other Preferred Shares are unpaid. The holders of APS and any other Preferred Shares will vote as a separate class on certain other matters as required under the Fund's Declaration of Trust and Amended By-Laws and under the 1940 Act. See "Description of APS--Voting Rights," "Description of capital structure" and "Anti-takeover and other provisions in the Declaration of Trust."
TAX CONSIDERATIONS
Interest on certain "private activity" municipal bonds is treated as a tax preference item for individuals for purposes of the federal alternative minimum tax. In addition, for corporations, interest on all tax-exempt obligations is taken into account in the computation of income subject to the federal alternative minimum tax. The Fund will seek to avoid portfolio investments that pay interest that is taxable to individuals under the federal alternative minimum tax. Nonetheless, the Fund may not be successful in this regard and if you are, or as a result of an investment in the Fund would become, subject to the federal alternative minimum tax, the Fund may not be a suitable investment for you. Moreover, distributions of any taxable net investment income and net short-term capital gain are taxable as ordinary income. See "Taxes."
The Fund
The Fund is a recently organized, diversified, closed-end management investment company registered under the 1940 Act. The Fund was organized as a Massachusetts business trust on May 9, 2001 pursuant to the Fund's Declaration of Trust, which is governed by the laws of The Commonwealth of Massachusetts. The Fund's principal office is located at 1345 Avenue of the Americas, New York, New York 10105, and its telephone number is (212) 739-3369.
The Fund commenced operations on June 29, 2001 upon the closing of an initial public offering of 20,600,000 of its Common Shares. The proceeds of such offering were approximately $295,095,000 after the payment of organizational and offering expenses. In connection with the initial public offering of the Fund's Common Shares, the underwriters were granted an option to purchase up to an additional 3,090,000 additional common shares to cover over-allotments. On July 23, 2001, the underwriters purchased, at a price of $14.325 per Common Share, an additional 3,090,000 Common Shares of the Fund pursuant to the over- allotment option.
Use of proceeds
The net proceeds of the offering of APS will be approximately $197,725,000 after payment of the estimated offering costs (not expected to exceed $275,000). The Fund will invest the net proceeds of the offering in accordance with the Fund's investment objective and policies discussed below under "The Fund's investments." It is presently anticipated that the Fund will be able to invest substantially all of the net proceeds in municipal bonds that meet the investment objective and policies within three months after the completion of the offering. Pending such investment, it is anticipated that the proceeds will be invested in short-term, tax-exempt securities.
Capitalization
The following table sets forth the unaudited capitalization of the Fund as of August 3, 2001 and as adjusted to give effect to the issuance of the APS offered hereby (including estimated offering expenses and sales load of $2,275,000).
As of August 3, 2001
Actual As Adjusted
-------------------------------------------------------------------------------
Shareholders' Equity
Auction Preferred Shares, no par value (no shares
issued; 8,000 shares issued, as adjusted, at
$25,000 per share liquidation preference)......... $ 0 $200,000,000
Common Shares, no par value, 23,696,667 shares
outstanding......................................... $338,748,555 $336,473,555
Undistributed net investment income.................. $ 1,287,135 $ 1,287,135
Net realized gain on investments..................... $ 63,713 $ 63,713
Net unrealized appreciation of investments........... $ 7,969,684 $ 7,969,684
Net assets........................................... $348,069,087 $545,794,087
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Portfolio composition
As of August 3, 2001, approximately 97.4% of the market value of the Fund's portfolio was invested in long-term municipal bonds and approximately 2.6% of the market value of the Fund's portfolio was invested in cash. The following table sets forth certain information with respect to the composition of the Fund's investment portfolio as of August 3, 2001.
Number
of Value (in
S&P* Moody's* Issues Thousands) Percent
--------------------------------------------------------------------------------------------------------
AAA Aaa 26 $174,106 44.7%
AA Aa1, Aa 6 32,434 8.3
A A1 21 115,532 29.6
BBB Baa1 10 23,147 5.9
BB Ba1 2 6,862 1.8
B B1 3 5,093 1.3
NR+ NR+ 6 22,448 5.8
Cash 9,991 2.6
----- --- -------- -----
Total 74 389,613 100.0%
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+ Securities that are not rated by S&P or Moody's. Such municipal bonds may be rated by Rating Agencies other than S&P or Moody's, or may not be rated by any such Rating Agency. With respect to the percentage of the Fund's assets invested in such securities, PIMCO believes that these are of comparable quality to municipal bonds rated investment grade (that is, rated within the four highest grades by Moody's, S&P or Fitch). This determination is based on PIMCO's own internal evaluation and does not necessarily reflect how such securities would be rated by S&P or Moody's if either were to rate the securities.
The Fund's investments
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide current income exempt from federal income tax. In pursuing this objective, PIMCO also seeks to preserve and enhance the value of the Fund's holdings relative to the municipal bond market generally, using proprietary analytical models that test and evaluate the sensitivity of those holdings to changes in interest rates and yield relationships.
PIMCO may at times believe that bonds associated with a particular municipal market sector (for example, electric utilities), issued by a particular municipal issuer, or having particular structural characteristics, are undervalued. PIMCO may purchase such a bond for the Fund's portfolio because it represents a market sector or issuer that PIMCO considers undervalued, even if the value of the particular bond appears to be consistent with the value of similar bonds. Municipal bonds of particular types (e.g., hospital bonds, industrial revenue bonds or bonds issued by a particular municipal issuer) may be undervalued because there is a temporary excess of supply in that market sector, or because of a general decline in the market price of municipal bonds of the market sector for reasons that do not apply to the particular municipal bonds that are considered undervalued. The Fund's investment in municipal bonds may be based on PIMCO's belief that their yield and/or total return potential is higher than that available on bonds bearing similar levels of interest rate risk, credit risk and other forms of risk, or that their value relative to the municipal bond market is less sensitive to these risks. The Fund attempts to increase its portfolio value relative to the municipal bond market generally by prudent selection of municipal bonds regardless of the direction the market may move. Any capital appreciation realized by the Fund will generally result in the distribution of taxable capital gains to holders of APS.
Under normal market conditions, the Fund will invest its net assets in a portfolio of municipal bonds the interest from which is exempt from federal income taxes. The Fund expects to be fully invested (at least 90% of its total assets) in tax-exempt municipal bonds under normal market conditions.
The Fund will seek to avoid bonds generating interest potentially subjecting individuals to the alternative minimum tax. The Fund will invest at least 80% of its net assets in investment grade quality municipal bonds. Investment grade quality means that such bonds are rated, at the time of investment, within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by PIMCO. The Fund may invest up to 20% of its net assets in municipal bonds that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by PIMCO. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as "junk bonds." Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. Bonds in the lowest investment grade category may also be considered to possess some speculative characteristics by certain rating agencies. The foregoing credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency or PIMCO downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a security, PIMCO may consider such factors as PIMCO's assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to such security by other rating agencies. A general description of Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in Appendix A to the Statement of Additional Information. The Fund may also invest in securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the types in which the Fund may invest directly. As a stockholder in an investment company, the Fund would bear its ratable
The Fund's investments
share of that investment company's expenses in addition to the Fund's own expenses. See "--Other Investment Companies" below.
The Fund may purchase municipal bonds that are additionally secured by insurance, bank credit agreements, or escrow accounts. The credit quality of companies which provide such credit enhancements will affect the value of those securities. Although the insurance feature reduces certain financial risks, the premiums for insurance and the higher market price paid for insured obligations may reduce the Fund's income. Insurance generally will be obtained from insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or Fitch. The insurance feature does not guarantee the market value of the insured obligations or the net asset value of the APS or the Common Shares.
Upon PIMCO's recommendation, temporarily or for defensive purposes and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of this offering are being invested, the Fund may invest a substantial portion of its net assets in short-term investments including high- quality, short-term securities that may be either tax-exempt or taxable. The Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. Investment in taxable short-term investments would result in a portion of your dividends being subject to federal income taxes. However, as discussed below under "Description of APS--Auction Procedures--Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable Income in Dividends," dividends on APS will generally increase if Taxable Income is included in a dividend.
The Fund cannot change its investment objective without the approval of the holders of a "majority of the outstanding" Common Shares and any Preferred Shares (including the APS) voting together as a single class, and of the holders of a "majority of the outstanding" Preferred Shares (including the APS) voting as a separate class. A "majority of the outstanding" shares (whether voting together as a single class or voting as a separate class) means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of those shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less. See "Description of APS--Voting Rights" in this Prospectus for additional information with respect to the voting rights of holders of APS.
The Fund will seek to avoid portfolio investments that pay interest that is taxable to individuals under the federal alternative minimum tax. Nonetheless, the Fund may not be successful in this regard and if you are, or as a result of an investment in the Fund would become, subject to the federal alternative minimum tax, the APS may not be a suitable investment for you. Special alternative minimum tax rules apply to corporate holders. In addition, capital gain dividends will be subject to capital gains taxes. See "Taxes."
MUNICIPAL BONDS
Municipal bonds are either general obligation or revenue bonds and typically are issued to finance public projects (such as roads or public buildings), to pay general operating expenses, or to refinance outstanding debt. General obligation bonds are backed by the full faith and credit, or taxing authority, of the issuer and may be repaid from any revenue source; revenue bonds may be repaid only from the revenues of a specific facility or source. The Fund also may purchase municipal bonds that represent lease obligations. These carry special risks because the issuer of the bonds may not be obligated to appropriate money annually to make payments under the lease. In order to reduce this risk, the Fund will only purchase municipal bonds representing lease obligations where PIMCO believes the issuer has a strong incentive to continue making appropriations until maturity.
The Fund's investments
The municipal bonds in which the Fund will invest are generally issued by states, cities or local authorities, or certain possessions and territories of the United States (such as Puerto Rico or Guam), and pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by PIMCO to be reliable), is exempt from federal income taxes.
The yields on municipal bonds depend on a variety of factors, including prevailing interest rates and the condition of the general money market and the municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. The market value of municipal bonds will vary with changes in interest rate levels and as a result of changing evaluations of the ability of their issuers to meet interest and principal payments.
The Fund will invest primarily in municipal bonds with long-term maturities in order to maintain a weighted average maturity of 15-30 years, but the weighted average maturity of obligations held by the Fund may be shortened, depending on market conditions.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The Fund may buy and sell municipal bonds on a when-issued, delayed delivery or forward commitment basis, making payment or taking delivery at a later date, normally within 45 days of the trade date. This type of transaction may involve an element of risk because no interest accrues on the bonds prior to settlement and, since bonds are subject to market fluctuations, the value of the bonds at time of delivery may be less (or more) than cost. When such purchases are outstanding, the Fund will segregate until the settlement date assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in an amount sufficient to meet the purchase price. In addition, the Fund's ability to engage in these types of transactions is limited by the Moody's guidelines discussed under "Rating agency guidelines."
STRUCTURED NOTES
The Fund may invest in "structured" notes, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market, such as selected securities or an index of securities, or the differential performance of two assets or markets, such as indices reflecting taxable and tax-exempt bonds. Depending on the terms of the note, the Fund may forgo all or part of the interest and principal that would be payable on a comparable conventional note. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves leverage which will serve to magnify the potential for gain and the risk of loss.
The Fund currently intends that any use of structured notes will be for the purpose of reducing the interest rate sensitivity of the Fund's portfolio (and thereby decreasing the Fund's exposure to interest rate risk) and, in any event, that the interest income on the notes will normally be exempt from federal income tax. The Fund will only invest in structured notes if it has received an opinion of counsel for the issuer (or the advice of another authority believed by PIMCO to be reliable) that the interest income on the notes will be exempt from federal income tax. Like other sophisticated strategies, the Fund's use of structured notes may not work as intended; for example, by reducing the duration of the Fund's portfolio, structured notes may limit the Fund's return when having a longer duration would be beneficial (for instance, when interest rates decline).
The Fund's investments
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The Fund may invest in floating rate debt instruments ("floaters") and engage in credit spread trades. While floaters provide a certain degree of protection against rises in interest rates, the Fund will participate in any decline in interest rates as well, although this is no guarantee that the interest rates earned by the Fund on its investments will be greater than the dividend rate payable with respect to the APS. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities, where the value of the investment position is determined by changes in the difference between such prices or interest rates, as the case may be, of the respective securities.
RESIDUAL INTEREST MUNICIPAL BONDS (RIBS)
The Fund may also invest up to 10% of its assets in RIBS, whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. An investment in RIBS typically will involve greater risk than an investment in a fixed rate bond. Because changes in the interest rate on the other security or index inversely affect the residual interest paid on a RIB, the value of a RIB is generally more volatile than that of a fixed rate bond. RIBS have interest rate adjustment formulas which generally reduce or, in the extreme, eliminate the interest paid to the Fund when short-term interest rates rise, and increase the interest paid to the Fund when short-term interest rates fall. RIBS have varying degrees of liquidity, and the market for these securities is volatile. These securities generally will underperform the market for fixed rate bonds in a rising interest rate environment, but tend to outperform the market for fixed rate bonds when interest rates decline or remain relatively stable. Although volatile, RIBS typically offer the potential for yields exceeding the yields available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. The Fund may also invest in RIBS for the purpose of increasing the Fund's leverage. Should short-term interest rates rise, the combination of the Fund's investment in RIBS and its use of other forms of leverage (including through the issuance of APS or the use of other derivative instruments) likely will adversely affect the Fund's net asset value. Trusts in which RIBS may be held could be terminated, in which case the residual bond holder would take possession of the underlying bond on an unleveraged basis.
OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its net assets in securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the types in which the Fund may invest directly. The Fund may invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Fund receives the proceeds of the offering of its APS, during periods when there is a shortage of attractive, high-yielding municipal bonds available in the market, or when PIMCO believes share prices of other investment companies offer attractive values. The Fund may invest in investment companies that are advised by PIMCO or its affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the Securities and Exchange Commission. As a stockholder in an investment company, the Fund will bear its ratable share of that investment company's expenses, and would remain subject to payment of the Fund's management fees and other expenses with respect to assets so invested. PIMCO will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available municipal bond investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the risks associated with leverage. The net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
Risks
Risk is inherent in all investing. Investing in any investment company security involves risk, including the risk that you may receive little or no return on your investment or even that you may lose part or all of your investment. Therefore, before purchasing APS, you should consider carefully the following risks that you assume when you invest in the Fund.
AUCTION RISK
You may not be able to sell your APS at an Auction if the Auction fails; that is, if there are more APS offered for sale than there are buyers for those shares. If Sufficient Clearing Bids do not exist in an Auction, the Applicable Rate will be the Maximum Applicable Rate, and in such event, owners of APS 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, your investment in APS may be illiquid. Neither the Broker-Dealers nor the Fund is obligated to purchase APS in an Auction or otherwise, nor is the Fund required to redeem APS in the event of a failed Auction. Also, if you place bid orders (orders to retain APS) at an Auction only at a specified rate, and that bid rate exceeds the Applicable Rate set at the Auction, you will not retain your APS. Finally, if you elect to retain APS without specifying a rate below which you would not wish to continue to hold those APS, and the Auction sets a below-market rate, you may receive a lower rate of return on your APS than the market rate. See "Description of APS--The Auction" and "Description of APS--Auction Procedures."
RATINGS AND ASSET COVERAGE RISK
While Moody's is expected to assign a rating of "Aaa" to the APS, the ratings would not eliminate or necessarily mitigate the risks of investing in the APS. A Rating Agency could downgrade the APS, which may make your shares less liquid at an Auction or in the secondary market. In addition, the Fund may be forced to redeem your APS to meet regulatory or Rating Agency requirements. The Fund may also voluntarily redeem APS under certain circumstances. See "Description of APS--Redemption." In addition, as a condition to its receipt of an "Aaa" rating on the APS, the Fund has agreed to certain investment limitations, which may restrict the Fund from making investments that PIMCO believes would benefit the Fund. See "Rating Agency Guidelines" for a description of the asset maintenance and other tests the Fund must meet.
SECONDARY MARKET RISK
The Broker-Dealers may maintain a secondary trading market in the APS outside of Auctions; however, they have no obligation to do so and there can be no assurance that a secondary market for the APS will develop or, if it does develop, that it will provide holders with a liquid trading market (i.e., trading will depend on the presence of willing buyers and sellers and the trading price is subject to variables to be determined at the time of the trade by the Broker-Dealers). The APS will not be registered on any stock exchange or on any automated quotation system. If you try to sell your APS between Auctions, you may not be able to sell any or all of your shares, or you may receive a purchase price of less than $25,000 per share. An increase in the level of interest rates, particularly during any Long Term Dividend Period, likely will have an adverse effect on the secondary market price of the APS .
LIMITED OPERATING HISTORY
The Fund is a recently organized, diversified, closed-end management investment company which has been operational for less than two months.
INTEREST RATE RISK
Interest rate risk is the risk that bonds (and the Fund's net assets) will decline in value because of changes in interest rates. Generally, municipal bonds will decrease in value when interest rates rise and
Risks
increase in value when interest rates decline. The value of the longer-term bonds in which the Fund generally invests normally fluctuates more in response to changes in interest rates than does the value of shorter-term bonds. Because the Fund will invest primarily in long-term bonds, the Fund's net asset value will fluctuate more in response to changes in market interest rates than if the Fund invested primarily in shorter-term bonds. The Fund may invest up to 10% of its assets in RIBS. Compared to similar fixed rate municipal obligations, the value of RIBS will fluctuate to a greater extent in response to changes in prevailing long-term interest rates. Moreover, the income earned on RIBS will fluctuate in response to changes in prevailing short-term interest rates. Thus, when RIBS are held by the Fund, an increase in short- or long-term market interest rates will adversely affect the income received from such bonds or the net asset value of the Fund's shares.
The APS pay dividends based on short-term interest rates. The Fund will use the proceeds from the issuance of APS to buy municipal bonds, which generally pay interest based on longer-term yields. Long-term municipal bond yields are typically, although not always, higher than short-term interest rates. If short-term interest rates rise, the dividend rate on the APS may rise so that the amount of dividends paid to APS shareholders exceeds the income from the portfolio securities purchased with the proceeds from the APS. Because income from the Fund's entire investment portfolio (not just the portion of the portfolio purchased with the proceeds of the APS offering) is available to pay APS dividends, however, APS dividend rates would need to greatly exceed the Fund's net portfolio income before the Fund's ability to pay APS dividends would be jeopardized. If long-term rates rise, the value of the Fund's investment portfolio will decline, reducing the amount of assets serving as asset coverage for the APS.
The Fund may utilize certain strategies, including investments in structured notes, for the purpose of reducing the interest rate sensitivity of the portfolio and decreasing the Fund's exposure to interest rate risk, although there is no assurance that it will do so or that such strategies will be successful. See "How the Fund manages risk--Hedging and Related Strategies."
CREDIT RISK
Credit risk is the risk that an issuer of a municipal bond will become unable to meet its obligation to make interest and principal payments. Because the primary source of income for the Fund is the interest and principal payments on the municipal bonds in which it invests, any default by an issuer of a municipal bond could have a negative impact on the Fund's ability to pay dividends on the APS and could result in the redemption of some or all of the APS. In general, lower-rated municipal bonds carry a greater degree of risk that the issuer will lose its ability to make interest and principal payments, which could have a negative impact on the Fund's net asset value or dividends. The Fund may invest up to 20% of its net assets in municipal bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of comparable quality by PIMCO. Bonds rated Ba/BB or B are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal, and these bonds are commonly referred to as "junk bonds." The prices of these lower-grade bonds are more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher-grade securities. Bonds in the lowest investment grade category may also be considered to possess some speculative characteristics by certain Rating Agencies.
MUNICIPAL BOND MARKET RISK
Investing in the municipal bond market involves certain risks. The amount of public information available about the municipal bonds in the Fund's portfolio is generally less than that for corporate equities or bonds, and the investment performance of the Fund may therefore be more dependent on
Risks
the analytical abilities of PIMCO than would be a stock fund or taxable bond fund. The secondary market for municipal bonds, particularly the below investment grade bonds in which the Fund may invest, also tends to be less well developed or liquid than many other securities markets, which may adversely affect the Fund's ability to sell its bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are reallocated among federal, state and local governments. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for payment of principal and/or interest, or impose other constraints on enforcement of such obligations, or on the ability of municipal issuers to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, the Fund could experience delays in collecting principal and interest and the Fund may not, in all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Fund may take possession of and manage the assets securing the issuer's obligations on such securities, which may increase the Fund's operating expenses. Any income derived from the Fund's ownership or operation of such assets may not be tax exempt.
REINVESTMENT RISK
Reinvestment risk is the risk that income from the Fund's bond portfolio will decline if and when the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the portfolio's current earnings rate. A decline in income could affect the Fund's net asset value or reduce asset coverage on the APS.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from an investment will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the APS and distributions can decline. However, during any periods of rising inflation, APS dividend rates would likely increase, which would tend to offset this risk.
LEVERAGE RISK
The Fund utilizes financial leverage on an ongoing basis for investment purposes. Leverage risk includes the risk associated with the issuance of APS to leverage the Fund's Common Shares. If the dividend rate on the APS exceeds the net rate of return on the Fund's portfolio, the leverage will result in a lower net asset value than if the Fund were not leveraged, and the Fund's ability to pay dividends and meet its asset coverage requirements on the APS would be reduced. Because the long-term bonds included in the Fund's portfolio will typically pay fixed rates of interest while the dividend rate on the APS will be adjusted periodically, this could occur even when both long-term and short-term municipal rates rise. Similarly, any decline in the net asset value of the Fund's investments could result in the Fund being in danger of failing to meet its asset coverage requirements or of losing its expected "Aaa" rating on the APS or, in an extreme case, the Fund's current investment income might not be sufficient to meet the dividend requirements on the APS. In order to counteract such an event, the Fund might need to liquidate investments in order to fund a redemption of some or all of the APS.
While the Fund may from time to time consider reducing leverage in response to actual or anticipated changes in interest rates in an effort to mitigate the increased volatility of current income and net asset value associated with leverage, there can be no assurance that the Fund will actually reduce leverage in the future or that any reduction, if undertaken, will be effective. Changes in the future direction of interest rates are very difficult to predict accurately. If the Fund were to reduce leverage based on a
Risks
prediction about future changes to interest rates, and that prediction turned out to be incorrect, the reduction in leverage would likely operate to reduce the Fund's net asset value relative to the circumstance where the Fund had not reduced leverage. The Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and net asset value if the prediction were to turn out to be correct, and determine not to reduce leverage as described above.
The Fund may also invest up to 10% of its assets in RIBS and invest in other derivative instruments, which may amplify the effects of leverage and, during periods of rising short-term interest rates, may adversely affect the Fund's net asset value. See "The Fund's investments--Residual Interest Municipal Bonds (RIBS)" and the Statement of Additional Information under "Investment objective and policies--Derivative Instruments."
Because the fees paid to PIMCO Advisors and PIMCO will be calculated on the basis of the Fund's managed assets, the fees will be higher when leverage is utilized, giving PIMCO Advisors and PIMCO an incentive to utilize leverage.
ANTI-TAKEOVER PROVISIONS
The Fund's Declaration of Trust and Amended By-Laws include provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of the Board of Trustees. See "Anti-takeover and other provisions in the Declaration of Trust."
CERTAIN AFFILIATIONS
Certain broker-dealers may be considered to be affiliated persons of the Fund, PIMCO Advisors and/or PIMCO due to their possible affiliations with Allianz AG, the ultimate parent of PIMCO Advisors and PIMCO. Absent an exemption from the Securities and Exchange Commission or other regulatory relief, the Fund is generally precluded from effecting certain principal transactions with affiliated brokers, and its ability to purchase securities being underwritten by an affiliated broker or a syndicate including an affiliated broker or to utilize affiliated brokers for agency transactions is subject to restrictions. This could limit the Fund's ability to engage in securities transactions and take advantage of market opportunities. Similar prohibitions apply to trades with the Underwriters or their affiliates during the offering of APS.
How the Fund manages risk
INVESTMENT LIMITATIONS
The Fund has adopted certain investment limitations designed to limit investment risk and maintain portfolio diversification. These limitations (two of which are listed below) are fundamental and may not be changed without the approval of the holders of a majority of the outstanding Common Shares and any Preferred Shares (including APS) voting together as a single class, and the approval of the holders of a majority of any Preferred Shares (including APS) voting as a separate class. The Fund may not:
.Concentrate its investments in a particular industry, as that term is used in the 1940 Act and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time; and
.With respect to 75% of the Fund's total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies, if, as a result, (i) more than 5% of the Fund's total assets would be
How the Fund manages risk
invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer. For the purpose of this restriction, each state and each separate political subdivision, agency, authority or instrumentality of such state, each multi-state agency or authority, and each guarantor, if any, are treated as separate issuers of municipal bonds.
The Fund's industry concentration policy does not preclude it from focusing investments in issuers in a group of related industries (such as different types of utilities).
The Fund is subject to guidelines which are more limiting than the investment restrictions set forth above or in the Statement of Additional Information in order to obtain and maintain a rating of "Aaa" from Moody's on the APS, and may become subject to additional guidelines in the future. See "Rating agency guidelines." The Fund does not anticipate that such guidelines will have a material adverse effect on the Fund's ability to achieve its investment objective. See "Rating Agency guidelines," "Investment objective and policies" and "Investment restrictions" in the Statement of Additional Information for information about these guidelines and a complete list of the fundamental investment policies of the Fund.
QUALITY OF INVESTMENTS
The Fund will invest at least 80% of its net assets in bonds of investment grade quality at the time of investment. Investment grade quality means that such bonds are rated by Rating Agencies within the four highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by PIMCO.
MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK
The Fund may take certain actions if short-term interest rates increase or market conditions otherwise change (or the Fund anticipates such an increase or change) and the Fund's leverage begins (or is expected) to adversely affect Common Shareholders. In order to attempt to offset such a negative impact of leverage on Common Shareholders, the Fund may shorten the average maturity or duration of its investment portfolio (by investing in shorter-term, high- quality securities) or may extend the maturity of outstanding Preferred Shares (including the APS). The Fund may also attempt to reduce leverage by redeeming or otherwise purchasing Preferred Shares (subject to any restrictions discussed under "Description of APS--Redemption") or by reducing any holdings in RIBS or other instruments that create leverage. The success of any such attempt to limit leverage risk depends on PIMCO's ability to accurately predict interest rate or other market changes. Because of the difficulty of making such predictions, the Fund may not be successful in managing its interest rate exposure in the manner described above.
If market conditions suggest that additional leverage would be beneficial, the Fund may issue additional Preferred Shares or utilize other forms of leverage, such as RIBS or other derivative instruments.
HEDGING AND RELATED STRATEGIES
The Fund may use various investment strategies designed to limit the risk of bond price fluctuations and to preserve capital. For instance, the Fund may invest in structured notes for the purpose of reducing the interest rate sensitivity of the Fund's portfolio and, thereby, decreasing the Fund's exposure to interest rate risk. The Fund currently intends that the income on these notes will normally be exempt from federal income tax. Other hedging strategies that the Fund may use include: financial futures contracts; short sales; swap agreements or options thereon; options on financial futures; and options
How the Fund manages risk
based on either an index of municipal securities or on taxable debt securities whose prices, PIMCO believes, correlate with the prices of the Fund's investments. Income earned by the Fund from many 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. If effectively used, hedging strategies will offset in varying percentages losses incurred on the Fund's investments due to adverse interest rate changes. There is no assurance that these hedging strategies will be available at any time or that PIMCO will determine to use them for the Fund. In addition, in accordance with the Rating Agency guidelines described below, the Fund's use of hedging transactions is limited to the types of transactions listed under the definition of "Moody's Hedging Transactions" in the glossary.
Rating agency guidelines
The Fund is required under Moody's guidelines to maintain assets having in the aggregate a Discounted Value at least equal to the APS Basic Maintenance Amount. Moody's has established guidelines for determining Discounted Value. To the extent any particular portfolio holding does not satisfy Moody's guidelines, all or a portion of such holding's value will not be included in the calculation of Discounted Value (as defined by Moody's). 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, although it is not anticipated that in the normal course of business the value of such assets would exceed 20% of the Fund's total assets. The Moody's guidelines also impose limitations on the Fund's investments.
The Fund is also required under the 1940 Act and Rating Agency guidelines to maintain, with respect to shares of APS, asset coverage of at least 200% with respect to senior securities which are shares, including APS (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are shares of a closed- end investment company as a condition of declaring dividends on its common shares) ("1940 Act APS Asset Coverage").
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the APS Basic Maintenance Amount or
(b) the 1940 Act APS Asset Coverage, in each case in accordance with the
requirements of the Rating Agency or Agencies then rating the shares of APS,
the Fund will be required by the Amended By-Laws to redeem shares of APS as
described under "Description of APS--Redemption--Mandatory Redemption."
The Moody's guidelines restrict the Fund's use of some types of investment strategies. For example, the guidelines limit the Fund's use of futures, options and other derivative transactions for hedging or investment purposes, prevent the Fund from entering into hedging transactions other than Moody's Hedging Transactions, restrict the use of forward commitments and similar transactions, and limit the percentage of the Fund's assets that may be invested in any one issuer or type or class of issuer.
The Moody's guidelines also prohibit the Fund from taking some types of actions unless it has received written confirmation from Moody's that such actions would not impair the ratings then assigned to the APS. These include restrictions on borrowing money, engaging in short sales, lending portfolio securities, issuing any class or series of shares ranking prior to or on a parity with the APS with respect to the payment of dividends or the distribution of assets upon dissolution, liquidation or winding up of the Fund or merging or consolidating into or with any other entity.
Rating agency guidelines
The restrictions in the Moody's guidelines may limit the Fund's ability to make investments that PIMCO believes would benefit the Fund. The descriptions of the Moody's guidelines in this section and in "Description of APS--Asset Maintenance" are summaries only and are not complete. The Moody's guidelines are set forth in their entirety in the Fund's Amended By-Laws, which have been filed as an exhibit to the Registration Statement of which this Prospectus is a part.
The Fund may, but is not required to, adopt any modifications to the guidelines that may hereafter be established by Moody'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 APS may, at any time, change or withdraw any such rating. The Board may, without shareholder approval, amend, alter or repeal any or all of the definitions and related provisions which have been adopted by the Fund pursuant to the Rating Agency guidelines in the event the Fund receives written confirmation from Moody's that any such amendment, alteration or repeal would not impair the ratings then assigned by Moody's to the APS.
As recently described by Moody's, a preferred stock rating is an assessment of the capacity and willingness of an issuer to pay preferred stock obligations. The ratings on the APS are not recommendations to purchase, hold or sell those shares, 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 APS will be able to sell such shares in an Auction or otherwise. The ratings are based on current information furnished to Moody's by the Fund and/or PIMCO 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. The Fund's Common Shares have not been rated by a Rating Agency.
A Rating Agency's guidelines will apply to the APS only so long as such Rating Agency is rating such shares. The Fund will pay certain fees to Moody's for rating the APS. The Fund may at some future time seek to have the APS rated by an additional or Substitute Rating Agency.
Description of APS
The following is a brief description of the terms of the APS. This description does not purport to be complete and is subject to and qualified in its entirety by reference to the Fund's Declaration of Trust and Amended By-Laws, including the provisions thereof establishing the APS. The Fund's Declaration of Trust and the form of Amended By-Laws establishing the terms of the APS have been filed as exhibits to the Registration Statement of which this Prospectus is a part.
Each series of APS will be Preferred Shares that entitle their holders to receive dividends when, as and if declared by the Board of Trustees, out of funds legally available therefor, at a rate per annum that may vary for the successive Dividend Periods for each such series. After the Initial Dividend Period, each Subsequent Dividend Period for each series of APS generally will be a 7-Day Dividend Period; provided, however, that prior to any Auction, the Fund may elect, subject to certain limitations described herein, upon giving notice to holders thereof, a Special Dividend Period. The Applicable Rate for a particular Dividend Period for a series of APS will be determined by an Auction conducted on the Business Day before the start of such Dividend Period. Beneficial Owners and Potential Beneficial Owners of APS may participate in Auctions therefor, although, except in the case of Special Dividend Periods of longer than 91 days, Beneficial Owners desiring to continue to hold all of their APS regardless of the Applicable Rate resulting from Auctions need not participate. For an explanation of Auctions and the method of determining the Applicable Rate, see "--The Auction."
Description of APS
The nominee of the Securities Depository is expected to be the sole holder of
record of each series of APS. Accordingly, each purchaser of APS must rely on
(i) the procedures of the Securities Depository and, if such purchaser is not a
member of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and when
applicable) and (ii) the records of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member, to evidence its beneficial ownership of the APS.
When issued and sold, the APS of each series will have a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) and will be fully paid and, except as discussed under "Anti-takeover and other provisions in the Declaration of Trust" below, non-assessable. See "Description of APS--Liquidation Rights." The APS will not be convertible into Common Shares or other shares of beneficial interest of the Fund, and the holders thereof will have no preemptive rights. The APS will not be subject to any sinking fund but will be subject to redemption at the option of the Fund at the Optional Redemption Price on any Dividend Payment Date for such series (except during the Initial Dividend Period and during a Non-Call Period) and, in certain circumstances, will be subject to mandatory redemption by the Fund at the Mandatory Redemption Price stated herein. See "--Redemption."
In addition to serving as the Auction Agent in connection with the Auction Procedures described below, Bankers Trust Company will be the transfer agent, registrar, dividend paying agent and redemption agent for each series of APS. The Auction Agent, however, will serve merely as the agent of the Fund, acting in accordance with the Fund's instructions, and will not be responsible for any evaluation or verification of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent permitted by applicable law) to purchase or otherwise acquire any APS so long as the Fund is current in the payment of dividends on APS and on any other shares of beneficial interest of the Fund ranking on a parity with the APS with respect to the payment of dividends or upon liquidation.
THE AUCTION
General
Holders of the APS of each series will be entitled to receive cumulative cash dividends on their shares when, as and if declared by the Board of Trustees of the Fund, out of the funds legally available therefor, on the Initial Dividend Payment Date with respect to the Initial Dividend Period for each series and, thereafter, on each Dividend Payment Date with respect to a Subsequent Dividend Period for each series (generally a period of seven days subject to certain exceptions set forth under "--Dividends--General") at the rate per annum equal to the Applicable Rate for each such Dividend Period.
The provisions of the Amended By-Laws establishing the terms of the APS offered hereby will provide that the Applicable Rate for each Dividend Period after the Initial Dividend Period for each series will be equal to the rate per annum that the Auction Agent advises has resulted on the Business Day preceding the first day of such Dividend Period due to implementation of the Auction Procedures set forth in the Amended By-Laws in which persons determine to hold or offer to purchase or sell the APS. The Auction Procedures are attached as Appendix C to the Statement of Additional Information. Each periodic operation of such procedures with respect to the APS is referred to herein as an "Auction." If, however, the Fund should fail to pay or duly provide for the full amount of any dividend on or the redemption price of the APS called for redemption, the Applicable Rate for the APS will be determined as set forth under "Dividends--Non-Payment Period; Late Charge."
Description of APS
Auction Agency Agreement
The Fund will enter into the Auction Agency Agreement with the Auction Agent, which provides, among other things, that the Auction Agent will follow the Auction Procedures for the purpose of determining the Applicable Rate for each series of APS. The Fund will pay the Auction Agent compensation for its services under the Auction Agency Agreement.
The Auction Agent will act as agent for the Fund in connection with Auctions. In the absence of bad faith or negligence on its part, the Auction Agent will not be liable for any action taken, suffered or omitted, or for any 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 shall have been negligent in ascertaining the pertinent facts. Pursuant to the Auction Agency Agreement, the Fund is required to indemnify the Auction Agent for certain losses and liabilities incurred by the Auction Agent without negligence or bad faith on its part in connection with the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agency Agreement upon notice to the Fund, which termination may be no earlier than 60 days following delivery of such notice. If the Auction Agent resigns, the Fund will use its best efforts to enter into an agreement with a successor Auction Agent containing substantially the same terms and conditions as the Auction Agency Agreement. The Fund may terminate the Auction Agency Agreement, provided that prior to such termination the Fund shall have entered into such an agreement with respect thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers. The Auction Agent will enter into agreements (collectively, the "Broker-Dealer Agreements") with one or more broker-dealers, or other entities permitted by law to perform the functions required of a Broker-Dealer in the Auction Procedures (collectively, the "Broker-Dealers"), selected by the Fund, which provide for the participation of such Broker-Dealers in Auctions and pursuant to which such Broker-Dealers agree to follow the Auction Procedures. A Broker- Dealer Agreement may be terminated by the Auction Agent or a Broker-Dealer on five days' notice to the other party, provided that the Broker-Dealer Agreement with UBS Warburg LLC may not be terminated without the prior written consent of the Fund, which consent may not be unreasonably withheld.
Securities Depository
The Depository Trust Company initially will act as the Securities Depository for the Agent Members with respect to the APS. All of the shares of each series of APS initially will be registered in the name of Cede & Co., as nominee of the Securities Depository. Such shares will be subject to the provisions restricting transfers of the APS contained in the Amended By-Laws. Cede & Co. initially will be the holder of record of all shares of APS, and Beneficial Owners will not be entitled to receive certificates representing their ownership interest in such shares. See Appendix C (Auction Procedures) to the Statement of Additional Information. The Securities Depository will maintain lists of its participants and will maintain the positions (ownership interests) of the APS held by each Agent Member, whether as the Beneficial Owner thereof for its own account or as nominee for the Beneficial Owner thereof. Payments made by the Fund to holders of APS will be duly made by making payments to the nominee of the Securities Depository.
AUCTION PROCEDURES
The following is a brief summary of the procedures to be used in conducting Auctions. This summary is qualified by reference to the Auction Procedures set forth in Appendix C to the Statement of Additional Information. The Settlement Procedures to be used with respect to Auctions are set forth in Appendix B to the Statement of Additional Information.
Description of APS
Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable Income in Dividends
An Auction to determine the Applicable Rate for the APS offered hereby for each Dividend Period for such shares (other than the Initial Dividend Period therefor) will be held on the last Business Day preceding the first day of such Dividend Period, which first day is also the Dividend Payment Date for the preceding Dividend Period (the date of each Auction being referred to herein as an "Auction Date"). The initial Auction Date will be August 31, 2001 for Series A APS, September 4, 2001 for Series B APS, September 5, 2001 for Series C APS, September 6, 2001 for Series D APS and September 7, 2001 for Series E APS. Auctions for the APS for Dividend Periods after the Initial Dividend Period normally will be held every Monday after the preceding Dividend Payment Date for Series A APS, every such Tuesday for Series B APS, every such Wednesday for Series C APS, every such Thursday for Series D APS and every such Friday for Series E APS; and each subsequent Dividend Period normally will begin on the following Tuesday for Series A APS, on the following Wednesday for Series B APS, on the following Thursday for Series C APS, on the following Friday for Series D APS and on the following Monday for Series E APS (also a Dividend Payment Date). The Auction Date and the first day of the related Dividend Period for a series of APS (both of which must be Business Days) need not be consecutive calendar days. See "--Dividends" for information concerning the circumstances under which a Dividend Payment Date may fall on a date other than the days specified above, which may affect the Auction Date.
Except as noted below and under "Dividends--Gross-up Dividends," whenever the Fund is aware that it will include any net capital gain or other income subject to federal income tax in any dividend on the APS, the Fund will notify the Auction Agent of the amount to be so included at least five Business Days prior to the Auction Date on which the Applicable Rate for such dividend is to be established. Whenever the Auction Agent receives such notice from the Fund, in turn it will notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance with its Broker-Dealer Agreement, will notify its customers who are Beneficial Owners and Potential Beneficial Owners believed to be interested in submitting an Order in the Auction to be held on such Auction Date. The Fund also may include such income in a dividend on the APS without giving advance notice thereof if it increases the dividend by an additional amount calculated as if such income were a Retroactive Taxable Allocation and the additional amount were a Gross-up Dividend; provided that the Fund will notify the Auction Agent of the additional amounts to be included in such dividend at least five Business Days prior to the applicable Dividend Payment Date. See "--Dividends-- Gross-up Dividends."
Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders
On or prior to the Submission Deadline on each Auction Date for a series of
APS:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) "Hold Order"--indicating the number of outstanding APS, if any, such Beneficial Owner desires to continue to hold without regard to Applicable Rate for the next Dividend Period for such shares;
(ii) "Bid"--indicating the number of outstanding APS, if any, that Beneficial Owner desires to continue to hold, provided that the Applicable Rate for the next Dividend Period for such shares is not less than the rate per annum then specified by such Beneficial Owner; and/or
(iii) "Sell Order"--indicating the number of outstanding APS, if any, that such Beneficial Owner offers to sell without regard to the Applicable Rate for the next Dividend Period for such shares; and
Description of APS
(b) Broker-Dealers will contact customers who are Potential Beneficial Owners of APS to determine whether such Potential Beneficial Owners desire to submit Bids indicating the number of APS which they offer to purchase provided that the Applicable Rate for the next Dividend Period is not less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a Broker-Dealer and the communication by a Broker-Dealer, whether or not acting for its own account, to the Auction Agent of the foregoing information is hereinafter referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a Potential Beneficial Owner placing an Order, including a Broker-Dealer acting in such capacity for its own account, is hereinafter referred to as a "Bidder" and collectively as "Bidders." Any Order submitted by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with respect to APS then held by such Beneficial Owner, as well as Bids for additional APS. If, however, a Beneficial Owner offers through its Broker- Dealer to purchase additional APS in such Auction, such Beneficial Owner, for purposes of such offer to purchase additional shares, will be treated as a Potential Beneficial Owner as described below. For information concerning the priority given to different types of Orders placed by Beneficial Owners, see "--Submission of Orders by Broker-Dealers to Auction Agent" below.
The "Maximum Applicable Rate" for a series of APS will be the Applicable Percentage of the Reference Rate. The Auction Agent will round each applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent per annum, with any such number ending in five ten-thousandths of one percent being rounded upwards to the nearest one-thousandth (0.001) of one percent. The Auction Agent will not round the applicable Reference Rate as part of its calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for a series of APS will depend on the credit rating assigned to such series. The "Applicable Percentage" will be determined based on (i) the credit rating assigned on such date to such shares by Moody's (or if Moody's shall not make such rating available, the equivalent of such rating by a Substitute Rating Agency), and (ii) whether the Fund has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend on the APS as follows:
Applicable Percentage Applicable Percentage
of Reference Rate-- of Reference Rate--
Moody's Credit Ratings on APS No Notification Notification
--------------------------------------------------------------------------------
aa3 or higher....................... 110% 150%
a................................... 125 160
baa................................. 150 250
Below baa........................... 200 275
|
There is no minimum Applicable Rate in respect of any Dividend Period.
The Fund will take all reasonable action necessary to enable Moody's to provide a rating for each series of APS. If Moody's does not make such a rating available, the Underwriters or their affiliates and successors, after consultation with the Fund, will select another Rating Agency to act as a Substitute Rating Agency.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a Potential Beneficial Owner specifying a rate per annum higher than the Maximum Applicable Rate will not be considered. See "--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and "--Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares."
Description of APS
A Broker-Dealer also may hold APS in its own account as a Beneficial Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be treated in the same manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit to the Auction Agent an Order in respect of any APS 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 APS held by it, as described in the next paragraph. If a Broker-Dealer participates in an Auction as an Existing Holder or a Potential Holder only to represent the interests of a Beneficial Owner or Potential Beneficial Owner, whether it be its customers or itself, all discussion herein relating to the consequences of an Auction for Existing Holders and Potential Holders also applies to the underlying beneficial ownership interests represented thereby. For information concerning the priority given to different types of Orders placed by Existing Holders, see "--Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or sale in an Auction will be settled on the Business Day next succeeding the Auction Date at a price per share equal to $25,000. See "-- Notification of Results; Settlement."
If one or more Orders covering in the aggregate all of the outstanding APS held by a Beneficial Owner are not submitted to the Auction Agent prior to the Submission Deadline, either because a Broker-Dealer failed to contact such Beneficial Owner or otherwise, the Auction Agent will deem a Hold Order (in the case of an Auction relating to a Special Dividend Period of 91 days or less) or a Sell Order (in the case of an Auction relating to a Special Dividend Period of longer than 91 days) to have been submitted on behalf of such Beneficial Owner covering the number of outstanding APS held by such Beneficial Owner and not subject to Orders submitted to the Auction Agent.
If all of the outstanding APS are subject to Submitted Hold Orders, the Dividend Period next succeeding the Auction automatically will be the same length as the immediately preceding Dividend Period, and the Applicable Rate for the next Dividend Period for all the APS will be 40% of the Reference Rate on the date of the applicable Auction (or 60% of such rate if the Fund has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend on the APS).
For the purposes of an Auction, the APS for which the Fund shall have given notice of redemption and deposited moneys therefor with the Auction Agent in trust or segregated in an account at the Fund's custodian bank for the benefit of the Auction Agent, as set forth under "--Redemption," will not be considered as outstanding and will not be included in such Auction. The Fund may not submit an Order in any Auction.
Neither the Fund nor the Auction Agent will be responsible for a Broker- Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with the foregoing.
Submission of Orders by Broker-Dealers to Auction Agent
Prior to 1:00 p.m., New York City time, on each Auction Date, or such other time on the Auction Date as may be specified by the Auction Agent (the "Submission Deadline"), each Broker-Dealer will submit to the Auction Agent in writing or through the Auction Agent's auction processing system all Orders obtained by it for the Auction for a series of APS to be conducted on such Auction Date, designating itself (unless otherwise permitted by the Fund) as the Existing Holder or Potential Holder in respect of the APS 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 for any Auction Date, shall be irrevocable.
Description of APS
If the rate per annum specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent will round such rate per annum up to the next highest one-thousandth (.001) of one-percent. If one or more Orders of an Existing Holder are submitted to the Auction Agent and such Orders cover in the aggregate more than the number of outstanding shares of APS held by such Existing Holder, such Orders will be considered valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the number of outstanding APS held by such Existing Holder, provided that if more than one Hold Order is submitted by such Existing Holder and the number of APS subject to such Hold Orders exceeds the number of outstanding APS held by such Existing Holder, the number of APS subject to each of such Hold Orders will be reduced pro rata so that such Hold Orders, in the aggregate, will cover exactly the number of outstanding APS held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of their respective rates per annum if more than one Bid is submitted by such Existing Holder, up to and including the excess of the number of outstanding APS held by such Existing Holder over the number of outstanding APS subject to any Hold Order referred to in clause (i) above (and if more than one Bid submitted by such Existing Holder specifies the same rate per annum and together they cover more than the remaining number of shares that can be the subject of valid Bids after application of clause (i) above and of the foregoing portion of this clause (ii) to any Bid or Bids specifying a lower rate or rates per annum, the number of shares subject to each of such Bids will be reduced pro rata so that such Bids, in the aggregate, cover exactly such remaining number of outstanding shares); and the number of outstanding shares, if any, subject to Bids not valid under this clause (ii) shall be treated as the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the excess of the number of outstanding APS held by such Existing Holder over the sum of the number of APS subject to Hold Orders referred to in clause (i) above and the number of APS subject to valid Bids by such Existing Holder referred to in clause (ii) above; provided that, if more than one Sell Order is submitted by any Existing Holder and the number of APS subject to such Sell Orders is greater than such excess, the number of APS subject to each of such Sell Orders will be reduced pro rata so that such Sell Orders, in the aggregate, will cover exactly the number of APS equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction, each Bid submitted in such Auction will be considered a separate Bid with the rate per annum and number of APS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline for each Auction, the Auction Agent will assemble all Orders submitted or deemed submitted to it by the Broker- Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or deemed submitted by a Broker-Dealer hereinafter being referred to as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as a "Submitted Order") and will determine the excess of the number of outstanding APS over the number of outstanding APS subject to Submitted Hold Orders (such excess being referred to as the "Available APS") and whether Sufficient Clearing Bids have been made in such Auction. Sufficient Clearing Bids will have been made if the number of outstanding APS that are the subject of Submitted Bids of Potential Holders with rates per annum not higher than the Maximum Applicable Rate equals or exceeds the number of outstanding shares that are the subject of Submitted Sell Orders (including the number of shares subject to Bids of Existing Holders specifying rates per annum higher than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made, the Auction Agent will determine the lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate") which
Description of APS
would result in the number of shares subject to Submitted Bids specifying such rate per annum or a lower rate per annum being at least equal to the Available APS. If Sufficient Clearing Bids have been made, the Winning Bid Rate will be the Applicable Rate for the next Dividend Period for the APS then outstanding. If Sufficient Clearing Bids have not been made (other than because all outstanding APS are the subject of Submitted Hold Orders), the Dividend Period next following the Auction automatically will be a 7-Day Dividend Period, and the Applicable Rate for such Dividend Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that have Submitted Sell Orders will not be able to sell in the Auction all, and may not be able to sell any, of their APS subject to such Submitted Sell Orders. See "--Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares." Thus, under some circumstances, Beneficial Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares
Based on the determinations described under "--Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" and subject to the discretion of the Auction Agent to round as described below, Submitted Bids and Submitted Sell Orders will be accepted or rejected in the order of priority set forth in the Auction Procedures with the result that Existing Holders and Potential Holders of a series of APS will sell, continue to hold and/or purchase APS as set forth below. Existing Holders that submit or are deemed to have submitted Hold Orders will continue to hold the APS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate per annum higher than the Winning Bid Rate or a Submitted Sell Order will sell the outstanding APS subject to such Submitted Bid or Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate per annum lower than the Winning Bid Rate will continue to hold the outstanding APS subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a rate per annum lower than the Winning Bid Rate will purchase the number of APS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate per annum equal to the Winning Bid Rate will continue to hold the outstanding shares of APS subject to such Submitted Bids, unless the number of outstanding APS subject to all such Submitted Bids of Existing Holders is greater than the excess of the Available APS over the number of APS accounted for in clauses (b) and (c) above, in which event each Existing Holder with such a Submitted Bid will sell a number of outstanding APS determined on a pro rata basis based on the number of outstanding APS subject to all such Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a rate per annum equal to the Winning Bid Rate will purchase any Available APS not accounted for in clause (b), (c) or (d) above on a pro rata basis based on the APS subject to all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all outstanding APS are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate per annum equal to or lower than the Maximum Applicable Rate will continue to hold the outstanding APS subject to such Submitted Bid;
Description of APS
(b) each Potential Holder that placed a Submitted Bid specifying a rate per annum equal to or lower than the Maximum Applicable Rate will purchase the number of APS subject to such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate per annum higher than the Maximum Applicable Rate or a Submitted Sell Order will sell a number of outstanding APS determined on a pro rata basis based on the outstanding APS subject to all such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of APS, the Auction Agent, in such manner as, in its sole discretion, it shall determine, will round up or down the number of APS being sold or purchased on such Auction Date so that each share sold or purchased by each Existing Holder or Potential Holder will be a whole APS. If any Potential Holder would be entitled or required to purchase less than a whole APS, the Auction Agent, in such manner as, in its sole discretion, it shall determine, will allocate APS for purchase among Potential Holders so that only whole APS are purchased by any such Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing any APS.
Notification of Results; Settlement
The Auction Agent will advise each Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid or Sell Order was accepted or rejected in whole or in part and of the Applicable Rate for the next Dividend Period for the related APS by telephone or through the Auction Agent's auction processing system at approximately 3:00 p.m., New York City time, on the Auction Date for such Auction. Each such Broker-Dealer that submitted an Order for the account of a customer then will advise such customer whether such Bid or Sell Order was accepted or rejected, will confirm purchases and sales with each customer purchasing or selling APS as a result of the Auction and will advise each customer purchasing or selling APS to give instructions to its Agent Member of the Securities Depository to pay the purchase price against delivery of such shares or to deliver such shares against payment therefor as appropriate. If a customer selling APS as a result of an Auction fails to instruct its Agent Member to deliver such shares, the Broker-Dealer that submitted such customer's Bid or Sell Order will instruct such Agent Member to deliver such shares against payment therefor. Each Broker-Dealer that submitted a Hold Order in an Auction on behalf of a customer also will advise such customer of the Applicable Rate for the next Dividend Period for the APS. The Auction Agent will record each transfer of APS on the record book of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the day after each Auction Date, the transactions described above will be executed through the Securities Depository, and the accounts of the respective Agent Members at the Securities Depository will be debited and credited as necessary to effect the purchases and sales of APS as determined in such Auction. Purchasers will make payment through their Agent Members in same-day funds to the Securities Depository against delivery through their Agent Members; the Securities Depository will make payment in accordance with its normal procedures, which now provide for payment in same-day funds. If the procedures of the Securities Depository applicable to APS shall be changed to provide for payment in next-day funds, then purchasers may be required to make payment in next-day funds. If the certificates for the APS are not held by the Securities Depository or its nominee, payment will be made in same-day funds to the Auction Agent against delivery of such certificates.
If any Existing Holder selling APS in an Auction fails to deliver such shares, the Broker-Dealer of any person that was to have purchased APS in such Auction may deliver to such person a number of whole APS that is less than the number of shares that otherwise was to be purchased by such person. In such event, the number of APS to be so delivered will be determined by such Broker-Dealer. Delivery of such
Description of APS
lesser number of shares will constitute good delivery. Each Broker-Dealer Agreement also will provide that neither the Fund nor the Auction Agent will have responsibility or liability with respect to the failure of a Potential Beneficial Owner, Potential Beneficial Owner or their respective Agent Members to deliver APS or to pay for APS purchased or sold pursuant to an Auction or otherwise.
BROKER-DEALERS
General
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price
of APS placed by such Broker-Dealer at such Auction. The service charge (i) for
any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for any Special Dividend Period shall be determined by mutual consent of
the Fund and any such Broker-Dealer or Broker-Dealers and shall be based upon a
selling concession that would be applicable to an underwriting of fixed or
variable rate preferred shares with a similar final maturity or variable rate
dividend period, respectively, at the commencement of the Dividend Period with
respect to such Auction. For the purposes of the preceding sentence, the APS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by such
Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold such
shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders in Auctions for its own account, unless the Fund notifies all Broker-Dealers that they no longer may do so; provided that Broker-Dealers may continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its own account in any Auction of APS, it may have knowledge of Orders placed through it in that Auction and therefore have an advantage over other Bidders, but such Broker-Dealer would not have knowledge of Orders submitted by other Broker- Dealers in that Auction.
Secondary Market Trading and Transfers of APS
The Broker-Dealers may maintain a secondary trading market in the APS outside of Auctions; however, they have no obligation to do so, and may discontinue such activity at any time. There can be no assurance that a secondary market for the APS will develop or, if it does develop, that it will provide holders with a liquid trading market (i.e., trading will depend on the presence of willing buyers and sellers and the trading price is subject to variables to be determined at the time of the trade by the Broker-Dealers). The APS will not be registered on any stock exchange or on any automated quotation system. An increase in the level of interest rates, particularly during any Long Term Dividend Period for a series of APS, likely will have an adverse effect on the secondary market price of such APS, and a selling shareholder may sell APS between Auctions at a price per share of less than $25,000.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of APS only in whole shares and only (1) pursuant to a Bid or Sell
Order placed with the Auction Agent in accordance with the Auction Procedures,
(2) to a Broker-Dealer or (3) to such other persons as may be permitted by the
Fund; provided, however, that (a) a sale, transfer or other disposition of
shares of APS 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, such Beneficial Owner or
Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises
the Auction Agent of such transfer.
Description of APS
DIVIDENDS
General
The holders of APS of each series will be entitled to receive, when, as and if declared by the Board of Trustees, out of funds legally available therefor, cumulative cash dividends on their shares, at the Applicable Rate determined as set forth below under "--Determination of Dividend Rate," payable on the dates set forth below. Dividends on the APS so declared and payable will be paid (i) in preference to and in priority over any dividends so declared and payable on the Common Shares, and (ii) to the extent permitted under the Code and to the extent available, out of net tax-exempt income earned on the Fund's investments. Dividends on the APS, to the extent that they are derived from municipal bonds, generally will be exempt from federal income tax, although all of those dividends will be a tax preference item for corporate taxpayers and a portion of those dividends may be a tax preference item for purposes of the federal alternative minimum tax for individuals ("Preference Item"). See "Taxes."
Dividends on each series of APS will accumulate from the date on which the Fund originally issues the APS (the "Date of Original Issue") and will be payable on the APS on the dates described below. Dividends on a series of APS with respect to the Initial Dividend Period shall be payable on the Initial Dividend Payment Date for that series. Following the Initial Dividend Payment Date, dividends on each series of APS will be payable, at the option of the Fund, either (i) with respect to any 7-Day Dividend Period and any Short Term Dividend Period of 35 or fewer days, on the day next succeeding the last day thereof or (ii) with respect to any Short Term Dividend Period of more than 35 days and with respect to any Long Term Dividend Period, monthly on the first Business Day of each calendar month during such Short Term Dividend Period or Long Term Dividend Period and on the day next succeeding the last day thereof (each such date referred to in clause (i) or (ii) being referred to herein as a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment Date is not a Business Day, the Dividend Payment Date will be the first Business Day next succeeding such Normal Dividend Payment Date. Although any particular Dividend Payment Date may not occur on the originally scheduled date because of the exceptions discussed above, the next succeeding Dividend Payment Date, subject to such exceptions, will nonetheless occur on the next following originally scheduled date. If for any reason a Dividend Period for a series of APS is scheduled to begin on the same day and end on the same day as a Dividend Period for another series of APS, then the last day of the Dividend Period for such other series of APS shall be the second Business Day next succeeding such scheduled day unless the Fund obtains the opinion of tax counsel referred to below. Subject to the limitation in the next sentence, if for any reason a Dividend Payment Date cannot be fixed as described above, then the Board of Trustees will fix the Dividend Payment Date. However, Dividend Periods of any series of APS shall not be co-extensive with the Dividend Period of any other series of APS unless the Fund has received an opinion of tax counsel that having such co-extensive periods will not affect the deductibility, for federal income tax purposes, of dividends paid on the different series of APS. The Board of Trustees before authorization of a dividend may change a Dividend Payment Date if such change does not adversely affect the contract rights of the holders of APS set forth in the Declaration of Trust or Amended By-Laws. The Initial Dividend Period, 7-Day Dividend Periods and Special Dividend Periods are hereinafter sometimes referred to as "Dividend Periods." Each dividend payment date determined as provided above is hereinafter referred to as a "Dividend Payment Date."
Prior to each Dividend Payment Date, the Fund is required to deposit with the Auction Agent sufficient funds for the payment of declared dividends. The Fund does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the APS as of 12:00 noon, New York City time, on the Business Day preceding the Dividend Payment Date, which holder is expected to be the nominee of the Securities Depository. See "--The Auction--Securities Depository." The Securities Depository will
Description of APS
credit the accounts of the Agent Members of the Existing Holders in accordance with the Securities Depository's normal procedures, which provide for payment in same-day funds. The Agent Member of an Existing Holder will be responsible for holding or disbursing such payments on the applicable Dividend Payment Date to such Existing Holder in accordance with the instructions of such Existing Holder. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the nominee of the Securities Depository. Any dividend payment made on the APS first shall be credited against the earliest declared but unpaid dividends accumulated with respect to such shares.
Holders of the APS will not be entitled to any dividends, whether payable in cash, property or stock, in excess of full cumulative dividends except as described under "--Gross-up Dividends" and "--Non-Payment Period; Late Charge" below. No interest will be payable in respect of any dividend payment or payments on the APS which may be in arrears.
The amount of cash dividends per share of APS of each series payable (if declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and each Dividend Payment Date of each Short Term Dividend Period will be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which will be the number of days in such Dividend Period or part thereof that such share was outstanding and for which dividends are payable on such Dividend Payment Date and the denominator of which will be 365, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent. During any Long Term Dividend Period, the amount of cash dividends per share of APS payable (if declared) on any Dividend Payment Date will be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which will be such number of days in such part of such Dividend Period that such share was outstanding and for which dividends are payable on such Dividend Payment Date and the denominator of which will be 360, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent.
Notification of Dividend Period
The Fund, at its sole option and to the extent permitted by law, by telephonic and written notice (a "Request for Special Dividend Period") to the Auction Agent and to each Broker-Dealer, may request that the next succeeding Dividend Period for a series of APS will be a number of days (other than seven), evenly divisible by seven, and not fewer than fourteen nor more than 364 in the case of a Short Term Dividend Period or one whole year or more but not greater than five years in the case of a Long Term Dividend Period, specified in such notice, provided that the Fund may not give a Request for Special Dividend Period for a Dividend Period of greater than 28 days (and any such request will be null and void) unless, for any Auction occurring after the initial Auction, Sufficient Clearing Bids were made in the last occurring Auction and unless full cumulative dividends, any amounts due with respect to redemptions, and any Gross-up Dividends payable prior to such date have been paid in full. Such Request for Special Dividend Period, in the case of a Short Term Dividend Period, shall be given on or prior to the second Business Day but not more than seven Business Days prior to an Auction Date for the APS of that series and, in the case of a Long Term Dividend Period, shall be given on or prior to the second Business Day but not more than 28 days prior to an Auction Date for the APS of that series. Upon receiving such Request for Special Dividend Period, the Broker-Dealers jointly shall determine the Optional Redemption Price of the APS of that series during such Special Dividend Period and the Specific Redemption Provisions and shall give the Fund and the Auction Agent written notice (a "Response") of such determination by no later than the second Business Day prior to such Auction Date. In making such determination, the Broker-Dealers will consider (i) existing short-term and long-term market rates and indices of such short-term and long-term rates, (ii) existing market supply and demand for short-term and long-term securities, (iii) existing yield curves for short-term and long-term
Description of APS
securities comparable to the APS, (iv) industry and financial conditions which
may affect the APS of that series, (v) the investment objective of the Fund and
(vi) the Dividend Periods and dividend rates at which current and potential
beneficial holders of the APS would remain or become beneficial holders.
After providing the Request for Special Dividend Period to the Auction Agent and each Broker-Dealer as set forth above, the Fund, by no later than the second Business Day prior to such Auction Date, may give a notice (a "Notice of Special Dividend Period") to the Auction Agent, the Securities Depository and each Broker-Dealer, which notice will specify (i) the duration of the Special Dividend Period, (ii) the Optional Redemption Price, if any, as specified in the related Response and (iii) the Specific Redemption Provisions, if any, as specified in the related Response. The Fund has agreed to provide a copy of such Notice of Special Dividend Period to Moody's. The Fund will not give a Notice of Special Dividend Period, and, if such Notice of Special Dividend Period was given already, will give telephonic and written notice of its revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the Securities Depository on or prior to the Business Day prior to the relevant Auction Date if (x) either the 1940 Act APS Asset Coverage is not satisfied or the Fund fails to maintain Moody's Eligible Assets with an aggregate Discounted Value at least equal to the APS Basic Maintenance Amount, on each of the two Valuation Dates immediately preceding the Business Day prior to the relevant Auction Date on an actual basis and on a pro forma basis giving effect to the proposed Special Dividend Period (using as a pro forma dividend rate with respect to such Special Dividend Period the dividend rate which the Broker-Dealers shall advise the Fund is an approximately equal rate for securities similar to the APS with an equal dividend period) or (y) sufficient funds for the payment of dividends payable on the immediately succeeding Dividend Payment Date have not been irrevocably deposited with the Auction Agent by the close of business on the third Business Day preceding the Auction Date immediately preceding such Dividend Payment Date. The Fund also shall provide a copy of such Notice of Revocation to Moody's. If the Fund is prohibited from giving a Notice of Special Dividend Period as a result of the factors enumerated in clause (x) or (y) above or if the Fund gives a Notice of Revocation with respect to a Notice of Special Dividend Period, the next succeeding Dividend Period for that series will be a 7-Day Dividend Period. In addition, in the event Sufficient Clearing Bids are not made in an Auction, or if an Auction is not held for any reason, the next succeeding Dividend Period will be a 7-Day Dividend Period, and the Fund may not again give a Notice of Special Dividend Period (and any such attempted notice will be null and void) until Sufficient Clearing Bids have been made in an Auction with respect to a 7-Day Dividend Period.
Determination of Dividend Rate
The dividend rate on a series of APS during the period from and including the Date of Original Issue for the APS to but excluding the Initial Dividend Payment Date for that series of APS (the "Initial Dividend Period") will be the rate per annum set forth on the inside cover page hereof. Commencing on the Initial Dividend Payment Date for a series of APS, the Applicable Rate on that series of APS for each Subsequent Dividend Period, which Subsequent Dividend Period shall be a period commencing on and including a Dividend Payment Date and ending on and including the calendar day prior to the next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period if there is more than one Dividend Payment Date), shall be equal to the rate per annum that results from the Auction with respect to such Subsequent Dividend Period. Cash dividends shall be calculated as set forth above under "Dividends--General."
