As filed with the Securities and Exchange Commission on December 19, 2002
1933 Act File No. 333-100605
1940 Act File No. 811-21235
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. 4 .................... X
Post-Effective Amendment No. ....................
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 4 ..................................... X
FEDERATED PREMIER MUNICIPAL INCOME FUND
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Leslie K. Ross, Esquire
Reed Smith LLP
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Copies to:
Matthew G. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
Approximate Date of Proposed Public Offering: As soon as possible after
the effectiveness of the Registration Statement.
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 the
Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such dates as the Commission, acting
pursuant to said Section 8(a), may determine.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Amount Being Proposed Proposed Maximum
Securities Registered Maximum Offering Aggregate Offering
Being Price Per Unit Price
Registered
Common stock 7,500,000 $15/share $112,500,000
shares
Amount of Registration Fee*
$10,350
*$5,520 of which was previously paid on October 17, 2002.
CROSS-REFERENCE SHEET
PARTS A AND B
ITEM NO. CAPTION LOCATION IN PROSPECTUS
1. Outside Front Cover Page Outside Front Cover Page
2. Inside Front and Outside Back Inside Front and Outside Back
3. Fee Table and Synopsis Summary of Fund Expenses
4. Financial Highlights Not Applicable
5. Plan of Distribution Outside Front Cover Page
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Outside Front Cover Page
Registrant
9. Management Management of the Fund
10. Capital Stock, Long-Term Debt Shares of Beneficial Interests
and Other Securities
11. Defaults and Arrears on Senior Not Applicable
Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of SAI Table of Contents (SAI)
14. Cover Page of SAI Cover Page (SAI)
15. Table of Contents of SAI Table of Contents (SAI)
16. General Information and Appendix A (SAI)
History
17. Investment Objective and Additional Investment
Policies
18. Management Trustees and Officers (SAI);
Advisory and Other Services
19. Control Persons and Principal Not Applicable
Holders of Securities
20. Investment Adisory and Other Investment Advisory and Other
Services (SAI)
Services
21. Brokerage Allocation and Other Brokerage Commissions (SAI)
Practices
22. Tax Status Not Applicable
23. Financial Statements Financial Statements (SAI)
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.
Subject to Completion
Preliminary Prospectus dated November 25, 2002
[Logo]
PROSPECTUS
[4,000,000] SHARES
Federated Premier Municipal Income Fund
Common Shares
$15.00 Per Share
---------------------
Investment Objective. Federated Premier Municipal Income Fund (the "Fund")
is a newly organized, diversified, closed-end management investment company. The
Fund's investment objective is to provide current income exempt from federal
income tax, including alternative minimum tax ("AMT"). The Fund cannot assure
you that it will achieve its investment objective.
Investment Portfolio. The Fund will invest primarily in securities that, in
the opinion of bond counsel to the issuer, or on the basis of another authority
believed by Federated Investment Management Company (the Fund's investment
adviser) to be reliable, pay interest exempt from federal income tax, including
AMT. The Fund normally invests substantially all (at least 90%) of its total
assets in tax exempt securities. The Fund will invest at least 80% of its total
assets in investment grade tax exempt securities. The Fund may invest up to 20%
of its total assets in tax exempt securities of below investment grade quality
(but not lower than B). Tax exempt securities of below investment grade quality
are regarded as having predominately speculative characteristics with respect to
the issuer's capacity to pay interest and repay principal, and are commonly
referred to as "junk bonds." Under normal circumstances, the Fund will maintain
a dollar-weighted average portfolio maturity of 15 to 30 years and a
dollar-weighted average duration of 7 to 13 years.
No Prior History. Because the Fund is newly organized, its common
shares ("Common Shares") have no history of public trading. Shares of
closed-end investment companies frequently trade at a discount from their
net asset values ("NAV") and investors may lose money by purchasing Common
Shares in the initial public offering. This risk may be greater for
investors expecting to sell their Common Shares in a relatively short
period after completion of the public offering. The Common Shares have
been approved for listing, subject to notice of issuance, on the New York
Stock Exchange under the symbol "FMN".
Preferred Shares. The Fund intends to use leverage by issuing shares of
preferred stock ("Preferred Shares") representing approximately 38% of the
Fund's capital immediately after their issuance. By using leverage, the Fund
will seek to obtain higher dividends for holders of Common Shares ("Common
Shareholders") than if the Fund did not use leverage. Leveraging is a
speculative technique and there are special risks involved. There can be no
assurance that a leveraging strategy will be used or that it will be successful
during any period in which it is employed. See "Preferred Shares and Leverage,"
"Risks-Leverage Risk" and "Risks-Derivative Contracts and Inverse Floater Risk."
Investing in Common Shares involves certain risks. See "Risks" on
page 25 of this prospectus.
Per Share Total
Public offering price $15.00 $
Sales load $0.675 $
Estimated offering
expenses(1) $0.03 $
Proceeds to the Fund $14.295 $
(1) In addition to the sales load, the Fund will pay organizational and
offering expenses of up to $0.03 per Common Share, estimated to total $
"Proceeds to the Fund" (above) reflects such expenses. Federated Investment
Management Company has agreed to pay organizational expenses and offering costs
of the Fund (other than the sales load) that exceed $0.03 per Common Share.
The underwriters may purchase up to additional Common Shares at the public
offering price, less the sales load, within 45 days from the date of this
prospectus to cover over-allotments.
The Securities and Exchange Commission ("SEC") has not approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver Common Shares to purchasers on or
about .
Merrill Lynch & Co.
UBS Warburg A.G. Edwards & Sons, RBC Capital Markets
Inc.
Wachovia Securities Wells Fargo Securities, Advest, Inc.
LLC
Robert W. Baird & Co. BB&T Capital Markets, a Fahnestock & Co. Inc.
subsidiary of Scott &
Stringfellow, Inc.
Ferris, Baker Watts Janney Montgomery Scott McDonald Investments,
Incorporated LLC Inc.
Parker/Hunter Quick & Reilly, Inc. Stephens Inc.
Incorporated
Stifel, Nicholaus & Company Incorporated
The date of this prospectus is , 2002.
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in Common Shares and retain it for
future reference. A Statement of Additional Information, dated , 2002,
containing additional information about the Fund, has been filed with the SEC
and is incorporated by reference in its entirety into this prospectus. You may
request a free copy of the Statement of Additional Information, the table of
contents of which is on page 52 of this prospectus, by calling 1-800-341-7400 or
by writing to the Fund, or obtain a copy (and other information regarding the
Fund) from the SEC's web site (http://www.sec.gov).
The Fund's Common Shares are not deposits or obligations of any bank, are
not endorsed or guaranteed by any bank and are not insured or guaranteed by the
U.S. government, the Federal Reserve Board or any other government agency.
TABLE OF CONTENTS
Prospectus Summary.....................................................2
Summary Of Fund Expenses...............................................2
The Fund...............................................................2
Use Of Proceeds........................................................2
The Fund's Investments.................................................2
Preferred Shares And Leverage..........................................2
Risks..................................................................2
How The Fund Manages Risk..............................................2
Management Of The Fund.................................................2
Net Asset Value........................................................2
Distributions..........................................................2
Dividend Reinvestment Plan.............................................2
Description Of Shares..................................................2
Certain Provisions In The Agreement And Declaration Of Trust...........2
Closed-End Fund Structure..............................................2
Repurchase Of Common Shares............................................2
Tax Matters............................................................2
Underwriting...........................................................2
Custodian And Transfer Agent...........................................2
Legal Opinions.........................................................2
Table Of Contents For The Statement Of Additional Information..........2
You should rely only on the information contained or incorporated by
reference in this prospectus. Neither the Fund nor the underwriters have
authorized anyone to provide you with different information. Neither the Fund
nor the underwriters are making an offer of these securities in any state where
the offer is not permitted. You should not assume that the information contained
in this prospectus is accurate as of any other date than the date on the front
of this prospectus.
Until , 2003 (25 days after the date of this prospectus), all dealers that
buy, sell or trade the Common Shares, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in Common Shares. You
should review the more detailed information contained in this prospectus and in
the Statement of Additional Information.
THE FUND..........................Federated Premier Municipal Income
Fund is a newly organized,
diversified, closed-end management
investment company. See "The Fund."
THE OFFERING......................The Fund is offering 4,000,000
Common Shares, with a par value of
$0.01 per Common Share, at $15.00
per Common Share, through a group of
underwriters led by Merrill Lynch,
Pierce, Fenner & Smith Incorporated
("Merrill Lynch"). You must
purchase at least 100 Common Shares.
The Fund has given the underwriters
an option to purchase up to
additional Common Shares to cover
orders in excess of Common
Shares. Federated Investment
Management Company (the "Adviser")
has agreed to pay organizational
expenses and offering costs (other
than the sales load) that exceed
$0.03 per Common Share. See
"Underwriting."
INVESTMENT OBJECTIVE............ The Fund's investment objective is
to provide current income exempt
from federal income tax, including
AMT.
INVESTMENT POLICIES...............The Fund will invest primarily in
securities that, in the opinion of
bond counsel to the issuer, or on
the basis of another authority
believed by the Adviser to be
reliable, pay interest exempt from
federal income tax, including AMT.
The Fund normally invests
substantially all (at least 90%) of
its total assets in tax exempt
securities. The Fund will invest at
least 80% of its total assets in
investment grade tax exempt
securities. Investment grade tax
exempt securities are those rated
within the four highest categories
by a nationally recognized
statistical rating organization
("NRSRO"). See "Investment
Ratings." The Fund may invest up
to 20% of its total assets in tax
exempt securities of below
investment grade quality (but not
lower than B). Tax exempt
securities of below investment grade
quality are regarded as having
predominately speculative
characteristics with respect to the
issuer's capacity to pay interest
and repay principal and are commonly
referred to as "junk bonds." See
"Investment Ratings."
Under normal circumstances, the Fund
will maintain a dollar-weighted
average portfolio maturity of 15 to
30 years and a dollar-weighted
average duration of 7 to 13 years.
See "The Fund's Investments."
The Fund may use derivative
contracts for risk management
purposes. Prior to the issuance of
Preferred Shares, the Fund may
leverage the portfolio by investing
up to 10% of its total assets in
inverse floaters and by investing in
derivative contracts. The Fund's
use of derivative contracts will be
limited by the Investment Company
Act of 1940, as amended (the "1940
Act"). See "Risks-Leverage Risk,"
"Risks-Derivative Contract and
Inverse Floater Risk," and
"Preferred Shares and Leverage-Other
Forms of Leverage and Borrowings."
SPECIAL TAX The Fund invests primarily in
CONSIDERATIONS....................securities that pay interest exempt
from federal income tax, including
AMT. Consequently, the regular
monthly dividends that you receive
generally will be exempt from
federal income tax, including AMT.
However, dividends may be subject to
state and local taxes. In addition,
distributions of any capital gain or
other taxable income will be taxable
to shareholders. The Fund will
allocate dividends paid as exempt
interest dividends, capital gain
dividends and ordinary taxable
dividends between Common
Shareholders and Preferred
Shareholders in proportion to the
total dividends paid to each such
class of shares. See "Tax Matters."
PROPOSED OFFERING OF PREFERRED Approximately one to three months
SHARES AND OTHER FORMS OF after completion of this offering of
LEVERAGE..........................Common Shares, the Fund intends to
offer Preferred Shares that will
represent approximately 38% of the
Fund's capital immediately after
their issuance. For purposes of
this prospectus, the Fund's capital
means the total assets of the Fund
less all liabilities and
indebtedness not representing
Preferred Shares or other senior
securities. The issuance of
Preferred Shares will leverage
Common Shares. Leverage involves
special risks. There is no
assurance that the Fund will issue
Preferred Shares or that, if issued,
the Fund's leveraging strategy will
be successful. See "Risks-Leverage
Risk."
The money that the Fund obtains by
selling Preferred Shares will be
invested in accordance with the
Fund's investment objective and
policies, primarily in long-term tax
exempt securities that generally
will pay fixed rates of interest
over the life of the securities.
The Preferred Shares will pay
dividends based on short-term
interest rates, which will reset
frequently. If the yield, after the
payment of applicable Fund expenses,
on the long-term tax exempt
securities and other instruments
purchased by the Fund, is greater
than the Preferred Share dividend
rate as reset periodically, the
investment of the proceeds of the
Preferred Shares will generate more
income than will be needed to pay
dividends on the Preferred Shares.
If so, the excess income may be used
to pay higher dividends to Common
Shareholders.
Prior to the issuance of Preferred
Shares, the Fund may add leverage to
the portfolio by investing up to 10%
of its total assets in inverse
floaters and by investing in
derivative contracts. The Fund's
use of derivative contracts will be
limited by the 1940 Act. See
"Preferred Shares and Leverage-Other
Forms of Leverage and Borrowings."
The Fund cannot assure you that the
issuance of Preferred Shares or the
use of other forms of leverage will
result in a higher yield on the
Common Shares. Once Preferred
Shares are issued or other forms of
leverage are used, the NAV and
market price of Common Shares and
the yield to Common Shareholders
will be more volatile. See
"Preferred Shares and Leverage,"
"Description of Shares-Preferred
Shares" "Risks-Leverage Risk," and
"Risks-Derivative Contract and
Inverse Floater Risk."
INVESTMENT ADVISER............. Federated Investment Management
Company will be the Fund's
investment adviser. The Adviser
will receive an annual fee in a
maximum amount equal to 0.55% of the
average daily value of the Fund's
Managed Assets. "Managed Assets"
means the total assets of the Fund
(including assets attributable to
any Preferred Shares or borrowings
that may be outstanding) minus the
sum of accrued liabilities (other
than debt representing financial
leverage). The liquidation
preference of the Preferred Shares
is not a liability. The Adviser has
contractually agreed to waive
receipt of a portion of the
management fee or reimburse other
expenses of the Fund in the amount
of 0.20% of the average daily value
of the Fund's Managed Assets from
the commencement of operations
through December 31, 2007 (i.e.,
approximately the first five years
of the Fund's operations), and for a
declining amount for an additional
three years (through December 31,
2010). See "Management of the Fund."
DISTRIBUTIONS..................... The Fund intends to distribute
monthly all or a portion of its tax
exempt interest income to Common
Shareholders (after it pays accrued
dividends on any Preferred Shares of
the Fund that may be outstanding).
It is expected that the initial
monthly dividend on Common Shares
will be declared approximately 45
days after completion of this
offering and that the initial
monthly dividend will be paid
approximately 60 to 90 days after
completion of this offering. Unless
an election is made to receive
dividends in cash, Common
Shareholders will automatically have
all dividends and distributions
reinvested in Common Shares through
the receipt of additional authorized
but unissued Common Shares from the
Fund or by purchasing Common Shares
in the open market through the
Fund's Dividend Reinvestment Plan.
See "Dividend Reinvestment Plan."
If the Fund realizes a capital gain
or other taxable income, it will be
required to allocate such income
between Common Shares and Preferred
Shares in proportion to the total
dividends paid to each class for the
year in which or with respect to
which the income is paid. The Fund
will distribute capital gains, if
any, annually. See "Distributions"
and "Preferred Shares and Leverage."
LISTING........................................
The Common Shares have been approved
for listing, subject to notice of
issuance, on the New York Stock
Exchange under the symbol "FMN". See
"Description of Shares-Common
Shares."
CUSTODIAN AND TRANSFER State Street Bank and Trust Company
AGENT.............................will serve as the Fund's Custodian
and EquiServe Trust Company, N.A.
will serve as the Fund's Transfer
Agent. See "Custodian and Transfer
Agent."
MARKET PRICE OF SHARES...... Common Shares of closed-end
investment companies frequently
trade at prices lower than their
NAV. Common Shares of closed-end
investment companies like the Fund
that invest primarily in investment
grade tax exempt securities have
during some periods traded at prices
higher than their NAV and during
other periods traded at prices lower
than their NAV. The Fund cannot
assure you that its Common Shares
will trade at a price higher than or
equal to NAV. The Fund's NAV will
be reduced immediately following
this offering by the sales load and
the amount of the organizational and
offering expenses paid by the Fund.
See "Use of Proceeds." In addition
to NAV, the market price of the
Fund's Common Shares may be affected
by dividend levels, which are in
turn affected by expenses, call
protection for portfolio securities,
dividend stability, portfolio credit
quality, liquidity and market supply
and demand. See "Preferred Shares
and Leverage," "Risks," "Description
of Shares" and the section of the
Statement of Additional Information
with the heading "Repurchase of
Common Shares." The Common Shares
are designed primarily for long-term
investors and you should not
purchase Common Shares if you intend
to sell them shortly after purchase.
SPECIAL RISK No Operating History. The Fund is a
CONSIDERATIONS....................newly organized, closed-end
management investment company with
no operating history.
Market Discount Risk. Shares of
closed-end management investment
companies frequently trade at a
discount from their NAV.
Interest Rate Risk. Prices of tax
exempt securities rise and fall in
response to changes in the interest
rate paid by similar securities.
Generally, when interest rates rise,
prices of tax exempt securities
fall. However, market factors, such
as the demand for particular tax
exempt securities, may cause the
price of certain fixed income
securities to fall while the prices
of other securities rise or remain
unchanged.
Interest rate changes have a greater
effect on the price of tax exempt
securities with longer maturities.
Because the Fund will invest
primarily in long-term tax exempt
securities, the NAV of Common Shares
will fluctuate more in response to
changes in market interest rates
than if the Fund invested primarily
in shorter-term tax exempt
securities.
The Fund may use certain strategies
for the purpose of reducing the
interest rate sensitivity of the
portfolio and decreasing the Fund's
exposure to interest rate risk,
although there is no assurance that
it will do so or that such
strategies will be successful.
The Fund's use of leverage, as
described below, tends to increase
the interest rate risk of Common
Shares.
Credit Risk. Credit risk is the
possibility that an issuer of a tax
exempt security will default on a
security by failing to pay interest
or principal when due. If an issuer
defaults, the Fund will lose money.
Leverage Risk. The use of leverage
through the issuance of Preferred
Shares creates an opportunity for
increased income that may be
distributed as Common Share
dividends, but also creates special
risks for Common Shareholders. Two
major types of risks created by
leverage include:
o the likelihood of greater
volatility of NAV and market price
of Common Shares, because changes in
the value of the Fund's tax exempt
security portfolio (including
securities bought with the proceeds
of the Preferred Shares offering)
are borne entirely by Common
Shareholders; and
o the possibility either that Common
Share income will fall if the
Preferred Share dividend rate rises,
or that Common Share income will
fluctuate because the Preferred
Share dividend rate varies.
It is anticipated that dividends on
Preferred Shares will be based on
shorter-term tax exempt security
yields (which will be reset
periodically) and that the Fund will
invest the proceeds of the Preferred
Shares offering in long-term,
typically fixed rate, tax exempt
securities. So long as the Fund's
tax exempt security portfolio
provides a higher yield, net of Fund
expenses, than the Preferred Share
dividend rate, as reset
periodically, the leverage may cause
Common Shareholders to receive
higher dividends than if the Fund
were not leveraged. However, the
Fund's leveraging strategy may not
be successful. For example, if
short-term rates rise, the Preferred
Share dividend rate could exceed the
yield on long-term tax exempt
securities held by the Fund that
were acquired during periods of
generally lower interest rates,
reducing dividends to Common
Shareholders. In addition, if
interest rates rise, the value of
the Fund's holdings in long-term tax
exempt securities likely will fall,
resulting in a decline in the NAV of
Common Shares. Investment by the
Fund in inverse floaters and
derivative contracts may increase
the Fund's leverage and, during
periods of rising interest rates,
may adversely affect the Fund's
income, dividends and total returns
to Common Shareholders. See "The
Fund's Investments" for a discussion
of these instruments. Preferred
Shares are expected to pay
cumulative dividends, which may tend
to increase leverage risk.
Because the fees received by the
Adviser are based on the Managed
Assets of the Fund (including assets
represented by Preferred Shares and
any leverage created thereby), the
Adviser has a financial incentive
for the Fund to issue Preferred
Shares, which may create a conflict
of interest between the Adviser and
Common Shareholders.
Risks Associated with Non-Investment
Grade Securities. Securities rated
below investment grade, also known
as junk bonds, generally entail
greater interest rate and credit
risks than investment grade
securities. For example, their
prices are more volatile, economic
downturns and financial setbacks may
affect their prices more negatively,
and their trading market may be more
limited.
Tax Exempt Securities Market Risk.
The amount of public information
available about tax exempt
securities is generally less than
that for corporate equities or
bonds. Consequently, the Adviser
may make investment decisions based
on information that is incomplete or
inaccurate. The secondary market
for tax exempt securities also tends
to be less well-developed or liquid
than many other securities markets,
which may adversely affect the
Fund's ability to sell its tax
exempt securities at attractive
prices. Special factors, such as
legislative changes and local and
business developments, may adversely
affect the yield or value of the
Fund's investments in tax exempt
securities.
Derivative Contract and Inverse
Floater Risk. Prior to the issuance
of Preferred Shares, the Fund may
add leverage to its portfolio by
investing up to 10% of its total
assets in inverse floaters and by
investing in derivative contracts.
The Fund's use of derivative
contracts will be limited by the
1940 Act. See "Preferred Shares and
Leverage-Other Forms of Leverage and
Borrowings." The Fund also may
invest in derivative contracts for
risk management purposes.
Derivative contracts and inverse
floaters are subject to a number of
risks described elsewhere in this
prospectus, such as interest rate
and credit risks. In addition,
investment by the Fund in derivative
contracts and inverse floaters may
increase the Fund's leverage and,
during periods of rising interest
rates, may adversely affect the
Fund's income, dividends and total
returns to Common Shareholders.
Reinvestment Risk. Income from the
Fund's tax exempt security portfolio
will decline if and when the Fund
invests the proceeds from matured,
traded or called tax exempt
securities at market interest rates
that are below the portfolio's
current earnings rate. A decline in
income could affect the market price
or overall return of Common Shares.
Tax Risk. In order to be tax
exempt, municipal securities must
meet certain legal requirements.
Failure to meet such requirements
may cause the interest received and
distributed by the Fund to Common
Shareholders to be taxable.
The federal income tax treatment of
payments in respect of certain
derivative contracts is unclear.
Additionally, the Fund may not be
able to close out certain derivative
contracts when it wants to.
Consequently, the Fund may receive
payments that are treated as
ordinary income for federal income
tax purposes.
Sector Risk. The Fund may invest
25% or more of its total assets in
tax exempt securities of issuers in
the same economic sector, such as
hospitals or life care facilities
and transportation-related issuers.
In addition, a substantial part of
the Fund's portfolio may be
comprised of securities credit
enhanced by banks, insurance
companies or companies with similar
characteristics. As a result, the
Fund will be more susceptible to any
economic, business, political or
other developments which generally
affect these sectors and entities.
Anti-Takeover Provisions. The Fund's
Agreement and Declaration of Trust
includes provisions that could limit
the ability of other entities or
persons to acquire control of the
Fund or convert the Fund to open-end
status. These provisions could
deprive Common Shareholders of
opportunities to sell their Common
Shares at a premium over the then
current market price of Common
Shares or at NAV. In addition, if
the Fund issues Preferred Shares,
Preferred Shareholders will have
voting rights that could deprive
Common Shareholders of such
opportunities.
Inflation Risk. Inflation risk is
the risk that the value of assets or
income from the Fund's investments
will be worth less in the future as
inflation decreases the present
value of payments at future dates.
Market Disruption. As a result of
the terrorist attacks on the World
Trade Center and the Pentagon on
September 11, 2001, some of the U.S.
securities markets were closed for a
four-day period. These terrorist
attacks and related events have led
to increased market volatility and
may have long-term effects on U.S.
and world economies and markets. A
similar disruption of the financial
markets would impact interest rates,
auctions, secondary trading,
ratings, credit risk, inflation and
other factors relating to the
securities.
SUMMARY OF FUND EXPENSES
The following table shows Fund expenses as a percentage of net
assets attributable to Common Shares and assumes the issuance of Preferred
Shares in an amount equal to 38% of the Fund's capital (after their
issuance).
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price)
..........4.50%
Expenses Borne by the Fund................................0.20%(1)(2)
Dividend Reinvestment Plan Fees
..............................................None(3)
Percentage Of Net Assets
Attributable To Common Shares
(Assumes Preferred Shares are Issued)(4)
-----------------------------------------------------------
Annual Expenses
Management Fees ................................................. 0.89%
Other Expenses .................................................. 0.32%
Total Annual Expenses ........................................... 1.21%
Fee and Expense Waiver........................................... 0.32%(5)
Total Net Annual Expenses........................................ 0.89%(5)
----------
(1) The Adviser has agreed to pay organizational and offering costs of the
Fund (other than the sales load) that exceed $0.03 per Common Share.
(2) If the Fund offers Preferred Shares, costs of that offering, estimated
to be slightly more than 1.00% of the total amount of the Preferred Share
offering, will effectively be borne by Common Shareholders and result in the
reduction of the NAV of Common Shares. Assuming the issuance of 13,333,333
Common Shares and the issuance of Preferred Shares in an amount equal to 38% of
the Fund's total assets (after issuance), those offering costs are estimated to
be not more than approximately $1,250,000 or $0.09 per Common Share (0.61% of
the offering price).
(3) You will pay brokerage charges if you direct the Plan Administrator to
sell your Common Shares held in a dividend reinvestment account.
(4) The table presented in this footnote also estimates Fund expenses as a
percentage of net assets attributable to Common Shares. However, unlike
the table above, this table assumes that no Preferred Shares are issued or
outstanding. In accordance with these assumptions, the Fund's estimated
expenses would be as follows:
Percentage Of
Net Assets
Attributable To Common Shares
(Assumes no Preferred Shares are Issued or Outstanding)
----------------------------------------
Annual Expenses
Management Fees................................................ 0.55%
Other Expenses................................................. 0.20%
Total Annual Expenses.......................................... 0.75%
Fee and Expense Waiver......................................... 0.20%(5)
Total Net Annual Expenses...................................... 0.55%(5)
(5) The Adviser has agreed to waive a portion of the management fees that
it is entitled to receive from the Fund at the annual rate of 0.20% of the
Fund's Managed Assets from the commencement of operations through December
31, 2007 (i.e., approximately the first 5 years of the Fund's operations),
0.15% of Managed Assets in year 6, 0.10% of Managed Assets in year 7 and
0.05% of Managed Assets in year 8.
The purpose of the table above is to help you understand all fees
and expenses that you, as a Common Shareholder, would bear directly or
indirectly. The expenses shown in the table under "Other Expenses" are
based on estimated amounts for the Fund's first year of operation and
assume that the Fund issues approximately 13,333,333 Common Shares. See
"Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the $45
sales load, estimated $2 offering expenses and estimated $6.10 Preferred
Share offering costs) that you would pay on a $1,000 investment in Common
Shares, assuming (a) total net annual expenses of 0.89% of net assets
attributable to Common Shares in years 1 through 5, increasing to 1.21% in
year 10 and (b) a 5% annual return(1):
1 year 3 years 5 years 10 years(2)
Total Expenses
Incurred......... $61.72 $80.04 $99.90 $171.73
(1) The example above should not be considered a representation of future
expenses. Actual expenses may be higher or lower than those shown. The
example assumes that the estimated "Other Expenses" set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below, and that all dividends and distributions are
reinvested at NAV. Actual expenses may be greater or less than those
assumed. Moreover, the Fund's actual rate of return may be greater or
less than the hypothetical 5% annual return shown in the example.
(2) Assumes waiver of management fees at the annual rate of 0.24% of the
Fund's average daily net assets attributable to Common Shares in year 6
(0.15% of average daily Managed Assets), 0.16% (0.10%) in year 7 and 0.08%
(0.05%) in year 8. The Adviser has not agreed to waive any portion of the
management fees it is entitled to receive from the Fund beyond December
31, 2010. See "Management of the Fund-Investment Management Agreement."
THE FUND
The Fund is a newly organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized
as a Delaware statutory trust on October 16, 2002, pursuant to an
Agreement and Declaration of Trust, which is governed by the laws of the
State of Delaware. As a newly organized entity, the Fund has no operating
history. The Fund's principal office is located at 5800 Corporate Drive,
Pittsburgh, PA 15237-7000, and its telephone number is 1-800-341-7400.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be
approximately
$ ($ if the underwriters exercise the over-allotment option in
full) after payment of the estimated organizational and offering costs.
The Adviser has agreed to pay the amount by which the aggregate of all the
Fund's organizational and offering costs (other than the sales load)
exceeds $0.03 per Common Share. The Fund will invest the net proceeds of
the offering in accordance with the Fund's investment objective and
policies as stated below. The Fund currently anticipates that it will be
able to invest primarily in tax exempt securities that meet the Fund's
investment objective and policies within approximately three months after
the completion of the offering. Pending such investment, it is
anticipated that the proceeds will be invested in short-term, tax exempt
or taxable investment grade securities.
