As filed with the Securities and Exchange Commission on December 19, 2002
1933 Act File No. _________
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. ....................
Post-Effective Amendment No. ....................
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 5 ..................................... 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
Preferred 1,600 shares $25,000/share $40,000,000
Shares
Amount of Registration Fee
$3,680
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
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 [XXX], 2003
[Federated Logo]
PROSPECTUS
$[XXX,XXX,XXX]
Federated Premier Municipal Income Fund
Municipal Auction Rate Cumulative Preferred Shares
("Preferred Shares")
[X,XXX Shares, Series X
X,XXX Shares, Series X
X,XXX Shares, Series X
X,XXX Shares, Series X
X,XXX Shares, Series X]
Liquidation Preference $25,000 per Share
---------------------
Investment Objective. Federated Premier Municipal Income Fund (the "Fund")
is a recently organized, diversified, closed-end management investment company.
The Fund's investment objective is to provide current income exempt from federal
income tax, 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. 53
Investing in the Preferred Shares involves certain risks. See "Risks"
beginning on page [X] of this prospectus. The minimum purchase amount of the
Preferred Shares is $25,000.
The Securities and Exchange Commission ("SEC") has not approved or
disapproved these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
Per Share Total
Public offering price $25,000 $[XXX]
Sales load $[XXX] $[XXX]
Proceeds to the Fund $[XXX] $[XXX]
(before expenses) (1)
(1) Not including offering expenses payable by the Fund estimated to be
$[XXX]. The Fund and its investment adviser, Federated Investment Management
Company, have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended.
The underwriters are offering the Preferred Shares subject to various
conditions. The underwriters expect to deliver the Preferred Shares to
purchasers, in book-entry form, through the facilities of The Depository Trust
Company on or about [Month, Day, 2003].
[NAMES OF UNDERWRITERS]
The date of this prospectus is , 2003
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in Preferred Shares and retain it
for future reference. A Statement of Additional Information, dated [Month, Day],
2003, containing additional information about the Fund, has been filed with the
Securities and Exchange Commission ("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 [XX] 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 Preferred Shares are not deposits or obligations of any bank, are not
insured 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.
The Fund is offering [X,XXX] shares of Series [X] municipal auction rate
cumulative preferred shares, [X,XXX] shares of Series [X] municipal auction rate
cumulative preferred shares, [X,XXX] shares of Series [X] municipal auction rate
cumulative preferred shares, [X,XXX] shares of Series [X] municipal auction rate
cumulative preferred shares and [X,XXX] shares of Series [X] municipal auction
rate cumulative preferred shares (collectively, the "Preferred Shares"). The
Preferred Shares have a liquidation preference of $25,000 per Preferred Share,
plus any accumulated, unpaid dividends. The Preferred Shares also have priority
over the Fund's common shares ("Common Shares") as to distribution of assets as
described in this prospectus. It is a condition of closing this offering that
the Preferred Shares be offered with a rating of "AAA" from Fitch, Inc.
("Fitch") and "Aaa" from Moody's Investors Service, Inc. ("Moody's").
The dividend rate for the initial dividend rate period will be [X.X]% for
Series [X], [X.X]% for Series [X], [X.X]% for Series [X], [X.X]% for Series [X],
and [X.X]% for Series [X]. The initial rate period is from the date of issuance
through [Month, Day], 2003 for Series [X], [Month, Day], 2003 for Series [X],
[Month, Day], 2003 for Series [X], [Month, Day], 2003 for Series [X], and
[Month, Day], 2003 for Series [X]. For subsequent rate periods, Preferred Shares
pay dividends based on a rate set at auction, usually held [weekly]. Prospective
purchasers should carefully review the auction procedures described in this
prospectus and should note: (1) a buy order (called a "bid order") or sell order
is a commitment to buy or sell Preferred Shares based on the results of an
auction; (2) auctions will be conducted by telephone; and (3) purchases and
sales will be settled on the next business day after the auction.
The Preferred Shares are redeemable, in whole or in part, at the option of
the Fund on the second business day prior to any date dividends are paid on the
Preferred Shares, and will be subject to mandatory redemption in certain
circumstances at a redemption price of $25,000 per Preferred Share, plus
accumulated but unpaid dividends to the date of the redemption, plus a premium
in certain circumstances.
Preferred Shares are not listed on an exchange. You may only buy or sell
Preferred Shares through an order placed at an auction with or through (1) a
broker-dealer that has entered into an agreement with the auction agent and the
Fund; or (2) such other person as the Fund permits. These broker-dealers are not
required to maintain this market, and it may not provide you with liquidity.
Dividends on Preferred Shares, to the extent payable from tax exempt income
earned on the Fund's investments, will be exempt from federal income tax
(including AMT) in the hands of owners of such shares ("Preferred
Shareholders"). The Fund is required to allocate net capital gains and other
taxable income, if any, proportionately between Common Shares and Preferred
Shares, based on the percentage of total dividends distributed to each class for
that year. The Fund may at its election give notice of the amount of any income
subject to federal income tax to be included in a dividend on a Preferred Share
in advance of the related auction. If the Fund does not give such advance
notice, it generally will be required to pay additional amounts to Preferred
Shareholders in order to adjust for their receipt of income subject to federal
income tax.
You should rely only on the information contained or incorporated by
reference in this prospectus. The Fund has not authorized anyone to provide you
with different information. The Fund is not making an offer of these securities
in any state where the offer is not permitted. You should not assume that the
information provided by this prospectus is accurate as of any date other than
the date on the front of this prospectus.
TABLE OF CONTENTS
Prospectus Summary.....................................................2
Financial Highlights (Unaudited).......................................2
The Fund...............................................................2
Use Of Proceeds........................................................2
Capitalization (Unaudited).............................................2
Portfolio Composition..................................................2
The Fund's Investments.................................................2
Risks..................................................................2
How The Fund Manages Risk..............................................2
Management Of The Fund.................................................2
Description Of Preferred Shares........................................2
The Auction............................................................2
Description Of Common Shares...........................................2
Certain Provisions In The Agreement And Declaration Of Trust...........2
Repurchase Of Common Shares............................................2
Tax Matters............................................................2
Underwriting...........................................................2
Custodian And Transfer Agent; Auction Agent............................2
Legal Opinions.........................................................2
Available Information..................................................2
Table Of Contents For The Statement Of Additional Information..........2
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in Preferred Shares. You should read
the more detailed information contained in this prospectus, the Statement of
Additional Information and the Fund's Statement of Preferences of Preferred
Shares (the "Statement") attached as Appendix A to the Statement of Additional
Information. Capitalized terms used but not defined in this prospectus shall
have the meanings given to such terms in the Statement.
THE Federated Premier Municipal Income
FUND........................................ Fund is a recently organized,
diversified, closed-end, management
investment company. The Fund's
Common Shares are traded on the New
York Stock Exchange under the symbol
"FMN". See "Description of Common
Shares." As of [Month, Day, Year],
the Fund had [XX,XXX,XXX] Common
Shares outstanding and net assets of
$[XXX,XXX,XXX].
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 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. Investment grade
tax exempt securities are those
rated within the four highest
categories by a nationally
recognized statistical rating
organization ("NRSRO"). See "The
Fund's Investments-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
"The Fund's Investments-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."
INVESTMENT ADVISER................... Federated Investment Management
Company will be the Fund's
investment adviser (the "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 the Preferred
Shares, any other preferred shares
that may be issued in the future 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 or any other
preferred shares that may be issued
in the future 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."
THE The Fund is offering [X,XXX] shares
OFFERING................................. of Series [X] Preferred Shares,
[X,XXX] shares of Series [X]
Preferred Shares, [X,XXX] shares of
Series [X] Preferred Shares, [X,XXX]
shares of Series [X] Preferred
Shares, and [X,XXX] shares of Series
[X] Preferred Shares each at a
purchase price of $25,000 per
Preferred Share. Preferred Shares
are being offered by the
underwriters listed under
"Underwriting."
RISK FACTORS SUMMARY............. Risk is inherent in all investing.
Therefore, before investing in the
Preferred Shares you should consider
certain risks carefully. The
primary risks of investing in the
Preferred Shares are:
- if an auction fails you may not
be able to sell some or all of your
Preferred Shares;
- because of the nature of the
market for Preferred Shares, you may
receive less than the price you paid
for your Preferred Shares if you
sell them outside of the auction,
especially when market interest
rates are rising;
- an NRSRO could downgrade the
rating assigned to the Preferred
Shares, which could affect liquidity;
- the Fund may be forced to redeem
your Preferred Shares to meet
regulatory or NRSRO requirements or
may voluntarily redeem your
Preferred Shares in certain
circumstances;
- in certain circumstances, the
Fund may not earn sufficient income
from its investments to pay
dividends;
- if interest rates rise, the value
of the Fund's investment portfolio
will decline, reducing the asset
coverage for the Preferred Shares;
- if an issuer of a tax exempt
security in which the Fund invests
experiences financial difficulty or
defaults, there may be a negative
impact on the income and net asset
value ("NAV") of the Fund's
portfolio; and
- the Fund may invest up to 20% of
its total assets in securities that
are below investment grade quality
(but not lower than B) which are
regarded as having predominately
speculative characteristics with
respect to the issuer's capacity to
pay interest and principal.
For additional discussion of the
risks associated with investing in
the Preferred Shares and the Fund,
see "Risks" below.
TRADING MARKET......................... Preferred Shares are not listed on
an exchange. Instead, you may buy or
sell the Preferred Shares at an
auction that normally is held
[weekly], by submitting orders to a
broker-dealer that has entered into
an agreement with the auction agent
and the Fund (a "Broker-Dealer"), or
to a broker-dealer that has entered
into a separate agreement with a
Broker-Dealer. In addition to the
auctions, Broker-Dealers and other
broker dealers may maintain a
secondary trading market in
Preferred Shares outside of
auctions, but may discontinue this
activity at any time. There is no
assurance that a secondary market
will provide Preferred Shareholders
with liquidity. You may transfer
Preferred Shares outside of auctions
only to or through a Broker-Dealer
or a broker-dealer that has entered
into a separate agreement with a
Broker-Dealer. The table below shows
the first auction date for each
series of Preferred Shares and the
day on which each subsequent auction
will normally be held for each
series of Preferred Shares. The
first auction date for each series
of Preferred Shares will be the
business day before the dividend
payment date for the initial rate
period for that series of Preferred
Shares. The start date for
subsequent rate periods will
normally be the business day
following the auction date unless
the then-current rate period is a
special rate period or the first day
of the subsequent rate period is not
a business day.