Non-Payment Period; Late Charge
A "Non-Payment Period" for a series of APS will commence if the Fund fails to
(i) declare, prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on or (to the extent permitted
as described below) within three Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York City time, on
the Business Day
Description of APS
preceding such Dividend Payment Date, the full amount of any dividend on the
APS payable on such Dividend Payment Date or (ii) deposit, irrevocably in
trust, in same-day funds, with the Auction Agent by 12:00 noon, New York City
time, (A) on such Dividend Payment Date the full amount of any cash dividend on
such shares payable (if declared) on such Dividend Payment Date or (B) on any
redemption date for any APS called for redemption, the Mandatory Redemption
Price per share of such APS or, in the case of an optional redemption, the
Optional Redemption Price per share. Such Non-Payment Period will consist of
the period commencing on and including the aforementioned Dividend Payment Date
or redemption date, as the case may be, and ending on and including the
Business Day on which, by 12:00 noon, New York City time, all unpaid cash
dividends and unpaid redemption prices shall have been so deposited or
otherwise shall have been made available to the applicable holders in same-day
funds, provided that a Non-Payment Period for the APS will not end unless the
Fund shall have given at least five days' but no more than 30 days' written
notice of such deposit or availability to the Auction Agent, the Securities
Depository and all holders of the APS of such series. Notwithstanding the
foregoing, the failure by the Fund to deposit funds as provided for by clauses
(ii) (A) or (ii) (B) above within three Business Days after any Dividend
Payment Date or redemption date, as the case may be, in each case to the extent
contemplated below, shall not constitute a "Non-Payment Period." The Applicable
Rate for each Dividend Period for the APS of any series, commencing during a
Non-Payment Period, will be equal to the Non-Payment Period Rate; and each
Dividend Period commencing after the first day of, and during, a Non-Payment
Period shall be a 7-Day Dividend Period. Any dividend on the APS due on any
Dividend Payment Date for such shares (if, prior to the close of business on
the second Business Day preceding such Dividend Payment Date, the Fund has
declared such dividend payable on such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect to such
shares not paid to such persons when due may be paid to such persons in the
same form of funds by 12:00 noon, New York City time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may be,
provided that such amount is accompanied by a late charge calculated for such
period of non-payment at the Non-Payment Period Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
divided by 365, and in such case such period shall not constitute a Non-Payment
Period. In the case of a willful failure of the Fund to pay a dividend on a
Dividend Payment Date or to redeem any APS on the date set for such redemption,
the preceding sentence shall not apply and the Applicable Rate for the Dividend
Period commencing during the Non-Payment Period resulting from such failure
shall be the Non-Payment Period Rate. For the purposes of the foregoing,
payment to a person in same-day funds on any Business Day at any time will be
considered equivalent to payment to that person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day. The
"Non-Payment Period Rate" initially will be 200% of the applicable Reference
Rate (or 275% of such rate if the Fund has provided notification to the Auction
Agent prior to the Auction establishing the Applicable Rate for any dividend
that net capital gains or other taxable income will be included in such
dividend on the APS), provided that the Board of Trustees of the Fund shall
have the authority to adjust, modify, alter or change from time to time the
initial Non-Payment Period Rate if the Board of Trustees of the Fund determines
and Moody's (or any Substitute Rating Agency in lieu of Moody's in the event
Moody's shall not rate the APS) advises the Fund in writing that such
adjustment, modification, alteration or change will not adversely affect its
then-current rating on the APS.
Restrictions on Dividends and Other Payments
Under the 1940 Act, the Fund may not declare dividends or make other distributions on Common Shares or purchase any such shares if, at the time of the declaration, distribution or purchase, as
Description of APS
applicable (and after giving effect thereto), asset coverage (as defined in the 1940 Act) with respect to the outstanding APS would be less than 200% (or such other percentage as in the future may be required by law). The foregoing limitations on dividends, other distributions and purchases in certain circumstances may impair the Fund's ability to maintain its qualification as a regulated investment company under the Code. See "Taxes." Upon any failure to pay dividends on the APS for two years or more, the holders of the APS will acquire certain additional voting rights. See "--Voting Rights" below.
For so long as any APS are outstanding, the Fund will not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase, Common Shares or other shares, if any, ranking junior to the APS as to dividends or upon liquidation) in respect of Common Shares or any other shares of the Fund ranking junior to or on a parity with the APS as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any Common Shares or any other such junior shares (except by conversion into or exchange for stock of the Fund ranking junior to APS as to dividends and upon liquidation) or any such parity stock (except by conversion into or exchange for stock of the Fund ranking junior to or on a parity with APS as to dividends and upon liquidation), unless (A) immediately after such transaction, the Fund would have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount, and the 1940 Act APS Asset Coverage (see "--Asset Maintenance" and "--Redemption" below) would be satisfied, (B) full cumulative dividends on the APS due on or prior to the date of the transaction have been declared and paid or shall have been declared and sufficient funds for the payment thereof deposited with the Auction Agent, (C) any Gross-up Dividend required to be paid on or before the date of such declaration or payment has been paid and (D) the Fund has redeemed the full number of APS required to be redeemed by any provision for mandatory redemption contained in the Amended By- Laws.
Inclusion of Taxable Income in Dividends
Where the Fund is aware that it will include any net capital gains or other taxable income in any dividend on APS, the Fund will notify the Auction Agent of the amount to be so included prior to the Auction Date on which the Applicable Rate for the dividend is to be established. The Fund may also include such income in a dividend on shares of APS without giving notice in advance of the Auction Date if it increases the dividend by an additional amount calculated as if such income were the subject of a Retroactive Taxable Allocation and the additional amount were a Gross-up Dividend (as described immediately below) and notifies the Auction Agent of such inclusion at least five days prior to the applicable Dividend Payment Date.
Gross-up Dividends
The Fund may retroactively allocate net capital gains or other Taxable Income to the APS without giving the advance notice to the Auction Agent described above under "--The Auction--Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of Taxable Income in Dividends." If the Fund does so solely by reason of the fact that such allocation is made as a result of the redemption of all or a portion of the outstanding shares of APS or the liquidation of the Fund (a "Retroactive Taxable Allocation"), the Fund, within 90 days (and generally within 60 days) after the end of the Fund's fiscal year for which a Retroactive Taxable Allocation is made, will provide notice thereof to the Auction Agent and to each holder of APS (initially Cede & Co. as nominee of the Securities Depository) during such fiscal year at such holder's address as the same appears or last appeared on the stock books of the Fund. Within 30 days after such notice is given to the Auction Agent, the Fund will pay to the Auction Agent (who then will distribute to such holders of the APS), out of funds legally available therefor, an amount equal to the aggregate Gross-up Dividend (as defined below) with respect to all Retroactive Taxable Allocations made to such holders during the fiscal year in question. The Fund will not otherwise compensate the holders of the APS for any tax liability caused by the retroactive allocation of net capital gains or other taxable income to the APS. See "Taxes."
Description of APS
A "Gross-up Dividend" means a payment to a present or former holder of the APS of an amount which, when giving effect to the Retroactive Taxable Allocation made to such holder with respect to the fiscal year in question, would cause such holder's after-tax return (taking into account both the Retroactive Taxable Allocation and the Gross-up Dividend) to be equal to the after-tax return the holder would have received if there had been no Retroactive Taxable Allocation. A Gross-up Dividend shall be calculated (i) without consideration being given to the time value of money, (ii) assuming that none of the dividends received from the Fund is a Preference Item, and (iii) assuming that each Retroactive Taxable Allocation would be taxable to each holder of APS at the maximum marginal federal income tax rate (including any surtax) applicable to the taxable character of the distribution (i.e., ordinary income or net capital gain) in the hands of an individual or a corporation, whichever is greater (disregarding the effect of any state and local taxes and the phase out of, or provision limiting, personal exemptions, itemized deductions, or the benefit of lower tax brackets). The Fund generally intends to designate any Gross-up Dividend as an "exempt-interest" dividend to the extent permitted by applicable law. However, a portion or all of any Gross-up Dividend will be taxable to the recipient thereof. See "Taxes." The Fund will not pay a further Gross-up Dividend with respect to any taxable portion of a Gross-up Dividend. The Fund shall not be required to pay Gross-up Dividends with respect to any net capital gain or other taxable income determined by the IRS to be allocable in a manner different from that allocated by the Fund.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance requirements under the terms of the Amended By-Laws. These requirements are summarized below.
1940 Act APS Asset Coverage
The Fund will be required under the Amended By-Laws to maintain, with respect to the APS, as of the last Business Day of each month in which any APS are outstanding, asset coverage of at least 200% with respect to senior securities which are shares of beneficial interest in the Fund, including the APS (or such other asset coverage as in the future may be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are shares of beneficial interest of a closed-end investment company as a condition of paying dividends on its common stock) ("1940 Act APS Asset Coverage"). If the Fund fails to maintain 1940 Act APS Asset Coverage and such failure is not cured as of the last Business Day of the following month (the "1940 Act Cure Date"), the Fund will be required under certain circumstances to redeem certain of the APS. See "--Redemption" below.
The 1940 Act APS Asset Coverage immediately following the issuance of APS offered hereby (after giving effect to the deduction of the sales load and offering expenses for the APS), computed using the Fund's net assets as of August 3, 2001, and assuming the APS had been issued as of such date, will be as follows:
Value of Fund assets less liabilities not
constituting senior securities $545,794,087
______________________________________________ = ____________ = 273%
Senior securities representing indebtedness plus $200,000,000
liquidation value of the shares of APS
|
APS Basic Maintenance Amount
So long as the APS are outstanding, the Fund will be required under the Amended By-Laws to maintain as of each Business Day (a "Valuation Date") Moody's Eligible Assets having in the aggregate a Discounted Value at least equal to the APS Basic Maintenance Amount. If the Fund fails to meet such
Description of APS
requirement as of any Valuation Date and such failure is not cured on or before the sixth Business Day after such Valuation Date (the "APS Basic Maintenance Cure Date"), the Fund will be required in certain circumstances to redeem certain of the APS. Upon any failure to maintain the required Discounted Value, the Fund will use its best efforts to alter the composition of its portfolio to retain a Discounted Value at least equal to the APS Basic Maintenance Amount on or prior to the APS Basic Maintenance Cure Date. See "--Redemption."
The "APS Basic Maintenance Amount" as of any Valuation Date is defined as the
dollar amount equal to the sum of (i)(A) the product of the number of shares of
APS outstanding on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Shares outstanding on such
date multiplied by the liquidation preference of such shares), plus any
redemption premium applicable to shares of APS (or other Preferred Shares) then
subject to redemption; (B) the aggregate amount of dividends that will have
accumulated at the respective Applicable Rates (whether or not earned or
declared) to (but not including) the first respective Dividend Payment Dates
for shares of APS outstanding that follow such Valuation Date (plus the
aggregate amount of dividends, whether or not earned or declared, that will
have accumulated in respect of other outstanding Preferred Shares to, but not
including, the first respective dividend payment dates for such other shares
that follow such Valuation Date); (C) the aggregate amount of dividends that
would accumulate on shares of each series of APS outstanding from such first
respective Dividend Payment Date therefor through the 49th day after such
Valuation Date, at the Maximum Applicable Rate (calculated as if such Valuation
Date were the Auction Date for the Dividend Period commencing on such Dividend
Payment Date) for a 7-Day Dividend Period of shares of such series to commence
on such Dividend Payment Date, assuming, solely for purposes of the foregoing,
that if on such Valuation Date the Fund shall have delivered a Notice of
Special Dividend Period to the Auction Agent with respect to shares of such
series, such Maximum Applicable Rate shall be the higher of (a) the Maximum
Applicable Rate for the Special Dividend Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Applicable Rate for
a 7-Day Rate Period of shares of such series to commence on such Dividend
Payment Date, multiplied by the Moody's Volatility Factor applicable to a 7-Day
Dividend Period, or, in the event the Fund shall have delivered a Notice of
Special Dividend Period to the Auction Agent with respect to shares of such
series designating a Special Dividend Period consisting of 49 days or more, the
Moody's Volatility Factor applicable to a Special Dividend Period of that
length (plus the aggregate amount of dividends that would accumulate at the
maximum dividend rate or rates on any other Preferred Shares outstanding from
such respective dividend payment dates through the 49th day after such
Valuation Date, as established by or pursuant to the respective statements
establishing and fixing the rights and preferences of such other Preferred
Shares) (except that (1) if such Valuation Date occurs during a Non-Payment
Period (or, in the case of Preferred Shares other than APS, a period similar to
a Non-Payment Period), the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in
respect of which such Non-Payment Period is applicable and (2) for those days
during the period described in this subparagraph (C) in respect of which the
Applicable Rate in effect immediately prior to such Dividend Payment Date will
remain in effect (or, in the case of Preferred Shares other than APS, in
respect of which the dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect), the dividend for
purposes of calculation would accumulate at such Applicable Rate (or other rate
or rates, as the case may be) in respect of those days); (D) the amount of
anticipated expenses of the Fund for the 90 days subsequent to such Valuation
Date; (E) the amount of the Fund's Maximum Potential Gross-up Dividend
Liability in respect of shares of APS (and similar amounts payable in respect
of other Preferred Shares) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (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 (ii) the
value (i.e., the face value of
Description of APS
cash, short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short- term securities that are the direct obligation of the U.S. government, provided in each case that such securities mature on or prior to the date upon which any of (i)(A) through (i)(F) become payable, otherwise the Moody's Discounted Value) of any of the Fund's assets irrevocably deposited by the Fund for the payment of any of (i)(A) through (i)(F). For purposes of the foregoing, "Maximum Potential Gross-up Dividend Liability" means, as of any Valuation Date, the aggregate amount of Gross-up Dividends that would be due if the Fund were to make Retroactive Taxable Allocations, with respect to any fiscal year, estimated based upon dividends paid and the amount of undistributed realized net capital gains and other taxable income earned by the Fund, as of the end of the calendar month immediately preceding such Valuation Date and assuming such Gross-up Dividends are fully taxable.
For purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the Fund is obligated to deliver or receive pursuant to an outstanding futures contract or option shall be as follows: (i) assets subject to call options written by the Fund that are either exchange-traded and "readily reversible" or that expire within 49 days after the date as of which such valuation is made shall be valued at the lesser of (A) Discounted Value and (B) the exercise price of the call option written by the Fund; (ii) assets subject to call options written by the Fund not meeting the requirements of clause (i) of this sentence shall have no value; (iii) assets subject to put options written by the Fund shall be valued at the lesser of (A) the exercise price and (B) the Discounted Value of the assets subject to the option; (iv) futures contracts shall be valued at the lesser of (A) settlement price and (B) the Discounted Value of the assets subject to the futures contract, provided that, if a contract matures within 49 days after the date as of which such valuation is made, where the Fund is the seller the contract may be valued at the settlement price and where the Fund is the buyer the contract may be valued at the Discounted Value of the assets subject to the futures contract; and (v) where delivery may be made to the Fund with any security of a class of securities, the Fund shall assume that it will take delivery of the security with the lowest Discounted Value.
In addition, for purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the following amounts shall be subtracted from the aggregate Discounted Value of the Moody's Eligible Assets held by the Fund to the extent the relevant asset is a Moody's Eligible Asset: (i) 10% of the exercise price of a written call option; (ii) the exercise price of any written put option; (iii) where the Fund is the seller under a financial futures contract, 10% of the settlement price of the financial futures contract; (iv) where the Fund is the purchaser under a financial futures contract, any amounts payable by the Trust under such financial futures contract; (v) the settlement price of the underlying financial futures contract if the Fund writes put options on a financial futures contract; and (vi) 105% of the Market Value of the underlying financial futures contracts if the Fund writes call options on a financial futures contract and does not own the underlying contract. The Discounted Value of all forward commitments to which the Fund is a party and of all securities deliverable to the Fund pursuant to such forward commitments shall be zero.
The Discount Factors and guidelines for determining the market value of the Fund's portfolio holdings have been based on criteria established in connection with rating the APS. These factors include, but are not limited to, the sensitivity of the market value of the relevant asset to changes in interest rates, the liquidity and depth of the market for the relevant asset, the credit quality of the relevant asset (for example, the lower the rating of a debt obligation, the higher the related discount factor) and the frequency with which the relevant asset is marked to market. In no event shall the Discounted Value of any asset of the Fund exceed its unpaid principal balance or face amount as of the date of calculation. The Discount Factor relating to any asset of the Fund and the APS Basic Maintenance Amount, the assets eligible for inclusion in the calculation of the Discounted Value of the Fund's portfolio and
Description of APS
certain definitions and methods of calculation relating thereto may be changed from time to time by the Fund, without shareholder approval, but only in the event the Fund receives written confirmation from Moody's, or any Substitute Rating Agency, that any such changes would not impair the ratings then assigned to the APS by Moody's or such Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the Fund fails to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount, the Fund is required to deliver to the Auction Agent and Moody's a report with respect to the calculation of the APS Basic Maintenance Amount and the value of its portfolio holdings (an "APS Basic Maintenance Report") as of the date of such failure. Additionally, on or before the third Business Day after the first day of a Special Dividend Period, the Fund will deliver an APS Basic Maintenance Report to Moody's and the Auction Agent. The Fund also will deliver an APS Basic Maintenance Report as of the last Business Day of the last month of each fiscal quarter of the Fund 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 the last month of each fiscal quarter of the Fund, the Fund will deliver a letter prepared by the Fund's independent accountants regarding the accuracy of the calculations made by the Fund in its most recent APS Basic Maintenance Report (and in another APS Basic Maintenance Report, randomly selected by the Fund's independent accountants, that was delivered during such Fiscal quarter). Also, on or before 5:00 p.m., New York City time, on the first Business Day after any Common Shares are repurchased by the Fund, the Fund will complete and deliver to Moody's an APS Basic Maintenance Report as of the close of business on such date that Common Shares are repurchased. If any such letter prepared by the Fund's independent accountants shows that an error was made in the most recent APS Basic Maintenance Report, the calculation or determination made by the Fund's independent accountants will be conclusive and binding on the Fund.
REDEMPTION
Optional Redemption
To the extent permitted under the 1940 Act and under Massachusetts law, upon giving a notice of redemption, as provided below, the Fund, at its option, may redeem the APS, in whole or in part, out of funds legally available therefor, at the Optional Redemption Price per share on any Dividend Payment Date; provided that no APS may be redeemed at the option of the Fund during (a) the Initial Dividend Period with respect to the APS or (b) a Non-Call Period to which such share is subject. "Optional Redemption Price" means $25,000 per share of APS plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) to the date fixed for redemption plus any applicable redemption premium, if any, attributable to the designation of a Premium Call Period, but excluding Gross-up Dividends. In addition, holders of APS may be entitled to receive Gross-up Dividends in the event of redemption of such APS to the extent provided herein. See "--Dividends--Gross-up Dividends." The Fund has the authority to redeem the APS for any reason and may redeem all or part of the outstanding APS if it anticipates that the Fund's leveraged capital structure will result in a lower rate of return to holders of Common Shares for any significant period of time than that obtainable if the Common Shares were unleveraged.
Mandatory Redemption
Under the Fund's Amended By-Laws, the Fund will be required to redeem, out of funds legally available therefor, at the Mandatory Redemption Price per share, the APS to the extent permitted under the 1940 Act and Massachusetts law, on a date fixed by the Board of Trustees, if the Fund fails to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount or to satisfy the 1940 Act APS Asset Coverage and such failure is not cured on or before the APS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the case may be. "Mandatory Redemption Price" for each series of APS means $25,000 per share plus an amount equal to accumulated but unpaid dividends
Description of APS
(whether or not earned or declared) to the date fixed for redemption, but excluding Gross-up Dividends. In addition, holders of APS may be entitled to receive Gross-up Dividends in the event of redemption of such APS to the extent provided herein. See "--Dividends--Gross-up Dividends." The number of APS to be redeemed will be equal to the lesser of (a) the minimum number of APS the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Cure Date, together with all other Preferred Shares subject to redemption or retirement, would result in the Fund having Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset Coverage, as the case may be, on such Cure Date (provided that, if there is no such minimum number of shares the redemption of which would have such result, all APS then outstanding will be redeemed), and (b) the maximum number of APS, together with all other shares of Preferred Shares subject to redemption or retirement, that can be redeemed out of funds expected to be legally available therefor on such redemption date. In determining the number of APS required to be redeemed in accordance with the foregoing, the Fund shall allocate the number required to be redeemed which would result in the Fund having Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset Coverage, as the case may be, pro rata among APS and other Preferred Shares subject to redemption pursuant to provisions similar to those set forth below; provided that APS that may not be redeemed at the option of the Fund due to the designation of a Non-Call Period applicable to such shares (A) will be subject to mandatory redemption only to the extent that other shares are not available to satisfy the number of shares required to be redeemed and (B) will be selected for redemption in an ascending order of outstanding number of days in the Non-Call Period (with shares with the lowest number of days to be redeemed first) and by lot in the event of shares having an equal number of days in such Non-Call Period. The Fund is required to effect such a mandatory redemption not later than 35 days after such Cure Date, except that if the Fund does not have funds legally available for the redemption of all of the required number of APS which are subject to mandatory redemption or the Fund otherwise is unable to effect such redemption on or prior to 35 days after such Cure Date, the Fund will redeem those APS which it was unable to redeem on the earliest practicable date on which it is able to effect such redemption.
General
If the APS are to be redeemed, a notice of redemption will be mailed to each record holder of such APS (initially Cede & Co. as nominee of the Securities Depository) and to the Auction Agent not less than 17 nor more than 30 days prior to the date fixed for the redemption thereof. Each notice of redemption will include a statement setting forth: (i) the redemption date, (ii) the aggregate number of APS to be redeemed, (iii) the redemption price, (iv) the place or places where APS are to be surrendered for payment of the redemption price, (v) a statement that dividends on the shares to be redeemed will cease to accumulate on such redemption date (except that holders may be entitled to Gross-up Dividends) and (vi) the provision of the Amended By-Laws pursuant to which such shares are being redeemed. No defect in the notice of redemption or in the mailing or publication thereof will affect the validity of the redemption proceedings, except as required by applicable law.
If less than all of the outstanding APS are to be redeemed, the shares to be redeemed will, unless otherwise required for the Fund's Amended By-Laws, be selected by lot or such other method as the Fund deems fair and equitable, and the results thereof will be communicated to the Auction Agent. The Auction Agent will give notice to the Securities Depository, whose nominee will be the record holder of all APS, and the Securities Depository will determine the number of shares to be redeemed from the account of the Agent Member of each Existing Holder. Each Agent Member will determine the number of shares to be redeemed from the account of each Existing Holder for which it acts as agent. An Agent Member may select for redemption shares from the accounts of some Existing Holders without
Description of APS
selecting for redemption any shares from the accounts of other Existing Holders. Notwithstanding the foregoing, if neither the Securities Depository nor its nominee is the record holder of all of the APS series, the particular shares to be redeemed shall be selected by the Fund by lot or by such other method as the Fund deems fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter deposits in trust with the Auction Agent, or segregates in an account at the Fund's custodian bank for the benefit of the Auction Agent, Deposit Securities (with a right of substitution) having an aggregate Discounted Value equal to the redemption payment for the APS as to which notice of redemption has been given, with irrevocable instructions and authority to pay the redemption price to the record holders thereof, then upon the date of such deposit or, if no such deposit is made, upon such date fixed for redemption (unless the Fund defaults in making payment of the redemption price), all rights of the holders of such shares called for redemption will cease and terminate, except the right of such holders to receive the redemption price thereof and any Gross-up Dividends, but without interest, and such shares no longer will be deemed to be outstanding. The Fund will be entitled to receive, from time to time, the interest, if any, earned on such Deposit Securities deposited with the Auction Agent, and the holders of any shares so redeemed will have no claim to any such interest. Any funds so deposited which are unclaimed at the end of one year from such redemption date will be repaid, upon demand, to the Fund, after which the holders of the APS of such series so called for redemption may look only to the Fund for payment thereof.
So long as any APS are held of record by the nominee of the Securities Depository (initially Cede & Co.), the redemption price for such shares will be paid on the redemption date to the nominee of the Securities Depository. The Securities Depository's normal procedures now provide for it to distribute the amount of the redemption price to Agent Members who, in turn, are expected to distribute such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no APS shall be subject to optional redemption (i) unless all dividends in arrears on the outstanding APS, and all capital stock of the Fund ranking on a parity with the APS with respect to the payment of dividends or upon liquidation, have been or are being contemporaneously paid or declared and set aside for payment and (ii) if redemption thereof would result in the Fund's failure to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether voluntary or involuntary, the holders of APS of each series will be entitled to receive, out of the assets of the Fund available for distribution to shareholders, before any distribution or payment is made upon any Common Shares or any other shares of beneficial interest of the Fund ranking junior in right of payment upon liquidation of APS, $25,000 per share together with the amount of any dividends accumulated but unpaid (whether or not earned or declared) thereon to the date of distribution, and after such payment the holders of APS will be entitled to no other payments except for any Gross-up Dividends. If such assets of the Fund are insufficient to make the full liquidation payment on outstanding APS and liquidation payments on any other outstanding class or series of Preferred Shares of the Fund ranking on a parity with the APS as to payment upon liquidation, then such assets will be distributed among the holders of APS and the holders of shares of such other class or series ratably in proportion to the respective preferential amounts to which they are entitled. After payment of the full amount of liquidation distribution to which they are entitled, the holders of APS will not be entitled to any further participation in any distribution of assets by the Fund except for any Gross-up Dividends. A consolidation, merger or share exchange of the Fund with or into any other entity or entities or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the Fund shall not be deemed or construed to be a liquidation, dissolution or winding up of the Fund.
Description of APS
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise required by applicable law, holders of APS will be entitled to one vote per share on each matter submitted to a vote of shareholders and will vote together with holders of Common Shares and other Preferred Shares as a single class.
In connection with the election of the Fund's trustees, holders of the APS and any other Preferred Shares, voting as a separate class, shall be entitled at all times to elect two of the Fund's trustees, and the remaining trustees will be elected by holders of Common Shares and APS and any other Preferred Shares, voting together as a single class. In addition, if at any time dividends on outstanding APS are unpaid in an amount equal to at least two full years' dividends thereon and sufficient cash or securities shall not have been deposited with the Auction Agent for the payment of such accumulated dividends, or if at any time holders of any shares of Preferred Shares are entitled, together with the holders of APS, to elect a majority of the trustees of the Fund under the 1940 Act, then the number of trustees constituting the Board of Trustees automatically shall be increased by the smallest number that, when added to the two trustees elected exclusively by the holders of APS and any other Preferred Shares 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 the APS and any other Preferred Shares, 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 in any event will be entitled to elect, constitutes a majority of the total number of trustees of the Fund as so increased. The terms of office of the persons who are trustees at the time of that election will continue. If the Fund thereafter shall pay, or declare and set apart for payment in full, all dividends payable on all outstanding APS and any other Preferred Shares for all past Dividend Periods, the additional voting rights of the holders of APS and any other Preferred Shares as described above shall cease, and the terms of office of all of the additional trustees elected by the holders of APS and any other Preferred Shares (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 APS and any other Preferred Shares have the right to elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by holders of outstanding APS and any other Preferred Shares, voting together as one class, will be required to (i) authorize, create or issue any class or series of stock ranking prior to the APS or any other series of Preferred Shares with respect to the payment of dividends or the distribution of assets on liquidation; provided, however, that no vote is required to authorize the issuance of another series of APS or another class of Preferred Shares which are substantially identical in all respects to the APS or (ii) amend, alter or repeal the provisions of the Declaration of Trust or the Amended By-Laws, whether by merger, consolidation or otherwise, so as to adversely affect any of the contract rights expressly set forth in the Declaration of Trust or the Amended By-Laws of holders of APS or any other Preferred Shares. To the extent permitted under the 1940 Act, in the event shares of more than one series of APS are outstanding, the Fund shall not approve any of the actions set forth in clause (i) or (ii) which adversely affects the contract rights expressly set forth in the Declaration of Trust or the Amended By-Laws of a holder of shares of a series of APS differently than those of a holder of shares of any other series of APS without the affirmative vote of at least a majority of votes entitled to be cast by holders of the APS of each series adversely affected and outstanding at such time (each such adversely affected series voting separately as a class). The Board of Trustees, however, without shareholder approval, may amend, alter or repeal any or all of the various Rating Agency guidelines described herein in the event the Fund receives confirmation from Moody's (or the applicable Substitute Rating Agency) that any such amendment, alteration or repeal would not impair the rating then assigned to the APS by such Rating Agency. Unless a higher
Description of APS
percentage is provided for under the Declaration of Trust, the affirmative vote
of a majority of the votes entitled to be cast by holders of outstanding APS
and any other Preferred Shares, voting as a separate class, will be required to
approve any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
investment restrictions described as fundamental policies under "Investment
Restrictions" in the Statement of Additional Information. The class vote of
holders of APS and any other Preferred Shares described above in each case will
be in addition to a separate vote of the requisite percentage of Common Shares
and APS and any other Preferred Shares, voting together as a single class,
necessary to authorize the action in question.
The foregoing voting provisions will not apply to the APS if, at or prior to the time when the act with respect to which such vote otherwise would be required shall be effected, 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.
Management of the Fund
TRUSTEES AND OFFICERS
The Board of Trustees is responsible for the management of the Fund, including supervision of the duties performed by PIMCO Advisors and PIMCO. There are currently five Trustees of the Fund, two of whom are "interested persons" (as defined in the 1940 Act) and three of whom are not "interested persons." The names and business addresses of the Trustees and officers of the Fund and their principal occupations and other affiliations during the past five years are set forth under "Management of the Fund" in the Statement of Additional Information.
INVESTMENT MANAGER
PIMCO Advisors serves as the investment manager of the Fund. Subject to the supervision of the Board of Trustees, PIMCO Advisors is responsible for managing, either directly or through others selected by it, the investment activities of the Fund and the Fund's business affairs and other administrative matters. PIMCO Advisors is located at 1345 Avenue of the Americas, New York, New York 10105.
Organized in 1987, PIMCO Advisors provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. As of June 30, 2001, PIMCO Advisors and its subsidiary partnerships had approximately $276 billion in assets under management.
PIMCO Advisors has retained its affiliate, PIMCO, to manage the Fund's investments. See "Portfolio Manager" below. PIMCO Advisors and PIMCO are each majority-owned indirect subsidiaries of Allianz AG, a publicly traded German insurance and financial services company.
PORTFOLIO MANAGER
PIMCO serves as the portfolio manager for the Fund. Subject to the supervision of PIMCO Advisors, PIMCO has full investment discretion and makes all determinations with respect to the investment of the Fund's assets.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660. Organized in 1971, PIMCO provides investment management and advisory services to private accounts of
Management of the Fund
institutional and individual clients and to mutual funds. As of June 30, 2001, PIMCO had approximately $222 billion in assets under management. PIMCO Advisors (and not the Fund) pays a portion of the fees it receives to PIMCO in return for its services.
The following individual at PIMCO has primary responsibility for the day-to-day portfolio management of the Fund.
Since Recent Professional Experience
-------------------------------------------------------------------------------------
Mark V. McCray 2001 (Inception) Executive Vice President, PIMCO. He joined PIMCO as
a Portfolio Manager in 2000. Prior to that, he was a
bond trader from 1992-1999 at Goldman Sachs & Co.
where he was appointed Vice President in 1996 and
named co-head of municipal bond trading in 1997 with
responsibility for the firm's proprietary account
and supervised municipal bond traders.
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Chris Dialynas, a Managing Director and senior member of PIMCO's investment strategy group, oversees Mr. McCray regarding the management of the Fund.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between PIMCO Advisors and the Fund, the Fund has agreed to pay PIMCO Advisors an annual management fee payable on a monthly basis at the annual rate of 0.65% of the Fund's average daily net assets (including net assets attributable to Preferred Shares) for the services and facilities it provides.
In addition to the fees of PIMCO Advisors, the Fund pays all other costs and expenses of its operations, including compensation of its trustees (other than those affiliated with PIMCO Advisors or PIMCO), custodial expenses, shareholder servicing expenses, transfer agency and dividend disbursing expenses, legal fees, expenses of independent auditors, expenses of repurchasing shares, expenses of issuing any Preferred Shares, expenses of preparing, printing and distributing prospectuses, shareholder reports, notices, proxy statements and reports to governmental agencies, and taxes, if any.
PIMCO Advisors has contractually agreed to waive a portion of the management fees it is entitled to receive from the Fund in the amounts, and for the time periods, set forth below (covering commencement of Fund operations through June 30, 2009):
Percentage Waived
(annual rate as a percentage
Period Ending June 30, of average daily net assets) (1)
--------------------------------------------------------------------------------
2002 (2)....................................... 0.20%
2003........................................... 0.20%
2004........................................... 0.20%
2005........................................... 0.20%
2006........................................... 0.20%
2007........................................... 0.15%
2008........................................... 0.10%
2009........................................... 0.05%
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(2) From the commencement of the Fund's operations.
PIMCO Advisors has not agreed to waive any portion of its fees beyond June 30, 2009.
Management of the Fund
Because the fees received by PIMCO Advisors and PIMCO are based on the total net assets of the Fund (including assets represented by APS and any leverage created thereby), PIMCO Advisors and PIMCO each have a financial incentive for the Fund to issue APS, which may create a conflict of interest between PIMCO Advisors and/or PIMCO and the holders of the Fund's Common Shares.
Net asset value
The net asset value ("NAV") of the Fund equals the total value of the Fund's portfolio investments and other assets, less any liabilities. For purposes of calculating NAV, portfolio securities and other assets for which market quotes are available are stated at market value. Market value is generally determined on the basis of the last reported sales price, or if no sales are reported, based on quotes obtained from a quotation reporting system, established market makers, or pricing services. Certain securities or investments for which market quotations are not readily available (which is usually the case for municipal bonds) may be valued, pursuant to guidelines established by the Board of Trustees, with reference to other securities or indices. For instance, a pricing service may recommend a fair market value based on prices of comparable municipal bonds. Short-term investments having a maturity of 60 days or less are generally valued at amortized cost. Exchange traded options, futures and options on futures are valued at the settlement price determined by the exchange. Other securities for which market quotes are not readily available are valued at fair value as determined in good faith by the Board of Trustees or persons acting at their direction.
The NAV of the Fund will be determined as of the close of regular trading (normally 4:00 p.m., New York City time) (the "NYSE Close") on each day the New York Stock Exchange is open. Domestic fixed income securities are normally priced using data reflecting the earlier closing of the principal markets for those securities. Information that becomes known to the Fund or its agent after the NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a security or the NAV determined earlier that day.
In unusual circumstances, instead of valuing securities in the usual manner, the Fund may value securities at fair value or estimate their value as determined in good faith by the Board of Trustees, generally based upon recommendations provided by PIMCO. Fair valuation may also be used if extraordinary events occur after the close of the relevant market but prior to the NYSE Close.
Taxes
FEDERAL INCOME TAX MATTERS
The following federal income tax discussion is based on the advice of Ropes & Gray, counsel to the Fund, and reflects provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing treasury regulations, rulings published by the IRS and other applicable authority, as of the date of this Prospectus. These authorities are subject to change by legislative or administrative action. The following discussion is only a summary of some of the important tax considerations generally applicable to investments in the Fund. For more detailed information regarding tax considerations, see the Statement of Additional Information. There may be other tax considerations applicable to particular investors. In addition, income earned through an investment in the Fund may be subject to state and local taxes.
The Fund intends to qualify each year for taxation as a regulated investment company eligible for treatment under the provisions of Subchapter M of the Code. If the Fund so qualifies and satisfies
Taxes
certain distribution requirements, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends or capital gain distributions.
In order for any distributions to holders of APS to be eligible to be treated as exempt interest dividends, the APS must be treated as equity for federal income tax purposes. Based in part on certain representations made by the Fund to Ropes & Gray relating to the lack of any present intention to redeem or purchase APS at any time in the future, it is the opinion of Ropes & Gray that the APS will constitute equity for federal income tax purposes. This opinion relies in part on a published ruling of the IRS stating that certain auction rate preferred stock similar in many material respects to the APS represents equity. The opinion of Ropes & Gray represents only its best legal judgment and is not binding on the IRS or the courts. If the IRS were successfully to assert that variable rate preferred stock such as the APS should be treated as debt for federal income tax purposes, dividends on APS would not be increased by the Fund and holders of APS would not be entitled to any additional distributions to offset the effect of paying Federal income tax on the Fund's distributions so recharacterized as interest. Ropes & Gray has advised the Fund that, should the IRS pursue in court the position that the APS should be treated as debt for Federal income tax purposes, the IRS would be unlikely to prevail.
To satisfy the distribution requirement applicable to regulated investment companies, amounts paid as dividends by the Fund to its shareholders, including holders of the APS, must qualify for the dividends-paid deduction. In certain circumstances, the IRS could take the position that dividends paid on the APS constitute preferential dividends under Section 562(c) of the Code, and thus do not qualify for the dividends-paid deduction.
If at any time when APS are outstanding the Fund does not meet applicable asset coverage requirements, it will be required to suspend distributions to Common Shareholders until the requisite asset coverage is restored. Any such suspension may cause the Fund to pay a 4% federal excise tax (imposed on regulated investment companies that fail to distribute for a given calendar year, generally, at least 98% of their net investment income and capital gain net income) and income tax on undistributed income or gains, and may, in certain circumstances, prevent the Fund from qualifying for treatment as a regulated investment company. The Fund may redeem APS in an effort to comply with the distribution requirement applicable to regulated investment companies and to avoid income and excise taxes.
The Fund primarily invests in municipal bonds issued by states, cities and local authorities and certain possessions and territories of the United States (such as Puerto Rico or Guam) or in municipal bonds whose income is otherwise exempt from federal income taxes. Thus, substantially all of the Fund's dividends to you will qualify as "exempt-interest dividends," which are not generally subject to federal income tax. An investment in the Fund may result in liability for federal alternative minimum tax for corporate shareholders. The Fund will seek to avoid portfolio investments that pay interest that is taxable to individuals under the federal alternative minimum tax. Nonetheless, the Fund may not be successful in this regard. Therefore, if your goal is to avoid or limit your receipt of income that is taxable under the federal alternative minimum tax, you should discuss with your tax adviser whether the Fund is an appropriate investment for you.
The IRS has taken the position in a published ruling that the Fund is required for each taxable year to allocate net capital gain and other income subject to regular federal income tax, if any, proportionately among its Common Shares and each series of APS in accordance with the percentage of total Fund distributions received by each such class of shares with respect to such year. As described above in the section entitled "Description of APS--Dividends-- Gross-up Dividends," if the Fund retroactively allocates any net capital gains or other taxable income to the APS, in certain circumstances, it will pay
Taxes
Gross-up Dividends to the holders of the APS. There are other circumstances where, even if it is determined after the payment of a dividend that a portion of that dividend was subject to federal income tax, the Fund will not be required to pay any additional amount to compensate for any tax payable on the dividend.
The federal income tax consequences of Gross-up Dividends under existing law are uncertain. For example, it is unclear how Gross-up Dividends will be treated under the rules in Subchapter M of the Code applicable to dividends paid following the close of a taxable year in respect of a prior year's income. The Fund intends to treat such Gross-up Dividends as paid during such prior taxable year for purposes of the rules governing the Fund's treatment of such dividends, and to treat a holder as receiving a dividend distribution in the amount of any Gross-up Dividend only as and when such Gross-up Dividend is paid.
Existing authorities do not specifically address whether dividends (including possible Gross-up Dividends) 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 Fund 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 IRS could disagree with the Fund's position concerning the treatment of dividends paid after the close of a taxable year or with the Fund's method of allocation, in which case the IRS could attempt to recharacterize a portion of the dividends paid to the holders of APS and designated by the Fund as exempt interest dividends as consisting instead of capital gains or other taxable income. If the IRS were to prevail with respect to any such attempted recharacterization, holders of APS could be subject to tax on amounts so recharacterized and the Fund could be subject to federal income and excise tax. In such event, no additional amounts (including Gross-up Dividends) would be paid by the Fund with respect to dividends so recharacterized to compensate for any additional tax owed by holders of APS.
If, in connection with the selection of a Long-Term Dividend Period, (i) the Fund provides that a Premium Call Period will follow a Non-Call Period, (ii) based on all the facts and circumstances at the time of the designation of the Long-Term Dividend Period the Fund is more likely than not to redeem the Preferred Shares during the Premium Call Period, and (iii) the premium to be paid upon redemption during the Premium Call Period exceeds a reasonable penalty for early redemption, it is possible that the holders of APS will be required to accrue such premium as a dividend (to the extent of the Fund's earnings and profits) over the term of the Non-Call Period.
The Fund will generally designate Gross-up Dividends as exempt-interest dividends to the extent it determines such designation is consistent with the allocation principles, as described in "Description of APS--Dividends--Gross-up Dividends." However, a portion or all of a Gross-up Dividend will be taxable either in the taxable year in which the dividend or dividends to which the Gross-up Dividend relates was paid or in the taxable year in which the Gross-up Dividend is paid. The Fund will not be required to pay any additional amount if it is determined that its treatment of Gross-up Dividends was improper.
The Fund may at times buy tax-exempt investments at a discount from the price at which they were originally issued, especially during periods of rising interest rates. For federal income tax purposes, some or all of this market discount will be included in the Fund's ordinary income and will be taxable to shareholders as such when it is distributed.
Taxes
The Fund's investments in certain debt obligations may cause the Fund to recognize taxable income in excess of the cash generated by such obligations. Thus, the Fund could be required at times to liquidate other investments in order to satisfy its distribution requirements.
For federal income tax purposes, distributions of investment income other than exempt interest dividends are taxable as ordinary income. Generally, gains realized by the Fund on the sale or exchange of investments will be taxable to its shareholders, even though the income from such investments generally will be tax exempt. Whether distributions of capital gains are taxed as ordinary income or capital gains is determined by how long the Fund owned the investments that generated such capital gains, rather than how long a shareholder has owned his or her shares. Distributions are taxable to shareholders even if they are paid from income or gains earned by the Fund before a shareholder's investment (and thus were included in the price the shareholder paid). Distributions of gains from the sale of investments that the Fund owned for more than one year will be taxable as capital gains. Distributions of gains from the sale of investments that the Fund owned for one year or less will be taxable as ordinary income. Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares through the Fund's Dividend Reinvestment Plan for Common Shares.
Any gain resulting from the sale or exchange of Fund shares will generally also be subject to tax. In addition, 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 state or local taxing authority. You should consult your tax advisor for more information on your own tax situation, including possible state and local taxes.
Description of capital structure
The Fund is an unincorporated business trust established under the laws of The Commonwealth of Massachusetts by an Agreement and Declaration of Trust dated May 9, 2001 (as amended to date, the "Declaration of Trust"). The Declaration of Trust provides that the Trustees of the Fund may authorize separate classes of shares of beneficial interest. The Trustees have authorized an unlimited number of Common Shares and Preferred Shares. Preferred Shares (such as the APS) may be issued in one or more series, with such par value and with such rights as determined by the Board of Trustees, by action of the Board of Trustees without the approval of the Common Shareholders. For a description of the APS, see "Description of APS." The following table shows the amount of (i) shares authorized and (ii) shares outstanding, for each class of authorized securities of the Fund as of August 17, 2001.
Amount Amount
Title of Class Authorized Outstanding
--------------------------------------------------------------------------------
Common Shares............................................ Unlimited 23,696,667
Auction Preferred Shares
Series A............................................... 1,600 -0-
Series B............................................... 1,600 -0-
Series C............................................... 1,600 -0-
Series D............................................... 1,600 -0-
Series E............................................... 1,600 -0-
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Holders of Common Shares are entitled to share equally in dividends declared by the Board of Trustees payable to holders of Common Shares and in the net assets of the Fund available for distribution to holders of Common Shares after payment of the preferential amounts payable to holders of any outstanding Preferred Shares. Neither holders of Common Shares nor holders of Preferred Shares have
Description of capital structure
pre-emptive or conversion rights or give shareholders the right to cause the Fund to redeem their shares. Upon liquidation of the Fund, after paying or adequately providing for the payment of all liabilities of the Fund and the liquidation preference with respect to any outstanding Preferred Shares, and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining assets of the Fund among the holders of the Fund's Common Shares.
Pursuant to the Fund's Dividend Reinvestment Plan, all Common Shareholders whose shares are registered in their own names will have all dividends, including any capital gain dividends, reinvested automatically in additional Common Shares by PFPC Inc., as agent for the Common Shareholders, unless the shareholder elects to receive cash. The Fund and PFPC Inc. reserve the right to amend or terminate the Dividend Reinvestment Plan.
Holders of Common Shares are entitled to one vote for each share held and will vote with the holders of any outstanding APS or other Preferred Shares on each matter submitted to a vote of holders of Common Shares, except as described under "Description of APS--Voting Rights."
Shareholders are entitled to one vote for each share held. Except as provided under "Description of APS--Voting Rights," holders of APS are (voting as a separate class) entitled to elect two Trustees, and the remaining Trustees shall be elected by holders of Common Shares and APS, voting as a single class.
So long as any APS or any other Preferred Shares are outstanding, holders of Common Shares will not be entitled to receive any dividends of or other distributions from the Fund, unless at the time of such declaration, (1) all accrued dividends on Preferred Shares or accrued interest on borrowings has been paid and (2) the value of the Fund's total assets (determined after deducting the amount of such dividend or other distribution), less all liabilities and indebtedness of the Fund not represented by senior securities, is at least 300% of the aggregate amount of such securities representing indebtedness and at least 200% of the aggregate amount of securities representing indebtedness plus the aggregate liquidation value of the outstanding Preferred Shares (expected to equal the aggregate original purchase price of the outstanding Preferred Shares plus redemption premium, if any, together with any accrued and unpaid dividends thereon, whether or not earned or declared and on a cumulative basis). In addition to the requirements of the 1940 Act, the Fund is required to comply with other asset coverage requirements as a condition of the Fund obtaining a rating of the Preferred Shares from a Rating Agency. These requirements include an asset coverage test more stringent than under the 1940 Act. See "Description of APS--Dividends--Restrictions on Dividends and Other Payments."
The Fund will send unaudited reports at least semi-annually and audited financial statements annually to all of its shareholders.
Common Shares of the Fund commenced trading on the NYSE on June 27, 2001. At August 3, 2001, the net asset value per share of Common Shares was $14.69, and the closing price per share of Common Shares on the NYSE was $15.15.
OTHER ISSUES RELATING TO PREFERRED SHARES
Under the 1940 Act, the Fund is permitted to have outstanding more than one series of Preferred Shares as long as no single series has priority over another series as to the distribution of assets of the Fund or the payment of dividends. Neither holders of Common Shares nor holders of Preferred Shares have pre-emptive rights to purchase any APS or any other Preferred Shares that might be issued. It is anticipated that the net asset value per share of the APS will equal its original purchase price per share plus accumulated dividends per share.
Anti-takeover and other provisions in the Declaration of Trust
The Declaration of Trust includes provisions that could limit the ability of other entities or persons to acquire control of the Fund or to convert the Fund to open-end status. Commencing with the first annual meeting of shareholders, the Board of Trustees will be divided into three classes. At each annual meeting of shareholders, the term of one class will expire and each Trustee elected to that class will hold office for a term of three years. The classification of the Board of Trustees in this manner could delay for an additional year the replacement of a majority of the Board of Trustees. In addition, the Declaration of Trust provides that a Trustee may be removed only for cause and only (i) by action of at least seventy-five percent (75%) of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining Trustees.
As described below, the Declaration of Trust grants special approval rights with respect to certain matters to members of the Board who qualify as "Continuing Trustees," which term means a Trustee that has been a member of the Board for a period of at least twelve months (or since the commencement of the Fund's operations, if less than twelve months) or who is the successor to a Continuing Trustee who was recommended by a majority of the Continuing Trustees then members of the Board. In either case, in the event of certain Fund transactions not in the ordinary course of business, including a merger or consolidation or sale or transfer of Fund assets (a "Material Fund Transaction"), a Continuing Trustee would not include any persons or affiliates of persons who enter or propose to enter into the Material Fund Transaction.
The Declaration of Trust requires the affirmative vote or consent of at least seventy-five percent (75%) of the Board of Trustees and holders of at least seventy-five percent (75%) of the Fund's shares (including Common and Preferred Shares) to authorize a Material Fund Transaction unless the transaction is authorized by both a majority of the Trustees and seventy-five percent (75%) of the Continuing Trustees (in which case no shareholder authorization would be required by the Declaration of Trust). The Declaration of Trust also requires the affirmative vote or consent of holders of at least seventy-five percent (75%) of each class of the Fund's shares entitled to vote on the matter to authorize a conversion of the Fund from a closed-end to an open-end investment company, unless the conversion is authorized by both a majority of the Trustees and seventy-five percent (75%) of the Continuing Trustees (in which case shareholders would have only the minimum voting rights required by the 1940 Act with respect to the conversion). Also, the Declaration of Trust provides that the Fund may be terminated at any time by vote or consent of at least seventy- five percent (75%) of the Fund's shares or, alternatively, by vote or consent of both a majority of the Trustees and seventy-five percent (75%) of the Continuing Trustees. See "Anti-takeover and other provisions in the Declaration of Trust" in the Statement of Additional Information for a more detailed summary of these provisions.
The Trustees may from time to time grant other voting rights to shareholders with respect to these and other matters in the Fund's Amended By-Laws, certain of which are required by the 1940 Act. For example, the Amended By-Laws grant holders of the APS and any other Preferred Shares special voting rights with respect to certain matters described in the preceding paragraph. See "Description of APS--Voting Rights."
The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. They provide, however, the advantage of potentially requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund's investment objective and policies. The provisions of the Declaration of Trust described above could have the effect of discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. The Board of Trustees of the Fund has considered the foregoing anti-takeover provisions and concluded that they are in the best interests of the Fund.
Anti-takeover and other provisions in the Declaration of Trust
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Declaration of Trust and the Fund's Amended By-Laws, both of which are on file with the Securities and Exchange Commission.
Under Massachusetts law, shareholders could, in certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust contains an express disclaimer of shareholder liability for debts or obligations of the Fund and requires that notice of such limited liability be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees. The Declaration of Trust further provides for indemnification out of the assets and property of the Fund for all loss and expense of any shareholder held personally liable for the obligations of the Fund. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund would be unable to meet its obligations. The Fund believes that the likelihood of such circumstances is remote.
Repurchase of Common Shares; conversion to open-end fund
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Shares of a closed-end investment company may frequently trade at prices lower than net asset value. The Fund's Board of Trustees regularly monitors the relationship between the market price and net asset value of the Common Shares. If the Common Shares 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 in private transactions, the making of a tender offer for such shares, or the conversion of the Fund to an open-end investment company.
If the Fund converted to an open-end company, it would be required to redeem all Preferred Shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Common Shares would likely no longer be listed on the New York Stock Exchange. In contrast to a closed-end investment company, shareholders of an open-end investment company may require the company to redeem their shares at any time (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less any redemption charge that is in effect at the time of redemption.
Before deciding whether to take any action to convert the Fund to an open-end investment company, the Board would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders, and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken. See the Statement of Additional Information under "Repurchase of Common Shares; conversion to open-end fund" for a further discussion of possible action to reduce or eliminate such discount to net asset value.
Underwriting
The underwriters named below (the "Underwriters"), acting through UBS Warburg LLC, 299 Park Avenue, New York, New York, as lead manager, and A.G. Edwards & Sons, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as their representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement with the Fund and PIMCO Advisors, to purchase from the Fund the number of APS set forth opposite their respective names. The Underwriters are committed to purchase and pay for all of such APS if any are purchased.
Number
Underwriters of APS
--------------------------------------------------------------------------------
UBS Warburg LLC.......................................................... 5,600
A.G. Edwards & Sons, Inc................................................. 1,200
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................... 1,200
-----
Total.................................................................. 8,000
=====
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The Underwriters have advised the Fund that they propose initially to offer the APS to the public at the public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $150 per share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $100 per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed. Investors must pay for any APS purchased in the initial public offering on or before August 23, 2001.
The Underwriters will act in Auctions as Broker-Dealers as set forth under "Description of APS--The Auction--Broker-Dealer Agreements" and will be entitled to fees for services as Broker-Dealers as set forth under "Description of APS--Broker-Dealers." The Underwriters also may provide information to be used in ascertaining the Reference Rate.
The Fund anticipates that the Representatives and certain other Underwriters may from time to time act as brokers and dealers in connection with the execution of the Fund's portfolio transactions after they have ceased to be principal underwriters of the Fund under the 1940 Act and, subject to certain conditions, may act as such brokers while they are principal underwriters.
The Fund and the Adviser have agreed to indemnify the Underwriters against certain liabilities including liabilities under the Securities Act of 1933, as amended.
Custodian and transfer agents
The custodian of the assets of the Fund is State Street Bank and Trust Co., 225 Franklin Street, Boston, MA 02110. The Custodian performs custodial and fund accounting services.
Bankers Trust Company, 4 Albany Street, New York, NY 10006, serves as Auction Agent, transfer agent, registrar, dividend paying agent and redemption agent for the APS. PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809, serves as the transfer agent, registrar, dividend disbursement agent and shareholder servicing agent for the Fund's Common Shares, as well as agent for the Fund's Dividend Reinvestment Plan for Common Shares.
Legal matters
Certain legal matters in connection with the Common Shares will be passed upon for the Fund by Ropes & Gray, Boston, Massachusetts, and for the Underwriters by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois, and its affiliated entities.
Table of contents for the
Statement of Additional Information
Use of proceeds............................................................. 3 Investment objective and policies........................................... 3 Investment restrictions..................................................... 27 Management of the Fund...................................................... 29 Investment manager and portfolio manager.................................... 34 Portfolio transactions...................................................... 39 Distributions............................................................... 41 Description of shares....................................................... 41 Anti-takeover and other provisions in the Declaration of Trust.............. 42 Repurchase of Common Shares; conversion to open-end fund.................... 44 Tax matters................................................................. 46 Performance related and comparative information............................. 52 Custodian, transfer agents and dividend disbursement agents................. 53 Independent accountants..................................................... 53 Counsel..................................................................... 54 Registration statement...................................................... 54 Financial statements........................................................ 55 Appendix A--Ratings of Investments.......................................... A-1 Appendix B--Settlement Procedures........................................... B-1 Appendix C--Auction Procedures.............................................. C-1 |
Glossary
"AA' Composite Commercial Paper Rate" on any Valuation Date, means (i) the Interest Equivalent of the rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of such rating by another nationally recognized statistical rating organization, as such rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date, or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the Interest Equivalent of the rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by UBS Warburg LLC or its successors that are Commercial Paper Dealers, to the Auction Agent for the close of business on the Business Day immediately preceding such date. If one of the Commercial Paper Dealers does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be determined on the basis of the quotation or quotations furnished by any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Fund to provide such rate or rates not being supplied by the Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7 or more but fewer than 49 days, such rate shall be the Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day rate on such commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the Interest Equivalent of the 60-day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on such commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall be the arithmetic average of the Interest Equivalent of the 90-day and 120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141 days, such rate shall be the Interest Equivalent of the 120-day rate on such commercial paper; (vii) 141 or more days but fewer than 162 days, such rate shall be the arithmetic average of the Interest Equivalent of the 120-day and 180-day rates on such commercial paper; and (viii) 162 or more days but fewer than 183 days, such rate shall be the Interest Equivalent of the 180-day rate on such commercial paper.
"Agent Member" means a member of the Securities Depository that will act on behalf of a Beneficial Owner of one or more APS or on behalf of a Potential Beneficial Owner.
"Amended By-Laws" means the By-Laws of the Fund as amended August 16, 2001, specifying, in part, the powers, preferences and rights of the APS.
"APS" means the Auction Preferred Shares with no par value and a liquidation preference of $25,000 per share plus an amount equal to accumulated but unpaid dividends thereon (whether or not earned or declared) of the Fund.
"APS Basic Maintenance Amount" has the meaning set forth on page 40 of this Prospectus.
"APS Basic Maintenance Cure Date" has the meaning set forth on page 40 of this Prospectus.
"APS Basic Maintenance Report" has the meaning set forth on page 42 of this Prospectus.
Glossary
"Applicable Percentage" has the meaning set forth on page 28 of this Prospectus.
"Applicable Rate" means the rate per annum at which cash dividends are payable on APS for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company unless and until another commercial bank, trust company or other financial institution appointed by a resolution of the Board of Trustees of the Fund or a duly authorized committee thereof enters into an agreement with the Fund to follow the Auction Procedures for the purpose of determining the Applicable Rate and to act as transfer agent, registrar, dividend disbursing agent and redemption agent for the APS.
"Auction Agency Agreement" means the agreement entered into between the Fund and the Auction Agent which provides, among other things, that the Auction Agent will follow the Auction Procedures for the purpose of determining the Applicable Rate.
"Auction Date" has the meaning set forth on page 27 of this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth in Appendix C to the Statement of Additional Information.
"Available APS" has the meaning set forth on page 30 of this Prospectus.
"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 APS or a Broker-Dealer that holds APS for its own account.
"Bid" has the meaning set forth on page 27 of this Prospectus.
"Bidder" has the meaning set forth on page 28 of this Prospectus.
"Board of Trustees" or "Board" means the Board of Trustees of the Fund.
"Broker-Dealer" has the meaning set forth on page 26 of this Prospectus.
"Broker-Dealer Agreement" has the meaning set forth on page 26 of this Prospectus.
"Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or other day on which banks in New York City are authorized or obligated by law to close.
"Closing Transactions" has the meaning set forth in the definition of "Moody's Hedging Transactions" below.
"Code" has the meaning set forth on page 48 of this Prospectus.
"Commercial Paper Dealers" means UBS Warburg LLC and such other commercial paper dealer or dealers as the Fund from time to time may appoint or, in lieu thereof, their respective affiliates and successors.
"Common Shares" means the common shares of benefical interest, no par value, of the Fund.
Glossary
"Cure Date" has the meaning set forth on page 42 of the Prospectus.
"Date of Original Issue" means, with respect to any share of APS, the date on which such share first is issued by the Fund.
"Declaration of Trust" has the meaning set forth on page 51 of the Prospectus.
"Deposit Securities" means cash and Municipal Obligations rated at least A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor.
"Discounted Value" of any asset of the Fund means with respect to a Moody's Eligible Asset, the quotient of the market value thereof divided by the applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page 34 of this Prospectus.
"Dividend Period" has the meaning set forth on page 34 of this Prospectus.
"Existing Holder" means a Broker-Dealer or any such other person as may be permitted by the Fund that is listed as the holder of record of APS in the records of the Auction Agent.
"Federal Tax Rate Increase" has the meaning set forth under the definition of "Moody's Volatility Factor" below.
"Fitch" means Fitch IBCA or its successors.
"Fund" means PIMCO Municipal Income Fund, a Massachusetts business trust that is the issuer of the APS.
"Gross-up Dividend" has the meaning set forth on page 39 of this Prospectus.
"Hold Order" has the meaning set forth on page 27 of this Prospectus.
"Initial Dividend Payment Date" has the meaning set forth on page 1 of this Prospectus.
"Initial Dividend Period" means, for each series of APS, the period from and including the Date of Original Issue but excluding the Initial Dividend Payment Date.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis security which is equal to the yield on an equivalent interest-bearing security.
"Issue Type Category" means, with respect to a Municipal Obligation acquired by the Fund, for purposes of calculating Moody's Eligible Assets as of any Valuation Date, one of the following categories into which such Municipal Obligation falls based upon a good faith determination by the Fund: health care issues (including issues related to teaching and non-teaching hospitals, public or private, and elder-care facilities, including nursing homes); housing issues (including issues related to
Glossary
single- and multi-family housing projects); educational facilities issues (including issues related to public and private schools); student loan issues; resource recovery issues; transportation issues (including issues related to mass transit, airports and highways); industrial development bond issues (including issues related to pollution control facilities); utility issues (including issues related to the provision of gas, water, sewers and electricity); general obligation issues; lease obligations (including certificates of participation); escrowed bonds; and other issues ("Other Issues") not falling within one of the aforementioned categories. The general obligation issue category includes any issue that is directly or indirectly guaranteed by any state or any political subdivision of a state. Utility issues are included in the general obligation issue category if the issue is directly or indirectly guaranteed by a state or any political subdivision of a state. Municipal Obligations in the utility issue category will be classified within one of the three following sub-categories: (i) electric, gas and combination issues (if the combination issue includes an electric issue); (ii) water and sewer utilities and combination issues (if the combination issues does not include an electric issue); and (iii) irrigation, resource recovery, solid waste and other utilities. Municipal Obligations in the transportation issue category will be classified within one of the two following sub-categories: (i) streets and highways, toll roads, bridges and tunnels, airports and multi- purpose port authorities (multiple revenue streams generated by toll roads, airports, real estate, bridges); (ii) mass transit, parking seaports and others.
"IRS" means the United States Internal Revenue Service.
"Liens" shall have the meaning set forth in the definition of "Moody's Eligible Asset" below.
"Long Term Dividend Period" has the meaning set forth on page 5 of this Prospectus.
"Mandatory Redemption Price" has the meaning set forth on page 42 of this Prospectus.
"Marginal Tax Rate" means the maximum marginal federal individual income tax rate applicable to an individual's or a corporation's ordinary income, whichever is greater.
"Market Value" of any asset of the Fund shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Fund from dealers who are members
of the National Association of Securities Dealers, Inc. and who make a market
in the security, at least one of which shall be in writing. Futures contracts
and options are valued at closing prices for such instruments established by
the exchange or board of trade on which they are traded, or if market
quotations are not readily available, are valued at fair value on a consistent
basis using methods determined in good faith by the Board of Trustees.
"Material Fund Transaction" has the meaning set forth on page 53 of this Prospectus.
"Maximum Applicable Rate" has the meaning specified under "Description of APS-- The Auction--Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders" in the Prospectus.
Glossary
"Maximum Potential Gross-up Dividend Liability" has the meaning set forth on page 41 of this Prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined by reference to the rating on such asset and the shortest Exposure Period set forth opposite such rating that is the same length as or is longer than the Moody's Exposure Period, in accordance with the table set forth below:
Rating Category
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 seven
weeks.................. 154 161 168 176 190 137 149 231
9 weeks or less but
greater than eight
weeks.................. 158 163 170 177 192 138 150 240
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** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, 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 but rated SP-1+ by S&P, which do not mature or have a demand feature at par exercisable in 30 days and which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 or not rated by Moody's and less than BBB or not rated by S&P, not to exceed 10% of Moody's Eligible Assets.
Notwithstanding the foregoing, (i) except as provided in clause (ii) below, 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-l or P-1 by Moody's and mature or have a demand feature at par exercisable in 30 days or less, or 125%, as long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable in 30 days or less, (ii) the Moody's Discount Factor for RIBS and structured notes shall be the product of (x) the percentage determined by reference to the rating on the security underlying such RIBS multiplied by (y) 1.25 (provided that the trust in which such RIBS are held may be terminated within five business days), and (iii) except as provided in clause (ii) above, no Moody's Discount Factor will be applied to cash, Receivables for Municipal Obligations Sold, or futures, options and similar instruments (to the extent such securities are Moody's Eligible Assets); provided, however, that for purposes of determining the Moody's Discount Factor applicable to a Municipal Obligation, any Municipal Obligation (excluding any short-term Municipal Obligation) not rated by Moody's but rated by S&P shall be deemed to have a Moody's rating which is one full rating category lower than its S&P rating.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal Obligations
Sold, futures and options (to the extent entered into in Moody's Hedging
Transactions) and similar instruments (including RIBS (provided that the trusts
in which such RIBS are held may be terminated within five business days) and
structured notes), or a Municipal Obligation that (i) pays interest in cash,
(ii) does not have its Moody's rating, as applicable, suspended by Moody's, and
(iii) is part of an issue of Municipal Obligations of at least $5,000,000,
except for Municipal Obligations rated below A by Moody's or Municipal
Obligations within the healthcare Issue Type Category, in which case the
minimum issue size is $10,000,000. Except for general obligation bonds,
Municipal Obligations issued by any one issuer and rated BBB or lower or not
rated by S&P and rated Ba or B or not rated by
Glossary
Moody's ("Other Securities") may comprise no more than 4% of total Moody's
Eligible Assets; such Other Securities, if any, together with any Municipal
Obligations issued by the same issuer and rated Baa by Moody's or A by S&P, may
comprise no more than 6% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated A by Moody's or AA by
S&P, may comprise no more than 10% of total Moody's Eligible Assets; and such
Other Securities, Baa, A and AA-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by the same issuer and rated Aa by
Moody's or AAA by S&P, may comprise no more than 20% of total Moody's Eligible
Assets. For purposes of the foregoing sentence, any Municipal Obligation backed
by the guaranty, letter of credit or insurance issued by a third party shall be
deemed to be issued by such third party if the issuance of such third party
credit is the sole determinant of the rating on such Municipal Obligation.
Other Securities falling within a particular Issue Type Category may comprise
no more than 12% of total Moody's Eligible Assets; such Other Securities, if
any, together with any Municipal Obligations falling within a particular Issue
Type Category and rated Baa by Moody's or A by S&P, may comprise no more than
20% of total Moody's Eligible Assets; such Other Securities, Baa and A-rated
Municipal Obligations, if any, together with any Municipal Obligations falling
within a particular Issue Type Category and rated A by Moody's or AA by S&P,
may comprise no more than 40% of total Moody's Eligible Assets; and such Other
Securities, Baa, A and AA-rated Municipal Obligations, if any, together with
any Municipal Obligations falling within a particular Issue Type Category and
rated Aa by Moody's or AAA by S&P, may comprise no more than 60% of total
Moody's Eligible Assets. For purposes of this definition, a Municipal
Obligation shall be deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by
S&P. Notwithstanding any other provision of this definition, (A) in the case of
general obligation Municipal Obligations only, Other Securities issued by
issuers located within any one county may comprise no more than 4% of Moody's
Eligible Assets; such Other Securities, if any, together with any Municipal
Obligations issued by issuers located within the same county and rated Baa by
Moody's or A by S&P, may comprise no more than 6% of Moody's Eligible Assets;
such Other Securities, Baa and A-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by issuers located within the same county
and rated A by Moody's or AA by S&P, may comprise no more than 10% of Moody's
Eligible Assets; and such Other Securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same county and rated Aa by Moody's or AAA by S&P, may
comprise no more than 20% of Moody's Eligible Assets; and (B) in no event may
(i) student loan Municipal Obligations comprise more than 10% of Moody's
Eligible Assets; (ii) resource recovery Municipal Obligations comprise more
than 10% of Moody's Eligible Assets; and (iii) Other Issues comprise more than
10% of Moody's Eligible Assets. For purposes of applying the foregoing
requirements, Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated
by Moody's, rated A-1+/AA or SP-1+/AA by S&P, shall be considered to have a
long-term rating of A. When the Fund sells a Municipal Obligation and agrees to
repurchase such Municipal Obligation at a future date, such Municipal
Obligation shall be valued at its Discounted Value for purposes of determining
Moody's Eligible Assets, and the amount of the repurchase price of such
Municipal Obligation shall be included as a liability for purposes of
calculating the APS Basic Maintenance Amount. When the Fund purchases a Moody's
Eligible Asset and agrees to sell it at a future date, such Eligible Asset
shall be valued at the amount of cash to be received by the Fund upon such
future date, provided that the counterparty to the transaction has a long-term
debt rating of at least A2 from Moody's and the transaction has a term of no
more than 30 days, otherwise such Eligible Asset shall be valued at the
Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset to the extent it is (i) subject to any material lien, mortgage, pledge, security interest or security agreement of any kind (collectively, "Liens"), except for (a) Liens which are being contested in good faith by appropriate proceedings and which Moody's has indicated to the Fund will not affect the status of such asset as a
Glossary
Moody's Eligible Asset, (b) Liens for taxes that are not then due and payable
or that can be paid thereafter without penalty, (c) Liens to secure payment for
services rendered or cash advanced to the Fund by PIMCO Advisors, PIMCO or
their affiliates, State Street Bank and Trust Company or the Auction Agent and
(d) Liens by virtue of any repurchase agreement; (ii) deposited irrevocably for
the payment of any liabilities for purposes of determining the APS Basic
Maintenance Amount; or (iii) held in a margin account.
