As filed with the Securities and Exchange Commission on August 8, 2003
1933 Act File No. 33-_____________
1940 Act File No. 811-21321
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(Check appropriate box or boxes)
_X_ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___ Pre-Effective Amendment No. __
___ Post-Effective Amendment No. __
and/or
_X_ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
_X_ Amendment No. 4
PIONEER MUNICIPAL HIGH INCOME TRUST
Exact Name of Registrant as Specified in Charter
60 State Street, Boston, Massachusetts 02109
Address of Principal Executive Offices (Number, Street, City, State, ZIP Code)
(617) 742-7825
Registrant's Telephone Number, including Area Code
David C. Phelan, Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109
Name and Address (Number, Street, City, State, ZIP Code) of Agent for Service
Copies to:
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form are to be offered on a delayed
or continuous basis in reliance on Rule 415 under the Securities Act of 1933, as
amended (the "Securities Act"), other than securities offered in connection with
dividend or interest reinvestment plans, check the following box. ___
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT
----------------------- --------------------- -------------------- --------------------- --------------------
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Per Aggregate Offering Registration Fee(1)
Unit Price
----------------------- --------------------- -------------------- --------------------- --------------------
----------------------- --------------------- -------------------- --------------------- --------------------
Preferred Shares (par
value, $.0001) 40 shares $25,000.00 $1,000,000.00 $89.90
----------------------- --------------------- -------------------- --------------------- --------------------
(1) Transmitted prior to the filing date to the designated lockbox of the
Securities and Exchange Commission at Mellon Bank in Pittsburgh,
Pennsylvania.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment, which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the Registration Statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
PIONEER MUNICIPAL HIGH INCOME TRUST
CROSS-REFERENCE SHEET
PART A--PREFERRED SHARES PROSPECTUS
ITEMS IN PART A OF FORM N-2 LOCATION IN PROSPECTUS
Item 1. Outside Front Cover Cover page
Item 2. Cover Pages; Other Offering
Information Cover pages
Item 3. Fee Table and Synopsis Not applicable
Item 4. Financial Highlights Financial Highlights (Unaudited)
Item 5. Plan of Distribution Cover page; Prospectus Summary; The
Auction; Underwriting
Item 6. Selling Shareholders Not applicable
Item 7. Use of Proceeds Use of Proceeds
Item 8. General Description of the
Registrant Cover page; Prospectus Summary; The
Trust; Investment Objectives and
Principal Investment Strategies; Risk
Factors; Net Asset Value
Item 9. Management Prospectus Summary; Management of the
Trust; Description of Preferred Shares;
Item 10. Capital Stock, Long-Term
Debt, and Other Securities Description of Preferred Shares; U.S.
Federal Income Tax Matters
Item 11. Defaults and Arrears on
Senior Securities Not applicable
Item 12. Legal Proceedings Not applicable
Item 13. Table of Contents of the
Statement of Additional
Information Table of Contents for the Statement of
Additional Information
PART B--STATEMENT OF ADDITIONAL INFORMATION
ITEMS IN PART B OF FORN N-2 LOCATION IN THE STATEMENT OF ADDITIONAL
INFORMATION
Item 14. Cover Page Cover page
Item 15. Table of Contents Cover page
Item 16. General Information and
History Not applicable
Item 17. Investment Objective and
Policies Use of Proceeds; Investment Objectives
and Policies; Investment Restrictions;
Appendix A--Description of Ratings
Item 18. Management Management of the Trust
Item 19. Control Persons and Principal
Holders of Securities Not applicable
Item 20. Investment Advisory and
Other Services Management of the Trust
Item 21. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 22. Tax Status Federal Income Tax Matters
Item 23. Financial Statements Experts; Financial Statements and
Independent Auditors' Report
PART C--OTHER INFORMATION
Items 24-33 have been answered in Part C of this Registration Statement.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS Subject to completion , 2003
[ ] SHARES SERIES [ ]
[ ] SHARES SERIES [ ]
[ ] SHARES SERIES [ ]
[PIONEER INVESTMENTS(R) LOGO]
PIONEER MUNICIPAL HIGH INCOME TRUST
PREFERRED SHARES
Pioneer Municipal High Income Trust (the "Trust") is a recently organized
diversified, closed-end management investment company. The Trust is offering
[ ] shares of its Series [ ] Preferred Shares, [ ] shares of its Series [ ]
Preferred Shares and [ ] shares of its Series [ ] Auction Preferred Shares
(collectively, the "Preferred Shares").
INVESTMENT OBJECTIVES. The Trust's primary investment objective is to provide
its common shareholders with a high level of current income exempt from regular
federal income tax. As a secondary investment objective, the Trust also may seek
capital appreciation to the extent consistent with its primary investment
objective. Distributions from sources other than interest income from the
Trust's portfolio of municipal securities, including capital gain distributions,
are not exempt from regular federal income tax. There can be no assurance that
the Trust will achieve its investment objectives.
PORTFOLIO CONTENTS. Under normal market conditions, the Trust seeks to achieve
its investment objectives by investing substantially all (at least 80%) of its
assets (net assets plus borrowings for investment purposes) in debt securities
and other obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest on which is
exempt from regular federal income tax ("municipal securities"). Up to 25% of
the Trust's total assets may be invested in municipal securities the interest
income on which is a preference item for purposes of the alternative minimum
tax. The Trust may invest in municipal securities with a broad range of
maturities and credit ratings, including both investment grade and below
investment grade municipal securities. At least 50% of the Trust's portfolio of
municipal securities will be rated investment grade at the time of acquisition
(that is, at least "Baa" by Moody's Investors Service, Inc. ("Moody's") or "BBB"
by Standard & Poor's Ratings Group ("S&P")) or, if unrated, determined by the
Trust's investment adviser to be of comparable credit quality. No more than 50%
of the Trust's portfolio of municipal securities will be rated below investment
grade at the time of acquisition (that is, Ba or lower by Moody's or BB or lower
by S&P) or, if unrated, determined by the Trust's investment adviser to be of
comparable credit quality. Municipal securities of below investment grade
quality are regarded as having predominantly speculative characteristics with
respect to the issuer's capacity to pay interest and repay principal, and are
commonly referred to as "junk bonds" or "high yield securities." Under normal
market conditions, the dollar-weighted average credit rating of the Trust's
portfolio of municipal securities will be at least investment grade.
INVESTMENT ADVISER. Pioneer Investment Management, Inc. is the Trust's
investment adviser (the "Adviser"). As of June 30, 2003, the Adviser had
approximately $28 billion in assets under management. See "Management of the
Trust."
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 TRUST IN "RISK FACTORS" BEGINNING ON PAGE __.
CERTAIN OF THESE RISKS ARE SUMMARIZED IN "PROSPECTUS SUMMARY--SPECIAL RISK
CONSIDERATIONS" BEGINNING ON PAGE _.
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.
PRICE TO PUBLIC SALES LOAD PROCEEDS TO TRUST(1)
---------------------------------------------------------------------------------------
Per share $ $ $
---------------------------------------------------------------------------------------
Total $ $ $
---------------------------------------------------------------------------------------
(1) Plus accumulated dividends, if any, from the date the Preferred Shares are
issued, but before offering expenses payable by the Trust estimated to be $[ ].
The Preferred Shares 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 Preferred Shares will be
delivered to the nominee of The Depository Trust Company on or about
August , 2003.
Investors in Preferred Shares will be entitled to receive cash dividends at an
annual rate that may vary for the successive dividend periods for such shares.
The dividend rate on the Series __ Preferred Shares for the initial period from
and including the date of issue to, but excluding, ________, 2003 will be % per
year. The dividend rate on the Series __ Preferred Shares for the initial period
from and including the date of issue to, but excluding, ________, 2003 will
be % per year. The dividend rate on the Series Preferred Shares for the
initial period from and including the date of issue to, but excluding, ________,
2003 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 Preferred Shares, 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 Preferred Shares outside of Auctions; however,
they have no obligation to do so, and there can be no assurance that a secondary
market for the Preferred Shares 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 will be 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 Preferred Shares, and a shareholder that sells
Preferred Shares between Auctions may receive a price per share of less than
$25,000. The Trust may redeem Preferred Shares as described under "Description
of Preferred Shares--Redemption."
The Preferred Shares will be senior in liquidation and distribution rights to
the Trust's outstanding common shares. The Trust's common shares are traded on
the New York Stock Exchange under the symbol "MHI." This offering is conditioned
upon the Preferred Shares receiving a rating of "Aaa" from [Rating Agency 1] and
[Rating Agency 2] ("Rating Agencies").
The Preferred Shares 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 insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other federal, state or municipal government or agency.
You should read this Prospectus, which contains important information about the
Trust, before deciding whether to invest in the Preferred Shares, and retain it
for future reference. A Statement of Additional Information, dated _________,
2003, containing additional information about the Trust, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this Prospectus. You can review the table of contents of the
Statement of Additional Information on page __ of this Prospectus. You may
request a free copy of the Statement of Additional Information by calling
(800)-225-6292 or by writing to the Trust, or obtain a copy (and other
information regarding the Trust) from the Securities and Exchange Commission's
website (http://www.sec.gov).
You should rely only on the information contained in this Prospectus. The Trust
has not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. The Trust is not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information appearing
in this Prospectus is given as of the date of this Prospectus. The Trust's
business, financial condition, results of operations and prospects may have
changed since the date of this Prospectus.
TABLE OF CONTENTS
Prospectus summary 1
Financial highlights (unaudited) 18
The Trust 19
Capitalization (unaudited) 19
Investment objectives and
principal investment strategies 20
Risk factors 30
Description of Preferred Shares 39
The Auction 49
Management of the Trust 56
Federal income tax matters 58
Net asset value 63
Certain provisions of the Agreement and
Declaration of Trust and By-Laws 63
Underwriting 65
Validity of Preferred Shares 66
Table of contents for the Statement
of Additional Information 67
GLOSSARY 68
ii
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT
YOU SHOULD CONSIDER BEFORE INVESTING IN THE TRUST'S PREFERRED SHARES. YOU SHOULD
REVIEW THE MORE DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION. CERTAIN CAPITALIZED TERMS USED IN THIS
PROSPECTUS ARE DEFINED IN THE GLOSSARY THAT APPEARS AT THE END OF THIS
PROSPECTUS.
THE TRUST
Pioneer Municipal High Income Trust (the "Trust") is a newly organized,
diversified, closed-end management investment company. The Trust's Common Shares
are traded on the New York Stock Exchange under the symbol "MHI". As of ______,
2003, the Trust had ____ common shares outstanding and had net assets of $____.
See "The Trust."
THE OFFERING
The Trust is offering an aggregate of ____ Series __ Preferred Shares, ____
Series __ Preferred Shares, and ____ Series __ Preferred Shares, each at a
purchase price of $25,000 per share plus accumulated dividends, if any, from the
date of original issue. The Preferred Shares are being offered through a group
of underwriters led by (collectively, the "Underwriters"). See
"Underwriting."
The Preferred Shares 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 Preferred Shares--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 Preferred Shares are not listed on an exchange. Instead, investors may buy
or sell Preferred Shares 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 Trust or to certain other Broker-Dealers. [ ], 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, Preferred
Shares. The Auction Agent then determines the lowest Applicable Rate that will
result in all of the outstanding Preferred Shares continuing to be held. The
first Auction Date for Series __ Preferred Shares will be ________, 2003, for
Series __ Preferred Shares will be __________, 2003, and for Series __ Preferred
Shares will be __________, 2003, each being the Business Day before the Initial
Dividend Payment Date for the Initial Dividend Period for the relevant series of
Preferred Shares (________, 2003 for Series __, ________, 2003 for Series __,
and _________, 2003 for Series __). The Auction day for Series __ Preferred
Shares generally will be _____, for Series __ Preferred Shares generally will be
_____, and for Series __ Preferred Shares generally will be _____, 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.
Generally, investors in the Preferred Shares will not receive certificates
representing ownership of their shares. The Securities Depository (The
Depository Trust Company or any successor) or its nominee for the account of the
investor's Broker-Dealer will maintain record ownership of Preferred Shares in
book-entry form. An investor's Broker-Dealer, in turn, will maintain records of
that investor's Beneficial Ownership of the Preferred Shares.
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVES
The Trust's primary investment objective is to provide its common shareholders
with a high level of current income exempt from regular federal income tax.
Distributions of interest income from the Trust's portfolio of municipal
securities generally will be exempt from regular federal income tax. As a
secondary investment objective, the Trust also may seek capital appreciation to
the extent consistent with its primary investment objective. Distributions from
sources other than interest income from the Trust's portfolio of
1
municipal securities, including capital gain distributions, are not exempt from
regular federal income tax. There can be no assurance that the Trust will
achieve its investment objectives.
PRINCIPAL INVESTMENT STRATEGIES
The Trust may invest in municipal securities with a broad range of maturities
and credit ratings, including both investment grade and below investment grade
municipal securities. In managing the Trust's portfolio, the Adviser adjusts the
portfolio's duration and overall credit quality in light of changing market and
economic conditions. In making decisions with respect to specific municipal
securities for the Trust's portfolio, the Adviser employs a disciplined
approach, driven primarily by proprietary research regarding prevailing interest
rates, economic fundamentals at both the national and state level and in-depth
credit research conducted by the Adviser's investment staff.
SECURITY SELECTION
The Adviser anticipates that the Trust's investments in revenue bonds will
emphasize municipal securities backed by revenue from essential services, such
as hospitals and healthcare, power generation, transportation, education and
housing. The Adviser considers both broad economic and issuer specific factors
in selecting a portfolio designed to achieve the Trust's investment objectives.
In assessing the appropriate maturity, rating and sector weightings of the
Trust's portfolio, the Adviser considers a variety of factors that are expected
to influence economic activity and interest rates. These factors include
fundamental economic indicators such as the rates of economic growth and
inflation, Federal Reserve monetary policy and the relative value of the U.S.
dollar compared to other currencies. Once the Adviser determines the preferable
portfolio characteristics, the Adviser selects individual securities based upon
the terms of the securities (such as yields compared to U.S. Treasuries or
comparable issues), liquidity and rating, sector and issuer diversification.
The Adviser attempts to identify investment grade and below investment grade
municipal securities that are trading at attractive valuations relative to the
Adviser's evaluation of the issuer's credit worthiness and, with respect to
private activity bonds, the profit potential of the corporation from which the
revenue supporting the bonds is derived. The Adviser's overall investment
approach is both top-down and bottom-up. The Adviser first seeks to identify the
sectors or regions of the municipal bond market that present the best relative
value opportunities, and then bases the Trust's overall sector and regional
weightings on that determination. Once the Adviser establishes the overall
regional and sector weightings, the Adviser focuses on selecting those
securities within each sector or region that meet its fundamental criteria. In
determining sector weightings, the Trust's portfolio management team also
maintains frequent contact with the Adviser's investment professionals who
follow U.S. equities and those who focus on corporate fixed income investments.
In many cases, the Adviser will augment its municipal bond credit research and
security selection processes with equity research analysis. The Adviser has a
fundamental bias towards long-term security selection, rather than engaging in
frequent "market timing" or short-term trading. There can be no assurance that
this process will be successful.
DURATION MANAGEMENT
The Adviser will actively manage the duration of the Trust's portfolio of
municipal securities based primarily on the Adviser's outlook for interest
rates. The Adviser will consider economic trends, Federal Reserve Board actions
and capital markets activity, among other factors, in developing its outlook for
interest rates. The Adviser believes that maintaining duration at an appropriate
level offers the potential for above-average returns while limiting the risks of
interest rate volatility. Duration is a measure of the expected life of a debt
security that is used to determine the sensitivity of the security's price to
changes in interest rates. While the Trust is not limited in the range of its
portfolio's average duration, in the current market environment the Adviser
expects that, once fully invested, the Trust's initial portfolio will have an
average duration of between eight and twelve years (including the effect of
anticipated leverage). In the future, the Adviser may modify the average
duration of the Trust's portfolio in response to market conditions. The Adviser
may employ certain strategies to reduce the Trust's interest rate sensitivity,
including investments in interest rate swap or cap transactions. There is no
assurance that the Adviser will do so or that such strategies will be
successful.
2
CREDIT MANAGEMENT
The Trust may invest in municipal securities with a broad range of credit
ratings, including both investment grade and below investment grade municipal
securities. At least 50% of the Trust's portfolio of municipal securities will
be rated investment grade at the time of acquisition (that is, at least "Baa" by
Moody's Investors Service, Inc. ("Moody's") or "BBB" by Standard & Poor's
Ratings Group ("S&P")) or, if unrated, determined by the Adviser to be of
comparable credit quality. No more than 50% of the Trust's portfolio of
municipal securities will be rated below investment grade at the time of
acquisition (that is, Ba or lower by Moody's or BB or lower by S&P) or, if
unrated, determined by the Adviser to be of comparable credit quality. The Trust
anticipates an initial allocation to below investment grade securities of
approximately 35%, although the actual allocation of the Trust's investments
will be subject to market conditions at the time the Trust commences investment
operations. Municipal securities of below investment grade quality are regarded
as having predominantly speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal, and are commonly referred to as
"junk bonds" or "high yield securities." They involve greater risk of loss, are
subject to greater price volatility and are less liquid, especially during
periods of economic uncertainty or change, than higher rated municipal
securities. Municipal securities rated BB or Ba may face significant ongoing
uncertainties or exposure to adverse business, financial or economic conditions
that could lead to the issuer being unable to meet its financial commitments.
The protection of interest and principal payments may be moderate and not
well-safeguarded during both good and bad times. Municipal securities rated B
generally lack the characteristics of a 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 low, and such municipal securities are more
vulnerable to nonpayment than obligations rated BB. Adverse business, financial
or economic conditions will likely impair the issuer's capacity or willingness
to meet its financial commitment on municipal securities. Municipal securities
rated CCC, CC, C, Caa, Ca or C are generally speculative to a high degree. These
municipal securities may be in default or they may present elements of danger
with respect to principal or interest. Generally, the issuers are dependent upon
favorable business, financial and economic conditions to meet their financial
commitment on such municipal securities. The Trust may invest in high yield
municipal securities of any rating, including securities that are in default at
the time of purchase. Under normal market conditions, the dollar-weighted
average credit rating of the Trust's portfolio of municipal securities will be
at least investment grade.
The Adviser will determine the allocation of the Trust's assets among securities
with different credit ratings depending upon the Adviser's evaluation of factors
such as the spread between the yields on municipal securities of different
ratings, changes in default rates, general economic conditions and the outlook
for fiscal issues facing municipal issuers. Generally, as the spread between the
yield on investment grade and non-investment grade securities widens, the
Adviser will allocate a greater portion of the Trust's assets to non-investment
grade municipal securities. If the spread based on relative credit quality
narrows, the Adviser may determine that high yield municipal securities no
longer offer a sufficient risk premium and increase the average credit quality
of the Trust's portfolio. As the economy strengthens and the default risk
lessens, the Adviser may increase the Trust's investment in lower quality,
non-investment grade securities. The Adviser also seeks to mitigate the risks of
investing in below investment grade securities through a disciplined approach,
driven primarily by fundamental research to assess an issuer's credit quality
and the relative value of its securities. Moreover, with respect to below
investment grade securities that are private activity bonds, the Adviser intends
to emphasize securities that are backed by revenue from publicly traded
companies. The Adviser believes that this focus offers the potential for an
informational advantage due to the substantial reporting requirements of public
companies. With respect to investments in below investment grade private
activity bonds, the Adviser also seeks to leverage its corporate credit research
capabilities by selecting securities for the Trust payable by revenue derived
from issuers followed by its staff focusing on below investment grade corporate
issuers. The Adviser believes that a prudent blend of investment grade and
non-investment grade municipal securities offers investors the opportunity for
high current yield without undue credit risk. Covering a broad range of sectors
and issuers, below investment grade municipal securities have been trading in
2003 with historically wide spreads and what the Adviser believes to be
attractive valuations relative to investment grade municipal securities. High
yield municipal
3
securities also have shown low correlation to other asset classes, including
corporate bonds and U.S. Treasury securities, providing diversification
potential to an investment portfolio.
PORTFOLIO CONTENTS
Under normal market conditions, the Trust will invest substantially all (at
least 80%) of its assets (net assets plus borrowings for investment purposes) in
debt securities and other obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is exempt from regular federal income tax ("municipal securities").
Municipal securities are often issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Municipal securities include private activity bonds,
pre-refunded municipal securities and auction rate securities. The municipal
securities in which the Trust invests may have fixed or variable principal
payments on all types of interest payment and reset terms, including fixed rate,
adjustable rate, zero coupon, contingent, deferred, payment in kind and auction
rate features.
Although distributions of interest income from the Trust's municipal securities
generally are exempt from regular federal income tax, distributions from other
sources, including capital gain distributions, are not. Up to 25% of the Trust's
total assets may be invested in municipal securities the interest income on
which is a preference item for purposes of the alternative minimum tax for
individuals or entities that are subject to such tax. All interest on municipal
securities may result in or increase a corporate shareholder's liability for
federal alternative minimum tax. Shareholders should consult a tax adviser about
whether an alternative minimum tax applies to them and about state and local
taxes on their distributions from the Trust.
MUNICIPAL SECURITIES
Municipal securities often are issued to obtain funds for various public
purposes, including refunding outstanding obligations, funding general operating
expenses and lending to other public institutions and facilities. "Private
activity bonds" or industrial development bonds are issued by or on behalf of
public authorities to provide financing aid to acquire sites or construct or
equip facilities within a municipality for privately or publicly owned
corporations. Municipal securities include both "general obligations" and
"revenue obligations" and may be issued to obtain funds for various purposes.
General obligations are secured by the issuer's pledge of its full faith, credit
and taxing power. Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities.
MUNICIPAL NOTES
Municipal securities in the form of notes generally are used to provide for
short-term capital needs in anticipation of an issuer's receipt of other
revenues or financing, and typically have maturities of up to three years. Such
instruments may include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue anticipation notes and construction loan
notes.
MUNICIPAL LEASES, CERTIFICATES OF PARTICIPATION AND "MORAL OBLIGATION" BONDS
The municipal securities in which the Trust may invest include municipal leases,
certificates of participation and "moral obligation" bonds. A municipal lease is
an obligation issued by a state or local government to acquire equipment or
facilities. Certificates of participation represent interests in municipal
leases. Moral obligation bonds are supported by a moral commitment of the
municipality, but that credit support is not a legal obligation of the federal
government or any state or local government.
TENDER OPTION BONDS
Municipal securities may also be in the form of a tender option bond, which is a
municipal security (generally held pursuant to a custodial arrangement) having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term, tax-exempt rates. The bond is typically
issued with the agreement of a third party, such as a bank, broker-dealer or
other financial institution, which grants the security holders the option, at
periodic intervals, to tender their securities to the institution. After payment
of
4
a fee to the financial institution that provides this option, a security holder
effectively holds a demand obligation that bears interest at the prevailing
short-term, tax-exempt rate. An institution may not be obligated to accept
tendered bonds in the event of certain defaults or a significant downgrade in
the credit rating assigned to the issuer of the bond. There is a risk that the
Trust will not be considered the owner of a tender option bond for federal
income tax purposes, and thus will not be entitled to treat such interest as
exempt from regular federal income tax. Certain tender option bonds may be
illiquid.
ILLIQUID SECURITIES
The Trust may invest up to 20% of its total assets in illiquid securities, which
are securities that the Trust cannot dispose of within seven days in the
ordinary course of business at approximately the amount at which the Trust
values the securities. The Adviser anticipates that its research efforts and
investment approach will result in a significant portion of the Trust's assets
being invested in thinly traded securities, including both illiquid securities
and liquid securities as to which the trading market is less active than
comparable issuers.
OTHER SECURITIES
Normally, the Trust invests substantially all of its assets to meet its
investment objectives. The Trust may invest the remainder of its assets in cash
or cash equivalent short-term obligations, including, but not limited to,
short-term municipal securities, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements. Interest
on certain of these short-term obligations may be subject to federal income tax.
The Trust may also invest all or any portion of its assets in such instruments
for temporary defensive purposes. During such periods, the Trust may not be able
to achieve its investment objectives.
HEDGING AND INTEREST RATE TRANSACTIONS
The Trust may, but is not required to, use various hedging and interest rate
transactions to earn income, facilitate portfolio management and mitigate risks.
The Trust may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, fixed income and
interest rate indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and enter into various interest
rate transactions such as swaps, caps, floors or collars or credit transactions
and credit default swaps. The Trust also may purchase derivative instruments
that combine features of these instruments. The Trust generally seeks to use
these instruments and transactions as a portfolio management or hedging
technique that seeks to protect against possible adverse changes in the market
value of securities held in or to be purchased for the Trust's portfolio,
facilitate the sale of certain securities for investment purposes, manage the
effective interest rate exposure of the Trust, manage the effective maturity or
duration of the Trust's portfolio or establish positions in the derivatives
markets as a temporary substitute for purchasing or selling particular
securities. Income that the Trust derives from these transactions generally will
not be tax-exempt.
USE OF LEVERAGE BY THE TRUST
The Trust expects to utilize financial leverage on an ongoing basis for
investment purposes. After completion of the offering of Preferred Shares, the
Trust anticipates its total leverage from the issuance of Preferred Shares will
be approximately 25% of the Trust's total assets. This amount may change, but
total leverage will not exceed 50% of the Trust's total assets. [Although the
Trust may in the future offer other Preferred Shares, the Trust does not
currently intend to offer Preferred Shares other than the Preferred Shares
offered hereby.] The Trust may also invest in derivative instruments, each of
which may amplify the effects of leverage in the Trust's portfolio.
The Trust 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
5
the fees paid to Pioneer will be calculated on the basis of the Trust's managed
assets, the fees will be higher when leverage (including the Preferred Shares)
is utilized, giving Pioneer an incentive to utilize leverage. See "Risk
factors--Risks of Investing in Preferred Securities--Leverage Risk."
SPECIAL RISK CONSIDERATIONS
RISKS OF INVESTING IN THE PREFERRED SHARES INCLUDE THE FOLLOWING:
THE PRIMARY RISKS
- If an Auction fails you may not be able to sell some or all of your
Preferred Shares and the Trust is not obligated to redeem your Preferred
Shares if the Auction fails
- Because of the nature of the market for Preferred Shares, you may receive
less than the price you paid for your shares if you sell them outside of
the Auction, especially when market interest rates are rising
- A rating agency could downgrade the rating assigned to the Preferred
Shares, which could affect liquidity
- The Trust may be forced to redeem Preferred Shares to meet regulatory or
rating agency requirements to may voluntarily redeem the Preferred Shares
in certain circumstances
- In certain circumstances, the Trust may not earn sufficient income from its
investments to pay dividends on the Preferred Shares
- If interest rates rise, the value of the Trust's investment portfolio
generally will decline, reducing the asset coverage for the Preferred
Shares
LEVERAGE RISK
The Trust's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Trust
and the Preferred Shares' asset coverage.
INTEREST RATE RISK
The Preferred Shares pay dividends based on shorter-term interest rates. The
Trust invests the proceeds from the issuance of the Preferred Shares
principally in municipal securities, which generally bear intermediate to
longer-term interest rates. The yields on municipal securities are typically,
although not always, higher than shorter-term interest rates. Shorter-term
interest rates may rise so that the amount of dividends to be paid to holders
of Preferred Shares exceeds the income from the preferred stocks and other
preferred securities and other investments purchased by the Trust with the
proceeds from the sale of the Preferred Shares. Because income from the
Trust's entire investment portfolio (not just the portion of the portfolio
purchased with the proceeds of the Preferred Shares offering) is available to
pay dividends on the Preferred Shares, however, dividend rates on the
Preferred Shares would need to exceed the rate of return on the Trust's
investment portfolio by a wide margin before the Trust's ability to pay
dividends on the Preferred Shares would be jeopardized. If intermediate to
longer-term interest rates rise, this could negatively impact the value of
the Trust's investment portfolio, reducing the amount of assets serving as
asset coverage for the Preferred Shares.
AUCTION RISK
The dividend rate for the Preferred Shares normally is set through an Auction
process. In the Auction, Existing Holders of Preferred Shares may indicate the
dividend rate at which the Existing Holders would be willing to hold or sell
their Preferred Shares or purchase additional Preferred Shares. The Auction also
provides liquidity for the sale of Preferred Shares. An Auction fails if there
are more Preferred Shares offered for sale than there are buyers. You may not be
able to sell your Preferred Shares at an Auction if the Auction fails. Also, if
you place Hold Orders (orders to retain shares) at an Auction only at a
specified dividend rate and that rate exceeds the rate set at the Auction, you
will not retain you Preferred Shares. Additionally, if you buy Preferred Shares
or elect to retain Preferred Shares without specifying a dividend rate below
which you would not wish to buy or continue to hold those Preferred Shares, you
could receive a lower of return on your shares than the market rate. Finally,
the Dividend Period for the Preferred Shares
6
may be changed by the Trust, subject to certain conditions with notice to the
holders of the Preferred Shares, which could also affect the liquidity of your
investment.
SECONDARY MARKET RISK
If you try to sell your Preferred Shares between Auctions, you may not be able
to sell any or all of your Preferred Shares, or you may not be able to sell them
for $25,000 per share plus accumulated dividends. If the Trust has designated a
Special Dividend Period, changes in interest rates could affect the price you
would receive if you sold your Preferred Shares in the secondary market.
RATINGS AND ASSET COVERAGE RISK
While it is expected that Rating Agency will assign a rating of "Aaa" to the
Preferred Shares, such rating does not eliminate or necessarily mitigate the
risks of investigating in Preferred Shares.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
Restrictions imposed on the declaration and payment of dividends or other
distributions to the holders of the Trust's Common Shares and the Preferred
Shares, both by the Investment Company Act of 1940, as amended (the "1940 Act"),
and by requirements imposed by rating agencies, might impair the Trust's ability
to satisfy minimum distribution requirements that it must satisfy to maintain
its qualification as a regulated investment company for federal income tax
purposes.
GENERAL RISKS OF INVESTING IN THE TRUST INCLUDE THE FOLLOWING:
MUNICIPAL SECURITIES MARKET RISK
The yields on and market prices of municipal securities are dependent on a
variety of factors, including general conditions of the municipal securities
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The value of outstanding municipal securities will vary
as a result of changing evaluations of the ability of their issuers to meet the
interest and principal payments. Such values will also change in response to
changes in the interest rates payable on new issues of municipal securities.
Changes in the value of the municipal securities held in the Trust's portfolio
arising from these or other factors will cause changes in the Trust's net asset
value per share.
The ability of a municipal issuer to repay obligations on municipal securities
(other than private activity bonds) is subject to the risk that the municipal
issuer of the securities will not have sufficient revenues from taxes and other
sources of income to pay interest and to repay principal on the municipal
securities. The level of municipal income may be adversely affected by various
factors, including general economic activity, real estate values and changes in
governmental expenses. The obligations of the issuer to pay the principal of and
interest on a municipal security are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, that may be enacted by Congress
or state legislatures extending the time for payment of principal or interest or
imposing other constraints upon the enforcement of such obligations. There is
also the possibility that, as a result of litigation or other conditions, the
power or ability of the issuer to pay when due the principal of or interest on a
municipal security may be materially affected.
The amount of public information available about the issuance of municipal
securities is generally less than that for corporate equities or bonds, and the
investment performance of the Trust may therefore be more dependent on the
analytical abilities of the Adviser than would be a stock fund or taxable bond
fund. The secondary market for municipal securities, particularly the below
investment grade municipal securities in which the Trust will invest, also tends
to be less well-developed or liquid than many other securities markets, which
may adversely affect the Trust's ability to sell its municipal securities at
attractive prices.
Municipal securities may be backed by letters of credit or other forms of credit
enhancement issued by domestic or foreign banks or by other financial
institutions. The credit quality of these banks and financial institutions
could, therefore, cause a loss to the Trust. Letters of credit and other
obligations of foreign banks and financial institutions may involve risks in
addition to those of domestic obligations because of less publicly available
financial and other information, less securities regulation, potential
imposition of foreign withholding and other taxes, war and expropriation or
other adverse governmental actions.
7
Foreign banks and their foreign branches are not regulated by U.S. banking
authorities, and generally are not bound by the accounting, auditing and
financial reporting standards applicable to U.S. banks.
TAX RISK
The value of the Trust's investments and its net asset value may be adversely
affected by changes in tax rates and policies. Because interest income from
municipal securities is normally not subject to regular federal income taxation,
the attractiveness of municipal securities in relation to other investment
alternatives is affected by changes in federal income tax rates or changes in
the tax-exempt status of interest income from municipal securities. Any proposed
or actual changes in such rates or exempt status, therefore, can significantly
affect the demand for and supply, liquidity and marketability of municipal
securities. This could in turn affect the Trust's net asset value and ability to
acquire and dispose of municipal securities at desirable yield and price levels.
Additionally, the Trust is not a suitable investment for IRAs, for other
tax-exempt or tax-deferred accounts or for investors who are not sensitive to
the federal, state or local income tax consequences of their investments.
CREDIT AND JUNK BOND RISK
Credit risk is the risk that an issuer of a municipal security will become
unable to meet its obligation to make interest and principal payments. The two
principal classifications of municipal securities are "general obligations" and
"revenue obligations." General obligations are secured by the issuer's pledge of
its credit and taxing power for the payment of principal and interest. Revenue
obligations are payable 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, but not from the general taxing power. Sizable
investments in these obligations could involve an increased risk to the Trust
should any of the related facilities experience financial difficulties. Private
activity bonds are in most cases revenue obligations and do not generally carry
the pledge of the credit of the issuing municipality.
The Trust intends to purchase municipal securities that are rated below
investment grade (commonly referred to as "junk bonds" or "high yield
securities"), that is, rated Ba or below by Moody's or BB or below by S&P, and
unrated securities determined by the Adviser to be of comparable credit quality.
Investment in municipal securities of below investment grade quality involves
substantial risk of loss. "Junk bonds" are considered predominantly speculative
with respect to the issuer's ability to pay interest and principal and are
susceptible to default or decline in market value due to adverse economic and
business developments. The market values for municipal securities of below
investment grade quality tend to be volatile, and these securities are less
liquid than investment grade debt securities. For these reasons, an investment
in the Trust is subject to the following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment
- greater risk of loss due to default or declining credit quality
- adverse issuer specific events are more likely to render the issuer unable
to make interest and/or principal payments
- if a negative perception of the high yield market develops, the price and
liquidity of high yield securities may be depressed, and this negative
perception could last for a significant period of time
Adverse changes in economic conditions are more likely to lead to a weakened
capacity of a high yield issuer to make principal payments and interest payments
than an investment grade issuer. The principal amount of high yield securities
outstanding has proliferated in the past decade as an increasing number of
issuers have used high yield securities for corporate financing. An economic
downturn could severely affect the ability of highly leveraged issuers to
service their debt obligations or to repay their obligations upon maturity.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor that may have an
adverse effect on the Trust's ability to dispose of a particular security. There
are fewer dealers in the market for high yield municipal securities than
investment grade municipal obligations. The prices quoted by different dealers
may vary significantly, and the spread between the bid and ask price is
generally much larger than for higher quality instruments.
8
Under adverse market or economic conditions, the secondary market for high yield
municipal securities could contract further, independent of any specific adverse
changes in the condition of a particular issuer, and these instruments may
become illiquid. As a result, the Trust could find it more difficult to sell
these securities or may be able to sell the securities only at prices lower than
if such securities were widely traded. Prices realized upon the sale of such
lower rated or unrated securities, under these circumstances, may be less than
the prices used in calculating the Trust's net asset value.
INTEREST RATE RISK
Interest rate risk is the risk that municipal securities (and the Trust's net
assets) will decline in value because of changes in interest rates. Interest
rate risk includes the following risks:
- if interest rates go up, the value of municipal securities in the Trust's
portfolio generally will decline
- during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Trust to reinvest in lower yielding securities. This is known as call or
prepayment risk. Municipal securities may have call features that allow the
issuer to repurchase the security prior to its stated maturity. An issuer
may redeem a high yield obligation if the issuer can refinance the debt at
a lower cost due to declining interest rates or an improvement in the
credit standing of the issuer
- the Adviser's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or investment
strategy may prove to be incorrect
MATURITY RISK
The Trust may invest in municipal securities of any maturity, although under
normal circumstances it is anticipated that the Trust will generally invest in
intermediate to long-term investments. Interest rate risk will generally affect
the price of a municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more volatile than
other fixed income securities with shorter maturities. Conversely, municipal
securities with shorter maturities will be less volatile but generally provide
lower returns than municipal securities with longer maturities. The average
maturity of the Trust's municipal security investments may affect the volatility
of the Trust's share price.
CONCENTRATION RISK
The Trust may invest 25% or more of the value of its total assets in municipal
securities of issuers located in the same state or territory or in the same
economic sector. The Trust will not invest more than 25% of its total assets in
issuers in a single industry, nor will the Trust invest more than 5% of its
total assets in the securities of any single issuer. Governmental issuers of
municipal securities are not considered part of any "industry," and general
obligation bonds of a state are not subject to the 5% limitation set forth
above. For purposes of the 5% limitation, the Trust will treat a revenue bond
payable from revenues received by the municipal issuer from a single entity (the
"underlying obligor") as being issued by the underlying obligor. The issuers of
these municipal securities may be related in such a way that an economic,
business or political development or change affecting one municipal security
would also affect other municipal securities held by the Trust. Under normal
market conditions, the Trust intends to limit its investment in tobacco
settlement bonds to approximately 10% of the Trust's total assets. The Trust may
invest all of its assets in municipal securities the interest on which is paid
solely from revenues from the same economic sector. The Adviser anticipates that
the Trust's investments in revenue bonds will emphasize municipal securities
backed by revenue from essential services, such as hospitals and healthcare,
power generation, transportation, education and housing. Subject to the
availability of suitable investment opportunities, the Adviser will attempt to
diversify the Trust's investments to seek to minimize the portfolio's
sensitivity to credit and other risks associated with a particular issuer,
industry or sector, or to the impact of a single economic, political or
regulatory occurrence. The Trust is not required to diversify its holdings in
municipal securities among a fixed number of states and, consequently, the
Trust's portfolio may be adversely affected by developments in a single state or
region. Concentration of the Trust's investments in one or a limited number of
states or economic sectors will subject the Trust, to a greater extent than if
such investments were not so concentrated, to the risks of adverse economic,
business or political developments
9
affecting the particular state, economic sector or other area of concentration.