Series First Auction Date*
Subsequent
Auction Day
[X] [Month Day] [Day of Week]
[X] [Month Day] [Day of Week]
[X] [Month Day] [Day of Week]
[X] [Month Day] [Day of Week]
[X] [Month Day] [Day of Week]
* All Dates are 2003.
DIVIDENDS AND RATE PERIODS..... The table below shows the dividend
rate for the initial rate period on
the Preferred Shares offered in this
prospectus. For subsequent rate
periods, Preferred Shares will pay
dividends based on a rate set at
auctions, normally held [weekly]. In
most instances, dividends are also
paid [weekly], on the first business
day following the end of the rate
period. The rate set at auction will
not exceed the maximum applicable
rate. See "Description of Preferred
Shares-Dividends and Rate Periods."
The table below also shows the date
from which dividends on the
Preferred Shares will accumulate at
the initial rate, the dividend
payment date for the initial rate
period and the day on which
dividends will normally be paid. If
the day on which dividends otherwise
would be paid is not a business day,
then dividends will be paid on the
first business day that falls after
that day.
Finally, the table below shows the
number of days of the initial rate
period for the Preferred Shares.
Subsequent rate periods generally
will be [seven] days. A requested
special rate period will not be
effective unless sufficient clearing
bids were made in the auction
immediately preceding the special
rate period. In addition, full
cumulative dividends, any amounts
due with respect to mandatory
redemptions and any additional
dividends payable prior to such date
must be paid in full. The Fund must
also have received confirmation from
Moody's and Fitch or any substitute
NRSRO that the proposed special rate
period will not adversely affect
such NRSRO's then-current rating on
the Preferred Shares, and the lead
Broker-Dealer designated by the
Fund, [name], must not have objected
to declaration of a special rate
period. The dividend payment date
for special rate periods of more
than [seven] days will be set out in
the notice designating a special
rate period. See "Description of
Preferred Shares-Dividends and Rate
Periods-Designation of Special Rate
Periods."
Date of Dividend
Initial Accumulation Payment Subsequent Number of
Dividend at Initial Date for Dividend Days of
Rate Rate* Initial Payment Day Initial
Rate Rate Period
Period*
[X] [Rate] [Month Day] [Month Day] [Day of [X]
Week]
[X] [Rate] [Month Day] [Month Day] [Day of [X]
Week]
[X] [Rate] [Month Day] [Month Day] [Day of [X]
Week]
[X] [Rate] [Month Day] [Month Day] [Day of [X]
Week]
[X] [Rate] [Month Day] [Month Day] [Day of [X]
Week]
*All dates are 2003.
SPECIAL TAX
CONSIDERATIONS......................... The Fund invests primarily in
securities that pay interest exempt
from federal income tax, including
AMT. Consequently, the 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.
Taxable income or gain earned by the
Fund will be allocated
proportionately to Preferred
Shareholders and Common
Shareholders, based on the
percentage of total dividends paid
to each class for that year.
Accordingly, certain specified
Preferred Shares dividends may be
subject to income tax on income or
gains attributed to the Fund. The
Fund may at its election give notice
before any applicable auction of the
amount of any taxable income and
gain to be distributed for the
period relating to that auction. If
the Fund does not provide such
notice, the Fund generally will make
shareholders whole for taxes owing
on dividends paid to Preferred
Shareholders that include taxable
income and gain. See "Tax Matters"
and "Description of Preferred
Shares-Dividends and Rate Periods."
RATINGS.............................. Shares of each series of Preferred
Shares will be issued with a rating
of "Aaa" from Moody's and "AAA" from
Fitch. These ratings are an
assessment of the capacity and
willingness of an issuer to pay
preferred share obligations. The
ratings are not a recommendation to
purchase, hold or sell those shares
inasmuch as the rating does not
comment as to market price or
suitability for a particular
investor. The ratings described
above also do not address the
likelihood that an owner of
Preferred Shares will be able to
sell such shares in an auction or
otherwise. The ratings are based on
current information furnished to
Moody's and Fitch by the Fund and
the Adviser and information obtained
from other sources. The ratings may
be changed, suspended or withdrawn
in the NRSRO's discretion as a
result of changes in, or the
unavailability of, such information.
In order to maintain this rating,
the Fund must own portfolio
securities of a sufficient value and
with adequate credit quality to meet
the NRSRO's guidelines. See
"Description of Preferred Shares
NRSRO Guidelines and Asset Coverage."
REDEMPTION....................... The Fund may be required to redeem
Preferred Shares if, for example,
the Fund does not meet an asset
coverage ratio required by law or to
correct a failure to meet an NRSRO
guideline in a timely manner. The
Fund voluntarily may redeem
Preferred Shares under certain
conditions. See "Description of
Preferred Shares-Redemption" and
"Description of Preferred Shares
NRSRO Guidelines and Asset Coverage."
LIQUIDATION PREFERENCE............ The liquidation preference for
shares of each series of Preferred
Shares will be $25,000 per Preferred
Share plus accumulated but unpaid
dividends. See "Description of
Preferred Shares-Liquidation."
VOTING RIGHTS.................... The holders of preferred shares,
including Preferred Shares, voting
as a separate class, have the right
to elect at least two trustees of
the Fund at all times. Such holders
also have the right to elect a
majority of the trustees in the
event that two years' dividends on
the preferred shares are unpaid. In
each case, the remaining trustees
will be elected by holders of Common
Shares and preferred shares,
including Preferred Shares, voting
together as a single class. The
holders of preferred shares,
including Preferred Shares, will
vote as a separate class or classes
on certain other matters as required
under the Fund's Agreement and
Declaration of Trust, the Investment
Company Act of 1940 (the "Investment
Company Act") and Delaware law. See
"Description of Preferred
Shares-Voting Rights," and "Certain
Provisions in the Agreement and
Declaration of Trust."
FINANCIAL HIGHLIGHTS (Unaudited)
Information contained in the table below shows the unaudited operating
performance of the Fund from the commencement of the Fund's investment
operations on [Month Day, Year] through [Month Day, Year]. Since the Fund was
recently organized and commenced investment operations on [Month Day, Year], the
table covers less than [X] weeks of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments pending
investment in tax exempt securities that meet the Fund's investment objectives
and policies. Accordingly, the information presented may not provide a
meaningful picture of the Fund's future operating performance.
For the Period
[Month Day, Year] *
Through
[Month Day, Year]
Per Common Share Operating Performance:
Net asset value, beginning of period**.............. $ [X.XX]+
--------
Net investment income.................................. [X.XX]
Net unrealized gain on investments......................[X.XX]
--------
Net increase from investment operations.................[X.XX]
--------
Capital charge with respect to issuance of common shares..[(X.XX)]
--------
Net asset value, end of period**........................$ [X.XX]
========
Market value, end of period**.......................... $ [X.XX]
========
Total Investment Return++............................... [X.XX]%
========
Ratios To Average Net Assets Of Common Shareholders:
Expenses after fee waiver.................................. [X.XX]%#
Expenses before fee waiver................................ [X.XX]%#
Net investment income after fee waiver................. [X.XX]%#
Net investment income before fee waiver................[X.XX]%#
Supplemental Data:
Average net assets of Common Shareholders (000)........... $[XXX,XXX]
Portfolio turnover............................................ [X]%
Net assets of Common Shareholders, end of period (000).... $[XXX,XXX]
--------
* Commencement of investment operations.
** NAV and market value are published in Barron's on Saturday, The Wall Street
Journal on Monday and The New York Times on Sunday.
+ NAV immediately after the closing of the first public offering was $[XX.XX].
++ Total investment return is calculated assuming a purchase of Common Shares at
the current market price on the first day and a sale at the current market price
on the last day of the period reported. Total investment return does reflect
brokerage commissions. Total investment returns for less than a full year are
not annualized. Past performance is not a guarantee of future results.
# Annualized
The information above represents the unaudited operating performance for a
Common Share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Fund's Common Shares.
THE FUND
The Fund is a recently organized, diversified, closed-end, management
investment company registered under the Investment Company Act. The Fund was
organized as a Delaware statutory trust on October 16, 2002 pursuant to an
Agreement and Declaration of Trust governed by the laws of the Stare of
Delaware. On [Month Day, Year], the Fund issued an aggregate of [XX,XXX,XXX]
Common Shares of beneficial interest, par value $.01 per share, pursuant to the
initial public offering and commenced its investment operations. The Fund's
Common Shares are traded on the New York Stock Exchange under the symbol "FMN".
The Fund 's principal office is located at 5800 Corporate Drive, Pittsburgh, PA
15237-7000, and its telephone number is 1-800-341-7400.
The following provides information about the Fund's outstanding shares as
of [Month Day, Year]:
Amount held by
Amount the Fund or
Title of Class Authorized for its Account Amount
Outstanding
Common Unlimited 0 0
Preferred Unlimited 0 0
Series [X] [X] 0 0
Series [X] [X] 0 0
Series [X] [X] 0 0
Series [X] [X] 0 0
Series [X] [X] 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $[XXX,XXX,XXX]
after payment of the sales load and estimated offering costs. The Fund will
invest the net proceeds of the offering in accordance with the Fund 's
investment objective and policies as stated below. The Adviser currently
anticipates that the Fund will be able to invest substantially all of the net
proceeds in tax exempt securities that meet the Fund 's objective and policies
at or shortly (within six to eight weeks) 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.
CAPITALIZATION (Unaudited)
The following table sets forth the capitalization of the Fund as of [Month
Day, Year], and as adjusted to give effect to the issuance of the Preferred
Shares offered hereby.
Actual As Adjusted
------------ ---------------
Shareholder's Equity:
Preferred Shares, $.01 par value, $25,000 stated
value per share, at liquidation value; unlimited
shares authorized (no shares issued; [XX,XXX]
shares issued, as adjusted).................. $ -- $[XXX,XXX,XXX]
Common Shares, $.01 par value per share;
unlimited shares authorized, [XX,XXX,XXX]shares
outstanding*................................... [XX,XXX] [XX,XXX]
Paid-in surplus................................... [XXX,XXX,XXX] [XXX,XXX,XXX]
Balance of undistributed net investment income......[X,XXX,XXX] [X,XXX,XXX]
Accumulated net realized gain/loss from
investment transactions.......................... (--) (--)
Net unrealized appreciation/depreciation of
investments......................................([X,XXX,XXX]) ([X,XXX,XXX])
------------------------
Net assets..................................... [XXX,XXX,XXX] [XXX,XXX,XXX]
============= =============
--------
* None of these outstanding shares are held by or for the account of the Fund.
