PROSPECTUS [FEDERATED(R) LOGO]
$53,675,000
FEDERATED PREMIER MUNICIPAL INCOME FUND
AUCTION MARKET PREFERRED SHARES ("AMPS")
2,147 SHARES, SERIES A
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.
INVESTING IN AMPS INVOLVES RISKS. SEE "RISKS" BEGINNING ON PAGE 16 OF THIS
PROSPECTUS. THE MINIMUM PURCHASE AMOUNT OF THE AMPS IS $25,000.
The Securities and Exchange Commission has not approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
PER SHARE TOTAL
--------- -----
Public offering price $ 25,000 $53,675,000
Sales load $ 250 $ 536,750
Proceeds to the Fund (1) $ 24,750 $53,138,250
(1) Not including offering expenses payable by the Fund estimated to be
$100,000. 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.
The underwriters are offering the AMPS subject to various conditions. The
underwriters expect to deliver the AMPS to purchasers, in book-entry form,
through the facilities of The Depository Trust Company on or about February 18,
2003.
MERRILL LYNCH & CO. UBS WARBURG
The date of this prospectus is February 13, 2003.
You should read this prospectus, which contains important information about
the Fund, before deciding whether to invest in AMPS and retain it for future
reference. A Statement of Additional Information, dated February 13, 2003,
containing additional information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 40 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 Securities and Exchange
Commission's web site (http://www.sec.gov).
AMPS 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 2,147 shares of Series A AMPS. AMPS have a liquidation
preference of $25,000 per share, plus any accumulated, unpaid dividends. AMPS
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 AMPS be offered with a rating of "AAA" from Fitch
Ratings ("Fitch") and "Aaa" from Moody's Investors Service, Inc. ("Moody's").
The dividend rate for the initial dividend rate period will be 1.05%. The
initial rate period is from the date of issuance through February 27, 2003. For
subsequent rate periods, AMPS pay dividends based on a rate set at auction,
usually held weekly on each Thursday. 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
AMPS 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.
AMPS 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 AMPS, and will be
subject to mandatory redemption in certain circumstances at a redemption price
of $25,000 per share, plus accumulated but unpaid dividends to the date of the
redemption, plus a premium in certain circumstances.
AMPS are not listed on an exchange. You may only buy or sell AMPS through
an order placed at an auction with or through (1) a broker-dealer that has
entered into an agreement with the auction agent or (2) such other person as the
Fund permits.
Dividends on AMPS, 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. The Fund is required to allocate net
capital gains and other taxable income, if any, proportionately between Common
Shares and AMPS, 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 AMPS
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 holders of
AMPS in order to adjust for their receipt of income subject to federal income
tax.
2
TABLE OF CONTENTS
PAGE
----
Prospectus Summary 4
Financial Highlights (Unaudited) 10
The Fund 11
Use of Proceeds 11
Capitalization (Unaudited) 11
Portfolio Composition 12
The Fund's Investments 12
Risks 16
How the Fund Manages Risk 19
Management of the Fund 20
Description of the AMPS 22
The Auction 29
Description of Common Shares 33
Certain Provisions in the Agreement and Declaration of Trust 34
Repurchase of Common Shares 35
Tax Matters 35
Underwriting 38
Custodian and Transfer Agent; Auction Agent 38
Legal Opinions 39
Available Information 39
Table of Contents for the Statement of Additional Information 40
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.
3
PROSPECTUS SUMMARY
THIS IS ONLY A SUMMARY. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING IN AMPS. YOU SHOULD READ THE MORE
DETAILED INFORMATION CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF ADDITIONAL
INFORMATION AND THE FUND'S STATEMENT OF PREFERENCES OF AMPS (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 FUND Federated Premier Municipal Income 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
February 3, 2003, the Fund had 6,106,981 Common Shares outstanding
and net assets of $87,420,823.
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."
4
INVESTMENT ADVISER Federated Investment Management Company will be the Fund's investment
adviser (the "Adviser"). The Adviser receives 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 AMPS, 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 AMPS 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 OFFERING The Fund is offering 2,147 shares of Series A AMPS at a purchase price of
$25,000 per share. AMPS are being offered by the underwriters listed
under "Underwriting."