THE FUND'S INVESTMENTS
Investment Objective
The Fund's investment objective is to provide current income exempt
from federal income tax, including AMT.
Investment Policies
The Fund will invest primarily in securities that, in the opinion of
bond counsel to the issuer, or on the basis of another authority believed
by the Adviser to be reliable, pay interest exempt from federal income
tax, including AMT. The Adviser will not conduct its own analysis of the
tax status of the interest paid by tax exempt securities held by the Fund.
The Fund normally invests substantially all (at least 90%) of its
total assets in tax exempt securities. The Fund normally will invest at
least 80% of its total assets in investment grade tax exempt securities.
The Fund may invest up to 20% of its total assets in tax exempt securities
of below investment grade quality (but not lower than B). Bonds of below
investment grade quality are commonly referred to as "junk bonds." Bonds
of below investment grade quality are regarded as having predominately
speculative characteristics with respect to the issuer's capacity to pay
interest and repay principal.
The Adviser performs a fundamental credit analysis on tax exempt
securities that the Fund is contemplating purchasing before the Fund
purchases such securities. The Adviser considers various factors,
including the economic feasibility of revenue bond financings and general
purpose financings; the financial condition of the issuer or guarantor;
and political developments that may affect credit quality. The Adviser
monitors the credit risks of the tax exempt securities held by the Fund on
an ongoing basis by reviewing periodic financial data and ratings of
NRSROs.
Under normal circumstances, the Fund will maintain a dollar-weighted
average portfolio maturity of 15 to 30 years and a dollar-weighted average
duration of 7 to 13 years. "Duration" measures the sensitivity of a
security's price to changes in interest rates. The greater a portfolio's
duration, the greater the change in the portfolio's value in response to a
change in market interest rates. The Adviser increases or reduces the
Fund's portfolio duration based on its interest rate outlook. When the
Adviser expects interest rates to fall, it attempts to maintain a longer
portfolio duration. When the Adviser expects interest rates to increase,
it attempts to shorten the portfolio duration. The Adviser considers a
variety of factors in formulating its interest rate outlook, including
current and expected U.S. economic growth; current and expected interest
rates and inflation; the Federal Reserve's monetary policy; and supply and
demand factors related to the municipal market and the effect they may
have on the returns offered for various bond maturities.
For temporary or for defensive purposes, including the period during
which the net proceeds of this offering are being invested, the Fund may
invest up to 100% of its assets in short-term investments, including high
quality, short-term securities that may be either tax exempt or taxable.
The Fund intends to invest in taxable short-term investments only in the
event that suitable tax exempt short-term investments are not available at
reasonable prices and yields. Investments in taxable short-term
investments would result in a portion of your dividends being subject to
federal income taxes. For more information, see "Tax Matters" in the
Statement of Additional Information.
Because the Fund refers to municipal investments in its name, it has
an investment policy that it will normally invest so that at least 80% of
the income that it distributes will be exempt from federal regular income
tax. This policy is referred to as the "80% Policy."
The Fund cannot change its investment objective or the 80% Policy
without the approval of (1) the holders of a majority of the outstanding
Common Shares and, once the Preferred Shares are issued, the Preferred
Shares voting together as a single class, and (2) the holders of a
majority of the outstanding Preferred Shares voting as a separate class.
A "majority of the outstanding" means (1) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (2) more than 50% of the shares,
whichever is less. See "Description of Shares-Preferred Shares-Voting
Rights" and the Statement of Additional Information under "Description of
Shares-Preferred Shares" for additional information with respect to the
voting rights of Preferred Shareholders.
Investment Ratings
The Adviser will determine whether a security is investment grade
based upon the credit ratings given by one or more NRSROs, such as
Standard & Poor's ("S&P"), Moody's Investors Service ("Moody's") or Fitch,
Inc. ("Fitch"). For example, S&P assigns ratings to investment grade
securities (AAA, AA, A and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal
(default) when due on each security. Lower credit ratings correspond to
higher credit risk. Securities in the lowest investment grade category
may be considered to possess speculative characteristics by certain
NRSROs. An NRSRO's rating categories are determined without regard for
sub-categories and gradations. If a security is downgraded below
investment grade, the Adviser will reevaluate the security, but will not
be required to sell it.
Tax exempt securities of below investment grade quality are regarded
as having predominately speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal and are commonly
referred to as "junk bonds."
If a security has not received a rating, the Fund must rely entirely
upon the Adviser's credit assessment. See Appendix A to the Statement
of Additional Information for a description of NRSRO ratings.
Investment Securities
Tax Exempt Securities
Tax exempt securities are fixed income securities that pay interest
that is not subject to federal regular income taxes. Fixed income
securities pay interest, dividends or distributions at a specified rate.
The rate may be a fixed percentage of the principal or adjusted
periodically.
Typically, states, counties, cities and other political subdivisions
and authorities issue tax exempt securities. The market categorizes tax
exempt securities by their source of repayment.
General Obligation Bonds
General obligation bonds are supported by the issuer's power to
exact property or other taxes. The issuer must impose and collect taxes
sufficient to pay principal and interest on the bonds. However, the
issuer's authority to impose additional taxes may be limited by its
charter or state law.
Special Revenue Bonds
Special revenue bonds are payable solely from specific revenues
received by the issuer such as specific taxes, assessments, tolls or fees.
Holders of special revenue bonds may not depend on the municipality's
general taxes or revenues for payment of the bonds. For example, a
municipality may issue bonds to build a toll road and pledge the tolls to
repay the bonds. Therefore, a shortfall in the tolls normally would result
in a default on the bonds.
Private Activity Bonds
Private activity bonds are special revenue bonds used to finance
private entities. For example, a municipality may issue bonds to finance a
new factory to improve its local economy. The municipality would lend the
proceeds from its bonds to the company using the factory, and the company
would agree to make loan payments sufficient to repay the bonds. The bonds
would be payable solely from the company's loan payments, not from any
other revenues of the municipality. Therefore, any default on the loan
normally would result in a default on the bonds. The interest on many
types of private activity bonds is subject to AMT.
Following are descriptions of other types of tax exempt securities
in which the Fund may invest:
Zero Coupon Securities
Zero coupon securities do not pay interest or principal until final
maturity unlike debt securities that provide periodic payments of interest
(referred to as a coupon payment). Investors buy zero coupon securities at
a price below the amount payable at maturity. The difference between the
purchase price and the amount paid at maturity represents interest on the
zero coupon security. Investors must wait until maturity to receive
interest and principal, which increases the interest rate risks and credit
risks of a zero coupon security.
Municipal Leases
Municipalities may enter into leases for equipment or facilities.
In order to comply with state public financing laws, these leases are
typically subject to annual appropriation. In other words, a municipality
may end a lease, without penalty, by not providing for the lease payments
in its annual budget. After the lease ends, the lessor can resell the
equipment or facility but may lose money on the sale.
The Fund may invest in securities supported by individual leases or
pools of municipal leases.
Inverse Floaters
Prior to the issuance of Preferred Shares, the Fund may invest up to
10% of its total assets in inverse floaters. An inverse floater has a
variable interest rate that moves in the opposite direction of market
interest rates. When market interest rates go up, the interest rate paid
on the inverse floater goes down; when market interest rates go down, the
interest rate paid on the inverse floater goes up. Inverse floaters
generally respond with more volatility to market interest rate changes
than fixed rate, tax exempt securities of the same maturity.
Credit Enhancement
The Fund may invest in securities that have credit enhancement.
Credit enhancement consists of an arrangement in which a company agrees to
pay amounts due on a fixed income security if the issuer defaults. In some
cases the company providing credit enhancement makes all payments directly
to the security holders and receives reimbursement from the issuer.
Normally, the credit enhancer has greater financial resources and
liquidity than the issuer. For this reason, the Adviser usually evaluates
the credit risk of a fixed income security with credit enhancement based
solely upon its credit enhancement.
Delayed Delivery Transactions
The Fund may engage in delayed delivery transactions. Delayed
delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with
payment and delivery of the securities scheduled for a future time. During
the period between purchase and settlement, no payment is made by the Fund
to the issuer and no interest accrues to the Fund. The Fund records the
transactions when it agrees to buy the securities and reflects their value
in determining the price of its shares. Settlement dates may be a month or
more after entering into these transactions so that the market values of
the securities bought may vary from the purchase prices. Therefore,
delayed delivery transactions create interest rate risks for the Fund.
Delayed delivery transactions also involve credit risks in the event of a
counterparty default.
Derivative Contracts
The Fund may buy and sell derivative contracts. Derivative
contracts are financial instruments that require payments based upon
changes in the values of designated or underlying securities, commodities,
financial indices or other assets or instruments. Some derivative
contracts such as futures, forwards and options require payments relating
to a future trade involving the underlying asset. Other derivative
contracts such as swaps require payments relating to the income or returns
from the underlying asset or instrument. The other party to a derivative
contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract
except for the price. Most exchanges require investors to maintain margin
accounts through their brokers to cover their potential obligations to the
exchange. The Fund may also trade derivative contracts over-the-counter
(OTC) in transactions negotiated directly between the Fund and the
counterparty.
Depending upon how the Fund uses derivative contracts and the
relationships between the market value of a derivative contract and the
underlying asset or instrument, derivative contracts may increase or
decrease the Fund's exposure to interest rate risks, and may also expose
the Fund to leverage and tax risks. OTC contracts also expose the Fund to
credit risks in the event that a counterparty defaults on the contract.
Other Investment Companies
The Fund may invest up to 10% of its total assets in securities of
other open- or closed-end investment companies that invest primarily in
tax exempt securities of the types in which the Fund may invest directly.
The Fund generally expects to invest in other investment companies during
periods when it has large amounts of uninvested cash, such as the period
shortly after the Fund receives the proceeds of the offering of its Common
Shares or Preferred Shares, during periods when there is a shortage of
attractive high-yielding tax exempt securities available in the market, or
when the Adviser believes share prices of other investment companies offer
attractive values. The Fund may invest in investment companies advised by
the Adviser to the extent permitted by applicable law or pursuant to
exemptive relief from the SEC; currently, the Fund has not applied for
such exemptive relief. As a shareholder in an investment company, the
Fund will bear its ratable share of that investment company's expenses and
will remain subject to payment of the Fund's advisory and other fees and
expenses with respect to assets so invested. Common Shareholders will
therefore be subject to duplicative expenses to the extent that the Fund
invests in other investment companies. The Adviser will take expenses
into account when evaluating the investment merits of an investment in an
investment company relative to available tax exempt securities. In
addition, the securities of other investment companies may also be
leveraged and will therefore be subject to the same leverage risks to
which the Fund is subject. As described in this prospectus in the
sections entitled "Risks" and "Preferred Shares and Leverage," the NAV 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. The Fund treats its investment in such open- or
closed-end investment companies as investments in tax exempt securities.
PREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one to three months
after the completion of the offering of Common Shares, the Fund intends to
offer Preferred Shares representing approximately 38% of the Fund's
capital immediately after their issuance. Preferred Shares will have
complete priority over Common Shares upon distribution of assets in
liquidation of the Fund. The issuance of Preferred Shares will leverage
Common Shares. Leverage involves special risks and there is no assurance
that the Fund's leveraging strategies will be successful. Although the
timing and other terms of the offering of Preferred Shares will be
determined by the Fund's Board of Trustees (the "Board"), the Fund expects
to invest the proceeds of a Preferred Shares offering primarily in
long-term tax exempt securities. Preferred Shares will pay dividends
based on short-term rates, which would be redetermined periodically by an
auction process. So long as the Fund's portfolio is invested in
securities that provide a higher yield than the dividend rate of Preferred
Shares, after taking expenses into consideration, the leverage will allow
Common Shareholders to receive higher dividends than if the Fund were not
leveraged.
Changes in the value of the Fund's tax exempt security portfolio,
including securities bought with the proceeds of the Preferred Shares
offering, will be borne entirely by Common Shareholders. If there is a
net decrease (or increase) in the value of the Fund's investment
portfolio, the leverage will decrease (or increase) the NAV per Common
Share to a greater extent than if the Fund were not leveraged. During
periods in which the Fund is using leverage, the fees paid to the Adviser
will be higher than if the Fund did not use leverage because the fees paid
will be calculated on the basis of the Fund's Managed Assets, including
the gross proceeds from the issuance of Preferred Shares.
For tax purposes, the Fund currently is required to allocate net
capital gain and other taxable income, if any, between the Common Shares
and Preferred Shares in proportion to total distributions paid to each
class for the taxable year in which the net capital gain or other taxable
income is realized. If net capital gain or other taxable income is
allocated to Preferred Shares instead of solely tax exempt income, the
Fund will have to pay higher total dividends to Preferred Shareholders or
make dividend payments intended to compensate Preferred Shareholders for
the unanticipated characterization of a portion of the dividends as
taxable ("Gross-up Dividends"). This would reduce any advantage of the
Fund's leveraged structure to Common Shareholders.
Under the 1940 Act, the Fund is not permitted to issue Preferred
Shares unless immediately after such issuance the value of the Fund's
capital is at least 200% of the liquidation value of the outstanding
Preferred Shares plus the aggregate amount of any senior securities of the
Fund representing indebtedness (i.e., the liquidation value of the
Preferred Shares plus the aggregate amount of senior securities
representing indebtedness may not exceed 50% of the Fund's capital). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless, at the time of such declaration,
the Fund satisfies the 200% capital requirement. If Preferred Shares are
issued, the Fund intends, to the extent possible, to purchase or redeem
Preferred Shares from time to time to the extent necessary in order to
maintain coverage of at least 200%. If the Fund has Preferred Shares
outstanding, two of the Fund's Trustees will be elected by Preferred
Shareholders voting separately as a class. The remaining Trustees will be
elected by Common Shareholders and Preferred Shareholders voting together
as a single class. In the event that the Fund failed to pay dividends on
Preferred Shares for two years, Preferred Shareholders would be entitled
to elect a majority of the Trustees of the Fund.
If the Fund issues Preferred Shares, it will be subject to certain
guidelines imposed by those NRSROs that rate the Preferred Shares. These
guidelines are expected to impose capital or portfolio composition
requirements that are more stringent than those imposed on the Fund by the
1940 Act. It is not anticipated that these guidelines will impede the
Adviser from managing the Fund's portfolio in accordance with the Fund's
investment objective and policies.
Preferred Shares may have to be redeemed to the extent that the Fund
fails to comply with the capital requirements imposed by the 1940 Act or
the NRSROs. In order to redeem Preferred Shares, the Fund may have to
liquidate portfolio securities. Such redemptions and liquidations would
cause the Fund to incur related transaction costs and could result in
capital losses to the Fund. Prohibitions on dividends and other
distributions on the Common Shares could impair the Fund's ability to
qualify as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
Assuming that the Preferred Shares will represent approximately 38%
of the Fund's capital and pay dividends at an annual average rate of
2.00%, the income generated by the Fund's portfolio (net of estimated
expenses) must exceed 0.76% in order to cover such dividend payments. Of
course, these numbers are merely estimates used for illustration. Actual
Preferred Share dividend rates will vary frequently and may be
significantly higher or lower than the rate estimated above.
The following table is designed to illustrate the effect of leverage
on Common Share total return. The assumed portfolio total returns and
Common Share total returns are hypothetical and actual returns may be
greater or less than those appearing in the table. The table assumes
investment portfolio total returns (comprised of income and changes in the
value of the tax exempt securities held in the Fund's portfolio) of -10%,
-5%, 0%, 5% and 10%. The table further assumes the issuance of Preferred
Shares representing 38% of the Fund's capital and the Fund's currently
projected annual Preferred Share dividend rate of 2.00%.
Assumed Portfolio Total
Return (10)% (5)% 0% 5% 10%
(Net of Expenses)
Common Share Total Return (17.35)% (9.29)% (1.23)% 6.84% 14.90%
Common Share total return is composed of two elements: the Common
Share dividends paid by the Fund (the amount of which is largely
determined by the net investment income of the Fund after paying dividends
on Preferred Shares) and changes in the value of the tax exempt securities
that the Fund owns. The table depicts three cases in which the Fund
suffers capital losses and two in which it enjoys capital appreciation.
For example, to assume a total return of 0%, the Fund must assume that the
tax exempt interest it receives on investments in tax exempt securities is
entirely offset by losses in the value of those investments.
Other Forms of Leverage and Borrowings
Prior to the issuance of Preferred Shares, the Fund also may add
leverage to the portfolio by investing up to 10% of its total assets in
inverse floaters and by investing in derivative contracts. By adding
additional leverage, these strategies have the potential to increase
returns to Common Shareholders, but also involve additional risks.
Additional leverage will increase the volatility of the Fund's investment
portfolio and could result in larger losses than if the strategies were
not used.
Under the 1940 Act, the Fund generally is not permitted to engage in
borrowings, including through the use of derivative contracts to the
extent that these instruments constitute senior securities, unless
immediately after a borrowing the value of the Fund's capital is at least
300% of the principal amount of such borrowing. In addition, the Fund is
not permitted to declare any cash dividend or other distribution on Common
Shares unless, at the time of such declaration, the value of the Fund's
capital is at least 300% of such principal amount. If the Fund borrows,
it intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to
maintain the required capital. Failure to meet the capital requirements
described herein could result in an event of default and entitle Preferred
Shareholders to elect a majority of the Trustees of the Fund. Derivative
contracts used by the Fund will not constitute senior securities (and will
not be subject to the Fund's limitations on borrowings) to the extent that
the Fund segregates liquid assets at least equal in amount to its
obligations under the instruments, or enters into offsetting transactions
or owns positions covering its obligations. For instance, the Fund may
cover its position in a forward purchase commitment by segregating liquid
assets in an amount sufficient to meet the purchase price.
RISKS
The NAV of the Common Shares will fluctuate with and be affected by,
among other things, market discount risk, interest rate risk, credit risk,
leverage risk, risks associated with non-investment grade securities, tax
exempt security market risk, derivative contract and inverse floater risk,
reinvestment risk, tax risk, sector risk and inflation risk. An
investment in Common Shares will also be subject to the risk associated
with the fact that the Fund is newly organized.
Newly Organized. The Fund is a newly organized, closed-end management
investment company and has no operating history.
Market Discount Risk. As with any stock, the price of the Common Shares
will fluctuate with market conditions and other factors. If Common Shares
are sold, the price received may be more or less than the original
investment.
NAV will be reduced immediately following the initial public
offering by the amount of the sales load and organizational and selling
expenses paid by the Fund. Shares of closed-end management investment
companies frequently trade at a discount from their NAV. This risk may be
greater for investors who sell Common Shares in a relatively short period
of time after completion of the initial public offering.
Interest Rate Risk. Prices of tax exempt securities rise and fall in
response to changes in the interest rate paid by similar securities.
Generally, when interest rates rise, prices of tax exempt securities fall.
However, market factors, such as the demand for particular tax exempt
securities, may cause the price of certain fixed income securities to fall
while the prices of other securities rise or remain unchanged. Interest
rate changes have a greater effect on the price of tax exempt securities
with longer maturities. Because the Fund will invest primarily in
long-term tax exempt securities, the NAV of Common Shares will fluctuate
more in response to changes in market interest rates than if the Fund
invested primarily in shorter-term tax exempt securities.
The Fund may use certain strategies for the purpose of reducing the
interest rate sensitivity of the portfolio and decreasing the Fund's
exposure to interest rate risk, although there is no assurance that it
will do so or that such strategies will be successful.
The Fund's use of leverage will increase the interest rate risk of
Common Shares.
Credit Risk. Credit risk is the possibility that an issuer will default
on a security by failing to pay interest or principal when due. If an
issuer defaults, the Fund will lose money. Many tax exempt securities
receive credit ratings from NRSROs such as S&P and Moody's. These NRSROs
assign ratings to securities by assessing the likelihood of issuer
default. Lower credit ratings correspond to higher perceived credit risk
and higher credit ratings correspond to lower perceived credit risk.
Credit ratings do not provide assurance against default or other loss of
money. If a security has not received a rating, the Fund must rely
entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
Leverage Risk. Leverage risk includes the risk associated with the
issuance of the Preferred Shares or the use of inverse floaters and
derivative contracts in order to leverage the Fund's portfolio. There is
no assurance that the Fund's leveraging strategies involving Preferred
Shares or inverse floaters and derivative contracts will be successful.
Once the Preferred Shares are issued or other forms of leverage are used,
the NAV and market value of Common Shares will be more volatile, and the
yield distribution to Common Shareholders will tend to fluctuate more in
response to changes in interest rates and with changes in the short-term
dividend rates on Preferred Shares. If the dividend rate on Preferred
Shares approaches the yield on the Fund's investment portfolio, the
benefit of leverage to Common Shareholders would be reduced. If the
dividend rate on Preferred Shares exceeds the yield on the Fund's
portfolio, the leverage will result in a lower dividend to Common
Shareholders than if the Fund were not leveraged. Because the long-term
bonds included in the Fund's portfolio will typically pay fixed rates of
interest while the dividend rate on Preferred Shares will be adjusted
periodically, this could occur even when both long-term and short-term
municipal rates rise. In addition, the Fund will pay and the Common
Shareholders will bear any costs and expenses relating to the issuance and
ongoing maintenance of the Preferred Shares. Furthermore, if the Fund has
net capital gain or other taxable income that is allocated to Preferred
Shares instead of solely tax-exempt income, the Fund may have to pay
higher total dividends or Gross-up Dividends to Preferred Shareholders,
which would reduce any advantage of the Fund's leveraged structure to
Common Shareholders without reducing the associated risk. See "Preferred
Shares and Leverage." The Fund cannot assure you that it will issue
Preferred Shares or use other forms of leverage or, if used, that these
strategies will result in a higher yield or return to Common Shareholders.
Similarly, any decline in the NAV of the Fund's investments will be
borne entirely by Common Shareholders. Therefore, if the market value of
the Fund's portfolio declines, the leverage will result in a greater
decrease in NAV to Common Shareholders than if the Fund were not
leveraged. This greater NAV decrease will also tend to cause a greater
decline in the market price for Common Shares. The Fund might be in
danger of failing to maintain the 200% capital requirement or of losing
its ratings on Preferred Shares or, in an extreme case, the Fund's current
investment income might not be sufficient to meet the dividend
requirements on Preferred Shares. In order to counteract such an event,
the Fund might need to liquidate investments in order to fund a redemption
of some or all of the Preferred Shares. Liquidation at times of low tax
exempt securities prices may result in capital loss and may reduce returns
to Common Shareholders.
While the Fund may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in an effort
to mitigate the increased volatility of current income and NAV associated
with leverage, there can be no assurance that the Fund will actually
reduce leverage in the future or that any reduction, if undertaken, will
benefit the Common Shareholders. Changes in the future direction of
interest rates are very difficult to predict accurately. If the Fund 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 likely would operate to reduce the income and/or total returns to
Common Shareholders relative to the circumstance where the Fund had not
reduced leverage. The Fund may decide that this risk outweighs the
likelihood of achieving the desired reduction to volatility in income and
Common Share price if the prediction were to turn out to be correct, and
determine not to reduce leverage as described above.
The Fund may invest up to 10% of its total assets in the securities
of other investment companies. Such securities may also be leveraged and
will therefore be subject to the leverage risks described above. This
additional leverage may in certain market conditions reduce the NAV of the
Fund's Common Shares and the returns to Common Shareholders.
Prior to the issuance of Preferred Shares, the Fund may leverage the
portfolio by investing up to 10% of its total assets in inverse floaters
and by investing in derivative contracts. The Fund's use of derivative
contracts will be limited by the 1940 Act. See "Preferred Shares and
Leverage-Other Forms of Leverage and Borrowings." These instruments may
increase the Fund's leverage and, during periods of rising short-term
interest rates, may adversely affect the Fund's NAV per share and
distributions to Common Shareholders. See "Inverse Floaters" and
"Derivative Contracts" under "The Fund's Investments" and the section of
the Statement of Additional Information with the heading "Derivative
Contracts."
Risks Associated With Non-Investment Grade Securities. Securities rated
below investment grade, also known as junk bonds, generally entail greater
credit, interest rate and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic
downturns and financial setbacks may affect their prices more negatively
and their trading market may be more limited.
Tax Exempt Security Market Risk. Investing in the tax exempt securities
market involves certain risks. The amount of public information available
about the tax exempt securities in the Fund's portfolio is generally less
than that for corporate equities or bonds. Consequently, the Adviser may
make investment decisions based on information that is incomplete or
inaccurate. The secondary market for tax exempt securities tends to be
less well-developed or liquid than many other securities markets, which
may adversely affect the Fund's ability to sell its bonds at attractive
prices. Special factors, such as legislative changes and local and
business developments, may adversely affect the yield or value of the
Fund's investments in tax exempt securities.
The ability of municipal issuers to make timely payments of interest
and principal may be diminished in general economic downturns and as
governmental cost burdens are reallocated among federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations or on the ability of municipalities to levy taxes.
Derivative Contract and Inverse Floater Risk. Prior to the issuance of
Preferred Shares, the Fund may leverage its portfolio by investing up to
10% of its total assets in inverse floaters and by investing in derivative
contracts. The Fund's use of derivative contracts will be limited by the
1940 Act. See "Preferred Shares and Leverage-Other Forms of Leverage and
Borrowings." The Fund also may invest in derivative contracts for risk
management purposes. Derivative contracts and inverse floaters are
subject to a number of risks described elsewhere in this prospectus, such
as interest rate risk and credit risk. In addition, investment by the
Fund in derivative contracts and inverse floaters may increase the Fund's
leverage and, during periods of rising interest rates, may adversely
affect the Fund's income, dividends and total returns to Common
Shareholders. Derivative contracts also involve the risk of mispricing or
improper valuation, the risk of ambiguous documentation and the risk that
changes in the value of a derivative contract may not correlate perfectly
with an underlying asset, interest rate or index. Suitable inverse
floaters and derivative contracts may not be available in all
circumstances and there can be no assurance that the Fund will engage in
these transactions to reduce exposure to other risks when that would be
beneficial.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's bond portfolio will decline if and when the Fund invests the
proceeds from matured, traded, prepaid or called bonds at market interest
rates that are below the portfolio's current earnings rate. A decline in
income could affect the market price or overall returns of Common Shares.
Tax Risk. In order to be tax exempt, municipal securities must meet
certain legal requirements. Failure to meet such requirements may cause
the interest received and distributed by the Fund to Common Shareholders
to be taxable. Changes or proposed changes in federal tax laws may cause
the prices of municipal securities to fall.
The federal income tax treatment of payments in respect of certain
derivative contracts is unclear. Additionally, the Fund may not be able
to close out certain derivative contracts when it wants to. Consequently,
the Fund may receive payments that are treated as ordinary income for
federal income tax purposes.
In certain circumstances, a portion of the Fund's dividends may be
subject to AMT.
Sector Risk. The Fund may invest 25% or more of its total assets in tax
exempt securities of issuers in the same economic sector, including
without limitation the following: bonds issued by state and local health
finance, housing finance, pollution control, industrial development and
other authorities or municipal entities for the benefit of hospitals, life
care facilities, educational institutions, housing facilities,
transportation systems, industrial corporations or utilities. In
addition, a substantial part of the Fund may be comprised of securities
that are credit enhanced by insurance companies, banks or other similar
financial institutions. As a result, the performance of the Fund will be
more susceptible to any economic, business, political or other
developments that generally affect these sectors or entities.
Anti-Takeover Provisions. The Fund's Agreement and Declaration of Trust
includes provisions that could limit the ability of other entities or
persons to acquire control of the Fund or convert the Fund to open-end
status. These provisions could deprive Common Shareholders of
opportunities to sell their Common Shares at a premium over the then
current market price of Common Shares or at NAV. In addition, if the Fund
issues Preferred Shares, Preferred Shareholders will have voting rights
that could deprive Common Shareholders of such opportunities.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of,
and distribution of, Common Shares can decline. In addition, during any
periods of rising inflation, Preferred Share dividend rates would likely
increase, which would tend to further reduce returns to Common
Shareholders.
Market Disruption. As a result of the terrorist attacks on the World
Trade Center and the Pentagon on September 11, 2001, some of the U.S.
securities markets were closed for a four-day period. These terrorist
attacks and related events have led to increased market volatility and may
have long-term effects on U.S. and world economies and markets. A similar
disruption of the financial markets would impact interest rates, auctions,
secondary trading, ratings, credit risk, inflation and other factors
relating to the securities.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to
limit investment risk. These limitations are fundamental and may not be
changed without the approval of (1) the holders of a majority of the
outstanding Common Shares and, if issued, Preferred Shares voting together
as a single class, and (2) the approval of the holders of a majority of
the outstanding Preferred Shares voting as a separate class.
Concentration. The Fund will not make investments that will result
in the concentration of its investments in the securities of issuers
primarily engaged in the same industry, but may invest more than 25% of
its total assets in securities of issuers in the same economic sector.