PORTFOLIO COMPOSITION
As of [Month Day, Year], approximately [XX.XX]% of the market value of the
Fund's portfolio was invested in long-term tax exempt securities and
approximately [X.XX]% of the market value of the Fund's portfolio was invested
in short-term tax exempt securities. The following table sets forth certain
information with respect to the composition of the Fund's investment portfolio
as of [Month Day, Year], based on the highest rating assigned.
Value
Credit Rating (000) Percent
AAA/Aaa* $[XXX,XXX] [XX.X]%
AA/Aa $[XXX,XXX] [XX.X]%
A/A $[XXX,XXX] [XX.X]%
BBB/Baa $[XX,XXX] [X.X]%
BB/Ba $[XX,XXX] [X.X]%
Unrated+ $[XX,XXX] [X.X]%
Short-Term $[XX,XXX] [X.X]%
Total $[XXX,XXX] [XXX.X]%
* Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government Securities to ensure the timely payment of principal
and interest. + Refers to securities that have not been rated by Moody's, Fitch
or Standard & Poor's ("S&P") but that have been assessed by the Adviser as being
of comparable credit quality to rated securities in which the Fund may invest.
See "The Fund's Investments-Investment Objective and Investment Policies."
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,
the Preferred Shares and any other preferred shares that may be issued in the
future voting together as a single class, and (2) the holders of a majority of
the outstanding Preferred Shares and any other preferred shares that may be
issued in the future 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 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 S&P, Moody's or
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 B 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. The Fund will invest primarily in bonds that pay interest exempt
from 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.
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 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 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. Preferred Shareholders therefore will 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 also may be leveraged and will therefore be subject to the same
leverage risks to which the Fund is subject. 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.
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in Preferred Shares.
Interest Rate Risk
Interest rate risk is the risk that tax exempt securities, and the Fund's
net assets, will decline in value because of changes in interest rates.
Generally, tax exempt securities will decrease in value when interest rates rise
and increase in value when interest rates decline. The Fund issues Preferred
Shares, which pay dividends based on short-term interest rates. The Fund then
uses the proceeds from the sale of Preferred Shares to buy tax exempt
securities, which pay interest based on long-term rates. Both long-term and
short-term interest rates may fluctuate. If short-term interest rates rise, the
Preferred Shares dividend rates may rise so that the amount of dividends paid to
Preferred Shareholders exceeds the income from the portfolio securities
purchased with the proceeds from the sale of Preferred Shares. Because income
from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the Preferred Shares offering) is
available to pay Preferred Share dividends, however, Preferred Share dividend
rates would need to greatly exceed the yield on the Fund's portfolio before the
Fund's ability to pay Preferred Share dividends would be impaired. If long-term
rates rise, the value of the Fund's investment portfolio will decline, reducing
the amount of assets serving as asset coverage for the Preferred Shares.
Auction Risk
The dividend rate for the Preferred Shares normally is set through an
auction process. In the auction, Preferred Shareholders may indicate the
dividend rate at which they would be willing to hold or sell their Preferred
Shares or purchase additional Preferred Shares. The auction also provides
liquidity for the sale of Preferred Shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers. You may not be able to
sell your Preferred Shares at an auction if the auction fails. Also, if you
place hold orders (orders to retain Preferred Shares) at an auction only at a
specified dividend rate, and that rate exceeds the rate set at the auction, you
will not retain your Preferred Shares. Finally, if you buy Preferred Shares or
elect to retain Preferred Shares without specifying a dividend rate below which
you would not wish to buy or continue to hold those Preferred Shares, you could
receive a lower rate of return on your Preferred Shares than the market rate.
See "Description of Preferred Shares" and "The Auction-Auction Procedures."
Secondary Market Risk
If you try to sell your Preferred Shares between auctions, you may not be
able to sell any or all of your Preferred Shares or you may not be able to sell
them for $25,000 per Preferred Share or $25,000 per Preferred Share plus
accumulated dividends. If the Fund has designated a special rate period (a rate
period of more than [seven] days), changes in interest rates could affect the
price you would receive if you sold your Preferred Shares in the secondary
market. You may transfer shares outside of auctions only to or through (1) a
broker-dealer that has entered into an agreement with the auction agent and the
Fund or (2) such other person as the Fund permits. The Fund does not anticipate
imposing significant restrictions on transfers to other persons. However, unless
any such other person has entered into a relationship with a broker-dealer that
has entered into a broker-dealer agreement with the auction agent, that person
will not be able to submit bids at auctions with respect to Preferred Shares.
Broker-dealers that maintain a secondary trading market for Preferred Shares are
not required to maintain this market, and the Fund is not required to redeem
Preferred Shares either if an auction or an attempted secondary market sale
fails because of a lack of buyers. Preferred Shares are not listed on a stock
exchange or the NASDAQ stock market. If you sell your Preferred Shares to a
broker-dealer between auctions, you may receive less than the price you paid for
them, especially if market interest rates have risen since the last auction.
Ratings and Asset Coverage Risk
It is expected that Moody's will assign a rating of "Aaa" to the Preferred
Shares and Fitch will assign a rating of "AAA" to the Preferred Shares. Such
ratings do not eliminate or necessarily mitigate the risks of investing in
Preferred Shares. Moody's or Fitch could downgrade Preferred Shares, which may
make your Preferred Shares less liquid at an auction or in the secondary market.
If Moody's or Fitch downgrades Preferred Shares, the Fund may alter its
portfolio or redeem Preferred Shares in an effort to improve the rating,
although there is no assurance that it will be able to do so to the extent
necessary to restore the prior rating. The Fund may voluntarily redeem Preferred
Shares under certain circumstances. See "Description of Preferred Shares-NRSRO
Guidelines and Asset Coverage" for a description of the asset maintenance tests
the Fund must meet.
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.
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.
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 Fund's ability to
pay dividends on the Preferred 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 holders of Preferred Shares 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.
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.
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 Preferred Shares and dividends
can decline. However, during any periods of rising inflation, Preferred Share
dividend rates would likely increase.
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 affecting the Preferred Shares.
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, Preferred Shares and any other preferred shares that may be issued in
the future, voting together as a single class, and (2) the approval of the
holders of a majority of the outstanding Preferred Shares and any other
preferred shares that may be issued in the future, 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. The Fund does not anticipate that such guidelines would
have a material adverse effect on 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.
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 of Trustees ("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 Investment Company 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, NRSRO 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.
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. 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.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
For the complete terms of the Preferred Shares, please refer to the detailed
description of the Preferred Shares in the Statement of Preferences (the
"Statement") attached as Appendix A to the Statement of Additional Information.
General
The Fund's Agreement and Declaration of Trust authorizes the issuance of an
unlimited number of preferred shares, par value $.01 per share, in one or more
classes or series with rights as determined by the Fund's Board without the
approval of Common Shareholders. The Statement currently authorizes the issuance
of [________] Preferred Shares, Series [X][#], [________] Preferred Shares,
Series [X][#], [________] Preferred Shares, Series [X][#], [________] Preferred
Shares, Series [X][#] and [________] Preferred Shares, Series [X][#]. All
Preferred Shares will have a liquidation preference of $25,000 per share, plus
an amount equal to accumulated but unpaid dividends (whether or not earned or
declared).
The Preferred Shares of each series will rank on parity with any other
series of Preferred Shares and any other series of preferred shares of the Fund
as to the payment of dividends and the distribution of assets upon liquidation.
Each Preferred Share carries one vote on matters on which Preferred Shares can
be voted. Preferred Shares, when issued, will be fully paid and non- assessable
and have no preemptive, conversion or cumulative voting rights.
Dividends and Rate Periods
The following is a general description of dividends and rate periods.
Rate Periods. The initial rate period for each Series is as set forth below:
Series Initial Rate Period
[X][#] __ Days
[X][#] __ Days
[X][#] __ Days
[X][#] __ Days
[X][#] __ Days
--------------------------------------------------------------------------------
Any subsequent rate periods of shares of a series of Preferred Shares will
generally be [seven] days. The Fund, subject to certain conditions, may change
the length of subsequent rate periods designating them as Special Rate Periods.
See "--Designation of Special Rate Periods" below.
Dividend Payment Dates. Dividends on each series of Preferred Shares will
be payable, when as and if declared by the Board, out of legally available funds
in accordance with the Agreement and Declaration of Trust, the Statement and
applicable law. Dividends are scheduled to be paid for each series of Preferred
Shares as follows:
Initial Dividend Subsequent Dividend
Series Payment Date Payment Days on Each
[X][#] [__________], [Day of Week]
2003
[X][#] [__________], [Day of Week]
2003
[X][#] [__________], [Day of Week]
2003
[X][#] [__________], [Day of Week]
2003
[X][#] [__________], [Day of Week]
2003
--------------------------------------------------------------------------------
If dividends are payable on a day that is not a business day, then
dividends will be payable on the next business day. In addition, the Fund may
specify different dividend payment dates for any Special Rate Period of more
than 28 rate period days.
Dividends will be paid through the securities depository on each dividend
payment date. The securities depository, in accordance with its current
procedures, is expected to distribute dividends received from the Fund in
next-day funds on each dividend payment date to agent members. These agent
members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Fund that dividend payments will be available in same-day funds
on each dividend payment date to customers that use such Broker-Dealer or that
Broker-Dealer's designee as agent member.
Calculation of Dividend Payment. The Fund computes the dividends per share
payable on a series of Preferred Shares by multiplying the applicable rate in
effect for shares of such series by a fraction. The numerator of this fraction
will normally be [seven] (i.e., the number of days in the rate period), and the
denominator will normally be 365. If the Fund has designated a special rate
period, then the numerator will be the number of days in the special rate
period, and the denominator will be 360. In either case, this rate is then
multiplied by $25,000 to arrive at dividends per Preferred Share.
Dividends on shares of each series of Preferred Shares will accumulate from
the date of their original issue. For each dividend payment period after the
initial rate period, the dividend rate will be the dividend rate determined at
auction, except that the dividend rate that results from an auction will not be
greater than the maximum applicable rate described below.