RISK FACTORS SUMMARY Risk is inherent in all investing. Therefore, before investing in AMPS
you should consider the risks carefully. The primary risks of
investing in AMPS are:
- if an auction fails, you may not be able to sell some or all of your
AMPS;
- because of the nature of the market for AMPS, you may receive less
than the price you paid for your AMPS if you sell them outside of the
auction, especially when market interest rates are rising;
- an NRSRO could downgrade the rating assigned to AMPS, which could
affect liquidity;
- the Fund may be forced to redeem your AMPS to meet regulatory or NRSRO
requirements or may voluntarily redeem your AMPS in certain
circumstances;
5
- 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 AMPS;
- 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;
- 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;
- if the securities in which the Fund invests fail to meet certain legal
requirements, interest received and distributed by the Fund to holders of AMPS
could be taxable;
- because the Fund may invest more than 25% of its total assets in
tax-exempt securities of issuers in the same economic sector or
securities that are credit enhanced by insurance companies, banks or
similar financial institutions, the performance of the Fund will be
more susceptible to any economic, business, political or other
developments that generally affect these sectors or entities;
- because the Fund is a recently organized investment company, it has
limited operating history; and
- because the Fund invests in tax exempt securities, it is susceptible
to market risks associated with such securities, including a tendency
toward less publicly available information, less liquidity and greater
vulnerability to local legislative changes and economic downturns.
For additional discussion of the risks associated with investing in
AMPS and the Fund, see "Risks" below.
6
TRADING MARKET AMPS are not listed on an exchange. Instead, you may buy or sell AMPS
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 (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 AMPS outside of auctions, but may
discontinue this activity at any time. There is no assurance that a
secondary market will provide holders of AMPS with liquidity. You may
transfer AMPS 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 AMPS
and the day on which each subsequent auction will normally be held.
The first auction date for AMPS will be the business day before the
dividend payment date for the initial rate period. 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.
SERIES FIRST AUCTION DATE SUBSEQUENT
------ ------------------ ----------
AUCTION DAY
-----------
A February 27, 2003 Thursday
DIVIDENDS AND RATE PERIODS The table below shows the dividend rate for the initial rate period on
AMPS offered in this prospectus. For subsequent rate periods, AMPS
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 the AMPS--Dividends and Rate Periods."
The table below also shows the date from which dividends on AMPS 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 AMPS. Subsequent rate
7
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,
for special rate periods exceeding 28 days, the Fund must have
provided Moody's and Fitch with prior notice of the special rate
period and for all special rate periods must have satisfied certain
asset coverage requirements. The dividend payment dates for special
rate periods of more than seven days will be set out in the notice
designating a special rate period. See "Description of the AMPS--Dividends
and Rate Periods--Designation of Special Rate Periods."
DATE OF DIVIDEND
INITIAL ACCUMULATION PAYMENT DATE SUBSEQUENT NUMBER OF
DIVIDEND AT INITIAL FOR INITIAL DIVIDEND DAYS IN INITIAL
RATE RATE* RATE PERIOD* PAYMENT DAY RATE PERIOD
---- ----- ------------ ----------- -----------
1.05% February 18 February 28 Friday 10
* 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 holders of AMPS and Common Shareholders, based on the
percentage of total dividends paid to each class for that year.
Accordingly, certain specified AMPS 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 holders of AMPS that include taxable income and gain. See "Tax
Matters" and "Description of the AMPS--Dividends and Rate Periods."
RATINGS AMPS 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
8
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 the AMPS--NRSRO Guidelines and
Asset Coverage."
REDEMPTION The Fund may be required to redeem AMPS 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 AMPS under certain conditions. See "Description
of the AMPS--Redemption" and "Description of the AMPS--NRSRO Guidelines
and Asset Coverage."
LIQUIDATION PREFERENCE The liquidation preference for AMPS will be $25,000 per share plus
accumulated but unpaid dividends. See "Description of the AMPS--Liquidation."
VOTING RIGHTS The holders of preferred shares, including AMPS, 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
AMPS, voting together as a single class. The holders of preferred
shares, including AMPS, 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 the
AMPS--Voting Rights," and "Certain Provisions in the Agreement and
Declaration of Trust."