The Trust has no current intention to invest more than 25% of the value of its
total assets in municipal securities of issuers located in a single state but
may do so in the future. To the extent that the Trust invests more than 25% of
its assets in municipal securities of issuers in a single state, the Trust will
be exposed to a greater degree to risks associated with that specific state,
including budget and fiscal issues, changes in the degree of financial support
from the state to local governments, political disputes that delay
appropriations or otherwise adversely affect municipal securities and the
general economic activity in such state which may adversely affect tax receipts
and other municipal revenue. For example, Moody's and S&P both placed their
ratings of California general obligation bonds on credit watch due to increased
uncertainty regarding the timing of state budget adoption and the potential
negative effect that prolonged delay in budget resolution could have on
California's ability to meet its debt obligations. The Trust will not notify
shareholders if 25% or more of the Trust's assets are represented by municipal
issuers in a single state. However, the Trust's annual and semi-annual financial
statements will disclose the percentage of the Trust's assets invested in each
state. To the extent that the Trust focuses its assets in the hospital and
healthcare sector, the Trust will be subject to risks associated with such
sector, including adverse government regulation and reduction in reimbursement
rates, as well as government approval of products and services and intense
competition. Issuers in the power generation sector can be significantly
affected by government regulation, financing difficulties, supply and demand of
services or fuel and natural resource conservation. The transportation sector,
including airports, airlines, ports and other transportation facilities, can be
significantly affected by changes in the economy, fuel prices, labor relations,
insurance costs and government regulation.
RISKS OF MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION
The Trust may invest in municipal leases and certificates of participation in
such leases. Municipal leases and certificates of participation involve special
risks not normally associated with general obligations or revenue bonds. Leases
and installment purchase or conditional sale contracts (which normally provide
for title to the leased asset to pass eventually to the governmental issuer)
have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the governmental issuer is prevented from maintaining
occupancy of the leased premises or utilizing the leased equipment. Although the
obligations may be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and may result in a delay in
recovering or the failure to fully recover the Trust's original investment. In
the event of non-appropriation, the issuer would be in default and taking
ownership of the assets may be a remedy available to the Trust, although the
Trust does not anticipate that such a remedy would normally be pursued. To the
extent that the Trust invests in unrated municipal leases or participates in
such leases, the credit quality rating and risk of cancellation of such unrated
leases will be monitored on an ongoing basis. Certificates of participation,
which represent interests in unmanaged pools of municipal leases or installment
contacts, involve the same risks as the underlying municipal leases. In
addition, the Trust may be dependent upon the municipal authority issuing the
certificates of participation to exercise remedies with respect to the
underlying securities. Certificates of participation also entail a risk of
default or bankruptcy, both of the issuer of the municipal lease and also the
municipal agency issuing the certificate of participation. Certain municipal
lease obligations and certificates of participation may be deemed to be illiquid
for the purpose of the Trust's limitation on investments in illiquid securities.
ILLIQUID INVESTMENTS RISK
The Trust may invest up to 20% of its total assets in illiquid securities.
Illiquid securities may be difficult to dispose of at a fair price at times when
the Trust believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect
10
the price that the Trust pays for or recovers upon the sale of illiquid
securities. Illiquid securities are also more difficult to value and the
Adviser's judgment may play a greater role in the valuation process. Investment
of the Trust's assets in illiquid securities may restrict the Trust's ability to
take advantage of market opportunities. The risks associated with illiquid
securities may be particularly acute in situations in which the Trust's
operations require cash and could result in the Trust borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities.
DERIVATIVES RISK
Even a small investment in derivatives can have a significant impact on the
Trust's exposure to interest rates. If changes in a derivative's value do not
correspond to changes in the value of the Trust's other investments, the Trust
may not fully benefit from or could lose money on the derivative position. In
addition, some derivatives involve risk of loss if the person who issued the
derivative defaults on its obligation. Certain derivatives may be less liquid
and more difficult to value.
INVESTMENT ADVISER
Pioneer Investment Management, Inc. is the Trust's investment adviser. The
Adviser is responsible on a day-to-day basis for investment of the Trust's
portfolio in accordance with its investment objectives and principal investment
strategies. The Adviser makes all investment decisions for the Trust and places
purchase and sale orders for the Trust's portfolio securities.
The Adviser or its predecessors have been managing investment companies since
1928. The Adviser is an indirect, wholly-owned subsidiary of UniCredito Italiano
S.p.A. ("UniCredito"), one of the leading banking groups in Italy. As of
June 30, 2003, assets under management by the Adviser and its affiliates were
approximately $112 billion worldwide, including over $28 billion in assets under
management by the Adviser. As of June 30, 2003, the Adviser managed
approximately $__ million in municipal securities and $__ billion in high yield
securities.
FEDERAL INCOME TAXATION
The Trust intends to take the position that under present law the Preferred
Shares will constitute stock of the Trust. Distributions with respect to the
Preferred Shares (other than distributions in redemption of the Preferred Shares
that are treated as exchanges of stock under Section 302(b) of the Internal
Revenue Code of 1986, as amended (the "Code") will constitute dividends to the
extent of the Trust's current or accumulated earnings and profits as calculated
for U.S. federal income tax purposes. Such dividends generally will be exempt
from regular federal income tax to the extent such dividends are paid from
tax-exempt income earned on the Trust's investments. To the extent any such
dividends are not attributable to tax-exempt income earned on the Trust's
investments, the dividends generally will be taxable as ordinary income and are
not expected to be eligible for the maximum 15% federal income tax rate on
"qualified dividend income." Distributions of net capital gain that are
designated by the Trust as capital gain dividends, if any, however, will be
treated as long-term capital gains without regard to the length of time the
shareholder has held shares of the Trust.
Exempt-interest dividends paid by the Trust from interest earned on certain
private activity bonds may increase a shareholder's alternative minimum tax
liability, and all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax liability. The extent of any such increase
will depend on the shareholder's particular tax situation. The Trust is
currently required to allocate net capital gain, other income taxable for
federal income tax purposes, if any, and net tax-exempt income between common
shares and Preferred Shares, if any, in proportion to the total dividends paid
to each class.
TRADING MARKET
The Preferred Shares will not be listed on an exchange. Instead, you may buy or
sell Preferred Shares at an Auction that normally is held every seven days by
submitting orders to a Broker-Dealer that has entered into an agreement with the
Auction Agent or a broker-dealer that has entered into a separate agreement with
a Broker-Dealer. In addition to the Auctions, Broker-Dealers and other
broker-dealers may maintain a
11
secondary trading market in Preferred Shares outside of Auctions, but may
discontinue this activity at any time. There is no assurance that a secondary
market will provide shareholders with liquidity. You may transfer Preferred
Shares outside of Auctions only to or through a Broker-Dealer or a broker-dealer
that has entered into a separate agreement with a Broker-Dealer.
DIVIDENDS AND DIVIDEND PERIODS
The Preferred Shares 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 Preferred Shares 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 immediately preceding
the start of such Dividend Period.
The table below shows the initial dividend rate, the Initial Dividend Payment
Date and the number of days for the Initial Dividend Period on each series of
the Preferred Shares offered in this Prospectus. For Subsequent Dividend
Periods, the Preferred Shares will pay dividends based on a rate set at
Auctions, normally held every seven days. In most instances, dividends are
payable on the first Business Day following the end of the Dividend Period. The
rate set at Auction will not exceed the Maximum Applicable Rate. See
"Description of Preferred Shares--Dividends and Dividend Periods." Dividends on
the Preferred Shares will be cumulative from the date the Preferred Shares are
first issued and will be paid out of legally available funds.
INITIAL ENDING DATE OF INITIAL SUBSEQUENT NUMBER OF DAYS OF
DIVIDEND INITIAL DIVIDEND DIVIDEND DIVIDEND INITIAL DIVIDEND
RATE PERIOD PAYMENT DATE PAYMENT DATES PERIOD
------------------------------------------------------------------------------------------------------
Series [ ]
Series [ ]
Series [ ]
After the Initial Dividend Period, each Subsequent Dividend Period for each
series of Preferred Shares will generally consist of seven days (a "7-Day
Dividend Period"); provided, however, that prior to any Auction, the Trust may
elect, subject to certain limitations described herein, upon giving notice to
holders thereof, a Special Dividend Period for any or all series. A "Special
Dividend Period" is a Dividend Period consisting of a specified number of days,
evenly divisible by seven and not fewer than 14 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 Preferred Shares offered hereby are cumulative from
the Date of Original Issue and are payable when, as and if declared by the Board
of Trustees of the Trust out of funds legally available therefor, commencing on
the Initial Dividend Payment Date. See "Description of Preferred
Shares--Dividends and Dividend Periods--Designation of Special Dividend
Periods." In the case of Dividend Periods that are not Special Dividend Periods,
dividends will be payable generally on each succeeding for Series
Preferred Shares, on each succeeding for Series Preferred Shares,
and on each succeeding for Series Preferred Shares, subject to certain
exceptions.
Dividends for the Preferred Shares 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 Preferred Shares--Dividends and Dividend Periods."
For each Subsequent Dividend Period, the cash dividend rate on each series of
Preferred Shares will be the Applicable Rate that the Auction Agent advises the
Trust has resulted from an Auction. See "Description of Preferred
Shares--Dividends and Dividend Periods." The first Auction for each series of
the Preferred Shares is scheduled to be held on the ending date for the Initial
Dividend Period as set forth above.
12
ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF TAXABLE INCOME IN
DIVIDENDS
Dividends paid by the Trust, to the extent paid from tax-exempt income earned on
municipal securities, will be exempt from federal income tax, although a portion
of those dividends may be a tax preference item for purposes of the federal
alternative minimum tax. In addition, for corporations, interest on all
municipal obligations is taken into account in the computation of income subject
to the federal alternative minimum tax. The Trust is required to allocate
tax-exempt interest, net capital gains and other income subject to federal
income tax, if any, proportionately among dividends paid on the common shares
and Preferred Shares. Except as noted below and under "Description of Preferred
Shares--Auction Procedures," whenever the Trust is aware that it will include
any net capital gains or other income that is subject to federal income tax, but
not including for this purpose income that is exempt for regular federal income
tax purposes but subject to the alternative minimum tax ("Taxable Income"), in
any dividend on the Preferred Shares, the Trust 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 Trust, and each Broker-Dealer will notify its Beneficial
Owners and Potential Beneficial Owners, as provided in its Broker-Dealer
Agreement. In the alternative, the Trust also may include such Taxable Income in
a dividend on the Preferred Shares 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 Preferred Shares will depend upon the amount of such income realized by
the Trust and other factors. See "Federal income tax matters" and "Description
of Preferred Shares--Auction Procedures."
GROSS-UP DIVIDENDS
The Trust may retroactively allocate any net capital gains or other Taxable
Income to dividends paid on the Preferred Shares without giving the advance
notice described in the preceding section. If the Trust 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 Preferred Shares or the liquidation of the Trust,
the Trust will make certain payments to holders of the Preferred Shares to which
such allocation was made to offset substantially the tax effect thereof.
Otherwise, the Trust does not expect to make payments to holders of the
Preferred Shares to offset the tax effect of any reallocation of net capital
gains or other taxable income. See "Description of Preferred Shares--Dividends
and Dividend Periods--Gross-up Dividends" and "Federal income tax matters."
DETERMINATION OF MAXIMUM APPLICABLE RATES
Except during a Non-Payment Period, the Applicable Rate for any Dividend Period
for Preferred Shares will not be more than the Maximum Applicable Rate
applicable to such shares. The Maximum Applicable Rate for each series of
Preferred Shares will depend on the credit rating assigned to such series 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 Preferred Shares by [Rating Agency 1] or [Rating Agency 2]
(or, if [Rating Agency 1] or [Rating Agency 2] 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
13
dividend that net capital gains or other taxable income will be included in such
dividend on the Preferred Shares, as follows:
[RATING AGENCY] CREDIT APPLICABLE PERCENTAGE OF APPLICABLE PERCENTAGE OF
RATINGS ON PREFERRED SHARES REFERENCE RATE--NOTIFICATION REFERENCE RATE--NO NOTIFICATION
--------------------------------------------------------------------------------------------
Aa3 or higher
A
Baa
Below Baa
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 Preferred Shares--Dividends and Dividend Periods--Non-Payment
Period; Late Charge," initially will be __% of the Reference Rate (or __% 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 on Preferred
Shares).
ASSET MAINTENANCE
Under the Statement of Preferences (the "Statement") which establishes and fixes
the rights and preferences of the shares of each series of Preferred Shares, the
Trust must maintain:
- Asset coverage (the "Preferred Shares Basic Maintenance Amount") of the
Preferred Shares as required by the rating agency or agencies rating the
Preferred Shares. The Preferred Shares Basic Maintenance Amount is the sum
of (a) the aggregate liquidation preference of the Preferred Shares then
outstanding, together with the aggregate liquidation preference on any
other series of preferred shares, and (b) certain accrued and projected
dividend and other payment obligations of the Trust. Moody's and Fitch have
each established separate guidelines for calculating discounted value of
the Trust's assets for purposes of this test. To the extent any particular
portfolio holding does not satisfy a rating agency's guidelines, all or a
portion of the holding's value will not be included in the rating agency's
calculation of discounted value. The Moody's and Fitch guidelines also
impose certain diversification requirements on the Trust's portfolio.
- Asset coverage of at least 200% with respect to senior securities that are
stock, including the Preferred Shares (the "1940 Act Preferred Share Asset
Coverage").
In the event that the Trust does not maintain or cure these coverage tests, some
or all of the Preferred Shares will be subject to mandatory redemption. See
"Description of Preferred Shares--Mandatory Redemption."
Based on the composition of the Trust's portfolio as of _____, 2003, the asset
coverage of the Preferred Shares, as measured pursuant to the 1940 Act, would be
approximately ___% if the Trust were to issue shares of Preferred Shares.
MANDATORY REDEMPTION
If the Preferred Shares Basic Maintenance Amount or the 1940 Act Preferred
Shares Asset Coverage is not maintained or restored as specified herein, the
Preferred Shares 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
Preferred Shares may be entitled to receive Gross-up Dividends in the event of
redemption of such Preferred Shares as described herein. See "Description of
Preferred Shares--Dividends and Dividend Periods--Gross-up Dividends." Any such
redemption will be limited to the minimum number of Preferred Shares necessary
to restore the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage, as the case may be. The Trust's ability to make
such a
14
mandatory redemption may be restricted by the provisions of the 1940 Act. See
"Description of Preferred Shares--Redemption--Mandatory Redemption."
OPTIONAL REDEMPTION
The Preferred Shares are redeemable at the option of the Trust, 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 Preferred Shares--Redemption--Optional Redemption." In addition, holders of
Preferred Shares may be entitled to receive Gross-up Dividends in the event of
redemption of such Preferred Shares as described herein. See "Description of
Preferred Shares--Dividends and Dividend Periods--Gross-up Dividends."
LIQUIDATION PREFERENCE
The liquidation preference of the Preferred Shares will be $25,000 per share,
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared). See "Description of Preferred Shares--Liquidation Rights." In
addition, holders of Preferred Shares may be entitled to receive Gross-up
Dividends in the event of the liquidation of the Trust as provided herein. See
"Description of Preferred Shares--Dividends and Dividend Periods--Gross-up
Dividends."
RATING
It is a condition to their issuance that the Preferred Shares be issued with a
credit quality rating of "Aaa" from [Rating Agency]. The Trust may at some
future time seek to have the Preferred Shares rated by an additional or
Substitute Rating Agency. See "Description of Preferred Shares--Rating Agency
Guidelines and Asset Coverage."
VOTING RIGHTS
The 1940 Act requires that the holders of Preferred Shares and any other
preferred shares, voting as a separate 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 Preferred Shares or any other preferred shares
are unpaid. The holders of Preferred Shares and any other preferred shares will
vote as a separate class on certain other matters as required under the
Agreement and Declaration of Trust and By-Laws and under the 1940 Act. See
"Description of Preferred Shares--Voting Rights," and "Certain Provisions of the
Agreement and Declaration of Trust and By-Laws."
AUCTION PROCEDURES
Separate Auctions will be conducted for each series of Preferred Shares. Unless
otherwise permitted by the Trust, Beneficial Owners and Potential Beneficial
Owners of Preferred Shares 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 Preferred
Shares (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 Preferred Shares without
regard to the Applicable Rate for the next Dividend Period for such shares.
- Bid--indicating its desire to hold the Preferred Shares, 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 Preferred Shares without
regard to the Applicable Rate for the next Dividend Period for such shares.
15
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to the Preferred Shares then held by such Beneficial Owner,
provided that the total number of Preferred Shares covered by such Orders does
not exceed the number of Preferred Shares held by such Beneficial Owner. If,
however, a Beneficial Owner offers through its Broker-Dealer to purchase
additional Preferred Shares 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 Preferred Shares 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 Preferred Shares may submit Bids through their
Broker-Dealers in which they offer to purchase Preferred Shares, provided that
the Applicable Rate for the next Dividend Period for such shares is not less
than the rate per annum specified in such Bid. A Bid by a Potential Beneficial
Owner with a rate per annum higher than the Maximum Applicable Rate will not be
considered. Neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to 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 Preferred Shares 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
Preferred Shares 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 Preferred Shares 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 Preferred Shares (that is, in general, the number of
Preferred Shares 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
Preferred Shares 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 Preferred Shares 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, Preferred Shares 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 % of the Reference Rate (as defined under "Determination of
Maximum Applicable Rates" above) in effect on the date of the Auction (or %
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 on
Preferred Shares). The Auction Procedures include a pro rata allocation of
shares for purchase and sale, which may result in an Existing Holder selling or
16
holding, or a Potential Holder purchasing, a number of Preferred Shares that is
less than the number of Preferred Shares 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 Preferred Shares subject thereto, and a Bid placed by an Existing Holder
also will constitute an irrevocable offer to sell the Preferred Shares 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 Preferred Shares 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 Preferred Shares--The Auction."
17
FINANCIAL HIGHLIGHTS (UNAUDITED)
Information contained in the table below shows the unaudited operating
performance of the Trust from the commencement of the Trust's investment
operations on July , 2003 through [ ], 2003. Since the Trust was recently
organized and commenced investment operations on July , 2003, the table covers
approximately one month of operations, during which a substantial portion of the
Trust's portfolio was held in temporary investments pending investment in
preferred stocks or other preferred securities that meet the Trust's investment
objectives and principal investment strategies. Accordingly, the information
presented does not provide a meaningful picture of the Trust's future operating
performance.
FOR THE PERIOD
JULY , 2003(1)
THROUGH [ ], 2003
(UNAUDITED)
----------------------------------------------------------------------------------------
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ [ ]
========
Increase/(decrease) from investment operations:
Net investment income [ ]
Net realized and unrealized gain/(loss) on investments [ ]
Dividends to preferred shareholders [ ]
Net increase/(decrease) from investment operations [ ]
Offering costs charged to capital [ ]
Net asset value, end of period $ [ ]
========
Market value, end of period $ [ ]
========
Total investment return(2) [ ]%(3)
========
RATIOS TO AVERAGE NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Ratio of expenses to average net assets [ ]%(4)
Ratio of adjusted expenses to average net assets [ ]%(4)(5)
Net investment income before preferred share dividends [ ]%(4)
Preferred share dividends [ ]%(4)
Net investment income applicable to common shareholders [ ]%(4)
Supplemental data:
Average net assets of common shareholders (000) $ [ ]
Portfolio turnover [ ]%
Net assets applicable to common shareholders, end of period (000) $ [ ]
(1) Commencement of investment operations
(2) Total investment return is calculated assuming a purchase of common shares
at the current market value on the first day and a sale at the current
market value on the last day of the period reported. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
Total investment returns of less than a full period are not annualized.
Past performance is not a guarantee of future results
(3) Not annualized
(4) Annualized
(5) Does not take into consideration expense reductions during period
The information above represents the unaudited operating performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Trust's common shares.
18
THE TRUST
Pioneer Municipal High Income Trust is a recently organized, diversified,
closed-end management investment company. The Trust was organized under the laws
of the State of Delaware on March 13, 2003, and has registered under the 1940
Act. As a recently organized entity, the Trust has no operating history. The
Trust's principal office is located at 60 State Street, Boston, Massachusetts
02109, and its telephone number is (617) 742-7825.
On July 22, 2003, the Trust issued an aggregate of 20,500,000 common shares of
beneficial interest, no par value, pursuant to an initial public offering.
[On , 2003, the Trust issued common shares of beneficial interest pursuant to
an over-allotment option.] The Trust's common shares are traded on the NYSE
under the symbol "MHI."
The following provides information about the Trust's outstanding shares as of
[ ], 2003.
AMOUNT HELD
BY THE TRUST OR AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
------------------------------------------------------------------------------------
Common shares Unlimited 0 [ ]
Preferred Shares Unlimited for each series 0 0
Series [ ]
Series [ ]
Series [ ]
CAPITALIZATION (UNAUDITED)
The following table sets forth the capitalization of the Trust as of [ ], 2003,
and as adjusted to give effect to the issuance of the Preferred Shares offered
hereby (including estimated offering expenses and a sales load of $250 per
Preferred Shares).
ACTUAL AS ADJUSTED
----------------------------------------------------------------------------------------------------------
Preferred Shares, no par value per share
(no shares issued; [ ] shares issued, as adjusted at $25,000
per share liquidation preference) $ -- $ [ ]
====== =======
Shareholder's equity:
Common shares, no par value per share (20,500,000 shares
outstanding; [ ] shares outstanding as adjusted)(1) [ ] [ ]
------ -------
Paid-in surplus
Balance of undistributed net investment income [ ] [ ]
------ -------
Accumulated net realized gain/(loss) from investment transactions [ ] [ ]
------ -------
Net unrealized appreciation/(depreciation) of investments [ ] [ ]
------ -------
Net assets attributable to common shares [ ] [ ]
====== =======
Net assets attributable to common shares outstanding plus
liquidation value of Preferred Shares
(1) None of these outstanding shares are held by or for the account of the
Trust
19
PORTFOLIO COMPOSITION
As of [ ], 2003, approximately [ ]% of the market value of the Trust's
portfolio was invested in municipal securities and approximately [ ]% of the
market value of the Trust's portfolio was invested in other securities and
short-term instruments.(1) The following table sets forth certain information
with respect to the composition of the Trust's investment portfolio as of [ ],
2003, based on the highest rating assigned each investment.
CREDIT RATING (MOODY'S/S&P) NUMBER OF ISSUES VALUE (000) PERCENT
-----------------------------------------------------------------------------------
Aaa/AAA [ ] $ [ ] [ ]%
Aa/AA [ ] [ ] [ ]
A/A [ ] [ ] [ ]
Baa/BBB [ ] [ ] [ ]
Ba/BB [ ] [ ] [ ]
B/B [ ] [ ] [ ]
Caa/CCC [ ] [ ] [ ]
Ca/CC [ ] [ ] [ ]
------ ------ ------
Total [ ] [ ] [ ]%
====== ====== ======
(1) As of [ ], 2003, approximately [ ]% of the market value of the Trust's
portfolio was invested in municipal securities and approximately [ ]% of
the market value of the Trust's portfolio was invested in other securities
and short-term instruments.
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVES
The Trust's primary investment objective is to provide its common shareholders
with a high level of current income exempt from regular federal income tax.
Distributions of interest income from the Trust's portfolio of municipal
securities generally will be exempt from regular federal income tax. As a
secondary investment objective, the Trust also may seek capital appreciation to
the extent consistent with its primary objective. Distributions from sources
other than interest income from the Trust's portfolio of municipal securities,
including capital gain distributions, are not exempt from regular federal income
tax. The Trust's investment objectives and its policy discussed under
"--Portfolio contents" with respect to investment in municipal securities are
fundamental policies and may not be changed without the approval of a majority
of the outstanding voting securities (as defined in the 1940 Act) of the Trust.
There can be no assurance that the Trust will achieve its investment objectives.
PRINCIPAL INVESTMENT STRATEGIES
The Trust may invest in municipal securities with a broad range of maturities
and credit ratings, including both investment grade and below investment grade
municipal securities. In managing the Trust's portfolio, the Adviser adjusts the
portfolio's duration and overall credit quality in light of changing market and
economic conditions. In making decisions with respect to specific municipal
securities for the Trust's portfolio, the Adviser employs a disciplined
approach, driven primarily by proprietary research regarding prevailing interest
rates, economic fundamentals at both the national and state levels and in-depth
credit research conducted by the Adviser's investment staff.
SECURITY SELECTION
The Adviser anticipates that the Trust's investment in revenue bonds will
emphasize municipal securities backed by revenue from essential services, such
as hospitals and healthcare, power generation, transportation, education
20
and housing. The Adviser considers both broad economic and issuer specific
factors in selecting a portfolio designed to achieve the Trust's investment
objectives. In assessing the appropriate maturity, rating and sector weightings
of the Trust's portfolio, the Adviser considers a variety of factors that are
expected to influence economic activity and interest rates. These factors
include fundamental economic indicators, such as the rates of economic growth
and inflation, Federal Reserve monetary policy and the relative value of the
U.S. dollar compared to other currencies. Once the Adviser determines the
preferable portfolio characteristics, the Adviser selects individual securities
based upon the terms of the securities (such as yields compared to U.S.
Treasuries or comparable issues), liquidity and rating, sector and issuer
diversification.
The Adviser attempts to identify investment grade and below investment grade
municipal securities that are trading at attractive valuations relative to the
Adviser's evaluation of the issuer's creditworthiness and, with respect to
private activity bonds, the profit potential of the corporation from which the
revenue supporting the bonds is derived. The Adviser's overall investment
approach is both top-down and bottom-up. The Adviser first seeks to identify the
sectors or regions of the municipal securities market that present the best
relative value opportunities and then bases the Trust's overall sector and
regional weightings on that determination. Once the Adviser establishes the
overall regional and sector weightings, the Adviser focuses on selecting those
securities within each sector or region that meet its fundamental criteria. In
determining sector weightings, the Trust's portfolio management team also
maintains frequent contact with the Adviser's investment professionals who
follow U.S. equities and those who focus on corporate fixed income investments.
In many cases, the Adviser will augment its municipal securities credit research
and security selection processes with equity research analysis. The Adviser has
a fundamental bias toward long-term security selection rather than engaging in
frequent "market timing" or short-term trading. There can be no assurance that
this process will be successful.
DURATION MANAGEMENT
The Adviser will actively manage the duration of the Trust's portfolio of
municipal securities based primarily on the Adviser's outlook for interest
rates. The Adviser will consider economic trends, Federal Reserve Board actions
and capital markets activity, among other factors, in developing its outlook for
interest rates. The Adviser believes that maintaining duration at an appropriate
level offers the potential for above-average returns while limiting the risks of
interest rate volatility. Duration is a measure of the expected life of a debt
security that is used to determine the sensitivity of the security's price to
changes in interest rates. While the Trust is not limited in the range of its
portfolio's average duration, in the current market environment the Adviser
expects that, once fully invested, the Trust's initial portfolio will have an
average duration of between eight and twelve years (including the effect of
anticipated leverage). In the future, the Adviser will modify the average
duration of the Trust's portfolio in response to economic and market conditions.
The Trust may employ certain strategies to reduce the Trust's interest rate
sensitivity, including investments in interest rate swap or cap transactions.
There is no assurance that the Trust will do so or that such strategies will be
successful.
CREDIT MANAGEMENT
The Trust may invest in municipal securities with a broad range of credit
ratings, including both investment grade and below investment grade municipal
securities. At least 50% of the Trust's portfolio of municipal securities will
be rated investment grade at the time of acquisition (that is, at least Baa by
Moody's or BBB by S&P) or, if unrated, determined by the Adviser to be of
comparable credit quality. No more than 50% of the Trust's portfolio of
municipal securities will be rated below investment grade at the time of
acquisition (that is, Ba or lower by Moody's or BB of the or lower by S&P) or,
if unrated, determined by the Adviser to be of comparable credit quality. The
Trust anticipates an initial allocation to below investment grade securities of
approximately 35%, although the actual allocation of the Trust's investments
will be subject to market conditions at the time the Trust commences investment
operations. Municipal securities of below investment grade quality are regarded
as having predominantly speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal, and are commonly referred to as
"junk bonds" or "high yield securities." They
21
involve greater risk of loss, are subject to greater price volatility and are
less liquid, especially during periods of economic uncertainty or change, than
higher rated municipal securities. Municipal securities rated BB or Ba may face
significant ongoing uncertainties or exposure to adverse business, financial or
economic conditions that could lead to the issuer being unable to meet its
financial commitments. The protection of interest and principal payments may be
moderate and not well-safeguarded during both good and bad times. Municipal
securities rated B generally lack the characteristics of a 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 low, and such municipal
securities are more vulnerable to nonpayment than obligations rated BB. Adverse
business, financial or economic conditions will likely impair the issuer's
capacity or willingness to meet its financial commitment on municipal
securities. Municipal securities rated CCC, CC, C, Caa, Ca or C are generally
speculative to a high degree. These municipal securities may be in default or
there may be present elements of danger with respect to principal or interest.
Generally, issuers are dependent upon favorable business, financial and economic
conditions to meet their financial commitment on such municipal securities. The
Trust may invest in high yield municipal securities of any rating, including
securities that are in default at the time of purchase. Under normal market
conditions, the dollar-weighted average credit rating of the Trust's portfolio
of municipal securities will be at least investment grade.
The Adviser will determine the allocation of the Trust's assets among securities
with different credit ratings depending upon the Adviser's evaluation of factors
such as the spread between the yields on municipal securities of different
ratings, changes in default rates, general economic conditions and the outlook
for fiscal issues facing municipal issuers. Generally, as the spread between the
yield on investment grade and non-investment grade securities widens, the
Adviser will allocate a greater portion of the Trust's assets to non-investment
grade municipal securities. If the spread based on relative credit quality
narrows, the Adviser may determine that high yield municipal securities no
longer offer a sufficient risk premium and increase the average credit quality
of the Trust's portfolio. As the economy strengthens and the default risk
lessens, the Adviser may increase the Trust's investment in lower quality
non-investment grade securities. The Adviser also seeks to mitigate the risks of
investing in below investment grade securities through a disciplined approach,
driven primarily by fundamental research to assess an issuer's credit quality
and the relative value of its securities. Moreover, with respect to below
investment grade securities that are private activity bonds, the Adviser intends
to emphasize securities that are backed by revenue from publicly traded
companies. The Adviser believes that this focus offers the potential for an
informational advantage due to the substantial reporting requirements of public
companies. With respect to investments in below investment grade private
activity bonds, the Adviser also seeks to leverage its corporate credit research
capabilities by selecting securities for the Trust payable by revenue derived
from issuers followed by its staff focusing on below investment grade corporate
issuers. The Adviser believes that a prudent blend of investment grade and
non-investment grade municipal securities offers investors the opportunity for
high current yield while managing credit risk. Covering a broad range of sectors
and issuers, below investment grade municipal securities have been trading in
2003 with historically wide spreads and what the Adviser believes to be
attractive valuations relative to investment grade municipal securities. High
yield municipal securities have also shown low correlation to other asset
classes, including corporate bonds and U.S. Treasury securities, providing
potential diversification to an investment portfolio.
PORTFOLIO CONTENTS
Under normal market conditions, the Trust seeks to achieve its investment
objectives by investing substantially all (at least 80%) of its assets (net
assets plus borrowing for investment purposes) in debt securities and other
obligations issued by or on behalf of states, territories and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which is exempt from regular
federal income tax ("municipal securities"). Municipal securities are often
issued to obtain funds for various public purposes, including the construction
of a wide range of public facilities such as bridges, highways, housing,
hospitals, mass transportation, schools, streets and water and sewer works.
Municipal securities include
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private activity bonds, pre-refunded municipal securities and auction rate
securities. The municipal securities in which the Trust invests may have fixed
or variable principal payments and all types of interest payment and reset
terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features.
Although distributions of interest income from the Trust's municipal securities
are generally exempt from regular federal income tax, distributions from other
sources, including capital gain distributions, are not. Up to 25% of the Trust's
total assets may be invested in municipal securities the interest income on
which is a preference item for purposes of the alternative minimum tax for
individuals or entities that are subject to such tax. All interest on municipal
securities may result in or increase a corporate shareholder's liability for
federal alternative minimum tax. Shareholders should consult a tax adviser about
whether an alternative minimum tax applies to them and about state and local
taxes on their distributions from the Trust.
Securities rated BBB by S&P are regarded by S&P as having an adequate capacity
to pay interest and to repay principal; while such securities normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely, in the opinion of S&P, to lead to a weakened
capacity to pay interest and repay principal for securities in this category
than in higher rating categories. Securities rated Baa by Moody's are considered
by Moody's as medium to lower medium grade securities; they are neither highly
protected nor poorly secured; interest payments and principal security appear to
Moody's to be adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over time; and in the opinion of
Moody's, securities in this rating category lack outstanding investment
characteristics and in fact have speculative characteristics as well. Municipal
securities of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to the issuer's capacity
to pay interest and to repay principal, and are commonly referred to as "junk
bonds" or "high yield securities." They involve greater risk of loss, are
subject to greater price volatility and are less liquid, especially during
periods of economic uncertainty or change, than higher rated municipal
securities.
The descriptions of the investment grade rating categories by Moody's and S&P,
including a description of their speculative characteristics, are set forth in
the Statement of Additional Information. All references to securities ratings by
Moody's and S&P in this Prospectus shall, unless otherwise indicated, include
all securities within each such rating category (that is, (1), (2) and (3) in
the case of Moody's and (+) and (-) in the case of S&P). All percentage and
ratings' limitations on securities in which the Trust may invest and the
dollar-weighted average credit rating of the Trust's portfolio shall apply at
the time of making an investment and shall not be considered violated if an
investment rating is subsequently downgraded to a rating that would have
precluded the Trust's initial investment in such security. The Trust is not
required to dispose of a security in the event a rating agency downgrades or
withdraws its rating of a security. In the event that the Trust disposes of a
portfolio security subsequent to its being downgraded, the Trust may experience
a greater risk of loss than if such security had been sold prior to such
downgrading. When a security is rated by more than one of these rating agencies,
the Adviser will use the highest rating in applying its investment policies.
MUNICIPAL SECURITIES
Municipal securities are often issued to obtain funds for various public
purposes, including refunding outstanding obligations, funding for general
operating expenses and lending to other public institutions and facilities.
Municipal securities also include certain "private activity bonds" or industrial
development bonds, which are issued by or on behalf of public authorities to
provide financing aid to acquire sites or construct or equip facilities within a
municipality for privately or publicly owned corporations. The two principal
classifications of municipal securities are "general obligations" and "revenue
obligations." General obligations are secured by the issuer's pledge of its full
faith and credit for the payment of principal and interest, although the
characteristics and enforcement of general obligations may vary according to the
law applicable to the particular issuer. Revenue obligations, which include, but
are not limited to, private activity bonds, certificates of participation and
certain municipal notes, are not backed by the credit and taxing authority of
the issuer, and are
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payable solely 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. The obligations of the issuer of a revenue obligation
may, in addition, be backed by a letter of credit from a bank, a guarantee from
another issuer or insurance. The credit rating assigned to municipal securities
may reflect the existence of these guarantees, letters of credit or other credit
enhancement features. General obligations and revenue obligations may be issued
in a variety of forms, including commercial paper, fixed, variable and floating
rate securities, tender option bonds, auction rate bonds, zero coupon bonds,
deferred interest bonds and capital appreciation bonds. In addition to general
obligations and revenue obligations, there is a variety of hybrid and special
types of municipal securities.
One or a small number of institutional investors such as the Trust may purchase
an entire issue of municipal securities. Thus, the issue may not be said to be
publicly offered. Unlike some securities that are not publicly offered, a
secondary market exists for many municipal securities that were not publicly
offered initially and such securities may be readily marketable.
Although distributions of interest income from the Trust's municipal securities
are generally exempt from regular federal income tax, distributions from other
sources, including capital gain distributions, and any gains on the sale of your
shares are not. You should consult your tax adviser as to whether the
alternative minimum tax applies to you and as to whether you will be subject to
state and local taxes on your distributions from the Trust.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on municipal securities. For example, under the Tax Reform Act of 1986,
interest on certain private activity bonds must be included in an investor's
federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their federal alternative minimum taxable income. The
Trust cannot predict what legislation, if any, may be proposed in the future in
Congress regarding the federal income tax status of interest on municipal
securities. Such proposals, if enacted, might materially and adversely affect
the Trust.
MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION
The Trust may invest in municipal leases and certificates of participation in
such leases. A municipal lease is an obligation in the form of a lease or
installment purchase which is issued by a state or local government to acquire
equipment and facilities. Income from such obligations is generally exempt from
state and local taxes in the state of issuance. Municipal leases frequently
involve special risks not normally associated with general obligations or
revenue obligations. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover the Trust's original investment. To
the extent that the Trust invests in unrated municipal leases or participates in
such leases, the credit quality rating and risk of cancellation of such unrated
leases will be monitored on an ongoing basis.
A certificate of participation represents an undivided interest in an unmanaged
pool of municipal leases, an installment purchase agreements or other
instruments. The certificates are typically issued by a municipal agency, a
trust or other entity which has received an assignment of the payments to be
made by the state or political subdivision under such leases or installment
purchase agreements. Such certificates provide the Trust with the right to a pro
rata undivided interest in the underlying municipal securities. In addition,
such participations
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generally provide the Trust with the right to demand payment, on not more than
seven days' notice, of all or any part of the Trust's participation interest in
the underlying municipal securities, plus accrued interest.
Certain municipal lease obligations and certificates of participation may be
deemed to be illiquid for the purpose of the Trust's limitation on investments
in illiquid securities. Other municipal lease obligations and certificates of
participation acquired by the Trust may be determined by the Adviser, pursuant
to guidelines adopted by the Trustees, to be liquid securities for the purpose
of such limitation. In determining the liquidity of municipal lease obligations
and certificates of participation, the Adviser will consider a variety of
factors, including: (i) the willingness of dealers to bid for the obligation;
(ii) the number of dealers willing to purchase or sell the obligation and the
number of other potential buyers; (iii) the frequency of trades or quotes for
the obligation; and (iv) the nature of the marketplace trades. In addition, the
Adviser will consider factors unique to particular lease obligations and
certificates of participation affecting the marketability thereof. These include
the general creditworthiness of the issuer, the importance to the issuer of the
property covered by the lease and the likelihood that the marketability of the
obligation will be maintained throughout the time the obligation is held by the
Trust.