The maximum applicable rate for any rate period for a series of Preferred
Shares will be the applicable percentage (set forth in the Applicable Percentage
Payment Table below) of the reference rate (set forth in the Reference Rate
Table below) for the applicable rate period. The applicable percentage for a
series of Preferred Shares is determined on the day that a notice of a special
rate period is delivered if the notice specifies a maximum applicable rate for a
special rate period. If Moody's or Fitch or both shall not make such rating
available, the rate shall be determined by reference to equivalent ratings
issued by a substitute NRSRO. If the Fund has provided notification to the
auction agent prior to an auction establishing the applicable rate for a rate
period that net capital gains or other taxable income will be included in the
dividend determined at such auction, the applicable percentage will be derived
from the column captioned "Applicable Percentage: Notification" in the
Applicable Percentage Table below:
Applicable Percentage Table
Credit Ratings Applicable Percentage Table
Applicable Applicable
Moody's Fitch Percentage: Percentage:
No Notification Notification
"Aa3" or higher AA- or higher 110% 150%
"A3" to "a1" A- to A+ 125% 160%
"Baa3" to "baa1" BBB- to BBB+ 150% 250%
"Ba3" to "ba1" BB- to BB+ 200% 275%
Below "Ba3" Below BB- 250% 300%
-----------------------------------------------------------------------------
The reference rate used to determine the maximum applicable rate generally
varies depending on the length of the applicable rate period, as set forth in
the Reference Rate Table below:
Reference Rate Table
Rate Period Reference Rate
28 days or less Greater of:
--------------------------------------------------
o "AA'' Composite Commercial Paper Rate
o Taxable Equivalent of the Short-Term
Municipal Bond Rate
29 days to 182 days "AA" Composite Commercial Paper Rate
183 days to 364 days Treasury Bill Rate
365 days or more Treasury Note Rate
The "AA Composite Commercial Paper Rate" is as set forth in the table set
forth below:
AA Composite Commercial Paper Rate Table
Rate Period Special Rate Period AA Composite Commercial Paper
Rate*
7 days or less 48 days or less 30-day rate
49 days to 69 days 60-day rate
70 days to 84 days Average of 60-day and 90-day
rates
85 days to 98 days 90-day rate
99 days to 119 days Average of 90-day and 120-day
rates
120 Days to 140 days 120-day rate
141 days to 161 days Average of 120-day and 180-day
rates
162 days to 182 days 180-day rate
___________
--------------------------------------------------------------------------------
* Rates stated on a discount basis.
If the Federal Reserve Bank of New York does not make available any such
rate, the rate shall be the average rate quoted on a discount basis by
commercial paper dealers to the auction agent at the close of business on the
business day next preceding such date. If any commercial paper dealer does not
quote a rate, the rate shall be determined by quotes provided by the remaining
commercial paper dealers.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" means 90% of an
amount equal to the per annum rate payable on taxable bonds in order for such
rate, on an after-tax basis, to equal the per annum rate payable on tax-exempt
bonds issued by "high grade" issuers as determined in accordance with the
procedures set forth in the Statement.
Prior to each dividend payment date, the Fund is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction.
The Fund does not intend to establish any reserves for the payment of dividends.
If an auction for any series of Preferred Shares is not held when scheduled
for any reason, the dividend rate for the corresponding rate period will be the
maximum applicable rate on the date the auction was scheduled to be held.
Additional Dividends. Under Federal income tax rules applicable to the
Fund, the Fund may, in certain circumstances, allocate net capital gains or
other taxable income to a dividend paid on Preferred Shares after the dividend
has been paid (a "Retroactive Taxable Allocation"). If the Fund makes a
Retroactive Taxable Allocation on the Preferred Shares without giving advance
notice thereof as described under "The Auction--Auction Proceeds," the Fund
will, in the circumstances below, pay to the holders of Preferred Shares, out of
funds legally available therefor, an additional dividend. The additional
dividend will be in an amount equal to the amount of taxes paid by a holder of
Preferred Shares on the Retroactive Taxable Allocation, provided that the
additional dividend will be calculated:
o without consideration being given to the time value of money;
o assuming that no holder of Preferred Shares is subject to AMT with respect
to dividends received from the Fund; and
o assuming that each Retroactive Taxable Allocation would be taxable in the
hands of each holder of Preferred Shares at the maximum marginal combined
regular Federal income tax rate applicable to individuals or corporations,
whichever is greater, in effect during the fiscal year in question.
Although the Fund generally intends to designate any additional dividend as
an exempt-interest dividend to the extent permitted by applicable law, it is
possible that all or a portion of any additional dividend will be taxable to the
recipient thereof. See "Taxes." The Fund will not pay a further additional
dividend with respect to any taxable portion of an additional dividend.
The Fund will, within 90 days (and generally within 60 days) after the end
of its fiscal year for which a Retroactive Taxable Allocation is made, provide
notice thereof to the auction agent. The Fund will pay, out of legally available
funds, any additional dividend due on all Retroactive Taxable Allocations made
during the fiscal year in question, within 30 days after such notice is given to
the auction agent.
Restrictions on Dividends and Other Distributions. While the Preferred
Shares are outstanding, the Fund generally may not declare, pay or set apart for
payment, any dividend or other distribution in respect of its Common Shares. In
addition, the Fund may not call for redemption or redeem any of its Common
Shares. However, the Fund is not confined by the above restrictions if:
o immediately after such transaction, the Discounted Value of the Fund's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the Investment Company Act Preferred Shares Asset
Coverage (see "--NRSRO Guidelines and Asset Coverage" below);
o full cumulative dividends on each series of Preferred Shares due on or
prior to the date of the transaction have been declared and paid or shall
have been declared and sufficient funds for the payment thereof deposited
with the auction agent; o any additional dividend required to be paid on or
before the date of such transaction has been paid; and
o the Fund has redeemed the full number of Preferred Shares required to be
redeemed by any provision for mandatory redemption contained in the
Statement.
The Fund generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Fund ranking, as to the payment
of dividends, on a parity with Preferred Shares unless the Fund has declared and
paid or contemporaneously declares and pays full cumulative dividends on each
series of the Preferred Shares through its most recent dividend payment date.
However, when the Fund has not paid dividends in full upon the shares of each
series of Preferred Shares through the most recent dividend payment date or upon
any other class or series of shares of the Fund ranking, as to the payment of
dividends, on a parity with Preferred Shares through their most recent
respective dividend payment dates, the amount of dividends declared per share on
Preferred Shares and such other class or series of shares will in all cases bear
to each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund may, in certain situations,
declare a special rate period for shares of a particular series of Preferred
Shares. To declare a special rate period, the Fund will give notice (a "request
for special rate period") to the auction agent and to each Broker-Dealer. The
notice will request that the next succeeding rate period for the series of
Preferred Shares be a number of days (other than seven) evenly divisible by
seven as specified in such notice and not more than 1,820 days long. The Fund
may not request a special rate period unless sufficient clearing bids for shares
of such series were made in the most recent auction. In addition, full
cumulative dividends, any amounts with respect to mandatory redemptions and any
additional dividends payable on shares of such series prior to such date must be
paid in full or deposited with the auction agent.
The Fund also must have received confirmation from Moody's and Fitch or any
substitute NRSRO that the proposed special rate period will not adversely affect
such agency's then-current rating on the Preferred Shares and the lead
Broker-Dealer designated by the Fund, initially [ ], must not have objected to
declaration of a special rate period. A notice of special rate period also will
specify whether the shares of Preferred Shares will be subject to optional
redemption during such special rate period and, if so, the redemption, premium,
if any, required to be paid by the Fund in connection with such optional
redemption.
Redemption
Mandatory Redemption. The Fund is required to maintain (a) a Discounted
Value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the Investment Company Act Preferred Shares Asset
Coverage. Eligible portfolio securities for these purposes will be determined
from time to time by the NRSROs then rating the Preferred Shares. If the Fund
fails to maintain such asset coverage amounts and does not timely cure such
failure in accordance with the requirements of the NRSRO that rates the
Preferred Shares, the Fund must redeem all or a portion of the Preferred Shares.
This mandatory redemption will take place on a date that the Board specifies out
of legally available funds in accordance with the Agreement and Declaration of
Trust, the Statement and applicable law, at the redemption price of $25,000 per
share plus accumulated but unpaid dividends (whether or not earned or declared)
to the date fixed for redemption. The number of Preferred Shares that must be
redeemed in order to cure such failure will be allocated pro rata among the
outstanding Preferred Shares of the Fund. The mandatory redemption will be
limited to the number of Preferred Shares necessary to restore the required
Discounted Value or the Investment Company Act Preferred Shares Asset Coverage,
as the case may be.
Optional Redemption. The Fund, at its option, may redeem the shares of each
series of Preferred Shares, in whole or in part, out of funds legally available
therefor. Any optional redemption will occur on the second business day prior to
any dividend payment date at the optional redemption price per share of $25,000
per share plus an amount equal to accumulated but unpaid dividends to the date
fixed for redemption. No shares of a series of Preferred Shares may be redeemed
if the redemption would cause the Fund to violate the Investment Company Act or
applicable law. In addition, holders of a series of Preferred Shares may be
entitled to receive additional dividends if the redemption causes the Fund to
make a Retroactive Taxable Allocation. Shares of a series of Preferred Shares
may not be redeemed in part if fewer than 300 Shares would remain outstanding
after the redemption. The Fund has the authority to redeem the shares of a
series of Preferred Shares for any reason.
Liquidation
If the Fund is liquidated, the holders of any series of outstanding
Preferred Shares will receive the liquidation preference on such series, plus
all accumulated but unpaid dividends, plus any applicable additional dividends
payable before any payment is made to the Common Shares. The holders of
Preferred Shares will be entitled to receive these amounts from the assets of
the Fund available for distribution to its shareholders. In addition, the rights
of holders of Preferred Shares to receive these amounts are subject to the
rights of holders of any series or class of shares, including other series of
preferred shares, ranking on a parity with the Preferred Shares with respect to
the distribution of assets upon liquidation of the Fund. After the payment to
the holders of Preferred Shares of the full preferential amounts as described,
the holders of Preferred Shares will have no right or claim to any of the
remaining assets of the Fund.