"Moody's Exposure Period" means the period commencing on a given Valuation Date and ending 49 days thereafter.
"Moody's Hedging Transactions" means purchases or sales of exchange-traded financial futures contracts based on the Municipal Index or Treasury Bonds, and purchases, writings or sales of exchange-traded put options on such financial futures contracts, the Municipal Index or Treasury Bonds, and purchases, writings or sales of exchange-traded call options on such financial futures contracts, the Municipal Index or Treasury Bonds, subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging Transaction based on the Municipal Index (other than transactions that terminate a futures contract or option held by the Fund by the Fund's taking the opposite position thereto ("Closing Transactions")) that would cause the Fund at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on the Municipal Index exceeding in number 10% of the average number of daily traded financial futures contracts based on the Municipal Index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal; or
(B) outstanding financial futures contracts based on the Municipal Index having a Market Value exceeding 50% of the Market Value of all Municipal Obligations constituting Moody's Eligible Assets owned by the Fund (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Fund at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by the Fund and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 80% of the aggregate Market Value of all Municipal Obligations constituting Moody's Eligible Assets owned by the Fund (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by S&P)
(for purposes of the foregoing clauses (i) and (ii), the Fund shall be deemed to own the number of financial futures contracts that underlie any outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close out any outstanding financial futures contract based on the Municipal Index if the amount of open interest in the Municipal Index as reported by The Wall Street Journal is less than 5,000;
(iv) the Fund will engage in a Closing Transaction to close out any outstanding financial futures contract by no later than the fifth Business Day of the month in which such contract expires and will engage in a Closing Transaction to close out any outstanding option on a financial futures contract by no later than the first Business Day of the month in which such option expires;
Glossary
(v) the Fund will engage in Moody's Hedging Transactions only with respect to financial futures contracts or options thereon having the next settlement date or the settlement date immediately thereafter;
(vi) the Fund will not engage in options and futures transactions for leveraging or speculative purposes and will not write any call options or sell any financial futures contracts for the purpose of hedging the anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Fund will not enter into an option or futures transaction unless, after giving effect thereto, the Fund would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount.
"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the case of
any 7-Day Dividend Period, any Special Dividend Period of 28 days or fewer, or
any Special Dividend Period of 57 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 Dividend Period of more than 28 but fewer than
36 days, a multiplicative factor equal to 203%; (iii) in the case of any
Special Dividend Period of more than 35 but fewer than 43 days, a
multiplicative factor equal to 217%; (iv) in the case of any Special Dividend
Period of more than 42 but fewer than 50 days, a multiplicative factor equal to
226%; and (v) in the case of any Special Dividend Period of more than 49 but
fewer than 57 days, a multiplicative factor equal to 235%. If, as a result of
the enactment of changes to the Code, the Marginal Tax Rate will increase, such
increase being rounded up to the next five percentage points (the "Federal Tax
Rate Increase"), until the effective date of such increase, the Moody's
Volatility Factor in the case of any Dividend Period described in (i) above in
this definition instead shall be determined by reference to the following
table:
Volatility
Federal Tax Rate Increase Factor
--------------------------------------------------------------------------------
5%.................................................................. 295%
10%.................................................................. 317%
15%.................................................................. 341%
20%.................................................................. 369%
25%.................................................................. 400%
30%.................................................................. 436%
35%.................................................................. 477%
40%.................................................................. 525%
|
"Municipal Index" means the Bond Buyer Municipal Bond Index.
"Municipal Obligations" means municipal obligations, including municipal bonds and short-term municipal obligations, the interest from which is exempt from federal income taxes.
"NAV" has the meaning set forth on page 48 of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, and the regulations thereunder, each as amended from time to time.
"1940 Act APS Asset Coverage" has the meaning set forth on page 23 of this Prospectus.
"1940 Act Cure Date" has the meaning set forth on page 39 of this Prospectus.
"Non-Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions" below.
"Non-Payment Period" has the meaning set forth on page 36 of this Prospectus.
Glossary
"Non-Payment Period Rate" has the meaning set forth on page 37 of this Prospectus.
"Normal Dividend Payment Date" has the meaning set forth on page 34 of this Prospectus.
"Notice of Revocation" has the meaning set forth on page 36 of this Prospectus.
"Notice of Special Dividend Period" has the meaning set forth on page 36 of this Prospectus.
"Optional Redemption Price" has the meaning set forth on page 42 of this Prospectus.
"Order" has the meaning set forth on page 28 of this Prospectus.
"Other Issues" has the meaning set forth in the definition of "Issue Type Category" above.
"Other Securities" has the meaning set forth in the definition of "Moody's Eligible Asset" above.
"PIMCO" means Pacific Investment Management Company LLC.
"PIMCO Advisors" means PIMCO Advisors L.P.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker- Dealer that is not a Beneficial Owner of APS but that wishes to purchase such shares, or that is a Beneficial Owner that wishes to purchase additional APS.
"Potential Holder" means any Broker-Dealer or any such other person as may be permitted by the Fund, including any Existing Holder, who may be interested in acquiring APS (or, in the case of an Existing Holder, additional APS).
"Preference Item" has the meaning set forth on page 34 of this Prospectus.
"Preferred Shares" means preferred shares of beneficial interest of the Fund, and includes APS.
"Premium Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions" below.
"Pricing Service" means Standard & Poor's/J.J. Kenny or any other pricing service designated by the Board of Trustees for purposes of determining whether the Fund has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount.
"Rating Agency" means a nationally recognized statistical rating organization.
"Receivables For Municipal Obligations Sold" has the meaning set forth under the definition of "Moody's Discount Factor."
"Reference Rate" means: (i) with respect to any 7-Day Dividend Period or any Short Term Dividend Period having 28 or fewer days, the higher of the applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term Municipal Obligation Rate, (ii) with respect to any Short Term Dividend Period having more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note Rate.
Glossary
"Request for Special Dividend Period" has the meaning set forth on page 35 of this Prospectus.
"Response" has the meaning set forth on page 35 of this Prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page 38 of this Prospectus.
"RIBS" means residual interest municipal bonds.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., or its successors.
"Securities Depository" means The Depository Trust Company and its successors and assigns or any successor securities depository selected by the Fund that agrees to follow the procedures required to be followed by such securities depository in connection with the APS.
"Sell Order" has the meaning set forth on page 27 of this Prospectus.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" has the meaning set forth on page 5 of this Prospectus.
"Special Dividend Period" has the meaning set forth on page 5 of this Prospectus.
"Specific Redemption Provisions" means, with respect to a Special Dividend Period, either, or both of, (i) a period (a "Non-Call Period") determined by the Board of Trustees of the Fund, after consultation with the Auction Agent and the Broker-Dealers, during which the APS subject to such Dividend Period shall not be subject to redemption at the option of the Fund and (ii) a period (a "Premium Call Period"), consisting of a number of whole years and determined by the Board of Trustees of the Fund, after consultation with the Auction Agent and the Broker-Dealers, during each year of which the APS subject to such Dividend Period shall be redeemable at the Fund's option at a price per share equal to $25,000 plus accumulated but unpaid dividends plus a premium expressed as a percentage of $25,000, as determined by the Board of Trustees of the Fund after consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page 29 of this Prospectus.
"Submitted Bid" has the meaning set forth on page 30 of this Prospectus.
"Submitted Hold Order" has the meaning set forth on page 30 of this Prospectus.
"Submitted Order" has the meaning set forth on page 30 of this Prospectus.
"Submitted Sell Order" has the meaning set forth on page 30 of this Prospectus.
"Substitute Commercial Paper Dealer" means such substitute Commercial Paper Dealer or Dealers as the Fund may from time to time appoint or their respective affiliates and successors.
"Subsequent Dividend Period" means each Dividend Period after the Initial Dividend Period.
"Substitute Rating Agency" shall mean a nationally recognized statistical rating organization selected by UBS Warburg LLC, or its affiliates and successors, after consultation with the Fund, to act as a substitute rating agency to determine the credit ratings of the APS.
Glossary
"Sufficient Clearing Bids" has the meaning specified in Subsection 11.4(i) of the Auction Procedures.
"Taxable Equivalent of the Short-Term Municipal Obligations Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index or any
successor index (the "Kenny Index") made available for the Business Day
immediately preceding such date but in any event not later than 8:30 a.m., New
York City time, on such date by Kenny Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of short term bonds the
interest on which is excludable for federal income tax purposes under the Code
of "high grade" component issuers selected by Kenny Information Systems Inc. or
any such successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds but
shall exclude any bonds the interest on which constitutes a Preference Item,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
a.m., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Obligations Rate
shall mean the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the most recent Kenny Index so made available for any
preceding Business Day, divided by (B) 1.00 minus the Marginal Tax Rate noted
above (expressed as a decimal). The Fund may not utilize a successor index to
the Kenny Index unless Moody's provides the Fund with written confirmation that
the use of such successor index will not adversely affect the then-current
Moody's rating of the APS.
"Taxable Income" has the meaning set forth on page 6 of this Prospectus.
"Treasury Bonds" means United States Treasury Bonds or Notes.
"Underwriters" has the meaning set forth on page 1 of this Prospectus.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of the rate on the actively traded Treasury Bill with a maturity most nearly comparable to the length of the related Dividend Period, as such rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report for such Business Day, or (ii) if such yield as so calculated is not available, the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on any date means the Interest Equivalent of the yield as calculated by reference to the arithmetic average of the bid price quotations of the actively traded Treasury Bill with a maturity most nearly comparable to the length of the related Dividend Period, as determined by bid price quotations as of any time on the Business Day immediately preceding such date, obtained from at least three recognized primary U.S. Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by reference to the bid price quotation of the actively traded, current coupon Treasury Note with a maturity most nearly comparable to the length of the related Dividend Period, as such bid price quotation is published on the Business Day immediately preceding such date by the Federal Reserve Bank of New York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report for such Business Day, or (ii) if such yield as so calculated is not available, the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on any date means the yield as calculated by reference to the arithmetic average of the bid price quotations of the actively traded, current coupon Treasury Note with a maturity most nearly comparable to the length of the related Dividend Period, as determined by the bid price quotations as of any time on the Business Day immediately preceding such date, obtained from at least three recognized primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" has the meaning set forth on page 39 of this Prospectus.
"Winning Bid Rate" has the meaning set forth on page 30 of this Prospectus.
[LOGO OF PIMCO FUNDS]
PIMCO MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
August 20, 2001
PIMCO Municipal Income Fund (the "Fund") is a newly organized, diversified closed-end management investment company.
This Statement of Additional Information relating to auction preferred shares of the Fund ("Preferred Shares" or "APS") does not constitute a prospectus, but should be read in conjunction with the Fund's prospectus relating thereto dated August 20, 2001 (the "Prospectus"). This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing Preferred Shares, and investors should obtain and read the Prospectus prior to purchasing such shares. A copy of the Prospectus may be obtained without charge by calling (877) 819-2224. You may also obtain a copy of the Prospectus on the Securities and Exchange Commission's ("SEC") web site (http://www.sec.gov). Capitalized terms used but not defined in this Statement of Additional Information have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
USE OF PROCEEDS................................................................3 INVESTMENT OBJECTIVE AND POLICIES..............................................3 INVESTMENT RESTRICTIONS.......................................................27 MANAGEMENT OF THE FUND........................................................29 INVESTMENT MANAGER AND PORTFOLIO MANAGER......................................34 PORTFOLIO TRANSACTIONS........................................................39 DISTRIBUTIONS.................................................................41 DESCRIPTION OF SHARES.........................................................41 ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST................42 REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND........................44 TAX MATTERS...................................................................46 PERFORMANCE RELATED AND COMPARATIVE INFORMATION...............................52 CUSTODIAN, TRANSFER AGENTS AND DIVIDEND DISBURSING AGENTS.....................53 INDEPENDENT ACCOUNTANTS.......................................................53 COUNSEL.......................................................................54 REGISTRATION STATEMENT........................................................54 FINANCIAL STATEMENTS..........................................................55 APPENDIX A - Ratings of Investments..........................................A-1 APPENDIX B - Settlement Procedures...........................................B-1 APPENDIX C - Auction Procedures..............................................C-1 |
This Statement of Additional Information is dated August 20, 2001.
USE OF PROCEEDS
The net proceeds of the offering of Preferred Shares of the Fund will be approximately $197,725,000 after payment of offering costs and the sales load.
Pending investment in Municipal Bonds (as hereinafter defined) that meet the Fund's investment objective and policies, the net proceeds of the offering will be invested in high quality, short-term tax-exempt money market securities or in high quality Municipal Bonds with relatively low volatility (such as pre-refunded and intermediate-term bonds), to the extent such securities are available. If necessary to invest fully the net proceeds of the offering immediately, the Fund may also purchase, as temporary investments, short-term taxable investments of the type described under "Investment Objective and Policies--Short-Term Investments/Temporary Defensive Strategies," the income on which is subject to regular federal income tax and securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which the Fund may invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies of the Fund are described in the Prospectus. Additional information concerning the characteristics of certain of the Fund's investments is set forth below.
Municipal Bonds
Under normal market conditions, the Fund expects to be fully invested (at least 90% of its total assets) in municipal bonds which pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by the Fund's portfolio manager to be reliable), is exempt from federal income taxes ("Municipal Bonds"). The Fund will seek to avoid bonds generating interest potentially subjecting individuals to the alternative minimum tax.
Municipal Bonds share the attributes of debt/fixed income securities in general, but are generally issued by states, municipalities and other political subdivisions, agencies, authorities and instrumentalities of states and multi-state agencies or authorities. The Municipal Bonds which the Fund may purchase include general obligation bonds and limited obligation bonds (or revenue bonds), including industrial development bonds issued pursuant to former federal tax law. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable from such issuer's general revenues and not from any particular source. 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 private activity bonds and industrial development bonds generally are also revenue bonds and thus are not payable from the issuer's general revenues. The credit and quality of private activity bonds and industrial development bonds are usually related to the credit of the corporate user of the facilities. Payment of interest on and repayment of principal of such bonds is the responsibility of the corporate user (and/or any guarantor).
The Fund will invest at least 80% of its net assets in Municipal Bonds that at the time of investment are investment grade quality. Investment grade quality bonds are bonds rated within the four highest grades (Baa or BBB or better by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch IBCA, Inc. ("Fitch")) or bonds that are unrated but judged to be of comparable quality by the Fund's portfolio manager, Pacific Investment Management Company LLC ("PIMCO"). The Fund may invest up to 20% of its net assets in Municipal Bonds that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or unrated but judged to be of comparable quality by PIMCO. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as "junk bonds." For a description of the risks associated with lower quality securities, see "High Yield Securities (`Junk Bonds')" below.
The Fund will primarily invest in Municipal Bonds with long-term maturities in order to maintain a weighted average maturity of 15-30 years, but the average weighted maturity of obligations held by the Fund may be shortened, depending on market conditions. As a result, the Fund's portfolio at any given time may include both long-term and intermediate-term Municipal Bonds. Moreover, during temporary or defensive periods (e.g., times when PIMCO believes that temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term Municipal Bonds are available), and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest any percentage of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable and up to 10% of its net assets in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the type in which the Fund may invest directly. The Fund intends to invest in taxable short-term investments only in the event that suitable tax-exempt short-term investments are not available at reasonable prices and yields. See "Tax Matters" for information relating to the allocation of taxable income between the Fund's common shares (called "Common Shares" herein)and the Preferred Shares. Tax-exempt short-term investments include various obligations issued by state and local governmental issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such Municipal Bonds maturing in three years or less from the date of issuance) and municipal commercial paper. The Fund will invest only in taxable short-term investments which are U.S. Government securities or securities rated within the highest grade by Moody's, S&P or Fitch, and which mature within one year from the date of purchase or carry a variable or floating rate of interest. See Appendix A for a general description of Moody's, S&P's and Fitch's ratings of securities in such categories. Taxable short-term investments of the Fund may include certificates of deposit issued by U.S. banks with assets of at least $1 billion, or commercial paper or corporate notes, bonds or debentures with a remaining maturity of one year or less, or repurchase agreements. See "Short-Term Investments/ Temporary Defensive Strategies." To the extent the Fund invests in taxable investments, the Fund will not at such times be in a position to achieve its investment objective.
Also included within the general category of Municipal Bonds in which the Fund may invest are participations in lease obligations or installment purchase contract obligations of municipal authorities or entities ("Municipal Lease Obligations"). Although a Municipal Lease Obligation does not constitute a general obligation of the municipality for which the municipality's taxing power is pledged, a Municipal Lease Obligation is ordinarily backed by the municipality's covenant to budget for, appropriate and make the payments due under the
Municipal Lease Obligation. However, certain Municipal Lease Obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. In the case of a "non- appropriation" lease, the Fund's ability to recover under the lease in the event of non-appropriation or default will be limited solely to the repossession of the leased property, without recourse to the general credit of the lessee, and disposition or releasing of the property might prove difficult. There have been challenges to the legality of lease financing in numerous states, and, from time to time, certain municipalities have considered not appropriating money for lease payments. In deciding whether to purchase a Municipal Lease Obligation, PIMCO will assess the financial condition of the borrower, the merits of the project, the level of public support for the project, and the legislative history of lease financing in the state. These securities may be less readily marketable than other Municipal Bonds. The Fund may also purchase unrated lease obligations if determined by PIMCO to be of comparable quality to rated securities in which the Fund is permitted to invest.
The Fund may seek to enhance its yield through the purchase of private placements. These securities are sold through private negotiations, usually to institutions or mutual funds, and may have resale restrictions. Their yields are usually higher than comparable public securities to compensate the investor for their limited marketability. The Fund may not invest more than 15% of its net assets in illiquid securities, including unmarketable private placements.
Some longer-term Municipal Bonds give the investor the right to "put" or sell the security at par (face value) within a specified number of days following the investor's request--usually one to seven days. This demand feature enhances a security's liquidity by shortening its effective maturity and enables it to trade at a price equal to or very close to par. If a demand feature terminates prior to being exercised, the Fund would hold the longer-term security, which could experience substantially more volatility.
The Fund may invest in Municipal Bonds with credit enhancements such as letters of credit, municipal bond insurance and Standby Bond Purchase Agreements ("SBPAs"). Letters of credit are issued by a third party, usually a bank, to enhance liquidity and ensure repayment of principal and any accrued interest if the underlying Municipal Bond should default. Municipal bond insurance, which is usually purchased by the bond issuer from a private, nongovernmental insurance company, provides an unconditional and irrevocable guarantee that the insured bond's principal and interest will be paid when due. Insurance does not guarantee the price of the bond or the share price of the Fund. The credit rating of an insured bond reflects the credit rating of the insurer, based on its claims-paying ability. The obligation of a municipal bond insurance company to pay a claim extends over the life of each insured bond. Although defaults on insured Municipal Bonds have been low to date and municipal bond insurers have met their claims, there is no assurance this will continue. A higher-than-expected default rate could strain the insurer's loss reserves and adversely affect its ability to pay claims to bondholders. The number of municipal bond insurers is relatively small, and not all of them have the highest rating. An SBPA is a liquidity facility provided to pay the purchase price of bonds that cannot be re-marketed. The obligation of the liquidity provider (usually a bank) is only to advance funds to purchase tendered bonds that cannot be remarketed and does not cover principal or interest under any other circumstances. The liquidity provider's obligations under the SBPA are usually subject to numerous conditions, including the continued creditworthiness of the underlying borrower.
The Fund also may invest in participation interests. Participation interests are various types of securities created by converting fixed rate bonds into short-term, variable rate certificates. These securities have been developed in the secondary market to meet the demand for short-term, tax-exempt securities. The Fund will invest only in securities deemed tax-exempt by a nationally recognized bond counsel, but there is no guarantee the interest will be exempt.
The Fund may also invest up to 10% of its assets in residual interest Municipal Bonds, which may involve leverage and related risks. See "Residual Interest Municipal Bonds (RIBS)" below.
The Fund may purchase custodial receipts representing the right to receive either the principal amount or the periodic interest payments or both with respect to specific underlying Municipal Bonds. In a typical custodial receipt arrangement, an issuer or third party owner of Municipal Bonds deposits the bonds with a custodian in exchange for two classes of custodial receipts. The two classes have different characteristics, but, in each case, payments on the two classes are based on payments received on the underlying Municipal Bonds. In no event will the aggregate interest paid with respect to the two classes exceed the interest paid by the underlying Municipal Bond. Custodial receipts are sold in private placements. The value of a custodial receipt may fluctuate more than the value of a Municipal Bond of comparable quality and maturity.
Municipal Bonds are subject to credit and market risk. Generally, prices of higher quality issues tend to fluctuate less with changes in market interest rates than prices of lower quality issues and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
The Fund may purchase and sell portfolio investments to take advantage of changes or anticipated changes in yield relationships, markets or economic conditions. The Fund may also sell Municipal Bonds due to changes in PIMCO's evaluation of the issuer. The secondary market for Municipal Bonds typically has been less liquid than that for taxable debt/fixed income securities, and this may affect the Fund's ability to sell particular Municipal Bonds at then-current market prices, especially in periods when other investors are attempting to sell the same securities.
Prices and yields on Municipal Bonds are dependent on a variety of factors, including general money-market conditions, the financial condition of the issuer, general conditions of the Municipal Bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular issues, are subject to change from time to time. Information about the financial condition of an issuer of Municipal Bonds may not be as extensive as that which is made available by corporations whose securities are publicly traded.
Obligations of issuers of Municipal Bonds 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 legislatures 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 for the payment of interest and principal on their Municipal Bonds may be materially affected 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 Bonds or certain segments thereof, or of 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 Fund's Municipal Bonds in the same manner. The Fund will be particularly subject to these risks to the extent that it focuses its investments in a particular state or region.
Residual Interest Municipal Bonds (RIBS)
The Fund may also invest up to 10% of its assets in residual interest Municipal Bonds ("RIBS") whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. RIBS are created by dividing the income stream provided by an underlying bond to create two securities, one short-term and one long-term. The interest rate on the short-term component is reset by an index or auction process normally every seven to 35 days. After income is paid on the short-term securities at current rates, the residual income goes to the long-term securities. Therefore, rising short-term interest rates result in lower income for the longer-term portion, and vice versa. The longer-term bonds can be very volatile and may be less liquid than other Municipal Bonds of comparable maturity. An investment in RIBS typically will involve greater risk than an investment in a fixed rate bond. Because changes in the interest rate on the other security or index inversely affect the residual interest paid on a RIB, the value of a RIB is generally more volatile than that of a fixed rate bond. RIBS have interest rate adjustment formulas which generally reduce or, in the extreme, eliminate the interest paid to the Fund when short-term interest rates rise, and increase the interest paid to the Fund when short-term interest rates fall. RIBS have varying degrees of liquidity, and the market for these securities is volatile. These securities generally will underperform the market for fixed rate bonds in a rising interest rate environment, but tend to outperform the market for fixed rate bonds when interest rates decline or remain relatively stable. Although volatile, RIBS typically offer the potential for yields exceeding the yields available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. The Fund may also invest in RIBS for the purpose of increasing the Fund's leverage as a more flexible alternative to the issuance of Preferred Shares. Should short-term interest rates rise, the combination of the Fund's investment in RIBS and its use of other forms of leverage (including through the issuance of Preferred Shares or the use of other derivative instruments) likely will adversely affect the Fund's net asset value per share and income and distributions to shareholders. Trusts in which RIBS may be held could be terminated, in which case the residual bond holder would take possession of the underlying bond on an unleveraged basis.
Short-Term Investments / Temporary Defensive Strategies
Upon PIMCO's recommendation, temporarily or for defensive purposes and in order to keep the Fund's cash fully invested, including the period during which the net proceeds of the offering are being invested, the Fund may invest up to 100% of its net assets in short-term investments including high quality, short-term securities that may be either tax-exempt or taxable. The Fund intends to invest in taxable short-term investments only in the event that
suitable tax-exempt short-term investments are not available at reasonable prices and yields. To the extent the Fund invests in taxable short-term investments, the Fund will not at such times be in a position to achieve its investment objective of providing current income exempt from federal income tax.
Short-term taxable fixed income investments are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds differing as to maturity and rates of interest that are either issued or guaranteed by the U.S. Treasury or by U.S. government agencies or instrumentalities. U.S. government agency securities include securities issued by (a) the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the United States, Small Business Administration, and the Government National Mortgage Association, whose securities are supported by the full faith and credit of the United States; (b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage Association, whose securities are supported by the discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and (d) the Student Loan Marketing Association, whose securities are supported only by its credit. While the U.S. government provides financial support to such U.S. government-sponsored agencies or instrumentalities, no assurance can be given that it always will do so since it is not so obligated by law. The U.S. government, its agencies, and instrumentalities do not guarantee the market value of their securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or a savings and loan association. Such certificates are for a definite period of time, earn a specified rate of return, and are normally negotiable. The issuer of a certificate of deposit agrees to pay the amount deposited plus interest to the bearer of the certificate on the date specified thereon. Under current FDIC regulations, the maximum insurance payable as to any one certificate of deposit is $100,000; therefore, certificates of deposit purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of debt securities. A repurchase agreement is a contractual agreement whereby the seller of securities (U.S. Government securities or Municipal Bonds) agrees to repurchase the same security at a specified price on a future date agreed upon by the parties. The agreed-upon repurchase price determines the yield during the Fund's holding period. Repurchase agreements are considered to be loans collateralized by the underlying security that is the subject of the repurchase contract. Income generated from transactions in repurchase agreements will be taxable. The Fund will only enter into repurchase agreements with registered securities dealers or domestic banks that PIMCO believes present minimal credit risk. The risk to the Fund is limited to the ability of the issuer to pay the agreed-upon repurchase price on the delivery date; however, although the value of the underlying
collateral at the time the transaction is entered into always equals or exceeds the agreed-upon repurchase price, if the value of the collateral declines there is a risk of loss of both principal and interest. In the event of default, the collateral may be sold but the Fund might incur a loss if the value of the collateral declines, and might incur disposition costs or experience delays in connection with liquidating the collateral. In addition, if bankruptcy proceedings are commenced with respect to the seller of the security, realization upon the collateral by the Fund may be delayed or limited. PIMCO will monitor the value of the collateral at the time the transaction is entered into and at all times subsequent during the term of the repurchase agreement in an effort to determine that such value always equals or exceeds the agreed-upon repurchase price. In the event the value of the collateral declines below the repurchase price, PIMCO will demand additional collateral from the issuer to increase the value of the collateral to at least that of the repurchase price, including interest.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between the Fund and a corporation. There is no secondary market for such notes. However, they are redeemable by the Fund at any time. PIMCO will consider the financial condition of the corporation (e.g., earning power, cash flow, and other liquidity ratios) and will continuously monitor the corporation's ability to meet all of its financial obligations, because the Fund's liquidity might be impaired if the corporation were unable to pay principal and interest on demand. Investments in commercial paper will be limited to commercial paper rated in the highest categories by a major rating agency and which mature within one year of the date of purchase or carry a variable or floating rate of interest.
Short-term tax-exempt fixed-income securities are securities that are exempt from regular federal income tax and mature within three years or less from the date of issuance. Short-term tax-exempt fixed income securities are defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of an issuer to meet its obligations on its BANs is primarily dependent on the issuer's access to the long-term Municipal Bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuer's capacity to raise taxes due to, among other things, a decline in its tax base or a rise in delinquencies, could adversely affect the issuer's ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as anticipated revenues from another level of government, could adversely affect an issuer's ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies, such as those described above to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("Municipal Paper") represents very short-term unsecured, negotiable promissory notes issued by states, municipalities and their agencies. Payment of principal and interest on issues of Municipal Paper may be made from various sources, to the extent the funds are available therefrom. Maturities of Municipal Paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for issues of Municipal Paper.
Certain Municipal Bonds may carry variable or floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or a tax-exempt money market index.
While the various types of notes described above as a group represent the major portion of the tax-exempt note market, other types of notes are available in the marketplace and the Fund may invest in such other types of notes to the extent permitted under its investment objective, policies and limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
High Yield Securities ("Junk Bonds")
The Fund may invest up to 20% of its net assets in Municipal Bonds that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch or unrated but judged to be of comparable quality by PIMCO. Bonds of below investment grade quality (Ba/BB or below) are commonly referred to as "high yield securities" or "junk bonds." Issuers of bonds rated Ba/BB or B are regarded as having current capacity to make principal and interest payments but are subject to business, financial or economic conditions which could adversely affect such payment capacity. Municipal bonds rated Baa or BBB are considered "investment grade" securities, although such bonds may be considered to possess some speculative characteristics. Municipal Bonds rated AAA in which the Fund may invest may have been so rated on the basis of the existence of insurance guaranteeing the timely payment, when due, of all principal and interest.
High yield securities are regarded as predominantly speculative with respect to the issuer's continuing ability to meet principal and interest payments and, therefore, carry greater price volatility and principal and income risk, including the possibility of issuer default and bankruptcy and increased market price volatility.
High yield securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield security prices because the advent of a recession could lessen the ability of an issuer to make principal and interest payments on its debt securities. If an issuer of high yield securities defaults, in addition to risking payment of all or a portion of interest and principal, the Fund may incur additional expenses to seek recovery. In the case of high yield securities structured as zero-coupon or pay-in-kind securities, their market prices are affected to a greater extent by interest rate changes, and therefore tend to be more volatile than securities which pay interest periodically and in cash. PIMCO seeks to reduce these risks through diversification, credit analysis and attention to current developments and trends in both the economy and financial markets.
The secondary market on which high yield securities are traded may be less liquid than the market for higher grade securities. Less liquidity in the secondary trading market could adversely affect the price at which the Fund could sell a high yield security, and could adversely affect the daily net asset value of the shares. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield securities, especially in a thinly traded market. When secondary markets for high yield securities are less liquid than the market for higher grade securities, it may be more difficult to value the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable, objective data available. During periods of thin trading in these markets, the spread between bid and asked prices is likely to increase significantly and the Fund may have greater difficulty selling its portfolio securities. The Fund will be more dependent on PIMCO's research and analysis when investing in high yield securities. PIMCO seeks to minimize the risks of investing in all securities through diversification, in-depth credit analysis and attention to current developments in interest rates and market conditions.
A general description of Moody's, S&P's and Fitch's ratings of Municipal Bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch represent their opinions as to the quality of the Municipal Bonds they rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, Municipal Bonds with the same maturity, coupon and rating may have different yields while obligations with the same maturity and coupon with different ratings may have the same yield. For these reasons, the use of credit ratings as the sole method of evaluating high yield securities can involve certain risks. For example, credit ratings evaluate the safety of principal and interest payments, not the market value risk of high yield securities. Also, credit rating agencies may fail to change credit ratings in a timely fashion to reflect events since the security was last rated. PIMCO does not rely solely on credit ratings when selecting securities for the Fund, and develops its own independent
analysis of issuer credit quality.
The Fund's credit quality policies apply only at the time a security is purchased, and the Fund is not required to dispose of a security in the event that a rating agency or PIMCO downgrades its assessment of the credit characteristics of a particular issue. In determining whether to retain or sell such a security, PIMCO may consider such factors as PIMCO's assessment of the credit quality of the issuer of such security, the price at which such security could be sold and the rating, if any, assigned to such security by other rating agencies. However, analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher quality debt securities.
Municipal Warrants
The Fund may invest in municipal warrants, which are essentially call options on Municipal Bonds. In exchange for a premium, they give the purchaser the right, but not the obligation, to purchase a Municipal Bond in the future. The Fund might purchase a warrant to lock in forward supply in an environment where the current issuance of bonds is sharply reduced. Like options, warrants may expire worthless and they may have reduced liquidity.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals may be regular, and range from daily up to annually, or may be event based, such as based on a change in the prime rate.
The Fund may invest in floating rate debt instruments ("floaters") and engage in credit spread trades. The interest rate on a floater is a variable rate which is tied to another interest rate, such as a municipal bond index or Treasury bill rate. The interest rate on a floater resets periodically, typically every six months. While, because of the interest rate reset feature, floaters provide the Fund with a certain degree of protection against rises in interest rates, the Fund will participate in any declines in interest rates as well. A credit spread trade is an investment position relating to a difference in the prices or interest rates of two bonds or other securities, where the value of the investment position is determined by movements in the difference between the prices or interest rates, as the case may be, of the respective securities or currencies.
Structured Notes and Other Hybrid Instruments
The Fund may invest in "structured" notes, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market, such as selected securities or an index of securities, or the differential performance of two assets or markets, such as indices reflecting taxable and tax-exempt bonds. Depending on the terms of the note, the Fund may forgo all or part of the interest and principal that would be payable on a comparable conventional note. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier involves
leverage which will serve to magnify the potential for gain and the risk of loss. The Fund currently intends that any use of structured notes will be for the purpose of reducing the interest rate sensitivity of the Fund's portfolio (and thereby decreasing the Fund's exposure to interest rate risk) and, in any event, that the interest income on the notes will be exempt from federal income tax. Like other sophisticated strategies, the Fund's use of structured notes may not work as intended; for example, by reducing the duration of the Fund's portfolio, structured notes may limit the Fund's return when having a longer duration would be beneficial (for instance, when interest rates decline).
The Fund may also invest in other "hybrid" instruments which combine the characteristics of securities, futures, and options. Hybrids can be used as an efficient means of pursuing a variety of investment goals, including duration management and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events that cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes the Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations in the net asset value of the Fund.
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the Investment Company Act of 1940 and the rules and regulations thereunder, as amended from time to time (the "1940 Act"). As a result, the Fund's investments in these products will be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Borrowing
The Fund may borrow money to the extent permitted under the 1940 Act as interpreted, modified or otherwise permitted by regulatory authority having jurisdiction, from time to time. This means that, in general, the Fund may borrow money from banks for any purpose on a secured basis in an amount up to one-third of the Fund's total assets. The Fund may also borrow money for temporary administrative purposes on an unsecured basis to the extent permitted by law.
Specifically, provisions of the 1940 Act require the Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the Fund's total assets made for temporary administrative purposes. Any borrowings for temporary administrative purposes in excess of 5% of the Fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, the Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time.
As noted below, the Fund also may enter into certain transactions, including reverse repurchase agreements, that can be viewed as constituting a form of borrowing or financing transaction by the Fund. To the extent the Fund covers its commitment under a reverse repurchase agreement (or economically similar transaction) by the segregation of assets determined to be liquid by PIMCO in accordance with procedures adopted by the Trustees, equal in value to the amount of the Fund's commitment to repurchase, such an agreement will not be considered a "senior security" by the Fund and therefore will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. The Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
The Fund may enter into reverse repurchase agreements and economically similar transactions. A reverse repurchase agreement involves the sale of a portfolio-eligible security by the Fund, coupled with its agreement to repurchase the instrument at a specified time and price. Under a reverse repurchase agreement, the Fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. The Fund typically will segregate assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, equal (on a daily mark-to-market basis) to its obligations under reverse repurchase agreements. However, reverse repurchase agreements involve the risk that the market value of securities retained by the Fund may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase. To the extent that positions in reverse repurchase agreements are not covered through the segregation of liquid assets at least equal to the amount of any forward purchase commitment, such transactions would be subject to the Fund's limitations on borrowings, which would, among other things, restrict the aggregate of such transactions (plus any other borrowings) to one-third of the Fund's total assets.
The Fund also may effect simultaneous purchase and sale transactions that are known as "sale-buybacks." A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to receive any principal or interest payments made on the underlying security pending settlement of the Fund's repurchase of the underlying security. The Fund's obligations under a sale-buyback typically would be offset by liquid assets equal in value to the amount of the Fund's forward commitment to repurchase the subject security.
Derivative Instruments
In pursuing its investment objective, the Fund may purchase and sell
(write) both put options and call options on securities, swap agreements, and
securities indexes, and enter into interest rate and index futures contracts and
purchase and sell options on such futures contracts ("futures options") for
hedging purposes or as part of its overall investment strategy. The Fund also
may enter into swap agreements with respect to interest rates and indexes of
securities. If other types of financial instruments, including other types of
options, futures contracts, or futures options are traded in the future, the
Fund may also use those instruments, provided that the Trustees determine that
their use is consistent with the Fund's investment objective.
The value of some derivative instruments in which the Fund may invest may be particularly sensitive to changes in prevailing interest rates, and, like the other investments of the Fund, the ability of the Fund to successfully utilize these instruments may depend in part upon the ability of PIMCO to forecast interest rates and other economic factors correctly. If PIMCO incorrectly forecasts such factors and has taken positions in derivative instruments contrary to prevailing market trends, the Fund could be exposed to the risk of loss.
The Fund might not employ any of the strategies described below, and no assurance can be given that any strategy used will succeed. If PIMCO incorrectly forecasts interest rates, market values or other economic factors in utilizing a derivatives strategy for the Fund, the Fund might have been in a better position if it had not entered into the transaction at all. Also, suitable derivative transactions may not be available in all circumstances. The use of these strategies involves certain special risks, including a possible imperfect correlation, or even no correlation, between price movements of derivative instruments and price movements of related investments. While some strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in related investments or otherwise, due to the possible inability of the Fund to purchase or sell a portfolio security at a time that otherwise would be favorable or the possible need to sell a portfolio security at a disadvantageous time because the Fund is required to maintain asset coverage or offsetting positions in connection with transactions in derivative instruments, and the possible inability of the Fund to close out or to liquidate its derivatives positions. Income earned by the Fund from many derivative strategies will be treated as capital gain and, if not offset by net realized capital loss, will be distributed to shareholders in taxable distributions.
Options on Securities, Swap Agreements and Indexes. The Fund may purchase and sell both put and call options on Municipal Bonds or other securities, swap agreements or indexes in standardized contracts traded on domestic or other securities exchanges, boards of trade, or similar entities, or quoted on NASDAQ or on an over-the-counter market, and agreements, sometimes called cash puts, which may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option (or the cash value of the index) at a
specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. Upon exercise, the writer of an option on an index is obligated to pay the difference between the cash value of the index and the exercise price multiplied by the specified multiplier for the index option. (An index is designed to reflect features of a particular Municipal Bond or other market, a specific group of financial instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they are "covered." In the case of a call option on a Municipal Bond or other security, the option is "covered" if the Fund owns the security underlying the call or has an absolute and immediate right to acquire that security without additional cash consideration (or, if additional cash consideration is required, cash or other assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in such amount are segregated by its custodian) upon conversion or exchange of other securities held by the Fund. For a call option on an index, the option is covered if the Fund maintains with its custodian assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in an amount equal to the contract value of the index. A call option is also covered if the Fund holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees. A put option on a security or an index is "covered" if the Fund segregates assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees equal to the exercise price. A put option is also covered if the Fund holds a put on the same security or index as the put written where the exercise price of the put held is (i) equal to or greater than the exercise price of the put written, or (ii) less than the exercise price of the put written, provided the difference is maintained by the Fund in segregated assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees.
If an option written by the Fund expires unexercised, the Fund realizes a capital gain equal to the premium received at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, exchange, underlying security or index, exercise price, and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires.
The Fund may sell put or call options it has previously purchased, which could result in a net gain or loss depending on whether the amount realized on the sale is more or less than the premium and other transaction costs paid on the put or call option which is sold. Prior to exercise or expiration, an option may be closed out by an offsetting purchase or sale of an option of the same series. The Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if it is more, the Fund will realize a capital loss. If the premium received from a closing sale
transaction is more than the premium paid to purchase the option, the Fund will realize a capital gain or, if it is less, the Fund will realize a capital loss. The principal factors affecting the market value of a put or a call option include supply and demand, interest rates, the current market price of the underlying security or index in relation to the exercise price of the option, the volatility of the underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Fund is an asset of the Fund. The premium received for an option written by the Fund is recorded as a deferred credit. The value of an option purchased or written is marked to market daily and is valued at the closing price on the exchange on which it is traded or, if not traded on an exchange or no closing price is available, at the mean between the last bid and asked prices.
The Fund may write covered straddles consisting of a combination of a call and a put written on the same underlying security. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
Risks Associated with Options on Securities and Indexes. There are several risks associated with transactions in options on securities and on indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events.
During the option period, the covered call writer has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying security above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying security at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security remains equal to or greater than the exercise price (in the case of a put), or remains less than or equal to the exercise price (in the case of a call), the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security.
There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. If the Fund were unable to close out an option that it had purchased on a security, it would have to exercise the option in order to realize any profit or the option may expire worthless. If the Fund were unable to close out a covered call option that it had written on a security, it would not be able to sell the underlying security unless the option expired without
exercise. As the writer of a covered call option, the Fund forgoes, during the option's life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index written by the Fund is covered by an option on the same index purchased by the Fund, movements in the index may result in a loss to the Fund; however, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding.
Futures Contracts and Options on Futures Contracts. The Fund may invest in interest rate futures contracts and options thereon ("futures options"). The Fund may also purchase and sell futures contracts on Municipal Bonds and U.S. government securities, as well as purchase put and call options on such futures contracts.
An interest rate or index futures contract provides for the future sale by one party and purchase by another party of a specified quantity of a Municipal Bond or other financial instrument or the cash value of an index at a specified price and time. A futures contract on a Municipal Bond or other index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to 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 index contract was originally written. Although the value of an index might be a function of the value of certain specified securities, no physical delivery of these securities is made. A public market exists in futures contracts covering a number of indexes as well as financial instruments, including: certain Municipal Bonds; U.S. Treasury bonds; U.S. Treasury notes; three-month U.S. Treasury bills; 90-day commercial paper; and bank certificates of deposit. It is expected that other futures contracts will be developed and traded in the future.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long
position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading Commission ("CFTC") under which the Fund avoids being deemed a "commodity pool" or a "commodity pool operator," the Fund intends generally to limit its use of futures contracts and futures options to "bona fide hedging" transactions, as such term is defined in applicable regulations, interpretations and practice. For example, the Fund might use futures contracts to hedge against anticipated changes in interest rates that might adversely affect either the value of the Fund's Municipal Bonds or the price of the bonds which the Fund intends to purchase. The Fund's hedging activities may include sales of futures contracts as an offset against the
effect of expected increases in interest rates, and purchases of futures contracts as an offset against the effect of expected declines in interest rates. Although other techniques could be used to reduce the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge its exposure more effectively and perhaps at a lower cost by using futures contracts and futures options.
The Fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or other exchange, board of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract which is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. The Fund expects to earn taxable interest income on its initial margin deposits. A futures contract held by the Fund is valued daily at the official settlement price of the exchange on which it is traded. Each day the Fund pays or receives cash, called "variation margin," equal to the daily change in value of the futures contract. This process is known as "marking to market." Variation margin does not represent a borrowing or loan by the Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. In computing daily net asset value, each Fund will mark to market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market value of the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the underlying securities, generally these obligations are closed out prior to delivery by offsetting purchases or sales of matching futures contracts (involving the same exchange, underlying security or index, and delivery month). If an offsetting purchase price is less than the original sale price, the Fund realizes a capital gain, or if it is more, the Fund realizes a capital loss. Conversely, if an offsetting sale price is more than the original purchase price, the Fund realizes a capital gain, or if it is less, the Fund realizes a capital loss. The transaction costs must also be included in these calculations.
The Fund may write covered straddles consisting of a call and a put written on the same underlying futures contract. A straddle will be covered when sufficient assets are deposited to meet the Fund's immediate obligations. The Fund may use the same liquid assets to cover both the call and put options where the exercise price of the call and put are the same, or the exercise price of the call is higher than that of the put. In such cases, the Fund will also segregate liquid assets equivalent to the amount, if any, by which the put is "in the money."
Limitations on Use of Futures and Futures Options. As noted above, the Fund generally intends to enter into positions in futures contracts and related options only for "bona fide hedging" purposes. With respect to positions in futures and related options that do not constitute bona fide hedging positions, the Fund will not enter into a futures contract or futures option contract if, immediately thereafter, the aggregate initial margin deposits relating to such positions plus premiums paid by it for open futures option positions, less the amount by which any such options are "in-the-money," would exceed 5% of the Fund's net assets. A call option is "in-the-money" if the value of the futures contract that is the subject of the option exceeds the exercise price. A put option is "in-the-money" if the exercise price exceeds the value of the futures contract that is the subject of the option.
When purchasing a futures contract, the Fund will maintain with its custodian (and mark-to-market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract. Alternatively, the Fund may "cover" its position by purchasing a put option on the same futures contract with a strike price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, the Fund will maintain with its custodian (and mark-to-market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or by holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Fund will maintain with its custodian (and mark-to-market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that, when added to the amounts deposited with a futures commission merchant as margin, equal the total market value of the futures contract underlying the call option. Alternatively, the Fund may cover its position by entering into a long position in the same futures contract at a price no higher than the strike price of the call option, by owning the instruments underlying the futures contract, or by holding a separate call option permitting the Fund to purchase the same futures contract at a price not higher than the strike price of the call option sold by the Fund.
When selling a put option on a futures contract, the Fund will maintain with its custodian (and mark-to-market on a daily basis) assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, that equal the purchase price of the futures contract, less any margin on deposit. Alternatively, the Fund may cover the position either by entering into a short position in the same futures contract, or by owning a separate put option permitting it to sell the same futures contract so long as the strike price of the purchased put option is the same or higher than the strike price of the put option sold by the Fund.
To the extent that securities with maturities greater than one year are used to segregate assets to cover the Fund's obligations under futures contracts and related options, such use will not eliminate the risk of a form of leverage, which may tend to exaggerate the effect on net asset value of any increase or decrease in the market value of the Fund's portfolio, and may require liquidation of portfolio positions when it is not advantageous to do so.
Risks Associated with Futures and Futures Options. There are several risks associated with the use of futures contracts and futures options as hedging techniques. A purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the Fund securities being hedged. In addition, there are significant differences between the securities and futures markets that could result in an imperfect correlation between the markets, causing a given hedge not to achieve its objectives. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and futures options on securities, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers. A decision as to whether, when and how to hedge involves the exercise of skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of market behavior or unexpected interest rate trends.
Futures contracts on U.S. Government securities historically have reacted to an increase or decrease in interest rates in a manner similar to that in which the underlying U.S. Government securities reacted. To the extent, however, that the Fund enters into such futures contracts, the value of such futures will not vary in direct proportion to the value of the Fund's holdings of Municipal Bonds. Thus, the anticipated spread between the price of the futures contract and the hedged security may be distorted due to differences in the nature of the markets. The spread also may be distorted by differences in initial and variation margin requirements, the liquidity of such markets and the participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation permitted in certain futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of the current trading session. Once the daily limit has been reached in a futures contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The daily limit governs only price movements during a particular trading day and therefore does not limit potential losses because the limit may work to prevent the liquidation of unfavorable positions. For example, futures prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the Fund seeks to close out a futures or a futures option position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, many of the contracts discussed above are relatively new instruments without a significant trading history. As a result, there can be no assurance that an active secondary market will develop or continue to exist.
Swap Agreements. The Fund may enter into interest rate, index, and credit swap agreements. The Fund may also enter into options on swap agreements ("swap options"). These transactions are entered into in an attempt to obtain a particular return when it is considered desirable to do so, possibly at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded that desired return. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or "swapped" between the parties are generally calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate or in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. A swap option is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. The Fund may write (sell) and purchase put and call swap options.
Most swap agreements entered into by the Fund would calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the segregation of assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, to avoid any potential leveraging of the Fund's portfolio. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of the Fund's investment restriction concerning senior securities. The Fund will not enter into a swap agreement with any single party if the net amount owed or to be received under existing contracts with that party would exceed 5% of the Fund's assets.
Whether the Fund's use of swap agreements or swap options will be successful in furthering its investment objective will depend on PIMCO's ability to predict correctly whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Fund will enter into swap agreements only with counterparties that meet certain standards of creditworthiness (generally, such
counterparties would have to be eligible counterparties under the terms of the Fund's repurchase agreement guidelines). The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect the Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Depending on the terms of the particular option agreement, the Fund will generally incur a greater degree of risk when it writes a swap option than it will incur when it purchases a swap option. When the Fund purchases a swap option, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when the Fund writes a swap option, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
Certain swap agreements are exempt from most provisions of the Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity option transactions under the CEA, pursuant to regulations approved by the CFTC effective February 22, 1993. To qualify for this exemption, a swap agreement must be entered into by "eligible participants," which includes the following, provided the participants' total assets exceed established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or other entity, employee benefit plan, governmental entity, broker-dealer, futures commission merchant, natural person, or regulated foreign person. To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First, the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms. Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap agreements may not be entered into and traded on or through a multilateral transaction execution facility. Swap agreements are likely to generate capital gains income which would in turn be distributed to shareholders.
This exemption is not exclusive, and participants may continue to rely on existing exclusions for swaps, such as the Policy Statement issued in July 1989 which recognized a safe harbor for swap transactions from regulation as futures or commodity option transactions under the CEA or its regulations. The Policy Statement applies to swap transactions settled in cash that (1) have individually tailored terms, (2) lack exchange-style offset and the use of a clearing organization or margin system, (3) are undertaken in conjunction with a line of business, and (4) are not marketed to the public.
Short Sales
The Fund may make short sales of securities as part of its overall portfolio management strategy involving the use of derivative instruments and to offset potential declines in long positions in securities in the Fund's portfolio. A short sale is a transaction in which the Fund
sells a security it does not own in anticipation that the market price of that security will decline. Although short sale transactions are not currently available with respect to Municipal Bonds, the Fund may engage in short sales on taxable bonds and on futures contracts with respect to Municipal Bonds and taxable bonds.
When the Fund makes a short sale on a security, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any accrued interest and dividends on such borrowed securities.
If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
To the extent that the Fund engages in short sales, it will provide collateral to the broker-dealer and (except in the case of short sales "against the box") will maintain additional asset coverage in the form of segregated assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees. The Fund does not intend to enter into short sales (other than those "against the box") if immediately after such sale the aggregate of the value of all collateral plus the amount of the segregated assets exceeds one-third of the value of the Fund's net assets. This percentage may be varied by action of the Trustees. A short sale is "against the box" to the extent that the Fund contemporaneously owns, or has the right to obtain at no added cost, securities identical to those sold short. The Fund will engage in short selling to the extent permitted by the 1940 Act and rules and interpretations thereunder.
Illiquid Securities
The Fund may invest up to 15% of its net assets in illiquid securities. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Illiquid securities are considered to include, among other things, written over-the-counter options, securities or other liquid assets being used as cover for such options, repurchase agreements with maturities in excess of seven days, certain loan participation interests, fixed time deposits which are not subject to prepayment or provide for withdrawal penalties upon prepayment (other than overnight deposits), and other securities whose disposition is restricted under the federal securities laws (other than securities issued pursuant to Rule 144A under the 1933 Act and certain commercial paper that PIMCO has determined to be liquid under procedures approved by the Board of Trustees).
Illiquid securities may include privately placed securities, which are sold directly to a small number of investors, usually institutions. Unlike public offerings, such securities are not registered under the federal securities laws. Although certain of these securities may be readily sold, others may be illiquid, and their sale may involve substantial delays and additional costs.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment objective of the Fund in relation to actual and anticipated movements in interest rates. In addition, a security may be sold and another of comparable quality purchased at approximately the same time to take advantage of what PIMCO believes to be a temporary price disparity between the two securities. Temporary price disparities between two comparable securities may result from supply and demand imbalances where, for example, a temporary oversupply of certain bonds may cause a temporarily low price for such bonds, as compared with other bonds of like quality and characteristics. The Fund may also engage to a limited extent in short-term trading consistent with its investment objective. Securities may be sold in anticipation of a market decline (a rise in interest rates) or purchased in anticipation of a market rise (a decline in interest rates) and later sold, or to recognize a gain.
A change in the securities held by the Fund is known as "portfolio turnover." PIMCO manages the Fund without regard generally to restrictions on portfolio turnover. The use of certain derivative instruments with relatively short maturities may tend to exaggerate the portfolio turnover rate for the Fund. Trading in fixed income securities does not generally involve the payment of brokerage commissions, but does involve indirect transaction costs. The use of futures contracts may involve the payment of commissions to futures commission merchants. High portfolio turnover (e.g., greater than 100%) involves correspondingly greater expenses to the Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. The higher the rate of portfolio turnover of the Fund, the higher these transaction costs borne by the Fund generally will be. Transactions in the Fund's portfolio securities may result in realization of taxable capital gains (including short-term capital gains which are generally taxed to shareholders at ordinary income tax rates). The trading costs and tax effects associated with portfolio turnover may adversely affect the Fund's performance.
The portfolio turnover rate of the Fund is calculated by dividing (a) the lesser of purchases or sales of portfolio securities for the particular fiscal year by (b) the monthly average of the value of the portfolio securities owned by the Fund during the particular fiscal year. In calculating the rate of portfolio turnover, there is excluded from both (a) and (b) all securities, including options, whose maturities or expiration dates at the time of acquisition were one year or less.
Other Investment Companies
The Fund may invest in securities of other open- or closed-end investment companies that invest primarily in Municipal Bonds of the types in which the Fund may invest directly. The Fund may invest in other investment companies either during periods when it has large amounts of uninvested cash, such as the period shortly after the Fund receives the proceeds of the offering of its Common Shares or Preferred Shares, during periods when there is a shortage of attractive, high-yielding Municipal Bonds available in the market, or when PIMCO believes share prices of other investment companies offer attractive values. The Fund may invest in investment companies that are advised by PIMCO or its affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the SEC. As a stockholder in an investment company,
the Fund will bear its ratable share of that investment company's expenses and would remain subject to payment of the Fund's management fees with respect to assets so invested. PIMCO will take expenses into account when evaluating the investment merits of an investment in an investment company relative to available Municipal Bond investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. As described in the Fund's Prospectus in the section entitled "Risks," the net asset value and market value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares.
When-Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis. When such purchases are outstanding, the Fund will segregate until the settlement date assets determined to be liquid by PIMCO in accordance with procedures established by the Board of Trustees, in an amount sufficient to meet the purchase price. Typically, no income accrues on securities the Fund has committed to purchase prior to the time delivery of the securities is made, although the Fund may earn income on securities it has segregated.
When purchasing a security on a when-issued, delayed delivery, or forward commitment basis, the Fund assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. Because the Fund is not required to pay for the security until the delivery date, these risks are in addition to the risks associated with the Fund's other investments. If the Fund remains substantially fully invested at a time when -issued, delayed delivery, or forward commitment purchases are outstanding, the purchases may result in a form of leverage.
When the Fund has sold a security on a when-issued, delayed delivery, or forward commitment basis, the Fund does not participate in future gains or losses with respect to the security. If the other party to a transaction fails to deliver or pay for the securities, the Fund could miss a favorable price or yield opportunity or could suffer a loss. The Fund may dispose of or renegotiate a transaction after it is entered into, and may sell when-issued, delayed delivery or forward commitment securities before they are delivered, which may result in a capital gain or loss. There is no percentage limitation on the extent to which the Fund may purchase or sell securities on a when-issued, delayed delivery, or forward commitment basis.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that does not pay interest for its entire life. The market prices of zero coupon bonds are affected to a greater extent by changes in prevailing levels of interest rates and thereby tend to be more volatile in price than securities that pay interest periodically. In addition, because the Fund accrues income with respect to these securities prior to the receipt of such interest, it may have to dispose of
portfolio securities under disadvantageous circumstances in order to obtain cash needed to pay income dividends in amounts necessary to avoid unfavorable tax consequences.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Except as described below, the Fund, as a fundamental policy, may not, without the approval of the holders of a majority of the outstanding Common Shares and Preferred Shares voting together as a single class, and of the holders of a majority of the outstanding Preferred Shares voting as a separate class:
(1) Concentrate its investments in a particular industry, as that term is used in the Investment Company Act of 1940, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.
(2) With respect to 75% of the Fund's total assets, purchase the securities of any issuer, except securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities issued by other investment companies, if, as a result, (i) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of that issuer. For the purpose of this restriction, each state and each separate political subdivision, agency, authority or instrumentality of such state, each multi-state agency or authority, and each guarantor, if any, are treated as separate issuers of Municipal Bonds.
(3) Purchase or sell real estate, although it may purchase securities (including Municipal Bonds) secured by real estate or interests therein, or securities issued by companies which invest in real estate, or interests therein.
(4) Purchase or sell commodities or commodities contracts or oil, gas or mineral programs. This restriction shall not prohibit the Fund, subject to restrictions described in the Prospectus and elsewhere in this Statement of Additional Information, from purchasing, selling or entering into futures contracts, options on futures contracts, forward contracts, or any interest rate, securities-related or other hedging instrument, including swap agreements and other derivative instruments, subject to compliance with any applicable provisions of the federal securities or commodities laws.
(5) Borrow money or issue any senior security, except to the extent permitted under the Investment Company Act of 1940, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.
(6) Make loans, except to the extent permitted under the Investment Company Act of 1940, as amended, and as interpreted, modified, or otherwise permitted by regulatory authority having jurisdiction, from time to time.
(7) Act as an underwriter of securities of other issuers, except to the extent that in connection with the disposition of portfolio securities, it may be deemed to be an underwriter under the federal securities laws.
For purposes of the foregoing, "majority of the outstanding," when used with respect to particular shares of the Fund (whether voting together as a single class or voting as separate classes), means (i) 67% or more of such shares present at a meeting, if the holders of more than 50% of such shares are present or represented by proxy, or (ii) more than 50% of such shares, whichever is less.
Unless otherwise indicated, all limitations applicable to the Fund's investments (as stated above and elsewhere in this Statement of Additional Information) apply only at the time a transaction is entered into. Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed by PIMCO to be of comparable quality), or change in the percentage of the Fund's assets invested in certain securities or other instruments, or change in the average maturity or duration of the Fund's investment portfolio, resulting from market fluctuations or other changes in the Fund's total assets, will not require the Fund to dispose of an investment until PIMCO determines that it is practicable to sell or close out the investment without undue market or tax consequences to the Fund. In the event that ratings services assign different ratings to the same security, PIMCO will determine which rating it believes best reflects the security's quality and risk at that time, which may be the higher of the several assigned ratings.
Under the 1940 Act, a "senior security" does not include any promissory note or evidence of indebtedness where such loan is for temporary purposes only and in an amount not exceeding 5% of the value of the total assets of the issuer at the time the loan is made. A loan is presumed to be for temporary purposes if it is repaid within sixty days and is not extended or renewed.
The Fund's industry concentration policy does not preclude it from focusing investments in issuers in a group of related industries (such as different types of utilities).
To the extent the Fund covers its commitment under a reverse repurchase agreement (or economically similar transaction) by the segregation of assets determined by PIMCO to be liquid in accordance with procedures adopted by the Trustees, equal in value to the amount of the Fund's commitment to repurchase, such an agreement will not be considered a "senior security" by the Fund and therefore will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Fund.
The staff of the SEC has taken the position that purchased over-the-counter ("OTC") options and the assets used as cover for written OTC options are illiquid securities. Therefore, the Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options if, as a result of such transactions, the sum of: 1) the market value of OTC options currently outstanding which are held by the Fund, 2) the market value of the underlying securities covered by OTC call options currently outstanding which were sold by the Fund and 3) margin deposits on the Fund's existing OTC options on futures contracts, exceeds 15% of the net assets of the Fund, taken at market value, together with all other assets of the Fund which are illiquid or are otherwise not readily marketable. However, if an OTC option is sold by the Fund
to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the dealer at a predetermined price, then the Fund will treat as illiquid such amount of the underlying securities equal to the repurchase price less the amount by which the option is "in-the-money" (i.e., current market value of the underlying securities minus the option's strike price). The repurchase price with the primary dealers is typically a formula price which is generally based on a multiple of the premium received for the option, plus the amount by which the option is "in-the-money." This policy is not a fundamental policy of the Fund and may be amended by the Trustees without the approval of shareholders. However, the Fund will not change or modify this policy prior to the change or modification by the SEC staff of its position.
The Fund interprets its policies with respect to borrowing and lending to permit such activities as may be lawful for the Fund, to the full extent permitted by the 1940 Act or by exemption from the provisions therefrom pursuant to exemptive order of the SEC.
It is a condition of the issuance of the Preferred Shares that they be issued with a credit quality rating of "Aaa" from Moody's. In order to obtain and maintain the required ratings, the Fund will be required to comply with investment quality, diversification and other guidelines established by Moody's. Such guidelines will likely be more restrictive than the restrictions set forth above. The Fund does not anticipate that such guidelines would have a material adverse effect on its holders of Common Shares ("Common Shareholders") or its ability to achieve its investment objective. Moody's receives fees in connection with its ratings issuances.
MANAGEMENT OF THE FUND
Trustees and Officers
The business of the Fund is managed under the direction of the Fund's Board of Trustees. Subject to the provisions of the Fund's Agreement and Declaration of Trust (the "Declaration"), its Bylaws and Massachusetts law, the Trustees have all powers necessary and convenient to carry out this responsibility, including the election and removal of the Fund's officers.
The Trustees and officers of the Fund, their ages, and a description of their principal occupations during the past five years are listed below. Except as shown, each Trustee's and officer's principal occupation and business experience for the last five years have been with the employer(s) indicated, although in some cases the Trustee or officer may have held different positions with such employer(s). Unless otherwise indicated, the business address of the persons listed below is c/o PIMCO Advisory Services, 1345 Avenue of the Americas, New York, New York 10105.
Position(s) with the Principal Occupation(s) During the Past Five Years
Name, Address and Age Fund
Stephen J. Treadway* Chairman, Executive Vice President, PIMCO Advisors; Chairman
2187 Atlantic Street President, Trustee and Chief Executive Officer, PIMCO Funds
Stamford, CT 06902 Distributors LLC ("PFD"); Trustee, President and
Age 52 Chief Executive Officer, PIMCO Funds: Multi-Manager
Series; Chairman, Fixed Income SHares; Trustee,
Chairman and President, OCC Cash Reserves, Inc., OCC
Accumulation Trust, PIMCO California Municipal
Income Fund and PIMCO New York Municipal Income
Fund; Executive Vice President, Value Advisors LLC;
Chairman, Municipal Advantage Fund, Inc.; President,
The Emerging Markets Income Fund, Inc., The Emerging
Markets Income Fund II, Inc., The Emerging Markets
Floating Rate Fund, Inc., Global Partners Income
Fund, Inc., Municipal Partners Fund, Inc. and
Municipal Partners Fund II, Inc. Formerly, Trustee,
President and Chief Executive Officer of Cash
Accumulation Trust; Chairman, The Central European
Value Fund, Inc.; Executive Vice President, Smith
Barney Inc.
Paul Belica Trustee Trustee, Fixed Income SHares, PIMCO California
Age 79 Municipal Income Fund and PIMCO New York Municipal
Income Fund; Manager, Stratigos Fund, L.L.C.,
Whistler Fund, L.L.C., Xanthus Fund, L.L.C. and
Wynstone Fund, L.L.C.; Director, Student Loan
Finance Corporation, Education Loans, Inc., Goal
Funding, Inc. and Surety Loan Funding Company;
Former Advisor, Salomon Smith Barney Inc.; Former
Director, Central European Value Fund, Inc., Deck
House, Inc., a manufacturing company, The Czech
Republic Fund, Inc.; Director, Senior Vice President
and Managing Director, Smith Barney, Harris Upham
and Co.; Director and Treasurer, Isabela Home Inc.,
Isabela Housing Company Inc., and Isabela Nursing
Home Inc.; Director, Dreyfus Tax Exempt Bond Fund,
Inc., Dreyfus New York State Tax Exempt Bond Fund,
Inc., and Union Dime Savings Bank; Executive
Director, New York State Housing Finance Agency, New
York State Medical Care Facilities Finance Agency,
New York State Municipal Bond Bank Agency, New York
State Project Finance Agency and Chairman, State of
New York Mortgage Agency; President, Paul Belica and
Company, Inc., a financial advisory business;
Project Manager, Walsh Construction Company; Member,
Ministry of Foreign Affairs of Czechoslovakia in
Prague and Czechoslovak Embassy in Vienna.
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Position(s) with the Principal Occupation(s) During the Past Five Years
Name, Address and Age Fund
Robert E. Connor Trustee, Fixed Income SHares, PIMCO California
Municipal Income Fund and PIMCO New York Municipal
Income Fund; Director, Municipal Advantage Fund,
Inc.; Corporate Affairs Consultant; Formerly, Senior
Vice President, Corporate Office, Salomon Smith
Barney Inc.
Hans W. Kertess* Trustee Managing Director, Dain Rauscher Inc.; Trustee,
Age 62 PIMCO California Municipal Income Fund and PIMCO New
York Municipal Income Fund. Formerly, Managing
Director, Salomon Brothers.