MUNICIPAL NOTES
Municipal securities in the form of notes generally are used to provide for
short-term capital needs, in anticipation of an issuer's receipt of other
revenues or financing, and typically have maturities of up to three years. Such
instruments may include tax anticipation notes, revenue anticipation notes, bond
anticipation notes, tax and revenue anticipation notes and construction loan
notes. Tax anticipation notes are issued to finance the working capital needs of
governments. Generally, they are issued in anticipation of various tax revenues,
such as income, sales, property, use and business taxes, and are payable from
these specific future taxes. Revenue anticipation notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under federal revenue sharing programs. Bond anticipation notes are
issued to provide interim financing until long-term bond financing can be
arranged. In most cases, the long-term bonds then provide the funds needed for
repayment of the notes. Tax and revenue anticipation notes combine the funding
sources of both tax anticipation notes and revenue anticipation notes.
Construction loan notes are sold to provide construction financing. Mortgage
notes insured by the Federal Housing Authority secure these notes; however, the
proceeds from the insurance may be less than the economic equivalent of the
payment of principal and interest on the mortgage note if there has been a
default. The anticipated revenues from taxes, grants or bond financing generally
secure the obligations of an issuer of municipal notes. An investment in such
instruments, however, presents a risk that the anticipated revenues will not be
received or that such revenues will be insufficient to satisfy the issuer's
payment obligations under the notes or that refinancing will be otherwise
unavailable.
TAX-EXEMPT COMMERCIAL PAPER
Issues of commercial paper typically represent short-term, unsecured, negotiable
promissory notes. These obligations are issued by state and local governments
and their agencies to finance the working capital needs of municipalities or to
provide interim construction financing and are paid from general revenues of
municipalities or are refinanced with long-term debt. In most cases, tax-exempt
commercial paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
PRE-REFUNDED MUNICIPAL SECURITIES
The principal of and interest on pre-refunded municipal securities are no longer
paid from the original revenue source for the securities. Instead, the source of
such payments is typically an escrow fund consisting of U.S. government
securities. The assets in the escrow fund are derived from the proceeds of
refunding bonds issued by the same issuer as the pre-refunded municipal
securities. Issuers of municipal securities use this advance refunding technique
to obtain more favorable terms with respect to securities that are not yet
subject to call or redemption by the issuer. For example, advance refunding
enables an issuer to refinance debt at lower market interest rates, restructure
debt to improve cash flow or eliminate restrictive covenants in the indenture or
other
25
governing instrument for the pre-refunded municipal securities. However, except
for a change in the revenue source from which principal and interest payments
are made, the pre-refunded municipal securities remain outstanding on their
original terms until they mature or are redeemed by the issuer.
PRIVATE ACTIVITY BONDS
Private activity bonds, formerly referred to as industrial development bonds,
are issued by or on behalf of public authorities to obtain funds to provide
privately operated housing facilities, airport, mass transit or port facilities,
sewage disposal, solid waste disposal or hazardous waste treatment or disposal
facilities and certain local facilities for water supply, gas or electricity.
Other types of private activity bonds, the proceeds of which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may constitute municipal securities, although the
current federal tax laws place substantial limitations on the size of such
issues. The Trust's distributions of its interest income from private activity
bonds may subject certain investors to the federal alternative minimum tax.
TENDER OPTION BONDS
A tender option bond is a municipal security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and bearing interest at
a fixed rate substantially higher than prevailing short-term, tax-exempt rates.
The bond is typically issued with the agreement of a third party, such as a
bank, broker-dealer or other financial institution, which grants the security
holders the option, at periodic intervals, to tender their securities to the
institution and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal to the
difference between the bond's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term, tax-exempt rate. However, an institution will not be
obligated to accept tendered bonds in the event of certain defaults or a
significant downgrade in the credit rating assigned to the issuer of the bond.
The liquidity of a tender option bond is a function of the credit quality of
both the bond issuer and the financial institution providing liquidity. Tender
option bonds are deemed to be liquid unless, in the opinion of the Adviser, the
credit quality of the bond issuer and the financial institution is deemed, in
light of the Trust's credit quality requirements, to be inadequate and the bond
would not otherwise be readily marketable. The Trust intends to invest in tender
option bonds the interest on which will, in the opinion of bond counsel, counsel
for the issuer of interests therein or counsel selected by the Adviser, be
exempt from regular federal income tax. However, because there can be no
assurance that the Internal Revenue Service (the "IRS") will agree with such
counsel's opinion in any particular case, there is a risk that the Trust will
not be considered the owner of such tender option bonds and thus will not be
entitled to treat such interest as exempt from such tax. Additionally, the
federal income tax treatment of certain other aspects of these investments,
including the proper tax treatment of tender option bonds and the associated
fees in relation to various regulated investment company tax provisions, is
unclear. The Trust intends to manage its portfolio in a manner designed to
eliminate or minimize any adverse impact from the tax rules applicable to these
investments.
AUCTION RATE SECURITIES
The Trust may invest in auction rate securities. Auction rate securities include
auction rate municipal securities and auction rate preferred securities issued
by closed-end investment companies that invest primarily in municipal securities
(collectively, "auction rate securities"). Provided that the auction mechanism
is successful, auction rate securities usually permit the holder to sell the
securities in an auction at par value at specified intervals. The dividend is
reset by "Dutch" auction in which bids are made by broker-dealers and other
institutions for a certain amount of securities at a specified minimum yield.
The dividend rate set by the auction is the lowest interest or dividend rate
that covers all securities offered for sale. While this process is designed to
permit auction rate securities to be traded at par value, there is some risk
that an auction will fail due to insufficient demand for the securities. The
Trust will take the time remaining until the next scheduled auction
26
date into account for purpose of determining the securities' duration. The
Trust's investments in auction rate securities of closed-end funds are subject
to the limitations prescribed by the 1940 Act.
ILLIQUID SECURITIES
The Trust may invest in bonds or other municipal securities that lack a
secondary trading market or are otherwise considered illiquid. Liquidity of a
security relates to the ability to easily dispose of the security and the price
to be obtained upon disposition of the security, which may be less than would be
obtained for a comparable, more liquid security. The Trust may invest up to 20%
of its total assets in investments that are not readily marketable, and it may
also invest in securities that are subject to contractual restrictions on
resale. Securities issued pursuant to Rule 144A under the Securities Act of
1933, as amended (the "1933 Act") and certain commercial paper that the Adviser
determines to be liquid under procedures approved by the Board of Trustees are
not subject to these restrictions. Such investments may affect the Trust's
ability to realize its net asset value in the event of a voluntary or
involuntary liquidation of its assets. See "Net asset value" for information
with respect to the valuation of illiquid securities.
STRUCTURED SECURITIES
The Trust may invest in structured securities. The value of the principal and/or
interest on such securities is determined by reference to changes in the value
of specific currencies, interest rates, commodities, indices or other financial
indicators ("reference") or the relative change in two or more references. The
interest rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the reference. The terms of the
structured securities may provide in certain circumstances that no principal is
due at maturity and, therefore, may result in a loss of the Trust's investment.
Changes in the interest rate or principal payable at maturity may be a multiple
of the changes in the value of the reference. Consequently, structured
securities may entail a greater degree of market risk than other types of fixed
income securities.
INSURED MUNICIPAL SECURITIES
The Trust may invest in "insured" municipal securities, which are securities for
which scheduled payments of interest and principal are guaranteed by a private
(non-governmental) insurance company. The insurance only entitles the Trust to
receive at maturity the face or par value of the securities held by the Trust.
The insurance does not guarantee the market value of the municipal securities or
the value of the shares of the Trust. The Trust may utilize new issue or
secondary market insurance. A bond issuer who wishes to increase the credit
rating of a security purchases a new issue insurance policy. By paying a premium
and meeting the insurer's underwriting standards, the bond issuer is able to
obtain a high credit rating (usually, Aaa from Moody's or AAA from S&P) for the
issued security. Such insurance is likely to increase the purchase price and
resale value of the security. New issue insurance policies are non-cancelable
and continue in force as long as the bonds are outstanding. A secondary market
insurance policy is purchased by an investor subsequent to a bond's original
issuance and generally insures a particular bond for the remainder of its term.
STANDBY COMMITMENTS
In order to enhance the liquidity of municipal securities, the Trust may acquire
the right to sell a security to another party at a guaranteed price and date.
Such a right to resell may be referred to as a "standby commitment" or
"liquidity put," depending on its characteristics. The aggregate price which the
Trust pays for securities with standby commitments may be higher than the price
which otherwise would be paid for the securities. Standby commitments may not be
available or may not be available on satisfactory terms. Standby commitments may
involve letters of credit issued by domestic or foreign banks supporting the
other party's ability to purchase the security. The right to sell may be
exercisable on demand or at specified intervals, and may form part of a security
or be acquired separately by the Trust.
Because the period prior to the put date is generally less than 365 days, the
Trust generally values the municipal securities subject to the standby
commitments at amortized cost. The Board of Trustees has adopted procedures
pursuant to which the Adviser may determine that amortized cost represents the
fair value of the securities. The
27
exercise price of the standby commitments is expected to approximate such
amortized cost. Consequently, no separate value is assigned to the standby
commitments for purposes of determining the Trust's net asset value. The cost of
a standby commitment is carried as unrealized depreciation from the time of
purchase until it is exercised or expires. Since the value of a standby
commitment is dependent on the ability of the standby commitment writer to meet
its obligation to repurchase, the Trust's policy is to enter into standby
commitment transactions only with banks, brokers or dealers that present a
minimal risk of default. However, this policy reduces, but does not eliminate,
the risk of default by the standby commitment writer.
ZERO COUPON SECURITIES
The securities in which the Trust invests may include zero coupon securities,
which are debt obligations that are issued or purchased at a significant
discount from face value. The discount approximates the total amount of interest
the security will accrue and compound over the period until maturity or the
particular interest payment date at a rate of interest reflecting the market
rate of the security at the time of issuance. Zero coupon securities do not
require the periodic payment of interest. These investments benefit the issuer
by mitigating its need for cash to meet debt service, but generally require a
higher rate of return to attract investors who are willing to defer receipt of
cash. These investments may experience greater volatility in market value than
securities that make regular payments of interest. The Trust accrues income on
these investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Trust's
distribution obligations, in which case the Trust will forgo the purchase of
additional income producing assets with these funds.
OTHER INVESTMENT COMPANIES
The Trust may invest in the securities of other investment companies to the
extent that such investments are consistent with the Trust's investment
objectives and principal investment strategies and permissible under the 1940
Act. Under one provision of the 1940 Act, the Trust may not acquire the
securities of other investment companies if, as a result, (i) more than 10% of
the Trust's total assets would be invested in securities of other investment
companies, (ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one investment company being held by the
Trust or (iii) more than 5% of the Trust's total assets would be invested in any
one investment company. Other provisions of the 1940 Act are less restrictive
provided that the Trust is able to meet certain conditions. These limitations do
not apply to the acquisition of shares of any investment company in connection
with a merger, consolidation, reorganization or acquisition of substantially all
the assets of another investment company. However, the Adviser has an exemptive
order from the Securities and Exchange Commission that permits the Trust to
invest cash balances in money market funds managed by the Adviser.
The Trust, as a holder of the securities of other investment companies, will
bear its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses will be in addition to the direct expenses
incurred by the Trust. Income generated from the Trust's investment in another
investment company may not be tax-exempt.
DEFENSIVE AND TEMPORARY INVESTMENTS
Normally, the Trust invests substantially all of its assets to meet its
investment objectives. The Trust may invest the remainder of its assets in cash
or cash equivalent short-term obligations, including, but not limited to,
short-term municipal securities, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements. Interest
on certain of these short-term obligations will be subject to federal income
tax. The Trust may also invest all or any portion of its assets in such
instruments for temporary defensive purposes. During such periods, the Trust may
not be able to achieve its investment objectives.
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STRATEGIC TRANSACTIONS
The Trust may, but is not required to, use various strategic transactions
described below to earn income, facilitate portfolio management and mitigate
risks. Such strategic transactions are generally accepted under modern portfolio
management theory and are regularly used by many mutual funds and other
institutional investors. Although the Adviser seeks to use these practices to
further the Trust's investment objectives, no assurance can be given that these
practices will achieve this result. Income earned from strategic transactions
will not be tax-exempt.
The Trust may purchase and sell derivative instruments, such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
fixed-income and interest rate indices, and other financial instruments;
purchase and sell financial futures contracts and options thereon; and enter
into various interest rate transactions, such as interest rate swaps, caps,
floors or collars, and credit default swaps. The Trust also may purchase
derivative instruments that combine features of these instruments. Collectively,
all of the above are referred to as "strategic transactions." The Trust
generally seeks to use strategic transactions as a portfolio management or
hedging technique to seek to protect against possible adverse changes in the
market value of securities held in or to be purchased for the Trust's portfolio,
protect the value of the Trust's portfolio, facilitate the sale of certain
securities for investment purposes, manage the effective interest rate exposure
of the Trust, manage the effective maturity or duration of the Trust's portfolio
or establish positions in the derivatives markets as a temporary substitute for
purchasing or selling particular securities.
Strategic transactions have risks, including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to use strategic transactions successfully depends on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of strategic transactions may result in losses greater
than if they had not been used, may require the Trust to sell or purchase
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Trust can realize on an
investment or may cause the Trust to hold a security that it might otherwise
sell. Additionally, amounts paid by the Trust as premiums and cash or other
assets held in margin accounts with respect to strategic transactions are not
otherwise available to the Trust for investment purposes.
REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements with broker-dealers, member banks
of the Federal Reserve System and other financial institutions. Repurchase
agreements are arrangements under which the Trust purchases securities and the
seller agrees to repurchase the securities within a specific time and at a
specific price. The repurchase price is generally higher than the Trust's
purchase price, with the difference being income to the Trust. Under the
direction of the Board of Trustees, the Adviser reviews and monitors the
creditworthiness of any institution that enters into a repurchase agreement with
the Trust. The counterparty's obligations under the repurchase agreement are
collateralized with U.S. Treasury and/or agency obligations with a market value
of not less than 100% of the obligations, valued daily. Collateral is held by
the Trust's custodian in a segregated, safekeeping account for the benefit of
the Trust. Repurchase agreements afford the Trust an opportunity to earn income
on temporarily available cash at low risk. In the event of commencement of
bankruptcy or insolvency proceedings with respect to the seller of the security
before repurchase of the security under a repurchase agreement, the Trust may
encounter delay and incur costs before being able to sell the security. Such a
delay may involve loss of interest or a decline in price of the security. If the
court characterizes the transaction as a loan and the Trust has not perfected a
security interest in the security, the Trust may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, the Trust would be at risk of losing some or
all of the principal and interest involved in the transaction. Any income
generated by repurchase agreements will not be tax-exempt.
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LENDING OF PORTFOLIO SECURITIES
The Trust may lend portfolio securities to registered broker-dealers or other
institutional investors deemed by the Adviser to be of good standing under
agreements which require that the loans be secured continuously by collateral in
cash, cash equivalents or U.S. Treasury bills maintained on a current basis at
an amount at least equal to the market value of the securities loaned. The Trust
continues to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned as well as the benefit of any increase and the
detriment of any decrease in the market value of the securities loaned and would
also receive compensation based on investment of the collateral. The Trust would
not, however, have the right to vote any securities having voting rights during
the existence of the loan, but would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of consent on a material matter affecting the investment. Any income
generated from securities lending will not be tax-exempt.
As with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the collateral should the borrower of the securities fail
financially. The Trust will lend portfolio securities only to firms that have
been approved in advance by the Board of Trustees, which will monitor the
creditworthiness of any such firms. At no time would the value of the securities
loaned exceed 331/3% of the value of the Trust's total assets.
PORTFOLIO TURNOVER
It is the policy of the Trust not to engage in trading for short-term profits,
although portfolio turnover rate is not considered a limiting factor in the
execution of investment decisions for the Trust.
RISK FACTORS
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 Preferred Shares, you should consider carefully the
following risks that you assume when you invest in the Trust.
RISKS OF INVESTMENT IN PREFERRED SHARES
AUCTION RISK
The dividend rate for the Preferred Shares normally is set through an auction
process. In the Auction, holders of Preferred Shares may indicate the dividend
rate at which they would be willing to hold or sell their Preferred Shares or
purchase additional Preferred Shares. The Auction also provides liquidity for
the sale of Preferred Shares. You may not be able to sell your Preferred Shares
at an Auction if the Auction fails. An Auction fails if there are more Preferred
Shares offered for sale than there are buyers. 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 Preferred Shares wishing to sell will not be
able to sell all, and may not be able to sell any, of such Preferred Shares in
the Auction. As a result, your investment in Preferred Shares may be illiquid.
Neither the Broker-Dealers nor the Trust is obligated to purchase Preferred
Shares in an Auction or otherwise, nor is the Trust required to redeem Preferred
Shares in the event of a failed Auction. Also, if you place Hold Orders (orders
to retain Preferred Shares) 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
Preferred Shares. Additionally, if you buy Preferred Shares or elect to retain
Preferred Shares without specifying a dividend rate below which you would not
wish to buy or continue to hold those Preferred Shares, you could receive a
lower rate of return on your Preferred Shares than the market rate. Finally, the
dividend period for the Preferred Shares may be changed by the Trust, subject to
certain conditions with notice to the holders of Preferred Shares, which could
also effect the liquidation of your investment. See "Description of Preferred
Shares--Auction Procedures."
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RATINGS AND ASSET COVERAGE RISK
While it is expected that [Rating Agency] will assign a rating of "Aaa" to the
Preferred Shares, such rating does not eliminate or necessarily mitigate the
risks of investing in Preferred Shares. [Rating Agency 1] or [Rating Agency 2]
could downgrade its rating of the Preferred Shares or withdraw its rating of the
Preferred Shares at any time, which may make your Preferred Shares less liquid
at an Auction or in the secondary market. If [Rating Agency 1] or [Rating Agency
2] downgrades the Preferred Shares, the Trust may alter its portfolio or redeem
Preferred Shares in an effort to improve the rating, although there is no
assurance that it will be able to do so to the extent necessary to restore the
prior rating. If the Trust fails to satisfy the asset coverage ratios discussed
under "Description of Preferred Shares--Rating Agency Guidelines and Asset
Coverage," the Trust will be required to redeem a sufficient number of Preferred
Shares in order to return to compliance with the asset coverage ratios. The
Trust may be required to redeem Preferred Shares at a time when it is not
advantageous for the Trust to make such redemption or to liquidate portfolio
securities in order to have available cash for such redemption. The Trust may
voluntarily redeem Preferred Shares under certain circumstances in order to meet
asset maintenance tests. While a sale of substantially all the assets of the
Trust or the merger of the Trust into another entity would require the approval
of the holders of the Preferred Shares voting as a separate class as discussed
under "Description of Preferred Shares--Voting Rights," a sale of substantially
all the assets of the Trust or the merger of the Trust with or into another
entity would not be treated as a liquidation of the Trust nor require that the
Trust redeem the Preferred Shares, in whole or in part, provided that the Trust
continued to comply with the asset coverage ratios discussed under "Description
of Preferred Shares--Rating Agency Guidelines and Asset Coverage." See
"Description of Preferred Shares--Rating Agency Guidelines and Asset Coverage"
for a description of the asset maintenance tests the Trust must meet.
SECONDARY MARKET RISK
If you try to sell your Preferred Shares between Auctions, you may not be able
to sell any or all of your Preferred Shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Trust has designated a Special Dividend Period (a rate period of more than
[seven] days for each series), changes in interest rates could affect the price
you would receive if you sold your Preferred Shares in the secondary market. An
increase in the level of interest rates likely will have an adverse effect on
the secondary market price of the Preferred Shares. You may transfer Preferred
Shares outside of Auctions only to or through a Broker-Dealer that has entered
into an agreement with the Trust's Auction Agent, [ ], and the Trust or other
person as the Trust permits. The Trust does not anticipate imposing significant
restrictions on transfers to other persons. However, unless any such other
person has entered into a relationship with a Broker-Dealer that has entered
into a Broker-Dealer agreement with the Auction Agent, that person will not be
able to submit Bids at Auctions with respect to the Preferred Shares.
Broker-Dealers that maintain a secondary trading market for Preferred Shares are
not required to maintain this market, and the Trust is not required to redeem
Preferred Shares if an Auction or an attempted secondary market sale fails
because of a lack of buyers. The Preferred Shares will not be listed on any
stock exchange or the Nasdaq National Market. If you sell your Preferred Shares
to a Broker-Dealer between Auctions, you may receive less than the price you
paid for them, especially if market interest rates have risen since the last
Auction.
INTEREST RATE RISK
The Preferred Shares pay dividends based on short-term interest rates. The Trust
invests the proceeds from the issuance of the Preferred Shares principally in
municipal securities, which bear dividends or interest rates reflecting
intermediate and long-term interest rates. The interest or dividend rates on
municipal securities are typically, although not always, higher than
shorter-term interest rates. Both shorter-term and intermediate to longer-term
interest rates may fluctuate. If shorter-term interest rates rise, dividend
rates on the Preferred Shares may rise so that the amount of dividends to be
paid to holders of Preferred Shares exceeds the income from the preferred
stocks, other preferred securities and other investments purchased by the Trust
with the proceeds from the sale of Preferred Shares. Because income from the
Trust's entire investment portfolio (not just the portion of
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the portfolio purchased with the proceeds of the Preferred Shares offering) is
available to pay dividends on the Preferred Shares, however, dividend rates on
the Preferred Shares would need to exceed the rate of return on the Trust's
investment portfolio by a wide margin before the Trust's ability to pay
dividends on the Preferred Shares would be jeopardized. If intermediate to
longer-term interest rates rise, this could negatively impact the value of the
Trust's investment portfolio, reducing the amount of assets serving as asset
coverage for the Preferred Shares.
LEVERAGE RISK
The Trust expects to use financial leverage on an ongoing basis for investment
purposes. Leverage risk includes the risk associated with the issuance of
Preferred Shares to leverage the Common Shares. If the dividend rate on the
Preferred Shares exceeds the net rate of return on the Trust's portfolio, the
leverage will result in a lower net asset value than if the Trust were not
leveraged, and the Trust's ability to pay dividends and meet its asset coverage
requirements on the Preferred Shares would be reduced. Similarly, any decline in
the net asset value of the Trust's investments could result in the Trust being
in danger of failing to meet its asset coverage requirements or of losing its
expected "Aaa" rating on the Preferred Shares or, in an extreme case, the
Trust's current investment income might not be sufficient to meet the dividend
requirements on the Preferred Shares. To counteract such an event, the Trust
might need to liquidate investments in order to fund a redemption of some or all
of the Preferred Shares.
It is currently anticipated that, taking into account the Preferred Shares being
offered in this Prospectus, the initial amount of leverage will represent
approximately __% of the Trust's total assets.
The Trust's leveraged capital structure creates special risks not associated
with unleveraged funds having similar investment objectives and policies. These
include the possibility of higher volatility of the net asset value of the Trust
and the Preferred Shares' asset coverage.
While the Trust 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 Trust 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 Trust were to reduce leverage based on a 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 Trust's net asset
value relative to the circumstance where the Trust had not reduced leverage. The
Trust 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.
Because the fee paid to the Adviser will be calculated on the basis of the
Trust's managed assets (which equals the aggregate net asset value of the common
shares plus the liquidation preference of the Preferred Shares), the fee will be
higher when leverage is utilized, giving the Adviser an incentive to utilize
leverage.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
Restrictions imposed on the declaration and payment of dividends or other
distributions to the holders of the Trust's Common Shares and Preferred Shares,
both by the 1940 Act and by requirements imposed by [Rating Agency 1], [Rating
Agency 2] or a Substitute Rating Agency, might impair the Trust's ability to
satisfy minimum distribution requirements that it must satisfy to be treated as
a regulated investment company for federal income tax purposes. While the Trust
intends to redeem Preferred Shares to enable the Trust to distribute its income
as required to maintain its qualification as a regulated investment company
under the Code, there can be no assurance that such redemptions can be effected
in time to meet the requirements of the Code. See "Federal income tax matters."
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GENERAL RISKS OF INVESTING IN THE FUND
LIMITED OPERATING HISTORY
The Trust is a newly organized, diversified, closed-end management investment
company and has a limited operating history or history of public trading.
MUNICIPAL SECURITIES MARKET RISK
The yields on and market prices of municipal securities are dependent on a
variety of factors, including general conditions of the municipal securities
market, the size of a particular offering, the maturity of the obligation and
the rating of the issue. The value of outstanding municipal securities will vary
as a result of changing evaluations of the ability of their issuers to meet the
interest and principal payments. Such values will also change in response to
changes in the interest rates payable on new issues of municipal securities.
Changes in the value of the municipal securities held in the Trust's portfolio
arising from these or other factors will cause changes in the Trust's net asset
value per share.
The ability of a municipal issuer to repay obligations on municipal securities,
other than private activity bonds, is subject to the risk that the municipal
issuer of the securities will not have sufficient revenues from taxes and other
sources of income to pay interest and repay principal on the municipal
securities. The level of municipal income may be adversely affected by various
factors, including general economic activity, real estate values and changes in
governmental expenses. The obligations of the issuer to pay the principal of and
interest on a municipal security are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Act, and laws, if any, that may be enacted by Congress
or state legislatures extending the time for payment of principal or interest or
imposing other constraints upon the enforcement of such obligations. There is
also the possibility that, as a result of litigation or other conditions, the
power or ability of the issuer to pay when due the principal of or interest on a
municipal security may be materially affected.
The amount of public information available about the issuance of municipal
securities is generally less than that for corporate equities or bonds, and the
investment performance of the Trust may therefore be more dependent on the
analytical abilities of the Trust's investment adviser 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 Trust will invest,
also tends to be less well-developed or liquid than many other securities
markets, which may adversely affect the Trust's ability to sell its bonds at
attractive prices.
Municipal securities may be backed by letters of credit or other forms of credit
enhancement issued by domestic or foreign banks or by other financial
institutions. The credit quality of these banks and financial institutions
could, therefore, cause a loss to the Trust. Letters of credit and other
obligations of foreign banks and financial institutions may involve risks in
addition to those of domestic obligations because of less publicly available
financial and other information, less securities regulation, potential
imposition of foreign withholding and other taxes, war and expropriation or
other adverse governmental actions. Foreign banks and their foreign branches are
not regulated by U.S. banking authorities and are generally not bound by the
accounting, auditing and financial reporting standards applicable to U.S. banks.
TAX RISK
The value of the Trust's investments and its net asset value may be adversely
impacted by changes in tax rates and policies. Because interest income from
municipal securities is normally not subject to regular federal income taxation,
the attractiveness of municipal securities in relation to other investment
alternatives is affected by changes in federal income tax rates or changes in
the tax-exempt status of interest income from municipal securities. Any proposed
or actual changes in such rates or exempt status, therefore, can significantly
affect the demand for and supply, liquidity and marketability of municipal
securities. This could in turn affect the Trust's
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net asset value and ability to acquire and dispose of municipal securities at
desirable yield and price levels. Additionally, the Trust is not a suitable
investment for IRAs, other tax-exempt or tax-deferred accounts or for other
investors who are not sensitive to the federal, state or local income tax
consequences of their investments.
CREDIT AND JUNK BOND 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. The two principal
classifications of municipal securities are "general obligations" and "revenue
obligations." General obligations are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Revenue obligations are payable 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, but not from the general taxing
power. Sizable investments in these obligations could involve an increased risk
to the Trust should any of the related facilities experience financial
difficulties. Private activity bonds are in most cases revenue obligations and
do not generally carry the pledge of the credit of the issuing municipality.
The Trust intends to purchase debt securities that are rated below investment
grade (commonly referred to as "junk bonds" or "high yield securities"), that
is, rated Ba or below by Moody's or BB or lower by S&P, or unrated securities
determined by the Adviser to be of comparable credit quality. Investment in
municipal securities of below investment grade quality involves substantial risk
of loss. "Junk bonds" are considered predominantly speculative with respect to
the issuer's ability to pay interest and principal and are susceptible to
default or decline in market value due to adverse economic and business
developments. The market values for high yield municipal securities tend to be
very volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Trust is subject to the
following specific risks:
- increased price sensitivity to changing interest rates and to a
deteriorating economic environment
- greater risk of loss due to default or declining credit quality
- adverse issuer specific events are more likely to render the issuer unable
to make interest and/or principal payments
- if a negative perception of the high yield market develops, the price and
liquidity of high yield securities may be depressed, and this negative
perception could last for a significant period of time
Adverse changes in economic conditions are more likely to lead to a weakened
capacity of a high yield issuer to make principal payments and interest payments
than an investment grade issuer. The principal amount of high yield securities
outstanding has proliferated in the past decade as an increasing number of
issuers have used high yield securities for corporate financing. An economic
downturn could severely affect the ability of highly leveraged issuers to
service their debt obligations or to repay their obligations upon maturity. If
the national economy enters into a recessionary phase during 2003, potentially
decreasing the tax and other revenue of municipal issuers, or interest rates
rise sharply, increasing the interest cost on variable rate instruments and
negatively impacting economic activity, the number of defaults by high yield
municipal issuers is likely to increase. Similarly, down-turns in profitability
in specific industries could adversely affect private activity bonds. The market
values of lower quality debt securities tend to reflect individual developments
of the issuer to a greater extent than do higher quality securities, which react
primarily to fluctuations in the general level of interest rates. Factors having
an adverse impact on the market value of lower quality securities may have an
adverse effect on the Trust's net asset value and the market value of its common
shares. In addition, the Trust may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings. In certain circumstances, the Trust may be required to
foreclose on an issuer's assets and take possession of its property or
operations. In such circumstances, the Trust would incur additional costs in
disposing of such assets and potential liabilities from operating any business
acquired.
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The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Trust's ability to dispose of a particular security. There
are fewer dealers in the market for high yield securities than investment grade
obligations. The prices quoted by different dealers may vary significantly, and
the spread between the bid and asked price is generally much larger than for
higher quality instruments. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer, and
these instruments may become illiquid. As a result, the Trust could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Trust's net asset value.
Issuers of such high yield securities often are highly leveraged and may not
have available to them more traditional methods of financing. Therefore, the
risk associated with acquiring the securities of such issuers generally is
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yield securities may experience financial stress.
During such periods, such issuers may not have sufficient revenues to meet their
interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific corporate developments,
the issuer's inability to meet specific projected business forecasts or the
unavailability of additional financing. The risk of loss from default by the
issuer is significantly greater for the holders of high yield securities because
such securities are generally unsecured and are often subordinated to other
creditors of the issuer. Prices and yields of high yield securities will
fluctuate over time and, during periods of economic uncertainty, volatility of
high yield securities may adversely affect the Trust's net asset value. In
addition, investments in high yield zero coupon or pay-in-kind bonds, rather
than income-bearing high yield securities, may be more speculative and may be
subject to greater fluctuations in value due to changes in interest rates.
INTEREST RATE RISK
Interest rate risk is the risk that municipal securities (and the Trust's net
assets) will decline in value because of changes in interest rates. In addition
to the risks discussed above, high yield municipal securities are subject to the
following interest rate risks:
- if interest rates go up, the value of debt securities in the Trust's
portfolio generally will decline
- during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Trust to reinvest in lower yielding securities. This is known as call or
prepayment risk. High yield municipal securities frequently have call
features that allow the issuer to repurchase the security prior to its
stated maturity. An issuer may redeem a high yield security if the issuer
can refinance the debt at a lower cost due to declining interest rates or
an improvement in the credit standing of the issuer
- the Adviser's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or investment
strategy may prove to be incorrect
MATURITY RISK
The Trust may invest in municipal securities of any maturity, although the
Adviser anticipates that the Trust will generally invest in intermediate to
long-term municipal securities. Interest rate risk will generally affect the
price of a municipal security more if the security has a longer maturity.
Municipal securities with longer maturities will therefore be more volatile than
other fixed income securities with shorter maturities. Conversely, municipal
securities with shorter maturities will be less volatile but generally provide
lower returns than municipal securities with longer maturities. The average
maturity of the Trust's municipal security investments may affect the volatility
of the Trust's share price.
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CALL RISK
The issuers of municipal securities held by the Trust may call, or prepay
principal due on, their securities, particularly during periods of declining
interest rates. The Trust may not be able to reinvest that principal at
attractive rates, reducing income to the Trust. The Trust also may lose the
premium paid for the securities.
CONCENTRATION RISK
The Trust may invest 25% or more of the value of its total assets in municipal
securities of issuers located in the same state or territory or in the same
economic sector. The Trust will not invest more than 25% of its total assets in
issuers in a single industry, nor will the Trust invest more than 5% of its
total assets in the securities of any single issuer. Governmental issuers of
municipal securities are not considered part of any "industry," and general
obligations of a state are not subject to the 5% limitation set forth above. For
purpose of the 5% limitation, the Trust will treat a revenue obligation payable
from revenues received by the municipal issuer from a single entity (the
"underlying obligor") as being issued by the underlying obligor. The issuers of
these municipal securities may be related in such a way that an economic,
business or political development or change affecting one municipal security
would also affect other municipal securities held by the Trust. The Trust may
invest all of its assets in municipal securities the interest on which is paid
solely from revenues from the same economic sector, and the Adviser anticipates
that the Trust's investments in revenue obligations will emphasize municipal
securities backed by revenue from essential services, such as hospitals and
healthcare, power generation, transportation, education and housing. Subject to
the availability of suitable investment opportunities, the Adviser will attempt
to diversify the Trust's investments to seek to minimize the portfolio's
sensitivity to credit and other risks associated with a particular issuer,
industry or sector, or to the impact of a single economic, political or
regulatory occurrence. The Trust is not required to diversify its holdings in
municipal securities among a fixed number of states, economic sectors, and,
consequently, the Trust's portfolio may be adversely affected by developments in
a single state or region. Concentration of the Trust's investments in one or a
limited number of states or economic sectors will subject the Trust, to a
greater extent than if such investments were not so concentrated, to the risks
of adverse economic, business or political developments affecting the particular
state, economic sector or other area of concentration. The Trust has no current
intention to invest more than 25% of the value of its total assets in municipal
securities of issuers located in a single state but may do so in the future. To
the extent that the Trust invests more than 25% of its assets in municipal
securities of issuers in a single state, the Trust will be exposed to a greater
degree to risks associated with that specific state, including budget and fiscal
issues, changes in the degree of financial support from the state to local
governments, political disputes that delay appropriations or otherwise adversely
affect municipal securities and the general economic activity in such state
which may adversely affect tax receipts and other municipal revenue. For
example, Moody's and S&P both placed their ratings of California general
obligations on credit watch due to increased uncertainty regarding the timing of
state budget adoption and the potential negative effect that prolonged delay in
budget resolution could have on California's ability to meet its debt
obligations. The Trust will not notify shareholders if 25% or more of the
Trust's assets are represented by municipal issuers in a single state. However,
the Trust's annual and semi-annual financial statements will disclose the
percentage of the Trust's assets invested in each state. To the extent that the
Trust focuses its assets in the hospital and healthcare sector, the Trust will
be subject to risks associated with such sector, including adverse government
regulation and reduction in reimbursement rates, as well as government approval
of products and services and intense competition. Issuers in the power
generation sector can be significantly affected by government regulation,
financing difficulties, supply and demand of services or fuel and natural
resource conservation. The transportation sector, including airports, airlines,
ports and other transportation facilities, can be significantly affected by
changes in the economy, fuel prices, labor relations, insurance costs and
government regulation.
The Trust may invest in municipal securities that are collateralized by the
proceeds from class action or other litigation against the tobacco industry.
Payment by tobacco industry participants of such proceeds is spread over several
years, and the collection and distribution of such proceeds to the issuers of
municipal securities is
36
dependent upon the financial health of such tobacco industry participants, which
cannot be assured. Additional litigation, government regulation or prohibition
on the sales of tobacco products, or the seeking of protection under the
bankruptcy laws, could adversly the tobacco industry which, in turn, could have
an adverse affect on tobacco-related municipal securities. Under normal market
conditions, the Trust intends to limit its investment in tobacco settlement
bonds to approximately 10% of the Trust's total assets.
RISKS OF MUNICIPAL LEASES AND CERTIFICATES OF PARTICIPATION
The Trust may invest in municipal leases and certificates of participation in
such leases. Municipal leases and certificates of participation involve special
risks not normally associated with general obligations or revenue obligations.
Leases and installment purchase or conditional sale contracts (which normally
provide for title to the leased asset to pass eventually to the governmental
issuer) have evolved as a means for governmental issuers to acquire property and
equipment without meeting the constitutional and statutory requirements for the
issuance of debt. The debt issuance limitations are deemed to be inapplicable
because of the inclusion in many leases or contracts of "non-appropriation"
clauses that relieve the governmental issuer of any obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic basis.
In addition, such leases or contracts may be subject to the temporary abatement
of payments in the event the issuer is prevented from maintaining occupancy of
the leased premises or utilizing the leased equipment. Although the obligations
may be secured by the leased equipment or facilities, the disposition of the
property in the event of non-appropriation or foreclosure might prove difficult,
time consuming and costly, and result in a delay in recovering or the failure to
fully recover the Trust's original investment. In the event of
non-appropriation, the issuer would be in default and taking ownership of the
assets may be a remedy available to the Trust, although the Trust does not
anticipate that such a remedy would normally be pursued. To the extent that the
Trust invests in unrated municipal leases or participates in such leases, the
credit quality rating and risk of cancellation of such unrated leases will be
monitored on an ongoing basis. Certificates of participation, which merely
represent an interest in municipal leases or installment contacts, involve the
same risks as the underlying municipal leases. Certificates of participation
also entail a risk of default or bankruptcy, both of the issuer of the municipal
lease and also the municipal agency issuing the certificate of participation.
Certain municipal lease obligations and certificates of participation may be
deemed to be illiquid for the purpose of the Trust's limitation on investments
in illiquid securities.
ILLIQUID INVESTMENTS RISK
The Trust may invest up to 20% of its total assets in illiquid securities.
Illiquid securities may be difficult to dispose of at a fair price at times when
the Trust believes it is desirable to do so. The market price of illiquid
securities generally is more volatile than that of more liquid securities, which
may adversely affect the price that the Trust pays for or recovers upon the sale
of illiquid securities. Illiquid securities are also more difficult to value and
the Adviser's judgment may play a greater role in the valuation process.
Investment of the Trust's assets in illiquid securities may restrict the Trust's
ability to take advantage of market opportunities. The risks associated with
illiquid securities may be particularly acute in situations in which the Trust's
operations require cash and could result in the Trust borrowing to meet its
short-term needs or incurring losses on the sale of illiquid securities. The
Adviser anticipates that its research efforts and investment approach will
result in a significant portion of the Trust's assets being invested in thinly
traded securities, including both illiquid securities and liquid securities as
to which the trading market is less active than comparable issuers.