For purpose of the foregoing paragraph, a voluntary or involuntary
liquidation of the Fund does not include:
o the sale of all or substantially all the property or business of the Fund;
o the merger or consolidation of the Fund into or with any other corporation;
or
o the merger or consolidation of any other corporation into or with the Fund.
NRSRO Guidelines and Asset Coverage
The Fund is required under guidelines of Moody's and Fitch to maintain
assets having in the aggregate a Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount. Moody's and Fitch have each
established separate guidelines for calculating Discounted Value. To the extent
any particular portfolio holding does not satisfy a NRSRO's guidelines, all or a
portion of the holding's value will not be included in the NRSRO's calculation
of Discounted Value. The Moody's and Fitch guidelines do not impose any
limitations on the percentage of the Fund's assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Fund's portfolio. The amount of ineligible assets included in the Fund's
portfolio at any time may vary depending upon the rating, diversification and
other characteristics of the eligible assets included in the portfolio. The
Preferred Shares Basic Maintenance Amount includes the sum of (a) the aggregate
liquidation preference of the Preferred Shares then outstanding and (b) certain
accrued and projected payment obligations of the Fund.
The Fund is also required under the Investment Company Act to maintain
asset coverage of at least 200% with respect to senior securities which are
equity shares, including the Preferred Shares ("Investment Company Act Preferred
Shares Asset Coverage"). The Fund's Investment Company Act Preferred Shares
Asset Coverage is tested as of the last business day of each month in which any
senior equity securities are outstanding. The minimum required Investment
Company Act Preferred Shares Asset Coverage amount of 200% may be increased or
decreased if the Investment Company Act is amended. Based on the composition of
the portfolio of the Fund and market conditions as of [__________], 2003, the
Investment Company Act Preferred Shares Asset Coverage with respect to all of
the Fund's preferred shares, assuming the issuance on that date of all Preferred
Shares offered hereby and giving effect to the deduction of related sales load
and related offering costs estimated at $[__________], would have been computed
as follows:
Value of Fund assets less
liabilities = $[_____________] = [____]%
not constituting senior securities
Senior securities representing $[_____________]
indebtedness
plus
liquidation value of the preferred
shares
--------------------------------------------------------------------------------
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the Investment Company Act Preferred Shares Asset
Coverage, in each case in accordance with the requirements of the NRSRO then
rating the Preferred Shares, the Fund will be required to redeem Preferred
Shares as described under "--Redemption--Mandatory Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or Fitch. Failure to adopt any
such modifications, however, may result in a change in the ratings described
above or a withdrawal of ratings altogether. In addition, any NRSRO providing a
rating for the Preferred Shares may, at any time, change or withdraw any such
rating. The Board may, without shareholder approval, amend, alter or repeal any
or all of the definitions and related provisions which have been adopted by the
Fund pursuant to the NRSRO guidelines in the event the Fund receives written
confirmation from Moody's or Fitch, as the case may be, that any such amendment,
alteration or repeal would not impair the rating then assigned to the Preferred
Shares.
As recently described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the Preferred Shares is not a recommendation to
purchase, hold or sell those shares, inasmuch as the rating does not comment as
to market price or suitability for a particular investor. The NRSRO guidelines
described above also do not address the likelihood that an owner of Preferred
Shares will be able to sell such shares in an auction or otherwise. The rating
is based on current information furnished to Moody's and Fitch by the Fund and
the Adviser and information obtained from other sources. The rating may be
changed, suspended or withdrawn as a result of changes in, or the unavailability
of, such information. The Common Shares have not been rated by an NRSRO.
The NRSRO's guidelines will apply to the Preferred Shares only so long as
the NRSRO is rating the shares. The Fund will pay certain fees to Moody's and
Fitch for rating the Preferred Shares.
Voting Rights
Except as otherwise provided in this prospectus and in the Statement of
Additional Information or as otherwise required by law, holders of Preferred
Shares will have equal voting rights with holders of Common Shares and any other
preferred shares (one vote per share) and will vote together with holders of
Common Shares and any preferred shares as a single class.
Holders of outstanding preferred shares, including Preferred Shares, voting
as a separate class, are entitled to elect two of the Fund's trustees. The
remaining trustees are elected by holders of Common Shares and preferred shares,
including Preferred Shares, voting together as a single class. In addition, if
at any time dividends (whether or not earned or declared) on outstanding
preferred shares, including Preferred Shares, are due and unpaid in an amount
equal to two full years of dividends, and sufficient cash or specified
securities have not been deposited with the auction agent for the payment of
such dividends, then, the sole remedy of holders of outstanding preferred
shares, including Preferred Shares, is that the number of trustees constituting
the Board will be automatically increased by the smallest number that, when
added to the two trustees elected exclusively by the holders of preferred shares
including Preferred Shares as described above, would constitute a majority of
the Board. The holders of preferred shares, including Preferred Shares, will be
entitled to elect that smallest number of additional trustees at a special
meeting of shareholders held as soon as possible and at all subsequent meetings
at which trustees are to be elected. The terms of office of the persons who are
trustees at the time of that election will continue. If the Fund thereafter
shall pay, or declare and set apart for payment, in full, all dividends payable
on all outstanding preferred shares, including Preferred Shares, these special
voting rights will cease, and the terms of office of the additional trustees
elected by the holders of preferred shares, including Preferred Shares, will
automatically terminate.
As long as any Preferred Shares are outstanding, the Fund will not, without
the affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time (voting together as a separate class):
(a) authorize, create or issue, or increase the authorized or issued amount
of, any class or series of stock ranking prior to or on a parity with the
Preferred Shares with respect to payment of dividends or the distribution of
assets on liquidation, or increase the authorized amount of the Preferred Shares
or any other preferred shares, unless, in the case of shares of preferred stock
on parity with the Preferred Shares, the Fund obtains written confirmation from
Moody's (if Moody's is then rating preferred shares), Fitch (if Fitch is then
rating preferred shares) or any substitute NRSRO (if any such substitute NRSRO
is then rating preferred shares) that the issuance of a class or series would
not impair the rating then assigned by such NRSRO to the Preferred Shares and
the Fund continues to comply with Section 13 of the Investment Company Act, the
Investment Company Act Preferred Shares Asset Coverage requirements and the
Preferred Shares Basic Maintenance Amount requirements, in which case the vote
or consent of the holders of the Preferred Shares is not required;
(b) amend, alter or repeal the provisions of the Agreement and Declaration
of Trust or the Statement, by merger, consolidation or otherwise, so as to
adversely affect any preference, right or power of the Preferred Shares or
holders of Preferred Shares; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect such
preferences, rights or powers, (ii) a division of Preferred Shares will be
deemed to affect such preferences, rights or powers only if the terms of such
division adversely affect the holders of Preferred Shares and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the Preferred Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, will be deemed to affect such preferences, rights or powers
only if Moody's or Fitch is then rating the Preferred Shares and such issuance
would, at the time thereof, cause the Fund not to satisfy the Investment Company
Act Preferred Shares Asset Coverage or the Preferred Shares Basic Maintenance
Amount.
(c) authorize the Fund's conversion from a closed-end to an open-end
investment company; or
(d) amend the provisions of the Agreement and Declaration of Trust or the
Statement, which provide for the classification of the Board of the Fund into
three classes, each with a term of office of three years with only one class of
Trustees standing for election in any year.
So long as any shares of the Preferred Shares are outstanding, the Fund
shall not, without the affirmative vote or consent of the Holders of at least 66
2/3% of the Preferred Shares outstanding at the time, in person or by proxy,
either in writing or at a meeting, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not foresee becoming
insolvent.
To the extent permitted under the Investment Company Act, the Fund will not
approve any of the actions set forth in (a) or (b) above which adversely affects
the rights expressly set forth in the Agreement and Declaration of Trust or the
Statement, of a holder of shares of a series of preferred shares differently
than those of a holder of shares of any other series of preferred shares without
the affirmative vote or consent of the holders of at least a majority of the
shares of each series adversely affected. Unless a higher percentage is provided
for under the Agreement and Declaration of Trust or the Statement, the
affirmative vote of the holders of a majority of the outstanding Preferred
Shares, voting together as a single class, will be required to approve any plan
of reorganization (including bankruptcy proceedings) adversely affecting such
shares or any action requiring a vote of security holders under Section 13(a) of
the Investment Company Act. However, to the extent permitted by the Agreement
and Declaration of Trust or the Statement, no vote of holders of Common Shares,
either separately or together with holders of preferred shares as a single
class, is necessary to take the actions contemplated by (a) and (b) above. The
holders of Common Shares will not be entitled to vote in respect of such
matters, unless, in the case of the actions contemplated by (b) above, the
action would adversely affect the contract rights of the holders of Common
Shares expressly set forth in the Agreement and Declaration of Trust.
The foregoing voting provisions will not apply with respect to Preferred
Shares if, at or prior to the time when a vote is required, such shares have
been (i) redeemed or (ii) called for redemption and sufficient funds have been
deposited in trust to effect such redemption.
THE AUCTION
General
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the shares of each series of Preferred
Shares for each rate period after the initial rate period will be the rate that
results from an auction conducted as set forth in the Statement and summarized
below. In such an auction, persons determine to hold or offer to sell or, based
on dividend rates bid by them, offer to purchase or sell shares of a series of
Preferred Shares. See the Statement included in the Statement of Additional
Information for a more complete description of the auction process.
Auction Agency Agreement. The Fund will enter into an auction agency
agreement with the auction agent (currently, [auction agent]) which provides,
among other things, that the auction agent will follow the auction procedures to
determine the applicable rate for shares of each series of Preferred Shares, so
long as the applicable rate for shares of such series of Preferred Shares is to
be based on the results of an auction.
The auction agent may terminate the auction agency agreement upon 60 days
notice to the Fund. If the auction agent should resign, the Fund will use its
best efforts to enter into an agreement with a successor auction agent
containing substantially the same terms and conditions as the auction agency
agreement. The Fund may remove the auction agent provided that, prior to
removal, the Fund has entered into a replacement agreement with a successor
auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Fund, a service charge at the annual rate of 1/4 of 1% in
the case of any auction before a rate period of 364 days or less, or a
percentage agreed to by the Fund and the Broker-Dealers, in the case of any
auction before a rate period of 365 days or longer, of the purchase price of
Preferred Shares placed by a Broker-Dealer at the auction.
The Fund may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after termination of the
agreement.