9
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 December 20, 2002 through February 3, 2003. Since the Fund was
recently organized and commenced investment operations on December 20, 2003 the
table covers less than seven 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
DECEMBER 20, 2002 *
THROUGH
FEBRUARY 3, 2003
(UNAUDITED)
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period** $ 14.32+
-------
Net investment income 0.06
Net realized and unrealized loss on investments (0.04)
-------
Net increase from investment operations 0.02
-------
Capital charge with respect to issuance of Common Shares (0.03)
-------
Net asset value, end of period** $ 14.31
-------
Market value, end of period** $ 14.55
=======
Total Investment Return++ (3.00)%
=======
Ratios To Average Net Assets Of Common Shareholders:
Expenses after fee waiver 0.55%#
Expenses before fee waiver 0.90%#
Net investment income after fee waiver 3.81%#
Net investment income before fee waiver 3.46%#
Supplemental Data:
Average net assets of Common Shareholders (000) $83,904
Portfolio turnover 16%
Net assets of Common Shareholders, end of period (000) $87,421
* Commencement of investment operations.
** NAV and market value are published in THE WALL STREET JOURNAL on Mondays.
+ NAV immediately after the closing of the first public offering was $14.36.
++ 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 not 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.
10
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 State of
Delaware. On December 24, 2002, the Fund issued an aggregate of 5,850,000 Common
Shares of beneficial interest, par value $.01 per share, pursuant to the initial
public offering. 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 February 3, 2003:
AMOUNT HELD BY
AMOUNT THE FUND OR
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT AMOUNT OUTSTANDING
-------------- ---------- --------------- ------------------
Common Unlimited 0 6,106,981
Preferred Unlimited 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $53,038,250 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
February 3, 2003, and as adjusted to give effect to the issuance of AMPS offered
hereby.
ACTUAL AS ADJUSTED
------ -----------
AMPS, $.01 par value, $25,000 stated
value per share, at liquidation value; unlimited
shares authorized (no shares issued; 2,147
shares issued, as adjusted) $ -- $53,675,000
Shareholder's Equity:
Common Shares, $.01 par value per share;
unlimited shares authorized, 6,106,981
shares outstanding* 61,070 $ 61,070
Paid-in surplus** 87,207,722 86,570,972
Balance of undistributed net investment income 376,741 376,741
Accumulated net realized loss from
investment transactions (4,072) (4,072)
Net unrealized depreciation of investments (220,638) (220,638)
----------- -----------
Net assets 87,420,823 $86,784,073
=========== ===========
* None of these outstanding shares are held by or for the account of the
Fund.
** As adjusted, paid-in surplus reflects a reduction for the estimated
offering costs of AMPS issuance ($636,750).
11
PORTFOLIO COMPOSITION
As of February 4, 2003, approximately 100% of the market value of the
Fund's portfolio was invested in long-term tax exempt securities. The following
table sets forth certain information with respect to the composition of the
Fund's investment portfolio as of February 4, 2003, based on the highest rating
assigned.
VALUE
CREDIT RATING (000) PERCENT
------------- ----- -------
AAA/Aaa* $45,303,030 46.56%
AA/Aa $ 1,521,410 1.63%
A/A $15,620,044 16.74%
BBB/Baa $20,310,933 21.77%
BB/Ba $ 0 0%
B/B $ 1,120,669 1.20%
Unrated+ $ 9,422,415 10.10%
----------- -----
Total $93,298,501 100%
* 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 issuers of 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.
12
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 defensive purposes, 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,
AMPS 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
AMPS 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 AMPS--Voting Rights."
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 its 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.
13
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.
14
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 AMPS, 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 Securities and Exchange Commission; 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. Holders of AMPS 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. 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.
15
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 AMPS.
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 AMPS, which
pay dividends based on short-term interest rates. The Fund then uses the
proceeds from the sale of AMPS 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, AMPS dividend rates may rise so
that the amount of dividends paid to holders of AMPS exceeds the income from the
portfolio securities purchased with the proceeds from the sale of AMPS. Because
income from the Fund's entire investment portfolio, not just the portion of the
portfolio purchased with the proceeds of the AMPS offering, is available to pay
AMPS dividends, AMPS dividend rates would need to greatly exceed the yield on
the Fund's portfolio before the Fund's ability to pay AMPS 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 AMPS.