DERIVATIVES RISK
Derivatives have risks, including the imperfect correlation between the value of
such instruments and the underlying assets, the possible default of the other
party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use derivatives depends on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. Thus, the use of derivatives may result in losses greater than if they
had not been used, may require the Trust to sell or purchase portfolio
securities at inopportune times or for prices other than current market values,
may limit the amount of appreciation the Trust can realize on an
37
investment or may cause the Trust to hold a security that it might otherwise
sell. Additionally, amounts paid by the Trust as premiums and cash or other
assets held in margin accounts with respect to derivatives are not otherwise
available to the Trust for investment purposes.
There are several risks associated with the use of futures contracts and futures
options. The purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. While the Trust may enter
into futures contracts and options on futures contracts for hedging purposes,
the use of futures contracts and options on futures contracts might result in a
poorer overall performance for the Trust than if it had not engaged in any such
transactions. There may be an imperfect correlation between the Trust's
portfolio holdings and futures contracts or options on futures contracts entered
into by the Trust, which may prevent the Trust from achieving the intended hedge
or expose the Trust to risk of loss. The degree of imperfection of correlation
depends on circumstances such as variations in market demand for futures,
options on futures and their related securities, including technical influences
in futures and futures options trading, and differences between the securities
markets and the securities underlying the standard contracts available for
trading. Further, the Trust's use of futures contracts and options on futures
contracts to reduce risk involves costs and will be subject to the Adviser's
ability to predict correctly changes in interest rate relationships or other
factors.
Depending on whether the Trust would be entitled to receive net payments from
the counterparty on a swap or cap, which in turn would depend on the general
state of short-term interest rates at that point in time, a default by a
counterparty could negatively impact the performance of the common shares. In
addition, at the time an interest rate swap or cap transaction reaches its
scheduled termination date, there is a risk that the Trust would not be able to
obtain a replacement transaction or that the terms of the replacement would not
be as favorable as on the expiring transaction. If this occurs, it could have a
negative impact on the performance of the common shares. If the Trust fails to
maintain the required 200% asset coverage of the liquidation value of any
outstanding preferred shares or if the Trust loses its expected rating on the
preferred shares or fails to maintain other covenants, the Trust may be required
to redeem some or all of the preferred shares. Similarly, the Trust could be
required to prepay the principal amount of any borrowings. Such redemption or
prepayment would likely result in the Trust seeking to terminate early all or a
portion of any swap or cap transaction. Early termination of a swap could result
in a termination payment by or to the Trust. Early termination of a cap could
result in a termination payment to the Trust. The Trust intends to maintain, in
a segregated account, cash or liquid securities having a value at least equal to
the Trust's net payment obligations under any swap transaction, marked to market
daily. The Trust will not enter into interest rate swap or cap transactions
having a notional amount that exceeds the outstanding amount of the Trust's
leverage.
The use of interest rate swaps, collars, caps and credit default swaps is a
highly specialized activity that involves investment techniques and risks
different from those associated with ordinary portfolio security transactions.
Depending on the state of interest rates in general, the Trust's use of interest
rate swaps or caps could enhance or harm the overall performance of the common
shares. To the extent there is a decline in interest rates, the value of the
interest rate swap or cap could decline, and could result in a decline in the
net asset value of the common shares. In addition, if short-term interest rates
are lower than the Trust's fixed rate of payment on the interest rate swap, the
swap will reduce common share net earnings. If, on the other hand, short-term
interest rates are higher than the fixed rate of payment on the interest rate
swap, the swap will enhance common share net earnings. Buying interest rate caps
could enhance the performance of the common shares by providing a maximum
leverage expense. Buying interest rate caps could also decrease the net earnings
of the common shares in the event that the premium paid by the Trust to the
counterparty exceeds the additional amount the Trust would have been required to
pay had it not entered into the cap agreement. The Trust has no current
intention of selling an interest rate swap or cap.
Interest rate swaps and caps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Trust is contractually obligated to make. If the counterparty defaults, the
Trust would not be able to use
38
the anticipated net receipts under the swap or cap to offset the dividend
payments on the Trust's preferred shares or interest payments on borrowings.
Depending on whether the Trust would be entitled to receive net payments from
the counterparty on the swap or cap, which in turn would depend on the general
state of short-term interest rates at that point in time, such a default could
negatively impact the performance of the common shares.
DESCRIPTION OF PREFERRED SHARES
THE FOLLOWING IS A BRIEF DESCRIPTION OF THE MATERIAL TERMS OF THE PREFERRED
SHARES. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO, AND
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE STATEMENT, INCLUDING THE
PROVISIONS THEREOF ESTABLISHING THE PREFERRED SHARES. THE STATEMENT ESTABLISHING
THE TERMS OF THE PREFERRED SHARES HAS BEEN FILED AS APPENDIX B TO THE
STATEMENT OF ADDITIONAL INFORMATION.
The Preferred Shares are preferred shares that entitle their holders to receive
dividends when, as and if declared by the Trust's Board of Trustees, out of
funds legally available therefor, at a rate per annum that may vary for
successive Dividend Periods for each such series of Preferred Shares. The
Applicable Rate for a particular Dividend Period for the Preferred Shares 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
Preferred Shares 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 Preferred Shares regardless of the Applicable Rate
resulting from Auctions need not participate in order to continue to hold their
Preferred Shares. For an explanation of Auctions and the method of determining
the Applicable Rate, see "--Dividends and Dividend Periods" below and "The
Auction."
The nominee of the Securities Depository is expected to be the sole holder of
record of the Preferred Shares. Accordingly, each purchaser of Preferred Shares
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
Preferred Shares.
The Preferred Shares will rank on parity with each other and any other series of
preferred shares of the Trust as to the payment of dividends and the
distribution of assets upon liquidation. Each share of Preferred Shares carries
one vote on matters on which Preferred Shares can be voted. When issued and
sold, the Preferred Shares will have a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends (whether or not
declared) and will be fully paid and, except as discussed under "Certain
provisions of the Agreement and Declaration of Trust and Statement,"
non-assessable. See "--Liquidation." The Preferred Shares will not be
convertible into common shares or other shares of beneficial interest of the
Trust, and the holders thereof will have no preemptive rights. The Preferred
Shares will not be subject to any sinking fund but will be subject to redemption
at the option of the Trust on any Dividend Payment Date for the Preferred Shares
(except during the Initial Dividend Period and during a Non-Call Period) of such
series at a redemption price of $25,000 per share plus accumulated and unpaid
dividends. In certain circumstances, the Preferred Shares will be subject to
mandatory redemption by the Trust at a redemption price of $25,000 per share
plus accumulated and unpaid dividends. See "--Redemption."
DIVIDENDS AND DIVIDEND PERIODS
The holders of Preferred Shares 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 "--Calculation of Dividend Payment," payable on the dates
set forth below. Dividends on the Preferred Shares so declared and payable will
be paid in preference to and in priority over any dividends so declared and
payable on the common shares. Dividends on the Preferred Shares, to the extent
that they are
39
derived from municipal securities, generally will be exempt from federal income
tax, although a portion of those dividends may be a tax preference item for
purposes of the federal alternative minimum tax for individuals or entities
subject to such tax ("Preference Item") and all of those dividends may result in
or increase a corporate shareholder's liability for federal alternative minimum
tax. See "Federal income tax matters." The following is a general description of
dividends for the Preferred Shares.
DIVIDEND PERIODS
The Initial Dividend Payment Date for each series of Preferred Shares is set
forth below. Any subsequent Dividend Period will generally be [seven (7)] days
for each series of the Preferred Shares; provided, however, that prior to any
Auction, the Trust may elect, subject to certain limitations described herein
and upon giving notice to Existing Holders, a Special Dividend Period. See
"--Designation of Special Dividend Periods."
DIVIDEND PAYMENT DATES
Dividends on the Preferred Shares will be payable, when, as and if declared by
the Trust's Board of Trustees, out of legally available funds in accordance with
the Agreement and Declaration of Trust, the Statement and applicable law.
Initial Dividend Payment Dates are scheduled as follows:
INITIAL DIVIDEND
PAYMENT DATE
Series [ ] [ ], 2003
Series [ ] [ ], 2003
Series [ ] [ ], 2003
Following the Initial Dividend Payment Date, dividends on each series of
Preferred Shares will be payable (i) with respect to any seven day Dividend
Period or any Short-Term Dividend Period of 35 or fewer days, on the Business
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 Business Day
next succeeding the last day thereof. If dividends are payable on a day that is
not a Business Day, then dividends will generally be payable on the next day if
that is a Business Day or as otherwise specified in the Statement.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Securities Depository, in accordance with its current
procedures, is expected to distribute dividends received from the Trust in
next-day funds on each Dividend Payment Date to Agent Members. These Agent
Members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Trust that dividend payments will be available in same-day
funds on each Dividend Payment Date to customers that use such Broker-Dealer or
that Broker-Dealer's designee as Agent Member.
CALCULATION OF DIVIDEND PAYMENT
The amount of cash dividends per share of Preferred Shares of each series
payable (if declared) on the Initial Dividend Payment Date, the Dividend Payment
Date of each seven 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 Preferred
Shares 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.
40
Dividends on Preferred Shares will accumulate from the date of their original
issue, which is [ ], 2003. The initial dividend rate is [ ]% for Series [ ]
Preferred Shares. The initial dividend rate is [ ]% for Series [ ] Preferred
Shares. The initial dividend rate is [ ]% for Series [ ] Preferred Shares. The
initial dividend rate is [ ]% for Series [ ] Preferred Shares. The initial
dividend rate is [ ]% for Series [ ] Preferred Shares. For each Dividend
Period after the Initial Dividend Period, the dividend rate will be the dividend
rate for a series determined at Auction for such series, except that the
dividend rate that results from an Auction will not be greater than the Maximum
Applicable Rate described below.
Except during a Non-Payment Period, the Applicable Rate for any Dividend Period
for Preferred Shares will not be more than the Maximum Applicable Rate
applicable to such shares. The Maximum Applicable Rate for each series of
Preferred Shares will depend on the credit rating assigned to such series 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 seven day Dividend Period or any Short-Term Dividend Period
having 182 or fewer days, the applicable "AA" Financial Composite Commercial
Paper Rate, (ii) 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 (iii)
with respect to any Long-Term Dividend Period, the applicable U.S. Treasury Note
Rate. The Applicable Percentage will be determined based on the credit rating
assigned on such date to the Preferred Shares by [Rating Agency 1] or [Rating
Agency 2] (or, if [Rating Agency 1] or [Rating Agency 2] shall not make such
rating available, the equivalent of such rating by a Substitute Rating Agency).
APPLICABLE PERCENTAGE PAYMENT TABLE
[RATING AGENCY] CREDIT RATINGS APPLICABLE PERCENTAGE
Aa3 or higher
A3 to A1
Baa3 to Baa1
Below Baa3
Prior to each Dividend Payment Date, the Trust is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any Auction.
The Trust does not intend to establish any reserves for the payment of
dividends.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
While any of the Preferred Shares are outstanding, the Trust, except as provided
below, may not declare, pay or set apart for payment any dividend or other
distribution in respect of its Common Shares. In addition, the Trust may not
call for redemption or redeem any of its common shares. However, the Trust is
not confined by the above restrictions if:
- immediately after such transaction, the Discounted Value of the Trust's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the value of the Trust's portfolio would be equal to
or greater than the 1940 Act Preferred Shares Asset Coverage (see "--Rating
Agency Guidelines and Asset Coverage" below)
- full cumulative dividends on each series of Preferred Shares 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
- the Trust has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Statement
The Trust generally will not declare, pay or set apart for payment any dividend
on any class or series of shares of the Trust ranking, as to the payment of
dividends, on a parity with Preferred Shares unless the Trust has declared and
paid or contemporaneously declares and pays full cumulative dividends on the
Preferred Shares through its
41
most recent dividend payment date. However, when the Trust has not paid
dividends in full upon the Preferred Shares through the most recent dividend
payment date or upon any other class or series of shares of the Trust ranking,
as to the payment of dividends, on a parity with Preferred Shares through their
most recent respective dividend payment dates, the amount of dividends declared
per share on Preferred Shares and such other class or series of shares will in
all cases bear to each other the same ratio that accumulated dividends per share
on the Preferred Shares and such other class or series of shares bear to each
other.
INCLUSION OF TAXABLE INCOME IN DIVIDENDS
Where the Trust is aware that it will include any net capital gains or other
taxable income in any dividend on Preferred Shares, the Trust 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 Trust may also
include such income in a dividend on shares of Preferred Shares 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 Trust may retroactively allocate net capital gains or other Taxable Income
to dividends paid on the Preferred Shares without giving the advance notice to
the Auction Agent described below under " The Auction Auction Date; Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividends." If the Trust 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 Preferred Shares or the liquidation of the Trust (a
"Retroactive Taxable Allocation"), the Trust, 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, will provide notice thereof to the Auction Agent and
to each holder of Preferred Shares (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 share books of the Trust. Within 30 days
after such notice is given to the Auction Agent, the Trust will pay to the
Auction Agent (who then will distribute to such holders of the Preferred
Shares), 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
Trust will not otherwise compensate the holders of the Preferred Shares for any
tax liability caused by the retroactive allocation of net capital gains or other
taxable income to the Preferred Shares. See "Federal income tax matters."
A "Gross-up Dividend" means a payment to a present or former holder of the
Preferred Shares 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 Trust is a Preference Item and (iii) assuming
that each Retroactive Taxable Allocation would be taxable to each holder of
Preferred Shares 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 Trust 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 "Federal income tax matters." The
Trust will not pay a further Gross-up Dividend with respect to any taxable
portion of a Gross-up Dividend. 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 IRS to be allocable in a manner different from that allocated
by the Trust.
42
DESIGNATION OF SPECIAL DIVIDEND PERIODS
The Trust, at its 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 the Preferred Shares of a series will be a number of days (other than seven
days) 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 (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 and any amounts due
with respect to redemptions have been paid in full and provided further that the
Trust may not request a Special Dividend Period that is a Long-Term Dividend
Period unless the Trust has received written confirmation from [Rating Agency
1], [Rating Agency 2] (or any Substitute Rating Agency) that the Trust's
election of a proposed Long-Term Dividend Period will not impair the ratings
then assigned by [Rating Agency 1], [Rating Agency 2] (or any Substitute Rating
Agency) of the applicable series of Preferred Shares. 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 Preferred Shares 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 Preferred Shares of
that series. Upon receiving such Request for Special Dividend Period, the
Broker-Dealers jointly shall determine the Optional Redemption Price of the
Preferred Shares of that series 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-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 securities comparable to the Preferred Shares, (iv)
industry and financial conditions which may affect the Preferred Shares of that
series, (v) the investment objectives of the Trust and (vi) the Dividend Periods
and dividend rates at which current and potential beneficial holders of the
Preferred Shares 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, 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 the duration of the Special Dividend
Period. The Trust has agreed to provide a copy of such Notice of Special
Dividend Period to Rating Agencies. The Trust 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 Preferred Shares Asset Coverage or the Preferred Shares
Basic Maintenance Amount is not satisfied on each of the two Business Days
immediately preceding the Business Day prior to the relevant Auction Date 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. If the Trust 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 Trust 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 seven 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 seven day Dividend Period, and the Trust 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
seven day Dividend Period.
43
NON-PAYMENT PERIOD AND LATE CHARGE
A "Failure to Deposit," with respect to shares of a series of Preferred Shares,
means a failure by the Trust to pay to the Auction Agent, not later than 12:00
noon, New York City time, (A) on the Business Day next preceding any Dividend
Payment Date for shares of such series, in funds available on such Dividend
Payment Date in the City of New York, New York, the full amount of any dividend
(whether or not earned or declared) to be paid on such Dividend Payment Date on
any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in the City of New York, New York, the redemption price to be paid on
such redemption date for any share of such series after notice of redemption is
mailed; provided, however, that the foregoing clause (B) shall not apply to the
Trust's failure to pay the redemption price in respect of Preferred Shares when
the related notice of redemption provides that redemption of such shares is
subject to one or more conditions precedent and any such condition precedent
shall not have been satisfied at the time or times and in the manner specified
in such notice of redemption. If a Failure to Deposit occurs with respect to a
series of Preferred Shares but, prior to 12:00 noon, New York City time, on the
third Business Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall have been cured, the Trust shall have
paid to the Auction Agent a late charge ("Late Charge") equal to the sum of (1)
if such Failure to Deposit consisted of the failure timely to pay to the Auction
Agent the full amount of dividends with respect to any Dividend Period of the
shares of such series, an amount computed by multiplying (x) 300% of the "AA"
Financial Composite Commercial Paper Rate for the period during which such
Failure to Deposit occurs on the Dividend Payment Date for such Dividend Period
by (y) a fraction, the numerator of which shall be the number of days for which
such Failure to Deposit has not been cured (including the day such Failure to
Deposit occurs and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against the
aggregate liquidation preference of the outstanding shares of such series and
(2) if such Failure to Deposit consisted of the failure timely to pay to the
Auction Agent the redemption price of the shares, if any, of such series for
which notice of redemption has been mailed by the Trust, an amount computed by
multiplying (x) 300% of the "AA" Financial Composite Commercial Paper Rate for
the Rate Period during which such Failure to Deposit occurs on the redemption
date by (y) a fraction, the numerator of which shall be the number of days for
which such Failure to Deposit is not cured (including the day such Failure to
Deposit occurs and excluding the day such Failure to Deposit is cured) and the
denominator of which shall be 360, and applying the rate obtained against the
aggregate liquidation preference of the outstanding shares of such series to be
redeemed, and no Auction will be held in respect of shares of such series for
the subsequent rate period thereof and the dividend rate for shares of such
series for such subsequent rate period will be the Maximum Applicable Rate for
shares of such series on the Auction Date for such subsequent rate period. If
any Failure to Deposit shall have occurred with respect to shares of such series
during any Rate Period thereof, and, prior to 12:00 noon, New York City time, on
the third Business Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall not have been cured or the Trust shall
not have paid the applicable Late Charge to the Auction Agent, no Auction will
be held in respect of shares of such series for the first subsequent rate period
thereafter (or for any Rate Period thereafter to and including the Rate Period
during which (1) such Failure to Deposit is cured and (2) the Trust pays the
applicable Late Charge to the Auction Agent (the condition set forth in this
clause (2) to apply only in the event the Rating Agencies are rating such shares
at the time the Trust cures such Failure to Deposit), in each case no later than
12:00 noon, New York City time, on the fourth Business Day prior to the end of
such Rate Period) (a "Non-Payment Period") and the dividend rate for shares of
such series for each such subsequent rate period shall be a rate per annum (the
"Non-Payment Period Rate") equal to 300% of the applicable "AA" Financial
Composite Commercial Paper Rate, provided that the Board of Trustees shall have
the authority to adjust, modify, alter or change from time to time such rate if
the Board of Trustees determines and the Rating Agencies (or any Substitute
Rating Agency) advises the Trust in writing that such adjustment, modification,
alteration or change will not adversely affect its then current ratings on the
Preferred Shares.
44
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Trust is required under guidelines established by each Rating Agency to
maintain assets having in the aggregate a Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount. The Preferred Shares Basic
Maintenance Amount is equal to __% of the sum of (a) the aggregate liquidation
preference of the Preferred Shares then outstanding, together with the aggregate
liquidation preference on any other series of Preferred Shares and (b) certain
accrued and projected dividend and other payment obligations of the Trust. Each
Rating Agency has established guidelines for determining Discounted Value which
are described in the Statement of Additional Information. The amount of discount
from market value varies depending upon functions such as the type of security,
the maturity of the instrument and the issuer's credit rating. The Rating Agency
guidelines also impose certain diversification requirements on the Trust's
portfolio and other limitations on the Trust's investments. To the extent any
particular portfolio holding does not satisfy the Rating Agency guidelines, all
or a portion of the holding's value will not be included in the calculation of
Discounted Value (as defined by Rating Agency). The Rating Agency guidelines do
not impose any limitations on the percentage of the Trust's assets that may be
invested in holdings not eligible for inclusion in the calculation of the
Discounted Value of the Trust's portfolio. The amount of ineligible assets
included in the Trust's portfolio at any time may vary depending upon the
rating, diversification and other characteristics of the eligible assets
included in the portfolio.
The Trust will be required under the Statement to maintain, with respect to the
Preferred Shares, as of the last Business Day of each month in which any
Preferred Shares are outstanding, asset coverage of at least 200% with respect
to senior securities which are shares of beneficial interest in the Trust,
including the Preferred Shares (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 Preferred Shares Asset Coverage"). If the Trust fails to maintain the
1940 Act Preferred Shares Asset Coverage and such failure is not cured as of the
last Business Day of the following month (the "1940 Act Cure Date"), the Trust
will be required under certain circumstances to redeem certain of the Preferred
Shares. See "--Redemption" below.
The 1940 Act Preferred Shares Asset Coverage immediately following the issuance
of Preferred Shares offered hereby (after giving effect to the deduction of the
sales load and offering expenses for the Preferred Shares), computed using the
Trust's net assets as of [ ], 2003, and assuming the Preferred Shares with an
aggregate liquidation preference of $[ ] million had been issued as of such
date, will be as follows:
Value of Trust assets less liabilities not
constituting senior securities [ ] = [ ]%
--------------------------------------------------- -------
Senior securities representing indebtedness plus
liquidation value of the shares of Preferred Shares [ ]
In the event the Trust does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of [Rating Agency 1], [Rating Agency 2]
or a Substitute Rating Agency, the Trust will be required by the Statement to
redeem shares of Preferred Shares as described under "--Redemption-- Mandatory
redemption" below.
The rating agency guidelines restrict the trust's use of some types of
investment strategies. For example, the guidelines, among other restrictions,
limit the trust's use of futures, options and other derivative transactions and
limit the percentage of the trust's assets that may be invested in any one
issuer or type or class of issuer.
The Rating Agency guidelines also prohibit the Trust from taking certain types
of actions unless it has received written confirmation from Rating Agency that
such actions would not impair the ratings then assigned to the
45
Preferred Shares. These include restrictions on borrowing money, issuing any
class or series of shares ranking prior to or on a parity with the Preferred
Shares with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the Trust or merging or
consolidating into or with any other entity.
The restrictions in the Rating Agency guidelines may limit the Trust's ability
to make investments that the Adviser believes would benefit the Trust. The
descriptions of the Rating Agency guidelines in this section are summaries only
and are not complete. The Rating Agency guidelines are described in greater
detail in the Statement of Additional Information and are set forth in their
entirety in the Statement, which have attached an Appendix B to the Statement of
Additional Information.
The Trust may, but is not required to, adopt any modifications to Rating Agency
guidelines that may hereafter be established by [Rating Agency 1] or [Rating
Agency 2]. Failure to adopt any such modifications, however, may result in a
change in the ratings assigned to the Preferred Shares or a withdrawal of
ratings altogether. In addition, any rating agency providing a rating for the
Preferred Shares may, at any time, change or withdraw any such rating. The Board
of Trustees may, without shareholder approval, amend, alter or repeal any or all
of the definitions and related provisions which have been adopted by the Trust
pursuant to a Rating Agency's guidelines in the event such Rating Agency is no
longer rating the Preferred Shares or the Trust receives written confirmation
from the Rating Agency or a Substitute Rating Agency that any such amendment,
alteration or repeal would not impair the rating then assigned to the Preferred
Shares.
As described by [Rating Agency], a preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The rating on the Preferred Shares is not a recommendation to purchase, hold or
sell those shares, inasmuch as the rating does 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 Preferred Shares will
be able to sell such shares in an Auction or otherwise. The rating is based on
current information furnished to Rating Agency by the Trust and/or the Adviser
and information obtained from other sources. The rating may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of, such
information. The common shares have not been rated by either Rating Agency.
The Rating Agency guidelines will apply to the Preferred Shares only so long as
[Rating Agency] is rating Preferred Shares. The Trust will pay certain fees to
[Rating Agency 1] and [Rating Agency 2] for rating the Preferred Shares. The
Trust may at some future time seek to have the Preferred Shares rated by an
additional or Substitute Rating Agency.
REDEMPTION
MANDATORY REDEMPTION
The Trust is required to maintain (a) a Discounted Value of eligible portfolio
securities at least equal to the Preferred Shares Basic Maintenance Amount and
(b) asset coverage of at least 200% of the value of senior securities of the
Trust which are equity shares, including the Preferred Shares (1940 Act
Preferred Shares Asset Coverage). Eligible portfolio securities for purposes of
the Preferred Shares Basic Maintenance Amount and their Discounted Value will be
determined from time to time by the rating agency then rating the Preferred
Shares. The guidelines currently in effect are described under "--Rating Agency
Guidelines and Asset Coverage" above and in the Statement of Additional
Information. If the Trust fails to maintain the 1940 Act Preferred Shares Asset
Coverage and eligible portfolio securities with a Discounted Value equal to the
Preferred Shares Basic Maintenance Amount and does not timely cure such failure
in accordance with the requirements of the rating agency that rates the
Preferred Shares, the Trust must redeem all or a portion of the Preferred
Shares. This mandatory redemption will take place on a date that the Trust's
Board of Trustees specifies out of legally available funds, in accordance with
the Agreement and Declaration of Trust, the Statement and applicable law, at the
redemption price of $25,000 per share plus accumulated but unpaid dividends
(whether or not earned or
46
declared) to (but not including) the date fixed for redemption. The mandatory
redemption will be limited to the number of Preferred Shares necessary, after
giving effect to such redemption, to cause the Discounted Value of the Trust's
portfolio to equal or exceed the Preferred Shares Basic Maintenance Amount, and
the value of the Trust's portfolio to equal or exceed the 1940 Act Preferred
Shares Asset Coverage. In determining the number of Preferred Shares required to
be redeemed in accordance with the foregoing, the Trust will allocate the number
of Preferred Shares required to be redeemed to satisfy the Preferred Shares
Basic Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, as the
case may be, pro rata among the series of Preferred Shares and any other
preferred shares of the Trust subject to redemption or retirement. The Trust
shall effect such redemption on the date fixed by the Trust, which date shall
not be earlier than 20 days nor later than 40 days after the applicable cure
date, except if the Trust does not have funds legally available therefor. If
fewer than all outstanding series of Preferred Shares are, as a result, to be
redeemed, the Trust may redeem such shares by lot or other method that it deems
fair and equitable.
OPTIONAL REDEMPTION
To the extent permitted under the 1940 Act and Delaware law, the Trust at its
option may, without the consent of the holders of Preferred Shares, redeem
Preferred Shares, in whole or in part, on the Business Day after the last day of
such Dividend Period upon not less than 15 calendar days' and not more than 40
calendar days' prior notice at the optional redemption price per share; provided
that no Preferred Shares may be redeemed at the option of the Trust during (a)
the Initial Dividend Period or (b) a Non-Call Period to which such Preferred
Shares are subject. The optional redemption price per share will be $25,000 per
share, plus an amount equal to accumulated but unpaid dividends thereon (whether
or not declared) to the date fixed for redemption plus any applicable redemption
premium attributable to the designation of a Premium Call Period. The Trust will
not make any optional redemption unless, after giving effect thereto, (i) the
Trust has available certain deposit securities with maturities or tender dates
not later than the day preceding the applicable redemption date and having a
value not less than the amount (including any applicable premium) due to holders
of the Preferred Shares of such series by reason of the redemption of the
Preferred Shares on such date fixed for the redemption and (ii) the Trust has
eligible assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount. Notwithstanding the foregoing,
Preferred Shares may not be redeemed at the option of the Trust unless all
dividends in arrears on the outstanding preferred shares, including all
outstanding Preferred Shares, have been or are being contemporaneously paid or
set aside for payment. This would not prevent the lawful purchase or exchange
offer for Preferred Shares made on the same terms to holders of all outstanding
preferred shares.
LIQUIDATION
If the Trust is liquidated, the holders of any series of outstanding Preferred
Shares will receive the liquidation preference on such series, plus all
accumulated but unpaid dividends, before any payment is made to the holders of
common shares. The holders of Preferred Shares will be entitled to receive these
amounts from the assets of the Trust available for distribution to its
shareholders. In addition, the rights of holders of Preferred Shares to receive
these amounts are subject to the rights of holders of any series or class of
shares, including other series of preferred shares, ranking on a parity with the
Preferred Shares with respect to the distribution of assets upon liquidation of
the Trust. After the payment to the holders of Preferred Shares of the full
preferential amounts as described, the holders of Preferred Shares will have no
right or claim to any of the remaining assets of the Trust.
For purpose of the foregoing paragraph, a voluntary or involuntary liquidation
of the Trust does not include:
- the sale, lease or exchange of all or substantially all the property or
assets of the Trust;
- the merger or consolidation of the Trust into or with any other business
trust, corporation or other organization; or
- the merger or consolidation of any other business trust or corporation into
or with the Trust.
47
In addition, none of the foregoing would result in the Trust being required to
redeem any Preferred Shares if after such transaction the Trust continued to
comply with the rating agency guidelines and asset coverage ratios.
VOTING RIGHTS
Except as otherwise provided in this Prospectus or as otherwise required by law,
holders of Preferred Shares will have equal voting rights with holders of common
shares and any other preferred shares (one vote per share) and will vote
together with holders of common shares and any preferred shares as a single
class.
Holders of outstanding preferred shares, including Preferred Shares, voting as a
separate class, are entitled to elect two of the Trust's Trustees. The remaining
Trustees are elected by holders of common shares. In addition, if at any time
dividends (whether or not earned or declared) on outstanding preferred shares,
including Preferred Shares, are due and unpaid in an amount equal to two full
years of dividends, and sufficient cash or specified securities have not been
deposited with the Auction Agent for the payment of such dividends, then, the
sole remedy of holders of outstanding preferred shares, including Preferred
Shares, is that the number of Trustees constituting the Board will be
automatically increased by the smallest number that, when added to the two
Trustees elected exclusively by the holders of preferred shares, including
Preferred Shares, as described above, would constitute a majority of the Board.
The holders of preferred shares, including Preferred Shares, will be entitled to
elect that smallest number of additional Trustees at a special meeting of
shareholders as soon as possible and at all subsequent meetings at which
Trustees are to be elected. The terms of office of the persons who are Trustees
at the time of that election will continue. If the Trust thereafter shall pay,
or declare and set apart for payment, in full, all dividends payable on all
outstanding preferred shares, including Preferred Shares, the special voting
rights stated above will cease, and the terms of office of the additional
Trustees elected by the holders of preferred shares, including Preferred Shares,
will automatically terminate.
As long as any Preferred Shares are outstanding, the Trust will not, without the
affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time (voting together as a separate class):
(a) authorize, create or issue any class or series of shares ranking prior to or
on a parity with the Preferred Shares with respect to payment of dividends or
the distribution of assets on dissolution, liquidation or winding up the affairs
of the Trust, or authorize, create or issue additional shares of any series of
Preferred Shares or any other preferred shares, unless, in the case of preferred
shares on a parity with the Preferred Shares, the Trust obtains written
confirmation from [Rating Agency 1] and [Rating Agency 2] (if [Rating Agency 1]
and [Rating Agency 2] is then rating the Preferred Shares) or any Substitute
Rating Agency (if any such Substitute Rating Agency is then rating the Preferred
Shares) that the issuance of a class or series would not impair the rating then
assigned by such rating agency to the Preferred Shares and the Trust continues
to comply with Section 13 of the 1940 Act, the 1940 Act Preferred Shares Asset
Coverage requirements and the Preferred Shares Basic Maintenance Amount
requirements, in which case the vote or consent of the holders of the Preferred
Shares is not required;
(b) amend, alter or repeal the provisions of the Agreement and Declaration of
Trust or the Statement, whether by merger, consolidation or otherwise, so as to
adversely affect any preference, right or power of the Preferred Shares or
holders of Preferred Shares; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of Preferred Shares will be
deemed to affect such preferences, rights or powers only if the terms of such
division adversely affect the holders of Preferred Shares and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the Preferred Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust will be deemed to affect such preferences, rights or powers
only if [Rating Agency 1] and [Rating Agency 2] is then rating the Preferred
Shares and such issuance would, at the time thereof, cause the Trust not to
satisfy the 1940 Act Preferred Shares Asset Coverage or the Preferred Shares
Basic Maintenance Amount;
48
(c) authorize the Trust's conversion from a closed-end to an open-end investment
company;
(d) amend the provisions of the Agreement and Declaration of Trust which provide
for the classification of the Board of Trustees of the Trust into three classes,
each with a term of office of three years with only one class of Trustees
standing for election in any year; or
(e) approve any reorganization (as such term is used in the 1940 Act) adversely
affecting the Preferred Shares.
So long as any shares of the Preferred Shares are outstanding, the Trust shall
not, without the affirmative vote or consent of the holders of at least 66 2/3%
of the Preferred Shares outstanding at the time, in person or by proxy, either
in writing or at a meeting, voting as a separate class, file a voluntary
application for relief under federal bankruptcy law or any similar application
under state law for so long as the Trust is solvent and does not foresee
becoming insolvent.
To the extent permitted under the 1940 Act, the Trust will not approve any of
the actions set forth in (a) or (b) above which adversely affects the rights
expressly set forth in the Agreement and Declaration of Trust or the Statement
of a holder of shares of a series of preferred shares differently than those of
a holder of shares of any other series of preferred shares without the
affirmative vote or consent of the holders of at least a majority of the shares
of each series adversely affected. Unless a higher percentage is provided for
under the Agreement and Declaration of Trust or the Statement, the affirmative
vote of the holders of a majority of the outstanding Preferred Shares, 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 foregoing voting provisions will not apply with respect to Preferred Shares
if, at or prior to the time when a vote is required, such shares have been (i)
redeemed or (ii) called for redemption and sufficient funds have been deposited
in trust to effect such redemption.
THE AUCTION
GENERAL
Holders of the Preferred Shares will be entitled to receive cumulative cash
dividends on their Preferred Shares when, as and if declared by the Trust's
Board of Trustees, 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 (generally a period of seven days, subject to certain
exceptions set forth under "Description of the Preferred Shares--Dividends and
Dividend Periods"), at the rate per annum equal to the Applicable Rate for each
such Dividend Period.
The provisions of the Statement establishing the terms of the Preferred Shares
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 Statement in which persons determine to hold or
offer to purchase or sell the Preferred Shares. The Auction Procedures are
attached as Appendix D to the Statement of Additional Information. Each periodic
operation of such procedures with respect to the Preferred Shares is referred to
herein as an "Auction." If, however, the Trust should fail to pay or duly
provide for the full amount of any dividend on or the redemption price of the
Preferred Shares called for redemption, the Applicable Rate for the Preferred
Shares will be determined as set forth under "Description of Preferred
Shares--Dividends and Dividend Periods--Non-Payment Period and Late Charge."
Except as noted below and under " Dividends Gross-up Dividends," whenever the
Trust is aware that it will include any net capital gain or other income subject
to federal income tax in any dividend on the Preferred Shares, the Trust will
49
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
Trust, it will in turn notify each Broker-Dealer, who, on or prior to such
Auction Date, in accordance with its Broker-Dealer Agreement, will notify its
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 Trust also may include such income in a dividend on the Preferred
Shares 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
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. See " Dividends Gross-up Dividends."
AUCTION AGENCY AGREEMENT
The Trust will enter into the Auction Agency Agreement with the Auction Agent
(currently, [ ]) which provides, among other things, that the Auction Agent
will follow the Auction Procedures to determine the Applicable Rate for the
Preferred Shares. The Trust will pay the Auction Agent compensation for its
services under the Auction Agency Agreement.
The Auction Agent will act as agent for the Trust in connection with Auctions.
In the absence of bad faith or negligence on its part, the Auction Agent will
not be liable for any action taken, suffered or omitted, or for any error of
judgment made, by it in the performance of its duties under the Auction 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 Trust 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
Trust no earlier than 60 days after delivery of said notice. If the Auction
Agent should resign, the Trust will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Trust may remove the Auction
Agent provided that, prior to removal, the Trust has entered into a replacement
agreement with a successor Auction Agent.
BROKER-DEALER AGREEMENTS
Each Auction requires the participation of one or more Broker-Dealers. The
Auction Agent will enter into agreements with several Broker-Dealers, or other
entities permitted by law to perform the functions required of a Broker-Dealer
in the Auction Procedures, selected by the Trust, which provide for the
participation of those Broker-Dealers in Auctions for Preferred Shares. The
Auction Agent will pay to each Broker-Dealer after each Auction, from funds
provided by the Trust, a service charge at the annual rate: (i) for any seven
day Dividend Period, 0.25% of the liquidation preference ($25,000 per share) of
the Preferred Shares held by a Broker-Dealer's customer upon settlement in an
Auction and (ii) for any Special Dividend Period, as determined by mutual
consent of the Trust and any such Broker-Dealer or Broker-Dealers and which
shall be based upon a selling concession that would be applicable to an
underwriting of fixed or variable rate preferred shares with a similar fixed
maturity or variable rate dividend period, respectively, at the commencement of
the Dividend Period with respect to such Auction.
The Trust may request that the Auction Agent terminate one or more Broker-Dealer
agreements at any time upon five days' notice, provided that at least one
Broker-Dealer agreement is in effect after termination of the agreement,
provided that neither the Broker-Dealer Agreement with [ ] nor the
Broker-Dealer Agreement with [ ] may be terminated without the prior written
consent of the Trust, which consent may not be unreasonably withheld.
50
SECURITIES DEPOSITORY
The Depository Trust Company initially will act as the Securities Depository for
the Agent Members with respect to the Preferred Shares. All of the shares of
Preferred Shares initially will be registered in the name of Cede & Co., as
nominee of the Securities Depository. Such Preferred Shares will be subject to
the provisions restricting transfers of Preferred Shares, and Beneficial Owners
will not be entitled to receive certificates representing their ownership
interest in such Preferred Shares. See Appendix __ (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 Preferred Shares 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 Trust to holders of Preferred Shares 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 __ to the Statement of Additional Information. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix __ to
the Statement of Additional Information.
ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS, EXISTING HOLDERS AND
POTENTIAL HOLDERS
Prior to the submission deadline on each Auction Date for the Preferred Shares,
each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a Beneficial Owner of
Preferred Shares may submit the following types of orders with respect to that
Broker-Dealer:
1. Hold Order--indicating its desire to hold Preferred Shares without regard
to the Applicable Rate for the next Dividend Period
2. Bid--indicating its desire to sell Preferred Shares at $25,000 per share if
the Applicable Rate for the next Dividend Period is less than the rate or
spread specified in the bid
3. Sell Order--indicating its desire to sell Preferred Shares at $25,000 per
share without regard to the Applicable Rate for the next Dividend Period
A Beneficial Owner may submit different types of orders to its Broker-Dealer
with respect to different shares of Preferred Shares then held by the Beneficial
Owner. A Beneficial Owner that submits its bid to its Broker-Dealer having a
rate higher than the Maximum Applicable Rate on the Auction Date will be treated
as having submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that
fails to submit an order to its Broker-Dealer will ordinarily be deemed to have
submitted a Hold Order to its Broker-Dealer. However, if a Beneficial Owner
fails to submit an order to its Broker-Dealer for an Auction relating to a
Dividend Period of more than 91 days such Beneficial Owner will be deemed to
have submitted a Sell Order to its Broker-Dealer. A Sell Order constitutes an
irrevocable offer to sell the Preferred Shares subject to the Sell Order. A
Beneficial Owner that offers to become the Beneficial Owner of additional
Preferred Shares is, for purposes of such offer, a Potential Holder as discussed
below.
A Potential Holder is either a customer of a Broker-Dealer that is not a
Beneficial Owner of a series of Preferred Shares but that wishes to purchase
Preferred Shares or that is a Beneficial Owner that wishes to purchase
additional Preferred Shares. A Potential Holder may submit Bids to its
Broker-Dealer in which it offers to purchase Preferred Shares at $25,000 per
share if the Applicable Rate for Preferred Shares for the next Dividend Period
is not less than the specified rate in such Bid. A Bid placed by a Potential
Holder of Preferred Shares specifying a rate higher than the Maximum Applicable
Rate for Preferred Shares on the Auction Date will not be accepted.
51
The Broker-Dealers in turn will submit the orders of their respective customers
who are Beneficial Owners and Potential Holders to the Auction Agent. They will
designate themselves (unless otherwise permitted by the Trust) as Existing
Holders of Preferred Shares subject to orders submitted or deemed submitted to
them by Beneficial Owners. They will designate themselves as Potential Holders
of Preferred Shares subject to orders submitted to them by Potential Holders.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated the same way as an order placed with a
Broker-Dealer by a Beneficial Owner or Potential Holder. Similarly, any failure
by a Broker-Dealer to submit to the Auction Agent an order for any Preferred
Shares held by it or customers who are Beneficial Owners will be treated as a
Beneficial Owner's failure to submit to its Broker-Dealer an order in respect of
Preferred Shares held by it. A Broker-Dealer may also submit orders to the
Auction Agent for its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Trust.
There are Sufficient Clearing Bids in an Auction if the number of Preferred
Shares subject to Bids submitted or deemed submitted to the Auction Agent by
Broker-Dealers for Potential Holders with rates or spreads equal to or lower
than the Maximum Applicable Rate is at least equal to or exceeds the sum of the
number of Preferred Shares subject to Sell Orders and the number of shares
subject to Bids specifying rates or spreads higher than the Maximum Applicable
Rate submitted or deemed submitted to the Auction Agent by Broker-Dealers for
Existing Holders. If there are Sufficient Clearing Bids, the Applicable Rate for
the next succeeding Dividend Period thereof will be the lowest rate specified in
the submitted Bids which, taking into account such rate and all lower rates bid
by Broker-Dealers as or on behalf of Existing Holders and Potential Holders,
would result in Existing Holders and Potential Holders owning the Preferred
Shares available for purchase in the Auction.
If there are not Sufficient Clearing Bids, the Applicable Rate for the next
Dividend Period will be the Maximum Applicable Rate on the Auction Date.
However, if the Trust has declared a Special Dividend Period and there are not
Sufficient Clearing Bids, the election of a Special Dividend Period will not be
effective and the Applicable Rate for the next Dividend Period will be the
Applicable Rate determined on the previous Auction Date same as during the
Dividend Period. If there are not Sufficient Clearing Bids, Beneficial Owners of
Preferred Shares that have submitted or are deemed to have submitted Sell Orders
may not be able to sell in the Auction all Preferred Shares subject to such Sell
Orders. If all of the applicable outstanding Preferred Shares are the subject of
submitted Hold Orders (or Hold Orders deemed to have been submitted), then the
Dividend Period will be a seven day Dividend Period and the Applicable Rate for
the next Dividend Period will be the "AA" Financial Composite Commercial Paper
Rate for a seven day Dividend Period.
The Auction Procedures include a pro rata allocation of shares for purchase and
sale which may result in an Existing Holder continuing to hold or selling, or a
Potential Holder purchasing, a number of Preferred Shares that is different than
the number specified in its order. To the extent the allocation procedures have
that result, Broker-Dealers that have designated themselves as Existing Holders
or Potential Holders in respect of customer orders will be required to make
appropriate pro rata allocations among their respective customers.
If an Auction Date is not a Business Day because the New York Stock Exchange is
closed for business due to an act of God, natural disaster, act of war, civil or
military disturbance, act of terrorism, sabotage, riots or a loss or malfunction
of utilities or communications services, or the Auction Agent is not able to
conduct an Auction in accordance with the Auction Procedures for any such
reason, then the Applicable Rate for the next Dividend Period will be the
Applicable Rate determined on the previous Auction Date.
If a Dividend Payment Date is not a Business Day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or
52
a loss or malfunction of utilities or communications services, or the dividend
payable on such date can not be paid for any such reason, then:
- the Dividend Payment Date for the affected Dividend Period will be the next
Business Day on which the Trust and its paying agent, if any, are able to
cause the dividend to be paid using their reasonable best efforts
- the affected Dividend Period will end on the day it otherwise would have
ended
- the next Dividend Period will begin and end on the dates on which it
otherwise would have begun and ended
The following is a simplified example of how a typical Auction works. Assume
that the Trust has 1,000 outstanding Preferred Shares and three Existing
Holders. The three Existing Holders and three Potential Holders submit orders
through Broker-Dealers at the Auction:
Existing Holder A Owns 500 shares, wants to Bid of 2.1% rate for all
sell all 500 shares if 500 shares
Applicable Rate is less than 2.1%
Existing Holder B Owns 300 shares, wants to hold Hold Order--will take the
Applicable Rate
Existing Holder C Owns 200 shares, wants to Bid of 1.9% rate for all
sell all 200 shares if 200 shares
Applicable Rate is less than 1.9%
Potential Holder D Wants to buy 200 shares Place order to buy at or
above 2.0%
Potential Holder E Wants to buy 300 shares Place order to buy at or
above 1.9%
Potential Holder F Wants to buy 200 shares Place order to buy at or
above 2.1%
The lowest dividend rate that will result in all 1,000 Preferred Shares
continuing to be held is 2.0% (the offer by D). For the purposes of the example,
the lowest dividend rate is 2.0% at which there is Sufficient Clearing Bids and,
therefore, the dividend rate will be 2.0%. Existing Holders B and C will
continue to own their shares. Existing Holder A will sell its shares because A's
bid was higher than the Applicable Rate. Potential Holder D will buy 200 shares
and Potential Holder E will buy 300 shares because their bid rates were at or
below the Applicable Rate. Potential Holder F will not buy any shares because
its bid rate was above the dividend rate.
ADVANCED NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF TAXABLE INCOME IN
DIVIDENDS
Except as noted below and under "--Dividends and Dividend Periods--Gross-up
Dividends," whenever the Trust is aware that it will include any net capital
gain or other income subject to federal income tax in any dividend on the
Preferred Shares, 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. Whenever the Auction
Agent receives such notice from the Trust, it will in turn notify each
Broker-Dealer, who, on or prior to such Auction Date, in accordance with its
Broker-Dealer Agreement, will notify its 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 Preferred Shares 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 Trust will notify the Auction Agent of
the additional amounts to be included in such dividend
53
at least five Business Days prior to the applicable Dividend Payment Date. See
"--Dividends--Gross-up Dividends."
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT
Prior to 1:30 p.m., New York City time, on each Auction Date, or such other time
on the Auction Date 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 Preferred Shares to be conducted on such Auction
Date, designating itself (unless otherwise permitted by the Trust) as the
Existing Holder or Potential Holder in respect of the Preferred Shares 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.
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 Preferred
Shares 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 Preferred Shares held by such Existing Holder, provided that
if more than one Hold Order is submitted by such Existing Holder and the
number of Preferred Shares subject to such Hold Orders exceeds the number
of outstanding Preferred Shares held by such Existing Holder, the number
of Preferred Shares 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 Preferred Shares 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 Preferred Shares held by such Existing Holder over the number
of outstanding Preferred Shares 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 Preferred Shares held by such Existing Holder
over the sum of the number of Preferred Shares subject to Hold Orders
referred to in clause (i) above and the number of Preferred Shares 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 Preferred Shares subject to such Sell Orders is
greater than such excess, the number of Preferred Shares 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 Preferred Shares 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 Preferred Shares therein specified.
NOTIFICATION OF RESULTS AND 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 Preferred Shares 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
54
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
Preferred Shares as a result of the Auction and will advise each customer
purchasing or selling Preferred Shares 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 Preferred Shares 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 Preferred Shares. The
Auction Agent will record each transfer of Preferred Shares 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 Preferred Shares 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 Preferred Shares 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 Preferred Shares 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 Preferred Shares in an Auction fails to deliver
such Preferred Shares, the Broker-Dealer of any person that was to have
purchased Preferred Shares in such Auction may deliver to such person a number
of whole Preferred Shares that is less than the number of Preferred Shares that
otherwise was to be purchased by such person. In such event, the number of
Preferred Shares to be so delivered will be determined by such Broker-Dealer.
Delivery of such lesser number of Preferred Shares will constitute good
delivery. Each Broker-Dealer Agreement also will provide that neither the Trust
nor the Auction Agent will have responsibility or liability with respect to the
failure of a Beneficial Owner, Potential Beneficial Owner or their respective
Agent Members to deliver Preferred Shares or to pay for Preferred Shares
purchased or sold pursuant to an Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Trust to each Broker-Dealer on the basis of the purchase price
of Preferred Shares placed by such Broker-Dealer at such Auction. The service
charge (i) for any seven day Dividend Period shall be payable at the annual rate
of [0.25%] of the purchase price of the Preferred Shares placed by such
Broker-Dealer in any such Auction and (ii) for any Special Dividend Period shall
be determined by mutual consent of the Trust and any such Broker-Dealer or
Broker-Dealers and shall be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred shares with a
similar final maturity or variable rate dividend period, respectively, at the
commencement of the Dividend Period with respect to such Auction. For the
purposes of the preceding sentence, the Preferred Shares 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 Preferred 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 Preferred Shares as a result
of the Auction or (C) a Submitted Hold Order.
55
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders in
Auctions for its own account, unless the Trust 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 Preferred Shares, 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 PREFERRED SHARES
The Broker-Dealers are expected to maintain a secondary trading market in
Preferred Shares outside of Auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that any
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. The Preferred Shares will not be registered on any stock exchange
or on the Nasdaq National Market.
Investors who purchase Preferred Shares in an Auction (particularly if the Trust
has declared a Special Dividend Period) should note that because the dividend
rate on such shares will be fixed for the length of that Dividend Period, the
value of such shares may fluctuate in response to the changes in interest rates,
and may be more or less than their original cost if sold on the open market in
advance of the next Auction thereof, depending on market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise dispose
of Preferred Shares only in whole shares and only:
- pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the Auction Procedures
- to a Broker-Dealer
- to such other persons as may be permitted by the Trust; provided, however,
that a sale, transfer or other disposition of Preferred Shares 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 if
such Broker-Dealer remains the Existing Holder of the shares; and in the case of
all transfers other than pursuant to Auctions, the Broker-Dealer (or other
person, if permitted by the Trust) to whom such transfer is made will advise the
Auction Agent of such transfer
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trust's Board of Trustees provides broad supervision over the affairs of the
Trust. The officers of the Trust are responsible for the Trust's operations. The
Trustees and officers of the Trust, together with their principal occupations
during the past five years, are listed in the Statement of Additional
Information. Each of the Trustees also serves as a Trustee of each of the 50
U.S. registered investment portfolios for which the Adviser serves as investment
adviser.
INVESTMENT ADVISER
The Trust has contracted with the Adviser to act as its investment adviser. The
Adviser is an indirect subsidiary of UniCredito. The Adviser is part of the
global asset management group providing investment management and financial
services to mutual funds and other clients. As of June 30, 2003, assets under
management by the Adviser and its affiliates were approximately $_ billion
worldwide, including over $28 billion in assets under management by the Adviser.
As of June 30, 2003, the Adviser managed approximately $_ million in municipal
securities and $_ billion in high yield securities. Certain Trustees or officers
of the Trust are also directors and/or officers of certain of UniCredito's
subsidiaries, including the Adviser.
56
The Adviser provides the Trust with investment research, advice and supervision
and furnishes the Trust with an investment program consistent with the Trust's
investment objectives and principal investment strategies, subject to the
supervision of the Trust's Board of Trustees. The Adviser determines what
portfolio securities will be purchased or sold, arranges for the placing of
orders for the purchase or sale of portfolio securities, selects brokers or
dealers to place those orders, maintains books and records with respect to the
Trust's securities transactions and reports to the Board of Trustees on the
Trust's investments and performance.
ADVISORY AGREEMENT
Under the terms of the advisory agreement (the "Advisory Agreement"), the Trust
will pay to the Adviser monthly, as compensation for the services rendered and
expenses paid by it, a fee equal on an annual basis to 0.60% of the Trust's
average daily managed assets. "Managed assets" means the total assets of the
Trust (including any assets attributable to leverage that may be outstanding)
minus the sum of the accrued liabilities (other than liabilities representing
financial leverage). The liquidation preference on any preferred shares is not a
liability. Because the fee paid to the Adviser is determined on the basis of the
Trust's managed assets, the Adviser's interest in determining whether to
leverage the Trust may differ from the interests of the Trust. The Trust's
average daily managed assets are determined for the purpose of calculating the
management fee by taking the average of all of the daily determinations of total
assets during a given calendar month. The fees are payable for each calendar
month as soon as practicable after the end of that month.
Under the terms of the Advisory Agreement, the Adviser pays all of the operating
expenses, including executive salaries and the rental of office space, relating
to its services for the Trust, with the exception of the following, which are to
be paid by the Trust: (a) charges and expenses for fund accounting, pricing and
appraisal services and related overhead, including, to the extent such services
are performed by personnel of the Adviser or its affiliates, office space and
facilities and personnel compensation, training and benefits; (b) the charges
and expenses of auditors; (c) the charges and expenses of any administrator,
custodian, transfer agent, plan agent, dividend disbursing agent and registrar
appointed by the Trust; (d) issue and transfer taxes chargeable to the Trust in
connection with securities transactions to which the Trust is a party; (e)
insurance premiums, interest charges, expenses in connection with any preferred
shares, dues and fees for membership in trade associations and all taxes and
corporate fees payable by the Trust to federal, state or other governmental
agencies; (f) fees and expenses involved in registering and maintaining
registrations of the Trust and/or its shares with federal regulatory agencies,
state or blue sky securities agencies and foreign jurisdictions, including the
preparation of prospectuses and statements of additional information for filing
with such regulatory authorities; (g) all expenses of shareholders' and
Trustees' meetings and of preparing, printing and distributing prospectuses,
notices, proxy statements and all reports to shareholders and to governmental
agencies; (h) charges and expenses of legal counsel to the Trust and the Board
of Trustees; (i) compensation of those Trustees of the Trust who are not
affiliated with or interested persons of the Adviser or the Trust (other than as
Trustees); (j) the cost of preparing and printing share certificates; (k)
interest on borrowed money, if any; (l) the fees and other expenses of listing
the Trust's shares on the New York Stock Exchange or any other national stock
exchange; and (m) any other expense that the Trust, the Adviser or any other
agent of the Trust may incur (I) as a result of a change in the law or
regulations, (II) as a result of a mandate from the Board of Trustees with
associated costs of a character generally assumed by similarly structured
investment companies or (III) that is similar to the expenses listed above, and
that is approved by the Board of Trustees (including a majority of the Trustees
who are not affiliates of the Adviser) as being an appropriate expense of the
Trust. In addition, the Trust will pay all brokers' and underwriting commissions
chargeable to the Trust in connection with securities transactions to which the
Trust is a party.
The Adviser has agreed for the first three years of the Trust's investment
operations to limit the Trust's total annual expenses (excluding organizational
and offering costs for common and preferred shares, interest expenses, the cost
of defending or prosecuting any claim or litigation to which the Trust is a
party (together with any amount in judgment or settlement), indemnification
expense or taxes incurred due to the failure of the Trust
57
to qualify as a regulated investment company under the Code or any other
non-recurring or non-operating expenses) to 0.80% of the Trust's average daily
managed assets. The dividend on any preferred shares is not an expense. The
Adviser may subsequently recover reimbursed expenses (within three years of
being incurred) from the Trust if the Trust's total expenses are less than 0.80%
of average daily managed assets.
The Trust has also entered into an administration agreement with Princeton
Administrators, L.P., an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated (one of the underwriters of this offering), and the Adviser,
pursuant to which Princeton Administrators, L.P. provides certain administrative
and accounting services to the Trust and the Adviser provides certain
administrative services to the Trust. The Trust pays Princeton Administrators,
L.P. a monthly fee equal to the greater of $10,000 per month or 0.07% of the
Trust's average weekly managed assets. The Adviser does not receive any
compensation under the administration agreement. Pursuant to a separate
agreement, the Trust may compensate the Adviser for providing certain legal and
accounting services.
PORTFOLIO MANAGER
Day-to-day management of the Trust's portfolio is the responsibility of a team
of fixed income portfolio managers led by Kenneth J. Taubes. The team, which
also includes David Eurkus and Timothy Pynchon, manages other Pioneer mutual
funds investing primarily in fixed income securities. Mr. Taubes is responsible
for overseeing the Adviser's fixed income team. He joined the Adviser as a
senior vice president in September 1998 and has been an investment professional
since 1982. Prior to joining the Adviser, Mr. Taubes had served since 1991 as a
senior vice president and senior portfolio manager for several institutional
accounts and mutual funds at another investment adviser. Mr. Eurkus joined the
Adviser as a senior vice president in January 2000 and has been an investment
professional since 1969. From 1998 to 2000, Mr. Eurkus was a senior vice
president of fixed income investing for the Private Client Group at Brown
Brothers Harriman. Prior to that he was a senior vice president at Putnam
Investments. Mr. Pynchon is a senior credit analyst and joined the Adviser as a
vice president in 2002. He has been an investment professional since 1988. Prior
to joining the Adviser, Mr. Pynchon was a managing director with Commerce
Capital Markets, where he was responsible for structuring high yield municipal
transactions.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of the material U.S. federal income tax
consequences of acquiring, holding and disposing of Preferred Shares that may be
relevant to a shareholder. This discussion only addresses U.S. federal income
tax consequences to U.S. shareholders who hold their shares as capital assets
and does not address all of the U.S. federal income tax consequences that may be
relevant to particular shareholders in light of their individual circumstances.
This discussion also does not address the tax consequences to shareholders who
are subject to special rules, including, without limitation, financial
institutions, insurance companies, dealers in securities or foreign currencies,
foreign shareholders, shareholders who hold their shares as or in a hedge
against currency risk, a constructive sale, or a conversion transaction,
shareholders who are subject to the alternative minimum tax, or tax-exempt or
tax-deferred plans, accounts, or entities. In addition, the discussion does not
address any state, local, or foreign tax consequences, and it does not address
any U.S. federal tax consequences other than U.S. federal income tax
consequences. The discussion reflects applicable tax laws of the United States
as of the date of this Prospectus, which tax laws may be changed or subject to
new interpretations by the courts or the Internal Revenue Service ("IRS")
retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal income tax concerns affecting the Fund and its
shareholders, and the discussion set forth herein does not constitute tax
advice. Investors are urged to consult their own tax advisers to determine the
specific tax consequences to them of investing in the Fund, including the
applicable federal, state, local and foreign tax consequences to them and the
effect of possible changes in tax laws.
58
The Trust intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code, so that it
generally will not pay U.S. federal income tax on income and capital gains
distributed to shareholders. In order to qualify as a regulated investment
company, which qualification the following discussion assumes, the Trust must
satisfy certain tests regarding the sources of its income and the
diversification of its assets. If the Trust qualifies as a regulated investment
company and, for each taxable year, it distributes to its shareholders an amount
equal to or exceeding the sum of (i) 90% of its "investment company taxable
income" as that term is defined in the Code (which includes, among other things,
dividends, taxable interest, and the excess of any net short-term capital gains
over net long-term capital losses, as reduced by certain deductible expenses)
and (ii) 90% of the excess of its gross tax-exempt interest over certain
disallowed deductions, the Trust generally will not be subject to U.S. federal
income tax on any income of the Trust, including long-term capital gains,
distributed to shareholders. However, if the Trust retains any investment
company taxable income or "net capital gain" (the excess of net long-term
capital gain over net short-term capital loss), it generally will be subject to
U.S. federal income tax at regular corporate tax rates on the amount retained.
The Trust intends to distribute at least annually all or substantially all of
its investment company taxable income, net tax-exempt interest, and net capital
gain. If for any taxable year the Trust did not qualify as a regulated
investment company, it would be treated as a corporation subject to U.S. federal
income tax thereby materially adversely affecting the Trust and its
shareholders.
Under the Code, the Trust will be subject to a nondeductible 4% federal excise
tax on a portion of its undistributed ordinary income and capital gains if it
fails to meet certain distribution requirements with respect to each calendar
year. The Trust intends to make distributions in a timely manner and accordingly
does not expect to be subject to the excise tax, but there can be no assurance
that the Trust's distributions will be sufficient to avoid this tax entirely.
Based in part on the lack of any present intention on the part of the Trust to
redeem or purchase the Preferred Shares at any time in the future, the Trust
intends to take the position that under present law the Preferred Shares will
constitute stock of the Trust and distributions with respect to the Preferred
Shares (other than distributions in redemption of the Preferred Shares that are
treated as exchanges under Section 302(b) of the Code) will constitute dividends
to the extent of the Trust's current or accumulated earnings and profits as
calculated for U.S. federal income tax purposes. This view relies in part on a
published ruling of the IRS stating that certain preferred stock similar in many
material respects to the Preferred Shares represents equity. It is possible,
however, that the IRS might take a contrary position asserting, for example that
the Preferred Shares constitute debt of the Trust. If this position were upheld,
the discussion of the treatment of distributions below would not apply. Instead
distributions by the Trust to holders of Preferred Shares would constitute
interest, whether or not such distributions exceeded the earnings and profits of
the Trust, would be included in full in the income of the recipient and would be
taxed as ordinary income.
The Trust intends to invest a significant portion of its assets in municipal
securities so that it will be permitted to pay "exempt-interest dividends" as
defined under applicable federal income tax law. The Code permits tax-exempt
interest received by the Trust to flow through as tax-exempt exempt-interest
dividends to the Trust's shareholders, provided that the Trust qualifies as a
regulated investment company and at least 50% of the value of the Trust's total
assets at the close of each quarter of its taxable year consists of tax-exempt
obligations, that is, obligations described in Section 103(a) of the Code. That
part of the Trust's net investment income which is attributable to interest from
tax-exempt obligations and which is distributed to shareholders will be
designated by the Trust as an "exempt-interest dividend" under the Code.
Exempt-interest dividends are excluded from a shareholder's gross income under
the Code but are nevertheless required to be reported on the shareholder's U.S.
federal income tax return. The percentage of income designated as tax-exempt is
applied uniformly to all distributions made during each taxable year and may
differ from the actual tax-exempt percentage earned by the Trust during any
particular month. That portion of the Trust's dividends and distributions not
designated as tax-exempt will be taxable as described below.
59
Exempt-interest dividends derived from interest on certain "private activity
bonds" will be items of tax preference that are subject to U.S. federal
alternative minimum tax for individuals or entities that are subject to such
tax, and all exempt-interest dividends may result in or increase a corporate
shareholder's liability for the U.S. federal alternative minimum tax. The Trust
may not be an appropriate investment for persons who are "substantial users" of
facilities financed by industrial revenue or private activity bonds or persons
related to substantial users.
Interest on indebtedness incurred (directly or indirectly) by a shareholder to
purchase or carry shares of the Trust will not be deductible for U.S. federal
income tax purposes to the extent it is deemed under the Code and applicable
regulations to relate to exempt-interest dividends received from the Trust.
Shareholders receiving social security or certain railroad retirement benefits
may be subject to U.S. federal income tax on a portion of such benefits as a
result of receiving investment income, including exempt-interest dividends and
other distributions paid by the Trust.
In accordance with its investment objectives, the Trust invests its assets in a
manner which will provide as large a portion of tax-exempt income as is
consistent with the protection of shareholders' capital. The Trust may from time
to time invest a portion of its portfolio in short-term taxable obligations and
may engage in transactions generating gain or income which is not tax-exempt.
For example, the Trust may purchase non-municipal securities, sell or lend
portfolio securities, enter into repurchase agreements, dispose of rights to
when-issued securities prior to issuance, acquire any debt obligation at a
market discount, acquire certain stripped tax-exempt obligations or their
coupons or enter into swaps, options and futures transactions. The Trust's
distributions from such gain or income will not be "exempt-interest dividends,"
as described above, and accordingly will be taxable.
For U.S. federal income tax purposes, all dividends, other than exempt-interest
dividends, are taxable as described below. In general, assuming that the Trust
has sufficient earnings and profits, dividends from investment company taxable
income are taxable as ordinary income and dividends from net capital gain, if
any, that are designated as capital gain dividends are taxable as long-term
capital gains for U.S. federal income tax purposes without regard to the length
of time the shareholder has held shares of the Trust. Distributions by the Trust
in excess of the Trust's current and accumulated earnings and profits will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's basis in its shares and any such amount in excess of that basis
will be treated as gain from the sale of shares, as discussed below.
As described under the heading "Description of Preferred Shares" above, the
Trust may be required to pay Gross-up Dividends to holders of Preferred Shares.
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
Trust intends to treat such Gross-up Dividends as paid during such prior taxable
year for purposes of the rules governing the Trust'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.
Gross-up Dividends are intended to put holders generally in substantially the
same federal income tax position they would have been in had all of the
dividends paid to them consisted of exempt-interest dividends. However, Gross-up
Dividends will not compensate for any foreign, state or local taxes on
distributions paid by the Trust, including foreign, state or local taxes on the
Gross-up Dividends themselves.
The Trust does not expect to receive any "qualified dividend income" as that
term is defined in Section 1(h)(11) of the Code from its investments, and thus
dividends distributed to individual shareholders attributable to the investment
company taxable income of the Trust (if any) will not qualify for the maximum
15% tax rate on qualified dividend income. Capital gain dividends distributed by
the Fund to individual shareholders, if any, generally will qualify for the
maximum 15% tax rate on long-term capital gains. Absent further legislation, the
maximum 15% tax rate on qualified dividend income and long-term capital gains
will cease to apply to taxable
60
years beginning after December 31, 2008. The U.S. federal income tax status of
all distributions will be reported to shareholders annually.
If the Trust retains any net capital gain for a taxable year, the Trust may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax, (i) will be required to
include in income for U.S. federal income tax purposes, as long-term capital
gain, their proportionate shares of such undistributed amount, and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Trust on
the undistributed amount against their U.S. federal income tax liabilities, if
any, and to claim refunds to the extent the credit exceeds such liabilities.
The IRS has taken the position that if a regulated investment company has two
classes of shares, it must designate distributions made to each class in any
year as consisting of no more than such class's proportionate share of
particular types of income, including tax-exempt interest, net capital gain, and
other income subject to federal income tax. A class's proportionate share of a
particular type of income is determined according to the percentage of total
dividends paid by the regulated investment company to such class. Consequently,
if both common shares and preferred shares are outstanding, the Trust intends to
designate distributions made to the classes of particular types of income in
accordance with each such class's proportionate share of such income. The Trust
will designate dividends qualifying as exempt-interest dividends, capital gain
dividends and other taxable dividends in a manner that allocates such income
between the holders of common shares and preferred shares in proportion to the
total dividends paid to each class during the taxable year, or otherwise as
required by applicable law.
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 Trust currently intends to treat such dividends as having
been paid in the prior taxable year for purposes of determining each class's
proportionate share of a particular type of income with respect to such prior
taxable year. Existing authorities also do not specifically address the
allocation of taxable income among the dividends paid to holders of a class of
shares during or with respect to a taxable year. It is possible that the IRS
could disagree with the Trust's position concerning the treatment of dividends
paid after the close of a taxable year or with the Trust's method of allocation,
in which case the IRS could attempt to recharacterize a portion of the dividends
paid to the holders of Preferred Shares and designated by the Trust 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 Preferred Shares could be subject to tax on
amounts so recharacterized and the Trust could be subject to federal income and
excise tax. In such event, no additional amounts (including Gross-up Dividends)
would be paid by the Trust with respect to dividends so recharacterized to
compensate for any additional tax owed by holders of Preferred Shares.
The Trust may invest to a significant extent in debt obligations that are in the
lowest rating categories or are unrated, including debt obligations of issuers
not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Trust. Tax rules are not entirely clear about issues such as when the Trust may
cease to accrue interest, original issue discount or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the Trust, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
Sales, redemptions, and other dispositions of Preferred Shares generally are
taxable events for shareholders that are subject to tax. Shareholders should
consult their own tax advisers with reference to their individual circumstances
to determine whether any particular transaction in the Fund's shares (including
a redemption of
61
Preferred Shares) is properly treated as a sale or exchange for tax purposes, as
the following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if Preferred Shares are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted basis in the shares
sold. Such gain or loss generally will be treated as long-term gain or loss if
the shares were held for more than one year and otherwise generally will be
treated as short-term gain or loss. Even if a redemption of Preferred Shares is
treated as a sale or exchange, any declared but unpaid dividends distributed to
shareholders in connection with the redeemed shares will be taxable to
shareholders as dividends as described above.
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 Preferred Shares 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.
Any loss recognized by a shareholder upon the sale or other disposition of
shares with a tax holding period of six months or less generally will be
disallowed to the extent of any exempt-interest dividends paid with respect to
the shares, and any portion of such loss that exceeds the amount disallowed will
be treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares. Losses on
sales or other dispositions of shares may be disallowed under "wash sale" rules
in the event a shareholder acquires other shares in the Fund (including those
acquired pursuant to reinvestment of dividends and/or capital gains
distributions) within a period of 61 days beginning 30 days before and ending 30
days after a sale or other disposition of shares.
The Trust's dividends and distributions will generally not qualify to any
material extent for any dividends received deduction that might otherwise be
available for certain dividends received by shareholders that are corporations.
In addition, no portion of the Trust's distributions from net capital gain will
qualify for this deduction.
The exclusion from gross income of exempt-interest dividends for U.S. federal
income tax purposes does not necessarily result in exclusion under the tax laws
of any state or local taxing authority, which laws vary with respect to the
taxation of such income. Many states will exempt from tax that portion of an
exempt-interest dividend which represents interest received by the Trust on that
state's securities, subject in some cases to compliance with concentration
and/or reporting requirements which the Trust makes no commitment to seek to
satisfy. However, the Trust will report annually to its shareholders the
percentage of interest income received by the Trust during the preceding year on
federally tax-exempt obligations indicating, on a state-by-state basis only, the
source of such income. Each shareholder is advised to consult his own tax
adviser regarding the exclusion from gross income, if any, of exempt-interest
dividends under the state and local tax laws applicable to the shareholder.
The Trust is required in certain circumstances to backup withhold on reportable
payments, including dividends (other than exempt-interest dividends), capital
gains distributions, and proceeds of sales or other dispositions of the Trust's
shares made to certain holders of the Trust's shares who do not furnish the
Trust with their correct social security number or other taxpayer identification
number and certain other certifications or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
from payments made to a shareholder may be refunded or credited against such
shareholder's federal income tax liability, if any, provided that the required
information is furnished to the IRS. Backup withholding may be inapplicable for
any year in which the Trust reasonably estimates that at least 95% of its
dividends paid with respect to such year are exempt-interest dividends.
The foregoing is a general and abbreviated summary of the provisions of the Code
and the Treasury regulations in effect as they generally affect the taxation of
the Trust and its shareholders. As noted above, these provisions
62
are subject to change by legislative, judicial or administrative action, and any
such change may be retroactive. A further discussion of the U.S. federal income
tax rules applicable to the Trust can be found in the Statement of Additional
Information which is incorporated by reference into this Prospectus.
Shareholders are urged to consult their tax advisers regarding specific
questions as to U.S. federal, foreign, state, and local income or other taxes.
NET ASSET VALUE
The Trust calculates a net asset value for its common shares every day the New
York Stock Exchange is open when regular trading closes (normally 4:00 p.m.
Eastern time). For purposes of determining the net asset value of a common
share, the value of the securities held by the Trust plus any cash or other
assets (including interest accrued but not yet received) minus all liabilities
(including accrued expenses and indebtedness) and the aggregate liquidation
value of any outstanding preferred shares is divided by the total number of
common shares outstanding at such time. Expenses, including the fees payable to
the Adviser, are accrued daily. Currently, the net asset values of shares of
publicly traded closed-end investment companies investing in municipal
securities are published in Barron's, the Monday edition of The Wall Street
Journal and the Monday and Saturday editions of The New York Times.
The Trust generally values its portfolio securities using readily available
market quotations, a pricing service or a pricing matrix. When prices from these
sources are not available or are considered by the Adviser to be unreliable, the
Trust may use a security's fair value. Fair value is the valuation of a security
determined on the basis of factors other than market value in accordance with
procedures approved by the Trust's Board of Trustees. The Trust also may use the
fair value of a security when the Adviser determines that market price
determined using these methods no longer accurately reflects the value of the
security due to factors affecting one or more relevant securities markets or the
specific issuer. The use of fair value pricing by the Trust may cause the net
asset value of its common shares to differ from the net asset value that would
be calculated using closing market prices. Debt securities with remaining
maturities of 60 days or less are valued at amortized cost, which is a method of
estimating market value and is a fair value methodology approved by the Board of
Trustees. The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation, which is a method, approved by the Board of Trustees, of determining
such instruments' fair value. Positions in options are valued at the last sale
price on the market where any such option is principally traded. Positions in
futures contracts are valued at closing prices for such contracts established by
the exchange on which they are traded. Repurchase agreements are valued at cost
plus accrued interest. This is a method, approved by the Board of Trustees, of
determining such repurchase agreement's fair value.
CERTAIN PROVISIONS OF THE AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS
The Trust's Agreement and Declaration of Trust (the "Declaration of Trust")
includes provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Trust or to change the composition
of its Board of Trustees and could have the effect of depriving shareholders of
an opportunity to sell their shares at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of the Trust.
63
The Board of Trustees is divided into three classes of approximately equal size.
The terms of the Trustees of the different classes are staggered so that
approximately one-third of the Board of Trustees is elected by shareholders each
year.
A Trustee may be removed from office with or without cause by a vote of at least
a majority of the Trustees if such removal is approved by a vote of the holders
of at least 75% of the shares entitled to be voted on the matter.
The Declaration of Trust requires the favorable vote of the holders of at least
75% of the Trust's shares to approve, adopt or authorize the following:
- a merger or consolidation or statutory share exchange of the Trust with any
other corporations
- a sale of all or substantially all of the Trust's assets (other than in the
regular course of the Trust's investment activities)
- a liquidation or dissolution of the Trust
unless such action has been approved, adopted or authorized by the affirmative
vote of at least 75% of the total number of Trustees fixed in accordance with
the By-Laws, in which case the affirmative vote of a majority of the Trust's
shares is required. Following any issuance of preferred shares by the Trust, it
is anticipated that the approval, adoption or authorization of the foregoing
also would require the favorable vote of a majority of the Trust's preferred
shares then entitled to be voted, voting as a separate class.
Conversion of the Trust to an open-end investment company would require an
amendment to the Trust's Declaration of Trust. The amendment would have to be
declared advisable by the Board of Trustees prior to its submission to
shareholders. Such an amendment would require the favorable vote of the holders
of at least 75% of the Trust's outstanding shares (including any preferred
shares) entitled to vote on the matter, voting as a single class (or a majority
of such shares if the amendment was previously approved, adopted or authorized
by 75% of the total number of Trustees fixed in accordance with the By-Laws),
and, assuming preferred shares are issued, the affirmative vote of a majority of
outstanding preferred shares, voting as a separate class. Such a vote also would
satisfy a separate requirement in the 1940 Act that the change be approved by
the shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares of common stock at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
or net asset value per share less such redemption charge, if any, as might be in
effect at the time of a redemption. All redemptions will be made in cash. If the
Trust is converted to an open-end investment company, it could be required to
liquidate portfolio securities to meet requests for redemption, and the common
shares would no longer be listed on the New York Stock Exchange.
Conversion to an open-end investment company would also require changes in
certain of the Trust's investment policies and restrictions, such as those
relating to the leverage and the purchase of illiquid securities.
The Declaration of Trust requires the favorable vote of a majority of the
Trustees followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of the Trust, voting
separately as a class or series, to approve, adopt or authorize certain
transactions with 5% or greater holders of a class or series of shares and their
associates, unless the transaction has been approved by at least 75% of the
Trustees, in which case "a majority of the outstanding voting securities" (as
defined in the 1940 Act) of the Trust shall be required. For purposes of these
provisions, a 5% or greater holder of a class or series of shares (a "Principal
Shareholder") refers to any person who, whether directly or indirectly and
whether alone or together with its affiliates and associates, beneficially owns
5% or more of the outstanding shares of any class or series of
64
shares of beneficial interest of the Trust. The 5% holder transactions subject
to these special approval requirements are:
- the merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder
- the issuance of any securities of the Trust to any Principal Shareholder
for cash, other than pursuant to any automatic dividend reinvestment plan
- the sale, lease or exchange of all or any substantial part of the assets of
the Trust to any Principal Shareholder, except assets having an aggregate
fair market value of less than $1,000,000, aggregating for the purpose of
such computation all assets sold, leased or exchanged in any series of
similar transactions within a 12-month period
- the sale, lease or exchange to the Trust or any subsidiary of the Trust, in
exchange for securities of the Trust, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within a
12-month period
The Declaration of Trust and By-Laws provide that the Board of Trustees has the
power, to the exclusion of shareholders, to make, alter or repeal any of the
By-Laws (except for any By-Law specified not to be amended or repealed by the
Board), subject to the requirements of the 1940 Act. Neither this provision of
the Declaration of Trust, nor any of the foregoing provisions thereof requiring
the affirmative vote of 75% of outstanding shares of the Trust, can be amended
or repealed except by the vote of such required number of shares.