John J. Dalessandro II Trustee President and Director, J.J. Dalessandro II Ltd.,
Age 65 registered broker-dealer and member of the New York
Stock Exchange.
Newton B. Schott, Jr. Vice President, Executive Vice President, Chief Administrative
2187 Atlantic Street Secretary Officer, Secretary and General Counsel, PFD; Senior
Stamford, CT 06902 Vice President -- Mutual Fund Division, PIMCO
Age 59 Advisors; Vice President and Secretary, PIMCO Funds:
Multi-Manager Series, PIMCO California Municipal
Income Fund and PIMCO New York Municipal Income
Fund; Executive Vice President and Secretary, The
Emerging Markets Income Fund, Inc., The Emerging
Markets Income Fund II, Inc., The Emerging Markets
Floating Rate Fund, Inc., Global Partners Income
Fund, Inc., Municipal Advantage Fund, Inc.,
Municipal Partners Fund, Inc. and Municipal Partners
Fund II, Inc.; Secretary, Fixed Income SHares.
Formerly, Vice President and Clerk, PIMCO Advisors
Funds and Cash Accumulation Trust.
Brian S. Shlissel Treasurer; Principal Vice President, PIMCO Advisors; Executive Vice
Age 36 Financial and Accounting President and Treasurer, OCC Cash Reserves, Inc. and
Officer OCC Accumulation Trust; President, Chief Executive
Officer and Treasurer, Fixed Income SHares;
Treasurer, Municipal Advantage Fund Inc.; Treasurer
and Principal Financial and Accounting Officer,
PIMCO California Municipal Income Fund and PIMCO New
York Municipal Income Fund. Formerly, Vice
President, Mitchell Hutchins Asset Management Inc.
Mark V. McCray Vice President Executive Vice President, PIMCO; Vice President,
840 Newport Center Drive PIMCO California Municipal Income Fund and PIMCO
Newport Beach, CA 92660 New York Municipal Income Fund. Formerly, Vice
Age 34 President and co-head of municipal bond trading,
Goldman Sachs & Co.
Michael B. Zuckerman Assistant Secretary Vice President, PIMCO Advisors; Secretary, OCC
Age 36 Accumulation Trust and OCC Cash Reserves, Inc.;
Assistant Secretary, PIMCO California Municipal
Income Fund and PIMCO New York Municipal Income
Fund. Formerly, Associate, Dechert Price and Rhoads;
Associate Counsel, Metropolitan Life Insurance
Company.
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* Denotes those Trustees who are "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Fund, PIMCO Advisors, PIMCO or one or more of the Underwriters. Mr. Treadway is an "interested person" because of his affiliation with PIMCO Advisors. Mr. Kertess is an "interested person" because of his affiliation with Dain Rauscher Inc., a broker-dealer.
As of August 6, 2001, the Fund's officers and Trustees as a group owned less than 1% of the outstanding Common Shares.
As of August 6, 2001, the following owned of record the number of Common Shares noted below, representing the indicated percentage of the Fund's outstanding shares as of such date.
PERCENTAGE OF THE FUND'S
NUMBER OF OUTSTANDING SHARES
SHAREHOLDER COMMON SHARES AS OF AUGUST 6, 2001
A.G. Edwards & Sons, Inc. 3,277,518 13.83%
125 Broad Street
40th Floor
New York, NY 10004
Merrill Lynch, Pierce Fenner & Smith Safekeeping 3,147,701 13.28
4 Corporate Place
Piscataway, NJ 08854
National Financial Services Corporation 1,829,553 7.72
200 Liberty Street
New York, NY 10281
Salomon Smith Barney Inc. 1,610,061 6.79
333 W. 34th Street
New York, NY 10001
UBS PaineWebber Inc. 4,681,824 19.76
1000 Harbor Boulevard
Weehawken, NJ 07087
Fleet Securities, Inc. 1,695,638 7.16
c/o ADP Proxy Services
42 Broadway, 2nd Floor
New York, NY 10004
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Messrs. Belica, Connor, Dalessandro Kertess and Treadway also serve as Trustees of PIMCO California Municipal Income Fund and PIMCO New York Municipal Income Fund (together with the Fund, the "Municipal Funds"), two closed-end funds for which PIMCO Advisors serves as Investment Manager and PIMCO serves as Portfolio Manager. In addition, Mr. Belica is a director or Trustee, as the case may be, of one open-end investment company (comprising two separate investment portfolios) advised by PIMCO Advisors. Mr. Connor is a director or Trustee, as the case may be, of one open-end investment company (comprising two separate investment portfolios) and one closed-end investment company advised by PIMCO Advisors. Mr. Treadway is a director or Trustee, as the case may be, of two open-end investment companies (which have multiple series) and seven closed- end investment companies advised by PIMCO Advisors or its affiliates. None of the independent Trustees has ever been a director, officer, or employee of, or a consultant to, PIMCO Advisors, PIMCO, any one or more of the Underwriters or any one or more affiliates of any of the foregoing. As indicated above, certain of the officers and Trustees of the Fund are affiliated with PIMCO Advisors and/or PIMCO.
At the next annual meeting of the Fund's shareholders, holders of Preferred Shares ("Preferred Shareholders"), voting as a separate class, will elect two Trustees and the remaining Trustees shall be elected by Common Shareholders and Preferred Shareholders, voting together as a single class. Messrs. Dalessandro and Kertess are the Trustees currently elected by Preferred Shareholders. Holders of Preferred Shares will be entitled to elect a majority of the Fund's Trustees under certain circumstances. See "Description of APS-- Voting Rights" in the Prospectus. See "Anti-Takeover and Other Provisions in the Declaration of Trust--Anti-Takeover Provisions" for a description of the various classes of Trustees and their terms in office.
Each Municipal Fund has the same Board of Trustees. The Municipal Funds are expected to hold joint meetings of their Boards of Trustees whenever possible. Each Trustee, other than any Trustee who is a director, officer, partner or employee of PIMCO Advisors, PIMCO or any entity controlling, controlled by or under common control with PIMCO Advisors or PIMCO, receives $6,000 for each joint meeting ($2,000 for each Municipal Fund) for the first four joint meetings in each year and $3,000 for each additional joint meeting ($1,000 for each Municipal Fund) in such year if the meetings are attended in person. Trustees receive $1,500 per joint meeting ($500 for each Municipal Fund) if the meetings are attended telephonically. Members of the Audit Oversight Committee will receive $1,500 per joint meeting ($500 for each Municipal Fund) of the Municipal Funds' Audit Oversight Committees if the meeting takes place on a day other than the day of a regularly scheduled Board meeting. Trustees will also be reimbursed for meeting-related expenses.
The Municipal Funds will allocate the costs of their joint meetings to the Municipal Funds pro rata based on the Funds' net assets, including assets attributable to the Preferred Shares.
It is estimated that the Trustees will receive the amounts set forth in the following table for the fiscal year ending April 30, 2002. For the calendar year ended December 31, 2000, the Trustees received the compensation set forth in the following table for serving as trustees of other funds in the "Fund Complex." Each officer and Trustee who is a director, officer, partner or employee of PIMCO Advisors, PIMCO or any entity controlling, controlled by or under common control with PIMCO Advisors or PIMCO serves without any compensation from the Fund.
Total Compensation
Estimated Compensation from the Fund Complex Paid
from the Fund for the to the Trustees for the
Fiscal Year Ended Calendar Year Ended
Name of Trustee April 30, 2002* December 31, 2000**
--------------- --------------- -----------------
Paul Belica $14,700 $2,000
Robert E. Connor $14,700 $8,550
Hans W. Kertess $ 9,555 $ 0
John J. Dalessandro II $ 9,555 $ 0
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* Since the Fund has not completed its first full fiscal year, compensation is estimated based upon future payments to be made and upon estimated relative Fund net assets.
** During the year ended December 31, 2000, Mr. Belica served as a Trustee of one open-end investment company (comprising two separate investment portfolios) advised by PIMCO Advisors, and Mr. Connor served as a director or Trustee of one open-end investment company (comprising two separate investment portfolios) and one closed-end investment company advised by PIMCO Advisors. These investment companies are considered to be in the same "Fund Complex" as the Fund.
The Fund has no employees. Its officers are compensated by PIMCO Advisors and/or PIMCO.
INVESTMENT MANAGER AND PORTFOLIO MANAGER
Investment Manager
PIMCO Advisors serves as investment manager to the Fund pursuant to an investment management agreement (the "Investment Management Agreement") between it and the Fund. PIMCO Advisors was organized as a limited partnership under Delaware law in 1987. Its sole general partner is Allianz-PacLife Partners LLC. Allianz-PacLife Partners LLC is a Delaware limited liability company with two members, Allianz GP Sub LLC, a Delaware limited liability company, and Pacific Asset Management LLC, a Delaware limited liability company. Allianz GP Sub LLC is a wholly-owned subsidiary of Allianz of America, Inc., which is a wholly- owned subsidiary of Allianz AG. Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific Life Insurance Company, which is a wholly-owned subsidiary of Pacific Mutual Holding Company. Allianz AG is a German based insurer. Pacific Mutual Holding Company is a Newport Beach, California based insurance holding company.
The general partner of PIMCO Advisors has substantially delegated its management and control of PIMCO Advisors to an Executive Committee. The Executive Committee is comprised of Joachim Faber, Udo Frank, Kenneth M. Poovey, William S. Thompson, Jr. and Marcus Riess.
PIMCO Advisors is located at 1345 Avenue of the Americas, New York, New York 10105. PIMCO Advisors and its subsidiary partnerships and limited liability companies had approximately $270 billion of assets under management as of June 30, 2001.
On May 5, 2000, the general partners of PIMCO Advisors closed the transactions contemplated by the Implementation and Merger Agreement dated as of October 31, 1999 ("Implementation Agreement"), as amended March 3, 2000, with Allianz of America, Inc. ("Allianz of America"), Pacific Asset Management LLC, PIMCO Partners, LLC, PIMCO Holding LLC, PIMCO Partners, G.P., and other parties to the Implementation Agreement. As a result of completing these transactions, PIMCO Advisors is now majority-owned indirectly by Allianz AG, with subsidiaries of Pacific Life Insurance Company ("Pacific Life") retaining a significant minority interest. Allianz AG is a German-based insurer. Pacific Life is a Newport Beach, California-based insurer.
In connection with the closing, Allianz of America entered into a put/call arrangement for the possible disposition of Pacific Life's indirect interest in PIMCO Advisors. The put option held by Pacific Life will allow it to require Allianz of America, on the last business day of each calendar quarter following the closing, to purchase at a formula-based price all of the PIMCO Advisors' units owned directly or indirectly by Pacific Life. The call option held by Allianz of America will allow it, beginning January 31, 2003 or upon a change in control of Pacific Life, to require Pacific Life to sell or cause to be sold to Allianz of America, at the same formula-based price, all of the PIMCO Advisors' units owned directly or indirectly by Pacific Life. Allianz AG's address is Koniginstrasse 28, D-80802, Munich, Germany. Pacific Life's address is 700 Newport Center Drive, Newport Beach, CA 92660.
Allianz AG, the parent of Allianz of America, is a publicly traded German company which, together with its subsidiaries, comprises the world's second largest insurance company as measured by premium income. Allianz AG is a leading provider of financial services, particularly in Europe, and is represented in 68 countries world-wide through subsidiaries, branch and representative offices, and other affiliated entities. As of March 31, 2001, the Allianz Group (including PIMCO Advisors and PIMCO) had assets under management of approximately $673 billion ($890 billion if the assets under management of Dresdner Bank AG, which Allianz acquired during the second quarter of 2001, are included). In its last fiscal year, Allianz AG wrote approximately $61 billion in gross insurance premiums.
As of the date of this Statement of Additional Information, significant institutional shareholders of Allianz AG currently include Munich Reinsurance and HypoVereinsbank.
Allianz AG in turn owns more than 95% of Dresdner Bank AG. Credit Lyonnais, Munich Reinsurance and HypoVereinsbank, as well as certain broker-dealers that might be controlled by or affiliated with these entities or Dresdner Bank AG, such as DB Alex. Brown LLC and Dresdner Klienwort Benson North America LLC (collectively, the "Affiliated Brokers"), may be considered to be affiliated persons of PIMCO Advisors and PIMCO. Absent an SEC exemption or other relief, the Fund generally is precluded from effecting principal transactions with the Affiliated Brokers, and its ability to purchase securities being underwritten by an Affiliated Broker or a syndicate including an Affiliated Broker is subject to restrictions. Similarly, the Fund's ability to utilize the affiliated brokers for agency transactions is subject to the restrictions of Rule 17e-1 under the 1940 Act. PIMCO does not believe that the restrictions on transactions with the Affiliated Brokers described above materially adversely affect its ability to provide services to the Fund, the Fund's ability to take advantage of market opportunities, or the Fund's overall performance.
PIMCO Advisors, subject to the supervision of the Board of Trustees, is responsible for managing, either directly or through others selected by PIMCO Advisers, the investments of the Fund. PIMCO Advisors also furnishes to the Board of Trustees periodic reports on the investment performance of the Fund. As more fully discussed below, PIMCO Advisors has retained PIMCO, its affiliate, to serve as the Fund's portfolio manager.
Under the terms of the Investment Management Agreement, subject to such policies as the Trustees of the Trust may determine, PIMCO Advisors, at its expense, will furnish continuously an investment program for the Fund and will make investment decisions on behalf of the Fund and place all orders for the purchase and sale of portfolio securities subject always to the Fund's investment objective, policies and restrictions; provided that, so long as PIMCO serves as the portfolio manager for the Fund, PIMCO Advisors' obligation under the Investment Management Agreement with respect to the Fund is, subject always to the control of the Trustees, to determine and review with PIMCO the investment policies of the Fund.
Subject to the control of the Trustees, PIMCO Advisors also manages, supervises and conducts the other affairs and business of the Fund, furnishes office space and equipment, provides bookkeeping and certain clerical services (excluding determination of the net asset value of the Fund, shareholder accounting services and the accounting services for the Fund) and pays all salaries, fees and expenses of officers and Trustees of the Fund who are affiliated with PIMCO Advisors. As indicated under "Portfolio Transactions--Brokerage and Research Services," the Fund's portfolio transactions may be placed with broker-dealers which furnish PIMCO Advisors and PIMCO, without cost, certain research, statistical and quotation services of value to them or their respective affiliates in advising the Fund or their other clients. In so doing, the Fund may incur greater brokerage commissions and other transactions costs than it might otherwise pay.
Pursuant to the Investment Management Agreement, the Fund has agreed to pay PIMCO Advisors an annual management fee, payable on a monthly basis, at the annual rate of 0.65% of the Fund's average daily net assets (including net assets attributable to Preferred Shares) for the services and facilities it provides. All fees and expenses are accrued daily and deducted before payment of dividends to investors.
From the commencement of the Fund's operations through June 30, 2009,
PIMCO
Advisors has contractually agreed to waive a portion of the management fees it is entitled to receive from the Fund in the amounts, and for the time periods, set forth below:
Percentage Waived Percentage Waived
(annual rate as a (annual rate as a
Period Ending percentage of average Period Ending percentage of average
June 30 daily net assets)/1/ June 30 daily net assets)/1/
------------- --------------------- ------------------- ---------------------
20022............... 0.20% 2006............... 0.20%
2003................ 0.20% 2007............... 0.15%
2004................ 0.20% 2008............... 0.10%
2005................ 0.20% 2009............... 0.05%
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PIMCO Advisors has not agreed to waive any portion of its fees beyond June 30, 2009.
Except as otherwise described in the Prospectus, the Fund pays, in addition to the investment management fee described above, all expenses not assumed by PIMCO Advisors, including, without limitation, fees and expenses of Trustees who are not "interested persons" of PIMCO Advisors or the Fund, interest charges, taxes, brokerage commissions, expenses of issue of shares, fees and expenses of registering and qualifying the Fund and its classes of shares for distribution under federal and state laws and regulations, charges of custodians, auditing and legal expenses, expenses of determining net asset value of the Fund, reports to shareholders, expenses of meetings of shareholders, expenses of printing and mailing prospectuses, proxy statements and proxies to existing shareholders, and its proportionate share of insurance premiums and professional association dues or assessments. The Fund is also responsible for such nonrecurring expenses as may arise, including litigation in which the Fund may be a party, and other expenses as determined by the Trustees. The Fund may have an obligation to indemnify its officers and Trustees with respect to such litigation.
Portfolio Manager
PIMCO serves as portfolio manager for the Fund pursuant to a portfolio management agreement (the "Portfolio Management Agreement") between PIMCO and PIMCO Advisors. Under the Portfolio Management Agreement, subject always to the control of the Trustees and the supervision of PIMCO Advisors, PIMCO's obligation is to furnish continuously an investment program for the Fund, to make investment decisions on behalf of the Fund and to place all orders for the purchase and sale of portfolio securities and all other investments for the Fund.
Under the Portfolio Management Agreement, PIMCO Advisors pays a portion of the fees it receives from the Fund to PIMCO in return for PIMCO's services, at the maximum annual rate of 0.37% of the Fund's average daily net assets (including assets attributable to the Preferred Shares). PIMCO has contractually agreed to waive a portion of the fee it is entitled to receive from PIMCO Advisors such that PIMCO will receive 0.25% of the Fund's average daily net assets from the commencement of Fund operations through June 30, 2006 (i.e., roughly the first 5 years of Fund operations), 0.28% of average daily net assets in year 6, 0.31% in year 7, and 0.34% in year 8.
Originally organized in 1971, reorganized as a Delaware general partnership in 1994 and reorganized as a Delaware limited liability company in 2000, PIMCO provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. The membership interests of PIMCO as of January 1, 2001, were held 94% by PIMCO Advisors and 6% by the managing directors of PIMCO. As of June 30, 2001, PIMCO had approximately $222 billion in assets under management. PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660.
Certain Terms of the Investment Management Agreement and Portfolio Management Agreement. The Investment Management Agreement and the Portfolio Management Agreement were each approved by the Trustees of the Fund (including all of the Trustees who are not "interested persons" of PIMCO Advisors or PIMCO). The Investment Management Agreement and Portfolio Management Agreement will each continue in force with respect to the Fund for two years from their respective dates, and from year to year thereafter, but only so long as their continuance is approved at least annually by (i) vote, cast in person at a meeting called for that purpose, of a majority of those Trustees who are not "interested persons" of PIMCO Advisors, PIMCO or the Fund, and by (ii) the majority vote of either the full Board of Trustees or the vote of a majority of the outstanding shares of all classes of the Fund. Each of the Investment Management Agreement and Portfolio Management Agreement automatically terminates on assignment. The Investment Management Agreement may be terminated on not less than 60 days' notice by PIMCO Advisors to the Fund or by the Fund to PIMCO Advisors. The Portfolio Management Agreement may be terminated on not less than 60 days' notice by PIMCO Advisors to PIMCO or by PIMCO to PIMCO Advisors, or by the Fund at any time by notice to PIMCO Advisors and PIMCO.
The Investment Management Agreement and the Portfolio Management Agreement each provide that PIMCO Advisors or PIMCO, as applicable, shall not be subject to any liability in connection with the performance of its services thereunder in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations and duties.
Codes of Ethics
The Fund, PIMCO Advisors and PIMCO have each adopted a separate code of ethics governing personal trading activities of, as applicable, all Trustees and officers of the Fund, and directors, officers and employees of PIMCO Advisors and PIMCO, who, in connection with their regular functions, play a role in the recommendation of any purchase or sale of a security by the Fund or obtain information pertaining to such purchase or sale or who have the power to influence the management or policies of the Fund, PIMCO Advisors or PIMCO, as applicable. Such persons are prohibited from effecting certain transactions, allowed to effect certain exempt transactions (including with respect to securities that may be purchased or held by the Fund), required to preclear certain security transactions with the applicable compliance officer or his designee and to report certain transactions on a regular basis. The Fund, PIMCO Advisors and PIMCO have each developed procedures for administration of their respective codes. Text-only versions of the codes of ethics can be viewed online or downloaded from the EDGAR Database on the SEC's internet web site at www.sec.gov. You may also review and copy those documents by visiting the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 202-942-8090. In addition,
copies of the codes of ethics may be obtained, after mailing the appropriate duplicating fee, by writing to the SEC's Public Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Investment Decisions and Portfolio Transactions
Investment decisions for the Fund and for the other investment advisory clients of PIMCO Advisors and PIMCO are made with a view to achieving their respective investment objectives. Investment decisions are the product of many factors in addition to basic suitability for the particular client involved (including the Fund). Some securities considered for investments by the Fund may also be appropriate for other clients served by PIMCO Advisors and PIMCO. Thus, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. If a purchase or sale of securities consistent with the investment policies of the Fund and one or more of these clients served by PIMCO Advisors or PIMCO is considered at or about the same time, transactions in such securities will be allocated among the Fund and clients in a manner deemed fair and reasonable by PIMCO Advisors or PIMCO, as applicable. PIMCO Advisors or PIMCO may aggregate orders for the Fund with simultaneous transactions entered into on behalf of its other clients so long as price and transaction expenses are averaged either for that transaction or for the day. Likewise, a particular security may be bought for one or more clients when one or more clients are selling the security. In some instances, one client may sell a particular security to another client. It also sometimes happens that two or more clients simultaneously purchase or sell the same security, in which event each day's transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which PIMCO Advisors or PIMCO believes is equitable to each and in accordance with the amount being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients.
Brokerage and Research Services
There is generally no stated commission in the case of fixed income securities, which are traded in the over-the-counter markets, but the price paid by the Fund usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Fund includes a disclosed, fixed commission or discount retained by the underwriter or dealer. Transactions on U.S. stock exchanges and other agency transactions involve the payment by the Fund of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a particular broker may charge different commissions according to such factors as the difficulty and size of the transaction.
Subject to the supervision of PIMCO Advisors, PIMCO places all orders for the purchase and sale of portfolio securities, options, futures contracts and other instruments for the Fund and buys and sells such securities, options, futures and other instruments for the Fund through a substantial number of brokers and dealers. In so doing, PIMCO uses its best efforts to obtain for the Fund the most favorable price and execution available, except to the extent it may be
permitted to pay higher brokerage commissions as described below. In seeking the most favorable price and execution, PIMCO, having in mind the Fund's best interests, considers 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 the 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.
Subject to the supervision of PIMCO Advisors, PIMCO places orders for the purchase and sale of portfolio investments for the Fund's account with brokers or dealers selected by it in its discretion. In effecting purchases and sales of portfolio securities for the account of the Fund, PIMCO will seek the best price and execution of the Fund's orders. In doing so, the Fund may pay higher commission rates than the lowest available when PIMCO believes it is reasonable to do so in light of the value of the brokerage and research services provided by the broker effecting the transaction, as discussed below.
It has for many years been a common practice in the investment advisory business for advisers of investment companies and other institutional investors to receive research services from broker-dealers which execute portfolio transactions for the clients of such advisers. Consistent with this practice, PIMCO may receive research services from many broker-dealers with which PIMCO places the Fund's portfolio transactions. PIMCO may also receive research or research credits from brokers which are generated from underwriting commissions when purchasing new issues of fixed income securities or other assets for the Fund. These services, which in some cases may also be purchased for cash, include such matters as general economic and security market reviews, industry and company reviews, evaluations of securities and recommendations as to the purchase and sale of securities. Some of these services are of value to PIMCO in advising various of its clients (including the Fund), although not all of these services are necessarily useful and of value in managing the Fund. Neither the management fee paid by the Fund to PIMCO Advisors nor the portfolio management fee paid by PIMCO Advisors to PIMCO is reduced because PIMCO and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, PIMCO may cause the Fund to pay a broker-dealer which provides "brokerage and research services" (as defined in such Act) to PIMCO an amount of disclosed commission for effecting a securities transaction for the Fund in excess of the commission which another broker-dealer would have charged for effecting that transaction.
The Fund may use broker-dealers that are affiliates (or affiliates of affiliates) of the Fund, PIMCO Advisors and/or PIMCO, subject to certain restrictions discussed above under "Investment Manager and Portfolio Manager-Investment Adviser-Agreement with Allianz AG."
References to PIMCO in this section would apply equally to PIMCO Advisors if PIMCO Advisors were to assume portfolio management responsibilities for the Fund and place orders for the purchase and sale of the Fund's portfolio investments.
DISTRIBUTIONS
See "Description of APS--Dividends" and "Description of capital structure" in the Prospectus for information relating to distributions made to Fund shareholders.
For tax purposes, the Fund is currently required to allocate net capital gain and other taxable income, if any, among the Common Shares, the Series A APS, the Series B APS, the Series C APS, the Series D APS and the Series E APS in proportion to total distributions paid to each class for the year in which such net capital gain or other taxable income is realized.
While any Preferred Shares are outstanding, the Fund may not declare any cash dividend or other distribution on its Common Shares unless at the time of such declaration (1) all accumulated dividends on the Preferred Shares have been paid and (2) the net asset value of the Fund's portfolio (determined after deducting the amount of such dividend or other distribution) is at least 200% of the liquidation value of any outstanding Preferred Shares. This latter limitation on the Fund's ability to make distributions on its Common Shares could cause the Fund to incur income and excise tax and, under certain circumstances, impair the ability of the Fund to maintain its qualification for taxation as a regulated investment company. See "Tax Matters."
The Board of Trustees has declared a dividend of $0.0769 per Common Share payable on September 4, 2001.
DESCRIPTION OF SHARES
Common Shares
The Fund's Declaration of Trust (the "Declaration") authorizes the issuance of an unlimited number of Common Shares. The Common Shares currently outstanding have been issued without par value. All Common Shares of the Fund have equal rights as to the payment of dividends and the distribution of assets upon liquidation of the Fund. The Common Shares currently outstanding have been fully paid and, subject to matters discussed in "Anti-Takeover and Other Provisions in the Declaration of Trust-Shareholder Liability" below, are non- assessable, and have no pre-emptive or conversion rights or rights to cumulative voting. At any time when the Fund's Preferred Shares are outstanding, Common Shareholders will not be entitled to receive any distributions from the Fund unless all accrued dividends on Preferred Shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to Preferred Shares would be at least 200% after giving effect to such distributions. See "Description of APS--Dividends--Restrictions on Dividends and Other Payments" and "Description of capital structure" in the Prospectus.
The Common Shares are listed on the New York Stock Exchange. The Fund intends to hold annual meetings of shareholders so long as the Common Shares are listed on a national securities exchange and such meetings are required as a condition to such listing.
Shares of closed-end investment companies may frequently trade at prices lower than net asset value. Shares of closed-end investment companies like the Fund that invest predominantly in investment grade Municipal Bonds have during some periods traded at prices higher than net asset value and during other periods traded at prices lower than net asset value. There can be no assurance that Common Shares or shares of other municipal funds will trade at a price higher than net asset value in the future. Net asset value generally increases when interest rates decline,
and decreases when interest rates rise, and these changes are likely to be greater in the case of a fund having a leveraged capital structure. Whether investors realize gains or losses upon the sale of Common Shares does not depend upon the Fund's net asset value but depends entirely upon whether the market price of the Common Shares at the time of sale is above or below the original purchase price for the shares. Since the market price of the Fund's Common Shares is determined by factors beyond the control of the Fund, the Fund cannot predict whether the Common Shares will trade at, below, or above net asset value or at, below or above the initial public offering price. Accordingly, the Common Shares are designed primarily for long-term investors, and investors in the Common Shares should not view the Fund as a vehicle for trading purposes.
Preferred Shares
See "Description of APS" and "Description of capital structure" in the Prospectus for information relating to the Preferred Shares.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST
Shareholder Liability
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration contains an express disclaimer of shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation or instrument entered into or executed by the Fund or the Trustees. The Declaration also provides for indemnification out of the Fund's property for all loss and expense of any shareholder held personally liable on account of being or having been a shareholder. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which such disclaimer is inoperative or the Fund is unable to meet its obligations, and thus should be considered remote.
Anti-Takeover Provisions
As described below, the Declaration includes provisions that could have the effect of limiting the ability of other entities or persons to acquire control of the Fund or to change the composition of its Board of Trustees, and could have the effect of depriving shareholders of opportunities to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund.
Commencing with the first annual meeting of shareholders, the Board of Trustees will be divided into three classes (Class I, Class II and Class III). At each annual meeting of shareholders, the term of one class will expire and each Trustee elected to that class will hold office for a term of three years. The classification of the Board of Trustees in this manner could delay for an additional year the replacement of a majority of the Board of Trustees. In addition, the Declaration provides that a Trustee may be removed only for cause and only (i) by action of at least seventy-five percent (75%) of the outstanding shares of the classes or series of shares entitled to vote for the election of such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining Trustees.
Except as provided in the next paragraph, the affirmative vote or consent of at least seventy-five percent (75%) of the Board of Trustees and at least seventy-five percent (75%) of the shares of the Fund outstanding and entitled to vote thereon are required to authorize any of the following transactions (each a "Material Transaction"): (1) a merger, consolidation or share exchange of the Fund or any series or class of shares of the Fund with or into any other person or company, or of any such person or company with or into the Fund or any such series or class of shares; (2) the issuance or transfer by the Fund or any series or class of shares (in one or a series of transactions in any twelve-month period) of any securities of the Fund or such series or class to any other person or entity for cash, securities or other property (or combination thereof) having an aggregate fair market value of $1,000,000 or more, excluding sales of securities of the Fund or such series or class in connection with a public offering, issuances of securities of the Fund or such series or class pursuant to a dividend reinvestment plan adopted by the Fund and issuances of securities of the Fund or such series or class upon the exercise of any stock subscription rights distributed by the Fund; or (3) a sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Fund or any series or class of shares (in one or a series of transactions in any twelve-month period) to or with any person of any assets of the Fund or such series or class having an aggregate fair market value of $1,000,000 or more, except for transactions in securities effected by the Fund or such series or class in the ordinary course of its business. The same affirmative votes are required with respect to any shareholder proposal as to specific investment decisions made or to be made with respect to the Fund's assets or the assets of any series or class of shares of the Fund.
Notwithstanding the approval requirements specified in the preceding paragraph, the Declaration provides that no vote or consent of the Fund's shareholders will be required to authorize a Material Transaction if the transaction is approved by a vote of both a majority of the Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined below), so long as all other conditions and requirements, if any, provided for in the Fund's Bylaws and applicable law have been satisfied.
In addition, the Declaration provides that the Fund may be terminated at any time by vote or consent of at least seventy-five percent (75%) of the Fund's shares or, alternatively, by vote or consent of both a majority of the Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined below).
In certain circumstances, the Declaration also imposes shareholder voting requirements that are more demanding than those required under the 1940 Act in order to authorize a conversion of the Fund from a closed-end to an open-end investment company. See "Repurchase of Fund Shares; Conversion to Open-End Fund" below.
As noted, the voting provisions described above could have the effect of depriving Common Shareholders of an opportunity to sell their Common Shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund in a tender offer or similar transaction. In the view of the Fund's Board of Trustees, however, these provisions offer several possible advantages, including: (1) requiring persons seeking control of the Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and stability; and (3) enhancing the Fund's ability to pursue long-term strategies that are consistent with its investment objective and management policies. The Board of Trustees has determined that the voting requirements described above, which are generally greater than the minimum requirements under the 1940 Act, are in the best interests of the Fund's Common Shareholders generally.
A "Continuing Trustee," as used in the discussion above, is any member of the Fund's Board of Trustees (1) who is not a person or affiliate of a person who enters or proposes to enter into a Material Transaction with the Fund (such a person or affiliate being referred to individually as an "Interested Party") and who has been a member of the Board of Trustees for a period of at least twelve months (or since the commencement of the Fund's operations, if less than twelve months), or (2) who is a successor of a Continuing Trustee who is unaffiliated with an Interested Party and is recommended to succeed a Continuing Trustee by a majority of the Continuing Trustees then members of the Fund's Board of Trustees.
The foregoing is intended only as a summary and is qualified in its entirety by reference to the full text of the Declaration and the Fund's Bylaws, both of which have been filed as exhibits to the Fund's registration statement on file with the SEC.
Liability of Trustees
The Declaration provides that the obligations of the Fund are not binding upon the Trustees of the Fund individually, but only upon the assets and property of the Fund, and that the Trustees shall not be liable for errors of judgment or mistakes of fact or law. Nothing in the Declaration, however, protects a Trustee against any liability to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders will not have the right to cause the Fund to redeem their shares. Instead, the Fund's Common Shares will trade in the open market at a price that will be a function of several factors, including dividend levels (which are in turn affected by expenses), net asset value, call protection, price, dividend stability, relative demand for and supply of such shares in the market, general market and economic conditions and other factors. Shares of a closed-end investment company may frequently trade at prices lower than net asset value. The Fund's Board of Trustees regularly monitors the relationship between the market price and net asset value of the Common Shares. If the Common Shares 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 in private transactions, or the making of a tender offer for such shares. There can be no assurance, however, that the Board of Trustees will decide to take or propose any of these actions, or that share repurchases or tender offers, if undertaken, will reduce market discount. The Fund has no present intention to repurchase its Common Shares and would do so only in the circumstances described in this section.
Notwithstanding the foregoing, at any time when the Fund's Preferred Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire any of its Common Shares unless (1) all accrued dividends on Preferred Shares have been paid and (2) at the time of such purchase, redemption or acquisition, the net asset value of the Fund's portfolio (determined after deducting the acquisition price of the Common Shares) is at least 200% of the liquidation value of the outstanding Preferred Shares (expected to equal the original purchase price per share plus any accrued and unpaid dividends thereon).
Subject to its investment limitations, the Fund may borrow to finance the repurchase of shares or to make a tender offer. Interest on any borrowings to finance share repurchase transactions or the accumulation of cash by the Fund in anticipation of share repurchases or tenders will reduce the Fund's net income. Any share repurchase, tender offer or borrowing that might be approved by the Board of Trustees would have to comply with the Securities Exchange Act of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
The Fund's Board of Trustees may also from time to time consider submitting to the holders of the shares of beneficial interest of the Fund a proposal to convert the Fund to an open-end investment company. In determining whether to exercise its sole 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 Fund's capital structure is leveraged and the possibility of re-leveraging, the spread, if any, between the yields on securities in the Fund's portfolio and interest and dividend charges on Preferred Shares issued by the Fund and general market and economic conditions.
The Declaration requires the affirmative vote or consent of holders of at least seventy-five percent (75%) of each class of the Fund's shares entitled to vote on the matter to authorize a conversion of the Fund from a closed-end to an open-end investment company, unless the conversion is authorized by both a majority of the Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as defined above under "Anti-Takeover and Other Provisions in the Declaration of Trust--Anti-Takeover Provisions"). This seventy-five percent (75%) shareholder approval requirement is higher than is required under the 1940 Act. In the event that a conversion is approved by the Trustees and the Continuing Trustees as described above, the minimum shareholder vote required under the 1940 Act would be necessary to authorize the conversion. Currently, the 1940 Act would require approval of the holders of a "majority of the outstanding" Common Shares and Preferred Shares voting together as a single class, and the holders of a "majority of the outstanding" Preferred Shares voting as a separate class, in order to authorize a conversion.
If the Fund converted to an open-end company, it would be required to redeem all Preferred Shares then outstanding (requiring in turn that it liquidate a portion of its investment portfolio), and the Fund's Common Shares likely would no longer be listed on the New York Stock Exchange. Shareholders of an open-end investment company may require the company to redeem their shares on any business day (except in certain circumstances as authorized by or under the 1940 Act) at their net asset value, less such redemption charge, if any, as might be in effect at the time of redemption. In order to avoid maintaining large cash positions or liquidating favorable investments to meet redemptions, open-end companies typically engage in a
continuous offering of their shares. Open-end companies are thus subject to periodic asset in-flows and out-flows that can complicate portfolio management.
The repurchase by the Fund of its shares at prices below net asset value will result in an increase in the net asset value of those shares that remain outstanding. However, there can be no assurance that share repurchases or tenders at or below net asset value will result in the Fund's shares trading at a price equal to their net asset value. Nevertheless, the fact that the Fund's shares may be the subject of repurchase or tender offers at net asset value from time to time, or that the Fund may be converted to an open-end company, may reduce any spread between market price and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease the Fund's total assets which would likely have the effect of increasing the Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time when Preferred Shares are outstanding will increase the leverage applicable to the outstanding Common Shares then remaining. See the Fund's Prospectus under "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares trade below net asset value, the Board of Trustees would consider all relevant factors, including the extent and duration of the discount, the liquidity of the Fund's portfolio, the impact of any action that might be taken on the Fund or its shareholders and market considerations. Based on these considerations, even if the Fund's shares should trade at a discount, the Board of Trustees may determine that, in the interest of the Fund and its shareholders, no action should be taken.
TAX MATTERS
Taxation of the Fund. The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, the Fund must, among other things:
(a) derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale of stock, securities and foreign currencies, or 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;
(b) distribute with respect to each taxable year at least 90% of the sum of its taxable net investment income, its net tax-exempt income, and the excess, if any, of net short-term capital gains over net long-term capital losses for such year; and
(c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Fund's assets is represented by
cash and cash items, U.S. government securities, securities of other
regulated investment companies, and other securities limited in respect of any one issuer to a value not greater than 5% of the value of the Fund's total assets and not more than 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of the Fund's assets is invested in the securities (other than those of the U.S. Government or other regulated investment companies) of any one issuer or of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or businesses.
If the Fund qualifies as a regulated investment company that is accorded special tax treatment, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends (including capital gain dividends).
If the Fund failed to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, would be taxable to shareholders as ordinary income. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying as a regulated investment company that is accorded special tax treatment.
The Fund may retain for investment its net capital gain. However, if the Fund retains any net capital gain or any investment company taxable income, it will be subject to tax at regular corporate rates on the amount retained. If the Fund retains any net capital gain, it may designate the retained amount as undistributed capital gains in a notice to its shareholders who, if subject to federal income tax on long-term capital gains, (i) will be required to include in income for federal income tax purposes, as long-term capital gain, their share of such undistributed amount, and (ii) will be entitled to credit their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by an amount equal under current law to the difference between the amount of undistributed capital gains included in the shareholder's gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence. The Fund intends to distribute at least annually to its shareholders all or substantially all of its net tax-exempt interest and any investment company taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining its investment company taxable income and net capital gain, to elect to treat all or part of any net capital loss, any net long-term capital loss or any net foreign currency loss incurred after October 31 as if it had been incurred in the succeeding year.
If the Fund fails to distribute in a calendar year at least an amount equal to the sum of 98% of its ordinary income for such year and 98% of its capital gain net income for the one-year period ending October 31, plus any retained amount from the prior year, the Fund will be subject to a 4% excise tax on the undistributed amounts. A dividend paid to shareholders in January of a year
generally is deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable to shareholders of record on a date in October, November or December of that preceding year. The Fund intends generally to make distributions sufficient to avoid imposition of the 4% excise tax.
Fund Distributions. Distributions from the Fund (other than exempt- interest dividends, as discussed below) will be taxable to shareholders as ordinary income to the extent derived from investment income and net short-term capital gains. Distributions of net capital gains (that is, the excess of net gains from the sale of capital assets held more than one year over net losses from the sale of capital assets held for not more than one year) will be taxable to shareholders as such, regardless of how long a shareholder has held the shares in the Fund.
The Fund's expenses attributable to earning tax-exempt income do not reduce its current earnings and profits; therefore, distributions in excess of the sum of the Fund's net tax-exempt and taxable income may be treated as taxable dividends to the extent of the Fund's remaining earnings and profits (which provides the measure of the Fund's dividend-paying capacity for tax purposes). Distributions in excess of the sum of the Fund's net tax-exempt and taxable income could occur, for example, if the Fund's book income exceeded the sum of its net tax-exempt and taxable income. Differences in the Fund's book income and its net tax-exempt and taxable income may arise from certain of the Fund's hedging and investment activities. See "Hedging Transactions" below.
Exempt-interest dividends. The Fund will be qualified to pay exempt- interest dividends to its shareholders only if, at the close of each quarter of the Fund's taxable year, at least 50% of the total value of the Fund's assets consists of obligations the interest on which is exempt from federal income tax under Code Section 103(a). Distributions that the Fund properly designates as exempt-interest dividends are treated as interest excludable from shareholders' gross income for federal income tax purposes but may be taxable for federal alternative minimum tax purposes and for state and local purposes. Because the Fund intends to qualify to pay exempt-interest dividends, the Fund may be limited in its ability to enter into taxable transactions involving forward commitments, repurchase agreements, financial futures and options contracts on financial futures, tax-exempt bond indices and other assets.
The receipt of exempt-interest dividends may affect the portion, if any, of a person's Social Security and Railroad Retirement benefits that will be includable in gross income subject to federal income tax. Up to 85% 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 an adjusted base amount ($34,000 for a single individual and $44,000 for individuals filing a joint return). Shareholders receiving Social Security or Railroad Retirement benefits should consult their tax advisers.
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 federal alternative minimum taxable income. The Fund will furnish to shareholders annually a report indicating the percentage of Fund income treated as a preference item for federal alternative
minimum tax ("AMT") purposes. In addition, for corporations, alternative minimum taxable income is increased by a percentage of the excess of an alternative measure of income that includes interest on all tax-exempt securities over the amount otherwise determined to be alternative minimum taxable income. Accordingly, the portion of the Fund's dividends that would otherwise be tax-exempt to the shareholders may cause an investor to be subject to the AMT or may increase the tax liability of an investor who is subject to such tax. As described above, the portfolio manager will normally avoid investments in bonds potentially subjecting individuals to the AMT, which generally includes private activity bonds.
Legislation has been introduced in recent years that would reinstate a deductible tax (the "Environmental Tax") imposed through tax years beginning before 1996 at a rate of 0.12% on a corporation's alternative minimum taxable income (computed without regard to the AMT net operating loss deduction) in excess of $2,000,000. If the Environmental Tax is reinstated, exempt-interest dividends that are included in a corporate shareholder's alternative minimum taxable income may subject corporate shareholders of the Fund to the Environmental Tax.
The Fund designates distributions made to the share classes as consisting of a portion of each type of income distributed by the Fund. The portion of each type of income deemed received by each class of shareholders is equal to the portion of total Fund distributions received by such class. Thus, the Fund will designate dividends paid as exempt-interest dividends in a manner that allocates such dividends among the Common Shares, the Series A APS, the Series B APS, the Series C APS, the Series D APS and the Series E APS in proportion to the total dividends paid to each 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 between the two (or more) classes. No dividend that the Fund pays will be increased to compensate for the fact that it may be subject to state and local taxes.
Dividend and capital gains distributions will be taxable as described above whether received in cash or in shares. A shareholder whose distributions are reinvested in shares will be treated as having received a dividend equal to the fair market value of the new shares issued to the shareholder, or the amount of cash allocated to the shareholder for the purchase of shares on its behalf.
Part or all of the interest on indebtedness, if any, incurred or continued by a shareholder to purchase or carry shares of the Fund paying exempt-interest dividends is not deductible. 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 Fund's total distributions (not including distributions from net long-term capital gains) paid to the shareholder that are exempt- interest dividends. Under rules used by the Internal Revenue Service (the "Service") to determine when borrowed funds are considered used for the purpose of purchasing or carrying particular assets, the purchase of shares may be considered to have been made with borrowed funds even though such funds are not directly traceable to the purchase of shares.
Under a published position of the Service, 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 preferred stock) does not exceed two percent of the average adjusted basis of
the shareholder's trade or business assets (in the case of most corporations) or portfolio investments (in the case of individuals). Legislation has been introduced in recent years that would further limit or repeal this two-percent de minimis exception, thus reducing the total after-tax yield of a shareholder.
In general, exempt-interest dividends, if any, attributable to interest received on certain private activity obligations and certain industrial development bonds will not be tax-exempt to any shareholders who are "substantial users," within the meaning of Section 147(a) of the Code, of the facilities financed by such obligations or bonds or who are "related persons" of such substantial users.
The Fund will inform investors within 60 days of the Fund's fiscal year-end of the percentage of its income distributions designated as tax-exempt. The percentage is applied uniformly to all distributions made in respect of Common Shares during the year; percentages may differ among distributions to holders of Preferred Shares. The percentage of income designated as tax-exempt for any particular distribution, whether to holders of Common Shares or holders of Preferred Shares, may be substantially different from the percentage of the Fund's income that was tax-exempt during the period covered by the distribution.
Hedging Transactions. If the Fund engages in hedging transactions, including hedging transactions in options, futures contracts, and straddles, or other similar transactions, it will be subject to special tax rules (including constructive sale, mark-to-market, straddle, wash sale, and short sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of the Fund's securities, convert long-term capital gains into short-term capital gains or convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders. Income earned as a result of the Fund's hedging activities will not be eligible to be treated as exempt-interest dividends when distributed to shareholders. The Fund will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interests of the Fund.
Certain of the Fund's hedging activities are likely to produce a difference between its book income and the sum of its net tax-exempt and taxable income. If the Fund's book income exceeds its net tax-exempt income, the distribution (if any) of such excess will be treated as (i) a taxable dividend to the extent of the Fund's remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter as a return of capital to the extent of the recipient's basis in the shares, and (iii) thereafter as gain from the sale or exchange of a capital asset. If the Fund's book income is less than its taxable income, the Fund could be required to make distributions exceeding book income to qualify as a regulated investment company that is accorded special tax treatment.
Return of Capital Distributions. If the Fund makes a distribution to you in excess of its current and accumulated earnings and profits in any taxable year, the excess distribution will be treated as a return of capital to the extent of your tax basis in your shares, and thereafter as capital gain. A return of capital is not taxable, but it reduces your tax basis in your shares, thus reducing any loss or increasing any gain on a subsequent taxable disposition by you of your
shares.
Dividends and distributions on the Fund's shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund's realized income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder's investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund's net asset value reflects gains that are either unrealized, or realized but not distributed. Such realized gains may be required to be distributed even when the Fund's net asset value also reflects unrealized losses. Distributions are taxable to a shareholder even if they are paid from income or gains earned by the Fund prior to the shareholder's investment (and thus included in the price paid by the shareholders).
Securities Issued or Purchased at a Discount. The Fund's investment in securities issued at a discount and certain other obligations will (and investments in securities purchased at a discount may) require the Fund to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its portfolio that it otherwise would have continued to hold.
Capital Loss Carryover. Distributions from capital gains are generally made after applying any available capital loss carryovers.
Sale or Redemption of Shares. The sale, exchange or redemption of Fund shares may give rise to a gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise the gain or loss on the taxable disposition of Fund shares will be treated as short-term capital gain or loss. However, if a shareholder sells shares at a loss within six months of purchase, 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 realized upon a taxable disposition of shares held for six months or less but not disallowed as provided in the preceding sentence will be treated as long-term, rather than short-term, to the extent of any long-term capital gain distributions received by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of Fund shares will be disallowed if other shares of the Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
From time to time the Fund may make a tender 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 Preferred Shares, held, or considered under certain attribution rules of the Code to be held, by such shareholder. Shareholders who tender all Common Shares and dispose of all Preferred Shares held, or considered to be held, by them will be treated as having sold their shares and generally will realize a capital gain or loss. If a shareholder tenders fewer than all of its Common Shares, or retains a substantial portion of its Preferred Shares, 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 will be treated as having received taxable distributions from the Fund. Likewise, if the Fund redeems some but not all of the Preferred Shares held by a holder of Preferred Shares and such shareholder is treated as having received a taxable dividend upon such redemption, there is a remote risk that Common Shareholders and non-redeeming holders of Preferred Shares will be treated as having
received taxable distributions from the Fund. To the extent that the Fund recognizes net gains on the liquidation of portfolio securities to meet such tenders of Common Shares, the Fund will be required to make additional distributions to its Common Shareholders, and a higher percentage of its distributions to holders of Preferred Shares will be taxable.
Backup Withholding. The Fund generally is required to withhold and remit to
the U.S. Treasury a percentage of the taxable dividends and other distributions
paid to any individual shareholder who fails to properly furnish the Fund with a
correct taxpayer identification number (TIN), who has under- reported dividend
or interest income, or who fails to certify to the Fund that he or she is not
subject to such withholding. Pursuant to recently enacted tax legislation, the
backup withholding tax rate will be (i) 30.5% for amounts paid after August 6,
2001 through the end of 2001, (ii) 30% for amounts paid during 2002 and 2003,
(iii) 29% for amounts paid during 2004 and 2005, and (iv) 28% for amounts paid
during 2006 through 2010. This legislation will expire and the backup
withholding rate will be 31% for amounts paid after December 31, 2010, unless
Congress enacts tax legislation providing otherwise.
The 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 are generally effective for payments made after December 31, 2000. In some circumstances, the new rules increase the certification and filing requirements imposed on foreign investors in order to qualify for exemption from the back-up withholding tax rates and for reduced withholding tax rates under income tax treaties. Foreign investors in the Fund should consult their tax advisers with respect to the potential application of these new regulations.
General. The federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal tax consequences of purchasing, holding, and disposing of shares of the Fund, as well as the effects of state, local and foreign tax law and any proposed tax law changes.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may be a suitable investment for a shareholder who is thinking of adding bond investments to his portfolio to balance the appreciated stocks that the shareholder is holding. Although the Fund currently intends to avoid investments generating income potentially subjecting individuals to the federal alternative minimum tax, it may not be successful in doing so. Therefore, Preferred Shares may not be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing Preferred Shares. The suitability of an investment in Preferred Shares will depend upon a comparison of the after-tax yield likely to be provided from the Fund with that from comparable tax-exempt investments (including those not subject to the alternative minimum tax), and from comparable fully taxable investments, in light of each such investor's tax position.
The Fund may quote certain performance-related information and may compare certain aspects of its portfolio and structure to other substantially similar closed-end funds as
categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services. Comparison of the Fund to an alternative investment should be made with consideration of differences in features and expected performance. The Fund may obtain data from sources or reporting services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be generally accurate.
The Fund, in its advertisements, may refer to pending legislation from time to time and the possible impact of such legislation on investors, investment strategy and related matters. This would include any tax proposals and their effect on marginal tax rates and tax-equivalent yields. At any time in the future, yields and total return may be higher or lower than past yields and there can be no assurance that any historical results will continue.
For the period from June 29, 2001 (the commencement of the Fund's operations) through August 3, 2001, the Fund's net increase in net assets resulting from investment operations was $9,320,532.
Past performance is not indicative of future results.
CUSTODIAN, TRANSFER AGENTS AND DIVIDEND DISBURSING AGENTS
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, serves as custodian for assets of the Fund. The custodian performs custodial and fund accounting services.
PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as the transfer agent, registrar, dividend disbursing agent and shareholder servicing agent for the Common Shares, as well as agent for the Dividend Reinvestment Plan relating to the Common Shares.
Bankers Trust Company, 4 Albany Street, New York, New York 10006, serves as auction agent, transfer agent, registrar, dividend paying agent and redemption agent for the Preferred Shares.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
New York 10036, serves as independent accountants for the Fund.
PricewaterhouseCoopers LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings to the
Fund.
COUNSEL
Ropes & Gray, One International Place, Boston, MA 02110, passes upon certain legal matters in connection with shares offered by the Fund, and also acts as counsel to the Fund.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, including any amendments thereto, relating to the shares of the Fund offered hereby, has been filed by the Fund with the SEC. The Fund's Prospectus and this Statement of Additional Information do not contain all of the information set forth in the Registration Statement, including any exhibits and schedules thereto. For further information with respect to the Fund and the shares offered or to be offered hereby, reference is made to the Fund's Registration Statement. Statements contained in the Fund's Prospectus and this Statement of Additional Information as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected without charge at the SEC's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the SEC upon the payment of certain fees prescribed by the SEC.
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities of the Fund dated as of June 20, 2001, and the Statement of Operations for the one-day period ending June 20, 2001, including the Notes thereto, and the report of PricewaterhouseCoopers LLP thereon dated June 21, 2001, as included in the Fund's Statement of Additional Information dated June 26, 2001, relating to the Common Shares, is hereby incorporated by reference into this Statement of Additional Information, which means that such Statement of Assets and Liabilities and the Notes thereto are considered to be a part of this Statement of Additional Information. The Statement of Additional Information for the Common Shares was filed electronically with the SEC on June 28, 2001 (Accession No. 0000927016-01-501716).
PIMCO MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
July 16, 2001
(unaudited)
Assets:
Investments, at value (cost-$289,131,192).............. $291,812,821
Cash................................................... 21,868,850
Receivable for investments sold ....................... 4,725,358
Interest receivable.................................... 3,050,588
------------
Total Assets....................................... 321,457,617
------------
Liabilities:
Payable for investments purchased ..................... $ 22,903,222
Offering expenses payable.............................. 618,000
Investment management fee payable...................... 61,952
Accrued expenses....................................... 16,452
------------
Total Liabilities.................................. 23,599,626
------------
Net Assets.................................. $297,857,991
============
Composition of Net Assets:
Paid-in-capital
(applicable to 20,606,667 shares of common stock
issued and outstanding)........................... $294,577,005
Undistributed net investment income................. 535,644
Net realized gain on investments ................... 63,713
Net unrealized appreciation of investments.......... 2,681,629
------------
Net Assets................................ $297,857,991
============
Net asset value per share................. $14.45
======
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PIMCO MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
For the period June 29, 2001* through July 16, 2001
(unaudited)
Investment Income:
Interest................................................................ $614,048
------------
Expenses:
Investment management fees.............................................. 61,952
Custodian fees.......................................................... 4,338
Reports to shareholders................................................. 2,358
Audit and tax service fees.............................................. 2,052
Transfer agent fees..................................................... 1,998
Legal fees.............................................................. 1,890
Trustees' fees and expenses............................................. 1,170
Miscellaneous........................................................... 2,646
------------
Total expenses..................................................... 78,404
------------
Net investment income.................................. 535,644
------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments .................................. 63,713
Net unrealized appreciation of investments ........................ 2,681,629
------------
Net realized and unrealized gain on investments ....... 2,745,342
------------
Net increase in net assets resulting from investment operations................. $3,280,986
============
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PIMCO MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
For the period June 29, 2001* through July 16, 2001
(unaudited)
Income from Investment Operations:
Net investment income........................................................ $535,644
Net realized gain on investments............................................. 63,713
Net unrealized appreciation of investments................................... 2,681,629
------------
Net increase in net assets resulting from investment operations......... 3,280,986
------------
Share Transactions:
Net proceeds from the sale of shares......................................... 295,095,000
Offering cost charged to paid-in-capital..................................... (618,000)
------------
Total share transactions................................................ 294,477,000
------------
Total increase in net assets............................................ 297,757,986
------------
Share Transactions:
Beginning of period.......................................................... 100,005
------------
End of period (including undistributed net investment income of $535,644).... $297,857,991
============
|
PIMCO MUNICIPAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
July 16, 2001
(unaudited)
1. Organization
PIMCO Municipal Income Fund (the "Fund") was organized as a Massachusetts business trust on May 9, 2001. Prior to commencing operations on June 29, 2001, the Fund had no operations other than matters relating to its organization and registration as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended, and the sale and issuance to PIMCO Advisors L.P. ( the "Investment Manager"), an indirect wholly-owned subsidiary of Allianz AG, of 6,667 shares of beneficial interest at an aggregate purchase price of $100,005. The Investment Manager has agreed to reimburse organizational costs and offering expenses (other than the sales load) which in aggregate exceeded $0.03 per share of the initial offering. There are an unlimited number of no par value common stock authorized.
The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates.
(a) Valuation of Investments
Debt securities are valued each day by an independent pricing service approved by the Board of Trustees. Any security or other asset for which market quotations are not readily available is valued at fair value as determined in good faith under procedures established by the Board of Trustees. The Fund invests substantially all of its assets in a diversified portfolio of debt obligations issued by states, territories and possessions of the United States and by the District of Columbia and their political subdivisions. The issuers' abilities to meet their obligations may be affected by economic and political developments in a specific state or region.
(b) Investment Transactions and Investment Income
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Interest income is recorded on an accrual basis. Original issue discount or premium on debt securities purchased is accreted or amortized daily to non-taxable interest income. Market discount, if any, is accreted daily to taxable income.
(c) Expense Offset
The Fund benefits from an expense offset arrangement with its custodian bank whereby uninvested cash balances earn credits which reduce monthly custodian expenses. Had these cash
balances been invested in income producing securities, they would have generated income for the Fund.
2. Investment Manager And Related Parties
Pursuant to the Investment Management Agreement, the Fund pays the Investment Manager an annual management fee, payable monthly, at the annual rate of 0.65% of the Fund's average daily net assets. The Investment Manager has retained its affiliate, Pacific Investment Management Co. LLC ("PIMCO"), to manage the Fund's investments. The Investment Manager (not the Fund) will pay a portion of the fees it receives as Investment Manager to PIMCO in return for its services, at the maximum annual rate of 0.37% of the Fund's average daily net assets.
In order to reduce Fund expenses, the Investment Manager has contractually agreed to reimburse the Fund for fees and expenses at the annual rate of 0.20% of the Fund's average daily net assets from the commencement of operations through June 30, 2006, and for a declining amount thereafter through June 30, 2009.
3. Federal Income Taxes
The Fund intends to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required. In addition, by distributing substantially all of its ordinary income and long-term capital gains, if any, during each calendar year, the Fund intends not to be subject to U. S. federal excise tax.
PIMCO MUNICIPAL INCOME FUND
SCHEDULE OF INVESTMENTS
July 16, 2001
(unaudited)
Principal
Amount
(000) Cusip # MUNICIPAL BONDS & NOTES Value*
------------------------------------------------------------------------------------------------------------------------------------
Alabama-3.5%
$2,500 091104FV6 Birmingham Baptist Med. Ctr., Ser. A,
5.875%, 11/15/24.......................................................... $ 2,446,975
8,000 44706HAV9 Huntsville Health Care Auth., Ser. A,
5.75%, 6/1/31............................................................. 7,929,440
----------------
10,376,415
----------------
Arizona-0.6%
2,000 037433AF6 Apache Cnty., Tucson Elec. Pwr.,
5.875%, 3/1/33............................................................ 1,857,620
----------------
Colorado-3.9%
2,000 24918EAS9 Denver Health & Hosp. Auth., Ser. A,
5.375%, 12/1/28 .......................................................... 1,669,420
Northwest Pkwy. Pub. Hwy. Auth.,
5,000 667737AS9 5.25%, 6/15/41, Ser. A.................................................... 4,901,500
4,965 667737BV1 7.125%, 6/15/41, Ser. D................................................... 4,928,805
----------------
11,499,725
----------------
District of Columbia-2.4%
6,970 254842AH0 Tobacco Settlement Fin. Corp.,
6.25%, 5/15/24 ........................................................... 7,190,670
----------------
Hawaii-1.1%
3,468 438701BR4 Honolulu City & Cnty. Wastewater Sys. Rev., Ser. 400,
7.18%, 7/19/01** ......................................................... 3,264,027
----------------
Illinois-17.1%
Chicago General Obligation Ref., Ser. A,
6,645 167484LV4 5.00%, 1/1/41 ............................................................ 6,182,176
9,080 167484YN8 5.375%, 1/1/34 ........................................................... 9,031,422
12,565 167562DS3 Chicago Midway Arpt. Rev., Ser. B,
5.00%, 1/1/35 ............................................................ 11,760,966
2,000 167736NH6 Chicago Water Rev.,
5.25%, 11/1/27............................................................ 1,972,340
7,253 213183P42 Cook Cnty., Residual Ctfs., Ser. 458,
7.33%, 7/19/01**.......................................................... 6,588,751
5,000 45188LBD3 Dev. Fin. Auth. Hosp. Rev., Adventist Health Sys.,
5.50%, 11/15/29........................................................... 4,535,100
1,115 452001C57 Educational Fac. Auth. Rev., Midwestern Univ., Ser. B,
5.50%, 5/15/18............................................................ 1,060,867
5,425 45200L5W2 Health Educational Fac. Auth. Rev., Silver Cross Hosp.,
5.50%, 8/15/25............................................................ 4,952,971
5,000 914353MZ7 Univ. Rev., Auxiliary Fac. Sys., Ser. B,
5.25%, 4/1/32............................................................. 4,907,600
----------------
50,992,193
----------------
|
Principal
Amount
(000) Cusip # MUNICIPAL BONDS & NOTES Value*
------------------------------------------------------------------------------------------------------------------------------------
Kansas-6.7%
Wichita Hosp. Rev.,
5,000 967250SC6 5.625%, 11/15/31, Ser. III................................................ 4,935,800
14,370 967250RD5 6.25%, 11/15/24, Ser. XI,................................................. 15,123,419
----------------
20,059,219
----------------
Louisiana-3.7%
$10,000 546279GM6 Loc. Gov't Environmental Fac., Community Dev. Auth. Rev.,
6.55%, 9/1/25............................................................. $ 10,928,100
----------------
Massachusetts-10.0%
15,240 575567JX1 Bay Trans. Auth., Ser. A,
4.50%, 3/1/26 ............................................................ 13,472,008
10,000 57585KQP6 Health Fac. Auth. Rev., Partners Healthcare Sys., Ser. C,
5.75%, 7/1/32 ............................................................ 10,046,500
7,000 576018DN2 State Turnpike Auth. Met. Hwy. Sys. Rev., Ser. A,
4.75%, 1/1/34 ............................................................ 6,228,600
----------------
29,747,108
----------------
Michigan-6.1%
5,000 59465CJ73 State Hosp. Fin. Auth. Rev., Detroit Med. Ctr.,
6.25%, 8/15/13 ........................................................... 4,999,650
Royal Oak Hosp. Fin. Auth., William Beaumont Hosp., Ser. M,
2,500 780486EP7 5.25%, 11/15/31 ......................................................... 2,458,825
4,050 780486EQ5 5.25%, 11/15/35 ......................................................... 3,967,623
6,270 944315AN0 Wayne Charter Cnty. Arpt. Fac. Rev., Northwest Airlines, Inc.,
6.75%, 12/1/15 .......................................................... 6,282,477
----------------
17,708,575
----------------
Nevada-6.1%
7,500 181006DB0 Clark Cnty. Passenger Fac., Ser. 343,
6.68%, 7/19/01** ........................................................ 6,391,500
11,250 897825BN4 Truckee Meadows Water Auth., Ser. A,
5.25%, 7/1/34............................................................. 11,030,175
860 940852ES1 Washoe Cnty. Improvement Dist. No. 23,
6.50%, 11/1/17............................................................ 879,393
----------------
18,301,068
----------------
New Hampshire-1.0%
3,000 64468CAM6 State Bus. Fin. Auth., Conn. Light & Power Co.,
5.85%, 12/1/22, .......................................................... 2,969,100
----------------
New Jersey-1.4%
Camden Cnty. Improvement Auth. Rev., Cooper Health Sys.,
1,230 13281NBY7 5.60%, 2/15/07 ........................................................... 1,022,437
875 13281NBX9 6.00%, 2/15/27............................................................ 667,214
3,000 654916AK3 Economic Dev. Auth., Arbor Glen, Ser. A,
5.875%, 5/15/16........................................................... 2,462,760
----------------
4,152,411
----------------
|
Principal
Amount
(000) Cusip # MUNICIPAL BONDS & NOTES Value*
------------------------------------------------------------------------------------------------------------------------------------
New Mexico-0.9%
2,500 311450DQ0 Farmington Poll. Ctl. Rev., Public Service Co.,
5.80%, 4/1/22, ........................................................... 2,400,875
250 647370BW4 State Hosp. Equip., Presbyterian Healthcare, Ser. A,
5.50%, 8/1/30, ........................................................... 246,425
----------------
2,647,300
----------------
New York-1.0%
$2,875 957366AA5 Westchester Cnty. Health Care Corp. Rev., Ser. A,
5.875%, 11/1/25 .......................................................... $ 2,954,436
----------------
Pennsylvania-9.3%
3,240 01728AWV4 Allegheny Cnty. Hosp. Dev. Auth. Rev., Ser. B,
9.25%, 11/15/30........................................................... 3,298,385
1,000 017292ST1 Allegheny Cnty. Indl. Dev. Auth. Rev., USX Corp.,
5.60%, 9/1/30............................................................. 912,000
5,150 246003GU5 Delaware Cnty. Auth. College, Rev., Neumann College,
5.80%, 10/1/17 ........................................................... 5,139,854
6,200 70917NJS4 State Higher Educational Fac. Auth. Rev., UPMC Health Sys., Ser. A,
6.00%, 1/15/31............................................................ 6,301,370
8,225 709221CF0 State Turnpike, Community Oil Franchise, Ser. A,
4.75%, 12/1/27............................................................ 7,543,230
1,000 717818WE4 Philadelphia Auth. Rev., Franklin Institute,
5.20%, 6/15/26............................................................ 872,750
3,610 717903RS9 Philadelphia Hosp. Higher Education Fac., Temple Univ., Ser. A,
6.625%, 11/15/23.......................................................... 3,557,872
----------------
27,625,461
----------------
South Carolina-5.5%
15,600 888806AD8 Tobacco Settlement Rev. Mgmt., Ser. B,
6.375%, 5/15/30 .......................................................... 16,373,916
----------------
Tennessee-3.1%
9,320 586169BH6 Memphis Health Educational & Housing, Wesley Housing Corp.,
6.95%, 1/1/20 ............................................................ 9,317,297
----------------
Texas-10.0%
5,000 052409AZ2 Austin Conv. Enterprises Inc., Ser. B,
5.75%, 1/1/32............................................................. 5,012,500
4,000 052476DR6 Austin Water & Wastewater Sys Rev., Ser. B,
5.25%, 5/15/31............................................................ 3,928,720
8,988 4135RCT9 Harris Cnty. Health Fac. Dev. Corp., Ser. 357,
8.03%, 7/19/01**.......................................................... 8,320,807
7,000 414152PX0 Harris Cnty. Health Fac. Dev. Corp., Memorial Hermann Healthcare,
6.375%, 6/1/29............................................................ 7,209,650
1,000 442436V24 Houston Water & Sewer Sys. Rev., Ser. 495,
7.83%, 7/19/01**.......................................................... 970,420
4,380 844426EJ1 Southlake Parks Dev. Corp. Sales Tax Rev.,
5.60%, 8/15/31............................................................ 4,445,963
----------------
29,888,060
----------------
|
Principal
Amount
(000) Cusip # MUNICIPAL BONDS & NOTES Value*
------------------------------------------------------------------------------------------------------------------------------------
Utah-2.2%
$7,000 795677AG8 Salt Lake Cnty., Hosp. Rev., IHC Health Services,
5.125%, 2/15/33........................................................... $6,709,430
----------------
Washington-1.7%
4,500 812626HA0 Seattle Residual Ctfs., Ser. 348,
7.43%, 7/19/01**.......................................................... 4,273,200
900 939780A77 State Healthcare Fac. Auth. Rev., Fred Hutchinson Cancer,
2.75%, 7/17/01**.......................................................... 900,000
----------------
5,173,200
----------------
Wisconsin-0.7%
2,230 97710N2L9 State Health & Educational Fac. Auth. Rev., Kenosha Hosp. & Med. Ctr.,
5.625%, 5/15/29........................................................... 2,077,490
----------------
Total Municipal Bonds & Notes (cost -$289,131,192)........................... 291,812,821
----------------
Total Investments (cost- $289,131,192) ...................................... 98.0 % 291,812,821
Other assets less liabilities................................................ 2.0 % 6,045,170
-------- ----------------
Net Assets .................................................................. 100.0 % $297,857,991
======== ================
|
** Variable Rate Demand Notes. Interest rates change on a specific date (such as a coupon date or interest payment date) and/or whose interest rates vary with changes in a designated base rate (such as the prime interest rate). Maturity date shown is date of next rate change.