AUCTION RISK
The dividend rate for the AMPS normally is set through an auction process.
In the auction, holders of AMPS may indicate the dividend rate at which they
would be willing to hold or sell their AMPS or purchase additional AMPS. The
auction also provides liquidity for the sale of AMPS. An auction fails if there
are more AMPS offered for sale than there are buyers. You may not be able to
sell your AMPS at an auction if the auction fails. Also, if you place hold
orders (orders to retain AMPS) at an auction only at a specified dividend rate,
and that rate exceeds the rate set at the auction, you will not retain your
AMPS. Finally, if you buy AMPS or elect to retain AMPS without specifying a
dividend rate below which you would not wish to buy or continue to hold those
AMPS, you could receive a lower rate of return on your AMPS than the market
rate. See "Description of the AMPS" and "The Auction--Auction Procedures."
SECONDARY MARKET RISK
If you try to sell your AMPS between auctions, you may not be able to sell
any or all of your AMPS or you may not be able to sell them for $25,000 per
share or $25,000 per 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 AMPS in the secondary market. You may transfer AMPS outside of auctions
only to or through (1) a broker-dealer that has entered into an agreement with
the auction agent 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
AMPS. Broker-dealers that maintain a secondary trading market for AMPS are not
required to maintain this market, and the Fund is not required to redeem AMPS
either if an auction or an attempted secondary market sale fails because of a
lack of buyers. AMPS are not listed on a stock exchange or the NASDAQ stock
market. If you sell your AMPS 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.
16
RATINGS AND ASSET COVERAGE RISK
It is expected that Moody's will assign a rating of "Aaa" to the AMPS and
Fitch will assign a rating of "AAA" to the AMPS. Such ratings do not eliminate
or necessarily mitigate the risks of investing in AMPS. Moody's or Fitch could
downgrade AMPS, which may make your AMPS less liquid at an auction or in the
secondary market. If Moody's or Fitch downgrades AMPS, the Fund may alter its
portfolio or redeem AMPS 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 AMPS under certain
circumstances. See "Description of the AMPS--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, Moody's and Fitch. 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 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
17
below the portfolio's current earnings rate. A decline in income could affect
the Fund's ability to pay dividends on AMPS.
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 AMPS to be taxable. Changes or
proposed changes in federal tax laws may cause the prices of municipal
securities to fall.
The Bush Administration has announced a proposal to eliminate the federal
income tax on dividends of income previously taxed at the corporate level. The
availability of tax free dividends may reduce the value of, and return on, other
tax exempt securities which are the primary focus of the Fund's investment
portfolio. Moreover, the proposal may be given a retroactive effect. This change
could adversely affect the Fund's shareholders and distributions they receive
from the Fund.
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 AMPS and dividends can decline.
However, during any periods of rising inflation, AMPS 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 AMPS.
18
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, AMPS 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 AMPS 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 restrictive than
its investment limitations in order to obtain and maintain ratings from an NRSRO
on AMPS. 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
"Fundamental Investment Objective, Policy and Limitations" and "Non-Fundamental
Investment Limitations" in the Statement of Additional Information for a
complete list of the fundamental and non-fundamental investment limitations of
the Fund.
QUALITY OF INVESTMENTS
The Fund will invest at least 80% of its total assets in investment grade
tax exempt securities.
19
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 138 mutual funds and a variety of separate
accounts, which totaled approximately $195 billion in assets as of December 31,
2002. Federated was established in 1955 and is one of the largest mutual fund
investment managers in the United States, with approximately 1,700 employees.
More than 5,000 investment professionals make Federated Funds available to their
customers. In the municipal sector, as of December 31, 2002, Federated managed
14 bond funds with approximately $3.2 billion in assets and 22 money market
funds with approximately $20.6 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.
20
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).
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:
TWELVE MONTH
PERIOD ENDING PERCENTAGE WAIVED
(AS A PERCENTAGE OF AVERAGE
MONTH DATE, YEAR** DAILY MANAGED ASSETS)
------------------ ---------------------
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.