The Trust's By-Laws generally require that advance notice be given to the Trust
in the event a shareholder desires to nominate a person for election to the
Board of Trustees or to transact any other business at an annual meeting of
shareholders. With respect to an annual meeting following the first annual
meeting of shareholders, notice of any such nomination or business must be
delivered to or received at the principal executive offices of the Trust not
less than 90 calendar days nor more than 120 calendar days prior to the
anniversary date of the prior year's annual meeting (subject to certain
exceptions). In the case of the first annual meeting of shareholders, the notice
must be given no later than the tenth calendar day following public disclosure
of the date of the meeting, as specified in the By-Laws. Any notice by a
shareholder must be accompanied by certain information as provided in the
By-Laws.
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through [ ] and [ ],
as lead managers, and [ ] as their representative (together with the lead
managers, the "Representatives"), have severally agreed, subject to the terms
and conditions of the Underwriting Agreement with the Trust and the Adviser, to
purchase from the Trust the number of Preferred Shares set forth opposite their
respective names. The Underwriters are committed to purchase and pay for all of
such Preferred Shares if any are purchased.
NUMBER OF
UNDERWRITER PREFERRED SHARES
--------------------------------------------------------------------------------
[ ] [ ]
[ ] [ ]
[ ] [ ]
------
Total [ ]
======
65
The Underwriters have advised the Trust that they propose initially to offer the
Preferred Shares directly 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 $ per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ 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 Preferred
Shares purchased in the initial public offering on or before , 2003.
The Underwriters will act in Auctions as Broker-Dealers and receive fees as set
forth under "The Auction" and in the Statement of Additional Information. The
Underwriters also may provide information to be used in determining the
Reference Rate.
The Trust anticipates that the Representatives may from time to time act as
brokers and dealers in connection with the execution of the Trust's portfolio
transactions after they have ceased to be principal underwriters of the Trust
under the 1940 Act and, subject to certain conditions, may act as such brokers
and dealers while they are principal underwriters.
In connection with this offering, certain of the Underwriters or selected
dealers may distribute prospectuses electronically.
The Trust and the Adviser have agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act.
As described under "Management of the Trust," will provide
shareholder services to the Trust pursuant to a shareholder servicing agreement
with the Adviser.
VALIDITY OF PREFERRED SHARES
Certain legal matters in connection with the shares offered hereby have been
passed upon for the Trust by Hale and Dorr LLP, Boston, Massachusetts. Certain
matters have been passed upon for the Underwriters by [ ].
66
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
PAGE
--------------------------------------------------------------------------------
Use of proceeds
Investment objectives and policies
Investment restrictions
Management of the Trust
Additional information concerning the auctions for the Preferred Shares
Rating agency guidelines
Portfolio transactions
Repurchase of common shares
Federal income tax matters
Performance-related, comparative and other information
Experts
Additional information
Financial statements and independent auditors' report
Appendix A--Description of ratings
Appendix B--Proxy voting guidelines and procedures
Appendix C--Auction procedures
Appendix D--Settlement procedures
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its shareholders and to
safeguarding their non-public personal information. The following information is
provided to help you understand what personal information the Trust collects,
how the Trust protects that information and why, in certain cases, the Trust may
share information with select other parties.
Generally, the Trust does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Trust. The Trust does not
disclose any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third-party
administrator).
The Trust restricts access to non-public personal information about its
shareholders to employees of the Trust's investment adviser and its affiliates
with a legitimate business need for the information. The Trust maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders. For more information about
the Trust's privacy policies, please visit www.pioneerfunds.com.
67
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 [Rating Agency] 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 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 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 Preferred Shares or on behalf of a
Potential Beneficial Owner.
"Applicable Rate" means the rate per annum at which cash dividends are payable
on Preferred Shares for any Dividend Period.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agency Agreement" means the agreement entered into between the Trust
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"Auction Agent" means [ ] 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 Preferred Shares.
"Auction Date" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends" in this Prospectus.
"Auction Procedures" means the procedures for conducting Auctions set forth in
Appendix C to the Statement of Additional Information.
68
"Available Preferred Shares" has the meaning specified under "Description of
Preferred Shares--Auction Procedures--Determination of Sufficient Clearing Bids,
Winning Bid Rate and Applicable Rate" in 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 Preferred Shares or a Broker-Dealer that holds Preferred Shares for its own
account.
"Bid" has the meaning specified under "Description of Preferred Shares--Auction
Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.
"Bidder" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
"Broker-Dealer" has the meaning specified under "Description of Preferred
Shares--The Auction--Broker-Dealer Agreements" in this Prospectus.
"Broker-Dealer Agreement" has the meaning specified under "Description of
Preferred Shares--The Auction--Broker-Dealer Agreements" in 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.
"Commercial Paper Dealers" means __________ and such other commercial paper
dealer or dealers as the Trust from time to time may appoint or, in lieu
thereof, their respective affiliates and successors.
"Cure Date" has the meaning specified under "Description of Preferred
Shares--Redemption--Mandatory Redemption" in this Prospectus.
"Date of Original Issue" means, with respect to any share of Preferred Shares,
the date on which such share first is issued by the Trust.
"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
[Rating Agency] or A (having a remaining maturity of 12 months or less), A-1+ or
SP-1+ by S&P.
"Dividend Payment Date" has the meaning specified under "Description of
Preferred Shares--Dividends--General" in this Prospectus.
"Dividend Period" has the meaning specified under "Description of Preferred
Shares--Dividends--General" in this Prospectus.
"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Trust that is listed as the holder of record of Preferred
Shares in the records of the Auction Agent.
"Trust" means Pioneer Municipal High Income Trust, a Delaware statutory trust
that is the issuer of the Preferred Shares.
"Gross-up Dividend" has the meaning specified under "Description of Preferred
Shares--Dividends--Gross-up Dividends" in this Prospectus.
"Hold Order" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Orders By Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
69
"Initial Dividend Payment Date" means, with respect to a series of Preferred
Shares, the Initial Dividend Payment Date as determined by the Board of Trustees
or pursuant to their delegated authority with respect to such series.
"Initial Dividend Period" means, for each series of Preferred Shares, 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.
"Long-Term Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on Preferred Shares" in this Prospectus.
"Mandatory Redemption Price" has the meaning specified under "Description of
Preferred Shares -- Redemption--Mandatory Redemption" in 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.
"Maximum Applicable Rate" has the meaning specified under "Description of
Preferred Shares--Auction Procedures--Orders by Beneficial Owners, Potential
Beneficial Owners, Existing Holders and Potential Holders" in this Prospectus.
"[Rating Agency]" means [Rating Agency] or its successors.
"1940 Act" means the Investment Company Act of 1940, and the regulations
thereunder, each as amended from time to time.
"1940 Act Preferred Shares Asset Coverage" has the meaning specified under
"Rating agency guidelines" in this Prospectus.
"1940 Act Cure Date" has the meaning specified under "Description of Preferred
Shares--Asset Maintenance--1940 Act Preferred Shares Asset Coverage" in this
Prospectus.
"Non-Call Period" has the meaning set forth in the definition of "Specific
Redemption Provisions" below.
"Non-Payment Period" has the meaning specified under "Description of Preferred
Shares--Dividends--Non-Payment Period; Late Charge" in this Prospectus.
"Non-Payment Period Rate" has the meaning specified under "Description of
Preferred Shares--Dividends--Non-Payment Period; Late Charge" in this
Prospectus.
"Normal Dividend Payment Date" has the meaning specified under "Description of
Preferred Shares--Dividends--General" in this Prospectus.
"Notice of Revocation" has the meaning specified under "Description of Preferred
Shares--Dividends--Notification of Dividend Period" in this Prospectus.
"Notice of Special Dividend Period" has the meaning. specified under
"Description of Preferred Shares--Dividends--Notification of Dividend Period"
in this Prospectus.
"Optional Redemption Price" has the meaning specified under "Description of
Preferred Shares--Redemption--Optional Redemption" in this Prospectus.
"Order" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
70
"Other Securities" has the meaning set forth in the definition of "[Rating
Agency] Eligible Asset" above.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of Preferred Shares but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional Preferred Shares.
"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 Preferred Shares (or, in the case of an Existing Holder, additional
Preferred Shares). "Preference Item" has the meaning specified under
"Description of Preferred Shares--Dividends--General" in this Prospectus.
"Preferred Shares" means the Preferred Shares with par value $0.00001 per share
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 Trust.
"Preferred Shares Basic Maintenance Amount" has the meaning specified under
"Description of Preferred Shares--Asset Maintenance--Preferred Shares Basic
Maintenance Amount" in this Prospectus.
"Premium Call Period" has the meaning set forth in the definition of "Specific
Redemption Provisions" below.
"Rating Agency" means a nationally recognized statistical rating organization.
"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.
"Request for Special Dividend Period" has the meaning specified under
"Description of Preferred Shares--Dividends--Notification of Dividend Period"
in this Prospectus.
"Response" has the meaning specified under "Description of Preferred
Shares--Dividends--Notification of Dividend Period" in this Prospectus.
"Retroactive Taxable Allocation" has the meaning specified under "Description of
Preferred Shares--Dividends--Gross-up Dividends" in this Prospectus.
"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Trust that
agrees to follow the procedures required to be followed by such securities
depository in connection with the Preferred Shares.
"Sell Order" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.
"7-Day Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on Preferred Shares" in this Prospectus.
"Short-Term Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on Preferred Shares" in this Prospectus.
"Special Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on Preferred Shares" in this Prospectus.
71
"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 Preferred Shares 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 Preferred
Shares 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.
"Submission Deadline" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Submission of Orders by Broker-Dealers to Auction
Agent" in this Prospectus.
"Submitted Bid" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" in this Prospectus.
"Submitted Hold Order" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" in this Prospectus.
"Submitted Order" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" in this Prospectus.
"Submitted Sell Order" has the meaning specified under "Description of Preferred
Shares--Auction Procedures--Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" in this Prospectus.
"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.
"Substitute Rating Agency" shall mean a nationally recognized statistical rating
organization by the Trust to act as a substitute rating agency to determine the
credit ratings of the Preferred Shares.
"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 Trust may not utilize a successor index to the
Kenny Index unless [Rating Agency] provides the Trust with written confirmation
that the use of such successor index will not adversely affect the then-current
[Rating Agency] rating of the Preferred Shares.
"Taxable Income" has the meaning specified under "Prospectus summary--Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividends" in this Prospectus.
72
"Treasury Bonds" means United States Treasury Bonds or Notes. "Underwriters" has
the meaning specified under "Prospectus summary--The Offering" in 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.
73
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[PIONEER INVESTMENTS(R) LOGO]
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST __, 2003
PIONEER MUNICIPAL HIGH INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
Pioneer Municipal High Income Trust (the "trust") is a recently organized,
diversified, closed-end management investment company. This statement of
additional information relating to preferred shares does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto dated ________, 2003. This statement of additional information does not
include all information that a prospective investor should consider before
purchasing the trust's Series ___ auction preferred shares, Series ___ auction
preferred shares, Series ___ auction preferred shares, Series ___ auction
preferred shares or Series ___ auction preferred shares (collectively, the
"Preferred Shares" or "APS"), 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 1-800-225-6292. You may also obtain a copy of
the prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov).
TABLE OF CONTENTS
Use of Proceeds.............................................................
Investment Objectives and Policies..........................................
Investment Restrictions.....................................................
Management of the Trust.....................................................
Additional Information Concerning the Auctions for the Preferred Shares.....
Rating Agency Guidelines....................................................
Portfolio Transactions......................................................
Federal Income Tax Matters..................................................
Performance-Related, Comparative and Other Information......................
Experts.....................................................................
Additional Information......................................................
Financial Statements and Independent Auditors' Report.......................
Appendix A--Description of Ratings..........................................A-1
Appendix B--Proxy Voting Guidelines and Procedures..........................B-1
Appendix C--Auction Procedures..............................................C-1
Appendix D--Settlement Procedures...........................................D-1
This statement of additional information is dated ________, 2003.
INVESTMENT OBJECTIVES AND POLICIES
The prospectus presents the investment objectives and the principal investment
strategies and risks of the trust. This section supplements the disclosure in
the trust's prospectus and provides additional information on the trust's
investment policies or restrictions. Restrictions or policies stated as a
maximum percentage of the trust's assets are only applied immediately after a
portfolio investment to which the policy or restriction is applicable (other
than the limitations on borrowing). Accordingly, any later increase or decrease
resulting from a change in values, net assets or other circumstances will not be
considered in determining whether the investment complies with the trust's
restrictions and policies.
PRIMARY INVESTMENTS
Under normal circumstances, the trust invests substantially all (at least 80%)
of its assets (net assets plus borrowing for investment purposes) in debt
securities and other obligations issued by or on behalf of states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest on which is
exempt from regular federal income tax ("municipal securities"). This policy is
fundamental and may not be changed without shareholder approval.
MUNICIPAL OBLIGATIONS
MUNICIPAL NOTES. Municipal securities in the form of notes generally are used to
provide for short-term capital needs, in anticipation of an issuer's receipt of
other revenues or financing, and typically have maturities of up to three years.
Such instruments may include tax anticipation notes, revenue anticipation notes,
bond anticipation notes, tax and revenue anticipation notes, construction loan
notes, bank notes and commercial paper.
o Tax Anticipation Notes ("TANs") are issued to finance the working capital
needs of governments. Generally, they are issued in anticipation of various tax
revenues, such as income, sales, property, use and business taxes, and are
payable from these specific future taxes. 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.
o Revenue Anticipation Notes ("RANs") are issued in expectation of receipt of
other kinds of revenue, such as federal revenues available under federal revenue
sharing programs. 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.
o Bond Anticipation Notes ("BANs") are issued to provide interim financing until
long-term bond financing can be arranged. In most cases, the long-term bonds
then provide the funds needed for repayment of the notes. 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.
o Tax and Revenue Anticipation Notes combine the funding sources of both tax
anticipation notes and revenue anticipation notes.
o Construction Loan Notes are sold to provide construction financing. Mortgage
notes insured by the Federal Housing Authority secure these notes; however, the
proceeds from the insurance may be less than the economic equivalent of the
payment of principal and interest on the mortgage note if there has been a
default.
o 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
have risks similar to the risks associated with TANs and RANs.
o Tax-Exempt Commercial Paper typically represent short-term, unsecured,
negotiable promissory notes. These obligations are issued by state and local
governments and their agencies to finance working capital needs of
municipalities or to provide interim construction financing and are paid from
general revenues of municipalities or are refinanced with long-term debt. In
most cases, tax-exempt commercial paper is backed by letters of credit, lending
agreements, note repurchase agreements or other credit facility agreements
offered by banks or other institutions. Payment of principal and interest on
issues of tax-exempt commercial paper may be made from various sources, to the
extent the funds are available therefrom. Maturities of tax-exempt commercial
paper generally will be shorter that the maturities of TANs, BANs or RANs. There
is a limited secondary marked for issues of tax-exempt commercial paper.
Certain municipal bonds 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 market index. While the
various types of notes described above as a group currently represent the major
portion of the tax-exempt note market, other types of notes are or may become
available in the marketplace and the trust may invest in such other types of
notes to the extent permitted under its investment objectives, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.
AUCTION RATE SECURITIES. The trust may invest in auction rate securities.
Auction rate securities include auction rate municipal securities and auction
rate preferred securities issued by closed-end investment companies that invest
primarily in municipal securities (collectively, "auction rate securities").
Provided that the auction mechanism is successful, auction rate securities
usually permit the holder to sell the securities in an auction at par value at
specified intervals. The dividend is reset by "Dutch" auction in which bids are
made by broker-dealers and other institutions for a certain amount of securities
at a specified minimum yield. The dividend rate set by the auction is the lowest
interest or dividend rate that covers all securities offered for sale. While
this process is designed to permit auction rate securities to be traded at par
value, there is some risk that an auction will fail due to insufficient demand
for the securities. The trust will take the time remaining until the next
scheduled auction date into account for purpose of determining the securities'
duration. The trust's investments in auction rate securities of closed-end funds
are subject to the limitations prescribed by the Investment Company Act of 1940,
as amended (the "1940 Act").
Certain issuers of structured products, such as hybrid instruments, may be
deemed to be investment companies as defined in the 1940 Act. As a result, the
trust's investments in these products may be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.
MUNICIPAL BONDS WITH CREDIT ENHANCEMENTS. The trust 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, non-governmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal and
interest will be paid when due. The insurance only entitles the trust to receive
the face or par value of the securities held by the trust. The insurance does
not guarantee the market value of the municipal securities or the value of the
shares of the trust. The trust may utilize new issue or secondary market
insurance. A bond issuer who wishes to increase the credit rating of a security
purchases a new issue insurance policy. By paying a premium and meeting the
insurer's underwriting standards, the bond issuer is able to obtain a high
credit rating (usually, Aaa from Moody's or AAA from Standard & Poor's) for the
issued security. Such insurance is likely to increase the purchase price and
resale value of the security. New issue insurance policies are non-cancelable
and continue in force as long as the bonds are outstanding. A secondary market
insurance policy is purchased by an investor subsequent to a bond's original
issuance and generally insures a particular bond for the remainder of its term.
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 re-marketed
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.
ZERO-COUPON BONDS AND STEP-UPS. Zero-coupon securities are debt obligations that
do not entitle the holder to any periodic payments of interest either for the
entire life of the obligation or for an initial period after the issuance of the
obligations. Like zero-coupon bonds, "step-up" bonds pay no interest initially
but eventually begin to pay a coupon rate prior to maturity, which rate may
increase at stated intervals during the life of the security. Each of these
instruments is typically issued and traded at a deep discount from its face
amount. The amount of the discount varies depending on such factors as the time
remaining until maturity of the securities, prevailing interest rates, the
liquidity of the security and the perceived credit quality of the issuer. The
market prices of zero-coupon bonds and step-ups generally are more volatile than
the market prices of debt instruments that pay interest currently and in cash
and are likely to respond to changes in interest rates to a greater degree than
do other types of securities having similar maturities and credit quality. In
order to satisfy a requirement for qualification as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"), an
investment company, such as the trust, must distribute each year at least 90% of
its net investment income, including the original issue discount accrued on
zero-coupon bonds and step-ups. Because the trust will not on a current basis
receive cash payments from the issuer of these securities in respect of any
accrued original issue discount, in some years the trust may have to distribute
cash obtained from selling other portfolio holdings of the trust. In some
circumstances, such sales might be necessary in order to satisfy cash
distribution requirements even though investment considerations might otherwise
make it undesirable for the trust to sell securities at such time. Under many
market conditions, investments in zero-coupon bonds and step-ups may be
illiquid, making it difficult for the trust to dispose of them or determine
their current value.
STRUCTURED NOTES AND HYBRID INSTRUMENTS. The trust may invest in "structured"
notes, which are debt obligations the principal and/or interest on which is
determined by reference to the performance of a benchmark asset, market or
interest rate, such as selected securities, an index of securities or specified
interest rates, or the differential performance of two assets or markets, such
as indexes reflecting taxable and tax-exempt bonds. Depending on the terms of
the note, the trust 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 that will serve to magnify the
potential for gain and the risk of loss. The trust currently intends that any
use of structured notes will be for the purpose of reducing the interest rate
sensitivity of the trust's portfolio (and, thereby, decreasing the trust's
exposure to interest rate risk) and, in any event, that the interest income one
the notes will normally be exempt from federal income tax. Like other
sophisticated strategies, the trust's use of the structured notes may not work
as intended; for example, the change in the value of structured notes may not
match very closely the change in the value of the bonds that the structured
notes were purchased to hedge.
The trust may invest in other types of "hybrid" instruments that combine the
characteristics of securities, futures, and options. For example, the principal
amount or interest of a hybrid could be tied (positively or negatively) to the
price of some securities index or another interest rate (each a "benchmark").
The interest rate or (unlike many debt obligations) the principal amount payable
at maturity of a hybrid security may be increased or decreased, depending on
changes in the value of the benchmark. 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 trust to the credit risk of
the issuer of the hybrids. These risks may cause significant fluctuations in the
net asset value of the trust.
U.S. GOVERNMENT SECURITIES
U.S. government securities in which the trust may invest include debt
obligations of varying maturities issued by the U.S. Treasury or issued or
guaranteed by an agency or instrumentality of the U.S. government, including the
Federal Housing Administration, Federal Financing Bank, Farmers Home
Administration, Export-Import Bank of the U.S., Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association ("FNMA"), Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Student Loan Marketing Association,
Resolution Trust Corporation and various institutions that previously were or
currently are part of the Farm Credit System (which has been undergoing
reorganization since 1987). Some U.S. government securities, such as U.S.
Treasury bills, Treasury notes and Treasury bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others are supported by: (i) the right of
the issuer to borrow from the U.S. Treasury, such as securities of the Federal
Home Loan Banks; (ii) the discretionary authority of the U.S. government to
purchase the agency's obligations, such as securities of the FNMA; or (iii) only
the credit of the issuer. No assurance can be given that the U.S. government
will provide financial support in the future to U.S. government agencies,
authorities or instrumentalities that are not supported by the full faith and
credit of the United States. Securities guaranteed as to principal and interest
by the U.S. government, its agencies, authorities or instrumentalities include:
(i) securities for which the payment of principal and interest is backed by an
irrevocable letter of credit issued by the U.S. government or any of its
agencies, authorities or instrumentalities; and (ii) participations in loans
made to non-U.S. governments or other entities that are so guaranteed. The
secondary market for certain of these participations is limited and, therefore,
may be regarded as illiquid.
U.S. government securities may include zero coupon securities that may be
purchased when yields are attractive and/or to enhance portfolio liquidity. Zero
coupon U.S. government securities are debt obligations that are issued or
purchased at a significant discount from face value. The discount approximates
the total amount of interest the security will accrue and compound over the
period until maturity or the particular interest payment date at a rate of
interest reflecting the market rate of the security at the time of issuance.
Zero coupon U.S. government securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but generally require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. government securities
that make regular payments of interest. The trust accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the fund's
distribution obligations, in which case the trust will forgo the purchase of
additional income producing assets with these funds. Zero coupon U.S. government
securities include STRIPS and CUBES, which are issued by the U.S. Treasury as
component parts of U.S. Treasury bonds and represent scheduled interest and
principal payments on the bonds.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
The trust may purchase and sell securities, including U.S. government
securities, on a when-issued, delayed delivery or forward commitment basis.
Typically, no income accrues on securities the trust has committed to purchase
prior to the time delivery of the securities is made, although the trust may
earn income on securities it has segregated. See "Asset Segregation."
When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the trust assumes the rights and risks of ownership of the
security, including the risk of price fluctuations, and takes such fluctuations
into account when determining its net asset value. Because the trust is not
required to pay for the security until the delivery date, these risks are in
addition to the risks associated with the trust's other investments. If the
trust remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.
When the trust has sold a security on a when-issued, delayed delivery, or
forward commitment basis, the trust 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 trust could miss a favorable price or
yield opportunity or could suffer a loss. The trust 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 trust may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.
The trust, as a holder of the securities of other investment companies, will
bear its pro rata portion of the other investment companies' expenses, including
advisory fees. These expenses are in addition to the direct expenses of the
trust's own operations.
ASSET SEGREGATION
The 1940 Act requires that the trust segregate assets in connection with certain
types of transactions that may have the effect of leveraging the trust's
portfolio. If the trust enters into a transaction requiring segregation, such as
a forward commitment, the custodian or Pioneer Investment Management, Inc., the
trust's investment adviser ("Pioneer"), will segregate liquid assets in an
amount required to comply with the 1940 Act. Such segregated assets will be
valued at market daily. If the aggregate value of such segregated assets
declines below the aggregate value required to satisfy the 1940 Act, additional
liquid assets will be segregated.
INTEREST RATE TRANSACTIONS
INTEREST RATE SWAPS, COLLARS, CAPS AND FLOORS. In order to hedge the value of
the trust's portfolio against interest rate fluctuations or to enhance the
trust's income, the trust may, but is not required to, enter into various
interest rate transactions such as interest rate swaps and the purchase or sale
of interest rate caps and floors. To the extent that the trust enters into these
transactions, the trust expects to do so primarily to preserve a return or
spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the trust anticipates purchasing
at a later date. The trust intends to use these transactions primarily as a
hedge and not as a speculative investment. However, the trust also may invest in
interest rate swaps to enhance income or to increase the trust's yield, for
example, during periods of steep interest rate yield curves (i.e., wide
differences between short-term and long-term interest rates). The trust is not
required to hedge its portfolio and may choose not to do so. The trust cannot
guarantee that any hedging strategies it uses will work.
In an interest rate swap, the trust exchanges with another party their
respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments). For example, if the trust holds a
debt instrument with an interest rate that is reset only once each year, it may
swap the right to receive interest at this fixed rate for the right to receive
interest at a rate that is reset every week. This would enable the trust to
offset a decline in the value of the debt instrument due to rising interest
rates but would also limit its ability to benefit from falling interest rates.
Conversely, if the trust holds a debt instrument with an interest rate that is
reset every week and it would like to lock in what it believes to be a high
interest rate for one year, it may swap the right to receive interest at this
variable weekly rate for the right to receive interest at a rate that is fixed
for one year. Such a swap would protect the trust from a reduction in yield due
to falling interest rates and may permit the trust to enhance its income through
the positive differential between one week and one year interest rates, but
would preclude it from taking full advantage of rising interest rates.
The trust usually will enter into interest rate swaps on a net basis (i.e., the
two payment streams are netted out with the trust receiving or paying, as the
case may be, only the net amount of the two payments). The net amount of the
excess, if any, of the trust's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and an amount of cash
or liquid instruments having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the trust's
custodian. If the interest rate swap transaction is entered into on other than a
net basis, the full amount of the trust's obligations will be accrued on a daily
basis, and the full amount of the trust's obligations will be maintained in a
segregated account by the trust's custodian.
The trust also may engage in interest rate transactions in the form of
purchasing or selling interest rate caps or floors. The trust will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (i.e., the reference amount with respect to which interest obligations
are determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor. The trust will not enter into caps or floors if, on a
net basis, the aggregate notional principal amount with respect to such
agreements exceeds the net assets of the trust.
Typically, the parties with which the trust will enter into interest rate
transactions will be broker-dealers and other financial institutions. The trust
will not enter into any interest rate swap, cap or floor transaction unless the
unsecured senior debt or the claims-paying ability of the other party thereto is
rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose
creditworthiness is believed by Pioneer to be equivalent to such rating. If
there is a default by the other party to such a transaction, the trust will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid in comparison with other similar instruments traded in the
interbank market. Caps and floors, however, are less liquid than swaps. Certain
federal income tax requirements may limit the trust's ability to engage in
interest rate swaps.
CREDIT DEFAULT SWAP AGREEMENTS. The trust may enter into credit default swap
agreements. The "buyer" in a credit default contract is obligated to pay the
"seller" a periodic stream of payments over the term of the contract provided
that no event of default on an underlying reference obligation has occurred. If
an event of default occurs, the seller must pay the buyer the "par value" (full
notional value) of the reference obligation in exchange for the reference
obligation. The trust may be either the buyer or seller in the transaction. If
the trust is a buyer and no event of default occurs, the trust loses its
investment and recovers nothing. However, if an event of default occurs, the
buyer receives full notional value for a reference obligation that may have
little or no value. As a seller, the trust receives a fixed rate of income
throughout the term of the contract, which typically is between six months and
three years, provided that there is no default event. If an event of default
occurs, the seller must pay the buyer the full notional value of the reference
obligation.
Credit default swaps involve greater risks than if the trust had invested in the
reference obligation directly. In addition to general market risks, credit
default swaps are subject to illiquidity risk, counterparty risk and credit
risks. The trust will enter into swap agreements only with counterparties who
are rated investment grade quality by at least one nationally recognized
statistical rating organization at the time of entering into such transaction or
whose creditworthiness is believed by Pioneer to be equivalent to such rating. A
buyer also will lose its investment and recover nothing should no event of
default occur. If an event of default were to occur, the value of the reference
obligation received by the seller, coupled with the periodic payments previously
received, may be less than the full notional value it pays to the buyer,
resulting in a loss of value to the trust. When the trust acts as a seller of a
credit default swap agreement it is exposed to many of the same risks of
leverage described under "Risk factors--Leverage" and "Leverage" in the
prospectus since if an event of default occurs the seller must pay the buyer the
full notional value of the reference obligation.
The trust may in the future employ new or additional investment strategies and
hedging instruments if those strategies and instruments are consistent with the
trust's investment objectives and are permissible under applicable regulations
governing the trust.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To hedge against changes in
interest rates or securities prices or to seek to increase total return, the
trust may purchase and sell various kinds of futures contracts, and purchase and
write (sell) call and put options on any of such futures contracts. The trust
may also enter into closing purchase and sale transactions with respect to any
of such contracts and options. The futures contracts may be based on various
securities (such as U.S. government securities), securities indices and other
financial instruments and indices. The trust will engage in futures and related
options transactions for bona fide hedging and non-hedging purposes as described
below. All futures contracts entered into by the trust are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the Commodity
Futures Trading Commission (the "CFTC").
FUTURES CONTRACTS. A futures contract may generally be described as an agreement
between two parties to buy and sell particular financial instruments for an
agreed price during a designated month (or to deliver the final cash settlement
price, in the case of a contract relating to an index or otherwise not calling
for physical delivery at the end of trading in the contract).
When interest rates are rising or securities prices are falling, the trust can
seek to offset a decline in the value of its current portfolio securities
through the sale of futures contracts. When interest rates are falling or
securities prices are rising, the trust, through the purchase of futures
contracts, can attempt to secure better rates or prices than might later be
available in the market when it effects anticipated purchases.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting transactions which may result in a profit
or a loss. While futures contracts on securities will usually be liquidated in
this manner, the trust may instead make, or take, delivery of the underlying
securities whenever it appears economically advantageous to do so. A clearing
corporation associated with the exchange on which futures on securities are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to establish
with more certainty the effective price, rate of return on portfolio securities
and securities that the trust owns or proposes to acquire. The trust may, for
example, take a "short" position in the futures market by selling futures
contracts in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the trust's portfolio securities. Such
futures contracts may include contracts for the future delivery of securities
held by the trust or securities with characteristics similar to those of the
trust's portfolio securities. If, in the opinion of Pioneer, there is a
sufficient degree of correlation between price trends for the trust's portfolio
securities and futures contracts based on other financial instruments,
securities indices or other indices, the trust may also enter into such futures
contracts as part of its hedging strategies. Although under some circumstances
prices of securities in the trust's portfolio may be more or less volatile than
prices of such futures contracts, Pioneer will attempt to estimate the extent of
this volatility difference based on historical patterns and compensate for any
such differential by having the trust enter into a greater or lesser number of
futures contracts or by attempting to achieve only a partial hedge against price
changes affecting the trust's portfolio securities. When hedging of this
character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures
position. On the other hand, any unanticipated appreciation in the value of the
trust's portfolio securities would be substantially offset by a decline in the
value of the futures position.
On other occasions, the trust may take a "long" position by purchasing futures
contracts. This may be done, for example, when the trust anticipates the
subsequent purchase of particular securities when it has the necessary cash, but
expects the prices then available in the market to be less favorable than prices
that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on futures
contracts will give the trust the right (but not the obligation) for a specified
price to sell or to purchase, respectively, the underlying futures contract at
any time during the option period. As the purchaser of an option on a futures
contract, the trust obtains the benefit of the futures position if prices move
in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may
partially offset a decline in the value of the trust's assets. By writing a call
option, the trust becomes obligated, in exchange for the premium, to sell a
futures contract (if the option is exercised), which may have a value higher
than the exercise price. Conversely, the writing of a put option on a futures
contract generates a premium which may partially offset an increase in the price
of securities that the trust intends to purchase. However, the trust becomes
obligated to purchase a futures contract (if the option is exercised) which may
have a value lower than the exercise price. Thus, the loss incurred by the trust
in writing options on futures is potentially unlimited and may exceed the amount
of the premium received. The trust will incur transaction costs in connection
with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same series. There
is no guarantee that such closing transactions can be effected. The trust's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. The trust will engage in futures and related options
transactions only for bona fide hedging or non-hedging purposes in accordance
with CFTC regulations which permit principals of an investment company
registered under the 1940 Act to engage in such transactions without registering
as commodity pool operators. The trust will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the trust or which the trust expects to purchase. Except as stated below, the
trust's futures transactions will be entered into for traditional hedging
purposes--i.e., futures contracts will be sold to protect against a decline in
the price of that the trust owns, or futures contracts will be purchased to
protect the trust against an increase in the price of securities it intends to
purchase. As evidence of this hedging intent, the trust expects that on 75% or
more of the occasions on which it takes a long futures or option position
(involving the purchase of futures contracts), the trust will have purchased, or
will be in the process of purchasing, equivalent amounts of related securities
in the cash market at the time when the futures or option position is closed
out. However, in particular cases, when it is economically advantageous for the
trust to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging definition, a
CFTC regulation permits the trust to elect to comply with a different test,
under which the sum of the amounts of initial margin deposits on the trust's
existing non-hedging futures contracts and premiums paid for options on futures
entered into for non-hedging purposes (net of the amount the positions are "in
the money") would not exceed 5% of the market value of the trust's total assets.
The trust will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Code for maintaining its qualification as a regulated investment company for
federal income tax purposes.
Futures contracts and related options involve brokerage costs, require margin
deposits and, in the case of contracts and options obligating the trust to
purchase securities, require the trust to segregate assets to cover such
contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while the trust may benefit from the use of futures and options on futures,
unanticipated changes in interest rates or securities prices may result in a
poorer overall performance for the trust than if it had not entered into any
futures contracts or options transactions. In the event of an imperfect
correlation between a futures position and a portfolio position which is
intended to be protected, the desired protection may not be obtained and the
trust may be exposed to risk of loss.
OPTIONS ON SECURITIES AND SECURITIES INDICES
The trust may purchase put and call options on any security in which it may
invest or options on any securities index based on securities in which it may
invest. The trust would also be able to enter into closing sale transactions in
order to realize gains or minimize losses on options it has purchased.
WRITING CALL AND PUT OPTIONS ON SECURITIES. A call option written by the trust
obligates the trust to sell specified securities to the holder of the option at
a specified price if the option is exercised at any time before the expiration
date. All call options written by the trust are covered, which means that the
trust will own the securities subject to the options as long as the options are
outstanding, or the trust will use the other methods described below. The
trust's purpose in writing covered call options is to realize greater income
than would be realized on portfolio securities transactions alone. However, the
trust may forgo the opportunity to profit from an increase in the market price
of the underlying security.
A put option written by the trust would obligate the trust to purchase specified
securities from the option holder at a specified price if the option is
exercised at any time before the expiration date. All put options written by the
trust would be covered, which means that the trust would have segregated assets
with a value at least equal to the exercise price of the put option. The purpose
of writing such options is to generate additional income for the trust. However,
in return for the option premium, the trust accepts the risk that it may be
required to purchase the underlying security at a price in excess of its market
value at the time of purchase.
Call and put options written by the trust will also be considered to be covered
to the extent that the trust's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the
trust. In addition, a written call option or put may be covered by entering into
an offsetting forward contract and/or by purchasing an offsetting option or any
other option which, by virtue of its exercise price or otherwise, reduces the
trust's net exposure on its written option position.
WRITING CALL AND PUT OPTIONS ON SECURITIES INDICES. The trust may also write
(sell) covered call and put options on any securities index composed of
securities in which it may invest. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price
fluctuations in a group of securities or segments of the securities market
rather than price fluctuations in a single security.
The trust may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional consideration if cash in such
amount is segregated) upon conversion or exchange of other securities in its
portfolio. The trust may cover call and put options on a securities index by
segregating assets with a value equal to the exercise price.
PURCHASING CALL AND PUT OPTIONS. The trust would normally purchase call options
in anticipation of an increase in the market value of securities of the type in
which it may invest. The purchase of a call option would entitle the trust, in
return for the premium paid, to purchase specified securities at a specified
price during the option period. The trust would ordinarily realize a gain if,
during the option period, the value of such securities exceeded the sum of the
exercise price, the premium paid and transaction costs; otherwise the trust
would realize either no gain or a loss on the purchase of the call option.
The trust would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle
the trust, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of the trust's
holdings. Put options may also be purchased by the trust for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. The trust would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise the
trust would realize either no gain or a loss on the purchase of the put option.
Gains and losses on the purchase of protective put options would tend to be
offset by countervailing changes in the value of the underlying portfolio
securities.
The trust may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
RISKS OF TRADING OPTIONS. There is no assurance that a liquid secondary market
on an options exchange will exist for any particular exchange-traded option, or
at any particular time. If the trust is unable to effect a closing purchase
transaction with respect to covered options it has written, the trust will not
be able to sell the underlying securities or dispose of its segregated assets
until the options expire or are exercised. Similarly, if the trust is unable to
effect a closing sale transaction with respect to options it has purchased, it
will have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options Clearing Corporation (the "OCC")
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange, if any, that had been issued by the OCC as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms.
The trust may purchase and sell options that are traded on U.S. exchanges and
options traded over the counter with broker-dealers who make markets in these
options. The ability to terminate over-the-counter options is more limited than
with exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations.
Transactions by the trust in options on securities and indices will be subject
to limitations established by each of the exchanges, boards of trade or other
trading facilities governing the maximum number of options in each class which
may be written or purchased by a single investor or group of investors acting in
concert. Thus, the number of options which the trust may write or purchase may
be affected by options written or purchased by other investment advisory clients
of Pioneer. An exchange, board of trade or other trading facility may order the
liquidations of positions found to be in excess of these limits, and it may
impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on Pioneer's ability to predict future
price fluctuations and the degree of correlation between the options and
securities markets.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price movements
can take place in the underlying markets that cannot be reflected in the options
markets.
In addition to the risks of imperfect correlation between the trust's portfolio
and the index underlying the option, the purchase of securities index options
involves the risk that the premium and transaction costs paid by the trust in
purchasing an option will be lost. This could occur as a result of unanticipated
movements in the price of the securities comprising the securities index on
which the option is based.
ILLIQUID SECURITIES
The trust may invest up to 20% of its total assets in securities which are
illiquid at the time of investment. 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 trust 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 Securities Act of 1933, as
amended (the "1933 Act") and certain commercial paper that Pioneer 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.
INVESTMENT RESTRICTIONS
The following are the trust's fundamental investment restrictions. These
restrictions may not be changed without the approval of the holders of a
majority of the trust's outstanding voting securities, which, as used in the
Prospectus and this Statement of Additional Information, means the approval of
the common and preferred shares, voting together as a class, and the approval of
a majority of the outstanding preferred shares, voting separately by class.