Diversification of Investments. With respect to securities
comprising 75% of the value of its total assets, the Fund will not
purchase the securities of any one issuer (other than cash, cash items,
securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized
by such U.S. government securities and securities of other investment
companies) if as a result more than 5% of the value of its total assets
would be invested in the securities of that issuer, or it would own more
than 10% of the outstanding voting securities of that issuer.
Underwriting. The Fund will not underwrite any issue of securities,
except as it may be deemed to be an underwriter under the Securities Act
of 1933 in connection with the sale of securities in accordance with its
investment objective, policies and limitations.
Investing in Real Estate. The Fund may not buy or sell real estate,
although it may invest in tax exempt securities secured by real estate or
interests in real estate.
Investing in Commodities. The Fund may not purchase or sell
physical commodities, provided that the Fund may purchase securities of
companies that deal in commodities. For purposes of this restriction,
investments in transactions involving futures contracts and options, swap
transactions, and other financial contracts that settle by payment of cash
are not deemed to be investments in commodities.
Lending. The Fund will not make loans, but may acquire publicly or
non-publicly issued tax exempt securities as permitted by its investment
objective, policies and limitations.
Borrowing Money and Issuing Senior Securities. The Fund may borrow
money, directly or indirectly, and issue senior securities to the maximum
extent permitted under the 1940 Act.
The Fund may become subject to guidelines which are more limiting
than its investment restrictions in order to obtain and maintain ratings
from an NRSRO on the Preferred Shares that it intends to issue. The Fund
does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve
its investment objective. See "Investment Objective and Policies" in the
Statement of Additional Information for a complete list of the fundamental
and non-fundamental investment policies of the Fund.
Quality of Investments
The Fund will invest at least 80% of its total assets in investment
grade tax exempt securities.
Limited Issuance of Preferred Shares
Under the 1940 Act, the Fund could issue Preferred Shares having a
total liquidation value (original purchase price of the shares being
liquidated plus any accrued and unpaid dividends) of up to 50% of the
value of the capital of the Fund. To the extent that the Fund has
outstanding any senior securities representing indebtedness such as
through the use of derivative contracts that constitute senior securities,
the aggregate amount of such senior securities will be added to the total
liquidation value of any outstanding Preferred Shares for purposes of this
capital requirement. If the total liquidation value of the Preferred
Shares plus the aggregate amount of such other senior securities were ever
more than 50% of the value of the capital of the Fund, the Fund would not
be able to declare dividends on the Common Shares until the liquidation
value and/or aggregate amount of other senior securities, as a percentage
of the Fund's assets, was reduced. Approximately one to three months after
the completion of the offering of the Common Shares, the Fund intends to
issue Preferred Shares representing about 38% of the Fund's capital
immediately after the time of issuance of the Preferred Shares. This
higher than required margin of NAV provides a cushion against later
fluctuations in the value of the Fund's portfolio and will subject Common
Shareholders to less income and NAV volatility than if the Fund were more
highly leveraged through Preferred Shares. The Fund intends to purchase
or redeem Preferred Shares, if necessary, to keep the liquidation value of
the Preferred Shares plus the aggregate amount of other senior securities
representing indebtedness below 50% of the value of the Fund's capital.
Management of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Fund may take certain actions if short-term interest rates
increase, or market conditions otherwise change (or the Fund anticipates
such an increase or change) and the Fund's leverage begins (or is
expected) to adversely affect Common Shareholders. In order to attempt to
offset such a negative impact of leverage on Common Shareholders, the Fund
may shorten the average maturity or duration of its investment portfolio
(by selling long-term securities and investing in short-term, high quality
securities or implementing certain hedging strategies) or may extend the
auction period of outstanding Preferred Shares. The Fund may also attempt
to reduce the leverage by redeeming or otherwise purchasing Preferred
Shares or redeeming holdings in derivative contracts or other instruments
that create leverage. As explained above under "Risks-Leverage Risk," the
success of any such attempt to limit leverage risk depends on the
Adviser's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund
may never attempt to manage its capital structure in the manner described
in this paragraph.
If market conditions suggest that additional leverage would be
beneficial, the Fund may sell previously unissued Preferred Shares or
Preferred Shares that the Fund previously issued but later repurchased or,
prior to the issuance of Preferred Shares, use other forms of leverage,
such as derivative contracts.
Hedging and Related Strategies
The Fund may use various investment strategies designed to limit the
risk of price fluctuations of its portfolio securities and to preserve
capital. These hedging strategies may include using financial futures
contracts; short sales; swap agreements or options thereon; options on
financial futures; options based on either an index of municipal
securities or on taxable debt securities whose prices, in the opinion of
the Adviser, correlate with the prices of the Fund's investments. Income
earned by the Fund from many hedging activities will be treated as capital
gain and, if not offset by net realized capital loss, will be distributed
to shareholders as taxable distributions. If effectively used, hedging
strategies will offset in varying percentages losses incurred on the
Fund's investments due to adverse interest rate changes. There is no
assurance that these hedging strategies will be available at any time or
that the Adviser will determine to use them for the Fund or, if used, that
the strategies will be successful.
MANAGEMENT OF THE FUND
Trustees And Officers
The Board is responsible for the overall management of the Fund,
including supervision of the duties performed by the Adviser. There are
twelve Trustees of the Fund. Three of the Trustees are "interested
persons" (as defined in the 1940 Act). The name and business addresses of
the Trustees and officers of the Fund and their principal occupations and
other affiliations during the past five years are set forth under
"Management of the Fund" in the Statement of Additional Information.
Investment Adviser
Federated Investment Management Company acts as the Fund's
investment adviser. The Adviser's address is Federated Investors Tower,
1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated Investors, Inc.
("Federated") advise approximately 139 mutual funds and a variety of
separate accounts, which totaled approximately $180 billion in assets as
of December 31, 2001. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States, with
approximately 1,800 employees. More than 4,000 investment professionals
make Federated Funds available to their customers. In the municipal
sector, as of December 31, 2001, Federated managed 12 bond funds with
approximately $2.3 billion in assets and 22 money market funds with
approximately $19.5 billion in total assets.
The Fund's Portfolio Managers are:
Mary Jo Ochson
Mary Jo Ochson is the Fund's Portfolio Manager. Ms. Ochson joined
Federated in 1982 and has been a Senior Portfolio Manager and a Senior
Vice President of the Fund's Adviser since 1996. From 1988 through 1995,
Ms. Ochson served as a Portfolio Manager and a Vice President of the
Fund's Adviser. Ms. Ochson is a Chartered Financial Analyst and received
her M.B.A. in Finance from the University of Pittsburgh.
Lee R. Cunningham II
Lee R. Cunningham II is the Fund's Portfolio Manager. Mr.
Cunningham joined Federated in 1995 as an Investment Analyst and has been
a Portfolio Manager since 1998. He was named an Assistant Vice President
of the Fund's Adviser in January 1998 and became a Vice President of the
Fund's Adviser in July 2000. From 1986 through 1994, Mr. Cunningham was a
Project Engineer with Pennsylvania Power and Light Company. Mr.
Cunningham received his M.B.A. with concentration in finance and
operations from the University of Pittsburgh.
RJ Gallo
RJ Gallo is the Fund's Portfolio Manager. Mr. Gallo joined
Federated in 2000 as an Investment Analyst. He was named an Assistant
Vice President of the Fund's Adviser in January 2002. From 1996 to 2000,
Mr. Gallo was a Financial Analyst and Trader at the Federal Reserve Bank
of New York. Mr. Gallo received a Master's in Public Affairs with a
concentration in economics and public policy from Princeton University.
Investment Management Agreement
Pursuant to an investment management agreement between the Adviser
and the Fund, the Fund has agreed to pay for the investment advisory
services and facilities provided by the Adviser a fee at an annual rate
equal to 0.55% of the average daily value of Managed Assets (the
"Management Fee"). The Adviser has contractually agreed to waive receipt
of a portion of its Management Fee in the amount of 0.20% of the average
daily value of Managed Assets for the first five years of the Fund's
operations (through December 31, 2007), and for a declining amount for an
additional three years (through December 31, 2010). During periods in
which the Fund is using leverage, the fee paid to the Adviser will be
higher than if the Fund did not use leverage, because the fee is
calculated as a percentage of Managed Assets, which include those assets
purchased with leverage.
In addition to the Management Fee of the Adviser, the Fund pays all
other costs and expenses of its operations, including compensation of its
trustees (other than those affiliated with the Adviser), custodian,
transfer and dividend disbursing agent expenses, legal fees, leverage
expenses, rating agency fees, listing fees and expenses, expenses of
independent auditors, expenses of repurchasing shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies and taxes, if any.
For the first 8 years of the Fund's operation, the Adviser has
undertaken to waive its investment advisory fees and expenses payable by
the Fund in the amounts, and for the time periods, set forth below:
Percentage Waived (as A
Percentage Of Average
Daily Managed Assets)
Twelve Month
Period Ending
Month Date, Year**
December 31, 2003 0.20%
December 31, 2004 0.20%
December 31, 2005 0.20%
December 31, 2006 0.20%
December 31, 2007 0.20%
December 31, 2008 0.15%
December 31, 2009 0.10%
December 31, 2010 0.05%
** From the commencement of operations.
The Adviser has not undertaken to waive any portion of the Fund's
fees and expenses beyond December 31, 2010 or after termination of the
investment management agreement.
Administrative Agreement
Federated Services Company, a subsidiary of Federated, provides
administrative personnel and services (including certain legal and
financial reporting services) necessary to operate the Fund. The
Administrator's address is Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA 15222-3779. Federated Services Company provides these at
the following annual rate of the average aggregate daily net assets of all
Federated Funds as specified below:
Average Aggregate Daily Net
Maximum Administrative Fee Assets of the Federated Funds
0.150 of 1% on the first $250 million
0.125 of 1% on the next $250 million
0.100 of 1% on the next $250 million
0.075 of 1% on assets in excess of $750 million
The administrative fee received during any fiscal year will be at least
$125,000. Federated Services Company may voluntarily waive a portion of
its fee and may reimburse the Fund for expenses.
NET ASSET VALUE
The Fund's NAV per Common Share is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open for business. To calculate NAV, the Fund's assets
are valued and totaled, liabilities and the aggregate liquidation value of
the outstanding Preferred Shares, if any, are subtracted, and the balance
is divided by the total number of Common Shares then outstanding.
The Fund values its fixed income securities by using market
quotations, prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with
similar characteristics in accordance with procedures established by the
Board. A substantial portion of the Fund's fixed income investments will
be valued according to the mean between bid and asked prices as furnished
by an independent pricing service. Debt securities with remaining
maturities of 60 days or less will be valued at amortized cost. Any
securities or other assets for which current market quotations are not
readily available are valued at their fair value as determined in good
faith by or under the direction of the Board.
DISTRIBUTIONS
The Fund will distribute to Common Shareholders monthly dividends of
all or a portion of its tax exempt interest income after payment of
dividends on any Preferred Shares of the Fund which may be outstanding.
It is expected that the initial monthly dividend on the Fund's Common
Shares will be declared approximately 45 days and paid approximately 60 to
90 days after completion of this offering. The Fund expects that all or a
portion of any capital gain and other taxable income will be distributed
at least annually.
Various factors will affect the level of the Fund's income,
including the asset mix, the amount of leverage used by the Fund and the
effects thereof and the Fund's use of hedging. To permit the Fund to
maintain a more stable monthly distribution, the Fund may from time to
time distribute less than the entire amount of tax exempt interest income
earned in a particular period. The undistributed tax exempt interest
income would be available to supplement future distributions. As a result,
the distributions paid by the Fund for any particular monthly period may
be more or less than the amount of tax exempt interest income actually
earned by the Fund during the period. Undistributed tax exempt interest
income will add to the Fund's NAV and, correspondingly, distributions from
undistributed tax exempt interest income will be deducted from the Fund's
NAV. Shareholders will automatically have all dividends and distributions
reinvested in Common Shares of the Fund issued by the Fund or purchased in
the open market in accordance with the Fund's Dividend Reinvestment Plan
unless an election is made to receive cash. See "Dividend Reinvestment
Plan."
DIVIDEND REINVESTMENT PLAN
Unless the registered owner of Common Shares elects to receive cash
by contacting the Plan Administrator, all dividends declared on Common
Shares of the Fund will be automatically reinvested by EquiServe Trust
Co., N.A. (the "Plan Administrator"), the administrator for shareholders
in the Fund's Dividend Reinvestment Plan (the "Plan"), in additional
Common Shares of the Fund. Common Shareholders who elect not to
participate in the Plan will receive all dividends and other distributions
in cash paid by check mailed directly to the shareholder of record (or, if
the Common Shares are held in street or other nominee name, then to such
nominee) by the Plan Administrator, as dividend disbursing agent. You may
elect not to participate in the Plan and to receive all dividends in cash
by contacting the Plan Administrator at the address set forth below if
your Shares are registered in your name or by contacting your bank, broker
or other entity if your Shares are held in street or other nominee name.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by notice if received and processed by
the Plan Administrator prior to the dividend record date; otherwise such
termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some brokers may
automatically elect to receive cash on your behalf and may re-invest that
cash in additional Common Shares of the Fund for you. If you wish for all
dividends declared on your Common Shares to be automatically reinvested
pursuant to the Plan, please contact your broker. The Plan Administrator
will open an account for each Common Shareholder under the Plan in the
same name in which such Common Shareholder's Common Shares are registered.
Whenever the Fund declares a dividend or other distribution (together, a
"Dividend") payable in cash, non-participants in the Plan will receive
cash and participants in the Plan will receive the equivalent in Common
Shares. The Common Shares will be acquired by the Plan Administrator for
the participants' accounts, depending upon the circumstances described
below, either (1) through receipt of additional unissued but authorized
Common Shares from the Fund ("Newly Issued Common Shares") or (2) by
purchase of outstanding Common Shares on the open market ("Open-Market
Purchases") on the New York Stock Exchange or elsewhere. If, on the
payment date for any Dividend, the closing market price plus estimated
brokerage commissions per Common Share is equal to or greater than the NAV
per Common Share, the Plan Administrator will invest the Dividend amount
in Newly Issued Common Shares on behalf of the participants. The number of
Newly Issued Common Shares to be credited to each participant's account
will be determined by dividing the dollar amount of the Dividend by the
NAV per Common Share on the payment date; provided that, if the NAV is
less than or equal to 95% of the closing market value on the payment date,
the dollar amount of the Dividend will be divided by 95% of the closing
market price per Common Share on the payment date. If, on the payment date
for any Dividend, the NAV per Common Share is greater than the closing
market value plus estimated brokerage commissions, the Plan Administrator
will invest the Dividend amount in Common Shares acquired on behalf of the
participants in Open-Market Purchases. In the event of a market discount
on the payment date for any Dividend, the Plan Administrator will have
until the last business day before the next date on which the Common
Shares trade on an "ex-dividend" basis or 30 days after the payment date
for such Dividend, whichever is sooner (the "Last Purchase Date"), to
invest the Dividend amount in Common Shares acquired in Open-Market
Purchases. It is contemplated that the Fund will pay monthly income
Dividends. Therefore, the period during which Open-Market Purchases can be
made will exist only from the payment date of each Dividend through the
date before the next "ex-dividend" date, which will be approximately ten
days. If, before the Plan Administrator has completed its Open-Market
Purchases, the market price per Common Share exceeds the NAV per Common
Share, the average per Common Share purchase price paid by the Plan
Administrator may exceed the NAV of the Common Shares, resulting in the
acquisition of fewer Common Shares than if the Dividend had been paid in
Newly Issued Common Shares on the Dividend payment date. Because of the
foregoing difficulty with respect to Open-Market Purchases, the Plan
provides that if the Plan Administrator is unable to invest the full
Dividend amount in Open-Market Purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period,
the Plan Administrator may cease making Open-Market Purchases and may
invest the uninvested portion of the Dividend amount in Newly Issued
Common Shares at the NAV per Common Share at the close of business on the
Last Purchase Date provided that, if the NAV is less than or equal to 95%
of the then current market price per Common Share, the dollar amount of
the Dividend will be divided by 95% of the market price on the payment
date.
The Plan Administrator maintains all shareholders' accounts in the
Plan and furnishes written confirmation of all transactions in the
accounts, including information needed by shareholders for tax records.
Common Shares in the account of each Plan participant will be held by the
Plan Administrator on behalf of the Plan participant, and each shareholder
proxy will include those shares purchased or received pursuant to the
Plan. The Plan Administrator will forward all proxy solicitation materials
to participants and vote proxies for shares held under the Plan in
accordance with the instructions of the participants.
In the case of record shareholders such as banks, brokers or
nominees which hold Common Shares for others who are the beneficial
owners, the Plan Administrator will administer the Plan on the basis of
the number of Common Shares certified from time to time by the record
shareholder and held for the account of beneficial owners who participate
in the Plan.
There will be no brokerage charges with respect to Common Shares
issued directly by the Fund. However, each participant will pay a pro rata
share of brokerage commissions incurred in connection with Open-Market
Purchases. The automatic reinvestment of Dividends will not relieve
participants of any Federal, state or local income tax that may be payable
(or required to be withheld) on such Dividends. See "Tax Matters."
Participants that request a sale of shares through the Plan Administrator
are subject to a $15.00 sales fee and a 12(cent) per share sold brokerage
commission.
The Fund reserves the right to amend or terminate the Plan. There is
no direct service charge to participants with regard to purchases in the
Plan; however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence or questions concerning the Plan should be
directed to the Plan Administrator, EquiServe Trust Company, N.A., P.O.
Box 43011, Providence, RI 02940-3011 or by telephone at (800) 730-6001.
DESCRIPTION OF SHARES
Common Shares
The Fund is an unincorporated statutory trust organized under the
laws of Delaware pursuant to an Agreement and Declaration of Trust dated
as of October 16, 2002. The Fund is authorized to issue an unlimited
number of Common Shares of beneficial interest, par value $0.01 per Common
Share. Each Common Share has one vote and, when issued and paid for in
accordance with the terms of this offering, will be fully paid and
non-assessable. Whenever Preferred Shares are outstanding, Common
Shareholders will not be entitled to receive any distributions from the
Fund unless (1) all accrued dividends on Preferred Shares have been paid,
(2) the Fund satisfies the 200% capital requirement and (3) certain other
requirements imposed by any NRSROs rating the Preferred Shares have been
met. See "Preferred Shares" below. All Common Shares are equal as to
dividends, assets and voting privileges and have no conversion, preemptive
or other subscription rights. The Fund will send annual and semi-annual
reports, including financial statements, to all Common Shareholders.
The Fund has no present intention of offering any additional shares
other than the Preferred Shares and Common Shares issued under the Fund's
Dividend Reinvestment Plan. Any additional offerings of shares will
require approval by the Board. Any additional offering of shares will be
subject to the requirements of the 1940 Act, which provides that shares
may not be issued at a price below the then current NAV, exclusive of
sales load, except in connection with an offering to existing Common
Shareholders or with the consent of a majority of the Fund's outstanding
voting securities.
The Common Shares have been approved for listing, subject to notice
of issuance, on the New York Stock Exchange under the symbol "FMN".
The Fund's NAV per share generally increases when interest rates
decline and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. NAV will be reduced immediately following the offering of
Common Shares by the amount of the sales load and organizational and
offering expenses paid by the Fund. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not
continuously offer shares and do not provide daily redemptions. Rather,
if a Common Shareholder determines to buy additional Common Shares or sell
Common Shares already held, the Common Shareholder may do so by trading
through a broker on the New York Stock Exchange or otherwise. Shares of
closed-end investment companies frequently trade on an exchange at prices
lower than NAV. Shares of closed-end investment companies like the Fund
that invest primarily in investment grade tax exempt securities have
during some periods traded at prices higher than NAV and during other
periods have traded at prices lower than NAV. Because the market value of
the Common Shares may be influenced by such factors as dividend levels
(which are in turn affected by expenses), call protection on its portfolio
securities, dividend stability, portfolio credit quality, NAV, relative
demand for and supply of such shares in the market, general market and
economic conditions and other factors beyond the control of the Fund, the
Fund cannot assure you that Common Shares will trade at a price equal to
or higher than NAV in the future. The Common Shares are designed primarily
for long-term investors and you should not purchase the Common Shares if
you intend to sell them soon after purchase. See "Preferred Shares and
Leverage" and the Statement of Additional Information under "Repurchase of
Common Shares."
Preferred Shares
The Fund's Agreement and Declaration of Trust provides that the
Board may authorize and issue Preferred Shares with rights as determined
by the Board, by action of the Board without the approval of the Common
Shareholders. Common Shareholders have no preemptive right to purchase any
Preferred Shares that might be issued.
The Board has indicated its intention to authorize an offering of
Preferred Shares, representing approximately 38% of the Fund's capital,
immediately after the Preferred Shares are issued, within approximately
one to three months after completion of this offering of Common Shares,
subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of Preferred
Shares is likely to achieve the potential benefits to the Common
Shareholders described in this prospectus. The Fund may conduct other
offerings of Preferred Shares in the future. The Board also reserves the
right to change the foregoing percentage limitation and may issue
Preferred Shares to the extent permitted by the 1940 Act, which currently
limits the aggregate liquidation preference of all outstanding Preferred
Shares to 50% of the value of the Fund's capital. We cannot assure you,
however, that any Preferred Shares will be issued. Although the terms of
any Preferred Shares, including dividend rate, liquidation preference and
redemption provisions, will be determined by the Board, subject to
applicable law and the Fund's Agreement and Declaration of Trust, it is
likely that the Preferred Shares will be structured to carry a relatively
short-term dividend rate reflecting interest rates on short-term tax
exempt debt securities, by providing for the periodic redetermination of
the dividend rate at relatively short intervals through an auction,
remarketing or other procedure. The Fund also believes that it is likely
that the liquidation preference, voting rights and redemption provisions
of the Preferred Shares will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the Preferred
Shareholders will be entitled to receive a preferential liquidating
distribution, which is expected to equal the original purchase price per
Preferred Share plus accrued and unpaid dividends, whether or not
declared, before any distribution of assets is made to Common
Shareholders. After payment of the full amount of the liquidating
distribution to which they are entitled, the Preferred Shareholders will
not be entitled to any further participation in any distribution of assets
by the Fund.
Voting Rights. The 1940 Act requires that Preferred Shareholders,
voting separately as a single class, have the right to elect at least two
Trustees at all times. The remaining Trustees will be elected by Common
Shareholders and Preferred Shareholders, voting together as a single
class. In addition, subject to the prior rights, if any, of the holders of
any other class of senior securities outstanding, the Preferred
Shareholders have the right to elect a majority of the Trustees of the
Fund at any time two years' dividends on any Preferred Shares are unpaid.
The 1940 Act also requires that, in addition to any approval by
shareholders that might otherwise be required, the approval of the holders
of a majority of any outstanding Preferred Shares, voting separately as a
class, would be required to (1) adopt any plan of reorganization that
would adversely affect the Preferred Shares, and (2) take any action
requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's subclassification as
a closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Agreement and Declaration of
Trust." As a result of these voting rights, the Fund's ability to take
any such actions may be impeded to the extent that there are any Preferred
Shares outstanding. The Board presently intends that, except as otherwise
indicated in this prospectus and except as otherwise required by
applicable law, Preferred Shareholders will have equal voting rights with
Common Shareholders (one vote per share, unless otherwise required by the
1940 Act) and will vote together with Common Shareholders as a single
class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend,
alter or repeal any of the preferences, rights or powers of Preferred
Shareholders so as to affect materially and adversely such preferences,
rights or powers, or to increase or decrease the authorized number of
Preferred Shares. The class vote of Preferred Shareholders described
above will in each case be in addition to any other vote required to
authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The
terms of the Preferred Shares are expected to provide that (1) they are
redeemable by the Fund in whole or in part at the original purchase price
per share plus accrued dividends per share, (2) the Fund may tender for or
purchase Preferred Shares and (3) the Fund may subsequently resell any
shares so tendered for or purchased. Any redemption or purchase of
Preferred Shares by the Fund will reduce the leverage applicable to the
Common Shares, while any resale of shares by the Fund will increase that
leverage.
The discussion above describes the possible offering of Preferred
Shares by the Fund. If the Board determines to proceed with such an
offering, the terms of the Preferred Shares may be the same as, or
different from, the terms described above, subject to applicable law and
the Fund's Agreement and Declaration of Trust. The Board, without the
approval of the Common Shareholders, may authorize an offering of
Preferred Shares or may determine not to authorize such an offering, and
may fix the terms of the Preferred Shares to be offered.
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Fund's Agreement and Declaration of Trust includes provisions
that could have the effect of limiting the ability of other entities or
persons to acquire control of the Fund or to change the composition of its
Board. This 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 over
the Fund. Such attempts could have the effect of increasing the expenses
of the Fund and disrupting the normal operation of the Fund. The Board is
divided into three classes, with the terms of one class expiring at each
annual meeting of shareholders. At each annual meeting, one class of
Trustees is elected to a three-year term. This provision could delay for
up to two years the replacement of a majority of the Board. A Trustee may
be removed from office only for cause by the action of a majority of the
remaining Trustees followed by a vote of the holders of at least 75% of
the shares then entitled to vote for the election of the respective
Trustee.
In addition, the Fund's Agreement and Declaration of Trust requires
the favorable vote of a majority of the Fund's Board followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Fund, 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 80% of the Trustees.
For purposes of these provisions, a 5% or greater holder of a class or
series of shares (a "Principal Shareholder") refers to any person,
including its affiliates and associates, 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 shares of beneficial interest of the Fund. The 5%
holder transactions subject to these special approval requirements are:
o the merger or consolidation of the Fund or any subsidiary of the
Fund with or into any Principal Shareholder;
o the issuance of any securities of the Fund to any Principal
Shareholder for cash (other than pursuant to any automatic dividend
reinvestment plan);
o the sale, lease or exchange of all or any substantial part of the
assets of the Fund 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 twelve-month
period; or
o the sale, lease or exchange to the Fund or any subsidiary of the
Fund, in exchange for securities of the Fund, 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 twelve-month period.
To convert the Fund to an open-end investment company, the Fund's
Agreement and Declaration of Trust requires the favorable vote of a
majority of the Board followed by the favorable vote of the holders of at
least 75% of the outstanding shares of each affected class or series of
shares of the Fund, voting separately as a class or series, unless such
amendment has been approved by at least 80% of the Trustees, in which case
"a majority of the outstanding voting securities" as defined in the 1940
Act of the Fund will be required. The foregoing vote would satisfy a
separate requirement in the 1940 Act that any conversion of the Fund to an
open-end investment company be approved by the shareholders. If approved
in the foregoing manner, conversion of the Fund to an open-end investment
company could not occur until 90 days after the shareholders' meeting at
which such conversion was approved and would also require at least 30
days' prior notice to all shareholders. Conversion of the Fund to an
open-end investment company would require the redemption of any
outstanding Preferred Shares, which could eliminate or alter the leveraged
capital structure of the Fund with respect to the Common Shares.
Following any such conversion, it is also possible that certain of the
Fund's investment policies and strategies would have to be modified to
assure sufficient portfolio liquidity. In the event of conversion, the
Common Shares would cease to be listed on the New York Stock Exchange or
other national securities exchanges or market systems. Shareholders of an
open-end investment company may require the company to redeem their shares
at any time, except in certain circumstances as authorized by or under the
1940 Act, at their NAV, less such redemption charge, if any, as might be
in effect at the time of a redemption. The Fund expects to pay all such
redemption requests in cash, but reserves the right to pay redemption
requests in a combination of cash or securities. If such partial payment
in securities were made, investors may incur brokerage costs in converting
such securities to cash. If the Fund were converted to an open-end fund,
it is likely that new shares would be sold at NAV plus a sales load. The
Board believes, however, that the closed-end structure is desirable in
light of the Fund's investment objective and policies. Therefore, you
should assume that it is not likely that the Board would vote to convert
the Fund to an open-end fund.
To liquidate the Fund, the Fund's Agreement and Declaration of Trust
requires the favorable vote of a majority of the Board followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Fund, voting separately as a class or
series, unless such liquidation has been approved by at least 80% of the
Trustees, in which case "a majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Fund will be required.
For the purposes of calculating "a majority of the outstanding
voting securities" under the Fund's Agreement and Declaration of Trust,
each class and series of the Fund will vote together as a single class,
except to the extent required by the 1940 Act or the Fund's Agreement and
Declaration of Trust with respect to any class or series of shares. If a
separate vote is required, the applicable proportion of shares of the
class or series, voting as a separate class or series, also will be
required. The Board has determined that the provisions with respect to
the Board and the shareholder voting requirements described above, which
voting requirements are greater than the minimum requirements under
Delaware law or the 1940 Act, are in the best interest of shareholders
generally. Reference should be made to the Agreement and Declaration of
Trust on file with the Securities and Exchange Commission for the full
text of these provisions.