21
DESCRIPTION OF THE AMPS
The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, please refer to the detailed description of the AMPS
in 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 2,147 AMPS, Series A. The AMPS 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 AMPS will rank on parity with any other series of preferred shares of
the Fund as to the payment of dividends and the distribution of assets upon
liquidation. Each of the AMPS carries one vote on matters on which the AMPS can
be voted. The AMPS, 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 the AMPS is as set forth below:
DATE OF ACCUMULATION NUMBER OF DAYS IN
INITIAL DIVIDEND RATE AT INITIAL RATE INITIAL RATE PERIOD
--------------------- -------------------- -------------------
1.05% February 18, 2003 10
Subsequent rate periods for the AMPS 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 the AMPS 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
on the AMPS are scheduled to be paid as follows:
INITIAL DIVIDEND SUBSEQUENT DIVIDEND
PAYMENT DATE PAYMENT DATES
---------------- -------------------
February 28, 2003 Friday
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.
22
CALCULATION OF DIVIDEND PAYMENT. The Fund computes the dividends per share
payable on the AMPS by multiplying the applicable rate in effect for the
dividend period by a fraction. The numerator of this fraction will normally be
seven (i.e., the number of days in the dividend period), and the denominator
will normally be 365. If the Fund has designated a dividend period of other than
seven rate period days (by changing the dividend payment dates for a special
rate period of more than 28 rate period days), then the numerator will be the
number of days in the special dividend period, and the denominator will be 360.
In either case, this rate is then multiplied by $25,000 to arrive at dividends
per share of the AMPS.
Dividends on the AMPS will accumulate from the date of their original
issue. For each rate 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.
For a minimum rate period of seven rate period days, the maximum
applicable rate for the AMPS will generally be the applicable percentage, set
forth in the Applicable Percentage Table below, of the "AA" Financial Composite
Commercial Paper Rate for the rate period. The Statement contains special
provisions for determining the maximum rate for a minimum rate period in the
event the AMPS have had a special rate period of more than 28 rate period days
but have not subsequently had an auction at which sufficient clearing bids
existed.
For a special rate period of more than seven rate period days, the maximum
rate will be the product of the applicable percentage, set forth in the
Applicable Percentage Table below, and the highest of:
- the reference rate, set forth in the Reference Rate Table below, for
a rate period equal in length to the then ending rate period;
- the reference rate, set forth in the Reference Rate Table below, for
a rate period equal in length to the special rate period for which
the auction is being held; or
- the "AA" Financial Composite Commercial Paper Rate for a minimum
rate period of seven rate period days.
The applicable percentage is determined based on the lower of the
prevailing ratings of the AMPS by Moody's or Fitch in effect at the close of
business on the business day next preceeding the auction date. If neither
Moody's nor Fitch shall make such rating available, the rate will be determined
by reference to equivalent ratings issued by one or more substitute NRSROs. 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
----------------------------------------------------------------------------------------
PREVAILING RATINGS APPLICABLE PERCENTAGE
------------------------------------ ------------------------------------------------
APPLICABLE PERCENTAGE: APPLICABLE PERCENTAGE:
MOODY'S FITCH 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%
23
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
------------------------- -------------------------------------------------
182 days or less "AA" Financial Composite Commercial Paper Rate
183 days to 364 days Treasury Bill Rate
365 days or more Treasury Note Rate
The "AA" Financial Composite Commercial Paper Rate is the interest
equivalent of the rate made available by the Federal Reserve for the business
day preceding the auction date, as set forth in the table below:
"AA" FINANCIAL COMPOSITE COMMERCIAL PAPER RATE TABLE
----------------------------------------------------------------------------------------------
MINIMUM RATE PERIOD SPECIAL RATE PERIOD "AA" FINANCIAL COMPOSITE COMMERCIAL PAPER RATE
------------------- ------------------- ----------------------------------------------
7 days* 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
-------------------
* In the case of a minimum rate period for which all outstanding AMPS
are subject to submitted hold orders, the "AA" Financial Composite
Commercial Paper Rate is the interest equivalent of the seven-day
rate.