Auction Procedures
Prior to the submission deadline on each auction date for shares of a
series of Preferred Shares, each customer of a Broker-Dealer who is listed on
the records of that Broker-Dealer (or, if applicable, the auction agent) as a
beneficial owner of such series of Preferred Shares may submit the following
types of orders with respect to shares of such series of Preferred Shares to
that Broker-Dealer.
1. Hold order-- indicating its desire to hold shares of such series
without regard to the applicable rate for the next rate period.
2. Bid -- indicating its desire to sell shares of such series at $25,000
per share if the applicable rate for shares of such series for the
next rate period is less than the rate or spread specified in the bid.
3. Sell order-- indicating its desire to sell shares of such series at
$25,000 per share without regard to the applicable rate for shares of
such series for the next rate period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares
then held by the beneficial owner. A beneficial owner for shares of
such series that submits its bid with respect to shares of such series
to its Broker-Dealer having a rate higher than the maximum applicable
rate for shares of such series on the auction date will be treated as
having submitted a sell order to its Broker-Dealer. A beneficial owner
of shares of such series that fails to submit an order to its
Broker-Dealer with respect to such shares will ordinarily be deemed to
have submitted a hold order with respect to such shares of such series
to its Broker-Dealer. However, if a beneficial owner of shares of such
series fails to submit an order with respect to such shares of such
series to its Broker-Dealer for an auction relating to a rate period
of more than 28 days, such beneficial owner will be deemed to have
submitted a sell order to its Broker-Dealer. A sell order constitutes
an irrevocable offer to sell the Preferred Shares subject to the sell
order. A beneficial owner that offers to become the beneficial owner
of additional Preferred Shares is, for purposes of such offer, a
potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of a series of Preferred Shares but that wishes to purchase
shares of such series or that is a beneficial owner of shares of such series
that wishes to purchase additional shares of such series. A potential holder may
submit bids to its Broker-Dealer in which it offers to purchase shares of such
series at $25,000 per share if the applicable rate for shares of such series for
the next rate period is not less than the specified rate in such bid. A bid
placed by a potential holder of shares of such series specifying a rate higher
than the maximum applicable rate for shares of such series on the auction date
will not be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
They will designate themselves (unless otherwise permitted by the Fund) as
existing holders of shares subject to orders submitted or deemed submitted to
them by beneficial owners. They will designate themselves as potential holders
of shares subject to orders submitted to them by potential holders. However,
neither the Fund nor the auction agent will be responsible for a Broker-Dealer's
failure to comply with these procedures. Any order placed with the auction agent
by a Broker-Dealer as or on behalf of an existing holder or a potential holder
will be treated the same way as an order placed with a Broker-Dealer by a
beneficial owner or potential holder. Similarly, any failure by a Broker-Dealer
to submit to the auction agent an order for any Preferred Shares held by it or
customers who are beneficial owners will be treated as a beneficial owner's
failure to submit to its Broker-Dealer an order in respect of Preferred Shares
held by it. A Broker-Dealer may also submit orders to the auction agent for its
own account as an existing holder or potential holder, provided it is not an
affiliate of the Fund.
There are sufficient clearing bids for shares of a series in an auction if
the number of shares of such series subject to bids submitted or deemed
submitted to the auction agent by Broker-Dealers for potential holders with
rates or spreads equal to or lower than the maximum applicable rate for such
series is at least equal to the number of shares of such series subject to sell
orders submitted or deemed submitted to the auction agent by Broker-Dealers for
existing holders of such series. If there are sufficient clearing bids for
shares of a series, the applicable rate for shares of such series for the next
succeeding rate period thereof will be the lowest rate specified in the
submitted bids which, taking into account such rate and all lower rates bid by
Broker-Dealers as or on behalf of existing holders and potential holders, would
result in existing holders and potential holders owning the shares of such
series available for purchase in the auction.
If there are not sufficient clearing bids for shares of such series, the
applicable rate for the next rate period will be the maximum applicable rate for
shares of such series on the auction date. If this happens, beneficial owners of
shares of such series that have submitted or are deemed to have submitted sell
orders may not be able to sell in the auction all shares of such series subject
to such sell orders. If all of the outstanding shares of such series are the
subject of submitted hold orders, then the rate period following the auction
will automatically be the same length as the preceding rate period for such
series. The applicable rate for the next rate period will then be:
o (i) if the applicable rate period is less than 183 days, the "AA"
Composite Commercial Paper Rate, (ii) if the applicable rate period is
more than 182 days but fewer than 365 days, the Treasury Bill Rate,
and (iii) if the applicable rate period is more than 364 days, the
Treasury Note Rate (the applicable rate being referred to as the
"Benchmark Rate"); multiplied by
o 1 minus the maximum marginal regular Federal individual income tax
rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income,
whichever is greater.
If the applicable rate period is less than 183 days and the Kenny Index is
less than the amount determined above for a rate period of less than 183 days,
then the applicable rate for an all hold period will be the rate equal to the
Kenny Index.
The "Kenny Index" is the Kenny S&P 30 day High Grade Index or any successor
index.
The "Treasury Bill Rate" is on any date either (i) the bond equivalent
yield, calculated in accordance with prevailing industry convention, of the rate
on the most recently auctioned Treasury bill with a remaining maturity closest
to the length of such rate period, as quoted in The Wall Street Journal on such
date for the business day next preceding such date; or (ii) in the event that
any such rate is not published in The Wall Street Journal, then the bond
equivalent yield, calculated in accordance with prevailing industry convention,
as calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury bill with a remaining maturity closest
to the length of such rate period, as determined by bid price quotations as of
the close of business on the business day immediately preceding such date
obtained by the auction agent.
The "Treasury Note Rate" is on any date an (i) the yield on the most
recently auctioned Treasury note with a remaining maturity closest to the length
of such rate period, as quoted in The Wall Street Journal on such date for the
business day next preceding such date; or (ii) in the event that any such rate
is not published in The Wall Street Journal, then the yield as calculated by
reference to the arithmetic average of the bid price quotations of the most
recently auctioned Treasury note with a remaining maturity closest to the length
of such rate period, as determined by bid price quotations as of the close of
business on the business day immediately preceding such date obtained by the
auction agent.
If all the shares of a series are subject to hold orders and the Fund has
notified the auction agent of its intent to allocate to a series of Preferred
Shares any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the applicable rate for the series of Preferred
Shares for the applicable rate period will be (i) if the Taxable Yield Rate is
greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the Taxable
Yield Rate is less than or equal to the Benchmark Rate, then the rate equal to
the sum of (x) the amount determined pursuant to the two bullet points above,
and (y) the product of the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is greater,
multiplied by the Taxable Yield Rate.
The "Taxable Yield Rate" is the rate determined by (i) dividing the amount
of Taxable Income available for distribution on each Preferred Share in the
affected series by the number of days in the rate period in respect of which the
Taxable Income is contemplated to be distributed, (ii) multiplying the amount
determined in (i) by 365 (in the case of a rate period of 7 days) or 360 (in the
case of any other rate period), and (iii) dividing the amount determined in (ii)
by $25,000.
The auction procedure includes a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of shares of a series of Preferred
Shares that is different than the number of shares of such series specified in
its order. To the extent the allocation procedures have that result,
Broker-Dealers that have designated themselves as existing holders or potential
holders in respect of customer orders will be required to make appropriate pro
rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through
Depository Trust Company (DTC). Purchasers will make payment through their agent
members in same-day funds to DTC against delivery to their respective agent
members. DTC will make payment to the sellers' agent members in accordance with
DTC's normal procedures, which now provide for payment against delivery by their
agent members in same-day funds.
The auctions for Series [X][#] will normally be held every [Day of the
Week], and each subsequent rate period will normally begin on the following [Day
of the Week]. The auctions for Series [X][#] will normally be held every [Day of
the Week], and each subsequent rate period will normally begin on the following
[Day of the Week]. The auctions for Series [X][#] will normally be held every
[Day of the Week], and each subsequent rate period will normally begin on the
following [Day of the Week]. The auctions for Series [X][#] will normally be
held every [Day of the Week], and each subsequent rate period will normally
begin on the following [Day of the Week]. The auctions for Series [X][#] will
normally be held every [Day of the Week], and each subsequent rate period will
normally begin on the following [Day of the Week].
If an auction date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the auction agent is not able to
conduct an auction in accordance with the auction procedures for any such
reason, then the applicable rate for the next rate period will be the applicable
rate determined on the previous auction date.
If a dividend payment date is not a business day because the New York Stock
Exchange is closed for business for more than three consecutive business days
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services, or the dividend payable on such date can
not be paid for any such reason then:
o the dividend payment date for the affected rate period will be the next
business day on which the Fund and its paying agent, if any, can pay the
dividend;
o the affected rate period will end on the day it otherwise would have ended;
and
o the next rate period will begin and end on the dates on which it otherwise
would have begun and ended.
Whenever the Fund intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on Preferred Shares, the
Fund may notify the auction agent of the amount to be so included not later than
the dividend payment date before the auction date. Whenever, the auction agent
receives such notice from the Fund, it will be required in turn to notify each
Broker-Dealer, who, on or prior to such auction date, will be required to notify
its customers who are beneficial owners and potential holders believed by it to
be interested in submitting an order in the auction to be held on such auction
date. In the event of such notice, the Fund will not be required to pay an
additional dividend with respect to such dividend.
Secondary Market Trading and Transfers of Preferred Shares
The Broker-Dealers are expected to maintain a secondary trading market in
Preferred Shares outside of auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance than any
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. The Preferred Shares are not registered on any stock exchange or
on the Nasdaq Stock Market. Investors who purchase shares in an auction for a
special rate period should note that because the dividend rate on such shares
will be fixed for the length of such rate period, the value of the shares may
fluctuate in response to changes in interest rates and may be more or less than
their original cost if sold on the open market in advance of the next auction.