CLOSED-END FUND STRUCTURE
The Fund is a newly organized, diversified, closed-end management
investment company, commonly referred to as a closed-end fund. Closed-end
funds differ from open-end funds, which are generally referred to as
mutual funds, in that closed-end funds generally list their shares for
trading on a stock exchange and do not redeem their shares at the request
of the shareholder. This means that if you wish to sell your shares of a
closed-end fund you must trade them on the market like any other stock at
the prevailing market price at that time. In a mutual fund, if the
shareholder wishes to sell shares of the fund, the mutual fund will redeem
or buy back the shares at "NAV," less any applicable redemption fee or
"back end" sales charge. Also, mutual funds generally offer new shares on
a continuous basis to new investors, and closed-end funds generally do
not. The continuous inflows and outflows of assets in a mutual fund can
make it difficult to manage the fund's investments. By comparison,
closed-end funds are generally able to stay more fully invested in
securities that are consistent with their investment objective, and also
have greater flexibility to make certain types of investments, and to use
certain investment strategies, such as financial leverage and investments
in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their
NAV. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Fund's Board
might consider from time to time engaging in open-market repurchases,
tender offers for Common Shares or other programs intended to reduce the
discount. There is no guarantee or assurance that the Fund's Board will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the Common
Shares trading at a price equal or close to NAV per share. The Board
might also consider converting the Fund to an open-end mutual fund, which
would also require a vote of the shareholders of the Fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount
to their NAVs, and the Fund's Common Shares may also trade at a discount
to their NAV, although it is possible that they may trade at a premium
above NAV. The market price of the Fund's Common Shares will be determined
by such factors as relative demand for and supply of such Common Shares in
the market, the Fund's NAV, general market and economic conditions and
other factors beyond the control of the Fund. See "Net Asset Value."
Although the Fund's Common Shareholders will not have the right to redeem
their Common Shares, the Fund may take action to repurchase Common Shares
in the open market or make tender offers for its Common Shares. This may
have the effect of reducing any market discount from NAV. There is no
assurance that, if action is undertaken to repurchase or tender for Common
Shares, such action will result in the Common Shares trading at a price
which approximates their NAV. Although share repurchases and tenders could
have a favorable effect on the market price of the Fund's Common Shares,
you should be aware that the acquisition of Common Shares by the Fund will
decrease the capital of the Fund and, therefore, may have the effect of
increasing the Fund's expense ratio and decreasing the asset coverage with
respect to any Preferred Shares outstanding. Any share repurchases or
tender offers will be made in accordance with requirements of the
Securities Exchange Act of 1934, as amended, the 1940 Act and the
principal stock exchange on which the Common Shares are traded.
TAX MATTERS
Federal Tax Matters
The discussion below and in the Statement of Additional Information
provides general tax information related to an investment in the Common
Shares. 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 retroactively or prospectively. Because tax laws are complex and
often change, you should consult your tax advisor about the tax
consequences of an investment in the Fund.
The Fund invests primarily in securities the income of which is
exempt from federal income tax, including AMT. Consequently, the regular
monthly dividends you receive will generally be exempt from Federal income
tax, including AMT. A portion of these dividends, however, may be subject
to AMT.
Although the Fund does not seek to realize taxable income or capital
gains, the Fund may realize and distribute taxable income or capital gains
from time to time as a result of the Fund's normal investment activities.
The Fund will distribute at least annually any taxable income or realized
capital gains. Distributions of net short-term gains are taxable as
ordinary income. Distributions of net long-term capital gains are taxable
to you as long-term capital gains regardless of how long you have owned
your Common Shares. Dividends will not qualify for a dividends received
deduction generally available to corporate shareholders.
Each year, you will receive a year-end statement designating the
amounts of tax exempt dividends, capital gain dividends and ordinary
income dividends paid to you during the preceding year, including the
source of investment income by state. You will receive this statement from
the firm where you purchased your Common Shares if you hold your
investment in street name. The Fund will send you this statement if you
hold your Common Shares in registered form.
The tax status of your dividends is not affected by whether you
reinvest your dividends or receive them in cash.
In order to avoid corporate taxation of its taxable income and be
permitted to pay tax exempt dividends, the Fund must elect to be treated
as a regulated investment company under Subchapter M of the Code and meet
certain requirements that govern the Fund's sources of income,
diversification of assets and distribution of earnings to shareholders.
The Fund intends to make such an election and meet these requirements. If
the Fund failed to do so, the Fund would be required to pay corporate
taxes on its taxable income and all the distributions would be taxable as
ordinary income to the extent of the
Fund's earnings and profits. In particular, in order for the Fund to pay
tax exempt dividends, at least 50% of the value of the Fund's total assets
must consist of tax exempt obligations on a quarterly basis. The Fund
intends to meet this requirement. If the Fund failed to do so, it would
not be able to pay tax exempt dividends and your distributions
attributable to interest received by the Fund from any source would be
taxable as ordinary income to the extent of the Fund's earnings and
profits.
The Fund may at times buy tax exempt securities at a discount from
the price at which they were originally issued, especially during periods
of rising interest rates. For federal income tax purposes, some or all of
any market discount that is other than de minimis will be included in the
Fund's ordinary income and will be taxable to shareholders as such when it
is distributed.
The Fund may be required to withhold taxes on certain of your
dividends if you have not provided the Fund with your correct taxpayer
identification number (if you are an individual, normally your Social
Security number), or if you are otherwise subject to back-up withholding.
If you receive Social Security benefits, you should be aware that tax
exempt dividend income is taken into account in calculating the amount of
these benefits that may be subject to federal income tax. If you borrow
money to buy Fund shares, you may not be permitted to deduct the interest
on that loan. Under federal income tax rules, Fund shares may be treated
as having been bought with borrowed money even if the purchase of the Fund
shares cannot be traced directly to borrowed money. Holders are urged to
consult their own tax advisors regarding the impact of an investment in
Common Shares upon the deductibility of interest payable by the holder.
State and Local Tax Matters
The exemption from federal income tax for exempt-interest dividends
does not necessarily result in exemption for such dividends under the
income or other tax laws of any state or local taxing authority. In some
states, the portion of any exempt-interest dividend that is derived from
interest received by a regulated investment company on its holdings of
that state's securities and its political subdivisions and
instrumentalities is exempt from that state's income tax. Therefore, the
Fund will report annually to its shareholders the percentage of interest
income earned by the Fund during the preceding year on tax exempt
obligations indicating, on a state-by-state basis, the source of such
income. Shareholders of the Fund are advised to consult with their own tax
advisors about state and local tax matters.
Please refer to the Statement of Additional Information for more
detailed information. You are urged to consult your tax advisor.
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated
[ ], 2002, each underwriter named below has severally agreed
to purchase, and the Fund has agreed to sell to such underwriter the
number of Common Shares set forth opposite the name of such underwriter.
Underwriter Number of Common Shares
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
UBS Warburg LLC
A.G. Edwards & Sons, Inc.
RBC Dain Rauscher, Inc.
Wachovia Securities, Inc.
Wells Fargo Securities, LLC
Advest, Inc.
Robert W. Baird & Co. Incorporated
BB&T Capital Markets, a subsidiary of
Scott & Stringfellow, Inc.
Fahnestock & Co. Inc.
Ferris, Baker Watts, Incorporated
Janney Montgomery Scott LLC
McDonald Investments Inc., a KeyCorp Company
Parker/Hunter Incorporated
Quick & Reilly, Inc.
Stephens Inc.
Stifel, Nicolaus & Company, Incorporated
Total..................................[ ]
The purchase agreement provides that the obligations of the
underwriters to purchase the Common Shares included in this offering are
subject to the approval of certain legal matters by counsel under the
purchase agreement and to certain other conditions. The underwriters are
obligated to purchase all of the Common Shares (other than those covered
by the over-allotment described below) if any of the Common Shares are
purchased. In the purchase agreement, the Fund and the Adviser have
agreed to indemnify the underwriters against certain liabilities,
including liabilities arising under the Securities Act of 1933, as
amended, or to contribute to payments the underwriters may be required to
make for any of those liabilities.
The underwriters propose to initially offer some of the Common
Shares directly to the public at the public offering price set forth on
the cover page of this prospectus and some of the Common Shares to certain
dealers at the public offering price less a concession not in excess of
$ per Common Share. The sales load the Fund will pay of $.675 per
Common Share is equal to 4.5% of the initial offering price. The
underwriters may allow, and the dealers may reallow, a discount not in
excess of $ per Common Share on sales to other dealers. After the
initial public offering, the public offering price, concession and
discount may be changed.
The following table shows the public offering price, sales load and
proceeds before and after expenses to the Fund. The information assumes
either no exercise or full exercise by the underwriters of their
over-allotment option.
Without With
Per Share Option Option
Public offering price $15.00 $ $
Sales load $0.675 $ $
Proceeds, before expenses, to the Fund $14.325 $ $
Proceeds, after expenses, to the Fund $14.295 $ $
The expenses of the offering are estimated at $ and are payable
by the Fund. The Fund has agreed to pay the underwriters $0.005 per
Common Share as a partial reimbursement of expenses incurred in connection
with the offering. The Adviser has agreed to pay organizational expenses
and offering costs of the Fund (other than sales load, but including the
reimbursement of underwriters expenses) that exceed $.03 per Common Share.
The Fund has granted the underwriters an option to purchase up
to additional Common Shares at the public offering price, less the
sales load, within 45 days from the date of this prospectus solely to
cover any over-allotments. If the underwriters exercise this option, each
will be obligated, subject to conditions contained in the purchase
agreement, to purchase a number of additional Common Shares proportionate
to that underwriter's initial amount reflected in the above table.
Until the distribution of the Common Shares is complete, SEC rules
may limit underwriters and selling group members from bidding for and
purchasing Common Shares. However, the representatives may engage in
transactions that stabilize the price of Common Shares, such as bids or
purchases to peg, fix or maintain that price.
If the underwriters create a short position in Common Shares in
connection with the offering, i.e., if they sell more Common Shares than
are listed on the cover of this prospectus, the representatives may reduce
that short position by purchasing Common Shares in the open market. The
representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above. The
underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of Common
Shares sold in this offering for their account may be reclaimed by the
syndicate if such Common Shares are repurchased by the syndicate in
stabilizing or covering transactions. Purchases of Common Shares to
stabilize its price or to reduce a short position may cause the price of
Common Shares to be higher than it might be in the absence of such
purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of Common Shares. In
addition, neither we nor any of the underwriters make any representation
that the representatives will engage in these transactions or that these
transactions, once commenced, will not be discontinued without notice.
The Fund has agreed not to offer or sell any additional Common
Shares for a period of 180 days after the date of the purchase agreement
without the prior written consent of the underwriters, except for the sale
of the Common Shares to the underwriters pursuant to the purchase
agreement and the sale of Common Shares pursuant to the Fund's Dividend
Reinvestment Plan.
The Fund anticipates that the underwriters may from time to time act
as brokers or dealers in executing the Fund's portfolio transactions after
they have ceased to be underwriters. The underwriters are active
underwriters of, and dealers in, securities and act as market markers in a
number of such securities, and therefore can be expected to engage in
portfolio transactions with the Fund.
The Common Shares will be sold to ensure that New York Stock
Exchange distribution standards (round lots, public shares and aggregate
market value) will be met.
The Adviser has also agreed to pay a fee to Merrill Lynch payable
quarterly at the annual rate of .10% of the Fund's Managed Assets during
the continuance of the investment management agreement or other advisory
agreement between the Adviser and the Fund. The sum of this fee plus the
amount of the expense reimbursement of $.005 per Common Share payable by
the Fund to the underwriters will not exceed 4.5% of the total price to
the public of the Common Shares offered hereby; provided, that in
determining when the maximum amount has been paid the value of each of the
quarterly payments shall be discounted at the annual rate of 10% to the
closing date of this offering. Merrill Lynch has agreed to provide
certain after-market support services to the Adviser designed to maintain
the visibility of the Fund on an ongoing basis, to provide relevant
information, studies or reports regarding the Fund and the closed-end
investment company and asset management industries and to provide
information to and consult with the Adviser with respect to applicable
strategies designed to address market discounts, if any.
The principal business address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated is 4 World Financial Center, New York, New York 10080.
CUSTODIAN AND TRANSFER AGENT
The Custodian of the assets of the Fund is State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The
Custodian performs custodial, fund accounting and portfolio accounting
services. EquiServe Trust Company, N.A., P.O. Box 43011, Providence, RI
02940-3011, will serve as the Fund's Transfer Agent and Dividend
Disbursing Agent.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be
passed upon for the Fund by Dickstein Shapiro Morin & Oshinsky LLP and for
the underwriters by Clifford Chance US LLP, New York, New York. Dickstein
Shapiro Morin & Oshinsky LLP and Clifford Chance US LLP may rely as to
certain matters of Delaware law on the opinion of Reed Smith LLP.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Page
Use of Proceeds.........................................................2
Investment Strategies...................................................2
Fundamental Investment Objective, Policy and Limitations.............. 2
Non-Fundamental Investment Policies.................................... 4
Investment Securities.................................................. 5
Management of the Fund.................................................11
Brokerage Transactions.................................................19
Description of Shares..................................................19
Repurchase of Common Shares............................................20
Tax Matters............................................................22
Performance Related and Comparative Information....................... 27
Federated Investors, Inc...............................................29
Experts................................................................30
Additional Information................................................ 30
Independent Auditors' Report.......................................... 30
Financial Statements.................................................. 32
APPENDIX A Ratings of Investments..................................... 34
4,000,000 Shares
Federated Premier Municipal Income Fund
Common Shares
PROSPECTUS
Merrill Lynch & Co.
UBS Warburg A.G. Edwards & Sons, RBC Capital Markets
Inc.
Wachovia Securities Wells Fargo Securities, Advest, Inc.
LLC
Robert W. Baird & Co. BB&T Capital Markets, a Fahnestock & Co. Inc.
subsidiary of Scott &
Stringfellow, Inc.
Ferris, Baker Watts Janney Montgomery Scott McDonald Investments,
Incorporated LLC Inc.
Parker/Hunter Quick & Reilly, Inc. Stephens Inc.
Incorporated
Stifel, Nicholaus & Company Incorporated
[Month Day, 2002]
CUSIP 31423P108
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 in any state where the offer or sale is not
permitted.
FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Federated Premier Municipal Income Fund (the "Fund") is a newly organized,
diversified, closed-end management investment company. This Statement of
Additional Information relating to Common Shares does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto dated November 25, 2002. This Statement of Additional Information
does not include all information that a prospective investor should
consider before purchasing Common Shares, and investors should obtain and
read the prospectus prior to purchasing such Common Shares. A copy of the
prospectus may be obtained without charge by calling 1-800-341-7400. You
may also obtain a copy of the prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings
ascribed to them in the prospectus.
TABLE OF CONTENTS
Page
Use Of Proceeds........................................................2
Investment Strategies..................................................2
Fundamental Investment Objective, Policy And Limitations...............2
Non-Fundamental Investment Policies....................................2
Investment Securities..................................................2
Management Of The Fund.................................................2
Brokerage Transactions.................................................2
Description Of Shares..................................................2
Repurchase Of Common Shares............................................2
Tax Matters............................................................2
Performance And Related Comparative Information........................2
Federated Investors, Inc...............................................2
Experts................................................................2
Additional Information.................................................2
Independent Auditors' Report...........................................2
Financial Statements...................................................2
Appendix A Ratings Of Investments......................................2
This Statement of Additional Information is dated November __, 2002.
USE OF PROCEEDS
Pending investment in tax exempt securities that meet the Fund's
investment objective and policies, the net proceeds of the offering will
be invested in high-quality, short-term tax exempt money market securities
or in high-quality tax exempt securities with relatively low volatility
(such as pre-refunded and intermediate-term bonds), to the extent such
securities are available. If necessary to invest fully the net proceeds of
the offering immediately, the Fund may also purchase, as temporary
investments, short-term taxable investments the income on which is subject
to federal regular income tax, and securities of other open- or closed-end
investment companies that invest primarily in tax exempt securities of the
type in which the Fund may invest directly.
INVESTMENT STRATEGIES
Under normal circumstances, the Fund will maintain a dollar-weighted
average portfolio maturity of 15 to 30 years and a dollar-weighted average
duration of 7 to 13 years.
The Fund's average portfolio maturity represents an average based on
the actual stated maturity dates of the debt securities in the Fund's
portfolio, except that: (1) variable-rate securities are deemed to mature
at the next interest-rate adjustment date, unless subject to a demand
feature; (2) variable-rate securities subject to a demand feature are
deemed to mature on the longer of the next interest-rate adjustment date
or the date on which principal can be recovered through demand; (3)
floating-rate securities subject to a demand feature are deemed to mature
on the date on which the principal can be recovered through demand; and
(4) securities being hedged with futures contracts may be deemed to have a
longer maturity, in the case of purchases of futures contracts, and a
shorter maturity, in the case of sales of futures contracts, than they
would otherwise be deemed to have. In addition, a security that is subject
to redemption at the option of the issuer on a particular date ("call
date"), which is prior to the security's stated maturity, may be deemed to
mature on the call date rather than on its stated maturity date. The call
date of a security will be used to calculate average portfolio maturity
when the Adviser reasonably anticipates, based upon information available
to it, that the issuer will exercise its right to redeem the security. The
average portfolio maturity of the Fund is dollar weighted based upon the
market value of the Fund's securities at the time of calculation.
The Fund cannot accurately predict its portfolio turnover rate but
anticipates that its annual portfolio turnover rate will not exceed 100%.
The Fund generally will not trade securities for the purpose of realizing
short-term profits, but it will adjust its portfolio as it deems advisable
in view of prevailing or anticipated market conditions to accomplish its
investment objective. Other than for consideration of tax consequences,
frequency of portfolio turnover will not be a limiting factor if the Fund
considers it advantageous to purchase or sell securities.
FUNDAMENTAL INVESTMENT OBJECTIVE, POLICY AND LIMITATIONS
The following fundamental investment objective, policy and
limitations may not be changed by the Fund's Board without the approval of
the holders of a majority of (1) the outstanding Common Shares and
Preferred Shares (if any) voting together as a class, and (2) the
outstanding Preferred Shares (if any), voting as a separate class. When
used with respect to particular shares of the Fund, "majority of the
outstanding" means (a) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by
proxy, or (b) more than 50% of the shares, whichever is less.
Investment Objectives
The Fund's investment objective is to provide current income exempt from
federal income tax, including AMT.
Investment Policy
The Fund will invest its assets so that at least 80% of the income that it
distributes will be exempt from federal regular income tax.
Investment Limitations
Concentration
The Fund will not make investments that will result in the
concentration of its investments in the securities of issuers primarily
engaged in the same industry, but may invest more than 25% of its total
assets in securities of issuers in the same economic sector.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase the securities of any one issuer
(other than cash, cash items, securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities
and repurchase agreements collateralized by such U.S. government
securities, and securities of other investment companies) if as a
result more than 5% of the value of its total assets would be invested
in the securities of that issuer, or it would own more than 10% of the
outstanding voting securities of that issuer.
Underwriting
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies and limitations.
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in
tax exempt securities secured by real estate or interests in real
estate.
Investing in Commodities
The Fund may not purchase or sell physical commodities, provided that
the Fund may purchase securities of companies that deal in
commodities. For purposes of this restriction, investments in
transactions involving futures contracts and options, swap
transactions, and other financial contracts that settle by payment of
cash are not deemed to be investments in commodities.
Lending
The Fund will not make loans, but may acquire publicly or non-publicly
issued tax exempt securities as permitted by its investment objective,
policies and limitations.
Borrowing Money and Issuing Senior Securities
The Fund may borrow money, directly or indirectly, and issue senior
securities to the maximum extent permitted under the Investment Company
Act of 1940 (the "1940 Act").
For purposes of applying the concentration limitation, 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.
For the purpose of applying the concentration limitation, a
non-governmental issuer will 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
will 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.
NON-FUNDAMENTAL INVESTMENT POLICIES
The Fund is also subject to the following non-fundamental investment
policies, which may be changed by the Board without shareholder approval.
Short Sales
The Fund will not make any short sale of securities except in conformity
with applicable laws, rules and regulations and unless after giving effect
to such sale, the market value of all securities sold short does not
exceed 25% of the value of the Fund's total assets and the Fund's
aggregate short sales of a particular class of securities does not exceed
25% of the then outstanding securities of that class.
Investing in Other Investment Companies
The Fund may purchase securities of open-end or closed-end investment
companies in compliance with the 1940 Act or any exemptive relief obtained
thereunder.
Exercise of Control
The Fund will not purchase securities of companies for the purpose of
exercising control.
INVESTMENT SECURITIES
The following information supplements the discussion of the Fund's
investment securities that are described in the prospectus.
Fixed Income Securities
Fixed income securities pay interest, dividends or distributions at a
specified rate. The rate may be a fixed percentage of the principal or
adjusted periodically. In addition, the issuer of a fixed income security
must repay the principal amount of the security, normally within a
specified time. Fixed income securities provide more regular income than
equity securities. However, the returns on fixed income securities are
limited and normally do not increase with the issuer's earnings. This
limits the potential appreciation of fixed income securities as compared
to equity securities.
A security's yield measures the annual income earned on a security as a
percentage of its price. A security's yield will increase or decrease
depending upon whether it costs less (a discount) or more (a premium) than
the principal amount. If the issuer may redeem the security before its
scheduled maturity, the price and yield on a discount or premium security
may change based upon the probability of an early redemption. Securities
with higher risks generally have higher yields.
The Fund may invest in tax exempt securities, which pay interest that is
not subject to regular income taxes, including AMT. Typically, states,
counties, cities and other political subdivisions and authorities issue
tax exempt securities. The market categorizes tax exempt securities by
their source of repayment.
Following is a description of non-principal tax exempt securities in which
the Fund may invest.
Variable Rate Demand Instruments. Variable rate demand instruments
are tax exempt securities that require the issuer or a third party, such
as a dealer or bank, to repurchase the security for its face value upon
demand. The securities also pay interest at a variable rate intended to
cause the securities to trade at their face value. The Fund treats demand
instruments as short-term securities because their variable interest rate
adjusts in response to changes in market rates, even though their stated
maturity may extend beyond 13 months.
Municipal Notes. Municipal notes are short-term tax exempt
securities. Many municipalities issue such notes to fund their current
operations before collecting taxes or other municipal revenues.
Municipalities may also issue notes to fund capital projects prior to
issuing long-term bonds. The issuers typically repay the notes at the end
of their fiscal year, either with taxes, other revenues or proceeds from
newly issued notes or bonds.
Tax Increment Financing Bonds. Tax increment financing (TIF) bonds
are payable from increases in taxes or other revenues attributable to
projects financed by the bonds. For example, a municipality may issue TIF
bonds to redevelop a commercial area. The TIF bonds would be payable
solely from any increase in sales taxes collected from merchants in the
area. The bonds could default if merchants' sales, and related tax
collections, failed to increase as anticipated.
Municipal Mortgage Back Securities. Municipal mortgage backed
securities are special revenue bonds the proceeds of which may be used to
provide mortgage loans for single family homes or to finance multifamily
housing. Municipal mortgage backed securities represent interests in pools
of mortgages. The mortgages that comprise a pool normally have similar
interest rates, maturities and other terms. Municipal mortgage backed
securities generally have fixed interest rates.
PACS. PACs (planned amortization classes) are a sophisticated form
of mortgage backed security issued with a companion class. PACs receive
principal payments and prepayments at a specified rate. In addition, PACs
will receive the companion classes' share of principal payments, if
necessary, to cover a shortfall in the prepayment rate. This helps PACs to
control prepayment risks by increasing the risks to their companion
classes.
Credit Enhancement
Common types of credit enhancement include guarantees, letters of credit,
bond insurance and surety bonds. Credit enhancement also includes
arrangements where securities or other liquid assets secure payment of a
fixed income security. If a default occurs, these assets may be sold and
the proceeds paid to a security's holders. Each form of credit enhancement
reduces credit risks by providing another source of payment for a fixed
income security.
Structured Notes
The Fund may invest in "structured" notes, which are privately negotiated
debt obligations where the principal and/or interest is determined by
reference to the performance of a benchmark asset, 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 indices reflecting taxable and tax exempt bonds. Depending on the
terms of the note, the Fund may forgo all or part of the interest and
principal that would be payable on a comparable conventional note. The
rate of return on structured notes may be determined by applying a
multiplier to the performance or differential performance of the
referenced index(es) or other assets(s). Application of a multiplier
involves leverage that will serve to magnify the potential for gain and
the risk of loss.
The Fund currently intends that any use of structured notes will be for
the purpose of reducing the interest rate sensitivity of the Fund's
portfolio (and thereby decreasing the Fund's exposure to interest rate
risk) and, in any event, that the interest income on the notes will
normally be exempt from federal income tax. The Fund will only invest in
structured notes if it has received an opinion of counsel for the issuer
(or the advice of another authority believed by the Adviser to be
reliable) that the interest income on the notes will be exempt from
federal income tax. Like other sophisticated strategies, the Fund's use
of structured notes may not work as intended; for example, the change in
value of the structured notes may not match very closely the change in the
value of bonds that the structured notes were purchased to hedge.
Derivative Contracts
Derivative contracts are financial instruments that require payments based
upon changes in the values of designated (or underlying) securities,
currencies, commodities, financial indices or other assets or instruments.
Some derivative contracts (such as futures, forwards and options) require
payments relating to a future trade involving the underlying asset. Other
derivative contracts (such as swaps) require payments relating to the
income or returns from the underlying asset or instrument. The other party
to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract
except for the price. Investors make payments due under their contracts
through the exchange. Most exchanges require investors to maintain margin
accounts through their brokers to cover their potential obligations to the
exchange. Parties to the contract make (or collect) daily payments to the
margin accounts to reflect losses (or gains) in the value of their
contracts. This protects investors against potential defaults by the
counterparty. Trading contracts on an exchange also allows investors to
close out their contracts by entering into offsetting contracts.
For example, the Fund could close out an open contract to buy an asset at
a future date by entering into an offsetting contract to sell the same
asset on the same date. If the offsetting sale price is more than the
original purchase price, the Fund realizes a gain; if it is less, the Fund
realizes a loss. Exchanges may limit the amount of open contracts
permitted at any one time. Such limits may prevent the Fund from closing
out a position. If this happens, the Fund will be required to keep the
contract open (even if it is losing money on the contract), and to make
any payments required under the contract (even if it has to sell portfolio
securities at unfavorable prices to do so). Inability to close out a
contract could also harm the Fund by preventing it from disposing of or
trading any assets it has been using to secure its obligations under the
contract.
The Fund may also trade derivative contracts over-the-counter (OTC) in
transactions negotiated directly between the Fund and the counterparty.
OTC contracts do not necessarily have standard terms, so they cannot be
directly offset with other OTC contracts. In addition, OTC contracts with
more specialized terms may be more difficult to price than exchange traded
contracts.
Depending upon how the Fund uses derivative contracts and the
relationships between the market value of a derivative contract and the
underlying asset or instrument, derivative contracts may increase or
decrease the Fund's exposure to interest rate risks, and may also expose
the Fund to liquidity, leverage and tax risks. OTC contracts also expose
the Fund to credit risks in the event that a counterparty defaults on the
contract.
The Fund may trade in the following types of derivative contracts, as well
as combinations of these contracts, including, but not limited to, options
on futures contracts, options on forward contracts and options on swaps.
Futures Contracts. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of an
underlying asset or instrument at a specified price, date and time.
Entering into a contract to buy an underlying asset is commonly referred
to as buying a contract or holding a long position in the asset. Entering
into a contract to sell an underlying asset is commonly referred to as
selling a contract or holding a short position in the asset. Futures
contracts are considered to be commodity contracts. Futures contracts
traded OTC are frequently referred to as forward contracts.
The Fund may buy or sell the interest rate futures contracts and
index financial futures contracts. The Fund may also buy or sell futures
contracts on tax exempt securities and U.S. government and agency
securities.
Options. Options are rights to buy or sell an underlying asset or
instrument for a specified price (the exercise price) during, or at the
end of, a specified period. A call option gives the holder (buyer) the
right to buy the underlying asset or instrument from the seller (writer)
of the option. A put option gives the holder the right to sell the
underlying asset or instrument to the writer of the option. The writer of
the option receives a payment, or premium, from the buyer, which the
writer keeps regardless of whether the buyer uses (or exercises) the
option. If the Fund writes options on futures contracts, it will be
subject to margin requirements similar to those applied to futures
contracts.