APPENDIX A
Ratings of Investments
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. -- A brief description of the applicable Standard & Poor's ("S&P") rating symbols and their meanings (as published by S&P) follows:
An S&P issue credit rating is a current opinion of the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program. It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation. The issue credit rating is not a recommendation to purchase, sell, or hold a financial obligation, inasmuch as it does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any credit rating and may, on occasion, rely on unaudited financial information. Credit ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term ratings are generally assigned to those obligations considered short term in the relevant market. In the U.S., for example, that means obligations with an original maturity of no more than 365 days - including commercial paper. Short-term ratings are also used to indicate the creditworthiness of an obligor with respect to put features on long-term obligations. The result is a dual rating, in which the short-term ratings address the put feature, in addition to the usual long-term rating. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based in varying degrees, on the following considerations:
1. Likelihood of payment - capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such, they pertain to senior obligations of an entity. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated obligations only in small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet it financial commitment on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic
conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation 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 or the taking of a similar action if payments on an obligation 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.
c The 'c' subscript is used to provide additional information to investors that the bank may terminate its obligation to purchase tendered bonds if the long-term credit rating of the issuer is below an investment-grade level and/or the issuer's bonds are deemed taxable.
p 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, 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 his own judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon S&P's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
r The 'r' highlights derivative, hybrid, and certain other obligations that S&P believes may experience high volatility or high variability in expected returns as a result of noncredit risks. Examples of such obligations are securities with principal or interest return indexed to equities, commodities, or currencies; certain swaps and options; and interest-only and principal-only mortgage securities. The absence of an 'r' symbol should not be taken as an indication that an obligation will exhibit no volatility or variability in total return.
N.R. Not rated.
Debt obligations of issuers outside the United States and its territories are rated on the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the obligor but do not take into account currency exchange and related uncertainties.
Bond Investment Quality Standards Under present commercial bank regulations issued by the Comptroller of the Currency, bonds rated in the top four categories ('AAA', 'AA', 'BBB', commonly known as investment-grade ratings) generally are regarded as eligible for bank investment. Also, the laws of various states governing legal investments impose certain rating or other standards for obligations eligible for investment by savings banks, trust companies, insurance companies, and fiduciaries in general.
An S&P note ratings reflects the liquidity factors and market access risks unique to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond three 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; and
. 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 Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
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 A short-term obligation rated 'A-1' is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's
capacity to meet its financial commitment on these obligations is
extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation 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 or the taking of a similar action if payments on an obligation
are jeopardized.
|
A commercial rating is not a recommendation to purchase, sell, or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information or based on other circumstances.
Moody's Investors Service, Inc.
A brief description of the applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings (as published by Moody's) follows:
Aaa Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." 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.
|
Issues that are secured by escrowed funds held in trust, reinvested in direct, non-callable U.S. government obligations or non-callable obligations unconditionally guaranteed by the U.S.
Government or Resolution Funding Corporation are identified with a # (hatchmark) symbol, e.g., #Aaa.
Con.(...): 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. The parenthetical rating
denotes probable credit stature upon completion of
construction or elimination of the basis of the condition.
|
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Short-Term Loans
----------------
MIG1/VMIG1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access
to the market for refinancing.
MIG2/VMIG2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the
preceding group.
MIG3/VMIG3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and market
access for refinancing is likely to be less well-established.
SG This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient margins
of protection.
|
Issuers rated Prime-1 (or related supporting institutions) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability 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 ability for repayment of senior short-term debt 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 ability for repayment of senior short-term debt 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.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
Fitch IBCA, Inc.
A brief description of the applicable Fitch IBCA, Inc. ("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Investment Grade
AAA
Highest credit quality. 'AAA' ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA
Very high credit quality. 'AA' ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings.
BBB
Good credit quality. 'BBB' ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment-grade category.
Speculative Grade
BB
Speculative. 'BB' ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B Highly speculative. 'B' ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC, and C
High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A 'CC' rating indicates that default of some kind appears probable. 'C' ratings signal imminent default.
DDD, DD, and D
Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. 'DDD' obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. 'DD' indicates potential recoveries in the range of 50%-90%, and 'D' the lowest recovery potential, i.e., below 50%. Entities rated in this category have defaulted on some or all of their obligations. Entities rated 'DDD' have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated 'DD' and 'D' are generally undergoing a formal reorganization or liquidation process; those rated 'DD' are likely to satisfy a higher portion of their outstanding obligations, while entities rated 'D' have a poor prospect for repaying all obligations.
A short-term rating has a time horizon of less than 12 months for most obligations, or up to three years for U.S. public finance securities, and thus places greater emphasis on the liquidity necessary to meet financial commitments in a timely manner.
F1 Highest credit quality . Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.
D Default. Denotes actual or imminent payment default.
"+" or "-" may be appended to a rating to denote relative status within major
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rating categories. Such suffixes are not added to the 'AAA' long-term rating category, to categories below 'CCC', or to short-term ratings other than 'F1'.
"NR" indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn": A rating is withdrawn when Fitch deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced.
"Rating Watch": Ratings are placed on RatingWatch to notify investors that there is a reasonable probability of a rating change and the likely direction of such change. These are designated as "Positive", indicating a potential upgrade, "Negative", for a potential downgrade, or "Evolving", if ratings may be raised, lowered or maintained. Rating Watch is typically resolved over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to move over a one to two year period. Outlooks may be positive, stable, or negative. A positive or negative Rating Outlook does not imply a rating change is inevitable. Similarly, companies whose outlooks are 'stable' could be downgraded before an outlook moves to positive or negative if circumstances warrant such an action. Occasionally, Fitch may be unable to identify the fundamental trend. In these cases, the Rating Outlook may be described as evolving.
APPENDIX B
Settlement Procedures
The following summary of Settlement Procedures sets forth the procedures expected to be followed in connection with the settlement of each Auction and will be incorporated by reference in the Auction Agency Agreement and each Broker-Dealer Agreement. Nothing contained in this Appendix B constitutes a representation by the Fund that in each Auction each party referred to herein actually will perform the procedures described herein to be performed by such party. Capitalized terms used herein shall have the respective meanings specified in the glossary of the Prospectus or Appendix C hereto, as the case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone or through the Auction Agent's Processing System the Broker-Dealers that participated in the Auction held on such Auction Date and submitted an Order on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid or a Sell Order on behalf of a Beneficial Owner, the number of Preferred Shares, if any, to be sold by such Beneficial Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on behalf of a Potential Beneficial Owner, the number of Preferred Shares, if any, to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of Preferred Shares to be sold by all Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order exceeds the aggregate number of Preferred Shares to be purchased by all Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid, the name or names of one or more Buyer's Broker-Dealers (and the name of the Agent Member, if any, of each such Buyer's Broker-Dealer) acting for one or more purchasers of such excess number of Preferred Shares and the number of such shares to be purchased from one or more Beneficial Owners on whose behalf such Broker-Dealer acted by one or more Potential Beneficial Owners on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of Preferred Shares to be purchased by all Potential Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid exceeds the aggregate number of Preferred Shares to be sold by all Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or more Seller's Broker-Dealers (and the name of the Agent Member, if any, of each such Seller's Broker-Dealer) acting for one or more sellers of such excess number of Preferred
Shares and the number of such shares to be sold to one or more Potential Beneficial Owners on whose behalf such Broker-Dealer acted by one or more Beneficial Owners on whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the Preferred Shares.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer, instruct each Potential Beneficial Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, to instruct such Potential Beneficial Owner's Agent Member to pay to such Broker-Dealer (or its Agent Member) through the Securities Depository the amount necessary to purchase the number of Preferred Shares to be purchased pursuant to such Bid against receipt of such shares and advise such Potential Beneficial Owner of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer, instruct each Beneficial Owner on whose behalf such Broker-Dealer submitted a Sell Order that was accepted, in whole or in part, or a Bid that was accepted, in whole or in part, to instruct such Beneficial Owner's Agent Member to deliver to such Broker-Dealer (or its Agent Member) through the Securities Depository the number of Preferred Shares to be sold pursuant to such Order against payment therefor and advise any such Beneficial Owner that will continue to hold Preferred Shares of the Applicable Rate for the next succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such Broker-Dealer submitted a Hold Order of the Applicable Rate for the next succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such Broker-Dealer submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such Broker-Dealer submitted a Bid that was accepted, in whole or in part, of the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at such time or times as in its sole discretion it may determine, allocate any funds received by it pursuant to (b)(i) above and any Preferred Shares received by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any, on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if any, on whose behalf such Broker-Dealer submitted Bids that were accepted or Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the Securities Depository shall instruct its Agent Member to (A) pay through the Securities Depository to the Agent Member of the Beneficial Owner delivering shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to purchase such shares against receipt of such shares, and (B) deliver such shares through the Securities Depository to a Buyer's Broker-Dealer (or its Agent Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the Securities Depository shall instruct its Agent Member to (A) pay through the Securities Depository to a Seller's Broker-Dealer (or its Agent Member) identified pursuant to (a)(vi) above the amount necessary to purchase the shares to be purchased pursuant to (b)(i) above against receipt of such shares, and (B) deliver such shares through the Securities Depository to the Agent Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall instruct the Securities Depository to execute the transactions described in (b)(i) or (ii) above, and the Securities Depository shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the Securities Depository to execute the transactions described in (d)(ii) above, and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the Securities Depository to execute the transactions described in (d)(iii) above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling Preferred Shares in an Auction fails to deliver such shares (by authorized book-entry), a Broker-Dealer may deliver to the Potential Beneficial Owner on behalf of which it submitted a Bid that was accepted a number of whole Preferred Shares that is less than the number of shares that otherwise was to be purchased by such Potential Beneficial Owner. In such event, the number of Preferred Shares to be so delivered shall be determined solely by such Broker-Dealer. Delivery of such lesser number of shares shall constitute good delivery. Notwithstanding the foregoing terms of this paragraph (f), any delivery or non-delivery of shares which shall represent any departure from the results of an Auction, as determined by the Auction Agent, shall be of no effect unless and until the Auction Agent shall have been notified of such delivery or non-delivery in accordance with the provisions of the Auction Agency Agreement and the Broker-Dealer Agreements.
APPENDIX C
Auction Procedures
The following procedures will be set forth in provisions of the Amended Bylaws relating to the Preferred Shares, and will be incorporated by reference in the Auction Agency Agreement and each Broker-Dealer Agreement. The terms not defined below are defined in the Prospectus. Nothing contained in this Appendix C constitutes a representation by the Fund that in each Auction each party referred to herein actually will perform the procedures described herein to be performed by such party.
ARTICLE 11
* * *
(i) "APS" means the shares of APS being auctioned pursuant to this
Section 11.10.
(ii) "Auction Date" means the first Business Day preceding the first day of a Dividend Period.
(iii) "Available APS" has the meaning specified in Section 11.10(d)(i) below.
(iv) "Bid" has the meaning specified in Section 11.10(b)(i) below.
(v) "Bidder" has the meaning specified in Section 11.10(b)(i) below.
(vi) "Hold Order" has the meaning specified in Section 11.10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the Applicable Percentage of the Reference Rate. The Auction Agent will round each applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent per annum, with any such number ending in five ten-thousandths of one percent being rounded upwards to the nearest one-thousandth (0.001) of one percent. The Auction Agent will not round the applicable Reference Rate as part of its calculation of the Maximum Applicable Rate. The Applicable Percentage will be determined based on (i) the credit rating assigned on such date to such shares by Moody's (or, if Moody's shall not make such rating available, the equivalent of such rating by a Substitute Rating Agency) and (ii) whether the Trust has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend on shares of APS as follows:
Percentage of Percentage of
Reference Rate - Reference Rate -
Moody's Credit Ratings on APS No Notification Notification
----------------------------- --------------- ------------
aa3 or higher 110% 150%
a 125% 160%
baa 150% 250%
Below baa 200% 275%
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The Trust shall take all reasonable action necessary to enable Moody's to provide a rating for each series of APS. If Moody's shall not make such a rating available, UBS Warburg LLC or its affiliates and successors, after consultation with the Trust, shall select another Rating Agency to act as a Substitute Rating Agency.
(viii) "Order" has the meaning specified in Section 11.10(b)(i) below.
(ix) "Sell Order" has the meaning specified in Section 11.10(b)(i) below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any Auction Date or such other time on any Auction Date as may be specified by the Auction Agent from time to time as the time by which each Broker-Dealer must submit to the Auction Agent in writing all Orders obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in Section 11.10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in Section 11.10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in Section 11.10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in Section 11.10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in Section 11.10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in Section 11.10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and Potential Beneficial Owners may only participate in Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves as Existing Holders in respect of shares subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of shares subject to Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer may also hold shares of APS in its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or
a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. On or prior to the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer information as to:
(1) the number of Outstanding shares, if any, of APS held by such Beneficial Owner which such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period for such shares;
(2) the number of Outstanding shares, if any, of APS held by such Beneficial Owner which such Beneficial Owner desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period for such shares shall not be less than the rate per annum specified by such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of APS held by such Beneficial Owner which such Beneficial Owner offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that shall be maintained in good faith for the purpose of conducting a competitive Auction, shall contact Potential Beneficial Owners, including Persons that are not Beneficial Owners, on such list to determine the number of Outstanding shares, if any, of APS which each such Potential Beneficial Owner offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker-Dealer acting for its own account to the Auction Agent, of information referred to in clause (A) or (B) of this Section 11.10(b)(i) is hereinafter referred to as an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing an Order, including a Broker-Dealer acting in such capacity for its own account, is hereinafter referred to as a "Bidder"; an Order containing the information referred to in clause (A)(1) of this Section 11.10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the information referred to in clause (A)(2) or (B) of this Section 11.10(b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this Section 11.10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder or a Potential Holder only to represent the interests of a Beneficial Owner or Potential Beneficial Owner, whether it be its customers or itself, all discussion herein relating to the consequences of an Auction for Existing Holders and Potential Holders also applies to the underlying beneficial ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding shares of APS specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein; or
(3) a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(ii)(C) if such specified rate per annum shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding shares of APS specified in such Sell Order; or
(2) such number or a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase:
(1) the number of Outstanding shares of APS specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(i)(E) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction Agent's Auction Processing System to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer, designating itself (unless otherwise permitted by the Trust) as an Existing Holder in respect of shares subject to Orders submitted or deemed submitted to it by Beneficial Owners and as a Potential Holder in respect of shares subject to Orders submitted to it by Potential Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker-Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding shares of APS that are the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of APS subject to any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of APS subject to any Bid placed by such Existing Holder and the rate per annum specified in such Bid; and
(3) the number of Outstanding shares, if any, of APS subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of APS held by an Existing Holder are not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of an Auction relating to a Special Dividend Period of 91 days or less) or a Sell Order (in the case of an Auction relating to a Special Dividend Period of longer than 91 days) to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of APS held by such Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the aggregate more than the number of Outstanding shares of APS held by such Existing Holder are submitted to the Auction Agent, such Order shall be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding shares of APS held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of shares of APS subject to such Hold Orders exceeds the number of Outstanding shares of APS held by such Existing Holder, the number of shares of APS subject to each of such Hold Orders shall be reduced pro rata so that such Hold Orders, in the aggregate, will cover exactly the number of Outstanding shares of APS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be considered valid, in the ascending order of their respective rates per annum if more than one Bid is submitted on behalf of such Existing Holder, up to and including the excess of the number of Outstanding shares of APS held by such Existing Holder over the number of shares of APS subject to any Hold Order referred to in Section 11.10(c)(iv)(A) above (and if more than one Bid submitted on behalf of such Existing Holder specifies the same rate per annum and together they cover more than the remaining number of shares that can be the subject of valid Bids after application of Section 11.10(c)(iv)(A) above and of the foregoing portion of this Section 11.10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum, the number of shares subject to each of such Bids shall be reduced pro rata so that such Bids, in the aggregate, cover exactly such remaining number of shares); and the number of shares, if any, subject to Bids not valid under this Section 11.10(c)(iv)(B) shall be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the excess of the number of Outstanding shares of APS held by such Existing Holder over the number of shares of APS subject to Hold Orders referred to in Section 11.10(c)(iv)(A) and Bids referred to in
Section 11.10(c)(iv)(B); provided that if more than one Sell Order is submitted on behalf of any Existing Holder and the number of shares of APS subject to such Sell Orders is greater than such excess, the number of shares of APS subject to each of such Sell Orders shall be reduced pro rata so that such Sell Orders, in the aggregate, cover exactly the number of shares of APS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate per annum and number of shares of APS therein specified.
(vi) Any Order submitted by a Beneficial Owner as 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.
(vii) The Trust shall not be responsible for a Broker-Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with the provisions of this Section 11.10.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of APS over the number of Outstanding shares of APS that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available APS");
(B) from the Submitted Orders whether the number of Outstanding shares of APS that are the subject of Submitted Bids by Potential Holders specifying one or more rates per annum equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of APS that are the subject of Submitted Bids by Existing Holders specifying one or more rates per annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of APS that are subject to Submitted Sell Orders (if such excess or such equality exists (other than because the number of Outstanding shares of APS in clause (1) above and this clause (2) are each zero because all of the Outstanding shares of APS are the subject of Submitted Hold Orders), such Submitted Bids by Potential Holders being hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid Rate and all other Submitted Bids from Existing Holders specifying lower rates per annum were rejected, thus entitling such Existing Holders to continue to hold the shares of APS that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning Bid Rate and all other Submitted Bids from Potential Holders specifying lower rates per annum were accepted, thus entitling the Potential Holders to purchase the shares of APS that are the subject of such Submitted Bids, would result in the number of shares subject to all Submitted Bids specifying the Winning Bid Rate or a lower rate per annum being at least equal to the Available APS.
(ii) Promptly after the Auction Agent has made the determinations pursuant to Section 11.10(d)(i), the Auction Agent shall advise the Trust of the Maximum Applicable Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of APS are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of APS are the subject of Submitted Hold Orders, that the Dividend Period next succeeding the Auction shall automatically be the same length as the immediately preceding Dividend Period and the Applicable Rate for the next succeeding Dividend Period shall be equal to 40% of the Reference Rate (or 60% of such rate if the Trust has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend pursuant to Section 11.2(f) hereof that net capital gains or other taxable income will be included in such dividend on shares of APS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Based on the determinations made pursuant to
Section 11.10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions of Section 11.10(e)(iii) and Section 11.10(e)(iv), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate per annum that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Outstanding shares of APS that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding shares of APS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding shares
of APS that are the subject of such Submitted Bid, unless the number of
Outstanding shares of APS subject to all such Submitted Bids shall be greater
than the number of Outstanding shares of APS ("Remaining Shares") equal to the
excess of the Available APS over the number of Outstanding shares of APS subject
to Submitted Bids described in Section 11.10(e)(i)(B) and Section
11.10(e)(i)(C), in which event the Submitted Bids of each such Existing Holder
shall be accepted, and each such Existing Holder shall be required to sell
Outstanding shares of APS, but only in an amount equal to the difference between
(1) the number of Outstanding shares of APS then held by such Existing Holder
subject to such Submitted Bid and (2) the number of shares of APS obtained by
multiplying (x) the number of Remaining Shares by (y) a fraction the numerator
of which shall be the number of Outstanding shares of APS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall be the
sum of the number of Outstanding shares of APS subject to such Submitted Bids
made by all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate per annum that is equal to the Winning Bid Rate shall be accepted but only in an amount equal to the number of Outstanding shares of APS obtained by multiplying (x) the difference between the Available APS and the number of Outstanding shares of APS subject to Submitted Bids described in Section 11.10(e)(i)(B), Section 11.10(e)(i)(C) and Section 11.10(e)(i)(D) by (y) a fraction the numerator of which shall be the number of Outstanding shares of APS subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of APS subject to such Submitted Bids made by all such Potential Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of APS are subject to Submitted Hold Orders), subject to the provisions of Section 11.10(e)(iii), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Outstanding shares of APS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus requiring such
Potential Holder to purchase the Outstanding shares of APS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and the
Submitted Sell Orders of each Existing Holder shall be accepted, in both cases
only in an amount equal to the difference between (1) the number of Outstanding
shares of APS then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of shares of APS obtained by multiplying
(x) the difference between the Available APS and the aggregate number of
Outstanding shares of APS subject to Submitted Bids described in Section
11.10(e)(ii)(A) and Section 11.10(e)(ii)(B) by (y) a fraction the numerator of
which shall be the number of Outstanding shares of APS held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and the denominator
of which shall be the number of Outstanding shares of APS subject to all such
Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Section 11.10(e), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of APS on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, round up or down the number of shares of APS to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that each Outstanding share of APS purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be a whole share of APS.
(iv) If, as a result of the procedures described in Section 11.10(e), any Potential Holder would be entitled or required to purchase less than a whole share of APS on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, allocate shares of APS for purchase among Potential Holders so that only whole shares of APS are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing any shares of APS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders on behalf of Existing Holders or Potential Holders, the aggregate number of Outstanding shares of APS to be purchased and the aggregate number of the Outstanding shares of APS to be sold by such Potential Holders and Existing Holders and, to the extent that such aggregate number of Outstanding shares to be purchased and such aggregate number of Outstanding shares to be sold differ, the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Outstanding shares of APS.
(f) Miscellaneous.
(i) The Trust may interpret the provisions of this Section 11.10 to resolve any inconsistency or ambiguity, remedy any formal defect or make any other change or modification that does not substantially adversely affect the rights of Beneficial Owners of APS.
(ii) A Beneficial Owner or an Existing Holder (A) may sell, transfer or otherwise dispose of shares of APS only pursuant to a Bid or Sell Order in accordance with the procedures described in this Section 11.10 or to or through a Broker-Dealer or to such other persons as may be permitted by the Fund, provided that in the case of all transfers other than pursuant to Auctions such Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of such transfer and (B) except as otherwise required by law, shall have the ownership of the shares of APS held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Beneficial Owner's beneficial ownership. The Trust may not submit an Order in any Auction.
(iii) All of the Outstanding shares of APS of a series shall be registered in the name of the nominee of the Securities Depository unless otherwise required by law or unless there is no Securities Depository. If there is no Securities Depository, at the Trust's option and upon its receipt of such documents as it deems appropriate, any shares of APS may be registered in the Stock Register in the name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled to receive certificates therefor and required to deliver certificates therefor upon transfer or exchange thereof.
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Included in Part A: Not applicable
Included in Part B: Financial Statements
Unaudited Statement of Assets and Liabilities as of
July 16, 2001
Unaudited Statement of Operations For the period
June 29, 2001 through July 16, 2001
Unaudited Statement of Changes in Net Assets For the
period June 29, 2001 through July 16, 2001
Unaudited Notes to Financial Statements as of July 16,
2001
Unaudited Schedule of Investments as of July 16, 2001
The Registrant's audited Statement of Assets and
Liabilities dated as of June 20, 2001 and Statement of
Operations for the one-day period ending June 20, 2001,
including notes thereto and the report of
PricewaterhouseCoopers LLP thereon, are incorporated by
reference into Part B from the Statement of Additional
Information dated June 26, 2001 for the offering of the
Registrant's common shares, which was filed with the
SEC on June 28, 2001 (File No. 333-61298).
2. Exhibits:
a. Amended and Restated Agreement and Declaration of Trust dated June 19,
2001.(1)
b.1 By-Laws of Registrant.(1)
b.2 Amendment No. 1 to the By-Laws of Registrant, filed herewith.
c. None.
d.1 Article III (Shares) and Article V (Shareholders' Voting Powers and
Meetings) of the Amended and Restated Agreement and Declaration of
Trust.(1)
d.2 Article 10 (Shareholders' Voting Powers and Meetings) of the By-Laws of
the Registrant.(1)
d.3 Form of Share Certificate of the Common Shares.(1)
d.4 Specimen Certificates representing the Registrant's Auction Preferred
Shares of beneficial interest ("Auction Preferred Shares"), filed
herewith.
e. Terms and Conditions of Dividend Reinvestment Plan.(1)
f. None.
g.1 Form of Investment Management Agreement between Registrant and PIMCO
Advisors L.P.(1)
g.2 Form of Portfolio Management Agreement between PIMCO Advisors L.P. and
Pacific Investment Management Company LLC.(1)
h.1 Form of Underwriting Agreement for the Auction Preferred Shares, filed
herewith.
h.2 Form of Master Agreement Among Underwriters, filed herewith.
i. None.
j. Form of Custodian Agreement between Registrant and State Street Bank and
Trust Co.(1)
k.1 Form of Transfer Agency Services Agreement between Registrant and
PFPC Inc.(1)
(1) Incorporated by reference from the corresponding exhibit of Pre-
Effective Amendment No. 2 to the Trust's Registration Statement on
Form N-2 (File Nos. 811-10377 and 333-61062), as filed June 25, 2001.
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k.2 Form of Organizational and Offering Expenses Reimbursement Agreement
between Registrant and PIMCO Advisors L.P.(1)
k.3 Form of Fee Waiver Agreement between Registrant and PIMCO Advisors
L.P.(1)
k.4 Form of Fee Waiver Agreement between PIMCO Advisors L.P. and Pacific
Investment Management Company LLC.(1)
k.5 Form of Auction Agency Agreement between the Registrant and the Auction
Agent as to the Registrant's Auction Preferred Shares. (2)
k.6 Form of Broker-Dealer Agreement as to the Registrant's Auction Preferred
Shares. (2)
k.7 Form of Depository Trust Company Representations Letter as to the
Registrant's Auction Preferred Shares. (2)
l. Opinion and consent of Ropes & Gray as to the Registrant's Auction
Preferred Shares, filed herewith.
m. None.
n. Consent of PricewaterhouseCoopers LLP. (2)
o. None.
p. Subscription Agreement of PIMCO Advisors L.P., dated June 19, 2001,
incorporated by reference from the corresponding exhibit of Pre-Effective
Amendment No. 3 to the Trust's Registration Statement on Form N-2 (File
Nos. 811-10377 and 333-61062), as filed June 26, 2001.
q. None.
r.1 Code of Ethics of Registrant.(1)
r.2 Code of Ethics of PIMCO Advisors L.P.(1)
r.3 Code of Ethics of Pacific Investment Management Company LLC.(1)
s.1 Power of Attorney for each of Messrs. Treadway, Shlissel, Connor, Belica
and Schott. (2)
s.2 Power of Attorney for each of Messrs. Kertess and Schott. (2)
--------------------------
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(1) Incorporated by reference from the corresponding exhibit of Pre- Effective Amendment No. 2 to the Trust's Registration Statement on Form N-2 (File Nos. 811-10377 and 333-61062), as filed June 25, 2001.
(2) Incoroporated by reference from the corresponding exhibit of Pre-Effective Amendment No. 1 to the Trust's Registration Statement on Form N-2 (File Nos. 811-10377 and 333-64796), as filed August 14, 2001.
Item 25: Marketing Arrangements
See Sections 5(h), 8 and 9 of Exhibit h.1 of Item 24 of this Registration Statement and sections 8, 9 and 15 of Exhibit h.2 of Item 24 of this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
Securities and Exchange Commission fees $ 50,000*
Printing and engraving expenses 55,000*
Legal Fees 103,000*
Accounting expenses 5,000*
Rating Agency Fees 60,000*
Miscellaneous expenses 2,000*
--------
Total 275,000*
========
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* Estimated expense.
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At August 6, 2001
(2)
(1) NUMBER OF
TITLE OF CLASS RECORD HOLDERS
Auction Preferred Shares of 0
beneficial interest, no par value
Common Shares of beneficial interest, 61
no par value
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Item 29: Indemnification
Reference is made to Article VIII, Sections 1 through 4, of the Registrant's Amended and Restated Agreement and Declaration of Trust, which is incorporated by reference herein.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Trust's Amended and Restated Agreement and Declaration of Trust, its By-Laws or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is 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 trustees, officers or controlling persons of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustees, officers or controlling persons 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, PIMCO Advisors L.P., Pacific Investment Management Company LLC and their respective trustees, directors and officers are insured by directors and officers/errors and ommissions liability policies.
Item 30: Business and Other Connections of Investment Adviser
Descriptions of the business of PIMCO Advisors L.P., the Registrant's investment manager, and Pacific Investment Management Company LLC, the Registrant's portfolio manager, are set forth under the captions "Investment Manager" and "Portfolio Manager" under "Management of the Fund" in both the prospectus and Statement of Additional Information forming part of this Registration Statement. The following sets forth business and other connections of each director and executive officer (and persons performing similar functions) of PIMCO Advisors L.P. and Pacific Investment Management Company LLC.
PIMCO Advisors L.P.
1345 Avenue of the Americas
New York, NY 10105
Name Position with Advisor Other Connections
---------------------- -------------------------- ------------------------------
Joachim Faber, Dr. Chief Executive Officer Member of the Board of
Allianz AG
Udo Frank Managing Director; Chief Managing Director and Chief
Investment Officer Investment Officer of Allianz
Asset Advisory and Management
GmbH
Robert M. Fitzgerald Executive Vice President Chief Financial Officer PIMCO
and Chief Financial Funds Distributors LLC,
Officer Cadence Capital Management,
NFJ Investment Group,
Parametric Portfolio
Associates, Pacific Investment
Management Company LLC and
StocksPLUS Management, Inc.;
Executive Vice President and
Chief Financial Officer, Value
Advisors LLC; and Chief
Financial Officer PIMCO Funds
Advertising Agency.
C-4
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Kenneth M. Poovey Managing Director; Chief Chief Executive Officer,
Executive Officer of U.S. Value Advisors LLC,
Equity Division of PIMCO Oppenheimer Capital
Advisors
Stephen J. Treadway Managing Director Chairman, President and Chief
Executive Officer, PIMCO
Funds Advertising Agency,
Inc., PIMCO Funds
Distributors LLC
James G. Ward Executive Vice President, Executive Vice President,
Human Resources Human Resources, Value
Advisors LLC
|
Stewart A. Smith Secretary Secretary, NFJ Investment
Group, Parametric Portfolio
Associates; Assistant
Secretary, Cadence Capital
Management
|
Pacific Investment Management Company LLC
("PIMCO")
840 Newport Center Drive, Suite 300
Newport Beach, CA 92660
Name Business and Other Connections
----------------------------- --------------------------------------------------
Arnold, Tamara J. Executive Vice President, PIMCO
Benz, William R. II Managing Director, Executive Committee Member,
PIMCO
Bhansali, Vineer Executive Vice President, PIMCO
Brynjolfsson, John B. Executive Vice President, PIMCO
Burns, R. Wesley Managing Director, PIMCO; President and Trustee of
PIMCO Funds and PIMCO Variable Insurance Trust;
President and Director of PIMCO Commercial
Mortgage Securities Trust, Inc.; Director, PIMCO
Funds: Global Investors Series plc and PIMCO
Global Advisors (Ireland) Limited
Cupps, Wendy W. Executive Vice President, PIMCO
Dialynas, Chris Managing Director, PIMCO
Ehlert, A. Benjamin Executive Vice President, PIMCO
El-Erian, Mohamed A. Managing Director, PIMCO
C-6
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Feingold, Andrea S. Executive Vice President, PIMCO
Gross, William H. Managing Director and Executive Committee Member,
PIMCO; Director and Vice President, StocksPLUS
Management, Inc.; Senior Vice President of PIMCO
Funds and PIMCO Variable Insurance Trust
Hague, John L. Managing Director, PIMCO
Hally, Gordon C. Executive Vice President, PIMCO
Hamalainen, Pasi M. Managing Director, PIMCO
Harris, Brent R. Managing Director and Executive Committee Member,
PIMCO; Director and Vice President, StocksPLUS
Management, Inc.; Trustee and Chairman of PIMCO
Funds and PIMCO Variable Insurance Trust; Director
and Chairman, PIMCO Commercial Mortgage Securities
Trust, Inc.
C-7
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Hinman, David C. Executive Vice President, PIMCO
Hodge, Douglas M. Executive Vice President, PIMCO
Holden, Brent L. Managing Director, PIMCO
Isberg, Margaret E. Managing Director, PIMCO; Senior Vice President of
PIMCO Funds
Keller, James M. Executive Vice President, PIMCO
Kennedy, Raymond G. Executive Vice President, PIMCO
Loftus, John S. Managing Director, PIMCO; Senior Vice President of
PIMCO Funds; Vice President and Assistant
Secretary, StocksPLUS Management, Inc.
Mariappa, Sudesh N. Executive Vice President, PIMCO
Mather, Scott A. Executive Vice President, PIMCO; Senior Vice
President, PIMCO Commercial Mortgage Securities
Trust, Inc.
McCray, Mark V. Executive Vice President, PIMCO
McCulley, Paul A. Managing Director, PIMCO
McDevitt, Joseph E. Executive Vice President, PIMCO; Director and
Chief Executive Officer, PIMCO Global Advisors
(Europe) Limited
C-8
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Muzzy, James F. Managing Director, PIMCO; Director and Vice
President, StocksPLUS Management, Inc.; Senior
Vice President, PIMCO Variable Insurance Trust;
Vice President of PIMCO Funds
Otterbein, Thomas J. Executive Vice President, PIMCO
Phansalkar, Mohan V. Executive Vice President, Senior Legal Officer
and Assistant Secretary, PIMCO; Vice President and
Assistant Secretary, StocksPLUS Management, Inc.
Powers, William C. Managing Director and Executive Committee Member,
PIMCO; Senior Vice President, PIMCO Commercial
Mortgage Securities Trust, Inc.
Schmider, Ernest L. Managing Director and Secretary, PIMCO; Director
and Assistant Secretary, StocksPLUS Management,
Inc.
Simon, Scott Executive Vice President, PIMCO
Thomas, Lee R. Managing Director, PIMCO
C-9
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Thompson, William S. Jr. Chief Executive Officer, Managing Director and
Executive Committee Member, PIMCO; Director and
President, StocksPLUS Management, Inc.; Senior
Vice President of PIMCO Variable Insurance Trust;
Vice President of PIMCO Funds and PIMCO Commercial
Mortgage Securities Trust, Inc.
Trosky, Benjamin L. Managing Director, PIMCO; Senior Vice President,
PIMCO Commercial Mortgage Securities Trust, Inc.
Weil, Richard M. Chief Operating Officer, PIMCO
Wood, George H. Executive Vice President, PIMCO
|
Item 31: Location of Accounts and Records
The account books and other documents required to be maintained by the Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder will be maintained at the offices of State Street Bank & Trust Co., 225 Franklin Street, Boston, MA 02110, PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809 and/or Bankers Trust Company, 4 Albany Street, New York, New York 10006.
Item 32: Management Services
Not applicable.
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its Common Shares until it amends the prospectus filed herewith if (1) subsequent to the effective date of its registration statement, the net asset value declines more than 10 percent from its net asset value as of the effective date of the registration statement, or (2) the net asset value increases to an amount greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant under Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective; and
b. 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. The Registrant undertakes to send by first class mail or other means designed to ensure equally prompt delivery, within two business days of receipt of a written or oral request, any Statement of Additional Information.
Notice
A copy of the Agreement and Declaration of Trust of PIMCO Municipal Income Fund (the "Fund"), together with all amendments thereto, is on file with the Secretary of State of The Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Fund by any officer of the Fund as an officer and not individually and that the obligations of or arising out of this instrument are not binding upon any of the Trustees of the Fund or shareholders of the Fund individually, but are binding only upon the assets and property of the Fund.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York on the 20th day of August, 2001.
PIMCO MUNICIPAL INCOME FUND
By: /s/ Stephen J. Treadway
-----------------------
Stephen J. Treadway,
President
|
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Name Capacity Date
---- -------- ----
/s/ Stephen J. Treadway Trustee and President August 20, 2001
------------------------------
Stephen J. Treadway
Paul Belica* Trustee August 20, 2001
------------------------------
Paul Belica
Robert E. Connor* Trustee August 20, 2001
------------------------------
Robert E. Connor
Hans Kertess* Trustee August 20, 2001
-----------------------------
Hans Kertess
/s/ Brian S. Shlissel Treasurer and Principal August 20, 2001
------------------------------ Financial and Accounting
Brian S. Shlissel Officer
*By: /s/ Stephen J. Treadway
---------------------------
Stephen J. Treadway,
Attorney-In-Fact
Date: August 20, 2001
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INDEX TO EXHIBITS
Exhibit Exhibit Name
------- ------------
b.2 Amendment No. 1 to the By-Laws of Registrant
d.4 Specimen Certificates representing Registrant's Auction Preferred
Shares
h.1 Form of Underwriting Agreement for the Auction Preferred Shares
h.2 Form of Master Agreement Among Underwriters
l. Opinion and Consent of Ropes & Gray as to the Registrant's Auction
Preferred Shares
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Exhibit b.2
AMENDED AND RESTATED
BYLAWS
OF
PIMCO MUNICIPAL INCOME FUND
(Amended and Restated as of August 16, 2001)
ARTICLE 1
AGREEMENT AND DECLARATION OF TRUST AND PRINCIPAL OFFICE
ARTICLE 2
MEETINGS OF TRUSTEES
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.
ARTICLE 3
OFFICERS
office occupied by him or her 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.
ARTICLE 4
COMMITTEES
With respect to a Valuation Committee of the Trustees, one or more of the Committee members shall constitute a quorum for the transaction of business.
Except as specifically provided in the resolutions constituting a Committee
of the Trustees and providing for the conduct of its meetings, Article 2,
Section 2.3 of these Bylaws relating to special meetings shall govern the notice
requirements for Committee meetings, except that it shall be sufficient notice
to a Valuation Committee of the Trustees to send notice by telegram, telex or
telecopy or other electronic means (including by telephone voice-message or e-
mail) at least fifteen minutes before the meeting.
ARTICLE 5
REPORTS
ARTICLE 6
FISCAL YEAR
ARTICLE 7
SEAL
ARTICLE 8
EXECUTION OF PAPERS
ARTICLE 9
ISSUANCE OF SHARE CERTIFICATES
Notwithstanding the foregoing, 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.
ARTICLE 10
SHAREHOLDERS' VOTING POWERS AND MEETINGS
fractional vote, except as otherwise provided in the Declaration of Trust, these Bylaws, or required by applicable law. Except as otherwise provided in the Declaration of Trust or these Bylaws or required by applicable law, all Shares of the Trust then entitled to vote shall 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. 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 instructions have been authorized by such Shareholder shall constitute execution of such proxy by or on behalf of such Shareholder. 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, the Declaration of Trust or these Bylaws to be taken by Shareholders as to such class or series.
ARTICLE 11
Statement Creating Two Series of Auction Preferred Shares
Auction Preferred Shares, Series A: 1,600 shares of beneficial interest of Preferred Shares, no par value, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Preferred Shares, Series A." Each share of Auction Preferred Shares, Series A (sometimes referred to herein as "Series A APS") may be issued on a date to be determined by the Board of
Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these By-Laws. The Series A APS shall constitute a separate series of Preferred Shares of the Trust, and each share of Series A APS shall be identical.
Auction Preferred Shares, Series B: 1,600 shares of beneficial interest of Preferred Shares, no par value, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Preferred Shares, Series B." Each share of Auction Preferred Shares, Series B (sometimes referred to herein as "Series B APS") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these By-Laws. The Series B APS shall constitute a separate series of Preferred Shares of the Trust, and each share of Series B APS shall be identical.
Auction Preferred Shares, Series C: 1,600 shares of beneficial interest of Preferred Shares, no par value, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Preferred Shares, Series C." Each share of Auction Preferred Shares, Series C (sometimes referred to herein as "Series C APS") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these By-Laws. The Series C APS shall constitute a separate series of Preferred Shares of the Trust, and each share of Series C APS shall be identical.
Auction Preferred Shares, Series D: 1,600 shares of beneficial interest of Preferred Shares, no par value, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Preferred Shares, Series D." Each share of Auction Preferred Shares, Series D (sometimes referred to herein as "Series D APS") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these By-Laws. The Series D APS shall constitute
a separate series of Preferred Shares of the Trust, and each share of Series D APS shall be identical.
Auction Preferred Shares, Series E: 1,600 shares of beneficial interest of Preferred Shares, no par value, liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) thereon, is hereby designated "Auction Preferred Shares, Series E." Each share of Auction Preferred Shares, Series E (sometimes referred to herein as "Series E APS") may be issued on a date to be determined by the Board of Trustees of the Trust or pursuant to their delegated authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as shall be determined in advance of the issuance thereof by the Board of Trustees of the Trust or pursuant to their delegated authority; and have such other preferences, voting powers, limitations as to dividends, qualifications and terms and conditions of redemption as are set forth in these By-Laws. The Series E APS shall constitute a separate series of Preferred Shares of the Trust, and each share of Series E APS shall be identical.
"'AA' Composite Commercial Paper Rate," on any Valuation Date, means (i) the Interest Equivalent of the rate on commercial paper placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the equivalent of such rating by another nationally recognized rating agency, as such rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York for the Business Day immediately preceding such date, or (ii) in the event that the Federal Reserve Bank of New York does not make available such a rate, then the arithmetic average of the Interest Equivalent of the rate on commercial paper placed on behalf of such issuers, as quoted on a discount basis or otherwise by UBS Warburg LLC or its successors that are Commercial Paper Dealers, to the Auction Agent for the close of business on the Business Day immediately preceding such date. If one of the Commercial Paper Dealers does not quote a rate required to determine the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be determined on the basis of the quotation or quotations furnished by any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the Trust to provide such rate or rates not being supplied by the Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7 or more but fewer than 49 days, such rate shall be the Interest Equivalent of the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70 days, such rate shall be the Interest Equivalent of the 60-day rate on such commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the arithmetic average of the Interest Equivalent on the 60-day and 90-day rates on such commercial paper; (iv) 85 or more days but fewer than 99 days, such rate shall be the Interest Equivalent of the 90-day rate on such commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall be the arithmetic average of the Interest Equivalent of the 90-day and 120-day rates on such commercial paper; (vi) 120 or more days but fewer than 141 days, such rate
shall be the Interest Equivalent of the 120-day rate on such commercial paper;
(vii) 141 or more days but fewer than 162 days, such rate shall be the
arithmetic average of the Interest Equivalent of the 120-day and 180-day rates
on such commercial paper; and (viii) 162 or more days but fewer than 183 days,
such rate shall be the Interest Equivalent of the 180-day rate on such
commercial paper.
"Accountant's Confirmation" has the meaning set forth in Section 11.7(c) of these By-Laws.
"Adviser" means the Trust's investment adviser which initially shall be PIMCO Advisors L.P.
"Affiliate" means any Person, other than UBS Warburg LLC or its successors, known to the Auction Agent to be controlled by, in control of, or under common control with, the Trust.
"Agent Member" means a member of the Securities Depository that will act on behalf of a Beneficial Owner of one or more APS or on behalf of a Potential Beneficial Owner.
"APS" means the Series A APS, the Series B APS, the Series C APS, the Series D APS and the Series E APS.
"APS Basic Maintenance Amount," as of any Valuation Date, means the dollar amount equal to the sum of (i)(A) the product of the number of shares of APS Outstanding on such date multiplied by $25,000 (plus the product of the number of shares of any other series of Preferred Shares Outstanding on such date multiplied by the liquidation preference of such shares), plus any redemption premium applicable to APS (or other Preferred Shares) then subject to redemption; (B) the aggregate amount of dividends that will have accumulated at the respective Applicable Rates (whether or not earned or declared) to (but not including) the first respective Dividend Payment Dates for each series of APS Outstanding that follow such Valuation Date (plus the aggregate amount of dividends, whether or not earned or declared, that will have accumulated in respect of other Outstanding Preferred Shares to (but not including) the first respective dividend payment dates for such other shares that follow such Valuation Date); (C) the aggregate amount of dividends that would accumulate on shares of each series of APS Outstanding from such first respective Dividend Payment Date therefor through the 49th day after such Valuation Date, at the Maximum Applicable Rate (calculated as if such Valuation Date were the Auction Date for the Dividend Period commencing on such Dividend Payment Date) for a 7- Day Dividend Period of shares of such series 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 Dividend Period to the Auction Agent with respect to shares of such series, such Maximum Applicable Rate shall be the higher of (a) the Maximum Applicable Rate for the Special Dividend Period of shares of such series to commence on such Dividend Payment Date and (b) the Maximum Applicable Rate for a 7-Day Rate Period of shares of such series to commence on such Dividend Payment Date, multiplied by the Moody's Volatility Factor applicable to a 7-Day Dividend Period, or, in the event the Trust shall have delivered a Notice of Special Dividend Period to the Auction Agent with respect to shares of such series designating a Special Dividend Period consisting of 49 days or more, the Moody's Volatility Factor applicable to a Special Dividend Period of that length (plus the aggregate
amount of dividends that would accumulate at the maximum dividend rate or rates
on any other Preferred Shares Outstanding from such respective dividend payment
dates through the 49th day after such Valuation Date, as established by or
pursuant to the respective statements establishing and fixing the rights and
preferences of such other Preferred Shares) (except that (1) if such Valuation
Date occurs during a Non-Payment Period (or, in the case of Preferred Shares
other than APS, a period similar to a Non-Payment Period), the dividend for
purposes of calculation would accumulate at the then current Non-Payment Period
Rate (or similar rate for Preferred Shares other than APS) and (2) for those
days during the period described in this subparagraph (C) in respect of which
the Applicable Rate in effect immediately prior to such Dividend Payment Date
will remain in effect (or, in the case of Preferred Shares other than APS, in
respect of which the dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect), the dividend for
purposes of calculation would accumulate at such Applicable Rate (or other rate
or rates, as the case may be) in respect of those days); (D) the amount of
anticipated expenses of the Trust for the 90 days subsequent to such Valuation
Date; (E) the amount of the Trust's Maximum Potential Gross-up Dividend
Liability in respect of shares of APS (and similar amounts payable in respect of
other Preferred Shares) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (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 (ii) the value (i.e., the
face value of cash, short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1,
and short-term securities that are the direct obligation of the U.S. government,
provided in each case that such securities mature on or prior to the date upon
which any of (i)(A) through (i)(F) become payable, otherwise the Moody's
Discounted Value) of any of the Trust's assets irrevocably deposited by the
Trust for the payment of any of (i)(A) through (i)(F).
"APS Basic Maintenance Cure Date," with respect to the failure by the Trust to satisfy the APS Basic Maintenance Amount (as required by Section 11.7(a) of these By-Laws) as of a given Valuation Date, means the sixth Business Day following such Valuation Date.
"APS Basic Maintenance Report" means a report signed by any of the President, Treasurer, any Senior Vice President or any Vice President of the Trust which sets forth, as of the related Valuation Date, the assets of the Trust, the Market Value and the Discounted Value thereof (seriatim and in aggregate), and the APS Basic Maintenance Amount.
"Applicable Percentage" has the meaning set forth in Section 11.10(a)(vii) of these By-Laws.
"Applicable Rate" means the rate per annum at which cash dividends are payable on the APS for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means Bankers Trust Company unless and until another commercial bank, trust company or other financial institution appointed by a resolution of the Board of Trustees of the Trust or a duly authorized committee
thereof enters into an agreement with the Trust to follow the Auction Procedures for the purpose of determining the Applicable Rate and to act as transfer agent, registrar, dividend disbursing agent and redemption agent for the APS.
"Auction Procedures" means the procedures for conducting Auctions set forth in Section 11.10 of these By-Laws.
"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 APS or a Broker-Dealer that holds APS for its own account.
"Broker-Dealer" means any broker-dealer, or other entity permitted by law to perform the functions required of a Broker-Dealer pursuant to Section 11.10 of these By-Laws, that has been selected by the Trust and has entered into a Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement between the Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the procedures specified in Section 11.10 of these By-Laws.
"Business Day" means a day on which the New York Stock Exchange is open for trading and which is not a Saturday, Sunday or other day on which banks in New York City are authorized or obligated by law to close.
"Closing Transactions" has the meaning set forth in Section 11.8(a) of these By-Laws.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealers" means UBS Warburg LLC and such other commercial paper dealer or dealers as the Trust may from time to time appoint or, in lieu thereof, their respective affiliates or successors.
"Common Shares" means the shares of beneficial interest designated as common shares, no par value, of the Trust.
"Date of Original Issue" means, with respect to any share of APS, the date on which the Trust first issues such share.
"Declaration of Trust" means the Agreement and Declaration of Trust of the Trust dated May 9, 2001, as from time to time amended and supplemented.
"Deposit Securities" means cash and Municipal Obligations rated at least A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+ by S&P.
"Discount Factor" means a Moody's Discount Factor.
"Discounted Value" of any asset of the Trust means with respect to a Moody's Eligible Asset, the quotient of the Market Value thereof divided by the applicable Moody's Discount Factor.
"Dividend Payment Date," with respect to APS, has the meaning set forth in
Section 11.2(b)(i) of these By-Laws.
"Dividend Period" means the Initial Dividend Period, any 7-Day Dividend Period and any Special Dividend Period.
"Eligible Assets" means Moody's Eligible Assets.
"Existing Holder" means a Broker-Dealer, or any such other Person that may be permitted by the Trust, that is listed as the holder of record of APS in the Share Books.
"Federal Tax Rate Increase" has the meaning set forth under the definition of "Moody's Volatility Factor" below.
"Forward Commitment" has the meaning set forth in Section 11.8(d) of these By-Laws.
"Gross-Up Dividend" has the meaning set forth in Section 11.2(e) of these By-Laws.
"Holder" means a Person identified as a holder of record of APS in the Share Register.
"Independent Accountant" means a nationally recognized accountant, or firm of accountants, that is, with respect to the Trust, an independent public accountant or firm of independent public accountants under the Securities Act of 1933, as amended.
"Initial Dividend Payment Date" means, with respect to a series of APS, the Initial Dividend Payment Date as determined by the Board of Trustees of the Trust with respect to such series.
"Initial Dividend Period" has the meaning set forth in Section 11.2(c)(i) of these By-Laws.
"Initial Dividend Rate" means the rate per annum applicable to the Initial Dividend Period for such series of APS.
"Interest Equivalent" means a yield on a 360-day basis of a discount basis security which is equal to the yield on an equivalent interest-bearing security.
"Issue Type Category" means, with respect to a Municipal Obligation acquired by the Trust, for purposes of calculating Moody's Eligible Assets as of any Valuation Date, one of the following categories into which such Municipal Obligation falls based upon a good faith determination by the Trust: health care issues (including issues related to teaching and non-teaching hospitals, public or private, and elder-care facilities, including nursing homes); housing issues
(including issues related to single- and multi-family housing projects); educational facilities issues (including issues related to public and private schools); student loan issues; resource recovery issues; transportation issues (including issues related to mass transit, airports and highways); industrial development bond issues (including issues related to pollution control facilities); utility issues (including issues related to the provision of gas, water, sewers and electricity); general obligation issues; lease obligations (including certificates of participation); escrowed bonds; and other issues ("Other Issues") not falling within one of the aforementioned categories. The general obligation issue category includes any issue that is directly or indirectly guaranteed by any state or any political subdivision of a state. Utility issues are included in the general obligation issue category if the issue is directly or indirectly guaranteed by a state or any political subdivision of a state. Municipal Obligations in the utility issue category will be classified within one of the three following sub-categories: (i) electric, gas and combination issues (if the combination issue includes an electric issue); (ii) water and sewer utilities and combination issues (if the combination issues does not include an electric issue); and (iii) irrigation, resource recovery, solid waste and other utilities. Municipal Obligations in the transportation issue category will be classified within one of the two following sub-categories: (i) streets and highways, toll roads, bridges and tunnels, airports and multi-purpose port authorities (multiple revenue streams generated by toll roads, airports, real estate, bridges); (ii) mass transit, parking seaports and others.
"Long Term Dividend Period" means a Special Dividend Period consisting of a specified period of one whole year or more but not greater than five years.
"Liens" shall have the meaning set forth in the definition of "Moody's Eligible Asset" below.
"Mandatory Redemption Price" means $25,000 per share of APS plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) to the date fixed for redemption, but excluding Gross-up Dividends.
"Marginal Tax Rate" means the maximum marginal regular Federal individual income tax rate applicable to an individual's or a corporation's ordinary income, whichever is greater.
"Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. In the event the
Pricing Service is unable to value a security, the security shall be valued at
the lower of two dealer bids obtained by the Trust from dealers who are members
of the National Association of Securities Dealers, Inc. and who make a market in
the security, at least one of which shall be in writing. Futures contracts and
options are valued at closing prices for such instruments established by the exchange or board of trade on which they are traded, or if market quotations are not readily available, are valued at fair value on a consistent basis using methods determined in good faith by the Board of Trustees.
"Maximum Applicable Rate," with respect to APS, has the meaning set forth in Section 11.10(a)(vii) of these By-Laws.
"Maximum Potential Gross-Up Dividend Liability" means, as of any Valuation Date, the aggregate amount of Gross-Up Dividends that would be due if the Trust were to make Retroactive Taxable Allocations, with respect to any fiscal year, estimated based upon dividends paid and the amount of undistributed realized net capital gains and other taxable income earned by the Trust, as of the end of the calendar month immediately preceding such Valuation Date and assuming such Gross-Up Dividends are fully taxable.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" shall mean, for purposes of determining the Discounted Value of any Moody's Eligible Asset, the percentage determined by reference to the rating on such asset and the shortest Exposure Period set forth opposite such rating that is the same length as or is longer than the Moody's Exposure Period, in accordance with the table set forth below:
Exposure Period Aaa* Aa* A* Baa* Other** (V)MIG-1*** SP-1+**** Unrated*****
------------------------------ ----- ---- ---- ----- -------- ------------ ---------- -------------
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7 weeks 151% 159% 166% 173% 187% 136% 148% 225%
----------------------------------------------------------------------------------------------------------
8 weeks or less but greater 154 161 168 176 190 137 149 231
than seven weeks.
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9 weeks or less but greater 158 163 170 177 192 138 150 240
than eight weeks
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** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, 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 but rated SP-1+ by S&P, which do not mature or have a demand feature at par exercisable in 30 days and which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 or not rated by Moody's and less than BBB or not rated by S&P, not to exceed 10% of Moody's Eligible Assets.
Notwithstanding the foregoing, (i) except as provided in clause (ii) below, 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-l or P-1 by
Moody's and mature or have a demand feature at par exercisable in 30 days or less, or 125%, as long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a demand feature at par exercisable in 30 days or less, (ii) the Moody's Discount Factor for residual interest municipal bonds and structured notes shall be the product of (x) the percentage determined by reference to the rating on the security underlying such residual interest municipal bond multiplied by (y) 1.25 (provided that the trust in which such residual interest municipal bond is held may be terminated within five business days), and (iii) except as provided in clause (ii) above, no Moody's Discount Factor will be applied to cash, Receivables for Municipal Obligations Sold, or futures, options and similar instruments (to the extent such securities are Moody's Eligible Assets); provided, however, that for purposes of determining the Moody's Discount Factor applicable to a Municipal Obligation, any Municipal Obligation (excluding any short-term Municipal Obligation) not rated by Moody's but rated by S&P shall be deemed to have a Moody's rating which is one full rating category lower than its S&P rating.
"Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold, futures and options (to the extent entered into in Moody's
Hedging Transactions) and similar instruments (including residual interest
municipal bonds (provided that the trust in which such residual interest
municipal bond is held may be terminated within five business days) and
structured notes), or a Municipal Obligation that (i) pays interest in cash,
(ii) does not have its Moody's rating, as applicable, suspended by Moody's, and
(iii) is part of an issue of Municipal Obligations of at least $5,000,000,
except for Municipal Obligations rated below A by Moody's or Municipal
Obligations within the healthcare Issue Type Category, in which case the minimum
issue size is $10,000,000. Except for general obligation bonds, Municipal
Obligations issued by any one issuer and rated BBB or lower or not rated by S&P
and rated Ba or B or not rated by Moody's ("Other Securities") may comprise no
more than 4% of total Moody's Eligible Assets; such Other Securities, if any,
together with any Municipal Obligations issued by the same issuer and rated Baa
by Moody's or A by S&P, may comprise no more than 6% of total Moody's Eligible
Assets; such Other Securities, Baa and A-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated A by
Moody's or AA by S&P, may comprise no more than 10% of total Moody's Eligible
Assets; and such Other Securities, Baa, A and AA-rated Municipal Obligations, if
any, together with any Municipal Obligations issued by the same issuer and rated
Aa by Moody's or AAA by S&P, may comprise no more than 20% of total Moody's
Eligible Assets. For purposes of the foregoing sentence, any Municipal
Obligation backed by the guaranty, letter of credit or insurance issued by a
third party shall be deemed to be issued by such third party if the issuance of
such third party credit is the sole determinant of the rating on such Municipal
Obligation. Other Securities falling within a particular Issue Type Category
may comprise no more than 12% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Baa by Moody's or A by S&P, may
comprise no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations falling within a particular Issue Type Category and rated
A by Moody's or AA by S&P, may comprise no more than 40% of total Moody's
Eligible Assets; and such Other Securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Aa by Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible Assets. For purposes of this definition, a Municipal Obligation shall be deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by S&P. Notwithstanding any other provision of this definition, (A) in the case of general obligation Municipal Obligations only, Other Securities issued by issuers located within any one county may comprise no more than 4% of Moody's Eligible Assets; such Other Securities, if any, together with any Municipal Obligations issued by issuers located within the same county and rated Baa by Moody's or A by S&P, may comprise no more than 6% of Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations, if any, together with any Municipal Obligations issued by issuers located within the same county and rated A by Moody's or AA by S&P, may comprise no more than 10% of Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated Municipal Obligations, if any, together with any Municipal Obligations issued by issuers located within the same county and rated Aa by Moody's or AAA by S&P, may comprise no more than 20% of Moody's Eligible Assets; and (B) in no event may (i) student loan Municipal Obligations comprise more than 10% of Moody's Eligible Assets; (ii) resource recovery Municipal Obligations comprise more than 10% of Moody's Eligible Assets; and (iii) Other Issues comprise more than 10% of Moody's Eligible Assets. For purposes of applying the foregoing requirements, Municipal Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-term rating of A. When the Trust sells a Municipal Obligation and agrees to repurchase such Municipal Obligation at a future date, such Municipal Obligation shall be valued at its Discounted Value for purposes of determining Moody's Eligible Assets, and the amount of the repurchase price of such Municipal Obligation shall be included as a liability for purposes of calculating the APS Basic Maintenance Amount. When the Trust purchases a Moody's Eligible Asset and agrees to sell it at a future date, such Eligible Asset shall be valued at the amount of cash to be received by the Trust upon such future date, provided that the counterparty to the transaction has a long-term debt rating of at least A2 from Moody's and the transaction has a term of no more than 30 days, otherwise such Eligible Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's Eligible Asset to the extent it is (i) subject to any material lien, mortgage, pledge, security interest or security agreement of any kind (collectively, "Liens"), except for (a) Liens which are being contested in good faith by appropriate proceedings and which Moody's has indicated to the Trust will not affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes that are not then due and payable or that can be paid thereafter without penalty, (c) Liens to secure payment for services rendered or cash advanced to the Trust by PIMCO Advisors, PIMCO or their affiliates, State Street Bank and Trust Company or the Auction Agent and (d) Liens by virtue of any repurchase agreement; (ii) deposited irrevocably for the payment of any liabilities for purposes of determining the APS Basic Maintenance Amount; or (iii) held in a margin account.
"Moody's Exposure Period" means the period commencing on a given Valuation Date and ending 49 days thereafter.
"Moody's Hedging Transactions" has the meaning set forth in Section 11.8(a) of these By-Laws.
"Moody's Volatility Factor" means as of any Valuation Date, (i) in the case
of any 7-Day Dividend Period, any Special Dividend Period of 28 days or fewer,
or any Special Dividend Period of 57 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 Dividend Period of more than 28 but fewer than
36 days, a multiplicative factor equal to 203%; (iii) in the case of any Special
Dividend Period of more than 35 but fewer than 43 days, a multiplicative factor
equal to 217%; (iv) in the case of any Special Dividend Period of more than 42
but fewer than 50 days, a multiplicative factor equal to 226%; and (v) in the
case of any Special Dividend Period of more than 49 but fewer than 57 days, a
multiplicative factor equal to 235%. If, as a result of the enactment of
changes to the Code, the Marginal Tax Rate will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Dividend Period described in (i) above in this definition instead
shall be determined by reference to the following table:
Volatility
Federal Tax Rate Increase Factor
------------------------- ----------
5%................................................. 295%
10%................................................. 317%
15%................................................. 341%
20%................................................. 369%
25%................................................. 400%
30%................................................. 436%
35%................................................. 477%
40%................................................. 525%
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"Municipal Obligations" means municipal obligations, including municipal bonds and short-term municipal obligations, the interest from which is exempt from federal income taxes.
"Municipal Index" means the Bond Buyer Municipal Bond Index.
"1940 Act" means the Investment Company Act of 1940, as amended from time to time.
"1940 Act APS Asset Coverage" means asset coverage, as defined in section 18(h) of the 1940 Act, of at least 200% with respect to all Outstanding senior securities of the Trust which are shares of beneficial interest, including APS (or such other asset coverage as may in the future be specified in or under the 1940 Act as the minimum asset coverage for senior securities which are shares of beneficial interest of a closed-end investment company as a condition of paying dividends on its common shares).
"1940 Act Cure Date," with respect to the failure by the Trust to maintain the 1940 Act APS Asset Coverage (as required by these By-Laws) as of the last Business Day of each month, means the last Business Day of the following month.
"Non-Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions."
"Non-Payment Period" means a period commencing on and including a Dividend Payment Date or redemption date for which the Trust shall fail to (i) declare, prior to the close of business on the second Business Day preceding such Dividend Payment Date, for payment on or (to the extent permitted by Section 11.2(c)(i) of these By-Laws) within three Business Days after such Dividend Payment Date to the Holders as of 12:00 noon, New York City time, on the Business Day preceding such Dividend Payment Date, the full amount of any dividend on APS payable on such Dividend Payment Date, or (ii) deposit, irrevocably in trust, in same-day funds, with the Auction Agent by 12:00 noon, New York City time, (A) on such Dividend Payment Date the full amount of any cash dividend on such shares payable (if declared) on such Dividend Payment Date or (B) on any such redemption date for any shares of APS called for redemption, the Mandatory Redemption Price per share of such APS or, in the case of an optional redemption, the Optional Redemption Price per share, and ending on and including the Business Day on which, by 12:00 noon, New York City time, all unpaid cash dividends and unpaid redemption prices shall have been so deposited or shall have otherwise been made available to Holders in same-day funds; provided that, a Non-Payment Period shall not end unless the Trust shall have given at least five days' but no more than 30 days' written notice of such deposit or availability to the Auction Agent, all Existing Holders (at their addresses appearing in the Share Books) and the Securities Depository. Notwithstanding the foregoing, the failure by the Trust to deposit funds as provided for by clauses (ii)(A) or (ii)(B) above within three Business Days after any Dividend Payment Date or redemption date, as the case may be, in each case to the extent contemplated by Section 11.2(c)(i) of these By-Laws, shall not constitute a "Non-Payment Period."
"Non-Payment Period Rate" means, initially, 200% of the applicable Reference Rate (or 275% of such rate if the Trust has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend the APS), provided that the Board of Trustees of the Trust shall have the authority to adjust, modify, alter or change from time to time the initial Non-Payment Period Rate if the Board of Trustees of the Trust determines and Moody's (and any Substitute Rating Agency in lieu of Moody's in the event Moody's shall not rate the APS) advise the Trust in writing that such adjustment, modification, alteration or change will not adversely affect its then current ratings on the APS.
"Normal Dividend Payment Date" has the meaning set forth in Section 11.2(b)(i) of these By-Laws.
"Notice of Redemption" means any notice with respect to the redemption of shares of APS pursuant to Section 11.4 of these By-Laws.
"Notice of Revocation" has the meaning set forth in Section 11.2(c)(iii) of these By-Laws.
"Notice of Special Dividend Period" has the meaning set forth in Section 11.2(c)(iii) of these By-Laws.
"Optional Redemption Price" means $25,000 per share plus an amount equal to accumulated but unpaid dividends (whether or not earned or declared) to the date fixed for redemption plus any applicable redemption premium attributable to the designation of a Premium Call Period, but excluding Gross-up Dividends.