If the Federal Reserve does not make available any such rate, the rate
shall be the average rate quoted by the Commercial Paper Dealers to the auction
agent for the close of business on the business day next preceding such date.
If an auction for a rate period is not held for any reason other than a
failure by the Fund to timely deposit with the auction agent any dividends or
redemption price of the AMPS, the dividend rate for the rate period will
generally be the maximum rate for the AMPS on the date the auction was scheduled
to be held. The Statement contains special provisions for determining the
applicable rate following a failure by the Fund to timely deposit with the
auction agent any dividends or redemption price payable on the AMPS.
GROSS-UP PAYMENTS. 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 the AMPS. If the Fund makes such a taxable
allocation to a dividend on the AMPS without giving advance notice thereof to
the auction agent as described below under "The Auction--Auction Procedures" (a
"Retroactive Taxable Allocation"), the Fund will pay to the holders of the AMPS
entitled to such dividend, when, as and if declared by the Board out of funds
legally available therefor, an additional payment. The additional payment will
be in an amount (the "Gross-up Payment") which, when taken together with the
aggregate amount of Retroactive Taxable Allocations to which the Gross-up
Payment relates, would cause such holder's dividends, after Federal income tax
consequences, from the aggregate of such Retroactive Taxable Allocations and the
related Gross-up Payment to be equal to the amount of dividends the holder would
have received if the Retroactive Taxable Allocations had been excludable from
the holder's gross income, provided that the Gross-up Payment will be
calculated:
- without consideration being given to the time value of money;
- assuming that no holder of AMPS is subject to AMT with respect to
dividends received from the Fund; and
24
- assuming that each Retroactive Taxable Allocation and each Gross-up
Payment, except to the extent the Gross-up Payment is designated as
an exempt-interest dividend, would be taxable in the hands of each
holder of AMPS at the maximum marginal regular Federal income tax
rate applicable to ordinary income or net capital gain, as
applicable, for individuals or corporations, whichever is greater,
in effect at the time the Gross-up Payment is made.
The Fund will, within 90 days after the end of its fiscal year for which a
Retroactive Taxable Allocation is made, provide notice thereof to the auction
agent and direct the Fund's dividend disbursing agent to send such notice and a
Gross-up Payment to each registered holder of AMPS that was entitled to such
dividend payment during the fiscal year.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. While the AMPS are
outstanding, the Fund may not declare, pay or set apart for payment, any
dividend or other distribution in respect of its Common Shares or call for
redemption, redeem or purchase or otherwise acquire for consideration any of its
Common Shares unless:
- full cumulative dividends on the AMPS through the most recently
ended dividend period have been paid or shall have been declared and
sufficient funds for the payment thereof deposited with the auction
agent;
- the Fund has redeemed the full number of AMPS required to be
redeemed by any provision for mandatory redemption contained in the
Statement; and
- immediately after such transaction, the Discounted Value of the
Fund's portfolio would at least equal the Preferred Shares Basic
Maintenance Amount in accordance with the guidelines of the NRSROs
then rating the AMPS (see "--NRSRO Guidelines and Asset Coverage"
below).
The Fund generally may 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 the AMPS unless the Fund has paid or
contemporaneously declares and pays full cumulative dividends on the AMPS
through the most recent dividend payment date. However, when the Fund has not
paid dividends in full on the AMPS through the most recent dividend payment date
or upon any such classes or series of parity shares through their most recent
dividend payment dates, all dividends upon the AMPS and any such class or
series of parity shares shall be declared pro rata so that the amount of
dividends declared per share on the AMPS and such other class or series of
shares bear to each other the same ratio that accumulated dividends per share on
the AMPS and such other class or series of shares bear to each other.
DESIGNATION OF SPECIAL RATE PERIODS. The Fund may, at its option,
designate any rate period for the AMPS after the initial rate period as a
special rate period consisting of a specified number of rate period days (other
than seven) evenly divisible by seven and not more than 1,820 (approximately
five years), subject to certain adjustments. A designation of a special rate
period shall be effective only if, among other things, (a) the Fund shall have
given certain notices to the auction agent, (b) an auction for the AMPS shall
have been held on the auction date immediately preceding the first day of the
proposed special rate period and sufficient clearing bids shall have existed in
such auction and (c) if the Fund shall have mailed a notice of redemption with
respect to any of the AMPS, the redemption price for such shares shall have been
deposited with the auction agent. The Fund will give holders of AMPS notice of
any special rate period as provided in the Statement.