Swaps. Swaps are contracts in which two parties agree to pay each
other (swap) the returns derived from underlying assets or instruments
with differing characteristics. Most swaps do not involve the delivery of
the underlying assets or instruments by either party, and the parties
might not own the assets or instruments underlying the swap. The payments
are usually made on a net basis so that, on any given day, the Fund would
receive (or pay) only the amount by which its payment under the contract
is less than (or exceeds) the amount of the other party's payment. Swap
agreements are sophisticated instruments that can take many different
forms, and are known by a variety of names including caps, floors and
collars. Common swap agreements that the Fund may use include:
Interest Rate Swaps. Interest rate swaps are contracts in which one
party agrees to make regular payments equal to a fixed or floating
interest rate times a stated, notional principal amount of fixed income
securities, in return for payments equal to a different fixed or floating
rate times the same notional principal amount, for a specific period. For
example, a $10 million LIBOR swap would require one party to pay the
equivalent of the London Interbank Offer Rate of interest (which
fluctuates) on $10 million notional principal amount in exchange for the
right to receive the equivalent of a stated fixed rate of interest on
$10 million notional principal amount.
Caps and Floors. Caps and floors are contracts in which one party
agrees to make payments only if an interest rate or index goes above (cap)
or below (floor) a certain level in return for a fee from the other party.
Total Return Swaps. Total return swaps are contracts in which one
party agrees to make payments of the total return from the underlying
asset or instrument during the specified period, in return for payments
equal to a fixed or floating rate of interest or the total return from
another underlying asset or instrument.
Municipal Market Data Rate Locks. The Fund may purchase and sell
Municipal Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock
permits the Fund to lock in a specified municipal interest rate for a
portion of its portfolio to preserve a return on a particular investment
or a portion of its portfolio as a duration management technique or to
protect against any increase in the price of securities to be purchased at
a later date. The Fund will ordinarily use these transactions as a hedge
or for duration or risk management although it is permitted to enter into
them to enhance income or gain. An MMD Rate Lock is a contract between
the Fund and an MMD Rate Lock provider pursuant to which the parties agree
to make payments to each other on a notional amount, contingent upon
whether the Municipal Market Data AAA General Obligation Scale is above or
below a specified level on the expiration date of the contract. For
example, if the Fund buys an MMD Rate Lock and the Municipal Market Data
AAA General Obligation Scale is below the specified level on the
expiration date, the counterparty to the contract will make a payment to
the Fund equal to the specified level minus the actual level, multiplied
by the notional amount of the contract. If the Municipal Market Data AAA
General Obligation Scale is above the specified level on the expiration
date, the Fund will make a payment to the counterparty equal to the actual
level minus the specified level, multiplied by the notional amount of the
contract. In entering into MMD Rate Locks, there is a risk that municipal
yields will move in the direction opposite the direction anticipated by
the Fund.
Short Sales
The Fund may make short sales of securities as part of its overall
portfolio management strategy and to offset potential declines in long
positions in securities in the Fund's portfolio. A short sale is a
transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. Although
short sale transactions are not currently available with respect to
Municipal Bonds, the Fund may engage in short sales on taxable bonds and
on futures contracts with respect to Municipal Bonds and taxable bonds.
When the Fund makes a short sale on a security, it must borrow the
security sold short and deliver it to the broker-dealer through which it
made the short sale as collateral for its obligation to deliver the
security upon conclusion of the sale. The Fund may have to pay a fee to
borrow particular securities and is often obligated to pay over any
accrued interest and dividends on such borrowed securities.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund
will incur a loss; conversely, if the price declines, the Fund will
realize a capital gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. The successful use of
short selling may be adversely affected by imperfect correlation between
movements in the price of the security sold short and the securities being
hedged.
To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer. A short sale is "against the box" to the
extent that the Fund contemporaneously owns, or has the right to obtain at
no added cost, securities identical to those sold short. The Fund may also
engage in so-called "naked" short sales (i.e., short sales that are not
"against the box"), in which case the Fund's losses could theoretically be
unlimited in cases where the Fund is unable for whatever reason to close
out its short position. The Fund has the flexibility to engage in short
selling to the extent permitted by the 1940 Act and rules and
interpretations thereunder.
Investing In Securities Of Other Investment Companies
The Fund may invest its assets in securities of other open-end or
closed-end investment companies, including the securities of affiliated
investment companies, as an efficient means of carrying out its investment
policies and managing its uninvested cash.
Temporary Defensive Investments
The Fund may make temporary defensive investments in the following taxable
securities:
Treasury Securities. Treasury securities are direct obligations of
the federal government of the United States.
Agency Securities. Agency securities are issued or guaranteed by a
federal agency or other government sponsored entity ("GSE") acting under
federal authority. The United States supports some GSEs with its full
faith and credit. Other GSEs receive support through federal
subsidies, loans or other benefits. A few GSEs have no explicit financial
support, but are regarded as having implied support because the federal
government sponsors their activities.
Bank Instruments. Bank instruments are unsecured interest bearing
deposits with banks. Bank instruments include bank accounts, time
deposits, certificates of deposit and banker's acceptances.
Corporate Debt Securities. Corporate debt securities are fixed
income securities issued by businesses. Notes, bonds, debentures and
commercial paper are the most prevalent types of corporate debt securities.
Commercial Paper. Commercial paper is an issuer's obligation with a
maturity of less than nine months. Companies typically issue commercial
paper to pay for current expenditures. Most issuers constantly reissue
their commercial paper and use the proceeds (or bank loans) to repay
maturing paper. If the issuer cannot continue to obtain liquidity in this
fashion, its commercial paper may default. The short maturity of
commercial paper reduces both the market and credit risks as compared to
other debt securities of the same issuer.
Repurchase Agreements. Repurchase agreements are transactions in
which the Fund buys a security from a dealer or bank and agrees to sell
the security back at a mutually agreed upon time and place. The repurchase
price exceeds the sale price, reflecting the Fund's return on the
transaction. This return is unrelated to the interest rate on the
underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the
securities subject to repurchase agreements. The Adviser or subcustodian
will monitor the value of the underlying security each day to ensure that
the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
MANAGEMENT OF THE FUND
Board of Trustees
The Board is responsible for managing the Fund's business affairs
and for exercising all the Fund's powers except those reserved for the
shareholders. The following tables give information about each Board
member and the senior officers of the Fund. Where required, the tables
separately list Board members who are "interested persons" of the Fund
(i.e., "Interested" Board members) and those who are not (i.e.,
"Independent" Board members). Unless otherwise noted, the address of each
person listed is Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA. The Federated Fund Complex consists of 44 investment
companies (comprising 139 portfolios). Unless otherwise noted, each Board
member oversees all portfolios in the Federated Fund Complex; serves for
an indefinite term; and also serves as a Board member of the following
investment company complexes: Banknorth Funds--five portfolios; CCMI
Funds--two portfolios; Regions Funds--eight portfolios; Riggs Funds--nine
portfolios; and WesMark Funds--five portfolios.
Interested Trustees Background And Compensation
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Total
Compensation
Aggregate From
Name Birth Date CompensationFund and
Address Principal Occupation(s) for Past Five Years, From Federated
Positions Held Other Directorships Held and Previous Positions Fund + Fund
with Fund Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
John F. Principal Occupations: Chairman and Director or $0 $0
Donahue* Birth Trustee of the Federated Fund Complex; Chairman
Date: July28, and Director, Federated Investors, Inc.;
1924 CHAIRMAN Chairman, Federated Investment Management
AND Company, Federated Global Investment Management
TRUSTEE(1)(2) Corp. and Passport Research, Ltd. Previous
Positions: Trustee, Federated Investment
Management Company and Chairman and Director,
Federated Investment Counseling.
J. Christopher Principal Occupations: President and Chief $0 $0
Donahue* Birth Executive Officer of the Federated Fund
Date: April11, Complex; Director or Trustee of some of the
1949 PRESIDENT Funds in the Federated Fund Complex; President,
AND Chief Executive Officer and Director, Federated
TRUSTEE(1)(2) Investors, Inc.; President, Chief Executive
Officer and Trustee, Federated Investment
Management Company; Trustee, Federated
Investment Counseling; President, Chief
Executive Officer and Director, Federated
Global Investment Management Corp.; President
and Chief Executive Officer, Passport Research,
Ltd.; Trustee, Federated Shareholder Services
Company; Director, Federated Services Company.
Previous Position: President, Federated
Investment Counseling.
Lawrence D. Principal Occupations: Director or Trustee of $0 $117,117.17
Ellis, M.D.* the Federated Fund Complex; Professor of
Birth Date: Medicine, University of Pittsburgh; Medical
October11, 1932 Director, University of Pittsburgh Medical
3471 Fifth Center Downtown; Hematologist, Oncologist and
Avenue Suite Internist, University of Pittsburgh Medical
1111 Center. Other Directorships Held: Member,
Pittsburgh, PA National Board of Trustees, Leukemia Society of
TRUSTEE(1)(2) America. Previous Positions: Trustee,
University of Pittsburgh; Director, University
of Pittsburgh Medical Center.
* Family relationships and reasons for "interested" status: John F.
Donahue is the father of J. Christopher Donahue; both are "interested" due
to the positions they hold with Federated Investors, Inc. and its
subsidiaries. Lawrence D. Ellis, M.D. is "interested" because his
son-in-law is employed by, Federated Securities Corp., a subsidiary of
Federated Investors, Inc.
+ Board members will not receive compensation from the Fund during the
Fund's first fiscal year. Thereafter, the Fund will be subject to a base
charge of $250 per quarter; the remainder of the "Total Compensation" in
column two will be allocated to each fund in the Federated Fund Complex
based on the net assets of each such fund.
Independent Trustees Background And Compensation
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous CompensationCompensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year)+ Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Thomas G. Principal Occupation: Director or Trustee of $0 $128,847.72
Bigley Birth the Federated Fund Complex. Other
Date: Directorships Held: Director, Member of
February3, 1934 Executive Committee, Children's Hospital of
15 Old Timber Pittsburgh; Director, Member of Executive
Trail Committee, University of Pittsburgh. Previous
Pittsburgh, PA Position: Senior Partner, Ernst & Young LLP.
TRUSTEE(1)(2)
John T. Conroy, Principal Occupations: Director or Trustee of $0 $128,847.66
Jr. Birth Date: the Federated Fund Complex; Chairman of the
June23, 1937 Board, Investment Properties Corporation;
Grubb & Partner or Trustee in private real estate
Ellis/Investment ventures in Southwest Florida. Previous
Properties Positions: President, Investment Properties
Corporation Corporation; Senior Vice President, John R.
3838 Tamiami Wood and Associates, Inc., Realtors;
Trail North President, Naples Property Management, Inc.
Naples, FL and Northgate Village Development Corporation.
TRUSTEE(1)(2)
Nicholas P. Principal Occupation: Director or Trustee of $0 $126,923.53
Constantakis the Federated Fund Complex; Previous
Birth Date: Position: Partner, Andersen Worldwide SC
September3, (prior to 9/1/97). Other Directorships Held:
1939 175 Director, Michael Baker Corporation
Woodshire Drive (engineering and energy services worldwide).
Pittsburgh, PA
TRUSTEE (1)(2)
John F. Principal Occupation: Director or Trustee of $0 $115,368.16
Cunningham the Federated Fund Complex. Other
Birth Date: Directorships Held: Chairman, President and
March5, 1943 Chief Executive Officer, Cunningham & Co.,
353 El Brillo Inc. (strategic business consulting); Trustee
Way Palm Beach, Associate, Boston College. Previous Positions:
FL TRUSTEE(1)(2) Director, Redgate Communications and EMC
Corporation (computer storage systems);
Chairman of the Board and Chief Executive
Officer, Computer Consoles, Inc.; President
and Chief Operating Officer, Wang
Laboratories; Director, First National Bank of
Boston; Director, Apollo Computer, Inc.
Peter E. Madden Principal Occupation: Director or Trustee of $0 $117,117.14
Birth Date: the Federated Fund Complex; Management
March16, 1942 Consultant. Previous Positions:
One Royal Palm Representative, Commonwealth of Massachusetts
Way 100 Royal General Court; President, State Street Bank
Palm Way Palm and Trust Company and State Street Corporation
Beach, FL (retired); Director, VISA USA and VISA
TRUSTEE(1)(2) International; Chairman and Director,
Massachusetts Bankers Association; Director,
Depository Trust Corporation; Director, The
Boston Stock Exchange.
Charles F. Principal Occupations: Director or Trustee of $0 $128,847.66
Mansfield, Jr. the Federated Fund Complex; Management
Birth Date: Consultant; Executive Vice President, DVC
April10, 1945 Group, Inc. (marketing, communications and
80 South Road technology) (prior to 9/1/00). Previous
Westhampton Positions: Chief Executive Officer, PBTC
Beach, NY International Bank; Partner, Arthur Young &
TRUSTEE(1)(2) Company (now Ernst & Young LLP); Chief
Financial Officer of Retail Banking Sector,
Chase Manhattan Bank; Senior Vice President,
HSBC Bank USA (formerly, Marine Midland Bank);
Vice President, Citibank; Assistant Professor
of Banking and Finance, Frank G. Zarb School
of Business, Hofstra University.
John E. Murray, Principal Occupations: Director or Trustee of $0 $117,117.14
Jr., J.D., the Federated Fund Complex; Chancellor and Law
S.J.D. Birth Professor, Duquesne University; Consulting
Date: Partner, Mollica & Murray. Other Directorships
December20, Held: Director, Michael Baker Corp.
1932 (engineering, construction, operations and
Chancellor, technical services). Previous Positions:
Duquesne President, Duquesne University; Dean and
University Professor of Law, University of Pittsburgh
Pittsburgh, PA School of Law; Dean and Professor of Law,
TRUSTEE(1)(2) Villanova University School of Law.
Marjorie P. Principal Occupations: Director or Trustee of $0 $117,117.17
Smuts Birth the Federated Fund Complex; Public Relations/
Date: June21, Marketing Consultant/Conference Coordinator.
1935 4905 Previous Positions: National Spokesperson,
Bayard Street Aluminum Company of America; television
Pittsburgh, PA producer; President, Marj Palmer Assoc.;
TRUSTEE(1)(2) Owner, Scandia Bord.
+ Board members will not receive compensation from the Fund during the
Fund's first fiscal year. Thereafter, the Fund will be subject to a base
charge of $250 per quarter; the remainder of the "Total Compensation" in
column two will be allocated to each fund in the Federated Fund Complex
based on the net assets of each such fund.
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous CompensationCompensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year)+ Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
John S. Walsh Principal Occupations: Director or Trustee of $0 $117,117.17
Birth Date: the Federated Fund Complex; President and
November28, Director, Heat Wagon, Inc. (manufacturer of
1957 2604 construction temporary heaters); President and
William Drive Director, Manufacturers Products, Inc.
Valparaiso, IN (distributor of portable construction
TRUSTEE(1)(2) heaters); President, Portable Heater Parts, a
division of Manufacturers Products, Inc. Other
Directorships Held: Director, Walsh & Kelly,
Inc. (heavy highway contractor). Previous
Position: Vice President, Walsh & Kelly, Inc.
OFFICERS**
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Principal Occupation(s) and Previous Positions
Date Address
Positions Held
with Fund
---------------------------------------------------------------------------------------
John W. Principal Occupations: Executive Vice President and Secretary of the
McGonigle Federated Fund Complex; Executive Vice President, Secretary and
Birth Date: Director, Federated Investors, Inc. Previous Positions: Trustee,
October26, Federated Investment Management Company and Federated Investment
1938 EXECUTIVE Counseling; Director, Federated Global Investment Management Corp.,
VICE PRESIDENT Federated Services Company and Federated Securities Corp.
AND SECRETARY
Richard J. Principal Occupations: Treasurer of the Federated Fund Complex;
Thomas Birth Senior Vice President, Federated Administrative Services. Previous
Date: June17, Positions: Vice President, Federated Administrative Services; held
1954 TREASURER various management positions within Funds Financial Services
Division of Federated Investors, Inc.
Richard B. Principal Occupations: President or Vice President of some of the
Fisher Birth Funds in the Federated Fund Complex; Vice Chairman, Federated
Date: May17, Investors, Inc.; Chairman, Federated Securities Corp. Previous
1923 VICE Positions: Director or Trustee of some of the Funds in the Federated
PRESIDENT Fund Complex; Executive Vice President, Federated Investors, Inc.
and Director and Chief Executive Officer, Federated Securities Corp.
William D. Principal Occupations: Chief Investment Officer of this Fund and
Dawson III various other Funds in the Federated Fund Complex; Executive Vice
Birth Date: President, Federated Investment Counseling, Federated Global
March3, 1949 Investment Management Corp., Federated Investment Management Company
CHIEF and Passport Research, Ltd.; Director, Federated Global Investment
INVESTMENT Management Corp. and Federated Investment Management Company;
OFFICER Portfolio Manager, Federated Administrative Services; Vice
President, Federated Investors, Inc. Previous Positions: Executive
Vice President and Senior Vice President, Federated Investment
Counseling Institutional Portfolio Management Services Division;
Senior Vice President, Federated Investment Management Company and
Passport Research, Ltd.
Mary Jo Ochson Mary Jo Ochson is the Portfolio Manager of the Fund. She is Vice
Birth Date: President of the Fund. Ms. Ochson joined Federated in 1982 and has
September 12, been a Senior Portfolio Manager and a Senior Vice President of the
1953 SENIOR Fund's Adviser since 1996. From 1988 through 1995, Ms. Ochson served
VICE PRESIDENT as a Portfolio Manager and a Vice President of the Fund's Adviser.
Ms. Ochson is a Chartered Financial Analyst and received her M.B.A.
in Finance from the University of Pittsburgh.
+ Board members will not receive compensation from the Fund during the
Fund's first fiscal year. Thereafter, the Fund will be subject to a base
charge of $250 per quarter; the remainder of the "Total Compensation" in
column two will be allocated to each fund in the Federated Fund Complex
based on the net assets of each such fund.
(1) After a Trustee's initial term, each Trustee is expected to serve a
three year term concurrent with the class of trustees for which he or
she serves:
-- Messrs. John F. Donahue, Thomas G. Bigley, John T. Conroy, Jr., and
John S. Walsh, as Class I trustees, are expected to stand for
re-election at the Fund's 2004 meeting of shareholders.
-- Messrs. J. Christopher Donahue, Nicholas P. Constantakis, John F.
Cunningham, and Majorie P. Smuts, as Class II trustees, are expected to
stand for re-election at the Fund's 2005 meeting of shareholders.
-- Messrs. Lawrence D. Ellis, M.D., Peter E. Madden, Charles F.
Mansfield, Jr. and John E. Murray, Jr., J.D, S.J.D., as Class III
trustees, are expected to stand for re-election at the Fund's 2006
meeting of shareholders.
** Officers do not receive any compensation from the Fund.
Thomas R. Donahue, Chief Financial Officer, Vice President, Treasurer and
Assistant Secretary of Federated Investors, Inc. and an officer of its
various advisory and underwriting subsidiaries, has served as a Term
Member on the Board of Directors of Duquesne University, Pittsburgh,
Pennsylvania, since May 12, 2000. Mr. John E. Murray, Jr., an Independent
Trustee of the Fund, served as President of Duquesne from 1988 until his
retirement from that position in 2001, and became Chancellor of Duquesne
on August 15, 2001. It should be noted that Mr. Donahue abstains on any
matter that comes before Duquesne's Board that affects Mr. Murray
personally.
Committees of the Board
--------------------------------------------------------------------------------------
Meetings
Held
During
Last
Board Committee Fiscal
Committee Members Committee Functions Year
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Executive John F. In between meetings of the full Board, the NA
Donahue John Executive Committee generally may exercise all
E. Murray, the powers of the full Board in the management
Jr., J.D., and direction of the business and conduct of the
S.J.D. affairs of the Fund in such manner as the
Executive Committee shall deem to be in the best
interests of the Fund. However, the Executive
Committee cannot elect or remove Board members,
increase or decrease the number of Trustees,
elect or remove any Officer, declare dividends,
issue shares or recommend to shareholders any
action requiring shareholder approval.
Audit Thomas G. The Audit Committee reviews and recommends to NA
Bigley John T. the full Board the independent auditors to be
Conroy, Jr. selected to audit the Fund's financial
Nicholas P. statements; meets with the independent auditors
Constantakis periodically to review the results of the audits
Charles F. and report the results to the full Board;
Mansfield, Jr. evaluates the independence of the auditors,
reviews legal and regulatory matters that may
have a material effect on the financial
statements, related compliance policies and
programs, and the related reports received from
regulators; reviews the Fund's internal audit
function; review compliance with the Fund's code
of conduct/ethics; review valuation issues;
monitors inter-fund lending transactions;
reviews custody services and issues and
investigate any matters brought to the
Committee's attention that are within the scope
of its duties.
Board Ownership of Shares in the Fund and in the Federated Family of
Investment Companies
--------------------------------------------
Aggregate
Dollar Dollar
Range Range of
of Shares
Interested Board Shares Owned in
Member Name Owned Federated
in Fund Family of
Investment
Companies
--------------------------------------------
--------------------------------------------
John F. Donahue $0 Over
$100,000
J. Christopher $0 Over
Donahue $100,000
Lawrence D. Ellis, $0 Over
M.D. $100,000
Independent Board
Member Name
Thomas G. Bigley $0 Over
$100,000
John T. Conroy, Jr. $0 Over
$100,000
Nicholas P. $0 Over
Constantakis $100,000
John F. Cunningham $0 Over
$100,000
Peter E. Madden $0 Over
$100,000
Charles F. $0 $50,001 -
Mansfield, Jr. $100,000
John E. Murray, $0 Over
Jr., J.D., S.J.D. $100,000
Marjorie P. Smuts $0 Over
$100,000
John S. Walsh $0 Over
$100,000
Code of Ethics
As required by SEC rules, the Fund, its Adviser, and the Fund's
principal underwriters have adopted codes of ethics. These codes permit
personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund. These codes can be
reviewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Securities and
Exchange Commission at 1-202-942-8090. The codes of ethics are available
on the EDGAR Database on the Security and Exchange Commission's web site
(http://www.sec.gov), and copies of these codes may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the Security and Exchange
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Investment Adviser
The Adviser conducts investment research and makes investment decisions
for the Fund.
The Adviser is a wholly owned subsidiary of Federated.
Pursuant to an investment management agreement between the Adviser and the
Fund, the Fund has agreed to pay for the investment advisory services and
facilities provided by the Adviser a fee payable monthly in arrears at an
annual rate equal to 0.55% of the average daily value of the Fund's
Managed Assets (the "Management Fee"). The Adviser has contractually
agreed to waive receipt of a portion of its Management Fee in the amount
of 0.20% of the average daily value of the Fund's Managed Assets for the
first five years of the Fund's operations (through December 31, 2007), and
for a declining amount for an additional three years (through December 31,
2010). Managed Assets means the total assets of the Fund including any
assets attributable to any Preferred Shares or borrowings that may be
outstanding, minus the sum of accrued liabilities (other than indebtedness
attributable to financial leverage). The liquidation preference on the
Preferred Shares is not a liability. This means that during periods in
which the Fund is using leverage, the fee paid to the Adviser will be
higher than if the Fund did not use leverage because the fee is calculated
as a percentage of the Fund's Managed Assets, which include those assets
purchased with leverage.
The Adviser shall not be liable to the Fund or any Fund shareholder for
any losses that may be sustained in the purchase, holding or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties imposed upon it by its contract with the Fund.
As required by the 1940 Act, the Board has reviewed the Fund's investment
advisory contract. During its review of the contract, the Board
considered many factors, among the most material of which are: the Fund's
investment objectives; the Adviser's management philosophy, personnel and
processes; the preferences and expectations of Fund shareholders and their
relative sophistication; the continuing state of competition in the mutual
fund industry; comparable fees in the mutual fund industry; the range and
quality of services provided to the Fund and its shareholders by the
Federated organization in addition to investment advisory services; and
the Fund's relationship to other funds in the Federated Fund family
("Federated Funds").
The Board also considered the compensation and benefits received by the
Adviser. This includes fees to be received for services provided to the
Fund by other entities in the Federated organization and research services
to be received by the Adviser from brokers that execute Fund trades, as
well as advisory fees. In this regard, the Board is aware that various
courts have interpreted provisions of the 1940 Act and have indicated in
their decisions that the following factors may be relevant to an adviser's
compensation: the nature and quality of the services provided by the
adviser, including the performance of the fund; the adviser's cost of
providing the services; the extent to which the adviser may realize
"economies of scale" as the fund grows larger; any indirect benefits that
may accrue to the adviser and its affiliates as a result of the adviser's
relationship with the fund; performance and expenses of comparable funds;
and the extent to which the independent Board members are fully informed
about all facts bearing on the adviser's services and fee. The Fund's
Board is aware of these factors and has taken them into account in its
review of the Fund's advisory contract.
The Board considered and weighed these circumstances in light of its
accumulated experience in working with Federated on matters relating to
the Federated Funds, and was assisted in its deliberations by the advice
of independent legal counsel. In this regard, the Board requested and
received a significant amount of information about the Fund, the Federated
Funds and the Federated organization. Thus, the Board's evaluation of the
Fund's advisory contract included an analysis of reports covering such
matters as: the Adviser's investment philosophy, personnel, and processes;
the short- and long-term performance of other Federated Funds (in absolute
terms as well as in relationship to their particular investment programs
and certain competitor or "peer group" funds) and comments on the reasons
for performance; the Fund's proposed expenses (including the advisory fee
itself and the overall expense structure of the Fund, both in absolute
terms and relative to similar and/or competing funds, with due regard for
contractual or voluntary expense limitations); the possible use and
allocation of brokerage commissions derived from trading the Fund's
portfolio securities; the nature and extent of the advisory and other
services to be provided to the Fund by the Adviser and its affiliates;
compliance and audit reports concerning the Federated Funds and the
Federated companies that service them; and relevant developments in the
mutual fund industry and how the Federated Funds and/or Federated are
responding to them.
The Board also received financial information about Federated, including
reports on the compensation and benefits Federated derives from its
relationships with the Federated Funds. These reports cover not only the
fees under the advisory contracts, but also fees received by Federated's
subsidiaries for providing other services to the Federated Funds under
separate contracts (e.g., for serving as administrator and transfer agent
to the Federated Funds). The reports also discuss any indirect benefit
Federated may derive from its receipt of research services from brokers
who execute fund trades.
The Board based its decision to approve the Fund's advisory contract on
the totality of the circumstances and relevant factors, and with a view to
past and future long-term considerations. The Board did not consider any
one of the factors and considerations identified above to be
determinative. Because the totality of circumstances included considering
the relationship of each Fund to the Federated Funds, the Board did not
approach consideration of the Fund's advisory contract as if that were the
only Federated Fund.
Custodian
State Street Bank and Trust Company, Boston, Massachusetts,
is custodian for the securities and cash of the Fund. Foreign instruments
purchased by the Fund are held by foreign banks participating in a network
coordinated by State Street Bank.
Transfer Agent and Dividend Disbursing Agent
EquiServe Trust Company, N.A. maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type
and number of accounts and transactions made by shareholders.
Independent Auditors
The independent auditor for the Fund, Ernst & Young LLP, conducts
its audits in accordance with auditing standards generally accepted in the
United States of America, which require it to plan and perform its audits
to provide reasonable assurance about whether the Fund's financial
statements and financial highlights are free of material misstatement.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the purchase and sale
of portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. The Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. In selecting
among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the
Fund and other funds under common control with the Fund. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those
of other accounts managed by the Adviser. When the Fund and one or more
of those accounts invests in, or disposes of, the same security, available
investments or opportunities for sales will be allocated among the Fund
and the accounts(s) in a manner believed by the Adviser to be equitable.
While the coordination and ability to participate in volume transactions
may benefit the Fund, it is possible that this procedure could adversely
impact the price paid or received and/or the position obtained or disposed
of by the Fund.
DESCRIPTION OF SHARES
Common Shares
The Fund intends to hold annual meetings of shareholders so long as
the Common Shares are listed on a national securities exchange and such
meetings are required as a condition to such listing.
Preferred Shares
Although the terms of any Preferred Share issued by the Fund,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board (subject to
applicable law and the Fund's Agreement and Declaration of Trust) when it
authorizes a Preferred Shares offering, the Fund currently expects that
the preference on distributions, liquidation preference, voting rights and
redemption provisions of any such Preferred Shares will likely be as
stated in the prospectus.
If the Board determines to proceed with an offering of Preferred
Shares, the terms of Preferred Shares may be the same as, or different
from, the terms described in the prospectus, subject to applicable law and
the Fund's Agreement and Declaration of Trust. The Board, without the
approval of Common Shareholders, may authorize an offering of Preferred
Shares or may determine not to authorize such an offering, and may fix the
terms of the Preferred Shares to be offered.