"Other Issues" has the meaning set forth in the definition of "Issue Type Category."
"Other Securities" has the meaning set forth in the definition of "Moody's Eligible Asset."
"Outstanding" means, as of any date (i) with respect to APS, shares of APS therefor issued by the Trust except, without duplication, (A) any shares of APS theretofore canceled or delivered to the Auction Agent for cancellation, or redeemed by the Trust, or as to which a Notice of Redemption shall have been given and Deposit Securities shall have been deposited in trust or segregated by the Trust pursuant to Section 11.4(c) hereto and (B) any shares of APS as to which the Trust or any Affiliate (other than an Affiliate that is a Broker- Dealer) thereof shall be a Beneficial Owner, provided that shares of APS held by an Affiliate shall be deemed outstanding for purposes of calculating the APS Basic Maintenance Amount and (ii) with respect to other Preferred Shares, has the equivalent meaning.
"Parity Shares" means the APS and each other outstanding series of Preferred Shares the holders of which, together with the holders of the APS, shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to the full respective preferential amounts to which they are entitled, without preference or priority one over the other.
"Person" means and includes an individual, a partnership, a trust, an unincorporated association, a joint venture or other entity or a government or any agency or political subdivision thereof.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a Broker-Dealer that is not a Beneficial Owner of APS but that wishes to purchase such shares, or that is a Beneficial Owner that wishes to purchase additional APS.
"Potential Holder" means any Broker-Dealer or any such other Person as may be permitted by the Trust, including any Existing Holder, who may be interested in acquiring APS (or, in the case of an Existing Holder, additional APS).
"Preferred Shares" means preferred shares of beneficial interest of the Trust, and includes APS.
"Premium Call Period" has the meaning set forth under the definition of "Specific Redemption Provisions."
"Pricing Service" means Standard & Poor's/J.J. Kenny or any pricing service designated by the Board of Trustees of the Trust for purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount.
"Quarterly Valuation Date" means the last Business Day of the last month of each fiscal quarter of the Trust in each fiscal year of the Trust, commencing October 31, 2001.
"Rating Agency" means a nationally recognized statistical rating organization.
"Receivables for Municipal Obligations Sold" has the meaning set forth under the definition of Moody's Discount Factor.
"Reference Rate" means: (i) with respect to a Dividend Period or a Short Term Dividend Period having 28 or fewer days, the higher of the applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term Municipal Obligation Rate, (ii) with respect to any Short Term Dividend Period having more than 28 but fewer than 183 days, the applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term Dividend Period, the applicable U.S. Treasury Note Rate.
"Request for Special Dividend Period" has the meaning set forth in Section 11.2(c)(iii) of these By-Laws.
"Response" has the meaning set forth in Section 11.2(c)(ii) of these By- Laws.
"Retroactive Taxable Allocation" has the meaning set forth in Section 11.2(e) of these By-Laws.
"Right" has the meaning set forth in Section 11.2(e) of these By-Laws.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., or its successors.
"Securities Depository" means The Depository Trust Company and its successors and assigns or any successor securities depository selected by the Trust as securities depository for the APS that agrees to follow the procedures required to be followed by such securities depository in connection with the APS.
"Service" means the United States Internal Revenue Service.
"Series A APS" means the Auction Preferred Shares, Series A.
"Series B APS" means the Auction Preferred Shares, Series B.
"Series C APS" means the Auction Preferred Shares, Series C.
"Series D APS" means the Auction Preferred Shares, Series D.
"Series E APS" means the Auction Preferred Shares, Series E.
"7-Day Dividend Period" means a Dividend Period consisting of seven days.
"Short Term Dividend Period" means a Special Dividend Period consisting of a specified number of days, evenly divisible by seven and not fewer than fourteen nor more than 364.
"Special Dividend Period" means a Short Term Dividend Period or a Long Term Dividend Period.
"Specific Redemption Provisions" means, with respect to a Special Dividend Period either, or both of, (i) a period (a "Non-Call Period") determined by the Board of Trustees of the Trust, after consultation with the Auction Agent and the Broker-Dealers, during which the APS subject to such Dividend Period shall not be subject to redemption at the option of the Trust and (ii) a period (a "Premium Call Period"), consisting of a number of whole years and determined by the Board of Trustees of the Trust, after consultation with the Auction Agent and the Broker-Dealers, during each year of which the APS subject to such Dividend Period shall be redeemable at the Trust's option at a price per share equal to $25,000 plus accumulated but unpaid dividends plus a premium expressed as a percentage of $25,000, as determined by the Board of Trustees of the Trust after consultation with the Auction Agent and the Broker-Dealers.
"Share Books" means the books maintained by the Auction Agent setting forth at all times a current list, as determined by the Auction Agent, of Existing Holders of the APS.
"Share Register" means the register of Holders maintained on behalf of the Trust by the Auction Agent in its capacity as transfer agent and registrar for the APS.
"Subsequent Dividend Period" has the meaning set forth in Section 11.2(c)(i) of these By-Laws.
"Substitute Commercial Paper Dealers" means such substitute commercial paper dealer or dealers as the Trust may from time to time appoint or, in lieu of any thereof, their respective affiliates or successors.
"Substitute Rating Agency" means a Rating Agency selected by UBS Warburg LLC or its affiliates and successors, after consultation with the Trust, to act as the substitute Rating Agency to determine the credit ratings of the APS.
"Taxable Equivalent of the Short-Term Municipal Obligations Rate" on any date means 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the Kenny S&P 30 day High Grade Index or any successor index (the "Kenny Index"), made available for the Business Day immediately preceding such date but in any event not later than 8:30 A.M., New York City time, on such date by Kenny Information Systems Inc. or any successor thereto, based upon 30-day yield evaluations at par of 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 Information Systems
Inc. or any such successor from time to time in its discretion, which component
issuers shall include, without limitation, issuers of general obligation bonds
but shall exclude any bonds the interest on which constitutes an item of tax
preference for purposes of the federal alternative minimum tax for individuals,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
provided, however, that if the Kenny Index is not made so available by 8:30
A.M., New York City time, on such date by Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Obligation Rate
shall mean the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the most recent Kenny Index so made available for any
preceding Business Day, divided by (B) 1.00 minus the Marginal Tax Rate
(expressed as a decimal). The Trust may not utilize a successor index to the
Kenny Index unless Moody's provides the Trust with written confirmation that the
use of such successor index will not adversely affect the then-current Moody's
rating of the APS.
"Treasury Bonds" means United States Treasury Bonds or Notes.
"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of the rate on the actively traded Treasury Bill with a maturity most nearly comparable to the length of the related Dividend Period, as such rate is made available on a discount basis or otherwise by the Federal Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report for such Business Day, or (ii) if such yield as so calculated is not available, the Alternate Treasury Bill Rate on such date. For purposes of determining the "U.S. Treasury Bill Rate" the "Alternate Treasury Bill Rate" on any date means the Interest Equivalent of the yield as calculated by reference to the arithmetic average of the bid price quotations of the actively traded Treasury Bill with a maturity most nearly comparable to the length of the related Dividend Period, as determined by bid price quotations as of any time on the Business Day immediately preceding such date, obtained from at least three recognized primary U.S. Government securities dealers selected by the Auction Agent.
"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by reference to the bid price quotation of the actively traded, current coupon Treasury Note with a maturity most nearly comparable to the length of the related Dividend Period, as such bid price quotation is published on the Business Day immediately preceding such date by the Federal Reserve Bank of New York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report for such Business Day, or (ii) if such yield as so calculated is not available, the Alternate Treasury Note Rate on such date. For purposes of determining the U.S. Treasury Note Rate, the "Alternate Treasury Note Rate" on any date means the yield as calculated by reference to the arithmetic average of the bid price quotations of the actively traded, current coupon Treasury Note with a maturity most nearly comparable to the length of the related Dividend Period, as determined by the bid price quotations as of any time on the Business Day immediately preceding such date, obtained from at least three recognized primary U.S. Government securities dealers selected by the Auction Agent.
"Valuation Date" means, for purposes of determining whether the Trust is maintaining the APS Basic Maintenance Amount, each Business Day commencing with the Date of Original Issue.
"Voting Period" has the meaning set forth in Section 11.5(b) of these By- Laws.
(b) The foregoing definitions of Accountant's Confirmation, APS Basic Maintenance Amount, APS Basic Maintenance Cure Date, APS Basic Maintenance Report, Closing Transactions, Deposit Securities, Discounted Value, Forward Commitment, Independent Accountant, Market Value, Maximum Potential Gross-Up Dividend Liability, Moody's Discount Factor, Moody's Eligible Asset, Moody's Exposure Period, Moody's Hedging Transactions, Moody's Volatility Factor, Municipal Index, Treasury Bonds and Valuation Date have been determined by the Board of Trustees of the Trust in order to obtain a "aaa" rating from Moody's on the APS on their Date of Original Issue; and the Board of Trustees of the Trust shall have the authority, without shareholder approval, to amend, alter or repeal from time to time the foregoing definitions and the restrictions and guidelines set forth thereunder if Moody's or any Substitute Rating Agency advises the Trust in writing that such amendment, alteration or repeal will not adversely affect its then current rating on the APS.
(b) (i) Cash dividends on shares of each series of APS shall accumulate from the Date of Original Issue and shall be payable, when, as and if declared by the Board of Trustees, out of funds legally available therefor, commencing on the Initial Dividend Payment Date. Following the Initial Dividend Payment Date for a series of APS, dividends on that series of APS will be payable, at the option of the Trust, either (i) with respect to any 7-Day Dividend Period and any Short Term Dividend Period of 35 or fewer days, on the day next succeeding the last day thereof, or (ii) with respect to any Short Term Dividend Period of more than 35 days and with respect to any Long Term Dividend Period, monthly on the first Business Day of each calendar month during such Short Term Dividend Period or Long Term Dividend Period and on the day next succeeding the last day thereof (each such date referred to in clause (i) or (ii) being herein referred to as a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment Date is not a Business Day, then the Dividend Payment Date shall be the first Business Day next succeeding such Normal Dividend Payment Date. Although any particular Dividend Payment Date may not occur on the originally scheduled date because of the exceptions discussed above, the next succeeding Dividend
Payment Date, subject to such exceptions, will occur on the next following originally scheduled date. If for any reason a Dividend Period for a Series of APS is scheduled to begin on the same day and end on the same day as a Dividend Period for another Series of APS, then the last day of such Dividend Period for such other Series of APS shall be the second Business Day next succeeding such scheduled day unless the Trust obtains the opinion of tax counsel referred to in this paragraph. Subject to the limitation in the next sentence, if for any reason a Dividend Payment Date cannot be fixed as described above, then the Board of Trustees shall fix the Dividend Payment Date. However, Dividend Periods of any series of APS shall not be co-extensive with the Dividend Period of any other series of APS unless the Trust has received an opinion of tax counsel that having such co-extensive periods will not affect the deductibility, for federal income tax purposes, of dividends paid on the different series of APS. The Board of Trustees before authorizing a dividend may change a Dividend Payment Date if such change does not adversely affect the contract rights of the Holders of APS set forth in the Declaration of Trust or the By-Laws. The Initial Dividend Period, 7-Day Dividend Periods and Special Dividend Periods with respect to a series of APS are hereinafter sometimes referred to as "Dividend Periods." Each dividend payment date determined as provided above is hereinafter referred to as a "Dividend Payment Date."
(ii) Each dividend shall be paid to the Holders as they appear in the Stock Register as of 12:00 noon, New York City time, on the Business Day preceding the Dividend Payment Date. Dividends in arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to the Holders as they appear on the Stock Register on a date, not exceeding 15 days prior to the payment date therefor, as may be fixed by the Board of Trustees of the Trust.
(c) (i) During the period from and including the Date of Original Issue to but excluding the Initial Dividend Payment Date for a series of APS (the "Initial Dividend Period"), the Applicable Rate for such series of APS shall be the Initial Dividend Rate. Commencing on the Initial Dividend Payment Date for a series of APS, the Applicable Rate on that series for each subsequent dividend period (hereinafter referred to as a "Subsequent Dividend Period"), which Subsequent Dividend Period shall commence on and include a Dividend Payment Date and shall end on and include the calendar day prior to the next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period if there is more than one Dividend Payment Date), shall be equal to the rate per annum that results from implementation of the Auction Procedures.
For a series of APS, the Applicable Rate for such series for each Dividend Period commencing during a Non-Payment Period shall be equal to the Non-Payment Period Rate; and each Dividend Period, commencing after the first day of, and during, a Non-Payment Period shall be a 7-Day Dividend Period. Except in the case of the willful failure of the Trust to pay a dividend on a Dividend Payment Date or to redeem any shares of APS on the date set for such redemption, any amount of any dividend due on any Dividend Payment Date (if, prior to the close of business on the second Business Day preceding such Dividend Payment Date, the Trust has declared such dividend payable on such Dividend Payment Date to the Holders of such shares of APS as of 12:00 noon, New York City time, on the Business Day preceding such Dividend Payment Date) or redemption price with respect to any shares of APS not paid to such Holders when due may be paid to
such Holders in the same form of funds by 12:00 noon, New York City time, on any of the first three Business Days after such Dividend Payment Date or due date, as the case may be, provided that, such amount is accompanied by a late charge calculated for such period of non-payment at the Non-Payment Period Rate applied to the amount of such non-payment based on the actual number of days comprising such period divided by 365, and in such case such period shall not constitute a Non-Payment Period. In the case of a willful failure of the Trust to pay a dividend on a Dividend Payment Date or to redeem any shares of APS on the date set for such redemption, the preceding sentence shall not apply and the Applicable Rate for the Dividend Period commencing during the Non-Payment Period resulting from such failure shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment to a person in same-day funds on any Business Day at any time shall be considered equivalent to payment to such person in New York Clearing House (next-day) funds at the same time on the preceding Business Day, and any payment made after 12:00 noon, New York City time, on any Business Day shall be considered to have been made instead in the same form of funds and to the same person before 12:00 noon, New York City time, on the next Business Day.
(ii) The amount of cash dividends per share of any series of APS payable (if declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and each Dividend Payment Date of each Short Term Dividend Period shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which will be the number of days in such Dividend Period or part thereof that such share was outstanding and the denominator of which will be 365, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent. During any Long Term Dividend Period, the amount of cash dividends per share of a series of APS payable (if declared) on any Dividend Payment Date shall be computed by multiplying the Applicable Rate for such Dividend Period by a fraction, the numerator of which will be such number of days in such part of such Dividend Period that such share was outstanding and for which dividends are payable on such Dividend Payment Date and the denominator of which will be 360, multiplying the amount so obtained by $25,000, and rounding the amount so obtained to the nearest cent.
(iii) The Trust may, at its sole option and to the extent permitted by law, by telephonic and written notice (a "Request for Special Dividend Period") to the Auction Agent and to each Broker-Dealer, request that the next succeeding Dividend Period for a series of APS be a number of days (other than seven), evenly divisible by seven and not fewer than fourteen nor more than 364 in the case of a Short Term Dividend Period or one whole year or more but not greater than five years in the case of a Long Term Dividend Period, specified in such notice, provided that the Trust may not give a Request for Special Dividend Period for a Dividend Period of greater than 28 days (and any such request shall be null and void) unless, for any Auction occurring after the initial Auction, Sufficient Clearing Bids were made in the last occurring Auction and unless full cumulative dividends, any amounts due with respect to redemptions, and any Gross-Up Dividends payable prior to such date have been paid in full. Such Request for Special Dividend Period, in the case of a Short Term Dividend Period, shall be given on or prior to the second Business Day but not more than seven Business Days prior to an Auction Date for a series of APS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for a series of
APS. Upon receiving such Request for Special Dividend Period, the Broker-
Dealer(s) shall jointly determine the Optional Redemption Price of the APS
during such Special Dividend Period and the Specific Redemption Provisions and
shall give the Trust and the Auction Agent written notice (a "Response") of such
determination by no later than the second Business Day prior to such Auction
Date. In making such determination the Broker-Dealer(s) will consider (1)
existing short-term and long-term market rates and indices of such short-term
and long-term rates, (2) existing market supply and demand for short-term and
long-term securities, (3) existing yield curves for short-term and long-term
securities comparable to the APS, (4) industry and financial conditions which
may affect the APS, (5) the investment objective of the Trust, and (6) the
Dividend Periods and dividend rates at which current and potential beneficial
holders of the APS would remain or become beneficial holders. After providing
the Request for Special Dividend Period to the Auction Agent and each Broker-
Dealer as set forth above, the Trust may by no later than the second Business
Day prior to such Auction Date give a notice (a "Notice of Special Dividend
Period") to the Auction Agent, the Securities Depository and each Broker-Dealer
which notice will specify (i) the duration of the Special Dividend Period, (ii)
the Optional Redemption Price as specified in the related Response and (iii) the
Specific Redemption Provisions, if any, as specified in the related Response.
The Trust also shall provide a copy of such Notice of Special Dividend Period to
Moody's. The Trust shall not give a Notice of Special Dividend Period and, if
the Trust has given a Notice of Special Dividend Period, the Trust is required
to give telephonic and written notice of its revocation (a "Notice of
Revocation") to the Auction Agent, each Broker-Dealer, and the Securities
Depository on or prior to the Business Day prior to the relevant Auction Date if
(x) either the 1940 Act APS Asset Coverage is not satisfied or the Trust shall
fail to maintain Moody's Eligible Assets with an aggregate Discounted Value at
least equal to the APS Basic Maintenance Amount, on each of the two Valuation
Dates immediately preceding the Business Day prior to the relevant Auction Date
on an actual basis and on a pro forma basis giving effect to the proposed
Special Dividend Period (using as a pro forma dividend rate with respect to such
Special Dividend Period the dividend rate which the Broker-Dealers shall advise
the Trust is an approximately equal rate for securities similar to the APS with
an equal dividend period) or (y) sufficient funds for the payment of dividends
payable on the immediately succeeding Dividend Payment Date have not been
irrevocably deposited with the Auction Agent by the close of business on the
third Business Day preceding the Auction Date immediately preceding such
Dividend Payment Date. The Trust also shall provide a copy of such Notice of
Revocation to Moody's. If the Trust is prohibited from giving a Notice of
Special Dividend Period as a result of any of the factors enumerated in clause
(x) or (y) above or if the Trust gives a Notice of Revocation with respect to a
Notice of Special Dividend Period for any series of APS, the next succeeding
Dividend Period will be a 7-Day Dividend Period. In addition, in the event
Sufficient Clearing Bids are not made in an Auction, or if an Auction is not
held for any reason, such next succeeding Dividend Period will be a 7-Day
Dividend Period and the Trust may not again give a Notice of Special Dividend
Period for the APS (and any such attempted notice shall be null and void) until
Sufficient Clearing Bids have been made in an Auction with respect to a 7-Day
Dividend Period.
(d) (i) Holders shall not be entitled to any dividends, whether payable in cash, property or shares on APS, in excess of full cumulative dividends as herein provided (except for Gross-up Dividends as provided in Section 11.2(e) hereof). Except for the late charge payable pursuant to Section 11.2(c)(i)
hereof, no interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment on the shares of APS that may be in arrears.
(ii) For so long as any share of APS is Outstanding, the Trust shall not declare, pay or set apart for payment any dividend or other distribution (other than a dividend or distribution paid in shares of, or options, warrants or rights to subscribe for or purchase, Common Shares or other shares of beneficial interest, if any, ranking junior to the shares of APS as to dividends or upon liquidation) in respect of the Common Shares or any other shares of beneficial interest of the Trust ranking junior to or on a parity with the shares of APS as to dividends or upon liquidation, or call for redemption, redeem, purchase or otherwise acquire for consideration any shares of the Common Shares or any other such junior shares (except by conversion into or exchange for shares of the Trust ranking junior to the shares of APS as to dividends and upon liquidation) or any other such Parity Shares (except by conversion into or exchange for stock of the Trust ranking junior to or on a parity with the shares of APS as to dividends and upon liquidation), unless (A) immediately after such transaction, the Trust shall have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount and the Trust shall maintain the 1940 Act APS Asset Coverage, (B) full cumulative dividends on shares of APS due on or prior to the date of the transaction have been declared and paid or shall have been declared and sufficient funds for the payment thereof deposited with the Auction Agent, (C) any Gross-up Dividend required to be paid pursuant to Section 11.2(e) below on or before the date of such declaration or payment has been paid and (D) the Trust has redeemed the full number of APS required to be redeemed by any provision for mandatory redemption contained herein.
(e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii) an uncertificated right (a "Right") to receive a Gross-up Dividend (as defined below), and (iii) any additional amounts as set forth in Section 11.2(f) below. Each Right shall thereafter be independent of the share or shares of APS on which the dividend was paid. The Trust shall cause to be maintained a record of each Right received by the respective Holders. A Right may not be transferred other than by operation of law. If the Trust retroactively allocates any net capital gains or other income subject to regular federal income taxes to shares of APS solely by reason of the fact that such allocation is made as a result of the redemption of all or a portion of the outstanding shares of APS or the liquidation of the Trust (the amount of such allocation referred to herein as a "Retroactive Taxable Allocation"), the Trust will, if it has not given advance notice thereof to the Auction Agent as described in Section 11.2(f) hereof, within 90 days (and generally within 60 days) after the end of the Trust's fiscal year for which a Retroactive Taxable Allocation is made, provide notice thereof to the Auction Agent and to each holder of a Right applicable to such shares of APS (initially as nominee of The Depository Trust Company) during such fiscal year at such holder's address as the same appears or last appeared on the Stock Books of the Trust. The Trust will, within 30 days after such notice is given to the Auction Agent, pay to the Auction Agent (who will then distribute to such holders of Rights), out of funds legally available therefor, an amount equal to the aggregate Gross-up Dividends with respect to all Retroactive Taxable Allocations made to such holders during the fiscal year in question.
A "Gross-Up Dividend" means payment to a present or former Holder of shares of APS of an amount which, giving effect to the Retroactive Taxable Allocation, if any, made to such Holder with respect to the fiscal year in question, would cause such Holder's after-tax return (taking into account both the Retroactive Taxable Allocation and the Gross-up Dividend) to be equal to the after-tax return such holder would have received if there had been no Retroactive Taxable Allocation. Such Gross-up Dividend shall be calculated (i) without consideration being given to the time value of money; (ii) assuming that no holder of shares of APS is subject to the federal alternative minimum tax with respect to dividends received from the Trust; and (iii) assuming that each Retroactive Taxable Allocation would be taxable in the hands of each holder of APS at the greater of: (x) the maximum marginal regular federal individual income tax rate applicable to ordinary income or capital gains depending on the taxable character of the distribution (including any surtax); or (y) the maximum marginal regular Federal corporate income tax rate applicable to ordinary income or capital gains depending on the taxable character of the distribution (disregarding in both (x) and (y) the effect of any state or local taxes and the phase out of, or provision limiting, personal exemptions, itemized deductions, or the benefit of lower tax brackets).
(f) Except as provided below, whenever the Trust is aware that it will include any net capital gains or other income subject to regular Federal income taxes in any dividend on shares of APS, the Trust will notify the Auction Agent of the amount to be so included at least five Business Days prior to the Auction Date on which the Applicable Rate for such dividend is to be established. The Trust may also include such income in a dividend on shares of a series of APS without giving advance notice thereof if it increases the dividend by an additional amount calculated as if such income were the subject of a Retroactive Taxable Allocation and the additional amount were a Gross-up Dividend, provided that the Trust will notify the Auction Agent of the additional amounts to be included in such dividend at least five Business Days prior to the applicable Dividend Payment Date. The Trust shall not be required to pay Gross-up Dividends 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.
(g) No fractional shares of APS shall be issued.
are entitled, the Holders will not be entitled to any further participation in any distribution of assets by the Trust except for any Gross-up Dividends. A consolidation, merger or statutory share exchange of the Trust with or into any other Trust or entity or a sale, whether for cash, shares of stock, securities or properties, of all or substantially all or any part of the assets of the Trust shall not be deemed or construed to be a liquidation, dissolution or winding up of the Trust.
(i) To the extent permitted under the 1940 Act and Massachusetts law, upon giving a Notice of Redemption, the Trust at its option may redeem shares of any series of APS, in whole or in part, out of funds legally available therefor, at the Optional Redemption Price per share, on any Dividend Payment Date; provided that no share of APS may be redeemed at the option of the Trust during (A) the Initial Dividend Period with respect to a series of shares or (B) a Non-Call Period to which such share is subject. In addition, holders of APS which are redeemed shall be entitled to receive Gross-Up Dividends to the extent provided herein.
(ii) The Trust shall redeem, out of funds legally available therefor, at the Mandatory Redemption Price per share, shares of APS to the extent permitted under the 1940 Act and Massachusetts law, on a date fixed by the Board of Trustees, if the Trust fails to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount as provided in Section 11.7(a) or to satisfy the 1940 Act APS Asset Coverage as provided in Section 6 and such failure is not cured on or before the APS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as the case may be. In addition, holders of APS so redeemed shall be entitled to receive Gross-Up Dividends to the extent provided herein. The number of APS to be redeemed shall be equal to the lesser of (i) the minimum number of APS the redemption of which, if deemed to have occurred immediately prior to the opening of business on the Cure Date, together with all shares of other Preferred Shares subject to redemption or retirement, would result in the Trust having Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset Coverage, as the case may be, on such Cure Date (provided that, if there is no such minimum number of shares of APS and shares of other Preferred Shares the redemption of which would have such result, all shares of APS and shares of other Preferred Shares then Outstanding shall be redeemed), and (ii) the maximum number of shares of APS, together with all shares of other Preferred Shares subject to redemption or retirement, that can be redeemed out of funds expected to be legally available therefore on such redemption date. In determining the number of APS required to be redeemed in accordance with the foregoing, the Trust shall allocate the number required to be redeemed which would result in the Trust having Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount or satisfaction of the 1940 Act APS Asset Coverage, as the case may be, pro rata among shares of APS of all series and other Preferred Shares subject to redemption pursuant to provisions similar to those contained in this Section 11.4(a)(ii); provided that, shares of APS which may not be redeemed at the option of the Trust due to the designation of a Non-Call Period applicable to such shares (A) will be subject to mandatory redemption only to the extent that
other shares are not available to satisfy the number of shares required to be redeemed and (B) will be selected for redemption in an ascending order of outstanding number of days in the Non-Call Period (with shares with the lowest number of days to be redeemed first) and by lot in the event of shares having an equal number of days in such Non-Call Period. The Trust shall effect such redemption on a Business Day which is not later than 35 days after such Cure Date, except that if the Trust does not have funds legally available for the redemption of all of the required number of APS and other Preferred Shares which are subject to mandatory redemption or the Trust otherwise is unable to effect such redemption on or prior to 35 days after such Cure Date, the Trust shall redeem those APS which it is unable to redeem on the earliest practicable date on which it is able to effect such redemption out of funds legally available therefor.
(b) Notwithstanding any other provision of this Section 11.4, no shares of APS may be redeemed pursuant to Section 11.4(a)(i) of these By-Laws (i) unless all dividends in arrears on all remaining outstanding shares of Parity Shares shall have been or are being contemporaneously paid or declared and set apart for payment and (ii) if redemption thereof would result in the Trust's failure to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount. In the event that less than all the outstanding shares of a series of APS are to be redeemed and there is more than one Holder, the shares of that series of APS to be redeemed shall be selected by lot or such other method as the Trust shall deem fair and equitable.
(c) Whenever shares of APS are to be redeemed, the Trust, not less than 17 nor more than 30 days prior to the date fixed for redemption, shall mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each Holder of APS to be redeemed and to the Auction Agent. The Notice of Redemption shall set forth (i) the redemption date, (ii) the amount of the redemption price, (iii) the aggregate number of APS of such series to be redeemed, (iv) the place or places where APS of such series are to be surrendered for payment of the redemption price, (v) a statement that dividends on the shares to be redeemed shall cease to accumulate on such redemption date (except that holders may be entitled to Gross-up Dividends) and (vi) the provision of these By-Laws pursuant to which such shares are being redeemed. No defect in the Notice of Redemption or in the mailing or publication thereof shall affect the validity of the redemption proceedings, except as required by applicable law.
If the Notice of Redemption shall have been given as aforesaid and, concurrently or thereafter, the Trust shall have deposited in trust with the Auction Agent, or segregated in an account at the Trust's custodian bank for the benefit of the Auction Agent, Deposit Securities (with a right of substitution) having an aggregate Discounted Value equal to the redemption payment for the APS as to which such Notice of Redemption has been given with irrevocable instructions and authority to pay the redemption price to the Holders of such shares, then upon the date of such deposit or, if no such deposit is made, then upon such date fixed for redemption (unless the Trust shall default in making the redemption payment), all rights (including without limitation voting rights) of the Holders of such shares as shareholders of the Trust by reason of the ownership of such shares will cease and terminate (except their right to receive the redemption price in respect thereof and any Gross-up Dividends, but without interest), and such shares shall no longer be deemed Outstanding. The Trust shall be entitled to receive, from time to time, from the Auction Agent the
interest, if any, on such Deposit Securities deposited with it and the Holders of any shares so redeemed shall have no claim to any of such interest. In case the Holder of any shares so called for redemption shall not claim the redemption payment for his shares within one year after the date of redemption, the Auction Agent shall, upon demand, pay over to the Trust such amount remaining on deposit and the Auction Agent shall thereupon be relieved of all responsibility to the Holder of such shares called for redemption and such Holder thereafter shall look only to the Trust for the redemption payment.
(b) Right to Elect Majority of Board of Trustees. During any period in which any one or more of the conditions described below shall exist (such period being referred to herein as a "Voting Period"), the number of trustees constituting the Board of Trustees shall be automatically increased by the smallest number that, when added to the two trustees elected exclusively by the holders of shares of Preferred Shares, would constitute a majority of the Board of Trustees as so increased by such smallest number; and the holders of Preferred Shares shall be entitled, voting separately as one class (to the exclusion of the holders of all other securities and classes of shares of beneficial interest of the Trust), to elect such smallest number of additional trustees, together with the two trustees that such holders are in any event entitled to elect.
A Voting Period shall commence:
(i) if at any time accumulated dividends (whether or not earned or declared, and whether or not funds are then legally available in an amount sufficient therefor) on the outstanding APS equal to at least two full years' dividends shall be due and unpaid and sufficient cash or specified securities shall not have been deposited with the Auction Agent for the payment of such accumulated dividends; or
(ii) if at any time holders of any Preferred Shares, including the holders of APS, are entitled to elect a majority of the trustees of the Trust under the 1940 Act.
Upon the termination of a Voting Period, the voting rights described in this Section 11.5(b) shall cease, subject always, however, to the reverting of such voting rights in the Holders upon the further occurrence of any of the events described in Section 11.5(b).
(c) Right to Vote with Respect to Certain Other Matters. So long as any
shares of APS are outstanding, the Trust shall not, without the affirmative vote
of the holders of a majority of the shares of Preferred Shares Outstanding at
the time, voting separately as one class: (i) authorize, create or issue any
class or series of shares of beneficial interest ranking prior to the APS or any
other series of Preferred Shares with respect to payment of dividends or the
distribution of assets on liquidation; provided, however, that no vote is
required to authorize the issuance of another series of APS or another class of
Preferred Shares that is substantially identical in all respects to the APS, or
(ii) amend, alter or repeal the provisions of the Declaration of Trust or By-
Laws, whether by merger, consolidation or otherwise, so as to adversely affect
any of the contract rights expressly set forth in the Declaration of Trust or
By-Laws of holders of APS or any other Preferred Shares. To the extent permitted
under the 1940 Act, in the event shares of more than one series of APS are
outstanding, the Trust shall not approve any of the actions set forth in clause
(i) or (ii) which adversely affects the contract rights expressly set forth in
the Declaration of Trust or By-Laws of a Holder of a series of APS differently
than those of a Holder of any other series of APS without the affirmative vote
of the holders of at least a majority of the APS of each series adversely
affected and Outstanding at such time (each such adversely affected series
voting separately as a class). Unless a higher percentage is provided for under
the Declaration of Trust, the affirmative vote of the holders of a majority of
the outstanding shares of Preferred Shares, including APS, voting together as a
single class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act. The class vote
of holders of Preferred Shares, including APS, described above will in each case
be in addition to a separate vote of the requisite percentage of Common Shares
and Preferred Shares, including APS, voting together as a single class necessary
to authorize the action in question.
(d) Voting Procedures.
(i) As soon as practicable after the accrual of any right of the holders of
shares of Preferred Shares to elect additional trustees as described in Section
11.5(b) above, the Trust shall call a special meeting of such holders and
instruct the Auction Agent to mail a notice of such special meeting to such
holders, such meeting to be held not less than 10 nor more than 20 days after
the date of mailing of such notice. If the Trust fails to send such notice to
the Auction Agent or if the Trust does not call such a special meeting, it may
be called by any such holder on like notice. The record date for determining
the holders entitled to notice of and to vote at such special meeting shall be
the close of business on the fifth Business Day preceding the day on which such
notice is mailed. At any such special meeting and at each meeting held during a
Voting Period, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of shares of beneficial interest of
the Trust), shall be entitled to elect the number of directors prescribed in
Section 11.5(b) above. At any such meeting or adjournment thereof in the
absence of a quorum, a majority of such holders present in person or by proxy
shall have the power to adjourn the meeting without notice, other than by an
announcement at the meeting, to a date not more than 120 days after the original
record date.
(ii) For purposes of determining any rights of the Holders to vote on any matter or the number of shares required to constitute a quorum, whether such right is created by these By-Laws, by the other provisions of the Declaration of Trust, by statute or otherwise, a share of APS which is not Outstanding shall not be counted.
(iii) The terms of office of all persons who are trustees of the Trust at the time of a special meeting of Holders and holders of other Preferred Shares to elect trustees shall continue, notwithstanding the election at such meeting by the Holders and such other holders of the number of trustees that they are entitled to elect, and the persons so elected by the Holders and such other holders, together with the two incumbent trustees elected by the Holders and such other holders of Preferred Shares and the remaining incumbent trustees elected by the holders of the Common Shares and Preferred Shares, shall constitute the duly elected trustees of the Trust.
(iv) Simultaneously with the expiration of a Voting Period, the terms of office of the additional trustees elected by the Holders and holders of other Preferred Shares pursuant to Section 11.5(b) above shall terminate, the remaining trustees shall constitute the trustees of the Trust and the voting rights of the Holders and such other holders to elect additional trustees pursuant to Section 11.5(b) above shall cease, subject to the provisions of the last sentence of Section 11.5(b).
(e) Exclusive Remedy. Unless otherwise required by law, the Holders of APS shall not have any rights or preferences other than those specifically set forth herein. The Holders of APS shall have no preemptive rights or rights to cumulative voting. In the event that the Trust fails to pay any dividends on the APS, the exclusive remedy of the Holders shall be the right to vote for trustees pursuant to the provisions of this Section 11.5.
(b) On or before 5:00 p.m., New York City time, on the third Business Day after a Valuation Date on which the Trust fails to satisfy the APS Basic Maintenance Amount, the Trust shall complete and deliver to the Auction Agent and Moody's a complete APS Basic Maintenance Report as of the date of such failure, which will be deemed to have been delivered to the Auction Agent if the Auction Agent receives a copy or telecopy, telex or other electronic transcription thereof and on the same day the Trust mails to the Auction Agent for delivery on the next Business Day the complete APS Basic Maintenance Report. The Trust will deliver an APS Basic Maintenance Report to the Auction Agent and Moody's, on or before 5:00 p.m., New York City time, on the third Business Day
after a Valuation Date on which the Trust cures its failure to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount or on which the Trust fails to maintain Moody's Eligible Assets with an aggregate Discounted Value which exceeds the APS Basic Maintenance Amount by 5% or more. The Trust will also deliver an APS Basic Maintenance Report to the Auction Agent and Moody's as of each Quarterly Valuation Date on or before the third Business Day after such date. Additionally, on or before 5:00 p.m., New York City time, on the third Business Day after the first day of a Special Dividend Period, the Trust will deliver an APS Basic Maintenance Report to Moody's and the Auction Agent. The Trust shall also provide Moody's with an APS Basic Maintenance Report when specifically requested by Moody's.
(c) Within ten Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with Section 11.7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Trust
during the quarter ending on such Quarterly Valuation Date), (ii) that, in such
Report (and in such randomly selected Report), the Trust correctly determined
the assets of the Trust which constitute Moody's Eligible Assets at such
Quarterly Valuation Date in accordance with these By-Laws, (iii) that, in such
Report (and in such randomly selected Report), the Trust determined whether the
Trust had, at such Quarterly Valuation Date (and at the Valuation Date addressed
in such randomly selected Report) in accordance with these By-Laws, Moody's
Eligible Assets of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, (iv) with respect to the S&P ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that the Independent Accountant has requested that S&P verify such information
and the Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the Moody's ratings on Municipal Obligations,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such information is not
verified by Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any differences) and
(vi) with respect to the bid or mean price (or such alternative permissible
factor used in calculating the Market Value) provided by the custodian of the
Trust's assets to the Trust for purposes of valuing securities in the Trust's
portfolio, the Independent Accountant has traced the price used in such Report
to the bid or mean price listed in such Report as provided to the Trust and
verified that such information agrees (in the event such information does not
agree, the Independent Accountant will provide a listing in its letter of such
differences) (such confirmation is herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the date of delivery to the Auction Agent and Moody's of an APS Basic Maintenance Report in accordance with Section 11.7(b) above relating to any Valuation Date on which the Trust failed to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount, and relating to the APS Basic Maintenance Cure Date with respect to such failure, the Independent Accountant will provide to the Auction Agent and Moody's an Accountant's Confirmation as to such APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to subparagraph (c) or (d) of this Section 11.7 shows that an error was made in the APS Basic Maintenance Report for a particular Valuation Date for which such Accountant's Confirmation as required to be delivered, or shows that a lower aggregate Discounted Value for the aggregate of all Moody's Eligible Assets of the Trust was determined by the Independent Accountant, the calculation or determination made by such Independent Accountant shall be final and conclusive and shall be binding on the Trust, and the Trust shall accordingly amend and deliver the APS Basic Maintenance Report to the Auction Agent and promptly following receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day after the Date of Original Issue of the APS, the Trust will complete and deliver to Moody's an APS Basic Maintenance Report as of the close of business on such Date of Original Issue. Within five Business Days of such Date of Original Issue, the Independent Accountant will confirm in writing to Moody's (i) the mathematical accuracy of the calculations reflected in such Report and (ii) that the aggregate Discounted Value of Moody's Eligible Assets reflected thereon equals or exceeds the APS Basic Maintenance Amount reflected thereon. Also, on or before 5:00 p.m., New York City time, on the first Business Day after shares of Common Shares are repurchased by the Trust, the Trust will complete and deliver to Moody's an APS Basic Maintenance Report as of the close of business on such date that Common Shares are repurchased.
(i) the Trust will not engage in any Moody's Hedging Transaction based on the Municipal Index (other than transactions that terminate a futures contract or option held by the Trust by the Trust's taking the opposite position thereto ("Closing Transactions")) that would cause the Trust at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on the Municipal Index exceeding in number 10% of the average number of daily traded financial futures contracts based on the Municipal Index in the 30 days preceding the time of effecting such transaction as reported by The Wall Street Journal; or
(B) outstanding financial futures contracts based on the Municipal Index having a Market Value exceeding 50% of the Market Value of all Municipal Obligations constituting Moody's Eligible Assets owned by the Trust (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging Transaction based on Treasury Bonds (other than Closing Transactions) that would cause the Trust at the time of such transaction to own or have sold:
(A) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 20% of the aggregate Market Value of Moody's Eligible Assets owned by the Trust and rated Aa by Moody's (or, if not rated by Moody's but rated by S&P, rated AAA by S&P); or
(B) outstanding financial futures contracts based on Treasury Bonds with such contracts having an aggregate Market Value exceeding 80% of the aggregate Market Value of all Municipal Obligations constituting Moody's Eligible Assets owned by the Trust (other than Moody's Eligible Assets already subject to a Moody's Hedging Transaction) and rated Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A or AA by S&P).
(For purposes of the foregoing clauses (i) and (ii), the Trust shall be deemed to own the number of financial futures contracts that underlie any outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any outstanding financial futures contract based on the Municipal Index if the amount of open interest in the Municipal Index as reported by The Wall Street Journal is less than 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any outstanding financial futures contract by no later than the fifth Business Day of the month in which such contract expires and will engage in a Closing Transaction to close out any outstanding option on a financial futures contract by no later than the first Business Day of the month in which such option expires;
(v) the Trust will engage in Moody's Hedging Transactions only with respect to financial futures contracts or options thereon having the next settlement date or the settlement date immediately thereafter;
(vi) the Trust will not engage in options and futures transactions for leveraging or speculative purposes and will not write any call options or sell any financial futures contracts for the purpose of hedging the anticipated purchase of an asset prior to completion of such purchase; and
(vii) the Trust will not enter into an option or futures transaction unless, after giving effect thereto, the Trust would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount.
(b) For purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the Trust is obligated to deliver or receive pursuant to an outstanding futures contract or option shall be as follows:
(i) assets subject to call options written by the Trust that are either exchange-traded and "readily reversible" or that expire within 49 days after the date as of which such valuation is made shall be valued at the lesser of (A) Discounted Value and (B) the exercise price of the call option written by the Trust;
(ii) assets subject to call options written by the Trust not meeting the requirements of clause (i) of this sentence shall have no value;
(iii) assets subject to put options written by the Trust shall be valued at the lesser of (A) the exercise price and (B) the Discounted Value of the assets subject to the option;
(iv) futures contracts shall be valued at the lesser of (A) settlement price and (B) the Discounted Value of the assets subject to the futures contract, provided that, if a contract matures within 49 days after the date as of which such valuation is made, where the Trust is the seller the contract may be valued at the settlement price and where the Trust is the buyer the contract may be valued at the Discounted Value of the assets subject to the futures contract; and
(v) where delivery may be made to the Trust with any security of a class of securities, the Trust shall assume that it will take delivery of the security with the lowest Discounted Value.
(c) For purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the following amounts shall be subtracted from the aggregate Discounted Value of the Moody's Eligible Assets held by the Trust to the extent the relevant asset is a Moody's Eligible Asset:
(i) 10% of the exercise price of a written call option;
(ii) the exercise price of any written put option;
(iii) where the Trust is the seller under a financial futures contract, 10% of the settlement price of the financial futures contract;
(iv) where the Trust is the purchaser under a financial futures contract, any amounts payable by the Trust under such financial futures contract;
(v) the settlement price of the underlying financial futures contract if the Trust writes put options on a financial futures contract; and
(vi) 105% of the Market Value of the underlying financial futures contracts if the Trust writes call options on a financial futures contract and does not own the underlying contract.
(d) For so long as any APS are rated by Moody's, the Trust will not enter into any "Forward Commitment," herein defined as any contract to purchase securities for a fixed price at a future date beyond customary settlement time (other than such contracts that constitute Moody's Hedging Transactions), except that the Trust may enter into Forward Commitments subject to the following limitations:
(i) for each Forward Commitment, the Trust will maintain with its custodian (A) cash, cash equivalents or short-term, fixed-income securities rated P-1, MIG-1 or VMIG-1 by Moody's or A-1 by S&P and maturing in one year or
less with a fair market value that equals or exceeds the amount by which the Trust's obligations under any Forward Commitments to which it is from time to time a party exceed obligations to the Trust arising from securities sales by the Trust that are scheduled to settle at a future date, or (B) long-term, fixed-income securities with a then current market value that equals or exceeds the amount by which the Trust's obligations under any Forward Commitments to which it is from time to time a party exceed obligations to the Trust arising from securities sales by the Trust that are scheduled to settle on a future date, or (C) a combination of assets described in (A) and (B) above that in the aggregate equals or exceeds the amount by which the Trust's obligations under any Forward Commitments to which it is from time to time a party exceed obligations to the Trust arising from securities sales by the Trust that are scheduled to settle on a future date; and
(ii) the Trust will not enter into a Forward Commitment unless, after giving effect thereto, the Trust would continue to have Moody's Eligible Assets with an aggregate Discounted Value equal to or greater than the APS Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance Amount, the Discounted Value of all Forward Commitments to which the Trust is a party and of all securities deliverable to the Trust pursuant to such Forward Commitments shall be zero.
(e) For so long as APS are rated by Moody's, the Trust, unless it has received written confirmation from Moody's that such action would not impair the ratings then assigned to the APS by Moody's, will not:
(i) borrow money except for the purpose of clearing transactions in portfolio securities (which borrowings under any circumstances shall be limited to an amount equal to 5% of the Market Value of the Trust's assets at the time of such borrowings and which borrowings shall be repaid within 60 days and not be extended or renewed and shall not cause the aggregate Discounted Value of Moody's Eligible Assets to be less than the APS Basic Maintenance Amount);
(ii) engage in short sales of securities;
(iii) lend any securities;
(iv) issue any class or series of stock ranking prior to or on a parity with the APS with respect to the payment of dividends or the distribution of assets upon dissolution, liquidation or winding up of the Trust;
(v) merge or consolidate into or with any other corporation or entity; and
(vi) change the Trust's Pricing Service.
(i) "APS" means the shares of APS being auctioned pursuant to this Section 11.10.
(ii) "Auction Date" means the first Business Day preceding the first day of a Dividend Period.
(iii)"Available APS" has the meaning specified in Section 11.10(d)(i) below.
(iv) "Bid" has the meaning specified in Section 11.10(b)(i) below.
(v) "Bidder" has the meaning specified in Section 11.10(b)(i) below.
(vi) "Hold Order" has the meaning specified in Section 11.10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will be the Applicable Percentage of the Reference Rate. The Auction Agent will round each applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent per annum, with any such number ending in five ten-thousandths of one percent being rounded upwards to the nearest one-thousandth (0.001) of one percent. The Auction Agent will not round the applicable Reference Rate as part of its calculation of the Maximum Applicable Rate. The Applicable Percentage will be determined based on (i) the credit rating assigned on such date to such shares by Moody's (or, if Moody's shall not make such rating available, the equivalent of such rating by a Substitute Rating Agency) and (ii) whether the Trust has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend that net capital gains or other taxable income will be included in such dividend on shares of APS as follows:
Percentage of Percentage of
Reference Rate- Reference Rate-
Moody's Credit Ratings on APS No Notification Notification
------------------------------- ----------------- -----------------
aa3 or higher 110% 150%
a 125% 160%
baa 150% 250%
Below baa 200% 275%
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The Trust shall take all reasonable action necessary to enable Moody's to provide a rating for each series of APS. If Moody's shall not make such a rating available, UBS Warburg LLC or its affiliates and successors, after consultation with the Trust, shall select another Rating Agency to act as a Substitute Rating Agency.
(viii) "Order" has the meaning specified in Section 11.10(b)(i) below.
(ix) "Sell Order" has the meaning specified in Section 11.10(b)(i) below.
(x) "Submission Deadline" means 1:00 P.M., New York City time, on any Auction Date or such other time on any Auction Date as may be specified by the Auction Agent from time to time as the time by which each Broker-Dealer must submit to the Auction Agent in writing all Orders obtained by it for the Auction to be conducted on such Auction Date.
(xi) "Submitted Bid" has the meaning specified in Section 11.10(d)(i) below.
(xii) "Submitted Hold Order" has the meaning specified in Section 11.10(d)(i) below.
(xiii) "Submitted Order" has the meaning specified in Section 11.10(d)(i) below.
(xiv) "Submitted Sell Order" has the meaning specified in Section 11.10(d)(i) below.
(xv) "Sufficient Clearing Bids" has the meaning specified in Section 11.10(d)(i) below.
(xvi) "Winning Bid Rate" has the meaning specified in Section 11.10(d)(i) below.
(b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and Potential Holders.
(i) Unless otherwise permitted by the Trust, Beneficial Owners and Potential Beneficial Owners may only participate in Auctions through their Broker-Dealers. Broker-Dealers will submit the Orders of their respective customers who are Beneficial Owners and Potential Beneficial Owners to the Auction Agent, designating themselves as Existing Holders in respect of shares subject to Orders submitted or deemed submitted to them by Beneficial Owners and as Potential Holders in respect of shares subject to Orders submitted to them by Potential Beneficial Owners. A Broker-Dealer may also hold shares of APS in its own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore participate in an Auction as an Existing Holder or Potential Holder on behalf of both itself and its customers. On or prior to the Submission Deadline on each Auction Date:
A. each Beneficial Owner may submit to its Broker-Dealer information as to:
(1) the number of Outstanding shares, if any, of APS held by such Beneficial Owner which such Beneficial Owner desires to continue to hold without regard to the Applicable Rate for the next succeeding Dividend Period for such shares;
(2) the number of Outstanding shares, if any, of APS held by such Beneficial Owner which such Beneficial Owner desires to continue to hold, provided that the Applicable Rate for the next succeeding Dividend Period for such shares shall not be less than the rate per annum specified by such Beneficial Owner; and/or
(3) the number of Outstanding shares, if any, of APS held by such Beneficial Owner which such Beneficial Owner offers to sell without regard to the Applicable Rate for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial Owners that shall be maintained in good faith for the purpose of conducting a competitive Auction, shall contact Potential Beneficial Owners, including Persons that are not Beneficial Owners, on such list to determine the number of Outstanding shares, if any, of APS which each such Potential Beneficial Owner offers to purchase, provided that the Applicable Rate for the next succeeding Dividend Period shall not be less than the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or Potential Beneficial Owner to a Broker-Dealer, or the communication by a Broker- Dealer acting for its own account to the Auction Agent, of information referred to in clause (A) or (B) of this Section 11.10(b)(i) is hereinafter referred to as an "Order" and each Beneficial Owner and each Potential Beneficial Owner placing an Order, including a Broker-Dealer acting in such capacity for its own account, is hereinafter referred to as a "Bidder"; an Order containing the information referred to in clause (A)(1) of this Section 11.10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the information referred to in clause (A)(2) or (B) of this Section 11.10(b)(i) is hereinafter referred to as a "Bid"; and an Order containing the information referred to in clause (A)(3) of this Section 11.10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder or a Potential Holder only to represent the interests of a Beneficial Owner or Potential Beneficial Owner, whether it be its customers or itself, all discussion herein relating to the consequences of an Auction for Existing Holders and Potential Holders also applies to the underlying beneficial ownership interests represented.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding shares of APS specified in such Bid if the Applicable Rate determined on such Auction Date shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(i)(D) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein; or
(3) a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(ii)(C) if such specified rate per annum shall be higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an irrevocable offer to sell:
(1) the number of Outstanding shares of APS specified in such Sell Order; or
(2) such number or a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable offer to purchase:
(1) the number of Outstanding shares of APS specified in such Bid if the Applicable Rate determined on such Auction Date shall be higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of Outstanding shares of APS to be determined as set forth in Section 11.10(e)(i)(E) if the Applicable Rate determined on such Auction Date shall be equal to the rate per annum specified therein.
(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through the Auction Agent's Auction Processing System to the Auction Agent prior to the Submission Deadline on each Auction Date all Orders obtained by such Broker-Dealer, designating itself (unless otherwise permitted by the Trust) as an Existing Holder in respect of shares subject to Orders submitted or deemed submitted to it by Beneficial Owners and as a Potential Holder in respect of shares subject to Orders submitted to it by Potential Beneficial Owners, and specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the Broker- Dealer unless otherwise permitted by the Trust);
(B) the aggregate number of Outstanding shares of APS that are the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of Outstanding shares, if any, of APS subject to any Hold Order placed by such Existing Holder;
(2) the number of Outstanding shares, if any, of APS subject to any Bid placed by such Existing Holder and the rate per annum specified in such Bid; and
(3) the number of Outstanding shares, if any, of APS subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than three figures to the right of the decimal point, the Auction Agent shall round such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the Outstanding shares of APS held by an Existing Holder are not submitted to the Auction Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of an Auction relating to a Special Dividend Period of 91 days or less) or a Sell
Order (in the case of an Auction relating to a Special Dividend Period of longer than 91 days) to have been submitted on behalf of such Existing Holder covering the number of Outstanding shares of APS held by such Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in the aggregate more than the number of Outstanding shares of APS held by such Existing Holder are submitted to the Auction Agent, such Order shall be considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder shall be considered valid up to and including the number of Outstanding shares of APS held by such Existing Holder; provided that if more than one Hold Order is submitted on behalf of such Existing Holder and the number of shares of APS subject to such Hold Orders exceeds the number of Outstanding shares of APS held by such Existing Holder, the number of shares of APS subject to each of such Hold Orders shall be reduced pro rata so that such Hold Orders, in the aggregate, will cover exactly the number of Outstanding shares of APS held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be considered valid, in the ascending order of their respective rates per annum if more than one Bid is submitted on behalf of such Existing Holder, up to and including the excess of the number of Outstanding shares of APS held by such Existing Holder over the number of shares of APS subject to any Hold Order referred to in Section 11.10(c)(iv)(A) above (and if more than one Bid submitted on behalf of such Existing Holder specifies the same rate per annum and together they cover more than the remaining number of shares that can be the subject of valid Bids after application of Section 11.10(c)(iv)(A) above and of the foregoing portion of this Section 11.10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per annum, the number of shares subject to each of such Bids shall be reduced pro rata so that such Bids, in the aggregate, cover exactly such remaining number of shares); and the number of shares, if any, subject to Bids not valid under this Section 11.10(c)(iv)(B) shall be treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and including the excess of the number of Outstanding shares of APS held by such Existing Holder over the number of shares of APS subject to Hold Orders referred to in Section 11.10(c)(iv)(A) and Bids referred to in Section 11.10(c)(iv)(B); provided that if more than one Sell Order is submitted on behalf of any Existing Holder and the number of shares of APS subject to such Sell Orders is greater than such excess, the number of shares of APS subject to each of such Sell Orders shall be reduced pro rata so that such Sell Orders, in the aggregate, cover exactly the number of shares of APS equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential Holder, each Bid submitted shall be a separate Bid with the rate per annum and number of shares of APS therein specified.
(vi) Any Order submitted by a Beneficial Owner as 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.
(vii) The Trust shall not be responsible for a Broker-Dealer's failure to act in accordance with the instructions of Beneficial Owners or Potential Beneficial Owners or failure to comply with the provisions of this Section 11.10.
(d) Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date, the Auction Agent shall assemble all Orders submitted or deemed submitted to it by the Broker-Dealers (each such Order as submitted or deemed submitted by a Broker-Dealer being hereinafter referred to individually as a "Submitted Hold Order", a "Submitted Bid" or a "Submitted Sell Order", as the case may be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of Outstanding shares of APS over the number of Outstanding shares of APS that are the subject of Submitted Hold Orders (such excess being hereinafter referred to as the "Available APS");
(B) from the Submitted Orders whether the number of Outstanding shares of APS that are the subject of Submitted Bids by Potential Holders specifying one or more rates per annum equal to or lower than the Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of Outstanding shares of APS that are the subject of Submitted Bids by Existing Holders specifying one or more rates per annum higher than the Maximum Applicable Rate, and
(2) the number of Outstanding shares of APS that are subject to Submitted Sell Orders (if such excess or such equality exists (other than because the number of Outstanding shares of APS in clause (1) above and this clause (2) are each zero because all of the Outstanding shares of APS are the subject of Submitted Hold Orders), such Submitted Bids by Potential Holders being hereinafter referred to collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the Winning Bid Rate and all other Submitted Bids from Existing Holders specifying lower rates per annum were rejected, thus entitling such Existing Holders to continue to hold the shares of APS that are the subject of such Submitted Bids, and
(2) each Submitted Bid from Potential Holders specifying the Winning Bid Rate and all other Submitted Bids from Potential Holders specifying lower rates per annum were accepted, thus entitling the Potential Holders to purchase the shares of APS that are the subject of such Submitted Bids, would result in the
number of shares subject to all Submitted Bids specifying the Winning Bid Rate or a lower rate per annum being at least equal to the Available APS.
(ii) Promptly after the Auction Agent has made the determinations pursuant to Section 11.10(d)(i), the Auction Agent shall advise the Trust of the Maximum Applicable Rate and, based on such determinations, the Applicable Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because all of the Outstanding shares of APS are the subject of Submitted Hold Orders), that the Applicable Rate for the next succeeding Dividend Period shall be equal to the Maximum Applicable Rate; or
(C) if all of the Outstanding shares of APS are the subject of Submitted Hold Orders, that the Dividend Period next succeeding the Auction shall automatically be the same length as the immediately preceding Dividend Period and the Applicable Rate for the next succeeding Dividend Period shall be equal to 40% of the Reference Rate (or 60% of such rate if the Trust has provided notification to the Auction Agent prior to the Auction establishing the Applicable Rate for any dividend pursuant to Section 11.2(f) hereof that net capital gains or other taxable income will be included in such dividend on shares of APS) on the date of the Auction.
(e) Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares. Based on the determinations made pursuant to Section 11.10(d)(i), the Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the provisions of Section 11.10(e)(iii) and Section 11.10(e)(iv), Submitted Bids and Submitted Sell Orders shall be accepted or rejected in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be accepted and the Submitted Bid of each of the Existing Holders specifying any rate per annum that is higher than the Winning Bid Rate shall be accepted, thus requiring each such Existing Holder to sell the Outstanding shares of APS that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding shares of APS that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying any rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying a rate per annum that is equal to the Winning Bid Rate shall be rejected, thus entitling each such Existing Holder to continue to hold the Outstanding shares of APS that are the subject of such Submitted Bid, unless the number of Outstanding shares of APS subject to all such Submitted Bids shall be greater than the number of Outstanding shares of APS ("Remaining Shares") equal to the excess of the Available APS over the number of Outstanding shares of APS subject to Submitted Bids described in Section 11.10(e)(i)(B) and Section 11.10(e)(i)(C), in which event the Submitted Bids of each such Existing Holder shall be accepted, and each such Existing Holder shall be required to sell Outstanding shares of APS, but only in an amount equal to the difference between (1) the number of Outstanding shares of APS then held by such Existing Holder subject to such Submitted Bid and (2) the number of shares of APS obtained by multiplying (x) the number of Remaining Shares by (y) a fraction the numerator of which shall be the number of Outstanding shares of APS held by such Existing Holder subject to such Submitted Bid and the denominator of which shall be the sum of the number of Outstanding shares of APS subject to such Submitted Bids made by all such Existing Holders that specified a rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be accepted but only in an
amount equal to the number of Outstanding shares of APS obtained by multiplying
(x) the difference between the Available APS and the number of Outstanding
shares of APS subject to Submitted Bids described in Section 11.10(e)(i)(B),
Section 11.10(e)(i)(C) and Section 11.10(e)(i)(D) by (y) a fraction the
numerator of which shall be the number of Outstanding shares of APS subject to
such Submitted Bid and the denominator of which shall be the sum of the number
of Outstanding shares of APS subject to such Submitted Bids made by all such
Potential Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than because all of the Outstanding shares of APS are subject to Submitted Hold Orders), subject to the provisions of Section 11.10(e)(iii), Submitted Orders shall be accepted or rejected as follows in the following order of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be rejected, thus entitling such Existing Holder to continue to hold the Outstanding shares of APS that are the subject of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying any rate per annum that is equal to or lower than the Maximum Applicable Rate shall be accepted, thus requiring such Potential Holder to purchase the Outstanding shares of APS that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any rate per annum that is higher than the Maximum Applicable Rate shall be accepted and the Submitted Sell Orders of each Existing Holder shall be accepted, in both cases only in an amount equal to the difference between (1) the number of Outstanding
shares of APS then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of shares of APS obtained by multiplying
(x) the difference between the Available APS and the aggregate number of
Outstanding shares of APS subject to Submitted Bids described in Section
11.10(e)(ii)(A) and Section 11.10(e)(ii)(B) by (y) a fraction the numerator of
which shall be the number of Outstanding shares of APS held by such Existing
Holder subject to such Submitted Bid or Submitted Sell Order and the denominator
of which shall be the number of Outstanding shares of APS subject to all such
Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Section 11.10(e), any Existing Holder would be entitled or required to sell, or any Potential Holder would be entitled or required to purchase, a fraction of a share of APS on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, round up or down the number of shares of APS to be purchased or sold by any Existing Holder or Potential Holder on such Auction Date so that each Outstanding share of APS purchased or sold by each Existing Holder or Potential Holder on such Auction Date shall be a whole share of APS.
(iv) If, as a result of the procedures described in Section 11.10(e), any Potential Holder would be entitled or required to purchase less than a whole share of APS on any Auction Date, the Auction Agent shall, in such manner as in its sole discretion it shall determine, allocate shares of APS for purchase among Potential Holders so that only whole shares of APS are purchased on such Auction Date by any Potential Holder, even if such allocation results in one or more of such Potential Holders not purchasing any shares of APS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders on behalf of Existing Holders or Potential Holders, the aggregate number of Outstanding shares of APS to be purchased and the aggregate number of the Outstanding shares of APS to be sold by such Potential Holders and Existing Holders and, to the extent that such aggregate number of Outstanding shares to be purchased and such aggregate number of Outstanding shares to be sold differ, the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers acting for one or more purchasers such Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or more sellers such Broker-Dealer shall receive, as the case may be, Outstanding shares of APS.
(f) Miscellaneous.
(i) The Trust may interpret the provisions of this Section 11.10 to resolve any inconsistency or ambiguity, remedy any formal defect or make any other change or modification that does not substantially adversely affect the rights of Beneficial Owners of APS.
(ii) A Beneficial Owner or an Existing Holder (A) may sell, transfer or otherwise dispose of shares of APS only pursuant to a Bid or Sell Order in accordance with the procedures described in this Section 11.10 or to or through a Broker-Dealer or to such other persons as may be permitted by the Fund, provided that in the case of all transfers other than pursuant to Auctions such
Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of such transfer and (B) except as otherwise required by law, shall have the ownership of the shares of APS held by it maintained in book entry form by the Securities Depository in the account of its Agent Member, which in turn will maintain records of such Beneficial Owner's beneficial ownership. The Trust may not submit an Order in any Auction.
(iii) All of the Outstanding shares of APS of a series shall be registered in the name of the nominee of the Securities Depository unless otherwise required by law or unless there is no Securities Depository. If there is no Securities Depository, at the Trust's option and upon its receipt of such documents as it deems appropriate, any shares of APS may be registered in the Stock Register in the name of the Beneficial Owner thereof and such Beneficial Owner thereupon will be entitled to receive certificates therefor and required to deliver certificates therefor upon transfer or exchange thereof.
(b) If the Applicable Rate applicable to all shares of APS of a series shall be the Non-Payment Period Rate or there is no Securities Depository, the Trust may at its option issue one or more new certificates with respect to such shares (without the legend referred to in Section 11.11(a)) registered in the names of the Beneficial Owners or their nominees and rescind the stop-transfer instructions referred to in Section 11.11(a) with respect to such shares.
ARTICLE 12
AMENDMENT TO THE BYLAWS
a series of APS (and terms relating thereto) to the series and shares of APS described herein. Each such additional series and all such additional APS shall be governed by the terms of Article 11.
Exhibit d.4
AUCTION PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES A
NO PAR VALUE
$25,000 LIQUIDATION PREFERENCE PER SHARE
THIS CERTIFICATE IS TRANSFERABLE CUSIP 72200R 20 6
IN BOSTON OR IN NEW YORK CITY SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
PIMCO MUNICIPAL INCOME FUND
SHARE CERTIFICATE
.
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This certifies that Cede & Co. is the owner of [__________ (_____)] fully paid and non-assessable Auction Preferred Share(s) of Beneficial Interest, Series A, No Par Value, $25,000 Liquidation Preference Per Share, of PIMCO Municipal Income Fund, the said shares being issued, received and held under and subject to the terms and provisions of the Agreement and Declaration of Trust dated as of May 9, 2001, establishing PIMCO Municipal Income Fund, and all amendments and restatements thereto, copies of which are on file with the Secretary of State of The Commonwealth of Massachusetts, and to the terms and provisions of the Amended and Restated Bylaws of PIMCO Municipal Income Fund, copies of which are on file with the Secretary of the Fund. The said owner by accepting this certificate agrees to and is bound by all of the said terms and provisions. The shares represented hereby are transferable in writing by the owner thereof in person or by attorney upon surrender of this certificate to the Trustees properly endorsed for transfer. This certificate is executed on behalf of the Trustees of the Fund as Trustees and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Fund and the facsimile signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Bankers Trust Company
(New York, New York)
Transfer Agent and Registrar
BY:
Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations. Abbreviations in addition to
those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
------------ ----------------------------------------- ---------------------------- ---------------------------
JT TEN As joint tenants, with rights of TEN IN COM As tenants in common
survivorship and not as tenants in TEN BY ENT As tenants by the entireties
common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors Act
Abbreviation Equivalent Abbreviation Equivalent
------------ ----------------------------------------- ---------------------------- ---------------------------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s) for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & testament
FBO For the benefit of
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Additional abbreviations may also be used though not in the above list.
For value received, ____________________ hereby sell, assign and transfer
(I/We)
unto:
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_________________ ___________________________________________________________
Please Print or Typewrite Name and Address (including postal
______________________
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Zip Code of Assignee)
________________________ shares represented by this Certificate, and do hereby irrevocably constitute and appoint _____________________________________ Attorney, to transfer such beneficial interest on the books of the Fund named therein with full power of substitution in the premises.
Dated _________________, _______
Signature(s)_______________________________________________
Signature Guaranteed By (The signature of this assignment must
correspond exactly with the name
as written upon the face of this Certificate in
every particular, without alteration or enlargement
or any change whatsoever. If more than one owner,
all must sign.)
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IMPORTANT NOTICE
When you sign your name to the Transfer Form without filling in the name of your "Assignee" this certificate becomes fully negotiable, similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the unsigned certificate and the signed "stock power" in separate envelopes. For added protection, use registered mail for a certificate.