REDEMPTION
MANDATORY REDEMPTION. 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
NRSROs then rating the AMPS, the AMPS will be subject to mandatory redemption on
a date specified by the Board out of funds legally available therefor in
accordance with the Declaration and
25
applicable law, at the redemption price of $25,000 per share plus an amount
equal to accumulated but unpaid dividends thereon to the date fixed for
redemption. Any such redemption will be limited to the number of AMPS necessary
to restore the required Discounted Value or the Investment Company Act Preferred
Shares Asset Coverage, as the case may be.
OPTIONAL REDEMPTION. The AMPS are redeemable at the option of the Fund,
out of funds legally available therefor, at the redemption price of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon to the
date fixed for redemption:
(a) as a whole or from time to time in part on the second business
day preceding any dividend payment date; provided, however, that (i) the
AMPS may not be redeemed in part if after such partial redemption fewer
than 300 AMPS would remain outstanding; and (ii) the notice establishing a
special rate period may provide that the AMPS shall not be redeemable
during the whole or any part of such special rate period, except as
provided in clause (b) below, or shall be redeemable during the whole or
any part of such special rate period only upon payment of such redemption
premium or premiums as shall be specified therein; and
(b) as a whole but not in part on the first business day following
any dividend period included in a special rate period of more than 364
rate period days if, on the date of determination of the applicable rate
for such rate period, such applicable rate equaled or exceeded the
Treasury Note Rate for such rate period.
Notwithstanding the foregoing, if any dividends on the AMPS are in
arrears, no AMPS shall be redeemed unless all of the outstanding AMPS are
simultaneously redeemed, and the Fund shall not purchase or otherwise acquire
any of the AMPS; provided, however, that the foregoing shall not prevent the
purchase or acquisition of all outstanding AMPS pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, holders of all of the outstanding AMPS.
LIQUIDATION
Subject to the rights of holders of any series or class of shares ranking
on a parity with the AMPS with respect to the distribution of assets upon
liquidation of the Fund, upon a liquidation of the Fund, whether voluntary or
involuntary, the holders of the AMPS then outstanding will be entitled to
receive out of the assets of the Fund available for distribution to its
shareholders, before any payment or distribution shall be made on the Common
Shares, an amount equal to the liquidation preference of $25,000 per share, plus
an amount equal to all dividends thereon accumulated but unpaid to the date of
final distribution, together with any applicable Gross-up Payments in connection
with the liquidation of the Fund. After the payment to the holders of the AMPS
of the full preferential amounts described above, the holders of the AMPS as
such shall have no claim to any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of
the Fund nor the merger or consolidation of the Fund with any corporation or
business trust shall be a liquidation, whether voluntary or involuntary, for the
purposes of the preceding paragraph.
26
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 an NRSRO's guidelines, all or
a portion of the holding's value will not be included in the calculation of
Discounted Value, as defined by that NRSRO. 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 AMPS 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 AMPS ("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 February 5, 2003, the Investment Company
Act Preferred Shares Asset Coverage, assuming the issuance on that date of all
of the AMPS offered hereby and giving effect to the deduction of related sales
load and offering costs estimated at $636,750, would have been computed as
follows:
Value of Fund assets less liabilities
not constituting senior securities = $140,650,829 = 262%
------------------------------------------- ------------
Senior securities representing indebtedness $53,675,000
plus
liquidation value of the AMPS
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 or
NRSROs then rating the AMPS, the Fund will be required to redeem the AMPS 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 AMPS 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 of the Statement 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
AMPS.
As 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. A rating on the AMPS 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 a holder of AMPS will be able to sell such
shares in an auction or otherwise. The ratings are
27
based on current information furnished to Moody's and Fitch by the Fund and the
Adviser and information obtained from other sources. A 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.