Other Shares
The Board (subject to applicable law and the Fund's Agreement and
Declaration of Trust) may authorize an offering, without the approval of
the Common Shareholders or Preferred Shareholders, of other classes of
shares, or other classes or series of shares, as they determine to be
necessary, desirable or appropriate, having such terms, rights,
preferences, privileges, limitations and restrictions as the Board sees
fit. The Fund currently does not expect to issue any other classes of
shares, or series of shares, except for the Common Shares and the
Preferred Shares.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end management investment company and as such
its Common Shareholders will not have the right to cause the Fund to
redeem their shares. Instead, the Fund's Common Shares will trade in the
open market at a price that will be a function of several factors,
including dividend levels (which are in turn affected by expenses), NAV,
call protection, dividend stability, relative demand for and supply of
such shares in the market, general market and economic conditions and
other factors. Because shares of a closed-end investment company may
frequently trade at prices lower than NAV, the Fund's Board may consider
action that might be taken to reduce or eliminate any material discount
from NAV in respect of Common Shares, which may include the repurchase of
such Common Shares in the open market or in private transactions, the
making of a tender offer for such Common Shares or the conversion of the
Fund to an open-end investment company. The Board may decide not to take
any of these actions. In addition, there can be no assurance that share
repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's Preferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise
acquire any of its Common Shares unless (1) all accrued Preferred Shares
dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the NAV of the Fund's portfolio (determined after
deducting the acquisition price of the Common Shares) is at least 200% of
the liquidation value of the outstanding Preferred Shares (expected to
equal the original purchase price per share plus any accrued and unpaid
dividends thereon). Any service fees incurred in connection with any
tender offer made by the Fund will be borne by the Fund and will not
reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to
finance the repurchase of shares or to make a tender offer. Interest on
any borrowings to finance share repurchase transactions or the
accumulation of cash by the Fund in anticipation of share repurchases or
tenders will reduce the Fund's net income. Any share repurchase, tender
offer or borrowing that might be approved by the Fund's Board would have
to comply with the Securities Exchange Act of 1934, as amended, the 1940
Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from
NAV will be made by the Board at the time it considers such issue, it is
the Board's present policy, which may be changed by the Board, not to
authorize repurchases of Common Shares or a tender offer for such Common
Shares if: (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the New York Stock Exchange, or (b)
impair the Fund's status as a regulated investment company under the Code,
(which would make the Fund a taxable entity, causing the Fund's income to
be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered
closed-end investment company under the Investment Company Act; (2) the
Fund would not be able to liquidate portfolio securities in an orderly
manner and consistent with the Fund's investment objective and policies in
order to repurchase shares; or (3) there is, in the Board's judgment, any
(a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting
the Fund, (b) general suspension of or limitation on prices for trading
securities on the New York Stock Exchange, (c) declaration of a banking
moratorium by Federal or state authorities or any suspension of payment by
United States or New York banks, (d) material limitation affecting the
Fund or the issuers of its portfolio securities by Federal or state
authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities
or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would
have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board may in the
future modify these conditions in light of experience.
The repurchase by the Fund of its shares at prices below NAV will
result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tender offers
at or below NAV will result in the Fund's shares trading at a price equal
to their net asset value. Nevertheless, the fact that the Fund's shares
may be the subject of repurchase or tender offers from time to time, or
that the Fund may be converted to an open-end investment company, may
reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will
decrease the Fund's Managed Assets which would likely have the effect of
increasing the Fund's expense ratio. Any purchase by the Fund of its
Common Shares at a time when Preferred Shares are outstanding will
increase the leverage applicable to the outstanding Common Shares then
remaining.
Before deciding whether to take any action if the Common Shares
trade below NAV, the Fund's Board would likely consider all relevant
factors, including the extent and duration of the discount, the liquidity
of the Fund's portfolio, the impact of any action that might be taken on
the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the
Board may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
TAX MATTERS
The following is a description of certain federal income tax
consequences to a shareholder of acquiring, holding and disposing of
Common Shares. 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 retroactively or prospectively.
The Fund intends to elect to be treated and to qualify to be taxed
as a regulated investment company under Subchapter M of the Code. In order
to qualify as a regulated investment company, the Fund must satisfy
certain requirements relating to the source of its income, diversification
of its assets and distributions of its income to its shareholders. First,
the Fund must derive at least 90% of its annual gross income (including
tax exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including but not
limited to gains from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"). Second, the Fund must diversify
its holdings so that, at the close of each quarter of its taxable year,
(1) at least 50% of the value of its total assets is comprised of cash,
cash items, United States government securities, securities of other
regulated investment companies and other securities, limited in respect of
any one issuer to an amount not greater in value than 5% of the value of
the Fund's total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (2) not more than 25% of the value of the
total assets is invested in the securities of any one issuer (other than
United States government securities and securities of other regulated
investment companies) or two or more issuers controlled by the Fund and
engaged in the same, similar or related trades or businesses.
As a regulated investment company, the Fund will not be subject to
federal income tax on income and gains that it distributes each taxable
year to its shareholders, provided that in such taxable year it
distributes at least 90% of the sum of (1) its "investment company taxable
income" (which includes, among other items, dividends, taxable interest,
taxable original issue discount and market discount income, income from
securities lending, net short-term capital gain in excess of net long-term
capital loss and any other taxable income other than "net capital gain"
(as defined below) and is reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (2) its net tax
exempt interest (the excess of its gross tax exempt interest income over
certain disallowed deductions). The Fund may retain for investment its net
capital gain (which consists of the excess of its net long-term capital
gain over its net short-term capital loss). However, if the Fund retains
any net capital gain or any investment company taxable income, it will be
subject to tax at regular corporate rates on the amount retained. If the
Fund retains any net capital gain, it may designate the retained amount as
undistributed capital gains in a notice to its shareholders who, if
subject to federal income tax on long-term capital gains, (1) will be
required to include in income for federal income tax purposes, as
long-term capital gain, their share of such undistributed amount and (2)
will be entitled to credit their proportionate shares of the tax paid by
the Fund against their federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For
federal income tax purposes, the tax basis of shares owned by a
shareholder of the Fund will be increased by the amount of undistributed
capital gains included in the gross income of the shareholder less the tax
deemed paid by the shareholder under clause (ii) of the preceding
sentence. The Fund intends to distribute at least annually to its
shareholders all or substantially all of its net tax exempt interest and
any investment company taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain, to
elect (unless it has made a special taxable year election for excise tax
purposes) to treat all or part of any net capital loss, any net long-term
capital loss or any net foreign currency loss incurred after October 31 as
if it had been incurred in the succeeding year.
Distributions by the Fund of investment company taxable income, if
any, whether received in cash or additional shares, will be taxable to
shareholders as ordinary income (to the extent of the current or
accumulated earning and profits of the Fund) and generally will not
qualify for the dividends received deduction in the case of corporate
shareholders. Net long-term capital gains realized by the Fund and
distributed to shareholders in cash or additional shares will be taxable
to shareholders as long-term capital gains regardless of the length of
time investors have owned shares of the Fund. Distributions by the Fund
that do not constitute ordinary income dividends, capital gain
distributions or exempt-interest dividends (as defined below) will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his or her shares. Any excess will be treated
as gain from the sale of his or her shares, as discussed below.
The Fund intends to invest in sufficient tax exempt securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Except as provided below, exempt-interest dividends paid to Common
Shareholders are not includable in the holder's gross income for federal
income tax purposes.
If the Fund engages in hedging transactions involving financial
futures and options, these transactions will be subject to special tax
rules, the effect of which may be to accelerate income to the Fund, defer
the Fund's losses, cause adjustments in the holding periods of the Fund's
securities, convert long-term capital gains into short-term capital gains
and convert short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of
distributions to Common Shareholders.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends which are expected to be or have been
declared, but not paid. Any dividend declared shortly after a purchase of
such shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend.
Although dividends generally will be treated as distributed when
paid, dividends declared in October, November or December, payable to
holders of common shares of record on a specified date in one of those
months and paid during the following January, will be treated as having
been distributed by the Fund (and received by the holder of common shares)
on December 31.
The Internal Revenue Service's position in a published revenue
ruling indicates that the Fund is required to designate distributions paid
with respect to its Common Shares and its Preferred Shares as consisting
of a portion of each type of income distributed by the Fund. The portion
of each type of income deemed received by the holders of each class of
shares will be equal to the portion of total Fund dividends received by
such class. Thus, the Fund will designate dividends paid as
exempt-interest dividends in a manner that allocates such dividends
between Common Shareholders and Preferred Shareholders in proportion to
the total dividends paid to each such class during or with respect to the
taxable year, or otherwise as required by applicable law. Capital gain
dividends and ordinary income dividends will similarly be allocated
between the two classes.
Exempt-interest dividends are included in determining what portion,
if any, of a person's Social Security and railroad retirement benefits
will be includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by
Common Shareholders as items of interest excluded from their gross income,
each Common Shareholder is advised to consult his tax advisor with respect
to whether exempt-interest dividends retain their exclusion if the
shareholder would be treated as a "substantial user," or a "related
person" of a substantial user, of the facilities financed with respect to
any of the tax exempt obligations held by the Fund.
Federal income tax law imposes an alternative minimum tax with
respect to both corporations and individuals based on certain items of tax
preference. Interest on certain "private activity bonds" is an item of tax
preference subject to the alternative minimum tax on individuals and
corporations. In addition, for corporations alternative minimum taxable
income is increased by 75% of the difference between an alternative
measure of income ("adjusted current earnings") and the amount otherwise
determined to be the alternative minimum taxable income. Interest on
municipal bonds, and therefore all exempt-interest dividends received from
the Fund, are included in calculating adjusted current earnings.
Accordingly, investment in the Fund could cause Common Shareholders to be
subject to or result in an increased liability under the AMT. The Fund
will annually supply Common Shareholders a report indicating the amount
and nature of amounts distributed to them.
The redemption, sale or exchange of Common Shares normally will
result in capital gain or loss to Common Shareholders who hold their
Common Shares as capital assets. Generally, a Common Shareholder's gain or
loss will be long-term capital gain or loss if the shares have been held
for more than one year even though the increase in value in such common
shares is attributable to tax exempt interest income. In addition, gain
realized by the Fund from the disposition of a tax exempt security that is
attributable to accrued market discount will be treated as ordinary income
rather than capital gain, and thus may increase the amount of ordinary
income dividends received by Common Shareholders. Present law taxes both
long- and short-term capital gains of corporations at the rates applicable
to ordinary income. For non-corporate taxpayers, however, long-term
capital gains will be taxed at a maximum rate of 20% (or 18% for capital
assets that have been held for more than five years and whose holding
periods began after December 31, 2000), while short-term capital gains and
other ordinary income will currently be taxed at a maximum rate of
38.6%1. Because of the limitations on itemized deductions and the
deduction for personal exemptions applicable to higher income taxpayers,
the effective tax rate may be higher in certain circumstances.
All or a portion of a sales charge paid in purchasing Common Shares
cannot be taken into account for purposes of determining gain or loss on
the redemption, sale or exchange of such Shares within 90 days after their
purchase to the extent Common Shares or shares of another fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Any disregarded portion of such charge
will result in an increase in the shareholder's tax basis in the shares
subsequently acquired. In addition, no loss will be allowed on the
redemption, sale or exchange of Common Shares if the Common Shareholder
purchases other Common Shares of the Fund (whether through reinvestment of
distributions or otherwise) or the shareholder acquires or enters into a
contract or option to acquire shares that are substantially identical to
Common Shares of the Fund within a period of 61 days beginning 30 days
before and ending 30 days after such redemption, sale or exchange. If
disallowed, the loss will be reflected in an adjustment to the basis of
the shares acquired. Further, any losses realized on the redemption, sale
or exchange of Common Shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with
respect to such Common Shares and, if not disallowed, such losses will be
treated as long-term capital losses to the extent of any capital gain
dividends received (or amounts credited as undistributed capital gains)
with respect to such Common Shares.
In order to avoid a 4% federal excise tax, the Fund must distribute
or be deemed to have distributed by December 31 of each calendar year the
sum of at least 98% of its taxable ordinary income for such year, at least
98% of its capital gain net income (the excess of its realized capital
gains over its realized capital losses, generally computed on the basis of
the one-year period ending on October 31 of such year) and 100% of any
taxable ordinary income and capital gain net income for the prior year
that was not distributed during such year and on which the Fund paid no
federal income tax. For purposes of the excise tax, a regulated investment
company may reduce its capital gain net income (but not below its net
capital gain) by the amount of any net ordinary loss for the calendar
year. The Fund intends to make timely distributions in compliance with
these requirements and consequently it is anticipated that it generally
will not be required to pay the excise tax.
If in any tax year the Fund should fail to qualify under Subchapter
M for tax treatment as a regulated investment company, the Fund would
incur a regular corporate federal income tax upon its taxable income for
that year, and distributions to its shareholders would be taxable to
shareholders as ordinary dividend income for federal income tax purposes
to the extent of the Fund's earnings and profits.
----------
1 The Economic Growth and Tax Relief Reconciliation Act of 2001, effective
for taxable years beginning after December 31, 2000, creates a new 10
percent income tax bracket and reduces the tax rates applicable to
ordinary income over a six year phase-in period. Beginning in the
taxable year 2006, ordinary income will be subject to a 35% maximum
rate, with approximately proportionate reductions in the other ordinary
rates.
---------
The Fund is required to withhold tax at a rate equal to the fourth
lowest rate applicable to unmarried individuals (currently, 30%) on
taxable dividends and certain other payments paid to non-corporate
shareholders who have not furnished to the Fund their correct taxpayer
identification number (in the case of individuals, their Social Security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax and any amount
withheld may be refunded or credited against the shareholder's federal
income tax liability, provided the required information is furnished to
the Internal Revenue Service.
The foregoing is a general and abbreviated summary of the provisions
of the Code and the Treasury Regulations presently in effect as they
directly govern the taxation of the Fund and its shareholders. For
complete provisions, reference should be made to the pertinent Code
sections and Treasury Regulations. The Code and the Treasury Regulations
are subject to change by legislative or administrative action, and any
such change may be retroactive with respect to Fund transactions. Common
Shareholders are advised to consult their own tax advisers for more
detailed information concerning the federal income taxation of the Fund
and the income tax consequences to its holders of Common Shares.
PERFORMANCE AND RELATED COMPARATIVE INFORMATION
Tax Equivalency Table
Set forth below is a sample of a tax-equivalency table that may be
used in advertising and sales literature. This table is for illustrative
purposes only and is not representative of past or future performance of
the Fund. The interest earned by the municipal securities owned by the
Fund generally remains free from federal income tax. However, some of the
Fund's income may be subject to state or local taxes.
Taxable Yield Equivalent for 2002
Multistate Municipal Fund
Federal Income Tax Bracket
10.00% 15.00% 27.00% 30.00% 35.00% 38.60%
Joint $0- $12,001 $46,701-112$112,851-1$17,951-307Over
Return 12,000 - 46,700 307,050
Single $0- $6,001-27,$27,951-67,$67,701-14$141-251-30Over0
Return 6,000 307,050
Tax Exempt
Yield Taxable Yield Equivalent
0.50% 0.56% 0.59% 0.68% 0.71% 0.77% 0.81%
1.00% 1.11% 1.18% 1.37% 1.43% 1.54% 1.63%
1.50% 1.67% 1.76% 2.05% 2.14% 2.31% 2.44%
2.00% 2.22% 2.35% 2.74% 2.86% 3.08% 3.26%
2.50% 2.78% 2.94% 3.42% 3.57% 3.85% 4.07%
3.00% 3.33% 3.53% 4.11% 4.29% 4.62% 4.89%
3.50% 3.89% 4.12% 4.79% 5.00% 5.38% 5.70%
4.00% 4.44% 4.71% 5.48% 5.71% 6.15% 6.51%
4.50% 5.00% 5.29% 6.16% 6.43% 6.92% 7.33%
5.00% 5.56% 5.88% 6.85% 7.14% 7.69% 8.14%
5.50% 6.11% 6.47% 7.53% 7.86% 8.46% 8.96%
6.00% 6.67% 7.06% 8.22% 8.57% 9.23% 9.77%
6.50% 7.22% 7.65% 8.90% 9.29% 10.00% 10.59%
7.00% 7.78% 8.24% 9.59% 10.00% 10.77% 11.40%
7.50% 8.33% 8.82% 10.27% 10.71% 11.54% 12.21%
8.00% 8.89% 9.41% 10.96% 11.43% 12.31% 13.03%
8.50% 9.44% 10.00% 11.64% 12.14% 13.08% 13.84%
9.00% 10.00% 10.59% 12.33% 12.86% 13.85% 14.66%
9.50% 10.56% 11.18% 13.01% 13.57% 14.62% 15.47%
10.00% 11.11% 11.76% 13.70% 14.29% 15.38% 16.29%
10.50% 11.67% 12.35% 14.38% 15.00% 16.15% 17.10%
11.00% 12.22% 12.94% 15.07% 15.71% 16.92% 17.92%
Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent.
Performance Comparisons
Advertising and sales literature may include:
- references to ratings, rankings and financial publications and/or
performance comparisons of Common Shares to certain indices;
- charts, graphs and illustrations using the Fund's returns, or
returns in general, that demonstrate investment concepts such as
tax-deferred compounding, dollar-cost averaging and systematic
investment;
- discussions of economic, financial and political developments and
their impact on the securities market, including the portfolio
manager's views on how such developments could impact the Fund;
and
- information about the mutual fund industry from sources such as the
Investment Company Institute.
The Fund may compare its performance, or performance for the types
of securities in which it invests, to a variety of other investments,
including federally insured bank products such as bank savings accounts,
certificates of deposit, and Treasury bills. Advertisements may contain a
chart showing average tax-adjusted returns and volatility of returns for
the last 10 years ending October 31, 2002 for indices of municipal bonds,
corporate bonds, U.S. Treasury securities, high-yield securities,
mortgage-backed securities, the S&P 500, the Russell 2000 and NASDAQ.
The Fund may quote information from reliable sources regarding
individual countries and regions, world stock exchanges, and economic and
demographic statistics.
You may use financial publications and/or indices to obtain a more
complete view of Share performance. When comparing performance, you
should consider all relevant factors such as the composition of the index
used, prevailing market conditions, portfolio compositions of other funds,
and methods used to value portfolio securities and compute offering
price. The financial publications and/or indices which the Fund uses in
advertising may include:
Lipper Analytical Services, Inc.
Lipper Analytical Services, Inc. ranks funds in various fund
categories based on total return.
Morningstar, Inc.
Morningstar, Inc., an independent rating service, is the publisher
of the bi-weekly Mutual Fund Values. Mutual Fund Values rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their
risk-adjusted returns.
Money
Money, a monthly magazine, regularly ranks money market funds in
various categories based on the latest available seven-day effective yield.
Lehman Brothers Municipal Bond Index
Lehman Brothers Municipal Bond Index is an unmanaged broad based
total return performance benchmark for the long-term, investment grade
bond market.
FEDERATED INVESTORS, INC.
Federated is dedicated to meeting investor needs by making
structured, straightforward and consistent investment decisions. Federated
investment products have a history of competitive performance and have
gained the confidence of thousands of financial institutions and
individual investors.
Federated's disciplined investment selection process is rooted in
sound methodologies backed by fundamental and technical research. At
Federated, success in investment management does not depend solely on the
skill of a single portfolio manager. It is a fusion of individual talents
and state-of-the-art industry tools and resources. Federated's investment
process involves teams of portfolio managers and analysts, and investment
decisions are executed by traders who are dedicated to specific market
sectors and who handle trillions of dollars in annual trading volume.
Municipal Funds. In the municipal sector, as of December 31, 2001,
Federated managed 12 bond funds with approximately $2.3 billion in assets
and 22 money market funds with approximately $19.5 billion in total
assets. In 1976, Federated introduced one of the first municipal bond
mutual funds in the industry and is now one of the largest institutional
buyers of municipal securities. The Funds may quote statistics from
organizations including The Tax Foundation and the National Taxpayers
Union regarding the tax obligations of Americans.
The Chief Investment Officers responsible for oversight of the
various investment sectors within Federated are William D. Dawson
III--Global and Fixed Income and Stephen F. Auth--Federated Global and
Equity. The Chief Investment Officers are Executive Vice Presidents of the
Federated advisory companies.
EXPERTS
The financial statements of the Fund at December 16, 2002 appearing
in this Statement of Additional Information have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Securities and Exchange Commission, 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 Fund 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 on the EDGAR
Database at the Commission's website at http://www.sec.gov or at the
Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission. The Fund changed its name from
Federated Municipal Income Fund to Federated Premier Municipal Income Fund
on December 16, 2002.
INDEPENDENT AUDITORS' REPORT
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and
Board of Trustees of
Federated Premier Municipal Income Fund
We have audited the accompanying statement of assets and liabilities of
Federated Premier Municipal Income Fund (the Fund) as of December 16,
2002. This financial statement is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statement referred to above present fairly,
in all material respects, the financial position of Federated Premier
Municipal Income Fund at December 16, 2002, in conformity with accounting
principles generally accepted in the United States of America.
[GRAPHIC OMITTED]
Boston, Massachusetts
December 16, 2002
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES December 16, 2002
Assets:
Cash $100,003
Deferred Offering Costs 200,000
Total Assets 300,003
Liabilities:
Offering Costs Payable (200,000)
Total Liabilities (200,000)
Net Assets (6,981 shares of $0.01 par value shares of beneficial interest
issued and outstanding; 6,666,667 shares authorized)
$100,003
Net Asset Value Per Share
$14.33
Maximum Offering Price Per Share (100/95.50 of $14.33)
$15.00
NOTES TO FINANCIAL STATEMENTS
1. Organization
Federated Premier Municipal Income Fund ("the Fund") was organized as a
Delaware Business Trust on October 16, 2002. The Fund has had no
operations to date other than matters relating to its organization and
registration as a diversified, closed-end management investment company
under the Investment Company Act of 1940, as amended, and the sale and
issuance to Federated Investment Management Company ("the Investment
Adviser"), a wholly owned subsidiary of Federated Investors, Inc., of
6,981 shares of beneficial interest at an aggregate purchase price of
$100,003.
2. Accounting Policies
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ
from those estimates.
3. Investment Adviser and Related Parties
The Fund has entered into an Investment Management Agreement (the
"Agreement") with the Investment Adviser to serve as investment manager to
the Fund. Pursuant to the Agreement, the Fund pays the Investment Adviser
an annual management fee, payable monthly, at the annual rate of 0.55 % of
the Fund's average daily net assets, not inclusive of any assets
attributable to any preferred shares that may be issued.
In order to reduce fund expenses, the Investment Adviser has contractually
agreed to waive a portion of its management fee at the annual rate of
0.20% of the Fund's average daily net assets, not inclusive of any net
assets attributable to any preferred shares that may be issued, from the
commencement of operations through December 31, 2007, and for a declining
amount thereafter through December 31, 2010.
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services.
The fee paid to FServ is based on a scale that ranges from 0.150% to
0.075% of the average aggregate daily net assets of all funds advised by
subsidiaries of Federated Investors, Inc., subject to a $125,000 minimum
per portfolio and $30,000 per each additional class.
4. Organization Expenses and Offering Costs
Based on an estimated Fund offering of 6,666,667 shares, organization
expenses and offering costs are estimated to be $461,114. The Investment
Advisor has agreed to pay i) all organizational costs; and ii) the amount
by which the aggregate of all of the Fund's offering costs (other than
sales load) exceed $0.03 per share. Such amount to be paid by the
Investment Adviser is $261,114. The Fund will pay offering costs
estimated at $200,000 from the proceeds of the offering. Offering costs
paid by the Fund will be charged as a reduction of paid-in capital at the
completion of the Fund offering.
5. Federal Income Taxes
The Fund intends to comply with the provisions of the Internal Revenue
Code, as amended, applicable to regulated investment companies and to
distribute to shareholders each year substantially all of its income.
Accordingly, no provision for federal tax is necessary. In addition, by
distributing substantially all of its ordinary income and long-term
capital gains, if any, during each calendar year, the Fund intends not to
be subject to federal excise tax.
6. Contingent Receivable from Investment Adviser
In the event that the public offering of the Fund does not occur, the
Investment Adviser has agreed to reimburse the Fund for all offering costs.
APPENDIX A
RATINGS OF INVESTMENTS
Standard and Poor's Long-Term Debt Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated
categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher-rated categories.
BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B--Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied BB or BB- rating.
CCC--Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
CC--The rating CC typically is applied to debt subordinated to senior debt
that is assigned an actual or implied CCC debt rating.
C--The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
Moody's Investors Service Long-Term Bond Rating Definitions
AAA--Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
AA--Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group, they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in AAA securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in AAA securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
BAA--Bonds which are rated BAA are considered as medium- grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
BA--Bonds which are BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA--Bonds which are rated CA represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated C are the lowest-rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Fitch Ratings Long-Term Debt Rating Definitions
AAA--Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is
generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
BB--Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B--Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited
margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC--Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC--Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C--Bonds are imminent default in payment of interest or principal.
Moody's Investors Service Commercial Paper Ratings
Prime-1--Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: Leading market positions in well-established industries;
High rates of return on funds employed; Conservative capitalization
structure with moderate reliance on debt and ample asset protection; Broad
margins in earning coverage of fixed financial charges and high internal
cash generation; and Well-established access to a range of financial
markets and assured sources of alternate liquidity.
Prime-2--Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Standard and Poor's Commercial Paper Ratings
A-1--This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Fitch Ratings Commercial Paper Rating Definitions
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded
as having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than the strongest issues.
Addresses
federated PREMIER municipal INCOME FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Underwriter
Merrill Lynch, Pierce, Fenner & Smith Incorporated
4 World Financial Center
New York, NY 10080
Investment Adviser
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Custodian
State Street Bank and Trust Company
P. O. Box 8600
Boston, MA 02266-8600
Transfer Agency and Dividend Disbursing Agent
EquiServe Trust Company, N.A.
P.O. Box 43011
Providence, RI 02940-3011
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
CUSIP 31423P108
Exhibit (a)(iii) under Form N-2
AMENDED AND RESTATED
CERTIFICATE OF TRUST
OF
FEDERATED MUNICIPAL INCOME FUND
a Delaware Statutory Trust
This Amended and Restated Certificate of Trust of Federated
Municipal Income Fund (the "Trust") is being duly executed and filed
pursuant to the Delaware Statutory Trust Act (the "Act"), Del. Code Ann.
tit. 12,ss.ss.3801-3819.
1. NAME. The name of the statutory trust as amended hereby is
"Federated Premier Municipal Income Fund." The former name of the Trust
was "Federated Municipal Income Fund."
2. DATE OF ORIGINAL FILING. The Trust was formed by the filing of
its original Certificate of Trust on October 16, 2002.
3. REGISTERED OFFICE AND REGISTERED AGENT. The Trust will become,
prior to the issuance of shares of beneficial interest, a registered
management investment company under the Investment Company Act of 1940, as
amended. Therefore, in accordance with Section 3807(b) of the Act, the
Trust has and shall maintain in the State of Delaware a registered office
and a registered agent for service of process.
(a) REGISTERED OFFICE. The registered office of the Trust in
Delaware is c/o Delaware GCL Services LLC, #3 S. American Avenue,
Dover, Delaware 19901.
(b) REGISTERED AGENT. The registered agent for service of
process on the Trust in Delaware is Delaware GCL Services LLC, #3 S.
American Avenue, Dover, Delaware 19901.
IN WITNESS WHEREOF, the Trustee named below does hereby execute this
Amended and Restated Certificate of Trust as of the 17th day of December,
2002.
/s/ J. Christopher Donahue
J. Christopher Donahue
Trustee
Exhibit (k)(ii) under Form N-2
Transfer Agency and Service Agreement
Among
Each of the Closed End Investment Companies Listed on Exhibit B Hereto
and
EquiServe Trust Company, N.A.
and
EquiServe, Inc.
Table of Contents
Section 1. Certain Definitions 4
Section 2. Appointment of Agent 5
Section 3. Standard Services 6
Section 4. Dividend Disbursing Services 8
Section 5. Shareholder Internet Account Access Services 9
Section 6. Optional Services 10
Section 7 Fee and Expenses 10
Section 8. Representations and Warranties of Transfer Agent 12
Section 9. Representations and Warranties of Customer 12
Section 10. Indemnification/Limitation of Liability 13
Section 11. Damages 15
Section 12. Responsibilites of the Transfer Agent 15
Section 13. Covenants of the Customer and Transfer Agent 16
Section 14. Data Access and Propreitary Information 17
Section 15. Confidentiality 19
Section 16. Term and Terminiation 19
Section 17. Assignment 21
Section 18. Unaffiliated Third Parties 21
Section 19. Miscellaneous 21
Section 19.1 Notice. 21
Section 19.2 Successors 22
Section 19.3. Amendments 22
Section 19.4. Severability 22
Section 19.5. Governing Law 22
Section 19.6 Force Majeure 22
Section 19.7 Descriptive Headings 22
Section 19.8 Third Party Beneficiaries 22
Section 19.9 Survival 23
Section 19.10 Priorities 23
Section 19.11. Merger of Agreement 23
Section 19.12 Counterparts 23
AGREEMENT made as of the 19th day of December, 2002, by and among
each of the closed-end investment companies listed on Exhibit B hereto, a
corporation, having a principal office and place of business at 5800
Corporate Drive, Pittsburgh, PA, 15237-7000 (each a "Customer" or the
"Customer"), and EquiServe, Inc., a Delaware corporation, and its fully
owned subsidiary EquiServe Trust Company, N.A., a federally charted trust
company doing business at [525 Washington Boulevard, Jersey City, New
Jersey 07310 or 150 Royall Street, Canton, Massachusetts 02021]
(collectively, the "Transfer Agent" or individually "EQI" and the "Trust
Company", respectively).