Investors who purchase shares in an auction for a special rate period in which
the Bid Requirements require a bid to specify a spread should be aware that the
value of their shares may also fluctuate and may be more or less than their
original cost if sold in the open market in advance of the next auction,
particularly if market spreads narrow or widen in a manner unfavorable to such
purchaser's position.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of
Preferred Shares only in whole shares and only:
o pursuant to a bid or sell order placed with the auction agent in accordance
with the auction procedures;
o to a Broker-Dealer; or
o to such other persons as may be permitted by the Fund;
provided, however, that
o a sale, transfer or other disposition of Preferred Shares from a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer as
the holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other
disposition if such Broker-Dealer remains the existing holder of the
shares; and
o in the case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Fund) to whom such
transfer is made will advise the auction agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the Preferred Shares, the Agreement and Declaration of Trust
authorizes the issuance of an unlimited number of Common Shares of beneficial
interest, par value $.01 per share. Each Common Share has one vote and is fully
paid and non-assessable. So long as any Preferred Shares are outstanding, Common
Shareholders will not be entitled to receive any distributions from the Fund
unless all accrued dividends on Preferred Shares have been paid, unless asset
coverage (as defined in the Investment Company Act) with respect to Preferred
Shares would be at least 200% after giving effect to the distributions and
unless certain other requirements imposed by any rating agencies rating the
Preferred Shares have been met. All Common Shares are equal as to dividends,
assets and voting privileges and have no conversion, preemptive or other
subscription rights.
The Fund's Common Shares are traded on the New York Stock Exchange under
the symbol "FMN."
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The 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 such 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
of the trustees followed by the favorable vote of the holders of at least 75% of
the outstanding shares of each affected class or series of 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 Investment Company Act) of the Fund will
be required. The foregoing vote would satisfy a separate requirement in the
Investment Company Act that any conversion of the Fund to an open-end investment
company be approved by the shareholders. The Statement also requires that any
conversion of the Fund to an open-end investment company be approved by the
affirmative vote of the holders or a majority of the Preferred Shares
outstanding, voting as a separate class. 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 all outstanding Preferred Shares. 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 Investment
Company 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 or
series of the Fund will vote together as a single class, except to the extent
required by the Investment Company 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, will also be required.
The Board has determined that 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 Investment
Company 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.
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. 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. 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. Any such
repurchase may cause the Fund to repurchase Preferred Shares to maintain asset
coverage requirements imposed by the Investment Company Act or any NRSRO rating
the Preferred Shares at that time.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the Statement of Additional Information
provides general information related to an investment in the Preferred 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 (the "IRS")
retroactively or prospectively. No attempt is made to present a detailed
explanation of all U.S. federal, state, local and foreign tax concerns affecting
the Fund and its shareholders. Investors are urged to consult their own tax
advisers to determine the tax consequences to them of investing in the Fund.
Based in part on a lack of present intention on the part of the Fund to redeem
the Preferred Shares at any time in the future, the Fund intends to take the
position that under present law the Preferred Shares will constitute stock,
rather than debt, of the Fund. It is possible, however, that the Internal
Revenue Service could take a contrary position asserting for example that the
Preferred Shares constitute debt of the Fund. If that position was upheld
distributions on the Preferred Shares would be considered interest, taxable as
ordinary income regardless of the taxable earnings of the Fund.
The Fund intends to elect to be treated and to qualify to be taxed as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code") and intends to distribute substantially all of its
net income and gains to its shareholders. Therefore, it is not expected that the
Fund will be subject to any U.S. federal income tax. The Fund invests primarily
in securities the income of which is exempt from federal income tax, including
AMT. Consequently, the dividends that you receive generally will be exempt from
federal income tax, including AMT. A portion of these dividends, however, may be
subject to AMT. The Fund also may distribute to its shareholders amounts that
are treated as long-term capital gain or ordinary income. The Fund will allocate
tax-exempt interest income, long-term capital gain and other taxable income, if
any, proportionately among the Common Shares and the Preferred Shares in
proportion to total dividends paid to each class for the year. The Fund intends
to notify Preferred Shareholders in advance if it will allocate income to them
that is not exempt from federal income tax. In addition, the Fund will provide
an annual statement describing the tax status of dividends paid during the
preceding year. In certain circumstances, the Fund will make payments to
Preferred Shareholders to offset the tax effects of the taxable distribution.
See "Description of Preferred Shares--Dividends and Rate Periods--Additional
Dividends."
The sale or other disposition of Common Shares or Preferred Shares of the
Fund will normally result in capital gain or loss to shareholders. Both
long-term and short-term capital gains of corporations are taxed at the rates
applicable to ordinary income. For non-corporate taxpayers, short-term capital
gains and ordinary income are taxed currently at a maximum rate of 38.6%, while
long-term capital gains are generally taxed at a maximum rate of 20% (or 18% for
capital assets that have been held for more than five years and the holding
period of which began after December 31, 2000).1 Because of certain limitations
on itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective rate of tax may be higher in certain
circumstances. Losses realized by a shareholder on the sale or exchange of
shares of the Fund held for six months or less are disallowed to the extent of
any exempt-interest dividends received with respect to such shares, and, if not
disallowed, such losses are treated as long-term capital losses to the extent of
any capital gain dividends received (or amounts credited as an undistributed
capital gain) with respect to such shares. A shareholder's holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property, or through certain options or short sales. Any loss
realized on a sale or exchange of shares of the Fund will be disallowed to the
extent those shares of the Fund are replaced by other shares within a period of
61 days beginning 30 days before and ending 30 days after the date of
disposition of the original shares. In that event, the basis of the replacement
shares of the Fund will be adjusted to reflect the disallowed loss.
If you borrow money to buy Preferred Shares, you may not be permitted to
deduct the interest on that loan. Holders are urged to consult their own tax
advisors regarding the impact of an investment in Preferred Shares on the
deductibility of interest payable by such holders.
The Fund is required to withhold tax (30% for 2003) on certain dividends
and other payments paid to noncorporate shareholders who have not furnished to
the Fund their correct taxpayer identification numbers 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
appropriate information is furnished to the Internal Revenue Service.
This summary of tax consequences is intended for general information only.
You should consult a tax advisor concerning the tax consequences of your
investment in the Fund. The foregoing discussion is subject to and qualified in
its entirety by the discussion in "Tax Matters" in the Statement of Additional
Information.
State and Local Tax Matters
While exempt-interest dividends are exempt from regular Federal income tax,
they may not be exempt from state or local income or other taxes. Some states
exempt from state income tax that portion of any exempt-interest dividend that
is derived from interest that a regulated investment company receives on its
holdings of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Fund will report annually to its shareholders
the percentage of interest income the Fund earned during the preceding year on
tax-exempt obligations and the Fund will indicate, on a state-by-state basis,
the source of this income. You should consult with your tax adviser about state
and local tax matters.
UNDERWRITING
[________________] is acting as a representative of the underwriters named
below. Subject to the terms and conditions of the underwriting agreement dated
the date hereof, each underwriter named below has severally agreed to purchase,
and the Fund has agreed to sell to such underwriter, the number of Preferred
Shares set forth opposite the name of such underwriter.
Number of Shares
Name Series Series Series Series Series
[X][#] [X][#] [X][#] [X][#] [X][#]
Total.....................
================================================================================
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions, including,
without limitation, the receipt by the underwriters of customary closing
certificates, opinions and other documents and the receipt by the Fund of Aaa
and AAA ratings on the Preferred Shares by Moody's and Fitch, respectively, as
of the time of the offering. The underwriters are obligated to purchase all the
Preferred Shares if they purchase any shares. In the underwriting agreement, the
Fund and the Adviser have agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the Securities Act of 1933, 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 Preferred Shares
directly to the public at the public offering price set forth on the cover page
of this prospectus and some of the Preferred Shares to certain dealers at the
public offering price less a concession not in excess of $[_____] per share. The
sales load the Fund will pay of $[_____] per share is equal to [___]% of the
initial offering price of the Preferred Shares. After the initial public
offering, the underwriters may change the public offering price and the
concession. Investors must pay for any Preferred Shares purchased in the initial
public offering on or before [___________], 2003.
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 makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the Fund.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction."
The principal business address of [_____________________] is
[_____________________].
The settlement date for the purchase of the Preferred Shares will be
[___________], 2003, as agreed upon by the underwriters, the Fund and the
Adviser pursuant to Rule 15c6-1 under the Securities Exchange Act of 1934.
CUSTODIAN AND TRANSFER AGENT; AUCTION 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, acts as the
Fund's Transfer Agent and Dividend Disbursing Agent with respect to the Common
Shares.
[Auction Agent], [address], a banking corporation organized under the laws
of [_________], is the auction agent with respect to the Preferred Shares and
acts as transfer agent, registrar, dividend disbursing agent, and redemption
agent with respect to such shares.
LEGAL OPINIONS
Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Fund by Dickstein Shapiro Morin & Oshinsky
LLP and for the underwriters by [XXX]. Dickstein Shapiro Morin & Oshinsky LLP
and [XXX] may rely as to certain matters of Delaware law on the opinion of Reed
Smith LLP.
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and is required to file
reports, proxy statements and other information with the Securities and Exchange
Commission. These documents can be inspected and copied for a fee at the SEC's
public reference room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661-2511. Reports, proxy statements,
and other information about the Fund can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus does not contain all of the information in the Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contact or other
document are not necessarily complete and in each instance reference is made to
the copy of the contact or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Fund and Preferred Shares can be found in
the Fund's registration statement (including amendments, exhibits, and
schedules) on Form N-2 filed with the SEC. The SEC maintains a web site
(http://www.sec.gov) that contains the Fund's registration statement, other
documents incorporated by reference, and other information the Fund has filed
electronically with the Commission, including proxy statements and reports filed
under the Securities Exchange Act of 1934.
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Page
Use of Proceeds.........................................................
Investment Strategies
Fundamental Investment Objective, Policy and Limitations................
Non-Fundamental Investment Policies.....................................
Investment Securities...................................................
Management of the Fund..................................................
Brokerage Transactions..................................................
Additional Information Concerning the Auctions for Preferred Shares.....
Description of Common Shares............................................
Repurchase of Common Shares.............................................
Tax Matters.............................................................
Experts.................................................................
Additional Information..................................................
Independent Auditors' Report............................................
Financial Statements....................................................
Financial Highlights
APPENDIX A--Statement of Preferences of Municipal Auction Rate
------------------------------------------------------------------------
Cumulative Preferred Shares.......................................
APPENDIX B--Ratings of Investments......................................