Statements in italics are not part of the restriction.
The trust may not:
(1) Issue senior securities, except as permitted by applicable law, as amended
and interpreted or modified from time to time by any regulatory authority
jurisdiction. SENIOR SECURITIES THAT THE TRUST MAY ISSUE IN ACCORDANCE WITH THE
1940 ACT INCLUDE PREFERRED SHARES, BORROWING, FUTURES, WHEN-ISSUED AND DELAYED
DELIVERY SECURITIES AND FORWARD FOREIGN CURRENCY EXCHANGE TRANSACTIONS.
(2) Borrow money, except as permitted by applicable law, as amended and
interpreted or modified from time to time by any regulatory authority
jurisdiction.
(3) Invest in real estate, except the trust may invest in securities of issuers
that invest in real estate or interests therein, securities that are secured by
real estate or interests therein, securities of real estate investment trusts,
mortgage-backed securities and other securities that represent a similar
indirect interest in real estate, and the trust may acquire real estate or
interests therein through exercising rights or remedies with regard to an
instrument.
(4) Make loans, except that the trust may (i) lend portfolio securities in
accordance with the trust's investment policies, (ii) enter into repurchase
agreements, (iii) purchase all or a portion of an issue of publicly distributed
debt securities, bank loan participation interests, bank certificates of
deposit, acceptances, debentures or other securities, whether or not the
purchase is made upon the original issuance of the securities, (iv) participate
in a credit facility whereby the trust may directly lend to and borrow money
from other affiliated funds to the extent permitted under the 1940 Act or an
exemption therefrom, and (v) make loans in any other manner consistent with
applicable law, as amended and interpreted or modified from time to time by any
regulatory authority having jurisdiction.
(5) Invest in commodities or commodity contracts, except that the trust may
invest in currency instruments and contracts and financial instruments and
contracts that might be deemed to be commodities and commodity contracts. A
FUTURES CONTRACT, FOR EXAMPLE, MAY BE DEEMED TO BE A COMMODITY CONTRACT.
(6) Act as an underwriter, except insofar as the trust technically may be deemed
to be an underwriter in connection with the purchase or sale of its portfolio
securities.
(7) Make any investment inconsistent with its classification as a diversified
closed-end investment company (or series thereof) under the 1940 Act. THIS MEANS
THAT WITH RESPECT TO 75% OF THE ITS TOTAL ASSETS, THE TRUST MAY NOT PURCHASE
SECURITIES OF AN ISSUER (OTHER THAN THE U.S. GOVERNMENT, ITS AGENCIES OR
INSTRUMENTALITIES), IF SUCH PURCHASE WOULD CAUSE MORE THAN 5% OF THE TRUST'S
TOTAL ASSETS, TAKEN AT MARKET VALUE, TO BE INVESTED IN THE SECURITIES OF A
SINGLE ISSUER, OR IF SUCH PURCHASE WOULD AT THE SAME TIME RESULT IN MORE THAN
10% OF THE OUTSTANDING VOTING SECURITIES OF SUCH ISSUER BEING HELD BY THE TRUST.
(8) Invest 25% or more of the value of its total assets in any one industry,
provided that this limitation does not apply to municipal securities other than
those municipal securities backed only by assets and revenues of
non-governmental issuers.
For purposes of applying the limitation set forth in restriction (8)
above, securities of the U.S. government, its agencies, or instrumentalities,
and securities backed by the credit of a governmental entity are not considered
to represent industries. However, obligations backed only by the assets and
revenues of non-governmental issuers may for this purpose be deemed to be issued
by such non-governmental issuers. Thus, the 25% limitation would apply to such
obligations. It is nonetheless possible that the trust may invest more than 25%
of its total assets in a broader economic sector of the market for municipal
obligations, such as revenue obligations of hospitals and other health care
facilities or electrical utility revenue obligations. In addition, for the
purpose of applying the limitation set forth in restriction (8), a
non-governmental issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the computation of
securities owned that are issued by such governmental or other entity. Where a
security is guaranteed by a governmental entity or some other facility, such as
a bank guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the trust's assets that may be invested in municipal
bonds insured by any given insurer.
In addition to the limitation under (7) above, as a non-fundamental policy, the
trust will not invest more than 5% of its total assets in the securities of any
single issuer. Governmental issuers of municipal securities are not considered
part of any "industry" and general obligation bonds of a state are not subject
to the 5% limitation set forth above. For purpose of the 5% limitation, the
Trust will treat a revenue bond payable from revenues received by the municipal
issuer from a single entity (the "underlying obligor") as being issued by the
underlying obligor.
All other investment policies (other than the policy under "Investment
Objectives and Policies - Primary Investments") of the trust are considered
non-fundamental and may be changed by the Board of Trustees without prior
approval of the trust's outstanding voting shares.
The trust has not adopted a fundamental policy prohibiting or limiting the
trust's use of short sales, purchases on margin and the writing of put and call
options. The trust is subject, however, to the limitations on its use of these
investments under the 1940 Act and the rules and interpretive positions of the
SEC under the 1940 Act. Certain other non-fundamental investment policies are
included in the prospectus under "Investment objectives and principal investment
strategies" and this statement of additional information under "Investment
Objectives and Policies."
Under one provision of the 1940 Act, the trust may invest up to 10% of its total
assets in the aggregate in shares of other investment companies and up to 5% of
its total assets in any one investment company, provided the investment does not
represent more than 3% of the voting stock of the acquired investment company at
the time such shares are purchased. Other provisions of the 1940 Act may allow
the trust to invest a greater percentage of its assets in other investment
companies subject to certain conditions. As a shareholder in any investment
company, the trust will bear its ratable share of that investment company's
expenses, and would remain subject to payment of the trust's advisory fees and
other expenses with respect to assets so invested. Holders of common shares
would therefore be subject to duplicative expenses to the extent the trust
invests in other investment companies. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein and in the prospectus. As described in the
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.
In addition, to comply with federal tax requirements for qualification as a
"regulated investment company," the trust's investments will be limited in a
manner such that at the close of each quarter of each tax year, (a) no more than
25% of the value of the trust's total assets are invested in the securities
(other than United States government securities or securities of other regulated
investment companies) of a single issuer or two or more issuers controlled by
the trust and engaged in the same, similar or related trades or businesses and
(b) with regard to at least 50% of the trust's total assets, no more than 5% of
its total assets are invested in the securities (other than United States
government securities or securities of other regulated investment companies) of
a single issuer. These tax-related limitations may be changed by the Trustees to
the extent appropriate in light of changes to applicable tax requirements.
The trust intends to apply for ratings for the preferred shares from one or more
national statistical rating organizations. In order to obtain and maintain the
required ratings, the trust will be required to comply with investment quality,
diversification and other guidelines established by such rating agency or
agencies. Such guidelines will likely be more restrictive than the restrictions
set forth above. The trust does not anticipate that such guidelines would have a
material adverse effect on the trust's holders of common shares or its ability
to achieve its investment objectives. The trust presently anticipates that any
preferred shares that it intends to issue would be initially given the highest
ratings by such rating agency or agencies, but no assurance can be given that
such ratings will be obtained. No minimum rating is required for the issuance of
preferred shares by the trust.
The trust does not currently intend to acquire insurance coverage on municipal
securities held in the trust's portfolio ("Trust Insured Bonds"), if, after any
such acquisition 10% or more of the trust's total assets are represented by
Trust Insured Bonds insured by the same insurance company or a related group of
insurance companies. If Trust Insured Bonds insured by a single insurance
company or related group of insurance companies represents more than 10% but
less than 25% of the trust's total assets, the trust undertakes that it will
amend its Registration Statement under the 1940 Act to include summary financial
information with respect to such insurance company or group of insurance
companies. If Trust Insured Bonds insured by a single insurance company or
related group of insurance companies represents 25% or more of the trust's total
assets, the trust undertakes that it will amend its Registration Statement under
the 1940 Act to include audited financial statements and an auditors' consent of
such insurance company or group of insurance companies. The forgoing limitation
and undertakings to not apply to insurance on any municipal securities at the
time of the issuance of such municipal security or any secondary market
insurance that was acquired by a prior holder of any municipal security in the
trust's portfolio.
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The trust's Board of Trustees provides broad supervision over the trust's
affairs. The officers of the trust are responsible for the trust's operations.
The trust's Trustees and officers are listed below, together with their
principal occupations during the past five years. Asterisks indicate those
Trustees who are interested persons of the trust within the meaning of the 1940
Act, and they are referred to as Interested Trustees. Trustees who are not
interested persons of the trust are referred to as Independent Trustees. Each of
the Trustees serves as a trustee of each of the 50 U.S. registered investment
portfolios for which Pioneer serves as investment adviser (the "Pioneer Funds").
The address for all Interested Trustees and all officers of the trust is 60
State Street, Boston, Massachusetts 02109.
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
POSITIONS TERM OF OFFICE
NAME, AGE AND HELD WITH THE AND LENGTH OF PRINCIPAL OCCUPATION DURING PAST OTHER DIRECTORSHIPS HELD BY
ADDRESS TRUST SERVICE FIVE YEARS THIS TRUSTEE
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
INTERESTED TRUSTEES:
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
John F. Cogan, Jr.* Chairman of Since May, Deputy Chairman and a Director of Director of Harbor Global
(76) the Board, 2003. Term Pioneer Global Asset Management Company, Ltd.
Trustee and expires in 2004. S.p.A. ("PGAM"); Non-Executive
President Chairman and a Director of
Pioneer Investment
Management USA Inc.
("PIM-USA"); Chairman
and a Director of
Pioneer and the various
Momentum Funds;
Director, Pioneer
Alternative Investments;
Director and Chairman of
the Supervisory Board of
Pioneer Czech Investment
Company, a.s.; President
of all of the Pioneer
Funds; and Of Counsel
(since 2000, partner
prior to 2000), Hale and
Dorr LLP (counsel to
PIM-USA and the Pioneer
Funds)
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Osbert M. Hood* Trustee and Trustee since President and Chief Executive None.
(50) Executive June, 2003. Officer, PIM-USA since May, 2003
Vice President Term expires in (Director since January, 2001);
2006. President and Director of Pioneer
Investment Management,
Inc. since May, 2003;
Chairman and Director of
Pioneer Investment
Management Shareholder
Services, Inc. ("PIMSS")
since May, 2003;
Executive Vice President
of all of the Pioneer
Funds since June 3,
2003; Executive Vice
President and Chief
Operating Officer of
PIM-USA, November
2000-May 2003; Executive
Vice President, Chief
Financial Officer and
Treasurer, John Hancock
Advisers, L.L.C.,
Boston, MA, November
1999-November 2000;
Senior Vice President
and Chief Financial
Officer, John Hancock
Advisers, L.L.C., April
1997-November 1999.
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
INDEPENDENT
TRUSTEES:
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Mary K. Bush (55) Trustee Since May, President, Bush International Director and/or Trustee of
3509 Woodbine 2003. Term (international financial advisory Brady Corporation
Street, Chevy expires in 2006. firm) (industrial identification
Chase, MD 20815 and specialty coated
material products
manufacturer), Mortgage
Guaranty Insurance
Corporation, R.J. Reynolds
Tobacco Holdings, Inc.
(tobacco) and Student Loan
Marketing Association
(secondary marketing of
student loans)
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Richard H. Egdahl, Trustee Since May, Alexander Graham Bell Professor None
M.D. (76) 2003. Term of Health Care Entrepreneurship,
Boston University expires in 2004. Boston University; Professor of
Healthcare Management, Boston University
Entrepreneurship School of Management; Professor
Program, 53 Bay of Public Health, Boston
State Road, Boston, University School of Public
MA 02215 Health; Professor of Surgery,
Boston University School of
Medicine; and University
Professor, Boston University
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Margaret B.W. Trustee Since May, Founding Director, The Winthrop None
Graham (55) 2003. Term Group, Inc. (consulting firm);
1001 Sherbrooke expires in 2005. Professor of Management, Faculty
Street West, of Management, McGill University
Montreal, Quebec,
Canada
H3A 1G5
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Marguerite A. Piret Trustee Since May, President and Chief Executive None
(54) 2003. Term Officer, Newbury, Piret &
One Boston Place, expires in 2006. Company, Inc. (investment banking
26th Floor, Boston, firm)
MA 02108
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Stephen K. West** Trustee Since May, Senior Counsel, Sullivan & Director, The Swiss
(74) 2003. Term Cromwell (law firm) Helvetia Fund, Inc.
125 Broad Street, expires in 2004. (closed-end investment
New York, NY 10004 company) and AMVESCAP PLC
(investment managers)
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
John Winthrop (66) Trustee Since May, President, John Winthrop & Co., None
One North Adgers 2003. Term Inc. (private investment firm)
Wharf, Charleston, expires in 2005.
SC 29401
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
TRUST OFFICERS:
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Dorothy E. Bourassa Assistant Since May, Secretary of PIM-USA; Senior Vice None
(55) Secretary 2003. Serves at President-Legal of Pioneer; and
the discretion Secretary/Clerk of most of
of the Board. PIM-USA's subsidiaries since
October 2000; Assistant
Secretary of all of the
Pioneer Funds since
November 2000; Senior
Counsel, Assistant Vice
President and Director
of Compliance of PIM-USA
from April 1998 through
October 2000
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Vincent Nave (57) Treasurer Since May, Vice President-Fund Accounting, None
2003. Serves at Administration and Custody
the discretion Services of Pioneer (Manager from
of the Board. September 1996 to February 1999);
and Treasurer of all of the
Pioneer Funds (Assistant
Treasurer from June 1999 to
November 2000)
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Luis I. Presutti Assistant Since May, Assistant Vice President- Fund None
(38) Treasurer 2003. Serves at Accounting, Administration and
the discretion Custody Services of Pioneer (Fund
of the Board. Accounting Manager from 1994 to
1999); and Assistant Treasurer of
all of the Pioneer Funds since
November 2000
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Gary Sullivan (45) Assistant Since May, Fund Accounting Manager - Fund None
Treasurer 2003. Serves at Accounting, Administration and
the discretion Custody Services of Pioneer; and
of the Board. Assistant Treasurer of all of the
Pioneer Funds since May 2002
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
Alan Janson (32) Assistant Since May, Manager, Valuation Risk and None
Treasurer 2003. Serves at Information Technology - Fund
the discretion Accounting, Administration and
of the Board. Custody Services of Pioneer since
March 2002; and
Assistant Treasurer of
all of the Pioneer Funds
since July 2002.
Manager, Valuation Risk
and Performance
Reporting of Pioneer
from June 2000 to
February 2002; Member of
Pioneer Pricing Group
from 1996 to 2000
(promoted to Manager in
1998)
--------------------- --------------- ----------------- ----------------------------------- -----------------------------
* Mr. Cogan and Mr. Hood are Interested Trustees because each is an officer or
director of the trust's investment adviser and certain of its affiliates. ** Mr.
West may be deemed to be an interested person of the trust and its principal
underwriter because Sullivan & Cromwell, with respect to which Mr. West is
Senior Counsel, acts as legal counsel to UBS Securities LLC.
The outstanding capital stock of the investment adviser is indirectly majority
owned by UniCredito Italiano S.p.A. ("UniCredito"), one of the largest banking
groups in Italy.
The trust's Board of Trustees currently consists of 8 members. The term of one
class expires each year commencing with the first annual meeting following the
initial public offering of the trust's common shares, which occurred on July 22,
2003, and no term shall continue for more than three years after the applicable
election. The terms of Mr. Cogan, Dr. Egdahl and Mr. West expire at the first
annual meeting following ths initial public offering of the trust's common
shares, the terms of Ms. Graham and Winthrop expire at the second annual
meeting, and the terms of Ms. Bush, Mr. Hood and Ms. Piret expire at the third
annual meeting. Subsequently, each class of Trustees will stand for election at
the conclusion of its respective term. Such classification may prevent
replacement of a majority of the Trustees for up to a two-year period.
BOARD COMMITTEES
The Board of Trustees has an Audit Committee, which is comprised of Marguerite
A. Piret (chair), Stephen K. West and John Winthrop; a Nominating Committee,
which is comprised of Mary K. Bush, Richard H. Egdahl (chair) and Marguerite A.
Piret; a Valuation Committee, which is comprised of Marguerite A. Piret, Stephen
K. West and John Winthrop; a Policy Administration Committee, which is comprised
of Mary K. Bush (chair), Richard H. Egdahl and Margaret B.W. Graham; and an
Independent Trustees Committee, which is comprised of all the trust's
Independent Trustees. Margaret B.W. Graham is the chair of the Independent
Trustees Committee.
The Board of Trustees has adopted a charter for the Audit Committee. In
accordance with its charter, the purposes of the Audit Committee are:
|X| act as a liaison between the trust's independent auditors and the full Board
of Trustees of the trust;
|X| discuss with the trust's independent auditors their judgments about the
quality of the trust's accounting principles and underlying estimates as
applied in the trust's financial reporting;
|X| together with the Independent Trustees Committee, review and assess the
renewal materials of all related party contracts and agreements, including
investment advisory agreements, underwriting contracts, administration
agreements, and transfer agency contracts, among any other instruments and
agreements that may be appropriate from time to time; and
|X| ensure that the independent auditors submit on a periodic basis to the
Audit Committee a formal written statement delineating all relationships
between the auditors and the trust or Pioneer; to actively engage in a
dialogue with the independent auditors with respect to any disclosed
relationships or services that may impact the objectivity and independence
of the independent auditors; and to recommend that the Trustees take
appropriate action in response to the independent auditors' report to
satisfy itself of the independent auditors' independence.
The Nominating Committee reviews the qualifications of any candidate recommended
by the Independent Trustees to serve as an Independent Trustee and makes a
recommendation regarding that person's qualifications. The Committee does not
accept nominations from shareholders.
The Valuation Committee reviews the valuation assigned to certain securities by
Pioneer in accordance with the trust's valuation procedures.
The Policy Administration Committee reviews the implementation of certain of the
trust's administration policies and procedures.
The Independent Trustees Committee reviews the trust's investment advisory
agreement and other related party contracts annually and is also responsible for
any other action required to be taken, under the 1940 Act, by the Independent
Trustees acting alone.
The trust's Declaration of Trust provides that the trust will indemnify the
Trustees and officers against liabilities and expenses incurred in connection
with any litigation in which they may be involved because of their offices with
the trust, unless it is determined in the manner specified in the Declaration of
Trust that they have not acted in good faith in the reasonable belief that their
actions were in the best interests of the trust or that such indemnification
would relieve any officer or Trustee of any liability to the trust or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
COMPENSATION OF OFFICERS AND TRUSTEES
The trust pays no salaries or compensation to any of its officers. The Pioneer
Funds, including the trust, compensate their trustees as follows:
|X| If the Pioneer fund has assets greater than $250 million, the Pioneer fund
pays each Independent Trustee an annual base fee calculated on the basis of
the Pioneer fund's net assets.
|X| If the Pioneer fund has assets less than $250 million, the Pioneer fund
pays each Independent Trustee an annual fee of $1,000.
|X| If the Pioneer fund has assets greater than $50 million, the Pioneer fund
pays each Interested Trustee an annual fee of $500, and if the Pioneer fund
has assets less than $50 million, the Pioneer fund pays each Interested
Trustee and annual fee of $200 (Pioneer reimburses the fund for these
fees).
|X| Each Pioneer fund with assets greater than $250 million pays each
Independent Trustee who serves on a board committee an annual committee fee
based the Pioneer fund's net assets (with additional compensation for
chairpersons of such committees).
The following table sets forth certain information with respect to the
compensation paid to each Trustee by the trust and the Pioneer Funds as a group.
Compensation from the trust is for the current calendar year and is estimated.
Total compensation from the Pioneer Funds as a group is for the calendar year
ended December 31, 2002.
PENSION OR RETIREMENT TOTAL COMPENSATION
BENEFITS ACCRUED AS FROM THE TRUST AND
AGGREGATE PART OF TRUST EXPENSES ESTIMATED ANNUAL OTHER PIONEER
COMPENSATION FROM BENEFIT UPON Funds**
NAME OF TRUSTEE TRUST* RETIREMENT
INTERESTED TRUSTEES:
John F. Cogan, Jr. *** $250.00 $0.00 $0.00 $17,000.00
Osbert M. Hood *** **** 250.00 0.00 0.00 250.00
INDEPENDENT TRUSTEES:
Mary K. Bush 3,500.00 0.00 0.00 103,625.00
Richard H. Egdahl, M.D. 3,500.00 0.00 0.00 99,375.00
Margaret B.W. Graham 3,500.00 0.00 0.00 103,625.00
Marguerite A. Piret 3,500.00 0.00 0.00 122,750.00
Stephen K. West 3,500.00 0.00 0.00 105,750.00
John Winthrop 3,500.00 0.00 0.00 110,500.00
-------- ---- ---- ----------
$21,500.00 $0.00 $0.00 $662,875.00
* Estimated for the calendar year ending December 31, 2003.
** For the calendar year ended December 31, 2002. There are 50 U.S.
registered investment portfolios in the Pioneer Family of Funds.
*** Under the investment advisory agreement, Pioneer reimburses
the trust for any Trustee fees paid by the trust.
**** Mr. Hood became a trustee of the other Pioneer Funds during the
current calendar year.
OWNERSHIP OF SHARES OF THE TRUST AND OTHER PIONEER FUNDS
The following table indicates the value of shares that each Trustee beneficially
owns in the trust and the Pioneer Funds in the aggregate. The value of shares of
the trust and any other closed-end fund are determined based on closing market
price on December 31, 2002. The value of shares of any Pioneer fund that is an
open-end investment company is determined on the basis of the net asset value of
the class of shares held as of December 31, 2002. The value of the shares held
are stated in ranges in accordance with the requirements of the SEC. The table
reflects the Trustee's beneficial ownership of shares of the Pioneer Funds.
Beneficial ownership is determined in accordance with the rules of the SEC.
------------------------------------- --------------------------- -------------------------------------------
AGGREGATE DOLLAR RANGE OF EQUITY
DOLLAR RANGE OF EQUITY SECURITIES IN ALL REGISTERED INVESTMENT
NAME OF TRUSTEE SECURITIES IN THE TRUST COMPANIES IN THE PIONEER FUNDS
------------------------------------- --------------------------- -------------------------------------------
INTERESTED TRUSTEES:
------------------------------------- --------------------------- -------------------------------------------
Mr. Cogan none Over $100,000
------------------------------------- --------------------------- -------------------------------------------
Mr. Hood none $50,001 - $100,000
------------------------------------- --------------------------- -------------------------------------------
INDEPENDENT TRUSTEES:
------------------------------------- --------------------------- -------------------------------------------
Ms. Bush none $10,001 - $50,000
------------------------------------- --------------------------- -------------------------------------------
Dr. Egdahl. none $50,001 - $100,000
------------------------------------- --------------------------- -------------------------------------------
Ms. Graham none $10,001 - $50,000
------------------------------------- --------------------------- -------------------------------------------
Ms. Piret none $50,001 - $100,000
------------------------------------- --------------------------- -------------------------------------------
Mr. West none $50,001 - $100,000
------------------------------------- --------------------------- -------------------------------------------
Mr. Winthrop none Over $100,000
------------------------------------- --------------------------- -------------------------------------------
MATERIAL RELATIONSHIPS OF THE INDEPENDENT TRUSTEES. For purposes of the
statements below:
|X| the IMMEDIATE FAMILY MEMBERS of any person includes their spouse, children
in the person's household (including step and adoptive children) and any
dependent of the person.
|X| an entity in a CONTROL RELATIONSHIP means any person who controls, is
controlled by or is under common control with the named person. For
example, UniCredito is an entity that is in a control relationship with
Pioneer.
|X| a RELATED FUND is a registered investment company or an entity exempt from
the definition of an investment company pursuant to Sections 3(c)(1) or
3(c)(7) of the 1940 Act, for which Pioneer or any of its affiliates act as
investment adviser or for which Pioneer or Pioneer Funds Distributor, Inc.
("PFD") or any of its affiliates act as principal underwriter. For example,
the trust's related funds include all of the Pioneer Funds and any non-U.S.
funds managed by Pioneer or its affiliates.
As of December 31, 2002, none of the Independent Trustees, nor any of their
immediate family members, beneficially own any securities issued by Pioneer,
UniCredito or any other entity in a control relationship to PFD.
During the calendar years 2001 and 2002, none of the Independent Trustees, nor
any of their immediately family members, had any direct or indirect interest
(the value of which exceeded $60,000), whether by contract, arrangement or
otherwise, in Pioneer, UniCredito, or any other entity in a control relationship
to Pioneer or PFD.
During the calendar years 2001 and 2002, none of the Independent Trustees,
nor any of their immediately family members, had an interest in a
transaction or a series of transactions, or in any currently proposed
transaction, or series of similar transactions, in which the aggregate
amount involved exceeded $60,000 and to which any of the following were a
party (each a "fund related party"):
|X| the trust
|X| an officer of the trust
|X| a related fund
|X| an officer of any related fund
|X| Pioneer or PFD
|X| an officer of Pioneer or PFD
|X| any affiliate of Pioneer or PFD
|X| an officer of any such affiliate
During the calendar years 2001 and 2002, none of the Independent Trustees, nor
any of their immediate family members, had any relationship (the value of which
exceeded $60,000) with any fund related party, including, but not limited to,
relationships arising out of (i) the payments for property and services, (ii)
the provision of legal services, (iii) the provision of investment banking
services (other than as a member of the underwriting syndicate) or (iv) the
provision of consulting services, except that Mr. West, an Independent Trustee,
is Senior Counsel to Sullivan & Cromwell and acts as counsel to the Independent
Trustees and the Independent Trustees of the other Pioneer Funds. The aggregate
compensation paid to Sullivan & Cromwell by the trust and the other Pioneer
Funds was approximately $60,000 in 2001 and 2002, respectively.
During the calendar years 2001 and 2002, none of the Independent Trustees, nor
any of their immediate family members, served as a member of a board of
directors on which an officer of any of the following entities also serves as a
director:
|X| Pioneer
|X| PFD
|X| UniCredito
|X| any other entity in a control relationship with Pioneer or PFD
None of the trust's Trustees or officers has any arrangement with any other
person pursuant to which that Trustee or officer serves on the Board of
Trustees. During the calendar years 2001 and 2002, none of the Independent
Trustees, nor any of their immediate family members, had any position, including
as an officer, employee, director or partner, with any of the following:
|X| the trust
|X| any related fund
|X| Pioneer
|X| PFD
|X| any affiliated person of the trust, Pioneer or PFD
|X| UniCredito
|X| any other entity in a control relationship to the trust, Pioneer or PFD
FACTORS CONSIDERED BY THE INDEPENDENT TRUSTEES IN APPROVING THE INVESTMENT
ADVISORY AGREEMENT.
The 1940 Act requires that the trust's Investment Advisory Agreement be approved
annually by both the Board of Trustees and a majority of the Independent
Trustees voting separately. The Independent Trustees have determined that the
terms of the trust's Investment Advisory Agreement are fair and reasonable and
that the contract is in the trust's best interest. The Independent Trustees
believe that the Investment Advisory Agreement will enable the trust to enjoy
high quality investment advisory services at a cost they deem appropriate,
reasonable and in the best interests of the trust and its shareholders. In
making such determinations, the Independent Trustees met independently from the
Interested Trustees of the trust and any officers of Pioneer or its affiliates.
The Independent Trustees also relied upon the assistance of counsel to the
Independent Trustees and counsel to the trust.
In evaluating the Investment Advisory Agreement, the Independent Trustees
reviewed materials furnished by Pioneer, including information regarding
Pioneer, its affiliates and their personnel, operations and financial condition.
The Independent Trustees discussed with representatives of Pioneer the trust's
proposed operations and Pioneer's ability to provide advisory and other services
to the trust. The Independent Trustees also reviewed:
|X| the experience of Pioneer in managing other portfolios with significant
investments in below investment grade securities and the performance of
such portfolios, as well as Pioneer's experience in managing municipal
securities;
|X| the experience of the investment advisory and other personnel who would be
providing services to the trust and the historical quality of the services
provided by Pioneer;
|X| the fee charged by Pioneer for investment advisory services;
|X| the trust's projected total operating expenses, and the Pioneer's agreement
to limit the trust's expenses for three years; and
|X| the investment performance, fees and total expenses of investment companies
with similar objectives and strategies managed by other investment
advisers.
The Independent Trustees considered the following as relevant to their
recommendations: (1) the favorable history, reputation, qualification and
background of Pioneer and UniCredito Italiano, as well as the qualifications of
their personnel; (2) that the fee and expense ratios of the trust are reasonable
given the quality of services expected to be provided and are comparable to or
lower than the fees and expense ratios of similar investment companies,
particularly other leverage investment companies investing in high yield
municipal securities; and (3) the relative performance of other funds advised by
Pioneer that invest a significant portion of their assets in below investment
grade securities compared to other investment companies with similar objectives
and unmanaged indices. The Independent Trustees deemed each of these factors to
be relevant to their consideration of the trust's management contract.
CODE OF ETHICS
The trust and Pioneer have adopted a code of ethics under Rule 17j-1 of the 1940
Act which is applicable to officers, directors/trustees and designated employees
of Pioneer and Pioneer Investment Management Limited ("PIML"). The code permits
such persons to engage in personal securities transactions for their own
accounts, including securities that may be purchased or held by the trust, and
is designed to prescribe means reasonably necessary to prevent conflicts of
interest from arising in connection with personal securities transactions. The
code is on public file with and available from the SEC.
INVESTMENT ADVISER
The trust has contracted with Pioneer to act as its investment adviser. Pioneer
is an indirect, majority owned subsidiary of UniCredito. Pioneer is part of the
global asset management group providing investment management and financial
services to mutual funds, institutional and other clients. As of March 31, 2003,
assets under management were approximately $112 billion worldwide, including
over $23 billion in assets under management by Pioneer. Certain Trustees or
officers of the trust are also directors and/or officers of certain of
UniCredito's subsidiaries. Pioneer has entered into an agreement with its
affiliate, PIML, pursuant to which PIML provides certain services and personnel
to Pioneer.
As the trust's investment adviser, Pioneer provides the trust with investment
research, advice and supervision and furnishes the trust with an investment
program consistent with the trust's investment objectives and policies, subject
to the supervision of the trust's Trustees. Pioneer determines what portfolio
securities will be purchased or sold, arranges for the placing of orders for the
purchase or sale of portfolio securities, selects brokers or dealers to place
those orders, maintains books and records with respect to the trust's securities
transactions, and reports to the Trustees on the trust's investments and
performance.
Under the investment advisory agreement, Pioneer is not liable to the trust
except by willful malfeasance, bad faith, gross negligence or reckless disregard
of its duties and obligations. In providing its services to the trust, Pioneer
may draw upon the research and investment management expertise of Pioneer's
affiliate, PIML.
The trust has retained Princeton Administrators, LP to act as administrator of
the trust. Pursuant to an administration agreement, the trust pays Princeton
Administrator LP a fee at a monthly rate equal to the greater of $10,000 or
0.07% of the trust's average daily managed assets.
COMPENSATION AND EXPENSES
Under the investment advisory agreement, the trust will pay to Pioneer monthly,
as compensation for the services rendered and expenses paid by it, a fee equal
on an annual basis to 0.60% of the trust's average daily managed assets. Because
the fees paid to Pioneer are determined on the basis of the trust's managed
assets, Pioneer's interest in determining whether to leverage the trust may
differ from the interests of the trust. The advisory fee payable by the trust to
Pioneer is higher than the fees paid by most U.S. investment companies.
The trust's average weekly managed assets are determined for the purpose of
calculating the advisory fee by taking the average of all the weekly
determinations of total assets during a given calendar month. The fee is payable
for each calendar month as soon as practicable after the end of that month.
Under the terms of its investment advisory agreement with the trust, Pioneer
pays all the operating expenses, including executive salaries and the rental of
office space, relating to its services for the trust, with the exception of the
following, which are to be paid by the trust: (a) charges and expenses for fund
accounting, pricing and appraisal services and related overhead, including, to
the extent such services are performed by personnel of Pioneer or its
affiliates, office space and facilities and personnel compensation, training and
benefits; (b) the charges and expenses of auditors; (c) the charges and expenses
of any administrator, custodian, transfer agent, plan agent, dividend disbursing
agent and registrar appointed by the trust; (d) issue and transfer taxes
chargeable to the trust in connection with securities transactions to which the
trust is a party; (e) insurance premiums, interest charges, expenses in
connection with any preferred shares, dues and fees for membership in trade
associations and all taxes and corporate fees payable by the trust to federal,
state or other governmental agencies; (f) fees and expenses involved in
registering and maintaining registrations of the trust and/or its shares with
federal regulatory agencies, state or blue sky securities agencies and foreign
jurisdictions, including the preparation of prospectuses and statements of
additional information for filing with such regulatory authorities; (g) all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
distributing prospectuses, notices, proxy statements and all reports to
shareholders and to governmental agencies; (h) charges and expenses of legal
counsel to the trust and the Trustees; (i) compensation of those Trustees of the
trust who are not affiliated with or interested persons of Pioneer or the trust
(other than as Trustees); (j) the cost of preparing and printing share
certificates; (k) interest on borrowed money, if any; (l) the fees and other
expenses of listing the trust's shares on the New York Stock Exchange or any
other national stock exchange; and (m) any other expense that the trust, Pioneer
or any other agent of the trust may incur (I) as a result of a change in the law
or regulations, (II) as a result of a mandate from the Board of Trustees with
associated costs of a character generally assumed by similarly structured
investment companies or (III) that is similar to the expenses listed above, and
that is approved by the Board of Trustees (including a majority of the Trustees
who are not affiliates of Pioneer) as being an appropriate expense of the trust.
In addition, the trust will pay all brokers' and underwriting commissions
chargeable to the trust in connection with securities transactions to which the
trust is a party.
[PROXY VOTING]
The trust's Trustees have delegated to Pioneer the authority to vote proxies on
behalf of the trust. The Trustees have approved the proxy voting guidelines of
Pioneer and will review the guidelines and suggest changes they deem advisable.
A summary of Pioneer's proxy voting guidelines and proxy voting procedures are
attached to this Statement of Additional Information as Appendix B.]
DURATION AND TERMINATIONS; NONEXCLUSIVE SERVICES
The economic terms of the investment advisory agreement were approved by the
trust's Board of Trustees at a meeting of the Board of Trustees held on July 8,
2003, including a majority of the Trustees who are not parties to the agreement
or interested persons of any such party (as such term is defined in the 1940
Act). The 1940 Act requires that the investment advisory agreement be approved
by a majority of the trust's Board of Trustees, including a majority of the
Trustees who are not interested persons as that term is defined in the 1940 Act,
at an in person meeting of the Board of Trustees.
The investment advisory agreement was approved by the sole common shareholder of
the trust as of July 14, 2003.
Unless earlier terminated as described below, the investment advisory agreement
will remain in effect for two years from the date of its execution and from year
to year thereafter if approved annually (i) by a majority of the Independent
Trustees of the trust and (ii) by the Board of Trustees or by a majority of the
outstanding voting securities of the trust. The investment advisory agreement
may be terminated without penalty on 60 days' written notice by either party
thereto or by a vote of a majority of the outstanding voting securities of the
trust and will terminate in the event it is assigned (as defined in the 1940
Act). The services of Pioneer are not deemed to be exclusive, and nothing in the
relevant agreement will prevent Pioneer or its affiliates from providing similar
services to other investment companies and other clients (whether or not their
investment objectives and policies are similar to those of the trust) or from
engaging in other activities.
POTENTIAL CONFLICTS OF INTEREST
The trust is managed by Pioneer which also serves as investment adviser to other
Pioneer funds and other accounts with investment objectives identical or similar
to those of the trust. Securities frequently meet the investment objectives of
the trust, the other Pioneer funds and such other accounts. In such cases, the
decision to recommend a purchase to one fund or account rather than another is
based on a number of factors. The determining factors in most cases are the
amount of securities of the issuer then outstanding, the value of those
securities and the market for them. Other factors considered in the investment
recommendations include other investments which each fund or account presently
has in a particular industry and the availability of investment funds in each
fund or account.
It is possible that at times identical securities will be held by more than one
fund and/or account. However, positions in the same issue may vary and the
length of time that any fund or account may choose to hold its investment in the
same issue may likewise vary. To the extent that more than one of the Pioneer
funds or a private account managed by Pioneer seeks to acquire the same security
at about the same time, the trust may not be able to acquire as large a position
in such security as it desires or it may have to pay a higher price for the
security. Similarly, the trust may not be able to obtain as large an execution
of an order to sell or as high a price for any particular portfolio security if
Pioneer decides to sell on behalf of another account the same portfolio security
at the same time. On the other hand, if the same securities are bought or sold
at the same time by more than one fund or account, the resulting participation
in volume transactions could produce better executions for the trust. In the
event more than one account purchases or sells the same security on a given
date, the purchases and sales will normally be made as nearly as practicable on
a pro rata basis in proportion to the amounts desired to be purchased or sold by
each account. Although the other Pioneer funds may have the same or similar
investment objectives and policies as the trust, their portfolios do not
generally consist of the same investments as the trust or each other, and their
performance results are likely to differ from those of the trust.
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS FOR THE PREFERRED SHARES
RATING AGENCY GUIDELINES
[To be completed by amendment.]
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on behalf
of the trust by Pioneer pursuant to authority contained in the trust's
investment advisory agreement. Securities purchased and sold on behalf of the
trust normally will be traded in the over-the-counter market on a net basis
(i.e., without commission) through dealers acting for their own account and not
as brokers or otherwise through transactions directly with the issuer of the
instrument. The cost of securities purchased from underwriters includes an
underwriter's commission or concession, and the prices at which securities are
purchased and sold from and to dealers include a dealer's markup or markdown.
Pioneer normally seeks to deal directly with the primary market makers unless,
in its opinion, better prices are available elsewhere. Some securities are
purchased and sold on an exchange or in over-the-counter transactions conducted
on an agency basis involving a commission. Pioneer seeks to obtain the best
execution on portfolio trades. The price of securities and any commission rate
paid are always factors, but frequently not the only factors, in judging best
execution. In selecting brokers or dealers, Pioneer considers various relevant
factors, including, but not limited to, the size and type of the transaction;
the nature and character of the markets for the security to be purchased or
sold; the execution efficiency, settlement capability and financial condition of
the dealer; the dealer's execution services rendered on a continuing basis; and
the reasonableness of any dealer spreads.