WHEREAS, the Customer desires to appoint the Transfer Agent as sole
transfer agent, registrar, administrator of dividend reinvestment plans,
option plans, and direct stock purchase plans and EQI as dividend
disbursing agent and processor of all payments received or made by
Customer under this Agreement.
WHEREAS, the Trust Company and EQI desire to accept such respective
appointments and perform the services related to such appointments;
WHEREAS, the Board of Trustees of each Customer has approved
appointment of the Transfer Agent.
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. Certain Definitions.
(a) "Account" or "Accounts" shall mean the account of each Shareholder
which account shall hold any full or fractional shares of stock held by
such Shareholder and/or outstanding funds or tax reporting to be done.
(b) "Additional Services" shall mean any and all services which
are not Services as set forth in the Fee and Service Schedule, but
performed by Transfer Agent upon request of Customer.
(c) "Agreement" shall mean this agreement and any and all exhibits or
schedules attached hereto and any and all amendments or modifications,
which may from time to time be executed.
(d) "Annual Period" shall mean each twelve (12) month period commencing
on the Effective Date and, thereafter, on each anniversary of the
Effective Date.
(e) "Closed Account" shall mean an account with a zero share balance, no
outstanding funds or no reportable tax information.
(f) "Customer ID(s)" shall have the meaning set forth in Section 14.3.
(g) "Data Access Service" shall have the meaning set forth in Section
14.1.
(h) "Dividend Reinvestment Plan" and "Direct Stock Purchase
Plan" shall mean the services as set forth in Section 4 and in the Fee and
Service Schedule.
(i) "Effective Date" shall mean the date first stated above.
(j) "Fee and Service Schedule" shall mean the fees and services set
forth in the "Fee and Service Schedule" attached hereto.
(k) "Password(s)" shall have the meaning set forth in Section 14.3.
(l) "Proprietary Information" shall have the meaning set forth in
Section 14.3.
(m) "Security Procedures" shall have the meaning set forth in Section
5.1.
(n) "Services" shall mean any and all services as further described
herein and in the "Fee and Service Schedule" or other schedules attached
hereto.
(o) "Share" shall mean Customer's common stock, par value $0.001 per
share and Customer's preferred stock, par value ______ per share
authorized by theDeclaration of Trust, and other classes of Customer's
stock to be designated by the Customer in writing and for which the
Transfer Agent agrees to service under this Agreement.
(p) "Shareholder" shall mean the holder of record of Shares.
(q) "Shareholder Data" shall have the meaning set forth in Section 14.2.
(r) "Shareholder Internet Services" shall have the meaning
set forth in Section 5.1.
2. Appointment of Agent.
2.1 Appointments. The Customer hereby appoints the Transfer Agent
to act as sole transfer agent and registrar for all Shares in accordance
with the terms and conditions hereof and as administrator of Plans and
appoints EQI as dividend disbursing agent and processor of all payments
received or made by or on behalf of the Customer under this Agreement, and
the Transfer Agent and EQI accept the appointments. Customer shall
provide Transfer Agent with certified copies of resolutions appointing the
Trust Company as Transfer Agent.
2.2 Documents. In connection with the appointing of Transfer
Agent as the transfer agent and registrar for each Customer, the Customer
will provide or has previously provided each of the following documents to
the Transfer Agent:
(a) Copies of Registration Statements and amendments
thereto, filed with the Securities and Exchange Commission
for initial public offerings;
(b) Specimens of all forms of outstanding stock
certificates
, with a certificate of the Secretary of the Customer as to
their authenticity;
(c) Specimens of the Signatures of the officers of the
Customer
authorized to sign stock certificates and individuals
authorized to sign written instructions and requests; and
(d) An opinion of counsel for the Customer addressed to both the Trust
Company
and EQI with respect to:
(i) The Customer's organization and existence under the
laws of its state of organization; and
(ii) That all issued Shares are, and all unissued Shares will be, when
issued, validly issued, fully paid and non-assessable.
2.3 Records. Transfer Agent may adopt as part of its records all
lists of holders, records of Customer's stock, books, documents and
records which have been employed by any former agent of Customer for the
maintenance of the ledgers for the Customer's shares, provided such ledger
is certified by an officer of Customer or the prior transfer agent to be
true, authentic and complete.
2.4 Shares. Customer shall, if applicable, inform Transfer Agent
as to (i) the existence or
termination of any restrictions on the transfer of Shares and in the
application to or removal from any certificate of stock of any legend
restricting the transfer of such Shares or the substitution for such
certificate of a certificate without such legend, (ii) any authorized but
unissued Shares reserved for specific purposes, (iii) any outstanding
Shares which are exchangeable for Shares and the basis for exchange, (iv)
reserved Shares subject to option and the details of such reservation and
(v) special instructions regarding dividends and information of foreign
holders.
2.5 Customer's Agent. Transfer Agent represents that it is
engaged in an independent business and will perform its obligations under
this Agreement as an agent of Customer.
2.6 Certificates. Customer shall deliver to Transfer Agent an
appropriate supply of stock
certificates, which certificates shall provide a signature panel for use
by an officer of or authorized signor for Transfer Agent to sign as
transfer agent and registrar, and which shall state that such certificates
are only valid after being countersigned and registered.
3. Standard Services.
3.1
Transfer Agent Services. The Transfer Agent will perform the following
services:
In accordance with the procedures established from time to
time by agreement between the Customer and the Transfer Agent, the
Transfer Agent shall:
(a) issue and record the appropriate number of Shares as
authorized and
hold such Shares in the appropriate Shareholder account;
(b) effect transfers of Shares by the registered owners thereof upon
receipt of appropriate documentation;
(c) act as agent for Shareholders pursuant to the Dividend
Reinvestment
Plan, and other investment programs as amended from time to
time in accordance with the terms of the agreements
relating thereto to which the Transfer Agent is or will be
a party; and
(d) issue replacement certificates for those certificates
alleged to have been lost,
stolen or destroyed in accordance with procedures adopted
by the Customer.
3.2 EQI Services. In accordance with procedures established from time
to time by agreement between the Customer and EQI, EQI shall:
(a) prepare and transmit payments for dividends and
distributions declared
by the Customer, provided good funds for said dividends or
distributions are received by EQI prior to the scheduled
payable date for said dividends or distributions;
(b) issue replacement checks and place stop orders on
original checks based on
shareholder's representation that a check was not received
or was lost.EQI shall be responsible for all losses or
claims resulting from such replacement; and
(c) Receive all payments made to the Customer or the
Transfer Agent under the Dividend Reinvestment Plan, Direct
Stock Purchase Plan, and Plans and make all payments
required to be made under such plans, including all
payments required to be made to the Customer.
3.3 Customary Services. The Transfer Agent shall perform all the
customary services of a transfer agent, agent of dividend reinvestment
plan, cash purchase plan and other investment programs as described in
Section 3.1 consistent with those requirements in effect as of the date of
this Agreement. EQI shall perform all the customary services of a
dividend disbursing agent and a processor of payments as described in
Section 3.2 consistently with those requirements in effect as of the date
of this Agreement. The detailed services and definition, frequency,
limitations and associated costs (if any) of the Services to be performed
by the Transfer Agent are set out in the attached Fee and Service Schedule.
3.4 Compliance with Laws. The Customer agrees that each of the
Trust Company and EQI is obligated to and the Trust Company and EQI agree
to comply with all applicable federal, state and local laws and
regulations, codes, order and government rules in the performance of its
duties under this Agreement.
3.5 Unclaimed Property and Lost Shareholders. The Transfer Agent
shall report unclaimed property to each state in compliance with state law
and shall comply with Section 17Ad-17 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), for lost Shareholders. If the
Customer is not in compliance with applicable state laws, there will be no
charge for the first two years for this service for such Customer, other
than a charge of $3.00 per due diligence notice mailed; provided that
after the first two years, the Transfer Agent will charge such Customer a
reasonable fee to be mutually agreed upon plus any out-of-pocket expenses.
3.6 Compliance with Office of Foreign Asset Control ("OFAC")
Regulations. The Transfer Agent shall ensure compliance with OFAC laws.
4. Dividend Disbursing Services.
4.1 Declaration of Dividends. Upon receipt of a written
notice from the President, any Vice President, Secretary, Assistant
Secretary, Treasurer or Assistant Treasurer of Customer declaring the
payment of a dividend, EQI shall disburse such dividend payments provided
that in advance of such payment, Customer furnishes EQI with sufficient
funds. The payment of such funds to EQI for the purpose of being
available for the payment of dividend checks from time to time is not
intended by Customer to confer any rights in such funds on Customer's
Shareholders whether in trust or in contract or otherwise.
4.2 Stop Payments. Customer hereby authorizes EQI to stop payment of
checks issued in payment of dividends, but not presented for payment, when
the payees thereof allege either that they have not received the checks or
that such checks have been mislaid, lost, stolen, destroyed or, through no
fault of theirs, are otherwise beyond their control and cannot be produced
by them for presentation and collection, and EQI shall issue and deliver
duplicate checks in replacement thereof.
4.3 Tax Withholding. EQI is hereby authorized to deduct from all
dividends declared by a Customer and disbursed by EQI, as dividend
disbursing agent, the tax required to be withheld pursuant to Sections
1441, 1442 and 3406 of the Internal Revenue Code of 1986, as amended, or
by any Federal or State statutes subsequently enacted, and to make the
necessary return and payment of such tax in connection therewith.
5. Shareholder Internet Account Access Services.
5.1 Shareholder Internet Services. The Transfer Agent shall provide
internet access to each Customer's shareholders through Transfer Agent's
web site, equiserve.com ("Shareholder Internet Services"), pursuant to its
established procedures ("Security Procedures"), to allow shareholders to
view their account information and perform certain on-line transaction
request capabilities. The Shareholder Internet Services shall be provided
at no additional charge at this time, other than the transaction fees
currently being charged for the different transactions as described on the
Fee and Service Schedule. The Transfer Agent reserves the right to charge
a fee for this service at any time in the future.
5.2 Scope of Transfer Agent Shareholder Internet Services
Obligations. Transfer Agent shall at all times use reasonable care in
performing Shareholder Internet Services under this Agreement. With
respect to any claims for losses, damages, costs or expenses which may
arise directly or indirectly from Security Procedures which Transfer Agent
has implemented or omitted, Transfer Agent shall be presumed to have used
reasonable care if it has followed, in all material respects, its Security
Procedures then in effect. Transfer Agent may, but shall not be required
to, modify such Security Procedures from time to time to the extent it
believes, in good faith, that such modifications will enhance the security
of Shareholder Internet Services. All data and information transmissions
accessed via Shareholder Internet Services are for informational purposes
only, and are not intended to satisfy regulatory requirements or comply
with any laws, rules, requirements or standards of any federal, state or
local governmental authority, agency or industry regulatory body,
including the securities industry, which compliance is the sole
responsibility of Customer.
5.3 No Other Warranties.
EXCEPT AS OTHERWISE EXPRESSLY STATED IN SECTION 5.2 OF THIS AGREEMENT, THE
SHAREHOLDER INTERNET SERVICES ARE PROVIDED "AS-IS," ON AN "AS AVAILABLE"
BASIS, AND TRANSFER AGENT HEREBY SPECIFICALLY DISCLAIMS ANY AND ALL
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING SUCH SERVICES
PROVIDED BY TRANSFER AGENT HEREUNDER, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES
ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
6. Optional Services.
To the extent that a Customer elects to engage the Transfer Agent to
provide the services listed below the Customer shall engage the Transfer
Agent to provide such services upon terms and fees to be agreed upon by
the parties:
(a) Corporate actions (including inter alia, odd lot buy backs,
exchanges, mergers,
redemptions, subscriptions, capital reorganization,
coordination of post-merger services and special meetings).
7. Fees and Expenses.
7.1 Fee and Service Schedules. Each Customer agrees to pay
Transfer Agent the fees for Services performed pursuant to this Agreement
as set forth in the Fee and Service Schedule attached hereto, for the
initial term of the Agreement (the "Initial Term").
7.2Fee Increases. After the Initial Term of the Agreement,
providing that service mix and volumes remain constant, the fees listed in
the Fee and Service Schedule may be increased by an amount mutually agreed
upon by the Customer and the Transfer Agent. (
7.3 Adjustments. Notwithstanding Section 7.1 above, fees, and
the out-of-pocket expenses and advances identified under Section 7.4
below, may be changed from time to time as agreed upon in writing between
the Transfer Agent and the Customer.
7.4 Out-of-Pocket Expenses. In addition to the fees paid under
Section 7.1 above, the Customer agrees to reimburse the Transfer Agent for
reasonable out-of-pocket expenses, including but not limited to postage,
forms, telephone, microfilm, microfiche, taxes, records storage, exchange
and broker fees, or advances incurred by the Transfer Agent for the items
set out in Exhibit A attached hereto. Out-of-pocket expenses may include
the costs to transfer agent of administrative expenses. In addition, any
other expenses incurred by the Transfer Agent at the request or with the
consent of the Customer, will be reimbursed by the Customer.
7.5 Conversion Funds. Conversion funding required by any out of
proof condition caused by a prior agents' services shall be advanced to
Transfer Agent prior to the commencement of services.
7.6 Postage. Postage for mailing of dividends, proxies, Customer
reports and other mailings to all Shareholder Accounts shall be advanced
to the Transfer Agent by the Customer prior to commencement of the mailing
date of such materials.
7.7 Invoices. The Customer agrees to pay all fees and
reimbursable expenses within 30 days of the date of the respective billing
notice, except for any fees or expenses that are subject to good faith
dispute. In the event of such a dispute, the Customer may only withhold
that portion of the fee or expense subject to the good faith dispute. The
Customer shall notify the Transfer Agent in writing within twenty-one (21)
calendar days following the receipt of each billing notice if the Customer
is disputing any amounts in good faith. If the Customer does not provide
such notice of dispute within the required time, the billing notice will
be deemed accepted by the Customer. The Customer shall settle such
disputed amounts within five (5) business days of the day on which the
parties agree on the amount to be paid by payment of the agreed amount.
If no agreement is reached, then such disputed amounts shall be settled as
may be required by law or legal process.
7.8 Taxes. Customer shall pay all sales or use taxes in lieu
thereof with respect to the Services (if applicable) provided by Transfer
Agent under this Agreement.
7.9 Late Payments.
(a) If any undisputed amount in an invoice of the Transfer Agent
(for fees or reimbursable expenses) is not paid when due, the Customer
shall pay the Transfer Agent interest thereon (from the due date to the
date of payment) at a per annum rate equal to one percent (1.0%) plus the
Prime Rate (that is, the base rate on corporate loans posted by large
domestic banks) published by The Wall Street Journal (or, in the event
such rate is not so published, a reasonably equivalent published rate
selected by Customer on the first day of publication during the month when
such amount was due). Notwithstanding any other provision hereof, such
interest rate shall be no greater than permitted under applicable
provisions of Massachusetts or New Jersey law.
(b) The failure by Customer to pay an invoice within 90 days after
receipt of such invoice or the failure by the Customer to timely pay two
consecutive invoices shall constitute a material breach pursuant to
Section 16.4(a) below. The Transfer Agent may terminate this Agreement
for such material breach immediately and shall not be obligated to provide
the Customer with 30 days to cure such breach.
7.10 Services Required by Legislation. Services required by
legislation or regulatory mandate that become effective after the
Effective Date of this Agreement shall not be part of the Services, and
shall be billed by appraisal.
7.11 Overtime Charges. Overtime charges will be assessed in the
event of a late delivery to the Transfer Agent of Customer material for
mailings to Shareholders, unless the mail date is rescheduled. Such
material includes, but is not limited to, proxy statements, quarterly and
annual reports, dividend enclosures and news releases.
7.12 Bank Accounts. The Customer acknowledges that the bank accounts
maintained by EQI in connection with the Services will be in its name.
However, each Customer's funds shall remain in a separate account
maintained at EQI and will not be commingled with any other accounts at
EQI. EQI may receive investment earnings in connection with the investment
at EQI's risk and for its benefit of funds held in those accounts from
time to time. However, Transfer Agent shall indemnify and hold Customer
harmless from and against, any and all losses, claims, damages, costs,
charges, counsel fees and expenses, payments, expenses and liability
arising out of or attributable to such investment
8. Representations and Warranties of Transfer Agent.
8.1 Governance. The Trust Company is a federally chartered limited
purpose national bank duly organized under the laws of the United States
and EQI is a corporation validly existing and in good standing under the
laws of the State of Delaware and each has full corporate power, authority
and legal right to execute, deliver and perform this Agreement. The
execution, delivery and performance of this Agreement by Transfer Agent
has been duly authorized by all necessary corporate action and constitutes
the legal valid and binding obligation of Transfer Agent enforceable
against Transfer Agent in accordance with its terms.
8.2 Compliance. The execution, delivery and performance of the
Agreement by Transfer Agent will not violate, conflict with or result in
the breach of any material term, condition or provision of, or require the
consent of any other party to, (i) any existing law, ordinance, or
governmental rule or regulation to which Transfer Agent is subject, (ii)
any judgement, order, writ, injunction, decree or award of any court,
arbitrator or governmental or regulatory official, body or authority which
is applicable to Transfer Agent, (iii) the incorporation documents or
by-laws of , or any material agreement to which Transfer Agent is a party.
8.3 Facilities. The Transfer Agent has and will continue to have
access to the necessary facilities, equipment and personnel to perform its
duties and obligations under this Agreement.
8.4 Computer Services. DATA ACCESS SERVICE AND ALL COMPUTER
PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE
PROVIDED ON AN AS IS, AS AVAILABLE BASIS. TRANSFER AGENT EXPRESSLY
DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING,
BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS
FOR A PARTICULAR PURPOSE. CUSTOMER HEREBY ACKNOWLEDGES THAT THE DATA
ACCESS SERVICE MAY NOT BE OR BECOME AVAILABLE DUE TO ANY NUMBER OF FACTORS
INCLUDING WITHOUT LIMITATION PERIODIC SYSTEM MAINTENANCE, SCHEDULED OR
UNSCHEDULED, ACTS OF GOD, TECHNICAL FAILURE, TELECOMMUICATIONS
INFRASTRUCTURE OR DELAY OR DISRUPTION ATTRIBUTATLE TO VIRUSES, DENIAL OF
SERVICE ATTACKS, INCREASED OR FLUCTUATING DEMAND, AND ACTIONS AND
OMISSIONS OF THIRD PARTIES. THEREFORE TRANSFER AGENT EXPRESSLY DISCLAIMS
ANY EXPRESS OR IMPLIED WARRANTY REGARDING SYSTEM AND/OR DATA ACCESS
SERVICE AVAILABILITY, ACCESSABILITY, OR PERFORMANCE.
9. Representations and Warranties of Customer.
Each Customer represents and warrants to the Transfer Agent
that:
9.1 Organizations. It is a business trust duly organized and
existing and in good standing under the laws of Deleware;
9.2 Governance. It is empowered under applicable laws and by
Declaration of Trust and By-Laws to enter into and perform this
Agreement. All corporate proceedings required by said Declaration of
Trust, By-Laws and applicable law have been taken to authorize it to enter
into and perform this Agreement; and
9.3 Securities Act of 1933. A registration statement under the
Securities Act of 1933, as amended (the "1933 Act") has been filed and is
currently effective, or will be effective prior to the sale of any Shares,
and will remain so effective, and all appropriate state securities law
filings have been made with respect to all the Shares of the Customer
being offered for sale except for any Shares which are offered in a
transaction or series of transactions which are exempt from the
registration requirements of the 1933 Act and state securities laws;
information to the contrary will result in immediate notification to the
Transfer Agent.
10. Indemnification/Limitation of Liability.
10.1 Standard of Care. The Transfer Agent shall at all times
act in good faith and agrees to use its best efforts within reasonable
time limits to insure the accuracy of all services performed under this
Agreement, but assumes no responsibility and shall not be liable for loss
or damage due to errors unless said errors are caused by its negligence,
bad faith or willful misconduct or that of its employees as set forth and
subject to the limitations set forth in Section 10.4 below.
10.2 Customer Indemnity. The Transfer Agent shall not be
responsible for, and the Customer shall indemnify and hold the Transfer
Agent harmless from and against, any and all losses, claims, damages,
costs, charges, counsel fees and expenses, payments, expenses and
liability arising out of or attributable to:
(a) All actions of the Transfer Agent or its agents or
subcontractors required to be
taken pursuant to this Agreement, provided such actions are taken in
good faith and without negligence or willful misconduct;
(b) The Customer's gross negligence or willful misconduct or the
breach of any representation or warranty of the Customer hereunder;
(c) The reliance or use by the Transfer Agent of information,
records and documents which (i) are received by the Transfer Agent
and furnished to it by or on behalf of the Customer, and (ii) have
been prepared and /or maintained by the Customer or any other person
or firm on behalf of the Customer. Such other person or firm shall
include any former transfer agent or former registrar, or
co-transfer agent or co-registrar or any current registrar where the
Transfer Agent is not the current registrar;
(d) The reliance on, or the carrying out by the Transfer Agent of
any instructions or requests of the Customer's representatives;
(e) The offer or sale of Shares in violation of any federal or
state securities laws requiring that such Shares be registered or in
violation of any stop order or other determination or ruling by any
federal or state agency with respect to the offer or sale of such
Shares;
(f) The negotiations and processing of all checks, including
checks made payable to prospective or existing shareholders which
are tendered to the Transfer Agent for the purchase of Shares
(commonly known as "third party checks"), provided that Transfer
Agent has followed any procedures relating to third party checks
adopted by the Customer and shared with Transfer Agenet;
(g) The negotiation, presentment, delivery or transfer of
Shares through the Direct Registration System Profile System.
10.3 Instructions. At any time the Transfer Agent may apply to any
officer of the Customer. The Transfer Agent shall be protected and
indemnified in acting upon any paper or document reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon
any instruction, information, data, records or documents provided the
Transfer Agent by telephone, in person, machine readable input, telex, CRT
data entry or similar means authorized by the Customer, and shall not be
held to have notice of any change of authority of any person, until
receipt of written notice thereof from the Customer. The Transfer Agent
shall also be protected and indemnified in recognizing stock certificates
which are reasonably believed to bear the proper manual or facsimile
signatures of officers of the Customer, and the proper countersignature of
any former transfer agent or former registrar, or of a co-transfer agent
or co-registrar.
10.4 Transfer Agent Indemnification/Limitation of Liability.
Transfer Agent shall be responsible for and shall indemnify and hold the
Customer harmless from and against any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to Transfer Agent's refusal or failure to comply with the
terms of this Agreement, or which arise out of Transfer Agent's negligence
or willful misconduct or which arise out of the breach of any
representation or warranty of Transfer Agent hereunder, for which Transfer
Agent is not entitled to indemnification under this Agreement; provided,
however, that Transfer Agent's aggregate liability during any term of this
Agreement with respect to, arising from, or arising in connection with
this Agreement, or from all services provided or omitted to be provided
under this Agreement, whether in contract, or in tort, or otherwise, is
limited to, and shall not exceed, the amounts paid hereunder by the
Customer to Transfer Agent as fees and charges, but not including
reimbursable expenses, under this Agreement.
10.5 Notice. In order that the indemnification provisions contained
in this Section shall
apply, upon the assertion of a claim for which one party may be required
to indemnify the other, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the other party
advised with respect to all developments concerning such claim. The
indemnifying party shall have the option to participate with the
indemnified party in the defense of such claim or to defend against said
claim in its own name or the name of the indemnified party. The
indemnified party shall in no case confess any claim or make any
compromise in any case in which the indemnifying party may be required to
indemnify it except with the indemnifying party's prior written consent.
11. Damages.
NO PARTY SHALL BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES OF ANY NATURE WHATSOEVER, INCLUDING, BUT NOT LIMITED
TO, LOSS OF ANTICIPATED PROFITS, OCCASIONED BY A BREACH OF ANY PROVISION
OF THIS AGREEMENT EVEN IF APPRISED OF THE POSSIBILITY OF SUCH DAMAGES.
12. Responsibilities of the Transfer Agent.
The Transfer Agent undertakes the duties and obligations imposed by
this Agreement upon the following terms and conditions, by all of which
the Customer, by its acceptance hereof, shall be bound:
12.1 Whenever in the performance of its duties hereunder the
Transfer Agent shall deem it necessary or desirable that any fact or
matter be proved or established prior to taking or suffering any action
hereunder, such fact or matter may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the
President, any Vice President, the Treasurer, any Assistant treasurer, the
Secretary or any Assistant Secretary of the Customer and delivered to the
Transfer Agent. Such certificate shall be full authorization to the
recipient for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
12.2 The Customer agrees that it will perform, execute, acknowledge
and deliver or cause to be performed, executed, acknowledged and delivered
all such further and other acts, instruments and assurances as may
reasonably be required by the Transfer Agent for the carrying out, or
performing by the Transfer Agent of the provisions of this Agreement.
12.3 Transfer Agent, any of its affiliates or subsidiaries, and any
stockholder,
director, officer or employee of the Transfer Agent may buy, sell or deal
in the securities of the Customer or become pecuniary interested in any
transaction in which the Customer may be interested, or contract with or
lend money to the Customer or otherwise act as fully and freely as though
it were not appointed as agent under this Agreement. Nothing herein shall
preclude the Transfer Agent from acting in any other capacity for the
Customer or for any other legal entity.
12.4 No provision of this Agreement shall require the Transfer
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the
exercise of its rights if it shall believe in good faith that repayment of
such funds or adequate indemnification against such risk or liability is
not reasonably assured to it.
13. Covenants of the Customer and Transfer Agent.
13.1 Customer Corporate Authority. The Customer shall furnish to
the Transfer Agent
the following:
(a) A copy of the Declaration of Trust and By-Laws of the
Customer;
(b) Copies of all material amendments to its
Declaration of Trust or By-Laws made after the date of this Agreement,
promptly after such amendments are made; and
(c) A certificate of the Customer as to the Shares
authorized, issued and outstanding, as well as a description of all
reserves of unissued Shares relating to the exercise of options,
warrants or a conversion of debentures or otherwise.
13.2 Transfer Agent Facilities. The Transfer Agent hereby agrees to
establish and maintain facilities and procedures reasonably acceptable to
the Customer for the safekeeping of stock certificates, check forms and
facsimile signature imprinting devices, if any, and for the preparation,
use, and recordkeeping of such certificates, forms and devices.
13.3 Records. The Transfer Agent shall keep records relating to the
services to be performed hereunder, in the form and manner as it may deem
advisable. The Transfer Agent agrees that all such records prepared or
maintained by it relating to the services performed hereunder are the
property of the Customer and will be preserved, maintained and made
available in accordance with the requirements of law, and will be
surrendered promptly to the Customer on and in accordance with its request.
13.4 Confidentiality. The Transfer Agent and the Customer agree
that all books, records, information and data pertaining to the business
of the other party which are exchanged or received pursuant to the
negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law. Transfer Agent acknowledges that it will
receive "nonpublic personal information," as such term is defined in
Regulation S-P, 17 CFR ss. 248 (such information is referred to herein as
"NPI") of Shareholders, and agrees that it shall use such information
solely in furtherance of fulfilling its contractual obligations under this
Agreement. Transfer Agent further agrees to use and redisclose such NPI
only for the limited purpose of fulfilling its duties and obligations
under the Agreement, for law enforcement and miscellaneous purposes as
permitted in 17 CFR ss.ss. 248.15, or in connection with joint marketing
arrangements that Customer may establish with Transfer Agent in accordance
with the limited exception set forth in 17 CFR ss. 248.13. Transfer Agent
has implemented, and will continue to maintain for the term of the
Agreement, policies and procedures reasonably designed to insure the
security and confidentiality of records and NPI of Shareholders, protect
against any anticipated threats or hazards to the security or integrity of
Shareholder records and NPI, and protect against unauthorized access to or
use of such Shareholder records or NPI that could result in substantial
harm or inconvenience to any Shareholder.
13.5 Non-Solicitation of Transfer Agent Employees. Customer shall
not knowingly attempt to hire or assist with the hiring of an employee of
Transfer Agent or encourage any employee to terminate their relationship
with Transfer Agent.