This certificate is issued subject to the provisions restricting transfers of the Auction Preferred Shares of Beneficial Interest, Series A, contained in the Amended and Restated Bylaws of PIMCO Municipal Income Fund.
AUCTION PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES B
NO PAR VALUE
$25,000 LIQUIDATION PREFERENCE PER SHARE
THIS CERTIFICATE IS TRANSFERABLE CUSIP 72200R 30 5
IN BOSTON OR IN NEW YORK CITY SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
PIMCO MUNICIPAL INCOME FUND
SHARE CERTIFICATE
.
|
This certifies that Cede & Co. is the owner of [__________ (_____)] fully paid and non-assessable Auction Preferred Share(s) of Beneficial Interest, Series B, No Par Value, $25,000 Liquidation Preference Per Share, of PIMCO Municipal Income Fund, the said shares being issued, received and held under and subject to the terms and provisions of the Agreement and Declaration of Trust dated as of May 9, 2001, establishing PIMCO Municipal Income Fund, and all amendments and restatements thereto, copies of which are on file with the Secretary of State of The Commonwealth of Massachusetts, and to the terms and provisions of the Amended and Restated Bylaws of PIMCO Municipal Income Fund, copies of which are on file with the Secretary of the Fund. The said owner by accepting this certificate agrees to and is bound by all of the said terms and provisions. The shares represented hereby are transferable in writing by the owner thereof in person or by attorney upon surrender of this certificate to the Trustees properly endorsed for transfer. This certificate is executed on behalf of the Trustees of the Fund as Trustees and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Fund and the facsimile signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Bankers Trust Company
(New York, New York)
Transfer Agent and Registrar
BY:
Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations. Abbreviations in addition to
those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
------------ ----------------------------------------- ---------------------------- ---------------------------
JT TEN As joint tenants, with rights of TEN IN COM As tenants in common
survivorship and not as tenants in TEN BY ENT As tenants by the entireties
common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors Act
Abbreviation Equivalent Abbreviation Equivalent
------------ ----------------------------------------- ---------------------------- ---------------------------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s) for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & testament
FBO For the benefit of
|
Additional abbreviations may also be used though not in the above list.
For value received, ____________________ hereby sell, assign and transfer
(I/We)
unto:
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_________________ ___________________________________________________________
Please Print or Typewrite Name and Address (including postal
______________________
|
Zip Code of Assignee)
________________________ shares represented by this Certificate, and do hereby irrevocably constitute and appoint _____________________________________ Attorney, to transfer such beneficial interest on the books of the Fund named therein with full power of substitution in the premises.
Dated _________________, _______
Signature(s)_______________________________________________
Signature Guaranteed By (The signature of this assignment must
correspond exactly with the name
as written upon the face of this Certificate in
every particular, without alteration or enlargement
or any change whatsoever. If more than one owner,
all must sign.)
|
IMPORTANT NOTICE
When you sign your name to the Transfer Form without filling in the name of your "Assignee" this certificate becomes fully negotiable, similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the unsigned certificate and the signed "stock power" in separate envelopes. For added protection, use registered mail for a certificate.
This certificate is issued subject to the provisions restricting transfers of the Auction Preferred Shares of Beneficial Interest, Series B, contained in the Amended and Restated Bylaws of PIMCO Municipal Income Fund.
AUCTION PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES C
NO PAR VALUE
$25,000 LIQUIDATION PREFERENCE PER SHARE
THIS CERTIFICATE IS TRANSFERABLE CUSIP 72200R 40 4
IN BOSTON OR IN NEW YORK CITY SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
PIMCO MUNICIPAL INCOME FUND
SHARE CERTIFICATE
|
This certifies that Cede & Co. is the owner of *ONE THOUSAND SIX HUNDRED* (1,600) fully paid and non-assessable Auction Preferred Share(s) of Beneficial Interest, Series C, No Par Value, $25,000 Liquidation Preference Per Share, of PIMCO Municipal Income Fund, the said shares being issued, received and held under and subject to the terms and provisions of the Agreement and Declaration of Trust dated as of May 9, 2001, establishing PIMCO Municipal Income Fund, and all amendments and restatements thereto, copies of which are on file with the Secretary of State of The Commonwealth of Massachusetts, and to the terms and provisions of the Amended and Restated Bylaws of PIMCO Municipal Income Fund, copies of which are on file with the Secretary of the Fund. The said owner by accepting this certificate agrees to and is bound by all of the said terms and provisions. The shares represented hereby are transferable in writing by the owner thereof in person or by attorney upon surrender of this certificate to the Trustees properly endorsed for transfer. This certificate is executed on behalf of the Trustees of the Fund as Trustees and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the seal of the Fund and the signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Bankers Trust Company
(New York, New York)
Transfer Agent and Registrar
BY:
******************************************************************************** * Unless this certificate is presented by an authorized * * representative of The Depository Trust Company, a New York corporation * * ("DTC"), to Issuer or its agent for registration of transfer, exchange, * * or payment, and any certificate issued is registered in the name of * * Cede & Co. or in such other name as is requested by an authorized * * representative of DTC (and any payment is made to Cede & Co. or to such * * other entity as is requested by an authorized representative of DTC), * * ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR * * TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede * * & Co., has an interest herein. * ********************************************************************************
******************************************************************************** * This certificate is issued subject to the provisions restricting * * transfers of the Auction Preferred Shares of Beneficial Interest, * * Series C, contained in the Amended and Restated Bylaws of PIMCO * * Municipal Income Fund. * ********************************************************************************
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations. Abbreviations in addition to
those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
--------------------------- ----------------------------------------- ------------------------ ---------------------------
JT TEN As joint tenants, with rights of TEN IN COM As tenants in common
survivorship and not as tenants in TEN BY ENT As tenants by the entireties
common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors Act
Abbreviation Equivalent Abbreviation Equivalent
--------------------------- ----------------------------------------- ------------------------ ---------------------------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s) for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & testament
FBO For the benefit of
|
Additional abbreviations may also be used though not in the above list.
For value received, ____________________ hereby sell, assign and transfer
(I/We)
unto:
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
---------------------- --------------------------------------------------------
Please Print or Typewrite Name and Address
(including postal Zip Code of Assignee)
|
________________________ shares represented by this Certificate, and do hereby irrevocably constitute and appoint _____________________________________ Attorney, to transfer such beneficial interest on the books of the Fund named therein with full power of substitution in the premises.
Dated _________________, _______
Signature(s) ___________________________________________________
Signature Guaranteed By (The signature of this assignment must correspond
exactly with the name as written upon the face of
this Certificate in every particular, without
alteration or enlargement or any change whatsoever.
If more than one owner, all must sign.)
_____________________________________________
|
(Signature must be guaranteed by a commercial bank or trust company or member firm of any national stock exchange.)
IMPORTANT NOTICE
When you sign your name to the Transfer Form without filling in the name of your "Assignee" this certificate becomes fully negotiable, similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the unsigned certificate and the signed "stock power" in separate envelopes. For added protection, use registered mail for a certificate.
This certificate is issued subject to the provisions restricting transfers of the Auction Preferred Shares of Beneficial Interest Series C, contained in the Amended and Restated Bylaws of PIMCO Municipal Income Fund.
AUCTION PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES D
NO PAR VALUE
$25,000 LIQUIDATION PREFERENCE PER SHARE
THIS CERTIFICATE IS TRANSFERABLE CUSIP 72200R 50 3
IN BOSTON OR IN NEW YORK CITY SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
PIMCO MUNICIPAL INCOME FUND
SHARE CERTIFICATE
|
This certifies that Cede & Co. is the owner of *ONE THOUSAND SIX HUNDRED* (1,600) fully paid and non-assessable Auction Preferred Share(s) of Beneficial Interest, Series D, No Par Value, $25,000 Liquidation Preference Per Share, of PIMCO Municipal Income Fund, the said shares being issued, received and held under and subject to the terms and provisions of the Agreement and Declaration of Trust dated as of May 9, 2001, establishing PIMCO Municipal Income Fund, and all amendments and restatements thereto, copies of which are on file with the Secretary of State of The Commonwealth of Massachusetts, and to the terms and provisions of the Amended and Restated Bylaws of PIMCO Municipal Income Fund, copies of which are on file with the Secretary of the Fund. The said owner by accepting this certificate agrees to and is bound by all of the said terms and provisions. The shares represented hereby are transferable in writing by the owner thereof in person or by attorney upon surrender of this certificate to the Trustees properly endorsed for transfer. This certificate is executed on behalf of the Trustees of the Fund as Trustees and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the seal of the Fund and the signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Bankers Trust Company
(New York, New York)
Transfer Agent and Registrar
BY:
Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations. Abbreviations in addition to
those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
-------------- ------------------------------------ ---------------------------- ---------------------------
JT TEN As joint tenants, with rights of TEN IN COM As tenants in common
survivorship and not as tenants in TEN BY ENT As tenants by the entireties
common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors Act
Abbreviation Equivalent Abbreviation Equivalent
-------------- ------------------------------------ ---------------------------- ---------------------------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s) for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & testament
FBO For the benefit of
|
Additional abbreviations may also be used though not in the above list.
For value received, ________________ hereby sell, assign and transfer unto:
(I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_____________________ __________________________________________________
Please Print or Typewrite Name and Address
(including postal Zip Code of Assignee)
__________________________________________________________________________
|
________________________ shares represented by this Certificate, and do hereby irrevocably constitute and appoint _____________________________________ Attorney, to transfer such beneficial interest on the books of the Fund named therein with full power of substitution in the premises.
Dated _________________, _______
Signature(s)________________________________
Signature Guaranteed By (The signature of this assignment
must correspond exactly with the
name as written upon the face of
this Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than one
owner, all must sign.)
______________________________________
|
(Signature must be guaranteed by a commercial bank or trust company or member firm of any national stock exchange.)
IMPORTANT NOTICE
When you sign your name to the Transfer Form without filling in the name of your "Assignee" this certificate becomes fully negotiable, similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the unsigned certificate and the signed "stock power" in separate envelopes. For added protection, use registered mail for a certificate.
This certificate is issued subject to the provisions restricting transfers of the Auction Preferred Shares of Beneficial Interest, Series D, contained in the Amended and Restated Bylaws of PIMCO Municipal Income Fund.
AUCTION PREFERRED
SHARE(S) OF BENEFICIAL INTEREST, SERIES E
NO PAR VALUE
$25,000 LIQUIDATION PREFERENCE PER SHARE
THIS CERTIFICATE IS TRANSFERABLE CUSIP 72200R 60 2
IN BOSTON OR IN NEW YORK CITY SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
PIMCO MUNICIPAL INCOME FUND
SHARE CERTIFICATE
|
This certifies that Cede & Co. is the owner of *ONE THOUSAND SIX HUNDRED* (1,600) fully paid and non-assessable Auction Preferred Share(s) of Beneficial Interest, Series E, No Par Value, $25,000 Liquidation Preference Per Share, of PIMCO Municipal Income Fund, the said shares being issued, received and held under and subject to the terms and provisions of the Agreement and Declaration of Trust dated as of May 9, 2001, establishing PIMCO Municipal Income Fund, and all amendments and restatements thereto, copies of which are on file with the Secretary of State of The Commonwealth of Massachusetts, and to the terms and provisions of the Amended and Restated Bylaws of PIMCO Municipal Income Fund, copies of which are on file with the Secretary of the Fund. The said owner by accepting this certificate agrees to and is bound by all of the said terms and provisions. The shares represented hereby are transferable in writing by the owner thereof in person or by attorney upon surrender of this certificate to the Trustees properly endorsed for transfer. This certificate is executed on behalf of the Trustees of the Fund as Trustees and not individually and the obligations hereof are not binding upon any of the Trustees, officers or shareholders of the Fund individually but are binding only upon the assets and property of the Fund. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar.
Witness the seal of the Fund and the signatures of its duly authorized officers.
Dated:
Countersigned and Registered:
Bankers Trust Company
(New York, New York)
Transfer Agent and Registrar
BY:
Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the
face of this certificate shall be construed as though they were written out in
full according to applicable laws or regulations. Abbreviations in addition to
those appearing below, may be used.
Abbreviation Equivalent Abbreviation Equivalent
------------------ -------------------------------- ---------------------------- ---------------------------
JT TEN As joint tenants, with rights TEN IN COM As tenants in common
of survivorship and not as TEN BY ENT As tenants by the entireties
tenants in common UNIF TRANSFERS MIN ACT Uniform Transfers to Minors Act
Abbreviation Equivalent Abbreviation Equivalent
---------------- -------------------------------- ---------------------------- ---------------------------
ADM Administrator(s) FDN Foundation
Administratrix PL Public Law
AGMT Agreement TR (As) trustee(s) for, of
CUST Custodian for UA Under Agreement
EST Estate, Of estate of UW Under will of, Of will of,
EX Executor(s), Executrix Under last will & testament
FBO For the benefit of
|
Additional abbreviations may also be used though not in the above list.
For value received, ________________ hereby sell, assign and transfer unto:
(I/We)
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
_______________ ________________________________________________________
Please Print or Typewrite Name and Address
(including postal Zip Code of Assignee)
___________________________________________________________________________
|
________________________ shares represented by this Certificate, and do hereby irrevocably constitute and appoint _____________________________________ Attorney, to transfer such beneficial interest on the books of the Fund named therein with full power of substitution in the premises.
Dated _________________, _______
Signature(s)________________________________
Signature Guaranteed By (The signature of this assignment
must correspond exactly with the
name as written upon the face of
this Certificate in every
particular, without alteration or
enlargement or any change
whatsoever. If more than owner,
all must sign.)
______________________________________
|
(Signature must be guaranteed by a commercial bank or trust company or member firm of any national stock exchange.)
IMPORTANT NOTICE
When you sign your name to the Transfer Form without filling in the name of your "Assignee" this certificate becomes fully negotiable, similar to a check endorsed in blank. Therefore, to safeguard a signed certificate, it is recommended that you fill in the name of the new owner in the "Assignee" space.
Alternatively, instead of using this Transfer Form, you may sign a separate "stock power" form and then mail the unsigned certificate and the signed "stock power" in separate envelopes. For added protection, use registered mail for a certificate.
This certificate is issued subject to the provisions restricting transfers of the Auction Preferred Shares of Beneficial Interest, Series E, contained in the Amended and Restated Bylaws of PIMCO Municipal Income Fund.
EXHIBIT h.1
PIMCO Municipal Income Fund
Auction Preferred Shares
No Par Value
UNDERWRITING AGREEMENT
August 20, 2001
UNDERWRITING AGREEMENT
August 20, 2001
UBS Warburg LLC
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner &
Smith Incorporated
as Managing Underwriters
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
PIMCO Municipal Income Fund, a voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust) (the "Fund"), proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the "Underwriters") an aggregate of 1,600 preferred shares of beneficial interest of the Fund, no par value, designated Auction Preferred Shares, Series A, of the Fund, 1,600 preferred shares of beneficial interest of the Fund, no par value, designated Auction Preferred Shares, Series B, of the Fund, 1,600 preferred shares of beneficial interest of the Fund, no par value, designated Auction Preferred Shares, Series C, of the Fund, 1,600 preferred shares of beneficial interest of the Fund, no par value, designated Auction Preferred Shares, Series D, of the Fund, and 1,600 preferred shares of beneficial interest of the Fund, no par value, designated Auction Preferred Shares, Series E, of the Fund, each with a liquidation preference of $25,000 per share (the "APS")
The Fund has filed with the Securities and Exchange Commission (the "Commission"), in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively called the "Act"), and with the provisions of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (collectively called the "Investment Company Act"), a registration statement on Form N-2 (File Nos. 333- 64796 and 811-10377), including a prospectus and a statement of additional information, relating to the APS. The Fund has furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses (including a preliminary statement of additional information) (each thereof, including such preliminary statement of additional information, being herein called a "Preliminary Prospectus") relating to the APS. Except where the context otherwise requires, the registration statement, as amended when it becomes effective (the "Effective Date"), including all documents filed as a part thereof or incorporated by reference therein, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 497 under the Act and deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule 430A under the Act is herein called the Registration Statement, and the prospectus (including the statement of additional information), in the form filed by the Fund with the Commission pursuant to Rule 497 under the Act or, if no such filing is required, the form of final prospectus (including the form of final statement of additional information) included in the Registration Statement at the time it became effective, is herein called the Prospectus. In addition, the Fund has filed a Notification of Registration on Form N-8A (the "Notification") pursuant to Section 8 of the Investment Company Act.
PIMCO Advisors L.P. ("PIMCO Advisors," or the "Investment Manager") acts as the Fund's investment manager pursuant to an Investment Management Agreement by and between the Fund and the Investment Manager, dated as of June 20, 2001 (the "Investment Management Agreement"). Pacific Investment Management Company LLC ("PIMCO," or the "Portfolio Manager") acts as the Fund's portfolio manager pursuant to a Portfolio Management Agreement by and between the Investment Manager and PIMCO, as accepted and agreed to by the Fund, dated as of June 20, 2001. State Street Bank & Trust Co. acts as the custodian (the "Custodian") of the Fund's cash and portfolio assets pursuant to a Custodian Agreement, dated as of June 20, 2001 (the "Custodian Agreement"). PFPC Inc. acts as the Fund's transfer agent, registrar, shareholder servicing agent and dividend disbursing agent with respect to the common shares of the Fund (the "Transfer Agent") pursuant to a Transfer Agency Services Agreement, dated as of June 20, 2001 (the "Transfer Agency Agreement"). Bankers Trust Company will act as the Fund's auction agent (the "Auction Agent") for the APS pursuant to an Auction Agency Agreement, dated as of August 23, 2001 (the "Auction Agency Agreement"). The Fund has entered into a Letter Agreement, dated as of August 23, 2001, with the Depository Trust Company (the "DTC Agreement").
The Fund, the Investment Manager and the Underwriters agree as follows:
1. SALE AND PURCHASE. Upon the basis of the warranties and representations and subject to the terms and conditions herein set forth, the Fund agrees to sell to the respective Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase from the Fund the aggregate number of APS set forth opposite the name of such Underwriter in Schedule A attached hereto in each case at a purchase price per share of $24,750. The Fund is advised that the Underwriters intend (i) to make a public offering of their respective portions of the APS as soon after the effective date of the Registration Statement as is advisable and (ii) initially to offer the APS upon the terms set forth in the Prospectus. The Underwriters may from time to time increase or decrease the public offering price after the initial public offering to such extent as they may determine.
2. PAYMENT AND DELIVERY. Payment of the purchase price for the APS shall be made by the Underwriters to the Fund by Federal Funds wire transfer, against delivery of the certificates for the APS to you through the facilities of the Depository Trust Company ("DTC") for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time on the third business day following the date of this Underwriting
Agreement (unless another date or time shall be agreed to by you and the Fund). The time at which such payment and delivery are actually made is hereinafter sometimes called the "Time of Purchase" or the "Closing Date." Certificates for the APS shall be delivered to you in definitive form in such names and in such denominations as you shall specify on the second business day preceding the Time of Purchase. For the purpose of expediting the checking of the certificates for the APS by you, the Fund agrees to make such certificates available to you for such purpose at least one full business day preceding the Time of Purchase.
A certificate in definitive form representing the APS registered in the name of Cede & Co., as nominee for DTC, shall be delivered by or on behalf of the Fund to DTC for the account of the Underwriters.
3. REPRESENTATIONS AND WARRANTIES OF THE FUND AND THE INVESTMENT MANAGER. Each of the Fund and the Investment Manager jointly and severally represents and warrants to each Underwriter as follows:
(a) On (A) the Effective Date and the date on which the Prospectus is first filed with the Commission pursuant to Rule 497(b) or (h) under the Act or a certification is first filed with the Commission pursuant to Rule 497(j) under the Act, as the case may be, (B) the date on which any post-effective amendment to the Registration Statement (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the APS is completed) became or becomes effective or any amendment or supplement to the Prospectus was or is filed with the Commission and (C) the Closing Date, the Registration Statement, the Prospectus and any such amendment or supplement thereto and the Notification complied or will comply in all material respects with the requirements of the Act and the Investment Company Act, as the case may be. On the Effective Date and on the date that any post-effective amendment to the Registration Statement (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the APS is completed) became or becomes effective, neither the Registration Statement nor any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated in it or necessary to make the statements in it not misleading. On the Effective Date, on the Closing Date, and, if applicable, on the date the Prospectus or any amendment or supplement to the Prospectus was or is filed with the Commission, the Prospectus did not or will not, as the case may be, contain any untrue statement of a material fact or omit to state a material fact required to be stated in it or necessary to make the statements in it, in light of the circumstances under which they were made, not misleading. The foregoing representations in this Section 3(a) do not apply to statements or omissions relating to the Underwriters made in reliance on and in conformity with information furnished in
writing to the Fund by the Underwriters expressly for use in the Registration Statement, the Prospectus, or any amendments or supplements thereto, as described in Section 9(f) hereof.
(b) The Fund has been duly formed and is validly existing as an unincorporated voluntary association under the laws of The Commonwealth of Massachusetts (commonly known as a "Massachusetts business trust"), with full power and authority to conduct all the activities conducted by it, to own or lease all assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Fund is duly licensed and qualified to do business and in good standing in each jurisdiction in which its ownership or leasing of property or its conducting of business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the Fund, and the Fund owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations, whether foreign or domestic, necessary to carry on its business as contemplated in the Prospectus. The Fund has no subsidiaries.
(c) The capitalization of the Fund is as set forth in the Registration Statement and the Prospectus. The common shares of beneficial interest of the Fund, no par value per share (the "Common Shares"), and the APS conform in all material respects to the description of them in the Prospectus. All outstanding Common Shares have been duly authorized and are validly issued, fully paid and nonassessable (except as described in the Registration Statement). The APS to be issued and delivered to and paid for by the Underwriters in accordance with this Underwriting Agreement against payment therefor as provided by this Underwriting Agreement have been duly authorized and when issued and delivered to the Underwriters will have been validly issued and will be fully paid and nonassessable (except as described in the Registration Statement). No person is entitled to any preemptive or other similar rights in connection with the issuance of the APS.
(d) The Fund is duly registered with the Commission under the Investment Company Act as a diversified, closed-end management investment company, and, subject to the filing of any final amendment to the Registration Statement (a "Final Amendment"), if not already filed, all action under the Act and the Investment Company Act, as the case may be, necessary to make the public offering and consummate the sale of the APS as provided in this Underwriting Agreement has or will have been taken by the Fund.
(e) The Fund has, or at the relevant time had, full power and authority to enter into each of this Underwriting Agreement, the Investment Management Agreement, the Custodian Agreement, the Transfer Agency Agreement,
the Auction Agency Agreement and the DTC Agreement (collectively, the "Fund
Agreements") and to perform all of the terms and provisions hereof and
thereof to be carried out by it and (i) each Fund Agreement has been duly
and validly authorized, executed and delivered by or on behalf of the Fund,
(ii) each Fund Agreement does not violate in any material respect any of
the applicable provisions of the Investment Company Act or the Investment
Advisers Act of 1940, as amended, and the rules and regulations thereunder
(collectively called the "Advisers Act"), as the case may be, and
(iii) assuming due authorization, execution and delivery by the other
parties thereto, each Fund Agreement constitutes the legal, valid and
binding obligation of the Fund enforceable in accordance with its terms,
(A) subject, as to enforcement, to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally and to general equitable
principles (regardless of whether enforcement is sought in a proceeding in
equity or at law) and (B) except as rights to indemnity thereunder may be
limited by federal or state securities laws.
(f) None of (i) the execution and delivery by the Fund of the Fund Agreements,
(ii) the issue and sale by the Fund of the APS as contemplated by this
Underwriting Agreement and (iii) the performance by the Fund of its
obligations under any of the Fund Agreements or consummation by the Fund of
the other transactions contemplated by the Fund Agreements conflicts with
or will conflict with, or results or will result in a breach of, the
Agreement and Declaration of Trust of the Fund, as amended through the date
hereof (the "Declaration of Trust"), and the Amended and Restated Bylaws of
the Fund, adopted in connection with the issuance of the APS and as amended
through the date hereof (the "Amended Bylaws"), or any agreement or
instrument to which the Fund is a party or by which the Fund is bound,
except where such violation does not have a material adverse effect on the
condition (financial or other), business prospects, properties, net assets
or results of operations of the Fund, or any law, rule or regulation, or
order of any court, governmental instrumentality, securities exchange or
association or arbitrator, whether foreign or domestic, applicable to the
Fund, other than state securities or "blue sky" laws applicable in
connection with the purchase and distribution of the APS by the
Underwriters pursuant to this Underwriting Agreement.
(g) The Fund is not currently in breach of, or in default under, any written agreement or instrument to which it is a party or by which it or its property is bound or affected, except where such violation does not have a material adverse effect on the condition (financial or other), business prospects, properties, net assets or results of operations of the Fund.
(h) No person has any right to the registration of any securities of the Fund because of the filing of the Registration Statement.
(i) No consent, approval, authorization or order of any court or governmental
agency or body or securities exchange or association, whether foreign or
domestic, is required by the Fund for the consummation by the Fund of the
transactions to be performed by the Fund or the performance by the Fund of
all the terms and provisions to be performed by or on behalf of it in each
case as contemplated in the Fund Agreements, except such as (i) have been
obtained under the Act, the Investment Company Act or the Advisers Act, and
(ii) may be required under state securities or "blue sky" laws, in
connection with the purchase and distribution of the APS by the
Underwriters pursuant to this Underwriting Agreement.
(j) To the knowledge of the Fund and the Investment Manager after due inquiry, based on representations from PricewaterhouseCoopers LLP, whose report appears in the Prospectus, PricewaterhouseCoopers LLP are independent public accountants with respect to the Fund as required by the Act and the Investment Company Act.
(k) The statement of assets and liabilities included in the Registration Statement and the Prospectus presents fairly in all material respects, in accordance with generally accepted accounting principles in the United States applied on a consistent basis, the financial position of the Fund as of the date indicated.
(l) The Fund will maintain a system of internal accounting controls sufficient
to provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and
to maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with existing
assets through an asset reconciliation procedure or otherwise at reasonable
intervals and appropriate action is taken with respect to any differences.
(m) Since the date as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (i) there has been no material adverse change in the condition, financial or otherwise, business affairs or business of the Fund, whether or not arising in the ordinary course of business, (ii) there have been no transactions entered into by the Fund other than those in the ordinary course of its business and (iii) there has been no dividend or distribution of any kind declared, paid or made on any class of its capital shares.
(n) There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending, or, to the knowledge of the Fund, threatened against or affecting the Fund, which (i) might result in any
material adverse change in the condition, financial or otherwise, business affairs or business prospects of the Fund or might materially adversely affect the properties or assets of the Fund or (ii) is of a character required to be described in the Registration Statement or the Prospectus; and there are no contracts, franchises or other documents that are of a character required to be described in, or that are required to be filed as exhibits to, the Registration Statement that have not been described or filed as required.
(o) The Fund intends to direct the investment of the proceeds of the offering of the APS in such a manner as to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
(p) The Common Shares are listed on the New York Stock Exchange.
(q) The APS have been, or prior to the Closing Date will be, assigned a rating of "Aaa" by Moody's Investors Service, Inc.
(r) No advertising, sales literature or other promotional materials (excluding road show slides or road show tapes) were authorized or prepared by or on behalf of the Fund, the Investment Manager or the Portfolio Manager or any representative thereof for use in connection with the public offering or sale of the APS (collectively referred to as the "Sales Materials"); any road show slides or road show tapes complied and comply in all material respects with the applicable requirements of the Act and the rules and interpretations of the NASD; and no broker kits, road show slides, road show tapes or sales materials authorized or prepared by the Fund or authorized or prepared on behalf of the Fund by the Investment Manager, the Portfolio Manager or any representative thereof for use in connection with the public offering or sale of the APS contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTMENT MANAGER. The Investment
Manager represents to each Underwriter and, in the case of paragraph
(f) also to the Fund, as follows:
(a) The Investment Manager has been duly formed, is validly existing as a limited partnership under the laws of the State of Delaware with full power and authority to conduct all of the activities conducted by it, to own or lease all of the assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Investment Manager is duly licensed and qualified to do business and in good standing in each jurisdiction in which it is required to be so qualified, except to the extent that failure to be so qualified or be in good standing
would not have a material adverse effect on the Investment Manager's ability to provide services to the Fund; and the Investment Manager owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations, whether foreign or domestic, necessary to carry on its business as contemplated in the Registration Statement and the Prospectus.
(b) The Investment Manager is (i) duly registered as an investment adviser under the Advisers Act and (ii) not prohibited by the Advisers Act or the Investment Company Act from acting as the investment adviser for the Fund as contemplated by the Investment Management Agreement, the Registration Statement and the Prospectus.
(c) The Investment Manager has, or at the relevant time had, full power and authority to enter into each of this Underwriting Agreement, the Investment Management Agreement and the Portfolio Management Agreement (collectively, this Underwriting Agreement, the Investment Management Agreement and the Portfolio Management Agreement being referred to as the "Investment Manager Agreements") and to carry out all the terms and provisions hereof and thereof to be carried out by it; and each Investment Manager Agreement has been duly and validly authorized, executed and delivered by the Investment Manager; none of the Investment Manager Agreements violates in any material respect any of the applicable provisions of the Investment Company Act or the Advisers Act; and assuming due authorization, execution and delivery by the other parties thereto, each Investment Manager Agreement constitutes a legal, valid and binding obligation of the Investment Manager, enforceable in accordance with its terms, (i) subject, as to enforcement, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law) and (ii) except as rights to indemnity thereunder may be limited by federal or state securities laws.
(d) Neither (i) the execution and delivery by the Investment Manager of any Investment Manager Agreement nor (ii) the consummation by the Investment Manager of the transactions contemplated by, or the performance of its obligations under, any Investment Manager Agreement conflicts or will conflict with, or results or will result in a breach of, the limited partnership agreement or other organizational documents of the Investment Manager or any agreement or instrument to which the Investment Manager is a party or by which the Investment Manager is bound, or any law, rule or regulation, or order of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to the Investment Manager.
(e) No consent, approval, authorization or order of any court, governmental
agency or body or securities exchange or association, whether foreign or
domestic, is required for the consummation of the transactions contemplated
in, or the performance by the Investment Manager of its obligations under,
any Investment Manager Agreement, as the case may be, except such as
(i) have been obtained under the Act, the Investment Company Act or the
Advisers Act, and (ii) may be required by the New York Stock Exchange or
under state securities or "blue sky" laws, in connection with the purchase
and distribution of the APS by the Underwriters pursuant to this
Underwriting Agreement.
(f) The description of the Investment Manager and its business, and the statements attributable to the Investment Manager, in the Registration Statement and the Prospectus comply with the requirements of the Act and the Investment Company Act and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading.
(g) There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to the knowledge of the Investment Manager, threatened against or affecting the Investment Manager of a nature required to be disclosed in the Registration Statement or Prospectus or that might reasonably be expected to result in any material adverse change in the ability of the Investment Manager to fulfill its respective obligations under any Investment Manager Agreement.
(h) None of the Fund, the Investment Manager or the Portfolio Manager has made available any promotional materials intended for use only by qualified broker-dealers and registered representatives thereof by means of an Internet web site or similar electronic means.
(i) The Portfolio Manager has been duly formed, is validly existing as a limited liability company under the laws of Delaware with full power and authority to conduct all of the activities conducted by it, to own or lease all of the assets owned or leased by it and to conduct its business as described in the Registration Statement and Prospectus, and the Portfolio Manager is duly licensed and qualified to do business and in good standing in each jurisdiction in which it is required to be so qualified, except to the extent that failure to be so qualified or be in good standing would not have a material adverse affect on the Portfolio Manager's ability to provide services to the Fund; and the Portfolio Manager owns, possesses or has obtained and currently maintains all governmental licenses, permits, consents, orders, approvals and other authorizations, whether foreign or domestic, necessary to carry on its business as contemplated in the Registration Statement and the Prospectus.
(j) The Portfolio Manager is (i) duly registered as an investment adviser under the Advisers Act and (ii) not prohibited by the Advisers Act or the Investment Company Act from acting as the investment sub-adviser for the Fund as contemplated by the Portfolio Management Agreement, the Registration Statement and the Prospectus.
(k) The Portfolio Manager has, or at the relevant time had, full power and authority to enter into each of this Underwriting Agreement and the Portfolio Management Agreement (collectively, this Underwriting Agreement and the Portfolio Management Agreement being referred to as the "Portfolio Manager Agreements") and to carry out all the terms and provisions hereof and thereof to be carried out by it; and each Portfolio Manager Agreement has been duly and validly authorized, executed and delivered by the Portfolio Manager; none of the Portfolio Manager Agreements violates in any material respect any of the applicable provisions of the Investment Company Act or the Advisers Act; and assuming due authorization, execution and delivery by the other parties thereto, each Portfolio Manager Agreement constitutes a legal, valid and binding obligation of the Portfolio Manager, enforceable in accordance with its terms, (i) subject, as to enforcement, to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and to general equitable principles (regardless of whether enforcement is sought in a proceeding in equity or at law) and (ii) except as rights to indemnity thereunder may be limited by federal or state securities laws.
(l) Neither (i) the execution and delivery by the Portfolio Manager of any Portfolio Manager Agreement nor (ii) the consummation by the Portfolio Manager of the transactions contemplated by, or the performance of its obligations under, any Portfolio Manager Agreement conflicts or will conflict with, or results or will result in a breach of, the limited liability company agreement or other organizational documents of the Portfolio Manager or any agreement or instrument to which the Portfolio Manager is a party or by which the Portfolio Manager is bound, or any law, rule or regulation, or order of any court, governmental instrumentality, securities exchange or association or arbitrator, whether foreign or domestic, applicable to the Portfolio Manager.
(m) No consent, approval, authorization or order of any court, governmental
agency or body or securities exchange or association, whether foreign or
domestic, is required for the consummation of the transactions contemplated
in, or the performance by the Portfolio Manager of its obligations under,
any Portfolio Manager Agreement, as the case may be, except such as
(i) have been obtained under the Act, the Investment Company Act or the
Advisers Act, and (ii) may be required by the New York Stock Exchange or
under state securities or "blue sky" laws, in connection with the purchase
and distribution of the APS by the Underwriters pursuant to this
Underwriting Agreement.
(n) The description of the Portfolio Manager and its business, and the statements attributable to the Portfolio Manager, in the Registration Statement and the Prospectus comply with the requirements of the Act and the Investment Company Act and do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading.
(o) There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to the knowledge of the Portfolio Manager, threatened against or affecting the Portfolio Manager of a nature required to be disclosed in the Registration Statement or Prospectus or that might reasonably be expected to result in any material adverse change in the ability of the Portfolio Manager to fulfill its respective obligations under any Portfolio Manager Agreement.
5. AGREEMENTS OF THE PARTIES.
(a) If the registration statement relating to the APS has not yet become effective, the Fund will promptly file any Final Amendment, if not previously filed, with the Commission, and will use its best efforts to cause such registration statement to become effective and, as soon as the Fund is advised, will advise UBS Warburg LLC (the "Managing Representative") when the Registration Statement or any amendment thereto has become effective. If the Registration Statement has become effective and the Prospectus contained therein omits certain information at the time of effectiveness pursuant to Rule 430A under the Act, the Fund will file a 430A prospectus pursuant to Rule 497(h) under the Act as promptly as practicable, but no later than the second business day following the earlier of the date of the determination of the offering price of the APS or the date the Prospectus is first used after the Effective Date. If the Registration Statement has become effective and the Prospectus contained therein does not so omit such information, the Fund will file a prospectus pursuant to Rule 497(b) or a certification pursuant to Rule 497(j) under the Act as promptly as practicable, but no later than the fifth business day following the date of the later of the Effective Date or the commencement of the public offering of the APS after the Effective Date. In either case, the Fund will provide you satisfactory evidence of the filing. The Fund will not file with the Commission any Prospectus or any other amendment (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which distribution of the APS is completed) or supplement to the Registration Statement or the Prospectus unless a copy has first been submitted to the Managing Representative a reasonable time before its filing and the Managing Representative has not objected to it in writing within a reasonable time after receiving the copy.
(b) For the period of three years from the date hereof, the Fund will advise the Managing Representative promptly (1) of the issuance by the Commission of any order in respect of the Fund, the Investment Manager or the Portfolio Manager which relates to the Fund, or which relates to any material arrangements or proposed material arrangements involving the Fund, the Investment Manager or the Portfolio Manager, (2) of the initiation or threatening of any proceedings for, or receipt by the Fund of any notice with respect to, any suspension of the qualification of the APS for sale in any jurisdiction or the issuance of any order by the Commission suspending the effectiveness of the Registration Statement, (3) of receipt by the Fund, or any representative or attorney of the Fund, of any other communication from the Commission relating in any material way to the Fund, the Registration Statement, the Notification, any Preliminary Prospectus, the Prospectus or to the transactions contemplated by this Underwriting Agreement and (4) of the issuance by any court, regulatory body, administrative agency or other governmental agency or body, whether foreign or domestic, of any order, ruling or decree, or the threat to initiate any proceedings with respect thereto, regarding the Fund, which relates in any material way to the Fund or any material arrangements or proposed material arrangements involving the Fund. The Fund will make every reasonable effort to prevent the issuance of any order suspending the effectiveness of the Registration Statement and, if any such order is issued, to obtain its lifting as soon as possible.
(c) If not delivered prior to the date of this Underwriting Agreement, the Fund will deliver to the Managing Representative, without charge, a signed copy of the Registration Statement and the Notification and of any amendments (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the APS is completed) to either the Registration Statement or the Notification (including all exhibits filed with any such document) and as many conformed copies of the Registration Statement and any amendments thereto (except any post-effective amendment which is filed with the Commission after the later of (x) one year from the date of this Underwriting Agreement or (y) the date on which the distribution of the APS is completed) (excluding exhibits) as the Managing Representative may reasonably request.
(d) During such period as a prospectus is required by law to be delivered by an underwriter or a dealer, the Fund will deliver, without charge, to you, the Underwriters and any dealers, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and, if any event occurs during such period as a result of which it is
necessary to amend or supplement the Prospectus, in order to make the statements therein, in light of the circumstances under which they were made, not misleading in any material respect, or if during such period it is necessary to amend or supplement the Prospectus to comply with the Act or the Investment Company Act, the Fund promptly will prepare, submit to the Managing Representative, file with the Commission and deliver, without charge, to the Underwriters and to dealers (whose names and addresses the Managing Representative will furnish to the Fund) to whom APS may have been sold by the Underwriters, and to other dealers on request, amendments or supplements to the Prospectus so that the statements in such Prospectus, as so amended or supplemented, will not, in light of the circumstances under which they were made, be misleading in any material respect and will comply with the Act and the Investment Company Act; provided that if the amendment or supplement is required exclusively as a result of a misstatement in or omission from the information provided to the Fund in writing by the Underwriters expressly for use in the Prospectus, the Fund may deliver such amendment or supplement to the Underwriters and dealers at a reasonable charge not to exceed the actual cost thereof to the Fund. Delivery by the Underwriters of any such amendments or supplements to the Prospectus will not constitute a waiver of any of the conditions in Section 6 hereof.
(e) The Fund will make generally available to holders of the Fund's securities, as soon as practicable but in no event later than the last day of the 18th full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement, if applicable, satisfying the provisions of the last paragraph of Section 11(a) of the Act and, at the option of the Fund, Rule 158 under the Act.
(f) The Fund will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Fund's counsel and accountants in
connection with the registration of the APS and all other expenses in
connection with the preparation, printing and filing of the Registration
Statement, any Preliminary Prospectus and the Prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
Underwriters and dealers; (ii) the cost of printing or reproducing this
Underwriting Agreement and any other documents in connection with the
offering, purchase, sale and delivery of the APS (including advertising
expenses of the Underwriters, if any); (iii) the cost of preparing share
certificates; (iv) the expenses (including, but not limited to, travel,
hotels and other accommodations) incurred by the Fund's directors,
officers, employees and other personnel in connection with meetings held
with registered brokers in connection with the offering of the APS, the
preparing to market and the marketing of the APS; (v) any fees charged by
securities rating services for rating the APS; (vi) the fees and expenses
of the DTC and its nominee, the Custodian and the Auction Agent; and
(vii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for.
It is understood, however, that, except as provided in this Section 5 and
Section 7 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel and stock transfer taxes, if any, on resale of any of the APS by them, except any advertising expenses connected with any offers they may make.
(g) If the transactions contemplated by this Underwriting Agreement are not
consummated, except as otherwise provided herein, no party will be under
any liability to any other party, except that (i) if this Underwriting
Agreement is terminated by (A) the Fund or the Investment Manager pursuant
to any of the provisions hereof or (B) by you or the Underwriters because
of any inability, failure or refusal on the part of the Fund or the
Investment Manager to comply with any material terms or because any of the
conditions in Section 6 are not satisfied, the Investment Manager or an
affiliate and the Fund, jointly and severally, will reimburse the
Underwriters for all out-of-pocket expenses (including the reasonable fees,
disbursements and other charges of their counsel) reasonably incurred by
them in connection with the proposed purchase and sale of the APS and
(ii) no Underwriter who has failed or refused to purchase the APS agreed to
be purchased by it under this Underwriting Agreement, in breach of its
obligations pursuant to this Underwriting Agreement, will be relieved of
liability to the Fund, the Investment Manager and the other Underwriters
for damages occasioned by its default.
(h) Without the prior written consent of the Managing Representative, the Fund will not offer, sell or register with the Commission, or announce an offering of, any equity securities of the Fund, within 180 days after the Effective Date, except for the APS as described in the Prospectus and any issuance of Common Shares pursuant to the dividend reinvestment plan established by the Fund.
(i) The Fund will direct the investment of the net proceeds of the offering of the APS in such a manner as to comply with the investment objective and policies of the Fund as described in the Prospectus.
(j) No later than the Closing Date, the Underwriters will provide, and will cause any selling group member to whom they have sold APS to provide, the Auction Agent with a list of the record names of the persons to whom they have sold APS, the number of APS sold to each such person, and the number of APS they are holding as of the Closing Date; provided that in lieu of thereof, an Underwriter may provide the Auction Agent with a list indicating itself as the sole holder of all the APS sold by such Underwriter.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters to purchase the APS are subject to the accuracy on the date of this Underwriting Agreement, and on the Closing Date, of the representations of the Fund and the Investment Manager in this Underwriting Agreement, to the accuracy and completeness of all material statements made by the Fund and the Investment Manager or any of their respective officers in any certificate delivered
to the Managing Representative or its counsel pursuant to this Underwriting Agreement, to performance by the Fund and the Investment Manager of their respective obligations under this Underwriting Agreement and to each of the following additional conditions:
(a) The Registration Statement must have become effective by 5:30 p.m.,
New York City time, on the date of this Underwriting Agreement or such
later date and time as the Managing Representative consents to in writing.
The Prospectus must have been filed in accordance with Rule 497(b) or
(h) or a certificate must have been filed in accordance with Rule 497(j),
as the case may be, under the Act.
(b) No order suspending the effectiveness of the Registration Statement may be in effect and no proceedings for such purpose may be pending before or, to the knowledge of counsel to the Underwriters, threatened by the Commission, and any requests for additional information on the part of the Commission (to be included in the Registration Statement or the Prospectus or otherwise) must be complied with or waived to the reasonable satisfaction of the Managing Representative.
(c) Since the dates as of which information is given in the Registration
Statement and the Prospectus, (i) there must not have been any material
change in the Common Shares, the APS or the liabilities of the Fund except
as set forth in or contemplated by the Prospectus; (ii) there must not have
been any material adverse change in the general affairs, prospects,
management, business, financial condition or results of operations of the
Fund, the Investment Manager or the Portfolio Manager whether or not
arising from transactions in the ordinary course of business as set forth
in or contemplated by the Prospectus which in the opinion of the Managing
Representative would materially adversely affect the market for the APS;
(iii) the Fund must not have sustained any material loss or interference
with its business from any court or from legislative or other governmental
action, order or decree, whether foreign or domestic, or from any other
occurrence not described in the Registration Statement and Prospectus; and
(iv) there must not have occurred any event that makes untrue or incorrect
in any material respect any statement or information contained in the
Registration Statement or Prospectus or that is not reflected in the
Registration Statement or Prospectus but should be reflected therein in
order to make the statements or information therein (in the case of the
Prospectus, in light of the circumstances in which they were made) not
misleading in any material respect.
(d) The Managing Representative must have received on the Closing Date a certificate, dated such date, of the President, a Vice President or Managing Director and the chief financial or accounting officer of each of the Fund and the Investment Manager certifying that (i) the signers have carefully examined the Registration Statement, the Prospectus, and this
Underwriting Agreement, (ii) the representations of the Fund (with respect to the certificates from such Fund officers) and the representations of the Investment Manager (with respect to the certificates from such officers of the Investment Manager) in this Underwriting Agreement are accurate on and as of the date of the certificate, (iii) there has not been any material adverse change in the general affairs, prospects, management, business, financial condition or results of operations of the Fund (with respect to the certificates from such Fund officers) or the Investment Manager (with respect to the certificates from such officers of the Investment Manager), which change would materially and adversely affect the ability of the Fund or the Investment Manager, as the case may be, to fulfill its obligations under this Underwriting Agreement or the Investment Management Agreement, whether or not arising from transactions in the ordinary course of business, (iv) with respect to the Fund only, to the knowledge of such officers after reasonable investigation, no order suspending the effectiveness of the Registration Statement, prohibiting the sale of any of the APS or otherwise having a material adverse effect on the Fund has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any other regulatory body, whether foreign or domestic, (v) to the knowledge of the officers of the Investment Manager, after reasonable investigation, no order having a material adverse effect on the ability of the Investment Manager to fulfill its obligations under this Underwriting Agreement or the Investment Management Agreement, as the case may be, has been issued and no proceedings for any such purpose are pending before or threatened by the Commission or any other regulatory body, whether foreign or domestic, and (vi) each of the Fund (with respect to the certificates from such Fund officers) and the Investment Manager (with respect to the certificates from such officers of the Investment Manager) has performed all of its respective agreements that this Underwriting Agreement requires it to perform by the Closing Date (to the extent not waived in writing by the Managing Representative).
(e) You must have received on the Closing Date the opinions dated the Closing Date substantially in the form of Schedules B, C, D and E and this Underwriting Agreement from the counsel identified in each such Schedule, or in such other form as is acceptable to counsel for the Underwriters.
(f) You must have received on the Closing Date from Skadden, Arps, Slate, Meagher & Flom LLP and its affiliated entities an opinion dated the Closing Date with respect to the Fund, the APS, the Registration Statement and the Prospectus, this Underwriting Agreement and the form and sufficiency of all proceedings taken in connection with the sale and delivery of the APS. Such opinion and proceedings shall fulfill the requirements of this Section 6(f) only if such opinion and proceedings are satisfactory in all respects to the Managing Representative. The Fund, the
Investment Manager and the Portfolio Manager must have furnished to such counsel such documents as counsel may reasonably request for the purpose of enabling them to render such opinion.
(g) The Managing Representative must have received on the date this Underwriting Agreement is signed and delivered by you a signed letter, dated such date, substantially in the form of Schedule F to this Underwriting Agreement from the firm of accountants designated in such Schedule. The Managing Representative also must have received on the Closing Date a signed letter from such accountants, dated as of the Closing Date, confirming on the basis of a review in accordance with the procedures set forth in their earlier letter that nothing has come to their attention during the period from a date not more than five business days before the date of this Underwriting Agreement, specified in the letter, to a date not more than five business days before the Closing Date, that would require any change in their letter referred to in the foregoing sentence.
(h) The APS shall have been accorded a rating of "aaa" by Moody's Investors Service, Inc. and a letter to such effect, dated on or before the Closing Date, shall have been delivered to the Managing Representative.
(i) As of the Closing Date, and assuming the receipt of the net proceeds from the sale of the APS, the 1940 Act APS Asset Coverage and the APS Basic Maintenance Amount (each as defined in the Prospectus) each will be met.
All opinions, letters, evidence and certificates mentioned above or elsewhere in this Underwriting Agreement will comply only if they are in form and scope reasonably satisfactory to counsel for the Underwriters, provided that any such documents, forms of which are annexed hereto, shall be deemed satisfactory to such counsel if substantially in such form.
7. TERMINATION. This Underwriting Agreement may be terminated by the Managing Representative by notifying the Fund at any time:
(a) before the later of the effectiveness of the Registration Statement and the time when any of the APS are first generally offered pursuant to this Underwriting Agreement by the Managing Representative to dealers by letter or telegram;
(b) at or before the Closing Date if, in the sole judgment of the Managing Representative, payment for and delivery of any APS is rendered impracticable or inadvisable because (i) trading in the APS or the Common Shares of the Fund is suspended by the Commission or the principal exchange that lists the Common Shares, (ii) trading in securities generally on the New York Stock Exchange or the Nasdaq Stock Market shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange or over-the-
counter market, (iii) additional material governmental restrictions, not in force on the date of this Underwriting Agreement, have been imposed upon trading in securities or trading has been suspended on any U.S. securities exchange, (iv) a general banking moratorium has been established by U.S. federal or New York authorities or (v) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred the effect of any of which is such as to make it, in the sole judgment of the Managing Representative, impracticable or inadvisable to market the APS on the terms and in the manner contemplated by the Prospectus; or
(c) at or before the Closing Date, if any of the conditions specified in
Section 6 have not been fulfilled when and as required by this Underwriting
Agreement.
8. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters fails (other than for a reason sufficient to justify the termination of this Underwriting Agreement) to purchase on the Closing Date the APS agreed to be purchased on the Closing Date by such Underwriter or Underwriters, the Managing Representative may find one or more substitute underwriters to purchase such APS or make such other arrangements as the Managing Representative deems advisable, or one or more of the remaining Underwriters may agree to purchase such APS in such proportions as may be approved by the Managing Representative, in each case upon the terms set forth in this Underwriting Agreement. If no such arrangements have been made within 36 hours after the Closing Date, and
(a) the number of APS to be purchased by the defaulting Underwriters on the Closing Date does not exceed 10% of the APS that the Underwriters are obligated to purchase on such Closing Date, each of the nondefaulting Underwriters will be obligated to purchase such APS on the terms set forth in this Underwriting Agreement in proportion to their respective obligations under this Underwriting Agreement, or
(b) the number of APS to be purchased by the defaulting Underwriters on the Closing Date exceeds 10% of the APS to be purchased by all the Underwriters on the Closing Date, the Fund will be entitled to an additional period of 24 hours within which to find one or more substitute underwriters reasonably satisfactory to the Managing Representative to purchase such APS on the terms set forth in this Underwriting Agreement.
Upon the occurrence of the circumstances described in the foregoing paragraph (b), either the Managing Representative or the Fund will have the right to postpone the Closing Date for not more than five business days in order that
necessary changes and arrangements (including any necessary amendments or supplements to the Registration Statement or the Prospectus) may be effected by the Managing Representative and the Fund. If the number of APS to be purchased on the Closing Date by such defaulting Underwriter or Underwriters exceeds 10% of the APS that the Underwriters are obligated to purchase on the Closing Date, and none of the nondefaulting Underwriters or the Fund makes arrangements pursuant to this Section within the period stated for the purchase of the APS that the defaulting Underwriters agreed to purchase, this Underwriting Agreement will terminate without liability on the part of any nondefaulting Underwriter, the Fund, the Investment Manager or the Portfolio Manager, except as provided in Sections 5(g) and 9 hereof. Any action taken under this Section will not affect the liability of any defaulting Underwriter to the Fund or to the nondefaulting Underwriters arising out of such default. A substitute underwriter will become an Underwriter for all purposes of this Underwriting Agreement.
9. INDEMNITY AND CONTRIBUTION.
(a) Each of the Fund and the Investment Manager, jointly and severally, agrees to indemnify, defend and hold harmless each Underwriter, its partners, directors and officers, and any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, any such Underwriter or any such person may incur under the Act, the Exchange Act, the Investment Company Act, the Advisers Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Fund) or in a Prospectus (the term "Prospectus" for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, any Sales Materials, the Prospectus and the Prospectus as amended or supplemented by the Fund), or arises out of or is based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein (with respect to the Prospectus, in light of the circumstances under which they were made) not misleading, except insofar as any such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of any Underwriter to the Fund, the Investment Manager or the Portfolio Manager expressly for use with reference to any Underwriter in such Registration Statement or such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such
information (with respect to the Prospectus, in light of the circumstances under which they were made) not misleading, provided, however, that the indemnity agreement contained in this subsection (a) with respect to any Preliminary Prospectus or amended Preliminary Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such loss, damage, expense, liability or claim purchased the APS which is the subject thereof if the Prospectus corrected any such alleged untrue statement or omission and if such Underwriter failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such APS to such person, unless the failure is the result of noncompliance by the Fund with Section 5(d) hereof.
If any action, suit or proceeding (together, a "Proceeding") is brought against an Underwriter or any such person in respect of which indemnity may be sought against the Fund or the Investment Manager pursuant to the foregoing paragraph, such Underwriter or such person shall promptly notify the Fund and the Investment Manager in writing of the institution of such Proceeding and the Fund or the Investment Manager shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify the Fund or the Investment Manager shall not relieve the Fund or the Investment Manager from any liability which the Fund or the Investment Manager may have to any Underwriter or any such person or otherwise. Such Underwriter or such person shall have the right to employ its or their own counsel in any such case, but the reasonable fees and expenses of such counsel shall be at the expense of such Underwriter or of such person unless the employment of such counsel shall have been authorized in writing by the Fund or the Investment Manager, as the case may be, in connection with the defense of such Proceeding or the Fund or the Investment Manager shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from, additional to or in conflict with those available to the Fund or the Investment Manager (in which case neither the Fund nor the Investment Manager shall have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but the Fund or the Investment Manager, as the case may be, may employ counsel and participate in the defense thereof at the expense of the Fund or the Investment Manager, as the case may be), in any of which events such reasonable fees and expenses shall be borne by the Fund or the Investment Manager and paid as incurred (it being understood, however, that the Fund or the Investment Manager shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction
representing the indemnified parties who are parties to such Proceeding).
Neither the Fund nor the Investment Manager shall be liable for any
settlement of any Proceeding effected without its written consent but if
settled with the written consent of the Fund or the Investment Manager, the
Fund or the Investment Manager, as the case may be, agrees to indemnify and
hold harmless any Underwriter and any such person from and against any loss
or liability by reason of such settlement. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for reasonable fees
and expenses of counsel as contemplated by the second sentence of this
paragraph, then the indemnifying party agrees that it shall be liable for
any settlement of any Proceeding effected without its written consent if
(i) such settlement is entered into more than 60 business days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall not have reimbursed the indemnified party in
accordance with such request prior to the date of such settlement and
(iii) such indemnified party shall have given the indemnifying party at
least 30 days' prior notice of its intention to settle. No indemnifying
party shall, without the prior written consent of the indemnified party,
effect any settlement of any pending or threatened Proceeding in respect of
which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such Proceeding and
does not include an admission of fault, culpability or a failure to act, by
or on behalf of such indemnified party.
(b) Each Underwriter severally agrees to indemnify, defend and hold harmless the Fund and the Investment Manager, and each of their respective shareholders, partners, managers, members, trustees, directors and officers, and any person who controls the Fund or the Investment Manager within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the successors and assigns of all of the foregoing persons from and against any loss, damage, expense, liability or claim (including the reasonable cost of investigation) which, jointly or severally, the Fund or the Investment Manager or any such person may incur under the Act, the Exchange Act, the Investment Company Act, the Advisers Act, the common law or otherwise, insofar as such loss, damage, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by or on behalf of such Underwriter to the Fund or the Investment Manager expressly for use with reference to such Underwriter in the Registration Statement (or in the Registration Statement as amended by any post-effective amendment thereof by the Fund) or in a Prospectus, or arises out of or is based upon any omission or
alleged omission to state a material fact in connection with such information required to be stated in such Registration Statement or such Prospectus or necessary to make such information not misleading (with respect to the Prospectus, in light of the circumstances under which they were made).
If any Proceeding is brought against the Fund, the Investment Manager or any such person in respect of which indemnity may be sought against any Underwriter pursuant to the foregoing paragraph, the Fund, the Investment Manager or such person shall promptly notify such Underwriter in writing of the institution of such Proceeding and such Underwriter shall assume the defense of such Proceeding, including the employment of counsel reasonably satisfactory to such indemnified party and payment of all fees and expenses; provided, however, that the omission to so notify such Underwriter shall not relieve such Underwriter from any liability which such Underwriter may have to the Fund, the Investment Manager or any such person or otherwise. The Fund, the Investment Manager or such person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Fund, the Investment Manager or such person, as the case may be, unless the employment of such counsel shall have been authorized in writing by such Underwriter in connection with the defense of such Proceeding or such Underwriter shall not have, within a reasonable period of time in light of the circumstances, employed counsel to have charge of the defense of such Proceeding or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to or in conflict with those available to such Underwriter (in which case such Underwriter shall not have the right to direct the defense of such Proceeding on behalf of the indemnified party or parties, but such Underwriter may employ counsel and participate in the defense thereof at the expense of such Underwriter), in any of which events such fees and expenses shall be borne by such Underwriter and paid as incurred (it being understood, however, that such Underwriter shall not be liable for the expenses of more than one separate counsel (in addition to any local counsel) in any one Proceeding or series of related Proceedings in the same jurisdiction representing the indemnified parties who are parties to such Proceeding). No Underwriter shall be liable for any
settlement of any such Proceeding effected without the written consent of such Underwriter but if settled with the written consent of such Underwriter, such Underwriter agrees to indemnify and hold harmless the Fund, the Investment Manager and any such person from and against any loss or liability by reason of such settlement. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second sentence of this paragraph, then the indemnifying party agrees that it shall be liable for any settlement of any Proceeding effected without its written consent if (i) such settlement is entered into more than 60 business days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement and (iii) such indemnified party shall have given the indemnifying party at least 30 days' prior notice of its intention to settle. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened Proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such Proceeding and does not include an admission of fault, culpability or a failure to act, by or on behalf of such indemnified party.
(c) If the indemnification provided for in this Section 9 is unavailable to an indemnified party under subsections (a) and (b) of this Section 9 in respect of any losses, damages, expenses, liabilities or claims referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, damages, expenses, liabilities or claims (i) in such proportion as is appropriate to reflect the relative benefits received by the Fund and the Investment Manager on the one hand and the Underwriters on the other hand from the offering of the APS or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Fund and the Investment Manager on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such losses, damages, expenses, liabilities or claims, as well as any other relevant equitable considerations. The relative benefits received by the Fund and the Investment Manager on the one hand and the Underwriters on the other shall be deemed to be in the same respective proportions as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Fund and the total underwriting discounts and commissions received by the Underwriters, bear to the aggregate public offering price of the APS. The relative fault of the Fund and the Investment Manager on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Fund or the Investment Manager or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses,
damages, expenses, liabilities and claims referred to in this subsection shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating, preparing to defend or defending any Proceeding.
(d) The Fund, the Investment Manager and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 9 were
determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in subsection
(c) above. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
fees and commissions received by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Act) shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 9 are several in proportion to their
respective underwriting commitments and not joint.
(e) The indemnity and contribution agreements contained in this Section 9 and
the covenants, warranties and representations of the Fund contained in this
Agreement shall remain in full force and effect regardless of any
investigation made by or on behalf of any Underwriter, its partners,
directors or officers or any person (including each partner, officer or
director of such person) who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, or by or on behalf
of the Fund or the Investment Manager, its shareholders, partners,
managers, members, trustees, directors or officers or any person who
controls the Fund or the Investment Manager within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, and shall survive any
termination of this Agreement or the issuance and delivery of the APS. The
Fund and the Investment Manager and each Underwriter agree promptly to
notify each other of the commencement of any Proceeding against it and, in
the case of the Fund or the Investment Manager, against any of the Fund's
or the Investment Manager's shareholders, partners, managers, members,
trustees, directors or officers in connection with the issuance and sale of
the APS, or in connection with the Registration Statement or Prospectus.
(f) The Fund and the Investment Manager each acknowledge that the statements with respect to (1) the public offering of the APS as set forth on the cover page of, and (2) selling concessions and reallowances of selling concessions under the caption "Underwriting" in, the Prospectus constitute the only information furnished in writing to the Fund by the Underwriters expressly for use in such document. The Underwriters severally confirm that these statements are correct in all material respects and were so furnished by or on behalf of the Underwriters severally for use in the Prospectus.
(g) Notwithstanding any other provisions in this Section 9, no party shall be entitled to indemnification or contribution under this Underwriting Agreement against any loss, claim, liability, expense or damage arising by reason of such person's willful misfeasance, bad faith, gross negligence or reckless disregard of its duties in the performance of its duties hereunder.
10. NOTICES. Except as otherwise herein provided, all statements, requests,
notices and agreements shall be in writing or by telegram and, if to the
Underwriters, shall be sufficient in all respects if delivered or sent to
UBS Warburg LLC, 299 Park Avenue, New York, NY 10171-0026, Attention:
Syndicate Department and, if to the Fund or the Investment Manager, shall
be sufficient in all respects if delivered or sent to the Fund or the
Investment Manager, as the case may be, at the offices of the Fund or the
Investment Manager at 1345 Avenue of the Americas, New York, New York
10105.
11. GOVERNING LAW; CONSTRUCTION. This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement.
12. SUBMISSION TO JURISDICTION. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and the Fund and UBS Warburg LLC each consent to the jurisdiction of such courts and personal service with respect thereto. The Fund and UBS Warburg hereby consent to personal jurisdiction, service and venue in any court in which any Claim arising out of or in any way relating to this Agreement is brought by any third party against UBS Warburg LLC or any indemnified party. Each of UBS Warburg LLC, the Fund (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Investment Manager (on its behalf and, to the extent permitted by applicable law, on behalf of its unitholders and affiliates) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. Each of the Fund and the Investment Manager agrees that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon the Fund and the Investment Manager, as the case may be, and may be enforced in any other courts in the jurisdiction of which the Fund or the Investment Manager, as the case may be, is or may be subject, by suit upon such judgment.
13. PARTIES AT INTEREST. The Agreement herein set forth has been and is made solely for the benefit of the Underwriters, the Fund and the Investment Manager and to the extent provided in Section 9 hereof the controlling persons, shareholders, partners, members, trustees, managers, directors and officers referred to in such section, and their respective successors, assigns, heirs, personal representatives and executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement.
14. COUNTERPARTS. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties.
15. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the Underwriters, the Fund and the Investment Manager, and any successor or assign of any substantial portion of the Fund's, the Investment Manager's, or any of the Underwriters' respective businesses and/or assets.
16. DISCLAIMER OF LIABILITY OF TRUSTEES AND BENEFICIARIES. A copy of the
Declaration of Trust is on file with the Secretary of State of The
Commonwealth of Massachusetts, and notice hereby is given that this
Underwriting Agreement is executed on behalf of the Fund by an officer or
Trustee of the Fund in his or her capacity as an officer or Trustee of the
Fund and not individually and that the obligations under or arising out of
this Underwriting Agreement are not binding upon any of the Trustees,
officers or shareholders individually but are binding only upon the assets
and properties of the Fund.
If the foregoing correctly sets forth the understanding among the Fund, the Investment Manager and the Underwriters, please so indicate in the space provided below, whereupon this letter and your acceptance shall constitute a binding agreement among the Fund, the Investment Manager and the Underwriters, severally.
Very truly yours,
PIMCO MUNICIPAL INCOME FUND
Title:
PIMCO ADVISORS L.P.
Title:
Accepted and agreed to as of the
date first above written, on
behalf of themselves and
the other several Underwriters
named in Schedule A
UBS WARBURG LLC
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By: UBS WARBURG LLC
SCHEDULE A
Number of Shares
Name to be Purchased
---- ---------------
UBS Warburg
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
|
Total
SCHEDULE B
FORM OF OPINION OF
ROPES & GRAY REGARDING THE FUND
August , 2001
UBS Warburg LLC
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o UBS Warburg LLC
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
We have acted as counsel to PIMCO Municipal Income Fund (the "Fund") in connection with the proposed issuance 1,600 Auction Preferred Shares, Series A, 1,600 Auction Preferred Shares, Series B, 1,600 Auction Preferred Shares, Series C, 1,600 Auction Preferred Shares, Series D, and 1,600 Auction Preferred Shares, Series E (together, the "Preferred Shares"). This opinion is furnished to you pursuant to Section 6(e) of the Underwriting Agreement dated as of August , 2001 (the "Underwriting Agreement") among the Fund, PIMCO Advisors L.P. (the "Investment Manager") and UBS Warburg LLC, A.G. Edwards & Sons, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the underwriters listed on Schedule A thereto (the "Underwriters"). Capitalized terms used in this opinion, unless otherwise defined, have the meanings specified in the Underwriting Agreement.