--
December 20, 2002 9:05 AM
--
December 20, 2002 9:05 AM
$
Federated Premier Municipal Income Fund
Preferred Shares
[ ] Shares, Series [ ]
[ ] Shares, Series [ ]
[ ] Shares, Series [ ]
[ ] Shares, Series [ ]
[ ] Shares, Series [ ]
Liquidation Preference $25,000 per Share
PROSPECTUS
[ ], 2003
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 recently
organized, diversified, closed-end management investment company. This Statement
of Additional Information relating to the Fund's Municipal Auction Rate
Cumulative Preferred Shares Series [X], Series [X], Series [X], Series [X] and
Series [X,] (the "Preferred Shares") does not constitute a prospectus, but
should be read in conjunction with the prospectus relating thereto dated [ ],
2003. This Statement of Additional Information does not include all information
that a prospective investor should consider before purchasing Preferred Shares,
and investors should obtain and read the prospectus prior to purchasing such
Preferred 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
Additional Information Concerning......................................2
The Auctions For Preferred Shares......................................2
Description Of Common Shares...........................................2
Repurchase Of Common Shares............................................2
Tax Matters............................................................2
Experts................................................................2
Additional Information.................................................2
Independent Auditors' Report...........................................2
Financial Highlights...................................................2
Portfolio Investments..................................................2
Statement Of Assets And Liabilities....................................2
Statement Of Operations................................................2
Statement Of Changes In Net Assets.....................................2
Appendix A Statement Of Preferences Of Municipal Action Rate Cumulative
Preferred Shares.......................................................2
Appendix B Investment Ratings..........................................2
This Statement of Additional Information is dated [ ], 2003.
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 and any
preferred shares that may in the future be issued voting together as a class,
and (2) the outstanding Preferred Shares and any preferred shares that may in
the future be issued , 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
regular federal income tax.
Investment Policy
The Fund will invest its assets so that at least 80% of the income that it
distributes will be exempt from federal income tax, including AMT.
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 Compensation Fund 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 Compensation Compensation
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 Compensation Compensation
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.
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.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR PREFERRED SHARES
General
Securities Depository. The Depository Trust Company ("DTC") will act as the
Securities Depository with respect to each series of Preferred Shares. One
certificate for all of the shares of each series will be registered in the name
of [ ], as nominee of the Securities Depository. Such certificate will bear a
legend to the effect that such certificate is issued subject to the provisions
restricting transfers of shares of Preferred Shares contained in the Statement
of Preferences of Municipal Auction Rate Cumulative Preferred Shares. The Fund
will also issue stop-transfer instructions to the transfer agent for Preferred
Shares. Prior to the commencement of the right of holders of Preferred Shares to
elect a majority of the Fund's trustees, as described under "Description of
Preferred Shares--Voting Rights" in the prospectus, [ ] will be the holder of
record of each series of Preferred Shares and owners of such shares will not be
entitled to receive certificates representing their ownership interest in such
shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of Preferred Shares, whether
for its own account or as a nominee for another person. Additional information
concerning DTC and the DTC depository system is included as an Exhibit to the
Registration Statement of which this statement of additional information forms a
part.
Concerning the Auction Agent
The auction agent will act as agent for the Fund in connection with
auctions. In the absence of bad faith or negligence on its part, the auction
agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the auction
agency agreement between the Fund and the auction agent and will not be liable
for any error of judgment made in good faith unless the auction agent was
negligent in ascertaining the pertinent facts.
The auction agent may rely upon, as evidence of the identities of the
holders of Preferred Shares, the auction agent's registry of holders, the
results of auctions and notices from any Broker-Dealer (or other person, if
permitted by the Fund) with respect to transfers described under "The
Auction--Secondary Market Trading and Transfers of Preferred Shares" in the
prospectus and notices from the Fund. The auction agent is not required to
accept any such notice for an auction unless it is received by the auction agent
by 3:00 p.m., New York City time, on the business day preceding such auction.
The auction agent may terminate its auction agency agreement with the Fund
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the auction agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Fund may remove
the auction agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor auction agent.
Broker-Dealers
The auction agent after each auction for shares of each series of Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge at the annual rate of 1/4 of 1% in the case of any auction
immediately preceding a rate period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealers in the case of any auction
immediately preceding a rate period of one year or longer, of the purchase price
of the series of Preferred Shares placed by such Broker-Dealer at such auction.
For the purposes of the preceding sentence, Preferred Shares will be placed by a
Broker-Dealer if such shares were (a) the subject of hold orders deemed to have
been submitted to the auction agent by the Broker-Dealer and were acquired by
such Broker-Dealer for its own account or were acquired by such Broker-Dealer
for its customers who are beneficial owners or (b) the subject of an order
submitted by such Broker-Dealer that is (i) a submitted bid of an existing
holder that resulted in the existing holder continuing to hold such shares as a
result of the auction or (ii) a submitted bid of a potential holder that
resulted in the potential holder purchasing such shares as a result of the
auction or (iii) a valid hold order.
The Fund may request the auction agent to terminate one or more Broker-
Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Fund) may submit orders in auctions for its own account, unless
the Fund notifies all Broker-Dealers that they may no longer do so, in which
case Broker-Dealers may continue to submit hold orders and sell orders for their
own accounts. Any Broker-Dealer that is an affiliate of the Fund may submit
orders in auctions, but only if such orders are not for its own account. If a
Broker-Dealer submits an order for its own account in any auction, it might have
an advantage over other bidders because it would have knowledge of all orders
submitted by it in that auction; such Broker-Dealer, however, would not have
knowledge of orders submitted by other Broker-Dealers in that auction.
DESCRIPTION OF COMMON SHARES
A description of Common Shares is contained in the prospectus. 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.
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 Preferred 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 (2) 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 Preferred 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 Preferred 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 Preferred
Shareholders as items of interest excluded from their gross income, each
Preferred 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
Preferred Shareholders to be subject to or result in an increased liability
under the AMT. The Fund will annually supply Preferred Shareholders a report
indicating the amount and nature of amounts distributed to them.
The redemption, sale or exchange of Preferred Shares normally will result
in capital gain or loss to Preferred Shareholders who hold their Preferred
Shares as capital assets. Generally, a Preferred 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 preferred 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 Preferred
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 Preferred 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 Preferred 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
Preferred Shares if the Preferred Shareholder purchases other Preferred 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 Preferred 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 Preferred Shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with respect
to such Preferred 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
Preferred 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.
If at any time when the Fund's Preferred Shares are outstanding the Fund
fails to meet the Preferred Shares Basic Maintenance Amount or the Investment
Company Act Preferred Shares Asset Coverage, the Fund will be required to
suspend distributions to holders of its Common Shares until such maintenance
amount or asset coverage, as the case may be, is restored. See "Description of
Preferred Shares--Dividends and Rate Periods--Restrictions on Dividends and
Other Distributions" in the prospectus. This may prevent the Fund from
distributing at least an amount equal to the sum of 90% of its investment
company taxable income (determined without regard to dividends paid) and 90% of
its net tax exempt income, and may therefore jeopardize the Fund's qualification
for taxation as a regulated investment company or cause the Fund to incur a tax
liability or a non-deductible 4% excise tax on the undistributed taxable income
(including net capital gain), or both. Upon failure to meet the Preferred Shares
Basic Maintenance Amount or the Investment Company Act Preferred Shares Asset
Coverage, the Fund will be required to redeem Preferred Shares in order to
maintain or restore such maintenance amount or asset coverage and avoid the
adverse consequences to the Fund and its shareholders of failing to qualify as a
regulated investment company. There can be no assurance, however, that any such
redemption would achieve such objectives.
The Fund may, at its option, redeem Preferred Shares in whole or in part,
and is required to redeem Preferred Shares to the extent required to maintain
the Preferred Shares Basic Maintenance Amount and the Investment Company Act
Preferred Shares Asset Coverage. Gain or loss, if any, resulting from a
redemption of Preferred Shares will be taxed as gain or loss from the sale or
exchange of Preferred Shares under Section 302 of the Code rather than as a
dividend, but only if the redemption distribution (a) is deemed not to be
essentially equivalent to a dividend, (b) is in complete redemption of an
shareholder's interest in the Fund, (c) is substantially disproportionate with
respect to the shareholder, or (d) with respect to a non-corporate shareholder,
is in partial liquidation of the shareholder's interest in the Fund. For
purposes of (a), (b) and (c) above, a Preferred Shareholder's ownership of
Common Shares will be taken into account.
Based in part on a lack of present intention on the part of the Fund to
redeem the Preferred Shares at any time in the future, the Fund intends to take
the position that under present law the Preferred Shares will constitute stock,
rather than debt of the Fund. It is possible, however, that the Internal Revenue
Service could take a contrary position asserting for example that the Preferred
Shares constitutes debt of the Fund. If that position was upheld distributions
in the Preferred Shares would be considered interest, taxable as ordinary income
regardless of the taxable earnings of the Fund.
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. Preferred 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.
EXPERTS
The Financial Highlights of the Fund as of [XXX] appearing in this
Statement of Additional Information has been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and is included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing. Ernst & Young LLP, provides
accounting and auditing services to the Fund.
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.
INDEPENDENT AUDITORS' REPORT
[To be provided.]
FINANCIAL HIGHLIGHTS
[To be provided.]
PORTFOLIO INVESTMENTS
[To be provided.]
STATEMENT OF ASSETS AND LIABILITIES
[To be provided.]
STATEMENT OF OPERATIONS
[To be provided.]
STATEMENT OF CHANGES IN NET ASSETS
[To be provided.]
APPENDIX A
STATEMENT OF PREFERENCES OF MUNICIPAL ACTION RATE CUMULATIVE PREFERRED SHARES
APPENDIX B
Investment Ratings
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 trust
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Underwriter
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
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
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; (4)
(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).
4. Response is incorporated to Registrant's Pre-Effective Amendment No. 4 to
its Registration Statement filed on Form N-2 on December 19, 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; (4)
(l) Conformed copy of Opinion and Consent of Counsel as to
legality of
shares being registered; (4)
(m) Not applicable;
(n) Conformed copy of Consent of Independent Auditors; (4)
(o) Not applicable;
(p) Form of Letter Agreement between the Registrant and the
Adviser to
Purchase Shares; (4)
(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
Registration Fee:
NYSE Listing Fee:
Printing:
Engraving and Printing Certificates:
Legal fees and expenses:
NASD fee:
________________________________________________________
+ 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).
4. Response is incorporated to Registrant's Pre-Effective Amendment No. 4 to
its Registration Statement filed on Form N-2 on December 19, 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
Preferred Shares
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 Initial 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 Initial
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
--------
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.