13.6 Notification. Customer shall notify Transfer Agent as soon as
possible in advance of any stock split, stock dividend similar event which
may affect the Shares, and any bankruptcy, insolvency, moratorium or other
proceeding regarding Customer affecting the enforcement of creditors'
rights. Notwithstanding any other provision of the Agreement to the
contrary, Transfer Agent will have no obligation to perform any Services
under the Agreement subsequent to the commencement of any bankruptcy,
insolvency, moratorium or other proceeding regarding Customer affecting
the enforcement of creditor' rights unless Transfer Agent receives
assurance satisfactory to it that it will receive full payment for such
services. Further, Customer may not assume the Agreement after the filing
of a bankruptcy petition without transfer agents written consent.
14. Data Access Service and Proprietary Information.
14.1 Transfer Agent has developed a data access service that enables
the Customer to access the Customer's shareholder records maintained on
Transfer Agent's computer system through the Internet or remote access, as
the case may be (the "Data Access Service"). The Customer wishes to use
such Data Access Service subject to the terms and conditions set forth
herein. Therefore, the Customer and Transfer Agent agree as follows:
14.2 Access to Shareholder Data.
The Service provided to the Customer pursuant to this Agreement shall
include granting the Customer access to the Shareholder, Customer and
proxy information ("Shareholder Data") maintained on the records database
for the purpose of examining, maintaining, editing, or processing
transactions with respect to Shareholder Data.
14.3 Procedures for Access.
To use the Data Access Service, the Customer must access through the
Internet or remote terminal, as the case may be, pursuant to the
procedures provided by Transfer Agent. Such access is accomplished by
entering a unique Customer identification ("Customer ID(s)") and passwords
("Password(s)") assigned to the Customer by Transfer Agent. Each Customer
ID and Password assigned to the Customer is for use only by the Customer.
The Customer shall establish and maintain reasonable security and control
over all such Customer IDs and Passwords. Transfer Agent shall maintain
reasonable security and control over each Customer ID. After Transfer
Agent assigns the Customer a Password, the Customer shall change the
Password. The Customer recognizes that Transfer Agent does not have
knowledge of the Password, which is selected by the Customer and is within
the Customer's exclusive control after the necessary change. The Customer
may change any Password thereafter at any time. Customer agrees to notify
Transfer Agent immediately if any employee of Customer granted access to
the Data Access Service leaves the employ of the Customer, in order to
enable Transfer Agent to terminate such employee's access.
14.4 Proprietary Information.
The Customer acknowledges that the databases, computer programs,
screen formats, report formats, interactive design techniques, and
documentation manuals furnished to the Customer by the Transfer Agent as
part of the Data Access Service to access Shareholder Data maintained by
the Transfer Agent on data bases under the control and ownership of the
Transfer Agent or other third party constitute copyrighted, trade secret,
or other proprietary information (collectively, "Proprietary Information")
of substantial value to the Transfer Agent or other third party. In no
event shall Proprietary Information be deemed Shareholder Data. The
Customer agrees to treat all Proprietary Information as proprietary to the
Transfer Agent and further agrees that it shall not divulge any
Proprietary Information to any person or organization except as may be
provided hereunder. Without limiting the foregoing, the Customer agrees
for itself and its employees and agents:
(a) to refrain from copying or duplicating in any way the
Proprietary Information, other than to print out pages
reflecting Shareholder Data to provide to shareholders or for
Customer's internal use;
(b) to refrain from obtaining unauthorized access to any
portion of the
Proprietary Information, and if such access is inadvertently
obtained, to inform Transfer Agent in a timely manner of such
fact and dispose of such information in accordance with
Transfer Agent's instructions;
(c) to refrain from causing or allowing the Proprietary
Information from being retransmitted to any other computer
facility or other location, except with the prior written
consent of Transfer Agent;
(d) that the Customer shall have access only to those authorized
transactions agreed upon by the parties; and
(e) to honor all reasonable written requests made by Transfer
Agent to protect at Transfer Agent's expense the rights of
Transfer Agent Proprietary Information at common law, under
federal copyright law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 14.
14.5 Content. If the Customer notifies the Transfer Agent that any
part of the Data Access Service does not operate in material compliance
with the user documentation provided by the Transfer Agent for such
service, the Transfer Agent shall endeavor in a timely manner to correct
such failure. Organizations from which the Transfer Agent may obtain
certain data included in the Services are solely responsible for the
contents of such data and the Customer agrees to make no claim against the
Transfer Agent arising out of the contents of such third party data,
including, but not limited to, the accuracy thereof.
14.6 Transactions. If the transactions available to the Customer
include the ability to originate electronic instructions to the Transfer
Agent in order to (i) effect the transfer or movement of Shares or direct
EQI to transfer cash or (ii) transmit Shareholder information or other
information, then in such event the Transfer Agent shall be entitled to
rely on the validity and authenticity of such instructions without
undertaking any further inquiry as long as such instructions are
undertaken in conformity with security procedures established by the
Transfer Agent from time to time.
15. Confidentiality.
15.1 Covenant. The Transfer Agent and the Customer agree that they
will not, at any time during the term of this Agreement or after its
termination, reveal, divulge, or make known to any person, firm,
corporation or other business organization, any customers' lists, trade
secrets, cost figures and projections, profit figures and projections, or
any other secret or confidential information whatsoever, whether of the
Transfer Agent or of the Customer, used or gained by the Transfer Agent or
the Customer during performance under this Agreement. The Customer and
the Transfer Agent further covenant and agree to retain all such knowledge
and information acquired during and after the term of this Agreement
respecting such lists, trade secrets, or any secret or confidential
information whatsoever in trust for the sole benefit of the Transfer Agent
or the Customer and their successors and assigns. The above prohibition
of disclosure shall not apply to the extent that the Transfer Agent must
disclose such data to its sub-contractor or agent for purposes of
providing services under this Agreement.
15.2 Request for Records. In the event that any requests or
demands are made for the inspection of the Shareholder records of the
Customer, other than request for records of Shareholders pursuant to
standard subpoenas from state or federal government authorities (e.g., in
divorce and criminal actions), the Transfer Agent will endeavor to notify
the Customer and to secure instructions from an authorized officer of the
Customer as to such inspection. The Transfer Agent expressly reserves the
right, however, to exhibit the Shareholder records to any person whenever
it is advised by counsel that it may be held liable for the failure to
exhibit the Shareholder records to such person or if required by law or
court order.
16. Term and Termination.
16.1 Term. The Initial Term of this Agreement
shall be three (3) years from the date first stated above unless
terminated pursuant to the provisions of this Section 16. Unless a
terminating party gives written notice to the other party sixty (60) days
before the expiration of the Initial Term this Agreement will renew
automatically from year to year ("Renewal Term"). Sixty (60) days before
the expiration of the Initial Term or a Renewal Term the parties to this
Agreement will agree upon a Fee Schedule for the upcoming Renewal Term.
If no new fee schedule is agreed upon, the fees will increase as set forth
in Section 7.2.
16.2 Early Termination. Notwithstanding anything contained
in this Agreement to the contrary, should Customer desire to move any of
its Services provided by the Transfer Agent hereunder to a successor
service provider prior to the expiration of the then current Initial or
Renewal Term, or without the required notice period, the Transfer Agent
shall make a good faith effort to facilitate the conversion on such prior
date, however, there can be no guarantee that the Transfer Agent will be
able to facilitate a conversion of Services on such prior date. In
connection with the foregoing, should Services be converted to a successor
service provider, or if the Customer is liquidated or its assets merged or
purchased or the like with another entity which does not utilize the
services of the Transfer Agent, Transfer Agent shall be entitled to
receive all reasonable and demonstrable out-of-pocket expenses or costs
associated with the conversion of the Services. Section 16.2 shall not
apply if the Transfer Agent is terminated for cause under Section 16.4(a)
of this Agreement.
16.3 Expiration of Term. After the expiration of the
Initial Term or Renewal Term whichever currently in effect, should either
party exercise its right to terminate, all reasonable out-of-pocket
expenses or costs associated with the movement of records and material
will be borne by the Customer.
16.4 Termination.
This Agreement may be terminated in accordance with the following:
(a) at any time by any party upon a material breach of a
representation, covenant or term of this Agreement by any
other unaffiliated party which is not cured within a period
not to exceed thirty (30) days after the date of written
notice thereof by one of the other parties; and
(b) at any time by any party, in the event that during the
term of this Agreement, a bankruptcy or insolvency proceeding
is filed by or against any party or a trustee or receiver is
appointed for any substantial part of any party's property
(and in a case of involuntary bankruptcy, insolvency or
receivership proceeding, there is entered an order for relief,
or order appointing a receiver or some similar order or decree
and the party does not succeed in having such order lifted or
stayed within sixty (60) days from the date of its entry), or
any party makes an assignment of all or substantially all of
its property for the benefit of creditors or ceases to
conduct its operations in the normal course or business.
16.5 Records. Upon receipt of written notice of termination, the
parties will use
commercially practicable efforts to effect an orderly termination of
this Agreement. Without limiting the foregoing, Transfer Agent will
deliver promptly to Customer, in machine readable form on media as
reasonably requested by Customer, all Shareholder and other records,
files and data supplied to or compiled by Transfer Agent on behalf of
Customer.
17. Assignment.
17.1 Affiliates. The Transfer Agent may, without further consent
of the Customer assign its rights and obligations hereunto to any
affiliated transfer agent registered under Section 17A(c)(2) of the
Exchange Act.
17.2 Sub-contractors. Transfer Agent may, without further consent
on the part of Customer, subcontract with other subcontractors for
telephone and mailing services as may be required from time to time;
provided, however, that the Transfer Agent shall be as fully
responsible to the Customer for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
18. Unaffiliated Third Parties.
Nothing herein shall impose any duty upon the Transfer Agent in
connection with or make the Transfer Agent liable for the actions or
omissions to act of unaffiliated third parties such as, by way of example
and not limitation, airborne services, the U.S. mails and
telecommunication companies, provided, if the Transfer Agent selected such
company, the Transfer Agent shall have exercised due care in selecting the
same.
19. Miscellaneous.
19.1 Notices.
Any notice or communication by the Transfer Agent or the Customer to
the other is duly given if in writing and delivered in person or mailed by
first class mail, postage prepaid, telex, telecopier or overnight air
courier guaranteeing next day delivery, to the other's address:
If to the Customer:
Federated Investors, Inc.
1001 Liberty Avenue
Pittsburgh, PA 15222
Attn: General Counsel
(412) 288-1567
If to the Transfer Agent:
EquiServe Trust Company, N.A.
c/o EquiServe, Inc.
150 Royall Street
Canton, MA 02021
Telecopy No.: (781) 575-4188
Attn: General Counsel
The Transfer Agent and the Customer may, by notice to the
other, designate additional or different addresses for subsequent notices
or communications.
19.2 Successors.
All the covenants and provisions of this agreement by or for the
benefit of the Customer or the Transfer Agent shall bind and inure to the
benefit of their respective successors and assigns hereunder.
19.3 Amendments.
This Agreement may be amended or modified by a written amendment
executed by the parties hereto and, to the extent required, authorized or
approved by a resolution of the Board of Directors of the Customer.
19.4 Severability.
If
any term, provision, covenant or restriction of this Agreement is held by
a court of competent jurisdiction or other authority to be invalid, void
or unenforceable, the remainder of the terms, provision, covenants and
restrictions of this Agreement shall remain in full force and effect and
shall in no way be affected, impaired or invalidated.
19.5 Governing Law.
This Agreement shall be governed by the laws of The Commonwealth of
Massachusetts .
19.6 Force Majeure.
Notwithstanding anything to the contrary contained herein, Transfer
Agent shall not be liable for any delays or failures in performance
resulting from acts beyond its reasonable control including, without
limitation, acts of God, terrorist acts, shortage of supply, breakdowns or
malfunctions, interruptions or malfunction of computer facilities, or loss
of data due to power failures or mechanical difficulties with information
storage or retrieval systems, labor difficulties, war, or civil unrest.
19.7 Descriptive Headings.
Descriptive headings of the several sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning
or construction of any of the provisions hereof.
19.8 Third Party Beneficiaries.
The provisions of this Agreement are intended to benefit only the Transfer
Agent, the Customer and their respective permitted successors and
assigns. No rights shall be granted to any other person by virtue of this
agreement, and there are no third party beneficiaries hereof.
19.9 Survival.
All provisions regarding indemnification, warranty, liability
and limits thereon, and confidentiality and protection of proprietary
rights and trade secrets shall survive the termination of this Agreement.
19.10 Priorities.
In the event of any conflict, discrepancy, or ambiguity
between the terms and conditions contained in this Agreement and any
schedules or attachments hereto, the terms and conditions contained in
this Agreement shall take precedence.
19.11 Merger of Agreement.
This agreement constitutes the entire agreement between the parties hereto
and supersedes any prior agreement with respect to the subject matter
hereof, whether oral or written.
19.12 Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, each of the parties hereto has
caused this Agreement to be executed by one of its officers thereunto duly
authorized, all as of the date first written above.
Federated Premier Municipal Income
Fund
Federated Premier
Intermediate Municipal Income Fund
By:_____________________
Name:___________________
Title:___________________
EquiServe, Inc. EquiServe Trust Company,
N.A.
By:_____________________ By:_____________________
Name:__________________ Name:___________________
Title:___________________ Title:___________________
Exhibit (l) under Form N-2
December 19, 2002
Federated Premier Municipal Income Fund
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237
Ladies and Gentlemen:
We have acted as special counsel for Federated Premier Municipal
Income Fund, a Delaware statutory trust (the "Fund"), in connection with
the registration under the Securities Act of 1933 (the "Act") of certain
of its common shares of beneficial interest (the "Shares") in registration
statement no. 333-100605 on Form N-2 as amended by pre-effective amendment
no. 1, pre-effective amendment no. 2, pre-effective amendment no. 3 and as
it is proposed to be amended by pre-effective amendment no. 4 and as may
be amended by a registration statement filed pursuant to and in compliance
with Rule 462(b) of the General Rules and Regulations promulgated pursuant
to the Act (as amended and as proposed to be amended, the "Registration
Statement").
In this connection we have examined originals, or copies
certified or otherwise identified to our satisfaction, of such documents,
corporate and other records, certificates and other papers as we deemed it
necessary to examine for the purpose of this opinion, including the
amended and restated agreement and declaration of trust (the "Trust
Agreement") and by-laws of the Fund, actions of the board of trustees of
the Fund authorizing the issuance of shares of the Fund and the
Registration Statement.
We assume that, upon sale of the Shares, the Fund will receive
the authorized consideration therefore, which will at least equal the net
asset value of the Shares.
Based upon the foregoing, we are of the opinion that the Fund is
authorized to issue the Shares, and that, when the Shares are issued and
sold after the Registration Statement has been declared effective and the
authorized consideration therefor is received by the Fund, they will be
validly issued, fully paid and nonassessable by the Fund.
We consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not admit that we
are in the category of persons whose consent is required under section 7
of the Act.
Very truly yours,
/s/ Dickstein Shapiro Morin & Oshinsky
LLP
MGM/klh
Exhibit (n) under Form N-2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the caption "Independent
Auditors" and "Experts" in the Statement of Additional Information
included in Pre-Effective Amendment Number 4 to the Registration Statement
(Form N-2, 333-100605), and to the inclusion of our report dated December
16, 2002 on the financial statements of the Federated Premier Municipal
Income Fund as of December 16, 2002.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 16, 2002
Exhibit (p) under Form N-2
FEDERATED PREMIER MUNICIPAL INCOME FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
DECEMBER 19, 2002
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Dear Sir or Madam:
Federated Premier Municipal Income Fund (the "Fund") hereby accepts
your offer to purchase 6,981 shares at a price of $14.325 per share for an
aggregage purchase price of $100,003.00. This agreement is subject to the
understanding that you have no present intention of selling or redeeming
the shares so acquired.
Very truly yours,
Federated Premier
Municipal Income Fund
By:________________________
Accepted:
Federated Investment Management Company
By:________________________
PART C. OTHER INFORMATION.
Item 24. Exhibits:
(a) Form of Declaration of Trust of the Registrant; (1)
(i) Conformed copy of Certificate of Trust of the Registrant; (2)
(ii) Copy of Amended and Restated Declaration of Trust of the Registrant;
(3)
(iii) Conformed copy of Amended and Restated Certificate of Trust of the
Registrant; +
(b) Copy of By-Laws of the Registrant; (1)
(i) Copy of Amended and Restated By-Laws of the
Registrant; (3)
(c) Not applicable;
(d) Form of Stock Certificate of the Registrant; (3)
(e) Copy of Registrant's dividend reinvestment plan; (3)
(f) Not applicable;
(g) Conformed copy of Investment Management Agreement of
the Registrant; (3)
____________________________________________________________
+ All exhibits are being filed electronically.
1. Response is incorporated to Registrant's Initial Registration
Statement filed on Form N-2 on October 17, 2002 (File Nos. 333-100605 and
811-21235).
2. Response is incorporated to Registrant's Pre-Effective Amendment No.
1 to its Registration Statement filed on Form N-2 on November 25, 2002
(File Nos. 333-100605 and 811-21235).
3. Response is incorporated to Registrant's Pre-Effective Amendment No. 3 to
its Registration Statement filed on Form N-2 on December 17, 2002 (File
Nos. 333-100605 and 811-21235).
(h) Conformed Copy of Master Agreement Among Underwriters; (3)
(i)Form of Purchase Agreement; (3)
(ii)Form of Standard Dealer Agreement of Merrill
Lynch and Co.; (3)
(iii)Form of Additional Compensation Agreement; (3)
(i) Not applicable;
(j) Conformed copy of custodian agreement; (3)
(i)Copy of Global Custody Fee Schedule; (3)
(ii) Copy of Addendum to Global Custody Fee
Schedule; (3)
(iii) Copy of Portfolio Recordkeeping Fee Schedule; (3)
(iv) Copy of Domestic Custody Fee Schedule; (3)
(k) Conformed copy of Amended and Restated Agreement for Fund
Accounting Services, Administrative Services,
Transfer Agency Services and Custody Services
Procurement; (3)
(i)Form of Indemnification Agreement between
the Registrant and the Adviser; (3)
(ii)Form of Transfer Agency Agreement of the
Registrant; +
(l) Conformed copy of Opinion and Consent of Counsel as
to legality of shares being registered; +
(m) Not applicable;
(n) Conformed copy of Consent of Independent Auditors;
+
(o) Not applicable;
(p) Form of Letter Agreement between the Registrant and the
Adviser to Purchase Shares; +
(q) Not applicable;
(r) The Registrant hereby incorporates the conformed copy of the Code of
Ethics for Access Persons from Item 23(p) of the
Federated Managed Allocation Portfolios Registration
Statement on Form N-1A filed with the Commission on
January 25, 2001. (File Nos. 33-51247 and 811-7129).
(s) Conformed copy of the Power of Attorney of the Registrant. (3)
Item 25. Marketing Arrangements
Reference is made to the Master Agreement Among Underwriters filed
as exhibit (h) to the registration statement on December 17, 2002.
Item 26. Other Expenses of Issuance and Distribution
*Estimated expenses:
Registration Fee: $5,520.00
NYSE Listing Fee: $81,100.00
Printing: $28,000.00
Engraving and Printing Certificates: $16,100.00
Legal fees and expenses: $108,500.00
NASD fee: $30,500.00
*All amounts above are estimated figures.
________________________________________________________
+ All exhibits are being filed electronically.
3. Response is incorporated to Registrant's Pre-Effective Amendment No. 3 to
its Registration Statement filed on Form N-2 on December 17, 2002 (File
Nos. 333-100605 and 811-21235).
Item 27. Persons Controlled by or Under Common Control with the Fund:
None
Item 28. Number of Holders of Securities
Title of Class Number of Record Holders
Common Shares 1
Item 29. Indemnification:
Indemnification is provided to Officers and Trustees of the
Registrant pursuant to Article V of Registrant's Declaration of
Trust. The Investment Management Agreement between the Registrant
and Federated Investment Management Company ("Adviser") provides
that, in the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the obligations or duties
under the Investment Management Agreement on the part of Adviser,
Adviser shall not be liable to the Registrant or to any shareholder
for any act or omission in the course of or connected in any way
with rendering services or for any losses that may be sustained in
the purchase, holding, or sale of any security. Registrant's
Trustees and Officers are covered by an Investment Trust Errors and
Omissions Policy. The Purchase Agreement between the Registrant,
the Adviser and the Underwriters named therein provides for
indemnification of the Underwriters by the Registrant and the
Adviser and of the Registrant and the Adviser and their officers
and trustees for certain liabilities and also provides for
contribution under certain circumstances. The Indemnification
Agreement between the Registrant and the Adviser provides for
indemnification of the Registrant and its officers and trustees for
certain liabilities.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, Officers, and
controlling persons of the Registrant by the Registrant pursuant to
the Declaration of Trust or otherwise, the Registrant is aware that
in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act
and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by Trustees), Officers,
or controlling persons of the Registrant in connection with the
successful defense of any act, suit, or proceeding) is asserted by
such Trustees, Officers, or controlling persons in connection with
the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issues.
Insofar as indemnification for liabilities may be permitted
pursuant to Section 17 of the Investment Company Act of 1940 for
Trustees, Officers, and controlling persons of the Registrant by
the Registrant pursuant to the Declaration of Trust or otherwise,
the Registrant is aware of the position of the Securities and
Exchange Commission as set forth in Investment Company Act Release
No. IC-11330. Therefore, the Registrant undertakes that in
addition to complying with the applicable provisions of the
Declaration of Trust or otherwise, in the absence of a final
decision on the merits by a court or other body before which the
proceeding was brought, that an indemnification payment will not be
made unless in the absence of such a decision, a reasonable
determination based upon factual review has been made (i) by a
majority vote of a quorum of non-party Trustees who are not
interested persons of the Registrant or (ii) by independent legal
counsel in a written opinion that the indemnitee was not liable for
an act of willful misfeasance, bad faith, gross negligence, or
reckless disregard of duties. The Registrant further undertakes
that advancement of expenses incurred in the defense of a
proceeding (upon undertaking for repayment unless it is ultimately
determined that indemnification is appropriate) against an Officer,
Trustee or controlling person of the Registrant will not be made
absent the fulfillment of at least one of the following
conditions: (i) the indemnitee provides security for his
undertaking; (ii) the Registrant is insured against losses arising
by reason of any lawful advances; or (iii) a majority of a quorum
of disinterested non-party Trustees or independent legal counsel in
a written opinion makes a factual determination that there is
reason to believe the indemnitee will be entitled to
indemnification.
Item 30. Business and Other Connections of Investment Adviser:
For a description of the other business of the investment
adviser, see the section entitled "Management of the Fund" in
Part A. The affiliations with the Registrant of four of the
Trustees and one of the Officers of the investment adviser are
included in Part B of this Registration Statement under
"Management of the Fund." The remaining Trustees of the
investment adviser and, in parentheses, their principal
occupations are: Thomas R. Donahue, (Chief Financial Officer,
Federated Investors, Inc.), 1001 Liberty Avenue, Pittsburgh, PA,
15222-3779 and Mark D. Olson (a principal of the firm, Mark D.
Olson & Company, L.L.C. and Partner, Wilson, Halbrook & Bayard,
P.A.), 800 Delaware Avenue, P.O. Box 2305, Wilmington, DE
19899-2305.
The remaining Officers of the investment adviser are:
Vice Chairman: ...... J. Thomas Madden
President/ Chief Executive
Officer: ...... Keith M. Schappert
Executive Vice Presidents:.... William D. Dawson, III
...... Stephen F. Auth
Senior Vice Presidents: ...... Joseph M. Balestrino
...... David A. Briggs
...... Jonathan C. Conley
...... Christopher F. Corapi
...... Deborah A. Cunningham
...... Michael P. Donnelly
...... Linda A. Duessel
...... Mark E. Durbiano
...... James E. Grefenstette
...... Robert M. Kowit
...... Jeffrey A. Kozemchak
...... Richard J. Lazarchic
...... Susan M. Nason
...... Mary Jo Ochson
...... Robert J. Ostrowski
...... Frank Semack
...... Richard Tito
...... Peter Vutz
Vice Presidents: ...... Todd A. Abraham
...... J. Scott Albrecht
Randall S. Bauer
...... Nancy J.Belz
...... G. Andrew Bonnewell
...... David Burns
...... Robert E. Cauley
...... Regina Chi
...... Ross M. Cohen
...... Fred B. Crutchfield
...... Lee R. Cunningham, II
...... Alexandre de Bethmann
Anthony Delserone, Jr.
...... Donald T. Ellenberger
...... Eamonn G. Folan
...... Kathleen M. Foody-Malus
...... Thomas M. Franks
...... John T. Gentry
...... David P. Gilmore
...... Marc Halperin
...... John W. Harris
...... Patricia L. Heagy
...... Susan R. Hill
...... Nikola A. Ivanov
...... William R. Jamison
...... Constantine J. Kartsonas
...... Nathan H. Kehm
...... John C. Kerber
...... Steven Lehman
...... Marian R. Marinack
...... Natalie F. Metz
...... Thomas J. Mitchell
...... Joseph M. Natoli
...... John L. Nichol
...... Mary Kay Pavuk
...... Jeffrey A. Petro
...... John P. Quartarolo
...... Ihab L. Salib
...... Roberto Sanchez-Dahl, Sr.
Aash M. Shah
...... John Sidawi
...... Michael W. Sirianni, Jr.
...... Christopher Smith
...... Timothy G. Trebilcock
...... Leonardo A. Vila
...... Paige M. Wilhelm
...... Richard M. Winkowski, Jr.
...... Lori A. Wolff
...... George B. Wright
Assistant Vice Presidents:.... Catherine A. Arendas
...... Angela A. Auchey
...... Nicholas P. Besh
...... Hanan Callas
...... David W. Cook
...... James R. Crea, Jr.
...... Karol M. Crummie
...... David Dao
...... Richard J. Gallo
...... James Grant
...... Anthony Han
...... Kathryn P. Heagy
...... Carol B. Kayworth
...... J. Andrew Kirschler
...... Robert P. Kozlowski
...... Ted T. Lietz, Sr.
...... Monica Lugani
...... Tracey L. Lusk
...... Theresa K. Miller
...... Bob Nolte
...... Rae Ann Rice
...... Jennifer G. Setzenfand
...... Kyle D. Stewart
...... Mary Ellen Tesla
...... Michael R. Tucker
Steven J. Wagner
Mark Weiss
Secretary: ...... G. Andrew Bonnewell
Treasurer: ...... Thomas R. Donahue
Assistant Secretaries: ...... Jay S. Neuman
...... Leslie K. Ross
Assistant Treasurer: ...... Denis McAuley, III
The business address of each of the Officers of the investment adviser is
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779. These individuals are also officers of a majority of the
investment advisers to the investment companies in the Federated Fund
Complex described in Part B of this Registration Statement.
Item 31. Location of Accounts and Records:
All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of
the following locations:
Registrant Reed Smith LLP
Investment and Asset
Management Group (IAMG)
Federated Investors Tower
12th Floor
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(Notices should be sent to the
Agent for Service at above
address)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
EquiServe Trust Co., N.A. P.O. Box 43011
("Transfer Agent and Dividend Providence, RI 02940-3011
Disbursing Agent")
Federated Services Federated Investors Tower
Company 1001 Liberty Avenue
("Administrator") Pittsburgh, PA 15222-3779
(((
Federated Investment Federated Investors Tower
Management Company 1001 Liberty Avenue
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and P.O. Box 8600
Trust Company Boston, MA 02266-8600
("Custodian")
Item 32. Management Services: Not applicable.
Item 33. Undertakings:
The Registrant undertakes to suspend the offering of shares
until the prospectus is amended if (1) subsequent to the
effective date of its registration statement, the net asset
value declines more than ten percent from its net asset value as
of the effective date of the registration statement.
The Registrant undertakes that:
(a) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(b) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two
business days of receipt of a written or oral request, the
Registrant's Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED PREMIER
MUNICIPAL INCOME FUND, has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the
City of Pittsburgh and Commonwealth of Pennsylvania, on the 19th day of
December, 2002.
FEDERATED PREMIER MUNICIPAL INCOME FUND
BY: /s/ Leslie K. Ross
Leslie K. Ross, Assistant Secretary
Attorney in Fact for John F. Donahue
December 19, 2002
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Leslie K. Ross Attorney In Fact December 19, 2002
Leslie K. Ross For the Persons
ASSISTANT SECRETARY Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
J. Christopher Donahue* President and Trustee
(Principal Executive Officer)
Richard J. Thomas* Treasurer
(Principal Financial Officer)
William D. Dawson, III* Chief Investment Officer
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
Nicholas P. Constantakis* Trustee
John F. Cunningham* Trustee
Lawrence D. Ellis, M.D.* Trustee
Peter E. Madden* Trustee
Charles F. Mansfield, Jr.* Trustee
John E. Murray, Jr.* Trustee
Marjorie P. Smuts* Trustee
John S. Walsh* Trustee
*by power of attorney