Pioneer may select broker-dealers that provide brokerage and/or research
services to the trust and/or other investment companies or other accounts
managed by Pioneer. In addition, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), if Pioneer determines in
good faith that the amount of commissions charged by a broker-dealer is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the trust may pay commissions to such broker-dealer in
an amount greater than the amount another firm may charge. Such services may
include advice concerning the value of securities; the advisability of investing
in, purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; providing stock quotation services, credit
rating service information and comparative fund statistics; furnishing analyses,
electronic information services, manuals and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts and particular investment decisions; and effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Pioneer maintains a listing of broker-dealers who
provide such services on regular basis. However, because many transactions on
behalf of the trust and other investment companies or accounts managed by
Pioneer are placed with broker-dealers (including broker-dealers on the listing)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such dealers solely
because such services were provided. Pioneer believes that no exact dollar value
can be calculated for such services.
The research received from broker-dealers may be useful to Pioneer in rendering
investment management services to the trust as well as other investment
companies or other accounts managed by Pioneer, although not all such research
may be useful to the trust. Conversely, such information provided by brokers or
dealers who have executed transaction orders on behalf of such other accounts
may be useful to Pioneer in carrying out its obligations to the trust. The
receipt of such research has not reduced Pioneer's normal independent research
activities; however, it enables Pioneer to avoid the additional expenses which
might otherwise be incurred if it were to attempt to develop comparable
information through its own staff.
In circumstances where two or more broker-dealers offer comparable prices and
executions, preference may be given to a broker-dealer which has sold shares of
the trust as well as shares of other investment companies managed by Pioneer.
This policy does not imply a commitment to execute all portfolio transactions
through all broker-dealers that sell shares of the trust. The Pioneer funds have
entered into third-party brokerage and/or expense offset arrangements to reduce
the funds' total operating expenses. Pursuant to third-party brokerage
arrangements, certain of the funds that invest primarily in U.S. equity
securities may incur lower custody fees by directing brokerage to third-party
broker-dealers. Pursuant to expense offset arrangements, the funds incur lower
transfer agency expenses by maintaining their cash balances with the custodian.
The Board of Trustees periodically reviews Pioneer's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the trust.
FEDERAL INCOME TAX MATTERS
The following is a summary discussion of certain U.S. federal income tax
consequences that may be relevant to a shareholder acquiring, holding and
disposing of preferred shares of the trust. This discussion addresses only U.S.
federal income tax consequences to U.S. shareholders who hold their shares as
capital assets and does not address all of the U.S. federal income tax
consequences that may be relevant to particular shareholders in light of their
individual circumstances. This discussion also does not address the tax
consequences to shareholders who are subject to special rules, including,
without limitation, financial institutions, insurance companies, dealers in
securities, foreign shareholders, tax-exempt or tax-deferred plans, accounts, or
entities, or investors who engage in constructive sale or conversion
transactions. In addition, the discussion does not address state, local or
foreign tax consequences, and it does not address any tax consequences other
than U.S. federal income tax consequences. The discussion reflects applicable
tax laws of the United States as of the date of this statement of additional
information, which tax laws may be changed or subject to new interpretations by
the courts, Treasury or the Internal Revenue Services ("IRS") retroactively or
prospectively. No attempt is made to present a detailed explanation of all U.S.
federal income tax concerns affecting the trust or its shareholders, and the
discussion set forth herein does not constitute tax advice. Investors are urged
to consult their own tax advisers to determine the specific tax consequences to
them of investing in the trust, including the applicable federal, state, local
and foreign tax consequences to them and the effect of possible changes in tax
laws.
The trust intends to elect to be treated and to qualify each year as a
"regulated investment company" under Subchapter M of the Code so that it
generally will not pay U.S. federal income tax on income and capital gains
distributed to shareholders. In order to qualify as a regulated investment
company under Subchapter M of the Code, which qualification this discussion
assumes, the trust must, among other things, derive at least 90% of its gross
income for each taxable year from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including gains from options, futures
and forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the 90% income test") and satisfy certain
quarterly asset diversification requirements. For purposes of the 90% income
test, the character of income earned by certain entities in which the trust
invests that are not treated as corporations for U.S. federal income tax
purposes (e.g., partnerships or trusts) will generally pass through to the
trust. Consequently, the trust may be required to limit its equity investments
in such entities that earn fee income, rental income or other nonqualifying
income.
If the trust qualifies as a regulated investment company and, for each taxable
year, it distributes to its shareholders an amount equal to or exceeding the sum
of (i) 90% of its "investment company taxable income" as that term is defined in
the Code (which includes, among other things, dividends, taxable interest, and
the excess of any net short-term capital gains over net long-term capital
losses, as reduced by certain deductible expenses) and (ii) 90% of the excess of
its gross tax-exempt interest, if any, over certain disallowed deductions, the
trust generally will not be subject to U.S. federal income tax on any income of
the trust, including long-term capital gains, distributed to shareholders.
However, if the trust retains any investment company taxable income or "net
capital gain" (the excess of net long-term capital gain over net short-term
capital loss), it generally will be subject to U.S. federal income tax at
regular corporate rates on the amount retained. The trust intends to distribute
at least annually all or substantially all of its investment company taxable
income, net tax-exempt interest, and net capital gain. If for any taxable year,
the trust did not qualify as a regulated investment company, it would be treated
as a corporation subject to U.S. federal income tax and all distributions out of
earnings and profits would be taxed to shareholders as ordinary income. In
addition, the trust could be required to recognize unrealized gains, pay taxes
and make distributions (which could be subject to interest charges) before
requalifying as a regulated investment company.
Under the Code, the trust will be subject to a nondeductible 4% U.S. federal
excise tax on a portion of its undistributed taxable ordinary income and capital
gains if it fails to meet certain distribution requirements with respect to each
calendar year. The trust intends to make distributions in a timely manner and
accordingly does not expect to be subject to the excise tax.
Commencing within approximately 90 days from the date of the filing of the
prospectus, the trust intends to declare a dividend from all or a portion of its
net investment income monthly. The trust intends to distribute any net short-
and long-term capital gains at least annually. Dividends from income and/or
capital gains may also be paid at such other times as may be necessary for the
trust to avoid U.S. federal income or excise tax.
In accordance with its investment objectives, the trust invests its assets in a
manner which will provide as large a portion of tax-exempt income as is
consistent with the protection of shareholders' capital. The trust may from time
to time invest a portion of its portfolio in short-term taxable obligations and
may engage in transactions generating gain or income which is not tax-exempt,
e.g., purchase non-municipal securities, sell or lend portfolio securities,
enter into repurchase agreements, dispose of rights to when-issued securities
prior to issuance, acquire any debt obligation at a market discount, acquire
certain stripped tax-exempt obligations or their coupons or enter into swaps,
options and futures transactions. The trust's distributions from such gain or
income will not be "exempt-interest dividends", as described below, and
accordingly will be taxable.
The Code permits tax-exempt interest received by the trust to flow through as
tax-exempt "exempt-interest dividends" to the trust's shareholders, provided
that the trust qualifies as a regulated investment company and at least 50% of
the value of the trust's total assets at the close of each quarter of its
taxable year consists of tax-exempt obligations, i.e., obligations described in
Section 103(a) of the Code. That part of the trust's net investment income,
which is attributable to interest from tax-exempt obligations and which is
distributed to shareholders will be designated by the trust as an
"exempt-interest dividend" under the Code. Exempt-interest dividends are
excluded from a shareholder's gross income under the Code but are nevertheless
required to be reported on the shareholder's U.S. federal income tax return. The
percentage of income designated as tax-exempt is applied uniformly to all
distributions made during each taxable year and may differ from the actual
tax-exempt percentage earned by the trust during any particular month. That
portion of the trust's dividends and distributions not designated as tax-exempt
will be taxable as described below.
Exempt-interest dividends derived from interest on certain "private activity
bonds" will be items of tax preference that are subject to U.S. federal
alternative minimum tax for individuals or entities that are subject to such
tax, and all exempt-interest dividends may result in or increase a corporate
shareholder's liability for the U.S. federal alternative minimum tax. The trust
may not be an appropriate investment for persons who are "substantial users" of
facilities financed by industrial revenue or private activity bonds or persons
related to substantial users.
Interest on indebtedness incurred (directly or indirectly) by a shareholder to
purchase or carry shares of the trust will not be deductible for U.S. federal
income tax purposes to the extent it is deemed under the Code and applicable
regulations to relate to exempt-interest dividends received from the trust.
Shareholders receiving social security or certain railroad retirement benefits
may be subject to U.S. federal income tax on a portion of such benefits as a
result of receiving investment income, including exempt-interest dividends and
other distributions paid by the trust.
Unless a shareholder is ineligible to participate or elects otherwise, all
distributions from the trust will be automatically reinvested in additional full
and fractional shares of the trust. For U.S. federal income tax purposes, all
dividends, other than exempt-interest dividends, generally are taxed as
described below whether a shareholder takes them in cash or reinvests them in
additional shares of the trust. In general, assuming that the trust has
sufficient earning and profits, dividends from investment company taxable
income, are taxable as ordinary income and dividends from net capital gain, if
any, that are designated as capital gain dividends are taxable as long-term
capital gains for U.S. federal income tax purposes without regard to the length
of time the shareholder has held shares of the trust. Distributions by the trust
in excess of the trust's current and accumulated earnings and profits will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in its shares and any such amount in excess of that
basis will be treated as gain from the sale of shares, as discussed below. The
U.S. federal income tax status of all distributions will be reported to
shareholders annually.
The trust does not expect to receive any "qualified dividend income" as that
term is defined in Section 1(h)(11) of the Code from its investments, and thus
dividends distributed to shareholders attributable to the investment company
taxable income of the trust (if any) will not qualify for the maximum 15% tax
rate on dividends under the Jobs and Growth Tax Relief Reconciliation Act of
2003 enacted on May 28, 2003. Capital gain dividends distributed by the trust to
individual shareholders generally will qualify for the maximum 15% tax rate on
long-term capital gains under such Act. Absent further legislation, the maximum
15% tax rate on long-term capital gains will cease to apply to taxable years
beginning after December 31, 2008.
Distributions to shareholders in the form of additional trust shares may be
tax-exempt or taxable as described above. In the case of newly issued shares of
the trust (i.e. when there is a market premium), the amount of the distribution
and the basis for federal income tax purposes of the shares to the shareholders
will be equal to the fair market value of the shares on the distribution date.
In the case of shares acquired through open market purchases (i.e. when there is
a market discount), the amount of the distribution and the basis to shareholders
will be equal to the cash they would have received had they elected to receive
cash.
If the trust retains any net capital gain for a taxable year, the trust may
designate the retained amount as undistributed capital gains in a notice to
shareholders who, if subject to U.S. federal income tax on long-term capital
gains, (i) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gain, their proportionate shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the trust on the undistributed amount against their
U.S. federal income tax liabilities, if any, and to claim refunds to the extent
the credit exceeds such liabilities.
Although dividends generally will be treated as distributed when paid, any
dividend declared by the trust as of a record date in October, November or
December and paid during the following January will be treated for U.S. federal
income tax purposes as received by shareholders on December 31 of the calendar
year in which it is declared. In addition, certain other distributions made
after the close of a taxable year of the trust may be "spilled back" and treated
as paid by the trust (except for purposes of the 4% excise tax) during such
taxable year. In such case, shareholders generally will be treated as having
received such dividends in the taxable year in which the distributions were
actually made. The trust's dividends and distributions will generally not
qualify to any material extent for any dividends-received deduction that might
otherwise be available for certain dividends received by shareholders that are
corporations. In addition, no portion of the trust's distributions from net
capital gain will qualify for this deduction.
If the trust invests in certain pay-in-kind securities, zero coupon securities,
deferred interest securities or, in general, any other securities with original
issue discount (or with market discount if the trust elects to include market
discount in income currently), the trust generally must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, the trust must distribute, at least
annually, all or substantially all of its investment company taxable income and
net tax-exempt interest, including such accrued income, to shareholders to
qualify as a regulated investment company under the Code and avoid U.S. federal
income and excise taxes. Therefore, the trust may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to borrow the cash, to satisfy distribution requirements.
The trust may invest to a significant extent in debt obligations that are in the
lowest rating categories or are unrated, including debt obligations of issuers
not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
trust. Tax rules are not entirely clear about issues such as when the trust may
cease to accrue interest, original issue discount or market discount, when and
to what extent deductions may be taken for bad debts or worthless securities,
how payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by the trust, in
the event it invests in such securities, in order to seek to ensure that it
distributes sufficient income to preserve its status as a regulated investment
company and does not become subject to U.S. federal income or excise tax.
If the trust utilizes leverage through borrowing or issuing preferred shares, a
failure by the trust to meet the asset coverage requirements imposed by the 1940
Act or by any rating organization that has rated such leverage, or additional
restrictions that may be imposed by certain lenders on the payment of dividends
or distributions potentially could limit or suspend the trust's ability to make
distributions on its common shares. Such a limitation or suspension or
limitation could prevent the trust from distributing at least 90% of its
investment company taxable income and net tax-exempt interest as is required
under the Code and therefore might jeopardize the trust's qualification for
taxation as a regulated investment company under the Code and/or might subject
the trust to the 4% excise tax discussed above. Upon any failure to meet such
asset coverage requirements, the trust may, in its sole discretion, purchase or
redeem shares of preferred stock in order to maintain or restore the requisite
asset coverage and avoid the adverse consequences to the trust and its
shareholders of failing to satisfy the distribution requirement. There can be no
assurance, however, that any such action would achieve these objectives. The
trust will endeavor to avoid restrictions on its ability to distribute
dividends.
For U.S. federal income tax purposes, the trust is permitted to carry forward an
unused net capital loss for any year to offset its capital gains, if any, for up
to eight years following the year of the loss. To the extent subsequent capital
gains are offset by such losses, they would not result in U.S. federal income
tax liability to the trust and are not expected to be distributed as such to
shareholders.
At the time of an investor's purchase of trust shares, a portion of the purchase
price may be attributable to realized or unrealized appreciation in the trust's
portfolio or undistributed taxable income of the trust. Consequently, subsequent
distributions by the trust with respect to these shares from such appreciation
or income may be taxable to such investor even if the trading value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares and the distributions economically represent a
return of a portion of the investment.
Sales and other dispositions of trust shares are taxable events for shareholders
that are subject to tax. Shareholders should consult their own tax advisers with
reference to their individual circumstances to determine whether any particular
transaction in trust shares is properly treated as a sale for tax purposes, as
the following discussion assumes, and the tax treatment of any gains or losses
recognized in such transactions. In general, if trust shares are sold, the
shareholder will recognize gain or loss equal to the difference between the
amount realized on the sale and the shareholder's adjusted basis in the shares
sold. Such gain or loss generally will be treated as long-term capital gain or
loss if the shares sold were held for more than one year and otherwise generally
will be treated as short-term capital gain or loss. Any loss realized by a
shareholder upon the sale or other disposition of shares with a tax holding
period of six months or less will be disallowed to the extent of any
exempt-interest dividends paid with respect to such shares, and any portion of
such loss that exceeds the amount disallowed will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares. Losses on sales or other dispositions
of shares may be disallowed under "wash sale" rules in the event the selling
shareholder makes other investments in the trust (including those made pursuant
to reinvestment of dividends and/or capital gain distributions) within a period
of 61 days beginning 30 days before and ending 30 days after a redemption or
other disposition of shares. In such a case, the disallowed portion of any loss
generally would be included in the U.S. federal tax basis of the shares acquired
in the other investments. If shares are sold after tax-exempt income is accrued
but before it is paid as a dividend, the sales price generally will reflect the
accrued income, which will increase the taxable gain (or reduce the loss) on the
sale, even though the income would have been exempt from tax if distributed as a
dividend prior to the sale.
Under recently promulgated Treasury regulations, if a shareholder recognizes a
loss with respect to shares of $2 million or more for an individual shareholder,
or $10 million or more for a corporate shareholder, in any single taxable year
(or a greater amount over a combination of years), the shareholder must file
with the IRS a disclosure statement on Form 8886. Direct shareholders of
portfolio securities are in many cases excepted from this reporting requirement
but, under current guidance, shareholders of regulated investment companies are
not excepted. The fact that a loss is reportable under these regulations does
not affect the legal determination of whether or nor the taxpayer's treatment of
the loss is proper. Shareholders should consult with their tax advisers to
determine the applicability of these regulations in light of their individual
circumstances.
Options written or purchased and futures contracts entered into by the trust on
certain securities or indices may cause the trust to recognize gains or losses
from marking-to-market even though such options may not have lapsed, been closed
out, or exercised, or such futures contracts may not have been performed or
closed out. The tax rules applicable to these contracts may affect the
characterization of some capital gains and losses realized by the trust as
long-term or short-term. Additionally, the trust may be required to recognize
gain if an option, futures contract, short sale or other transaction that is not
subject to the mark-to-market rules is treated as a "constructive sale" of an
"appreciated financial position" held by the trust under Section 1259 of the
Code. Any net mark-to-market gains and/or gains from constructive sales may also
have to be distributed to satisfy the distribution requirements referred to
above even though the trust may receive no corresponding cash amounts, possibly
requiring the disposition of portfolio securities or borrowing to obtain the
necessary cash. Losses on certain options or futures contracts and/or offsetting
positions (portfolio securities or other positions with respect to which the
trust's risk of loss is substantially diminished by one or more options or
futures contracts) may also be deferred under the tax straddle rules of the
Code, which may also affect the characterization of capital gains or losses from
straddle positions and certain successor positions as long-term or short-term.
Certain tax elections may be available that would enable the trust to ameliorate
some adverse effects of the tax rules described in this paragraph. The tax rules
applicable to options, futures and straddles may affect the amount, timing and
character of the trust's income and gains or losses and hence of its
distributions to shareholders.
The exclusion from gross income of exempt-interest dividends for U.S. federal
income tax purposes does not necessarily result in exclusion under the tax laws
of any state or local taxing authority, which vary with respect to the taxation
of such income. Many states will exempt from tax that portion of an
exempt-interest dividend which represents interest received by the trust on that
state's securities, subject in some cases to compliance with concentration
and/or reporting requirements, which the trust makes no commitment to seek to
satisfy. However, the trust will report annually to its shareholders the
percentage of interest income received by the trust during the preceding year on
federally tax-exempt obligations indicating, on a state-by-state basis only, the
source of such income. Each shareholder is advised to consult his own tax
adviser regarding the exclusion from gross income, if any, of exempt-interest
dividends under the state and local tax laws applicable to the shareholder.
The federal income tax treatment of the trust's investment in transactions
involving swaps, caps, floors, and collars is uncertain and may be subject to
recharacterization by the IRS. To the extent the tax treatment of such
securities or transactions differs from the tax treatment expected by the trust,
the timing or character of income recognized by the trust could be affected,
requiring the trust to purchase or sell securities, or otherwise change its
portfolio, in order to comply with the tax rules applicable to regulated
investment companies under the Code.
The IRS has taken the position that if a regulated investment company has two
classes or more of shares, it must designate distributions made to each class in
any year as consisting of no more than such class's proportionate share of
particular types of income, including tax-exempt interest, net capital gains,
and other income subject to federal income tax. A class's proportionate share of
a particular type of income is determined according to the percentage of total
dividends paid by the regulated investment company to such class. Consequently,
if both common shares and preferred shares are outstanding, the trust intends to
designate distributions made to the classes of particular types of income in
accordance with the classes' proportionate shares of such income. Thus, the
trust will designate exempt-interest dividends, capital gain dividends, and
other taxable dividends in a manner that allocates such income between the
holders of common shares and preferred shares in proportion to the total
dividends paid to each class during the taxable year, or otherwise as required
by applicable law.
Federal law requires that the trust withhold (as "backup withholding") 28% of
reportable payments, including dividends (other than exempt-interest dividends),
capital gain distributions and the proceeds of redemptions and exchanges or
repurchases of trust shares, paid to shareholders who have not complied with IRS
regulations. In order to avoid this withholding requirement, shareholders must
certify on their Account Applications, or on separate IRS Forms W-9, that the
Social Security Number or other Taxpayer Identification Number they provide is
their correct number and that they are not currently subject to backup
withholding, or that they are exempt from backup withholding. The trust may
nevertheless be required to withhold if it receives notice from the IRS or a
broker that the number provided is incorrect or backup withholding is applicable
as a result of previous underreporting of interest or dividend income. Backup
withholding may be inapplicable for any year in which the trust reasonably
estimates that at least 95% of its dividends paid with respect to such year are
exempt-interest dividends.
The description of certain U.S. federal tax provisions above relates only
to U.S. federal income tax consequences for shareholders who are U.S. persons,
i.e., U.S. citizens or residents or U.S. corporations, partnerships, trusts or
estates, and who are subject to U.S. federal income tax. This description does
not address the special tax rules that may be applicable to particular types of
investors, such as financial institutions, insurance companies, securities
dealers, or tax-exempt or tax-deferred plans, accounts or entities. Investors
other than U.S. persons may be subject to different U.S. tax treatment,
including a non-resident alien U.S. withholding tax at the rate of 30% or at a
lower treaty rate on amounts treated as ordinary dividends from the trust and,
unless an effective IRS Form W-8BEN or other authorized withholding certificate
is on file, to backup withholding at the rate of 28% on certain other payments
from the trust. Shareholders should consult their own tax advisers on these
matters and on state, local and other applicable tax laws.
PERFORMANCE-RELATED, COMPARATIVE AND OTHER INFORMATION
PERFORMANCE-RELATED INFORMATION. From time to time, in advertisements, in sales
literature or in reports to shareholders, the past performance of the trust may
be illustrated and/or compared with that of other investment companies with
similar investment objectives and to municipal securities or other relevant
indices. For example, yield or total return of the trust's shares may be
compared to averages or rankings prepared by Lipper, Inc., a widely recognized
independent service which monitors mutual fund performance; the Lehman Brothers
Municipal Bond Index; or other comparable indices or investment vehicles. In
addition, the performance of the trust's shares may be compared to alternative
investment or savings vehicles and/or to indices or indicators of economic
activity, e.g., inflation or interest rates. The trust may also include
securities industry or comparative performance information generally and in
advertising or materials marketing the trust's shares. Performance rankings and
listings reported in newspapers or national business and financial publications,
such as Barron's, Business Week, Consumers Digest, Consumer Reports, Financial
World, Forbes, Fortune, Investors Business Daily, Kiplinger's Personal Finance
Magazine, Money Magazine, New York Times, Smart Money, USA Today, U.S. News and
World Report, The Wall Street Journal and Worth, may also be cited (if the trust
is listed in any such publication) or used for comparison, as well as
performance listings and rankings from various other sources including Bloomberg
Financial Markets, CDA/Wiesenberger, Donoghue's Mutual Fund Almanac, Ibbotson
Associates, Investment Company Data, Inc., Johnson's Charts, Kanon Bloch Carre
and Co., Lipper, Inc., Micropal, Inc., Morningstar, Inc., Schabacker Investment
Management and Towers Data Systems, Inc. In addition, from time to time
quotations from articles from financial publications such as those listed above
may be used in advertisements, in sales literature or in reports to shareholders
of the trust.
The trust may also present, from time to time, historical information depicting
the value of a hypothetical account in one or more classes of the trust since
inception.
Past performance is not indicative of future results. At the time common
shareholders sell their shares, they may be worth more or less than their
original investment. At any time in the future, yields and total return may be
higher or lower than past yields and total return, and there can be no assurance
that any historical results will continue.
PIONEER. From time to time, Pioneer or the trust may use, in advertisements or
information furnished to present or prospective shareholders, information
regarding Pioneer including, without limitation, information regarding Pioneer's
investment style, countries of operation, organization, professional staff,
clients (including other registered investment companies), assets under
management and performance record. These materials may refer to opinions or
rankings of Pioneer's overall investment management performance contained in
third-party reports or publications. Pioneer's U.S. mutual fund investment
history includes creating in 1928 one of the first mutual funds. Pioneer has
traditionally served a mutual fund and an institutional clientele.
Advertisements for the trust may make reference to certain other open- or
closed-end investment companies managed by Pioneer.
As of 5/31/03, 10-year investment-grade municipal bonds were yielding
approximately 92% of the taxable yield of 10-year U.S. Treasury securities, vs.
the average since 1996 of 79% of the taxable yield of the 10-year U.S. Treasury
securities. High yield municipal bonds are also currently trading with
historically wide spreads and attractive valuations relative to investment grade
municipals. High yield municipals have also shown low correlations to other
asset classes, including corporate bonds, U.S. Treasury bonds and equity
securities, potentially making them attractive portfolio diversifiers.1
--------
1 10-year U.S. Treasuries represented by Merrill Lynch Treasuries 10-yr.
Index. Corporate bonds offer a fixed principal value and a fixed rate of return
if held to maturity. Equity investments offer a higher rate of return, but may
be more volatile and riskier than fixed income investments.
SPREAD BETWEEN HIGH YIELD MUNICIPAL SECURITIES AND INVESTMENT GRADE MUNICIPAL
SECURITIES 10/31/95 - 5/31/03
As of May 31, 2003, spreads between high yield and investment grade municipal
bonds were approximately twice their historical (1995-2003) average (see chart
below).
[Table appears here indicating the spread between investment and below
investment grade municipal securities from 10/31/95 through 5/31/03]
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Source: Pioneer
research. Municipal bonds represented by Lehman High Yield Municipal Bond Index
and U.S. Municipal Bond Index and U.S. Municipal Bond Index, respectively. Both
are unmanaged, measuring the performance of their respective sectors. It is not
possible to invest directly in an index. Below-investment grade securities grade
securities may be more volatile and riskier than investment grade securities.
Chart prepared by Pioneer.
AFTER TAX YIELD AND DEFAULT RATES 1970 - 2000
As the chart (below) shows, high yield municipals have offered greater after-tax
income with significantly lower default rates than high yield corporate bonds.
Average default rates on municipal bonds have historically been extremely low
relative to corporate securities. In fact, of the 375,818 municipal issuers
between 1970 and 2000, only 18 defaulted. Essential service revenue bonds, in
particular, have offered safe havens, with no defaults recorded for
Moody's-rated issuers during the same 30-year period.
[Table appears here showing the after tax yield and default rates on (i)
investment grade municipal securities, (ii) investment grade corporate bonds,
(iii) high yield municipal securities and (iv) high yield corporate bonds.]
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Source: Moody's Municipal
Bond Default Study - November, 2002. 1-year average default rates for the period
1970 to 2000 (most recent data available). After-tax yield assumes maximum 35%
federal tax bracket. Sectors represented by the Lehman High Yield Municipal Bond
Index, Merrill Lynch High Yield Master II Index, Lehman U.S. Municipal Bond
Index and Citigroup Corporate Bond Index, unmanaged measures of high yield
municipal, high yield corporate, investment grade municipal and investment grade
corporate bonds, respectively. It is not possible to invest directly in an
index. Below-investment grade securities may be more volatile and riskier than
investment grade securities. Chart prepared by Pioneer.
The income from a municipal bond fund is generally exempt from regular federal
income taxes, which can result in a higher after-tax return than a similar
taxable investment. On a tax-equivalent basis, municipals have provided
favorable yields to U.S. Treasuries. High yield municipal bond offered greater
tax-equivalent yields than those of their taxable counterparts including high
yield corporate bonds, as of May 31, 2003.
[Table here showing the after tax yield on on (i) investment grade municipal
securities, (ii) investment grade corporate bonds, (iii) high yield municipal
securities, (iv) high yield corporate bonds and 10 year U.S.
Treasurities.]
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. Source: Pioneer research.
Assumes maximum 35% federal tax bracket. Sectors represented by the Lehman High
Yield Municipal Bond, Merrill Lynch High Yield Master II, Lehman U.S. Municipal
Bond, Citigroup Corporate Bond and Merrill Lynch Treasuries, 10-yr. Indices,
unmanaged measures of high yield municipal, high yield corporate, investment
grade municipal and investment grade corporate and 10-year U.S. Treasury bonds,
respectively. It is not possible to invest directly in an index.
Below-investment securities may be more volatile and riskier than investment
grade securities. Treasury securities are guaranteed as to the timely payment of
interest and principal; other asset classes shown are not. Corporate bonds offer
a fixed principal value and a fixed rate of return if held to maturity. Chart
prepared by Pioneer.
EXPERTS
The independent auditors of the trust, _________________, located at ___
________________, ______, _____________ _____, provide accounting, auditing and
tax preparation services to the trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating to
the shares offered hereby, has been filed by the trust with the SEC, Washington,
D.C. The 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
trust and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in the 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. A copy 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 AND INDEPENDENT AUDITORS' REPORT
PIONEER MUNICIPAL HIGH INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
REPORT OF INDEPENDENT AUDITORS
APPENDIX A - DESCRIPTION OF RATINGS2
MOODY'S PRIME RATING SYSTEM
Moody's short-term ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. Such obligations generally have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment grade,
to indicate the relative repayment ability of rated issuers.
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries. High rates of return on
funds employed.
Conservative capitalization structure 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.
Prime-2: Issuers (or supporting institutions) rated Prime-2 have a strong
ability to repay 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, may be more subject to
variation than is the case for Prime-2 securities. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Prime-3: Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt-protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
In addition, in certain countries the prime rating may be modified by the
issuer's or guarantor's senior unsecured long-term debt rating.
MOODY'S DEBT RATINGS
Aaa: Bonds and preferred stock, 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 and preferred stock 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 risk appear somewhat larger than
the Aaa securities.
A: Bonds and preferred stock 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 some time in the
future.
Baa: Bonds and preferred stock 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 and preferred stock 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.
--------
2The ratings indicated herein are believed to be the most recent ratings
available at the date of this statement of additional information for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligation to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of the trust's fiscal year-end.
B: Bonds and preferred stock 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 and preferred stock 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 and preferred stock 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 and preferred stock 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.
Moody's assigns ratings to individual debt securities issued from medium-term
note ("MTN") programs, in addition to indicating ratings to MTN programs
themselves. Notes issued under MTN programs with such indicated ratings are
rated at issuance at the rating applicable to all pari passu notes issued under
the same program, at the program's relevant indicated rating, provided such
notes do not exhibit any of the characteristics listed below. For notes with any
of the following characteristics, the rating of the individual note may differ
from the indicated rating of the program:
1) Notes containing features which link the cash flow and/or market value to the
credit performance of any third party or parties. 2) Notes allowing for negative
coupons, or negative principal.
3) Notes containing any provision which could obligate the investor to make any
additional payments.
Market participants must determine whether any particular note is rated, and if
so, at what rating level.
Note: 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.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
A-1: A short-term obligation rated A-1 is rated in the highest category by
Standard & Poor's. 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 Standard & Poor's 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.
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based, in varying degrees, on the following
considerations:
o 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;
o Nature of and provisions of the obligation;
o 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 rating 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. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. 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 its 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.
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: A subordinated debt or preferred stock obligation rated C is CURRENTLY HIGHLY
VULNERABLE to nonpayment. The C rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action taken, but payments on this
obligation are being continued. A C also will be assigned to a preferred stock
issue in arrears on dividends or sinking fund payments, but that is currently
paying.
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 Standard & Poor's 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.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
LOCAL CURRENCY AND FOREIGN CURRENCY RISKS
Country risk considerations are a standard part of Standard & Poor's analysis
for credit ratings on any issuer or issue. Currency of repayment is a key factor
in this analysis. An obligor's capacity to repay foreign currency obligations
may be lower than its capacity to repay obligations in its local currency due to
the sovereign government's own relatively lower capacity to repay external
versus domestic debt. These sovereign risk considerations are incorporated in
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different for the same issuer.
APPENDIX B - PROXY VOTING GUIDELINES AND PROCEDURES
APPENDIX C--AUCTION PROCEDURES
APPENDIX D--SETTLEMENT PROCEDURES
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Financial statements.
[To be filed by amendment.]
2. Exhibits:
a.1. Agreement and Declaration of Trust.(1)
a.2. Certificate of Trust.(1)
a.3. Statement of Preferences of Auction Market Preferred Shares.(5)
b. By-Laws.(1)
c. None.
d. Specimen Share Certificate(s).(5)
e. Automatic Dividend Reinvestment Plan.(3)
f. None.
g. Investment Advisory Agreement with Pioneer Investment Management,
Inc.(4)
h. Underwriting Agreement among the Registrant, Pioneer Investment
Management, Inc. and Underwriters.(5)
i. None.
j. Custodian Agreement.(3)
k.1. Administration Agreement with Pioneer Investment Management,
Inc. (formerly Pioneering Management Corporation).(4)
k.2. Expense Limit and Reimbursement Agreement.(4)
k.3. Investment Company Service Agreement.(4)
k.4. Additional Compensation Agreement.(4)
k.5. Shareholder Servicing Agreement betweem the Registrant and
UBS Securities.(4)
k.6. Sub-Transfer Agent Services Agreement.(4)
k.7. Administration Agreement among the Registrant, Pioneer Investment
Management, Inc. and Princeton Administrators L.P.(4)
k.8. Auction Agency Agreement.(5)
l. Opinion of Counsel.(5)
m. None.
n. Consent of Independent Auditors.(5)
o. None.
p. None.
q. None.
r. Code of Ethics.(2)
s. Powers of Attorney.(2)
(1) Incorporated herein by reference from the exhibits filed in the
Registrant's Registration Statement on Form N-2 (File No.
333-103836) as filed with the Securities and Exchange Commission
(the "SEC") on March 14, 2003 (Accession No. 0001223026-03-
000007).
(2) Incorporated herein by reference from the exhibits filed in Pre-
Effective Amendment No. 2 to the Registrant's Registration
Statement on Form N-2 (File No. 333-103836) as filed with the
SEC on July 2, 2003 (Accession No. 0001016964-03-000160).
(3) Incorporated herein by reference from the exhibits filed in Pre-
Effective Amendment No. 3 to the Registrant's Registration
Statement on Form N-2 (File No. 333-103836) as filed with the
SEC on July 17, 2003 (Accession No. 0001223026-03-000026).
(4) Filed herewith.
(5) To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
[To be completed]
C-1
ITEM 26. OTHER EXPENSES AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Registration fees $
Printing (other than certificates)
Engraving and printing certificates
Accounting fees and expenses
Legal fees and expenses
NASD fee
Miscellaneous
Total $
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of August 8, 2003, the number or record holders of each class of securities
of the Registrant was
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common Shares (no par value) 6
Preferred Shares (par value, $.0001) 0
ITEM 29. INDEMNIFICATION
The Registrant's Agreement and Declaration of Trust (the "Declaration"),
dated March 13, 2003, provides that every person who is, or has been, a
Trustee or an officer, employee or agent of the Registrant (including any
individual who serves at its request as director, officer, partner, trustee or
the like of another organization in which it has any interest as a shareholder,
creditor or otherwise) ("Covered Person") shall be indemnified by the Registrant
or the appropriate series of the Registrant to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or paid by
him in connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Covered
Person and against amounts paid or incurred by him in the settlement thereof;
provided that no indemnification shall be provided to a Covered Person (i) who
shall have been adjudicated by a court or body before which the proceeding was
brought (A) to be liable to the Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, or (B) not to have acted in good
faith in the reasonable belief that his action was in the best interest of the
Registrant; or (ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
The Declaration also provides that if any shareholder or former
shareholder of any series of the Registrant shall be held personally
liable solely by reason of his being or having been a shareholder and
not because of his acts or omissions or for some other reason, the
shareholder or former shareholder (or his heirs, executors,
administrators or other legal representatives or in the case of any
entity, its general successor) shall be entitled out of the assets
belonging to the applicable series of the Registrant to be held
harmless from and indemnified against all loss and expense arising from
such liability. The Registrant, on behalf of its affected series,
shall, upon request by such shareholder, assume the defense of any
claim made against such shareholder for any act or obligation of the
series and satisfy any judgment thereon from the assets of the series.
C-2
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be available to Trustees,
officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised
that in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant's expenses incurred or paid
by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such Trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933
Act and will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Pioneer Investment Management, Inc. ("Pioneer Investments") is a
registered investment adviser under the Investment Advisers Act of
1940, as amended, and is an indirect, wholly owned subsidiary of
UniCredito Italiano S.p.A ("UniCredito"). Pioneer Investments manages
investment companies, pension and profit sharing plans, trusts, estates
or charitable organizations and other corporations or business
entities.
To the knowledge of the Registrant, none of Pioneer Investments'
directors or executive officers is or has been during their employment
with Pioneer Investments engaged in any other business, profession,
vocation or employment of a substantial nature for the past two fiscal
years, except as noted below. Certain directors and officers, however,
may hold or may have held various positions with, and engage or have
engaged in business for, the investment companies that Pioneer
Investments manages and/or other UniCredito subsidiaries.
OTHER BUSINESS, PROFESSION, VOCATION OR
EMPLOYMENT OF SUBSTANTIAL NATURE WITHIN
NAME OF TRUSTEE/OFFICER LAST TWO FISCAL YEARS
John F. Cogan, Jr. Of Counsel to Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts 02109
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records are maintained at the Registrant's office at
60 State Street, Boston, Massachusetts 02109; contact the Treasurer.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. Not applicable.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. (a) For the purposes of determining any liability under the
1933 Act, the information omitted from the form of prospectus
C-3
filed as part of a registration statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the 1933 Act shall be
deemed to be part of the Registration Statement as of the time
it was declared effective.
(b) For the purpose of determining any liability under the
1933 Act, 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 prominent delivery within two business days
of receipt of a written or oral request the Registrant's statement
of additional information.
C-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and/or
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 Boston and Commonwealth of Massachusetts, on the 8th
day of August, 2003.
PIONEER MUNICIPAL HIGH INCOME TRUST
By /s/ Osbert M. Hood
Osbert M. Hood
Executive Vice President and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
Signature Title
John F. Cogan, Jr.* Chairman of the Board )
John F. Cogan, Jr. and President )
(Principal Executive )
Officer) )
)
)
Vincent Nave* Chief Financial Officer )
Vincent Nave and Treasurer (Principal )
Financial and Accounting )
Officer) )
)
)
Trustees: )
)
)
Mary K. Bush* )
Mary K. Bush )
)
)
John F. Cogan, Jr.* )
John F. Cogan, Jr. )
)
)
)
Richard H. Egdahl* )
Richard H. Egdahl )
)
)
Margaret B. W. Graham* )
Margaret B. W. Graham )
)
)
Marguerite A. Piret* )
Marguerite A. Piret )
)
)
/s/ Osbert M. Hood )
Osbert M. Hood )
)
)
Stephen K. West* )
Stephen K. West )
)
)
John Winthrop* )
John Winthrop )
)
)
*By: /s/ Osbert M. Hood Dated: August 8, 2003)
Osbert M. Hood
Attorney-in-fact