We have examined signed copies of the registration statement of the Fund on Form N-2 (File No. 333-64796) under the Securities Act of 1933, as amended (the "Securities Act") (which also constitutes Amendment No. 5 to the Fund's Registration Statement on Form N-2 (File No. 811-10377) under the Investment Company Act of 1940, as amended (the "Investment Company Act")), including all exhibits thereto, as filed with the Securities and Exchange Commission (the "Commission") on July 9, 2001 (the "Original Registration Statement"), Pre- Effective Amendment No. 1 to the Original Registration Statement, including all exhibits thereto, as filed with the Commission on August 14, 2001 ("Pre- Effective Amendment No. 1") and Pre-Effective Amendment No. 2 to the Original Registration Statement, including all exhibits thereto, as filed with the Commission on August , 2001 ("Pre-Effective Amendment No. 2," and together with Pre-Effective Amendment No. 1 and the Original Registration Statement, the "Registration Statement"); the Fund's Agreement and Declaration of Trust, as amended to the date hereof (the "Declaration of Trust"), on file in the offices of the Secretary of
State of The Commonwealth of Massachusetts and the Clerk of the City of Boston; the Amended and Restated Bylaws of the Fund, as amended to the date hereof (the "Amended Bylaws"); a copy of the Prospectus dated August , 2001, relating to the Preferred Shares and the Statement of Additional Information of the Fund dated August , 2001, each as filed with the Commission pursuant to Rule 497 under the Securities Act on August , 2001 (together, the "Prospectus"); the Investment Management Agreement dated as of June 20, 2001, between the Fund and the Investment Manager (the "Investment Management Agreement"); the Portfolio Management Agreement dated as of June 20, 2001, between Pacific Investment Management Company LLC (the "Portfolio Manager") and the Investment Manager (the "Portfolio Management Agreement"), as agreed to and accepted by the Fund; the Custodian Agreement dated as of June 29, 2001, between the Fund and State Street Bank and Trust Company (the "Custodian Agreement"); the Auction Agency Agreement dated as of August , 2001, as supplemented by the acceptance letter dated as of the date hereof between between the Fund and Bankers Trust Company (the "Auction Agency Agreement," and together with the Custodian Agreement, the "Fund Agreements"); and the Underwriting Agreement. Additionally, we have relied upon the Order of the Commission pursuant to Section 8(a) of the Securities Act, declaring the Registration Statement effective as of p.m. on August , 2001, and the oral representation by a member of the Commission staff on the date hereof that as of a.m., no stop order suspending the effectiveness of the Registration Statement had been issued and no proceeding for any such purpose was pending or threatened.
We have also examined and relied upon the original or copies of minutes of
the meetings or written consents of the sole shareholder and the Board of
Trustees of the Fund, the documents delivered to the Underwriters by the Fund
and the Investment Manager dated as of the date hereof pursuant to the
Underwriting Agreement and such other documents, including certificates of
officers of the Fund, as we have deemed necessary for purposes of rendering our
opinions below. For purposes of paragraph 2 below, we have relied solely on
(1) the certificate dated as of August , 2001, of the Secretary of State of the
State of California as to the entitlement of the Fund to transact intrastate
business in the State of California and (2) a Certificate of the Special Deputy
Secretary of State of the State of New York dated June 21, 2001, certifying
copies of (a) a Certificate of Designation by the Fund dated June 11, 2001 and
(b) a Statement under Section 18 of the New York General Associations Law,
(3) a Filing Receipt of the Department of State of the State of New York dated
June 21, 2001 relating to the Fund and (4) a LEXIS search on August , 2001, of
the New York Department of State, Corporate Record, showing the "status" of the
Fund as "active" and noting that "good standing status can only be determined by
performing a search in the records of both the Department of State Corporation
Records and the Department of Tax and Franchise." We have assumed the
genuineness of the signatures on all documents examined by us, the authenticity
of all documents submitted to us as originals and the conformity to the
corresponding originals of all documents submitted to us as copies.
We express no opinion as to the laws of any jurisdiction other than The Commonwealth of Massachusetts and the United States of America. We call your attention to the fact that each of the Underwriting Agreement, the Auction Agency Agreement and the Broker-Dealer Agreement provides that it is to be governed by and construed in accordance with the laws of the State of New York. In rendering the opinion as to enforceability expressed in paragraph 5 below, we have limited the scope of our opinion to the conclusions that would be reached by a Massachusetts court that had determined that each of the Fund Agreements would be governed by, and construed in accordance with, the internal laws of The Commonwealth of Massachusetts. Further, we express no opinion as to the state securities or Blue Sky laws of any jurisdiction, including The Commonwealth of Massachusetts.
For purposes of our opinion set forth in paragraph 2 below with respect to the power and authority of the Fund to own, lease and operate its properties and conduct its business, we have relied upon certificates of officers of the Fund as to the states in which the Fund leases or owns real property or in which it conducts material operations.
Insofar as this opinion relates to factual matters, we have made inquiries to officers of the Fund, the Investment Manager and the Portfolio Manager to the extent we believe reasonable with respect to such matters and have relied upon representations made by the Fund and the Investment Manager in the Underwriting Agreement, representations made by the Portfolio Manager to the Investment Manager and representations made to us by one or more officers of the Fund, the Investment Manager or the Portfolio Manager. We have not independently verified the accuracy of such representations. In respect of our opinions set forth in paragraphs 7, 9 and 10 below, we have not searched the dockets of any court, administrative body or other filing office in any jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Registration Statement is effective under the Securities Act; the filing of the Prospectus pursuant to Rule 497 under the Securities Act has been made in the manner and within the time period required by Rule 497; and based upon oral inquiries to the Commission staff on the date hereof, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for any such purpose is pending or threatened by the Commission.
2. The Fund has been duly organized and is validly existing and in good standing as an unincorporated voluntary association under and by virtue of the laws of The Commonwealth of Massachusetts and has full power and authority to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus. The Certificate of Designation relating to the Fund's conduct of business in the State of New York is on file with the Department of State of the State of New York, and the Fund is entitled to transact intrastate business in the State of California.
3. The Fund's authorized capitalization is as set forth in the Registration Statement and the Prospectus. The Fund has an indefinite number of authorized common shares of beneficial interest, no par value per share. The Shares conform in all material respects as to legal matters to the description of them under the caption entitled "Description of APS" in the Prospectus. All outstanding common shares of beneficial interest of the Fund have been duly authorized and are validly issued, fully paid and, subject to the penultimate paragraph of this opinion letter, non-assessable. The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and, subject to the penultimate paragraph of this opinion letter, non-assessable. No person is entitled to any preemptive or other similar rights with respect to the Shares.
4. To the best of our knowledge after due inquiry, including oral inquiries of the Commission staff on June 28, 2001, the Fund is duly registered with the Commission under the Investment Company Act as a closed-end management investment company, and all required action has been taken by the Fund under the Securities Act, the Investment Company Act and the rules and regulations thereunder in connection with the issuance and sale of the Shares to make the public offering and consummate the sale of the Shares pursuant to the Underwriting Agreement.
5. The Fund has, or at the relevant time had, full power and authority to enter into each of the Fund Agreements and to perform all of the terms and provisions thereof to be carried out by it. Each Fund Agreement has been duly and validly authorized, executed and delivered by the Fund. Each Fund Agreement complies in all material respects with all applicable provisions of the Investment Company Act and the Investment Advisers Act of 1940, as amended, as the case may be. Assuming due authorization, execution and delivery by the other parties thereto, each Fund Agreement constitutes the legal, valid and binding obligation of the Fund enforceable in accordance with its terms, subject as to enforcement to bankruptcy, insolvency, moratorium, reorganization and other laws of general applicability relating to or affecting creditors' rights and to general equity principles (regardless of whether enforceability is considered in a proceeding in equity or at law).
6. The Fund has, or at the relevant time had, full power and authority to enter into each of the Investment Management Agreement and the Underwriting Agreement and to perform all of the terms and provisions thereof to be carried out by it. The Investment Management Agreement and the Underwriting Agreement have been duly and validly authorized, executed and delivered by the Fund.
7. None of (a) the execution and delivery by the Fund of the Investment
Management Agreement, the Underwriting Agreement or any of the Fund Agreements,
(b) the issue and sale by the Fund of the Shares as contemplated by the
Underwriting Agreement and (c) the performance by the Fund of its obligations
under the Investment Management Agreement, the Underwriting Agreement or any of
the Fund Agreements or the consummation by the Fund of the other transactions
contemplated by the Investment Management Agreement, the Underwriting Agreement
or any of the Fund Agreements
conflicts or will conflict with, or results or will result in a breach of, the Declaration of Trust or the Amended Bylaws or, to our knowledge, any agreement or instrument to which the Fund is a party or by which the Fund is bound, or violates or will violate any federal statute, law or regulation or any judgment, injunction, order or decree of any federal governmental agency or body that is applicable to the Fund and that is known to us, which violation would have a material adverse effect on the condition or business of the Fund.
8. To the best of our knowledge, the Fund is not currently in breach of, or in default under, any material written agreement or instrument to which it is a party or by which it or its property is bound or affected.
9. No consent, approval, authorization or order of any court or governmental agency or body or securities exchange or securities association is required by the Fund for the consummation by the Fund of the transactions contemplated in the Investment Management Agreement, the Underwriting Agreement and the Fund Agreements, except such as (a) have been obtained under the Securities Act, the Investment Company Act or the Exchange Act and (b) may be required by the New York Stock Exchange or the National Association of Securities Dealers, Inc. or under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters pursuant to the Underwriting Agreement.
10. To our knowledge, there are no legal or governmental proceedings pending or threatened against the Fund, or to which the Fund or any of its properties is subject, that are required to be described in the Registration Statement or the Prospectus but are not described therein as required.
11. To the best of our knowledge after due inquiry, there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which have not been so described or filed as an exhibit or incorporated therein by reference.
12. Each of the sections in the Prospectus entitled "Taxes" and "Tax matters," to the extent that it states matters of United States law or legal conclusions with respect thereto, presents a fair summary of the principal federal income tax rules currently in effect applicable to the Fund and to the purchase, ownership and disposition of the Shares.
13. The Registration Statement (except for the financial statements and schedules, the notes thereto and any schedules and other financial data contained or incorporated by reference therein or omitted therefrom, as to which we express no opinion), at the effective time set forth above, and the Prospectus (except as aforesaid), as of the date thereof, complied as to form in all material respects to the applicable requirements of the Securities Act and the Investment Company Act.
We have not independently verified the accuracy, completeness or fairness of the statements made or the information contained in the Registration Statement or the Prospectus and, except in the respects and to the extent set forth in paragraphs 3 and 13 above, we are not passing upon and do not assume any responsibility therefor. In the course of the preparation by the Fund of the Registration Statement and the Prospectus, we have participated in discussions with your representatives and employees and officers of the Fund, the Investment Manager and the Portfolio Manager and in discussions with the Fund's independent accountants, in which the business and the affairs of the Fund, the Investment Manager and the Portfolio Manager and the contents of the Registration Statement and the Prospectus were discussed. There is no assurance that all material facts as to the Fund, the Investment Manager, the Portfolio Manager and their affairs were disclosed to us or that our familiarity with the Fund, the Investment Manager or the Portfolio Manager is such that we would have necessarily recognized the materiality of such facts as were disclosed to us, and we have to a large extent relied upon statements of representatives of the Fund, the Investment Manager and the Portfolio Manager as to the materiality of the facts disclosed to us. On the basis of information that we have gained in the course of our representation of the Fund in connection with its preparation of the Registration Statement and the Prospectus and our participation in the discussions referred to above, no facts have come to our attention that would lead us to believe that as of August , 2001, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that as of the date of the Prospectus and the date hereof the Prospectus contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light, in each case, of the circumstances under which they were made, not misleading (in each case, other than the financial statements and schedules, the notes thereto and any schedules and other financial data contained or incorporated by reference therein or omitted therefrom, as to which we express no opinion).
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Fund's Declaration of Trust disclaims shareholder liability for acts or obligations of the Fund and requires that notice of such disclaimer be given in each agreement, obligation, and instrument entered into or executed by the Fund or the Trustees. The Declaration of Trust provides for indemnification out of the property of the Fund for all loss and expense of any shareholder held personally liable solely by reason of being or having been a shareholder of the Fund. Thus, the risk of a shareholder's incurring financial loss on account of being a shareholder is limited to circumstances in which the Fund itself would be unable to meet its obligations.
This letter and the opinions expressed herein are furnished by us to you and are solely for benefit of the Underwriters, except that Skadden, Arps, Slate, Meagher & Flom (Illinois) may rely on this letter as to all matters governed by the laws of The Commonwealth of Massachusetts in delivering its opinion to you on the date hereof.
Very truly yours,
Ropes & Gray
SCHEDULE C
FORM OF OPINION OF INTERNAL COUNSEL
REGARDING PIMCO ADVISORS L.P.
August , 2001
UBS Warburg LLC
A.G. Edwards & Sons, Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
as Managing Underwriters
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
I am the General Counsel of PIMCO Advisors L.P., a Delaware limited partnership ("PIMCO Advisors"), and have counseled PIMCO Advisors in such capacity in connection with the sale to you by PIMCO Municipal Income Fund, a voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust) (the "Fund"), of 1,600 Auction Preferred Shares, Series A, 1,600 Auction Preferred Shares, Series B, 1,600 Auction Preferred Shares, Series C, 1,600 Auction Preferred Shares, Series D, and 1,600 Auction Preferred Shares, Series E, of the Fund (the "APS"), pursuant to a registration statement on Form N-2 under the Securities Act of 1933, as amended (the "Act") and the Investment Company Act of 1940, as amended (the "Investment Company Act"), filed with the Securities and Exchange Commission (the "Commission") on July 9, 2001 (Act File No. 333-64796, and Investment Company Act File No. 811-10377), as amended by Amendment No. 1 filed with the Commission on August 14, 2001, and Amendment No. 2 filed with the Commission on August , 2001 (the "Registration Statement"), and an underwriting agreement dated August , 2001 by and among you, the Fund and PIMCO Advisors (the "Underwriting Agreement") relating to the issuance and sale by the Fund of the APS.
This opinion is rendered to you pursuant to Section 6(e) of the Underwriting Agreement. Capitalized terms used herein without definition have the meanings assigned to them in the Underwriting Agreement.
As such counsel, I have examined such matters of fact and questions of law as I have considered appropriate for purposes of rendering the opinions
expressed below, except where a statement is qualified as to knowledge or awareness, in which case I have made no or limited inquiry as specified below. I have examined, among other things, the following:
(a) the Underwriting Agreement;
(b) that certain Investment Management Agreement by and between the Fund and PIMCO Advisors, dated as of June 20, 2001; and
(c) that certain Portfolio Management Agreement by and among Pacific Investment Management Company LLC and PIMCO Advisors, as accepted and agreed to by the Fund, dated as of June 20, 2001.
The documents described in subsection (a)-(c) above are referred to herein collectively as the "Transaction Documents."
In my examination, I have assumed the genuineness of all signatures (other than those of officers of PIMCO Advisors on the Transaction Documents), the authenticity of all documents submitted to me as originals, and the conformity to authentic original documents of all documents submitted to me as copies.
I have been furnished with, and with your consent have relied upon, certificates of officers of PIMCO Advisors with respect to certain factual matters. In addition, I have obtained and relied upon such certificates and assurances from public officials as I have deemed necessary.
I am opining herein as to the effect of the federal laws of the United States, the internal laws of the State of New York and the internal laws of the State of Delaware, and I express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or country or as to any matters of municipal law or the laws of any other local agencies within any state or country. My opinions set forth in paragraph 4 below are based upon my consideration of only those statutes, rules and regulations which, in my experience, are normally applicable to transactions similar to those contemplated by the Transaction Documents, generally.
Whenever a statement herein is qualified by "to my knowledge" or a similar phrase, it is intended to indicate that I do not have current actual knowledge of the inaccuracy of such statement. However, except as otherwise expressly indicated, I have not undertaken any independent investigation to determine the accuracy of any such statement, and no inference that I have any knowledge of any matters pertaining to such statement should be drawn from my position as General Counsel of PIMCO Advisors.
Subject to the foregoing and the other matters set forth herein, it is my opinion that, as of the date hereof:
1. PIMCO Advisors is a limited partnership and is validly existing and in good standing under the Delaware Revised Uniform Limited Partnership Act (6 Del. C (S). 17-101, et seq.) with all necessary partnership power and authority to enter into
and deliver the Transaction Documents and perform its obligations thereunder and to carry on its business as it is now being conducted and as described in the Registration Statement. Based solely on certificates from public officials, I confirm that PIMCO Advisors is qualified to do business in the following States: California, New York, Connecticut, Texas and Washington, such States being those in which its ownership or leasing of property or its conducting of business may require such qualification and where failure to so qualify would have a material adverse effect on the ability of the Investment Manager to perform its obligations under the Investment Management Agreement and the Portfolio Management Agreement.
2. The execution, delivery and performance of the Transaction Documents by PIMCO Advisors have been duly authorized by all necessary partnership action of PIMCO Advisors and no other actions on the part of PIMCO Advisors or its unitholders or any subsidiary of PIMCO Advisors or its unitholders is necessary to authorize and consummate the transactions contemplated thereby, and the Transaction Documents have been duly executed and delivered by PIMCO Advisors.
3. Each of the Investment Management Agreement and the Portfolio Management Agreement constitutes a legally valid and binding agreement of PIMCO Advisors, enforceable against PIMCO Advisors in accordance with its terms.
4. Neither the execution and delivery of the Transaction Documents by PIMCO Advisors, nor the consummation by PIMCO Advisors of transactions contemplated thereby, nor compliance by PIMCO Advisors with any of the terms and provisions thereof will:
(i) violate any provision of the Second Amended and Restated Agreement of Limited Partnership of PIMCO Advisors L.P., effective May 5, 2000,
(ii) violate any federal, California or New York statute, rule or regulation applicable to PIMCO Advisors (other than federal and state securities or blue sky laws, the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended, as to which I express no opinion),
(iii) violate any agreement to which PIMCO Advisors is a party or by which it is bound and which is material to PIMCO Advisors' businesses taken as a whole (the "Material Agreements"),
(iv) violate any order, writ, injunction or decree, known to me and applicable to PIMCO Advisors, or
(v) to the best of my knowledge, require any consents, approvals, authorizations, registrations, declarations or filings by PIMCO Advisors under any federal statute, rule or regulation applicable to PIMCO Advisors, except as have been obtained under the Act, the Investment Company Act or the Investment Advisers Act of 1940.
No opinion is expressed in this paragraph 4 as to the application of
Section 548 of the federal Bankruptcy Code and comparable provisions of state or
foreign law or of any antifraud laws, antitrust or trade regulation laws. No
opinion is expressed in this paragraph 4 with respect to the operating licenses
necessary for PIMCO Advisors' businesses.
5. PIMCO Advisors is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the Investment Company Act from acting as investment adviser for the Fund as contemplated by the Investment Management Agreement, the Registration Statement and the Prospectus.
6. The description of PIMCO Advisors and its business, and the statements attributable to PIMCO Advisors, set forth in the Registration Statement and the Prospectus under the headings "Prospectus Summary - Investment Manager" and "Management of the Fund" do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
7. There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to my knowledge, threatened against PIMCO Advisors of a nature required to be disclosed in the Registration Statement or Prospectus or that might reasonably result in any material adverse change in the ability of PIMCO Advisors to fulfill its obligations under either the Investment Management Agreement or the Portfolio Management Agreement.
The opinions expressed in paragraph 3 above are subject to the following limitations, qualifications and exceptions:
(a) the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights or remedies of creditors generally;
(b) the effect of general principles of equity, whether enforcement is considered in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought;
(c) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; and
(d) the unenforceability of any provision requiring the payment of attorney's fees, except to the extent that a court determines such fees to be reasonable.
In rendering the opinions expressed in paragraph 4 insofar as they require interpretation of the Material Agreements (i) I have assumed with your permission that all courts of competent jurisdiction would enforce such agreements as written but would apply the internal laws of the State of New York without giving effect to any choice of law provisions contained therein or any choice of law principles which would result in application of the internal laws of any other state and (ii) to the extent that any questions of legality or legal construction have arisen in connection with my review, I have applied the laws of the State of New York in resolving such questions. I advise you that certain of the Material Agreements may be governed by other laws, that such laws may vary substantially from the law assumed to govern for purposes of this opinion, and that this opinion may not be relied upon as to whether or not a breach or default would occur under the law actually governing such Material Agreements.
To the extent that the obligations of PIMCO Advisors may be dependent upon such matters, I assume for purposes of this opinion that: (i) all parties to the Transaction Documents other than PIMCO Advisors are duly incorporated or organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation or organization; (ii) all parties to the Transaction Documents other than PIMCO Advisors have the requisite power and authority and, in the case of natural persons, legal capacity to execute and deliver the Transaction Documents and to perform their respective obligations under the Transaction Documents to which they are a party; and (iii) the Transaction Documents to which such parties other than PIMCO Advisors are a party have been duly authorized, executed and delivered by such parties and, other than PIMCO Advisors, constitute their legally valid and binding obligations, enforceable against them in accordance with their terms. I express no opinion as to compliance by any parties to the Transaction Documents with any state or federal laws or regulations applicable to the subject transactions because of the nature of their business and I express no opinion as to compliance by any parties to the Transaction Documents with any foreign laws or regulations applicable to the transactions contemplated by the Transaction Documents or which may affect the Transaction Documents' enforceability.
This opinion is rendered only to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without my prior written consent.
Very truly yours,
* * *
Special Counsel for the Investment Adviser shall separately opine that, assuming the Investment Manager is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the Investment Company Act from acting as investment adviser for the Fund as contemplated by the Investment Management Agreement, the Registration Statement and the Prospectus, neither the execution and
delivery of the Underwriting Agreement, the Investment
Management Agreement or the Portfolio Management Agreement by the Investment
Manager, nor the consummation by the Investment Manager of the transactions
contemplated thereby, nor compliance by the Investment Manager with any of the
terms and provisions thereof will violate the provisions of the Investment
Company Act or the Advisers Act; provided, however, that such opinion may
specifically disclaim any opinion as to (a) the reasonableness of the fees to be
paid to the Investment Manager under the Investment Management Agreement and
(b) the compliance by the Investment Manager with its indemnification and
contribution obligations set forth in the Underwriting Agreement.
SCHEDULE D
FORM OF OPINION OF INTERNAL COUNSEL
REGARDING PIMCO
August , 2001
UBS Warburg LLC
A.G. Edwards & Sons, Inc.
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated
as Managing Underwriters
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
I am the General Counsel of PIMCO Advisors L.P., a Delaware limited partnership ("PIMCO Advisors"), managing member of Pacific Investment Management Company LLC, a Delaware limited liability company ("PIMCO"). In such capacity I am rendering this opinion on behalf of PIMCO in connection with the sale to you by PIMCO Municipal Income Fund, a voluntary association with transferable shares organized and existing under and by virtue of the laws of The Commonwealth of Massachusetts (commonly referred to as a Massachusetts business trust) (the "Fund"), of 1,600 Auction Preferred Shares, Series A, 1,600 Auction Preferred Shares, Series B, 1,600 Auction Preferred Shares, Series C, 1,600 Auction Preferred Shares, Series D, and 1,600 Auction Preferred Shares, Series E, of the Fund (the "APS"), pursuant to a registration statement on Form N-2 under the Securities Act of 1933, as amended (the "Act") and the Investment Company Act of 1940, as amended (the "Investment Company Act"), filed with the Securities and Exchange Commission (the "Commission") on July 9, 2001 (Act File No. 333-64796, and Investment Company Act File No. 811-10377), as amended by Amendment No. 1 filed with the Commission on August 14, 2001, and Amendment No. 2 filed with the Commission on August , 2001 (the "Registration Statement"), and an underwriting agreement dated August , 2001, by and among you, the Fund and PIMCO Advisors (the "Underwriting Agreement") relating to the issuance and sale by the Fund of the APS.
This opinion is rendered to you pursuant to Section 6(e) of the Underwriting Agreement. Capitalized terms used herein without definition have the meanings assigned to them in the Underwriting Agreement.
As such counsel, I have examined such matters of fact and questions of law as I have considered appropriate for purposes of rendering the opinions expressed
below, except where a statement is qualified as to knowledge or awareness, in which case I have made no or limited inquiry as specified below. I have examined, among other things, that certain Portfolio Management Agreement by and between PIMCO and PIMCO Advisors L.P., as accepted and agreed to by the Fund, dated as of June 20, 2001 (the "Portfolio Management Agreement").
In my examination, I have assumed the genuineness of all signatures (other than those of officers of PIMCO on the Portfolio Management Agreement), the authenticity of all documents submitted to me as originals, and the conformity to authentic original documents of all documents submitted to me as copies.
I have been furnished with, and with your consent have relied upon, certificates of officers of PIMCO with respect to certain factual matters. In addition, I have obtained and relied upon such certificates and assurances from public officials as I have deemed necessary.
I am opining herein as to the effect of the federal laws of the United States, the internal laws of the State of New York and the internal laws of the State of Delaware, and I express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or country or as to any matters of municipal law or the laws of any other local agencies within any state or country. My opinions set forth in paragraph 4 below are based upon my consideration of only those statutes, rules and regulations which, in my experience, are normally applicable to transactions similar to those contemplated by the Portfolio Management Agreement, generally.
Whenever a statement herein is qualified by "to my knowledge" or a similar phrase, it is intended to indicate that I do not have current actual knowledge of the inaccuracy of such statement. However, except as otherwise expressly indicated, I have not undertaken any independent investigation to determine the accuracy of any such statement, and no inference that I have any knowledge of any matters pertaining to such statement should be drawn from my position as General Counsel of PIMCO Advisors.
Subject to the foregoing and the other matters set forth herein, it is my opinion that, as of the date hereof:
1. PIMCO is a limited liability company and is validly existing and in good standing under the Delaware Limited Liability Company Act (6 Del. C (S). 18-101, et seq.) with all necessary limited liability company power and authority to enter into and deliver the Portfolio Management Agreement and perform its obligations thereunder and to carry on its business as it is now being conducted and as described in the Registration Statement. Based solely on certificates from public officials, I confirm that PIMCO is qualified to do business in the following States: California and New York, such States being those in which its ownership or leasing of property or its conducting of business may require such qualification and where failure to so qualify would have a material adverse effect on the ability of PIMCO to perform its obligations under the Portfolio Management Agreement.
2. The execution, delivery and performance of the Portfolio Management Agreement by PIMCO have been duly authorized by all necessary limited liability company action of PIMCO and no other actions on the part of PIMCO or its unitholders or any subsidiary of PIMCO or its unitholders is necessary to authorize and consummate the transactions contemplated thereby, and the Portfolio Management Agreement has been duly executed and delivered by PIMCO.
3. The Portfolio Management Agreement constitutes a legally valid and binding agreement of PIMCO, enforceable against PIMCO in accordance with its terms.
4. Neither the execution and delivery of the Portfolio Management Agreement by PIMCO, nor the consummation by PIMCO of transactions contemplated thereby, nor compliance by PIMCO with any of the terms and provisions thereof will:
(i) violate any provision of the limited liability company agreement of PIMCO, effective May 5, 2000,
(ii) violate any federal, California or New York statute, rule or regulation applicable to PIMCO (other than federal and state securities or blue sky laws, the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended, as to which I express no opinion),
(iii) violate any agreement to which PIMCO is a party or by which it is bound and which is material to PIMCO's businesses taken as a whole (the "Material Agreements"),
(iv) violate any order, writ, injunction or decree, known to me and applicable to PIMCO, or
(v) to the best of my knowledge, require any consents, approvals, authorizations, registrations, declarations or filings by PIMCO under any federal statute, rule or regulation applicable to PIMCO, except as have been obtained under the Act, the Investment Company Act or the Investment Advisers Act of 1940.
No opinion is expressed in this paragraph 4 as to the application of
Section 548 of the federal Bankruptcy Code and comparable provisions of state or
foreign law or of any antifraud laws, antitrust or trade regulation laws. No
opinion is expressed in this paragraph 4 with respect to the operating licenses
necessary for PIMCO's businesses.
5. PIMCO is duly registered as an investment adviser under the Advisers Act and is not prohibited by the Advisers Act or the Investment Company Act from acting as investment sub-adviser for the Fund as contemplated by the Portfolio Management Agreement, the Registration Statement and the Prospectus.
6. The description of PIMCO and its business, and the statements attributable to PIMCO, set forth in the Registration Statement and the Prospectus under
the headings "Prospectus Summary - Portfolio Manager" and "Management of the Fund" do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
7. There is no action, suit or proceeding before or by any court, commission, regulatory body, administrative agency or other governmental agency or body, foreign or domestic, now pending or, to my knowledge, threatened against PIMCO of a nature required to be disclosed in the Registration Statement or Prospectus or that might reasonably result in any material adverse change in the ability of PIMCO to fulfill its obligations under the Portfolio Management Agreement.
The opinions expressed in paragraph 3 above are subject to the following limitations, qualifications and exceptions:
(a) the effect of bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to or affecting the rights or remedies of creditors generally;
(b) the effect of general principles of equity, whether enforcement is considered in a proceeding in equity or at law, and the discretion of the court before which any proceeding therefor may be brought;
(c) the unenforceability under certain circumstances under law or court decisions of provisions providing for the indemnification of or contribution to a party with respect to a liability where such indemnification or contribution is contrary to public policy; and
(d) the unenforceability of any provision requiring the payment of attorney's fees, except to the extent that a court determines such fees to be reasonable.
In rendering the opinions expressed in paragraph 4 insofar as they require interpretation of the Material Agreements (i) I have assumed with your permission that all courts of competent jurisdiction would enforce such agreements as written but would apply the internal laws of the State of New York without giving effect to any choice of law provisions contained therein or any choice of law principles which would result in application of the internal laws of any other state and (ii) to the extent that any questions of legality or legal construction have arisen in connection with my review, I have applied the laws of the State of New York in resolving such questions. I advise you that certain of the Material Agreements may be governed by other laws, that such laws may vary substantially from the law assumed to govern for purposes of this opinion, and that this opinion may not be relied upon as to whether or not a breach or default would occur under the law actually governing such Material Agreements.
To the extent that the obligations of PIMCO may be dependent upon such matters, I assume for purposes of this opinion that: (i) all parties to the Portfolio Management Agreement other than PIMCO are duly incorporated or organized, validly
existing and in good standing under the laws of their respective jurisdictions of incorporation or organization; (ii) all parties to the Portfolio Management Agreement other than PIMCO have the requisite power and authority and, in the case of natural persons, legal capacity to execute and deliver the Portfolio Management Agreement and to perform their respective obligations under the Portfolio Management Agreement; and (iii) the Portfolio Management Agreement has been duly authorized, executed and delivered by such parties other than PIMCO and, other than PIMCO, constitutes their legally valid and binding obligations, enforceable against them in accordance with their terms. I express no opinion as to compliance by any parties to the Portfolio Management Agreement with any state or federal laws or regulations applicable to the subject transactions because of the nature of their business and I express no opinion as to compliance by any parties to the Portfolio Management Agreement with any foreign laws or regulations applicable to the transactions contemplated by the Portfolio Management Agreement or which may affect the Portfolio Management Agreement's enforceability.
This opinion is rendered only to you and is solely for your benefit in connection with the transactions covered hereby. This opinion may not be relied upon by you for any other purpose, or furnished to, quoted to or relied upon by any other person, firm or corporation for any purpose, without my prior written consent.
Very truly yours,
SCHEDULE E
FORM OF ACCOUNTANT'S LETTER
August , 2001
The Board of Trustees of
PIMCO Municipal Income Fund
840 Newport Center Drive
Suite 300
Newport Beach, California 92660
UBS Warburg LLC
299 Park Avenue
New York, New York 10171
as Managing Representative of the Underwriters
Ladies and Gentlemen:
We have audited the statement of assets and liabilities of PIMCO Municipal Income Fund (the "Fund") as of __________, 2001 included in the Registration Statement on Form N-2 filed by the Fund under the Securities Act of 1933 (the "Act") (File No. 333- ) and under the Investment Company Act of 1940 (the "1940 Act") (File No. 811- ); such statement and our report with respect to such statement are included in the Registration Statement.
In connection with the Registration Statement:
1. We are independent public accountants with respect to the Fund within the meaning of the Act and the applicable rules and regulations thereunder.
2. In our opinion, the statement of assets and liabilities included in the Registration Statement and audited by us complies as to form in all respects with the applicable accounting requirements of the Act, the 1940 Act and the respective rules and regulations thereunder.
3. For purposes of this letter we have read the minutes of all meetings of the Shareholders, the Board of Trustees and all Committees of the Board of Trustees of the Fund as set forth in the minute books at the offices of the Fund, officials of the Fund having advised us that the minutes of all such meetings through ________________, 2001, were set forth therein.
4. Fund officials have advised us that no financial statements as of any date subsequent to ________________, 2001, are available. We have made inquiries of certain officials of the Fund who have responsibility for financial and accounting
matters regarding whether there was any change at ________________, 2001, in the capital shares or net assets of the Fund as compared with amounts shown in the _____________, 2001, statement of assets and liabilities included in the Registration Statement, except for changes that the Registration Statement discloses have occurred or may occur. On the basis of our inquiries and our reading of the minutes as described in Paragraph 3, nothing came to our attention that caused us to believe that there were any such changes.
The foregoing procedures do not constitute an audit made in accordance with generally accepted auditing standards. Accordingly, we make no representations as to the sufficiency of the foregoing procedures for your purposes.
This letter is solely for the information of the addressees and to assist the underwriters in conducting and documenting their investigation of the affairs of the Fund in connection with the offering of the securities covered by the Registration Statement, and is not to be used, circulated, quoted or otherwise referred to within or without the underwriting group for any other purpose, including but not limited to the registration, purchase or sale of securities, nor is it to be filed with or referred to in whole or in part in the Registration Statement or any other document, except that reference may be made to it in the underwriting agreement or in any list of closing documents pertaining to the offering of the securities covered by the Registration Statement.
Very Truly Yours,
PRICEWATERHOUSECOOPERS LLP
Exhibit h.2
UBS Warburg LLC
Master Agreement Among Underwriters
MAY 2000
Master Agreement Among Underwriters
January 1, 1999
UBS Warburg LLC
299 Park Avenue
New York, New York 10171-0026
Ladies and Gentlemen:
We hereby agree that this Master Agreement Among Underwriters (this "Agreement") will apply to our participation in offerings of securities where you act as Manager or one of the Managers of the underwriting syndicate (including offerings subject to competitive bidding where you act as Representative of a group of bidders or purchasers). The issuer of the securities is referred to as the "Company", the seller of any such securities other than the Company is referred to as the "Seller" and such securities are referred to as the "Securities".
1. Applicability
This Agreement as amended or supplemented by the Terms Communication (as defined below) will apply to any offering of Securities, pursuant to a registration statement filed under the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively, the "Securities Act"), or exempt from such registration, where you have informed us that this Agreement applies. Any such offering in which we participate as an Underwriter is referred to as an "Offering".
You may, from time to time, invite us to participate in an Offering by sending a wire, telex, facsimile or other means of invitation relating to that Offering (an "Invitation"). As to any such Offering, you will promptly advise us of the following as applicable: the amount of Securities to be underwritten by us, the expected offering and closing dates, the offering price and the purchase price, the interest or dividend rate (or the method by which such rate is to be determined), the conversion price, the underwriting discount, the management fee, the concession and the reallowance. If the offering price is to be determined by a formula based upon the market price of certain securities ("Formula Pricing"), you will so indicate and specify the maximum underwriting discount, management fee and concession. You will also advise us if the Offering includes Delayed Delivery Contracts or if the Underwriting Agreement (as defined below) grants the Underwriters an option to purchase additional Securities (the "Option Securities"). The foregoing information may be conveyed in the Invitation or in a Terms Wire substantially in the forms of Exhibits A and B hereto, respectively (collectively, the "Terms Communication"). The Terms Communication may also supplement or amend the terms of this Agreement applicable to an Offering.
Receipt of our acceptance substantially in the form set forth in Exhibit A without receipt of our written revocation before the time specified in the Terms Communication constitutes our "Final Acceptance". By our Final Acceptance, we agree that this Agreement will be incorporated by reference in such Terms Communication as though set forth in its entirety and will govern our participation in such Offering.
2. Underwriting Agreement and Master Underwriters' Questionnaire
For each Offering, the Company, any Seller and/or any guarantor of such Securities will enter into an underwriting or purchase agreement or similar agreement (the "Underwriting Agreement"), which will be sent to us, available for review in your office or in publicly available form with the Securities and Exchange Commission (the "Commission"). By our Final Acceptance, we authorize you to purchase on our behalf the amount of the Securities set forth in the Terms Communication (our "Initial Commitment") plus our share of any Option Securities less any amount of our Securities to be sold pursuant to Delayed Delivery Contracts under Section 7 below. The Securities we are obligated to purchase after any such adjustment are referred to as "Our Securities." If the Securities are debt obligations maturing serially, our allocation of the maturities will be proportionate to our underwriting obligation.
Our Final Acceptance will also constitute (i) our representation that our
commitment with respect to the Offering will not violate any applicable capital
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder (collectively, the "Exchange Act"), the National
Association of Securities Dealers, Inc. ("NASD") or any securities exchange and
(ii) our confirmation that the information given or deemed given in response to
the Master Underwriters' Questionnaire attached as Exhibit C is correct. We will
notify you immediately whenever such information becomes inaccurate or
incomplete during an Offering.
3. Offering Documents
Registered Offerings. For an Offering of Securities registered under the Securities Act ("Registered Offering"), you will provide the file number(s) of the Registration Statement (as defined below) filed with the Commission or, to the extent made available by the Company, send us or make available for our
review in your office a copy of such Registration Statement except for any exhibits and documents incorporated therein by reference. As soon as practicable after sufficient quantities of the final prospectus (excluding documents incorporated by reference therein) are made available to you by the Company to be used in connection with the Offering of the Securities, you will furnish to us sufficient copies thereof or arrange to have such copies furnished to us. We understand that we are not authorized to give any information or make any representation not contained in the Prospectus (including documents incorporated by reference therein), as amended or supplemented, in connection with the Offering.
Our Final Acceptance will constitute (i) our acknowledgment that we are familiar with such Registration Statement, as amended to the date of the Offering, including any exhibits or documents incorporated therein by reference (the "Registration Statement"), and with any preliminary prospectus, final prospectus, or prospectus supplement filed with the Commission (collectively, the "Prospectus") and the forms of Underwriting Agreement and indenture or other document describing the terms of the Securities filed as exhibits thereto or otherwise made available to us, (ii) our representation that the information relating to us in such Registration Statement and Prospectus is correct and not misleading, (iii) our consent to be named as an Underwriter therein, and (iv) our representation that we will furnish a Prospectus to each person to whom we sell Securities or to whom we furnished a previous Prospectus as required by applicable regulation or as requested by you. We will maintain accurate records of our distribution of the Registration Statement and the Prospectus.
Where specified in the Terms Communication, we will not without your consent sell any of the Securities to an account over which we have investment discretion.
Offerings Pursuant to Offering Circular. For other than a Registered Offering, you will provide or make available to us for our review in your office, to the extent made available by the Company, copies of any preliminary and final offering circulars or other offering materials and any amendments thereto (the "Offering Circular"). As soon as practicable after sufficient quantities of the final offering circular (excluding documents incorporated by reference therein) are made available to you by the Company to be used in connection with the Offering of the Securities, you will furnish to us sufficient copies thereof or arrange to have such copies furnished to us. We understand that we are not authorized to give any information or make any representation not contained in the Offering Circular (including documents incorporated by reference therein), as amended or supplemented, in connection with the Offering.
Our Final Acceptance will also constitute (i) our acknowledgment that we are familiar with the Offering Circular, and the forms of Underwriting Agreement and indenture or other document describing the terms of the Securities made available to us (ii) our representation that the information relating to us in the Offering Circular is correct and not misleading, (iii) our consent to being named as an Underwriter therein, and (iv) our representation that we will furnish an Offering Circular to each person to whom we sell Securities or to whom we furnish a previous Offering Circular as required by any regulation or as requested by you. We will maintain accurate records of our distribution of the Offering Circular.
4. Manager's Authority
We authorize you, acting as Manager, to (i) negotiate, execute and deliver the Underwriting Agreement, (ii) exercise all authority and discretion granted by the Underwriting Agreement and take all action you deem desirable in connection with this Agreement and the Underwriting Agreement including, but not limited to, waiving performance or satisfaction by the Company, any selling security holder or any other party to the Underwriting Agreement of its or their obligations or conditions included in the Underwriting Agreement or the Terms Communication (including this Agreement), if in your judgment such waiver will not have a material adverse effect upon the interests of the Underwriters and exercising any right of cancellation or termination, (iii) modify, vary or waive any provision in the Underwriting Agreement except the amount of Our Securities or the purchase price (except you may determine the price by Formula Pricing where applicable), (iv) determine the timing and the terms of the Offering (including varying the offering terms and the concessions and discounts to dealers), (v) exercise any option relating to the purchase of Option Securities, and (vi) take all action you deem desirable in connection with the Offering and the purchase, carrying, sale and distribution of the Securities. If there are other Managers with respect to an Offering, you may take any action hereunder alone on behalf of the Managers, and our representations, agreements and authorizations given herein shall also be for the benefit of such other Manager to whom you may grant any of your authority to act hereunder.
You may arrange for the purchase by others, who may include your or other Underwriters, of any Securities not taken up by an Underwriter in respect of its obligations hereunder who defaults under this Agreement and/or the Underwriting Agreement. We will assume our proportionate share of all defaulted obligations not assumed by others and any Securities so assumed shall be included in Our Securities. However, nothing in this paragraph will affect our liability or obligations in the event of a default by us or any other Underwriter(s).
You may advertise the Offering as you determine and determine all matters relating to communications with dealers or others. We will not advertise the Offering without your consent, and we assume all expense and risk with respect to any advertising by us.
Notwithstanding any information you furnish as to jurisdictions where you believe the Securities may be sold, you have no obligation for qualification of the Securities for sale under the laws of any jurisdiction. You may file a New York Further State Notice. You have no liability to us except for your own lack of good faith in meeting obligations expressly assumed by you hereunder.
5. Management Fee
We will pay and authorize you to charge our account with our share of the Management Fee set forth in the Terms Communication and calculated without deduction in respect of any Delayed Delivery Securities. Such compensation may be divided among the Managers as you decide.
6. Offering
We will comply with any applicable requirement of the Securities Act, the
Exchange Act and any other applicable Federal or state statute and the rules and
regulations thereunder. We will make no sales of Securities until you release us
to do so. Any Securities released to us for public offering will be promptly
offered in conformity with the Prospectus or Offering Circular and we will not
allow any discount except as permitted by this Agreement. If we offer Securities
outside the United States, its territories or possessions, we will take all
action necessary to comply with all applicable laws at our own expense and risk.
You may reserve for sale, sell and deliver for our account any of Our Securities
(i) to customers, (ii) to dealers (including Underwriters) who are members of
the NASD and agree to comply with the terms of Section 16 below and (iii) to
foreign dealers or other institutions (including Underwriters) not eligible for
NASD membership who agree to comply with the terms of Section 16 below. Sales of
Securities to customers for the account of Underwriters will be as nearly as
practicable in proportion to their respective Initial Commitments, and sales of
Securities to dealers for the account of Underwriters will be as nearly as
practicable in proportion to each Underwriter's pro rata share of Securities
reserved for such sales. You will advise us of the amount of Our Securities
which we will retain for direct sale. Any Securities reserved by you for sale
for our account but not sold may be released by you to us for direct sale, in
which event the amount of Securities so reserved shall be correspondingly
reduced. We will obtain an agreement containing the representations in Section
16 below from dealers to whom we sell Securities.
In connection with any Offering of Securities that are registered under the Act
and issued by a company that was not, immediately prior to the filing of the
Registration Statement, subject to the requirements of Section 13(a) or 15(d) of
the Exchange Act, we agree that unless otherwise advised by you and disclosed in
the Prospectus we will not make sales to any account over which we exercise
discretionary authority with respect to that sale (discretionary accounts). We
will advise you on request of the unsold amount of Our Securities. You may at
any time (i) reserve such Securities for sale by you for our account, (ii)
purchase any such Securities to make deliveries for the Underwriters (at the
public offering price or at such price less all or part of the concession) or
(iii) reserve such Securities for sale by the Company pursuant to Delayed
Delivery Contracts. If the total of the unsold Securities does not exceed 15% of
all Securities, you may sell the unsold Securities for the Underwriters as you
determine.
If prior to the termination of this Agreement with respect to the offering of the Securities, you shall purchase or contract to purchase any of Our Securities sold or loaned directly by us, in your discretion you may (i) sell for our account the Securities so purchased and debit or credit our account for the loss or profit resulting from such sale, (ii) charge our account with an amount not in excess of the concession to dealers with respect thereto and credit such amount against the cost thereof or (iii) require us to purchase such Securities at a price equal to the total cost of such purchase, including commissions, accrued interest, amortization of original issue discount or dividends and transfer taxes on redelivery.
7. Arrangements for Delayed Delivery
Arrangements for Delayed Delivery Securities will be made only through you directly, or through dealers (which may be Underwriters) to whom you may pay a commission. Our Initial Commitment will be reduced by the Delayed Delivery Securities attributed to us. Delayed Delivery Securities will be attributed in the same manner and proportions as provided in Section 6 above.
The fee payable to us will be credited to our account based on the amount by which our Initial Commitment is reduced in accordance with the above paragraph, less the commission paid on Delayed Delivery Securities that are sold through dealers and attributed to us. We will be treated as only a dealer and receive only the concession with respect to the Securities, if any, by which the aggregate of the Delayed Delivery Securities attributable to us exceeds our Initial Commitment.
8. Stabilization and Over-Allotment
During an Offering, and longer if necessary to cover any short position, you may
buy and sell for either long or short account in the open market or otherwise
(i) the Securities, (ii) if the Securities are common stock or a security
convertible into or exchangeable or exercisable for common stock (including any
option on common stock), the common stock of the Company and any security
convertible into or exchangeable or exercisable for common stock including any
option on such common stock (referred to as "Equivalent Securities"), and (iii)
any other securities that you may designate in the
Terms Communication. In arranging for sales of Securities, you may also over-
allot and cover such over-allotment on such terms as you deem advisable. At no
time (except for over-allotments which may be covered by an over-allotment
option and except as a result of a default by an Underwriter) shall our net
commitment pursuant to this Section exceed 20% of our Initial Commitment. All
transactions pursuant to this Section shall be made for the respective accounts
of the Underwriters as nearly as practicable in proportion to their Initial
Commitments. Any securities purchased by you for stabilizing purposes prior to
our Final Acceptance will also be subject to this Section. On demand, we will
(x) pay for any Securities purchased, deliver any Securities sold or over-
allotted, or pay any losses or expenses incurred for our account pursuant to
this Section and (y) advise you of the Securities retained by us and unsold and
will sell to you for the account of one or more of the Underwriters such of our
unsold Securities at such price, not less than the net price to selected dealers
nor more than the public offering price, as you determine.
You will notify us promptly of any transaction which in your judgment may be a "stabilizing purchase" within the meaning of the applicable rules of the Commission and will also notify us of the date and time when any such stabilizing was terminated. If stabilization is effected we will provide you not later than the fifth full business day following the termination of stabilization, with such information and reports as are required in relation to such stabilization pursuant to the rules and regulations of the Commission under the Exchange Act.
9. Open Market Transactions
Until notified by you to the contrary, we will not buy, sell, deal or trade in Securities, any Equivalent Securities, or any other securities designated in the Terms Communication. However, such restrictions will not apply to unsolicited brokerage orders received in the ordinary course of business. We may, with your prior consent, make purchases of the Securities from and sales to other Underwriters at the public offering price, less all or any part of the concession to dealers. We will also comply with the provisions of Regulation M under the Exchange Act if applicable to us.
10. Payment, Delivery and Settlement
In payment for the Securities we are obligated to purchase, we will deliver a federal funds wire transfer to your order in accordance with your instructions as to time and place of delivery and amount of funds. As our agent you may pay the Company and any Seller the amount due against delivery of the Securities. Unless we promptly provide contrary instructions, transactions may be settled through The Depository Trust Company if we or our correspondent is a member. If you do not receive our payment as instructed, you may make payment for our account without relieving us of our obligations under this Agreement and, we will repay promptly on demand the amount advanced plus interest at current rates.
You may deliver to us from time to time against payment, for carrying purposes only, the unsold amount of Our Securities except that if the aggregate amount of reserved but unsold Securities upon termination in accordance with the second paragraph of Section 13 below does not exceed 10% of the total amount of Securities, you may in your discretion sell such Securities for the accounts of the Underwriters, at such prices and in such manner as you determine. On demand, we will redeliver against payment any Securities so delivered.
As soon as practicable after any Offering, the net credit or debit balance in our account shall be paid to or collected from us; provided, however, that you may reserve any amount for possible additional expenses chargeable to the Underwriters. No statement by you regarding a balance in our account or the establishment of any reserve shall constitute a representation as to the existence or nonexistence of amounts chargeable to us. Notwithstanding any distribution to us, we will remain liable for and pay on demand (i) any transfer taxes paid after settlement of our account, and (ii) our proportionate share based on our Initial Commitment of all expenses and liability incurred for the Underwriters, including any liability based on the claim that the Underwriters constitute an association, unincorporated business, partnership or any separate entity. You may at any time make partial distribution of credit balances or require partial payment of debit balances.
11. Authority to Borrow
In carrying out this Agreement, you may arrange loans from yourself or others for our account. In connection with any such loan, you may hold or pledge the Securities or any other securities and execute and deliver any notes, agreements or other instruments you deem appropriate. Any lender is authorized to accept your instructions as Manager in all matters relating to such loans. Any Securities or such other securities held by you for our account may be delivered to us for carrying purposes, and if so delivered will be redelivered to you upon demand.
12. Expenses
All expenses incurred by you in connection with an Offering and with this Agreement are to be charged to the Underwriters' accounts in proportion to their respective Initial Commitments except that any transfer taxes on sales made by you to dealers are to be charged to the Underwriter for whose account such sales were made. Any of our funds may be held with your general funds without interest. Your determination, apportionment and distribution of profits, losses and expenses will be final and conclusive.
13. Termination
This Agreement may be terminated by either party on five business days' prior written notice except that our notice is not effective as to any Offering where such notice is received by you after our Final Acceptance. Further, the third paragraph of Section 10 and Sections 12, 14, 15, and 17 and your representations hereunder will in all circumstances survive as to all Offerings.
Except as otherwise provided in the foregoing paragraph, with respect to any Offering this Agreement will terminate at the close of business on the thirtieth day after the Securities are released for public sale, unless you either terminate this Agreement earlier or extend it for up to thirty additional days.
This Agreement will continue in full force and effect regardless of (i) any termination of any Underwriting Agreement, (ii) any investigation relating to any Securities or any Offering and (iii) the delivery of and payment for any Securities. No termination pursuant to this Section will affect your authority or our obligations under Sections 8 and 10. No termination will relieve any defaulting Underwriter.
14. Underwriters' Status
Nothing herein is to constitute any of the Underwriters a partnership, association, unincorporated business or other separate entity or is to render you or us liable (except as provided herein or in the Underwriting Agreement) for any obligation of any other Underwriters; and the obligations and liabilities of each of the Underwriters are several and not joint. In no event will the Underwriters elect to be treated as a partnership for Federal income tax purposes, and will not take any position inconsistent with this sentence. If for Federal income tax purposes the Underwriters should be deemed to constitute a partnership, then each Underwriter elects to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code and authorizes UBS Warburg LLC, in its discretion, on behalf of such Underwriter, to execute such evidence of such election as may be required by the Internal Revenue Services.
15. Default by Underwriters
Default by one or more Underwriters hereunder or under the Underwriting Agreement will not release the other Underwriters from their respective obligations or affect the liability of any defaulting Underwriters to the other Underwriters for damages resulting from such default.
16. Indemnity and Contribution
We will indemnify, hold harmless and reimburse you and each other Underwriter (and your respective controlling persons within the meaning of the Securities Act or the Exchange Act) and the successors and assigns of all of the foregoing persons to the extent and on the terms that each Underwriter agrees to indemnify any person in the Underwriting Agreement.
If any inquiry or investigation is initiated or if any claim is asserted against you as Manager or otherwise involves the Underwriters generally, or relates to any Prospectus, Registration Statement, Offering Circular, the offering of the Securities, or any transaction contemplated by this Agreement or any Underwriting Agreement, you may make such investigation, retain such counsel and take any other action you deem desirable, including settlement of any claim if recommended by counsel retained by you. Upon your request, we will pay our proportionate share of all expenses incurred by you or with your consent (including, but not limited to, fees and disbursements of counsel) in investigating and defending against such inquiry, investigation, claim or otherwise, and, as contributions, our proportionate share of any related liability incurred whether such liability results from a judgment, settlement or otherwise. A claim against or liability incurred by a person who controls an Underwriter within the meaning of the Securities Act or Exchange Act shall be deemed incurred by such Underwriter. You may consent to being named as the representative of a defendant class of Underwriters. If any Underwriter or Underwriters default in their obligation to make any payments under Section 15, each nondefaulting Underwriter shall be obligated to pay its proportionate share of all defaulted payments, based upon such Underwriter's underwriting obligation as related to the underwriting obligations of all nondefaulting Underwriters, without relieving the defaulting Underwriter or Underwriters of liability therefor. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
17. NASD
We understand that you are a member in good standing of the NASD. We represent that (i) we are a member in good standing of the NASD and will comply with all applicable rules of the NASD, including the NASD's Interpretation with respect to Free Riding and Withholding and Rule 2740 of the Conduct Rules, or (ii) we are a foreign bank, broker, dealer or other institutions not eligible for such membership and will not make sales within the United States, its territories or possessions or to persons who are citizens or residents thereof except through you (except that we may participate in group sales pursuant to Section 6 above) and that in making sales outside the United States, we will comply with the requirements of the NASD's
Interpretation with respect to Free Riding and Withholding and comply as though a member with Rules 2420, 2730, 2740 and 2750 of the Conduct Rules of the NASD.
18. Miscellaneous
This Agreement and any claim, counterclaim or dispute of any kind or nature whatsoever arising out of or in any way relating to this Agreement ("Claim"), directly or indirectly, shall be governed by, and construed in accordance with, the laws of the State of New York without regard to the conflicts of law provisions thereof. Except as set forth below, no Claim may be commenced, prosecuted or continued in any court other than the courts of the State of New York located in the City and County of New York or in the United States District Court for the Southern District of New York, which courts shall have jurisdiction over the adjudication of such matters, and we and you consent to the jurisdiction of such courts and personal service with respect thereto. We and you waive all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) in any way arising out of or relating to this Agreement. We agree that a final judgment in any such action, proceeding or counterclaim brought in any such court shall be conclusive and binding upon us and may be enforced in any other courts to the jurisdiction of which we are, or may be subject, by suit upon such judgment. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. This Agreement may be supplemented or amended by you by written notice to us and, except for supplements or amendments set forth in a Terms Communication, any such supplement or amendment to this Agreement shall be effective with respect to any Offering to which this Agreement applies after the date of such supplement or amendment. Each reference to "Agreement" herein shall, as appropriate, be to this Agreement as so amended and supplemented. This Agreement may be signed by the parties in one or more counterparts which together shall constitute one and the same agreement among the parties.
19. Notices
Any notice hereunder is duly given if sent from you by registered mail, telegram or telex, to us as set forth below or if sent to you at UBS Warburg LLC, 299 Park Avenue, New York, New York 10171-0026, Attention: Corporate Syndicate Department.
Very truly yours,
By:____________________________
(Signature)
Facsimile No.:____________
Confirmed as of the date first above written.
UBS Warburg LLC
By: ______________________________
Executive Director
By: ______________________________
Managing Director
FORM OF INVITATION TO BE USED WITH MASTER AGREEMENT AMONG UNDERWRITERS
(The following form of Invitation, adapted as appropriate for debt securities, convertible securities, stock or units, is designed for use in all offerings to which UBS Warburg LLC Master Agreement Among Underwriters (the "Master AAU") will apply. In certain cases, all or a part of the following form will be combined with the form of Terms Wire.)
(Date)
(Name and address of prospective Underwriter)
Attention: Corporate Syndicate Department
Invitation Wire
(Name of Issuer)
|
(Title of Securities) (principal amount or number shares)
(Name of Guarantor, if any)
Registration form or application filed with (name of regulatory authority)
Seller(s): (Insert if other than or in addition to Company)
The anticipated terms are as follows:
Call Protection: (insert if applicable)
Sinking Fund: (insert if applicable) Starts in and
retires $ per annum through
Optional Redemption Schedule: Redeemable at %, beginning declining
(straight-line) to 100%, beginning
Over-allotment Option: (insert amount, if applicable)
Ratings: (expected-confirmed)
Listing: (insert if applicable) Application has been made
to list (insert name(s) of exchange(s))
Delayed Delivery: (insert if applicable)
Name of Trustee: (insert if applicable)
Name of Parent of Trustee: (insert if applicable)
Name of Parent of Company: (insert if applicable)
Equivalent Securities and other securities subject
to stabilization pursuant to Section 8 of Master
AAU and restricted pursuant to Section 9 of Master
AAU:
(insert if applicable)
Other terms of the Offering or the Securities: (insert if applicable)
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|
[The issuer is not subject to the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We call your attention to the final paragraph of Section 3(a) of our Master Agreement Among Underwriters and advise you that, without our consent, Securities should not be sold to an account over which you have investment discretion.] (insert if applicable)
You are hereby invited to participate as one of the several Underwriters in the above-referenced Offering for (amount). Your participation as an Underwriter shall be subject to the provisions of the Master Agreement Among Underwriters between you and UBS Warburg LLC, as amended.
If you wish to accept this Invitation and thereby agree to its terms, the
Corporate Syndicate Department of UBS Warburg LLC : must receive a telegram,
telex or Graphic Scanning communication from you not later than _____________
M., New York City time, on ____________, ___, in substantially the following
form:
(Signature of firm)
UBS Warburg LLC
[Name of Co-Manager(s), if any]
By: UBS Warburg LLC
FORM OF TERMS WIRE TO BE USED WITH UBS WARBURG LLC
MASTER AGREEMENT AMONG UNDERWRITERS
(The following form, adapted as appropriate for debt securities, convertible securities, stock or units, will be used in connection with offerings to which the UBS Warburg LLC Master Agreement Among Underwriters will apply. In certain cases all or part of the following form will be combined with the form of Invitation.)
(Date)
(Name and address of prospective Underwriter)
Attention: Corporate Syndicate Department
Terms Wire
(Name of Issuer)
|
(Title of Securities) (principal amount or number of shares)
(Name of Guarantor, if any)
Your underwriting commitment shall be ____________________
Coupon [dividend rate] (insert if applicable) Initial offering price[s] (1) (or specify formula pricing is being used) Yield to Maturity: Conversion price and other terms: (insert if applicable) Expected Offering Date: Expected Closing Date: Delivery of Securities: Type of Funds: Gross spread: (unless formula pricing is being used) Management fee: (or maximum amount thereof) Underwriting: (unless formula pricing is being used) Selling concession: (unless formula pricing is being used) Reallowance: (unless formula pricing is being used) Other terms of the Offering or the Securities: (insert if applicable) ----------------------------------------------------------------------------------------------- |
NOTE: Plus accrued interest/dividends from (insert date for fixed income securities).
Unless a telex from you revoking your previous Acceptance of our Invitation with respect to this offering is received by the UBS Warburg LLC Corporate Syndicate Department, prior to New York City time on ___________, your Acceptance will become final and our Master Agreement Among Underwriters will become effective as to you with respect to this Offering.
UBS Warburg LLC
[Name of Co-Manager(s), if any]
By: UBS Warburg LLC
MASTER UNDERWRITERS' QUESTIONNAIRE
Unless otherwise defined herein, capitalized terms used herein shall have the
meaning assigned thereto in the Master Agreement Among Underwriters between UBS
Warburg LLC and us (such agreement as amended or supplemented from time to time
being hereinafter referred to as the "Agreement"). Reference will be made to
this Master Underwriters' Questionnaire in the Terms Communication described in
Section 1 of the Agreement received by us in connection with the offerings of
securities in which UBS Warburg LLC is acting as manager of the several
underwriters. Our acceptance of any Terms Communication should respond to this
Master Underwriters' Questionnaire, and state that there are "no exceptions" or,
if there are exceptions, provide details thereof. We authorize you to furnish
such information and make such representations to appropriate authorities based
on the information provided by us pursuant to this Questionnaire.
In connection with the Offering, we advise you and the Company that, except as indicated in our acceptance of the Terms Communication:
neither we nor any of our directors, officers or partners has, nor have we or they had within the last three years, a "material" relationship (as the term "material" is defined in Regulation C promulgated under the Securities Act) with the Company, its parent, if any, any Seller or Guarantor;
neither we nor any of our officers, directors or partners, separately or as a "group" (as that term is used in Section 13(d)(3) of the Exchange Act), owns of record or beneficially (determined in accordance with Rule 13d-3 under the Exchange Act) more than 5% of any class of voting securities of the Company, its parent or any Seller or Guarantor or is affiliated (as that term is defined in the Rules and Regulations under the Exchange Act) with any person who owns of record or beneficially more than 5% of any such class of securities or has knowledge that more than 5% of any such class is or is to be held subject to any voting trust or similar arrangement;
other than as may be stated in the Agreement, the Terms Communication or the Underwriting Agreement relating to the proposed offering or the UBS Warburg LLC Master Dealer Agreement, we do not know of, or have any reason to believe that there are, any arrangements (i) for any discounts or commissions to be allowed or paid to underwriters or any other items that would be deemed by the NASD to constitute underwriting compensation for purposes of Rule 2710 of the NASD's Conduct Rules; (ii) for any discounts or commissions to be allowed or paid to dealers or any cash, securities, contracts or other consideration to be received by any dealer in connection with the sale of the Securities; (iii) for limiting or restricting the sale of any securities of the Company or the Guarantor for the period of distribution; (iv) for stabilizing the market for any securities of the Company or the Guarantor; or (v) for withholding commissions or otherwise holding each underwriter or dealer responsible for the distribution of his participation;
neither we nor any of our directors, officers, partners or "persons associated with" us (as defined in the By-laws of the NASD) within the last 12 months have purchased (or intends within six months after the commencement of the offering of the Securities to purchase) in private transactions any securities of the Company or the Guarantor or any parent or subsidiary thereof or have had any dealings with the Company or the Guarantor or any parent or controlling stockholder thereof (other than relating to the proposed Underwriting Agreement), as to which documents or information are required to be filed with the NASD pursuant to its Conduct Rules;
no report or memorandum has been prepared by or for us for external use in connection with the Offering, and if the Registration Statement is on Form S-1, no engineering, management or similar report or memorandum relating to broad aspects of the business, operations or products of the Company, the Guarantor or any parent thereof has been prepared for or by you within the past twelve months (except for reports solely comprised of recommendations to buy, sell or hold the securities of the Company, the Guarantor or any parent thereof, unless such recommendations have changed within the last six months)/1/
if the Securities are to be issued under an Indenture qualified under the Trust Indenture Act of 1939:
we (if a corporation) do not have outstanding nor have we assumed or guaranteed any securities issued otherwise than in our present corporate name and neither the Trustee nor its parent is a holder of any of our securities;
neither we nor any of our directors, officers or partners is an "affiliate," as defined in Rule 0-2 under the Trust Indenture Act of 1939, of the Trustee or its parent, and neither the Trustee nor its parent, nor any of their directors or executive officers is a director, officer, partner, employee, appointee or representative of us as those terms are defined in said Act or in the relevant instructions to the Trustee's Statement of Eligibility and Qualification on Form T-1; and
if the issuer is a public utility, we are not a "holding company" or a "subsidiary company" or an "affiliate" of a "holding company" or of a "public utility company," each as defined in the Public Utility Holding Company Act of 1935.
[LETTERHEAD OF ROPES & GRAY]
Exhibit l
August 17, 2001
PIMCO Municipal Income Fund
c/o PIMCO Advisory Services
1345 Avenue of the Americas
New York, New York 10105
Ladies and Gentlemen:
We have acted as counsel to PIMCO Municipal Income Fund (the "Fund") in connection with the Registration Statement of the Fund on Form N-2 (File No. 333-64796) under the Securities Act of 1933 and the Investment Company Act of 1940 (File No. 811-10377) (as amended, the "Registration Statement"), relating to the proposed sale of an aggregate of 1,600 Auction Preferred Shares, Series A, 1,600 Auction Preferred Shares, Series B, 1,600 Auction Preferred Shares, Series C, 1,600 Auction Preferred Shares, Series D, and 1,600 Auction Preferred Shares, Series E (together, the "Preferred Shares"). The Preferred Shares are to be sold pursuant to an Underwriting Agreement substantially in the form filed as an exhibit to the Registration Statement (the "Underwriting Agreement") among the Fund, PIMCO Advisors L.P. and UBS Warburg LLC, on behalf of itself and the underwriters named in Schedule A thereto.
We have examined the Fund's Agreement and Declaration of Trust on file in the office of the Secretary of State of The Commonwealth of Massachusetts, as amended (the "Declaration of Trust"), and the Fund's Amended and Restated Bylaws, and are familiar with the actions taken by the Fund in connection with the issuance and sale of the Preferred Shares. We have also examined such other documents and records as we have deemed necessary for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that:
1. The Fund is a duly organized and validly existing unincorporated association under and by virtue of the laws of The Commonwealth of Massachusetts.
2. Assuming the due execution and delivery of the Underwriting Agreement by an authorized officer of the Fund, the Preferred Shares have been duly authorized and, when issued and paid for in accordance with the
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Underwriting Agreement, will be validly issued, fully paid and, except as described in the following paragraph, nonassessable by the Fund.
The Fund is an entity of the type commonly known as a "Massachusetts business trust." Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Fund. However, the Declaration of Trust disclaims shareholder liability for acts or obligations of the Fund and requires that a notice of such disclaimer be given in each note, bond, contract, instrument, certificate or undertaking entered into or executed by the Fund or its Trustees. The Declaration of Trust provides for indemnification out of the property of the Fund for all loss and expense of any shareholder of the Fund held personally liable solely by reason of his being or having been a shareholder. Thus, the risk of a shareholder's incurring financial loss on account of being a shareholder is limited to circumstances in which the Fund itself would be unable to meet its obligations.
We understand that this opinion is to be used in connection with the registration of the Preferred Shares for offering and sale pursuant to the Securities Act of 1933, as amended. We consent to the filing of this opinion with and as part of the Registration Statement and to the references to our firm in the related prospectus under the captions "Taxes" and "Legal matters" in the Prospectus contained in the Registration Statement.
Very truly yours
/s/ Ropes & Gray Ropes & Gray |