An NRSRO's guidelines will apply to the AMPS only so long as such NRSRO is
rating the AMPS. The Fund will pay certain fees to Moody's and Fitch for rating
the AMPS.
VOTING RIGHTS
Except as otherwise described in this prospectus and in the Statement of
Additional Information or as otherwise required by law, holders of AMPS 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 other preferred shares of the Fund as a single class. There are
presently no other preferred shares of the Fund authorized or issued.
Holders of outstanding preferred shares, including the AMPS, 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
the AMPS, voting together as a single class. In addition, if on any dividend
payment date dividends (whether or not earned or declared) on any outstanding
preferred shares, including the AMPS, are due and unpaid in an amount equal to
two full years' 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 the AMPS,
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 the AMPS as described
above, would constitute a majority of the Board. The holders of preferred
shares, including the AMPS, voting as a separate class, will be entitled to
elect that smallest number of additional trustees at a special meeting of
holders of preferred shares held as soon as practicable 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 the AMPS, these
special voting rights will cease, and the terms of office of the additional
trustees elected by the holders of preferred shares, including the AMPS, will
automatically terminate.
As long as any of the AMPS are outstanding, the Fund will not, without the
affirmative vote or consent of the holders of at least a majority of the AMPS
outstanding at the time (voting together as a separate class):
(a) authorize, create or issue any class or series of shares ranking
prior to or on a parity with the AMPS with respect to the payment of
dividends or the distribution of assets upon liquidation, or authorize,
create or issue additional AMPS; except that, notwithstanding the
foregoing, the Board, without the vote or consent of the holders of the
AMPS, may from time to time authorize and create, and the Fund may from
time to time issue, additional AMPS, or classes or series of other
preferred shares ranking on a parity with the AMPS with respect to the
payment of dividends and the distribution of assets upon liquidation if the
Fund receives written confirmation from Moody's (if Moody's is then rating
the AMPS) and Fitch (if Fitch is then rating the AMPS) or any substitute
NRSRO (if such NRSRO is then rating the AMPS) that such authorization,
creation and issuance would not impair the rating then assigned by such
NRSRO to the AMPS and if, in any event, the Fund would, after giving effect
thereto, continue to maintain the Investment Company Act Preferred Shares
Asset Coverage; or
(b) amend, alter or repeal the provisions of the Agreement and
Declaration of Trust or the Statement, whether by merger, consolidation or
otherwise, so as to adversely affect any preference, right or power of the
AMPS or the holders of the AMPS; provided, however, that (i) none of the
28
actions permitted by the exception to (a) above will be deemed to affect
such preferences, rights or powers, (ii) a division or split of the AMPS
will be deemed to affect such preferences, rights or powers only if the
terms thereof adversely affect the holders of the AMPS and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the AMPS with respect to the payment of dividends and the
distribution of assets upon liquidation of the Fund, will be deemed to
affect such preferences, rights or powers only if Moody's or Fitch is then
rating the AMPS 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; or
(c) 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.
Unless a higher percentage is provided for in the Agreement and
Declaration of Trust (see "Certain Provisions in the Agreement and Declaration
of Trust"), the affirmative vote of the holders of "a majority of the
outstanding," as defined in the Investment Company Act, preferred shares,
including the AMPS, voting as a separate class, shall be required to approve (A)
any plan of reorganization, as such term is used in the Investment Company Act,
adversely affecting such shares and (B) any action requiring a vote of security
holders of the Fund under Section 13(a) of the Investment Company Act.
The foregoing voting provisions will not apply with respect to AMPS 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 dividend rate for the AMPS 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 AMPS. 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 Deutsche Bank Trust Company
Americas, which provides, among other things, that the auction agent will follow
the auction procedures set forth in the Statement to determine the applicable
rate for the AMPS, so long as the applicable rate is to be based on the results
of an auction.
The auction agent may terminate the auction agency agreement upon 45 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. 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 one or
more Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in auctions for the AMPS.
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
29
seven days, or a percentage agreed to by the Fund and the Broker-Dealer in the
case of any auction before a special rate period, of the purchase price of AMPS
placed by such Broker-Dealer at the auction.
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 termination of the agreement.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for the AMPS, 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 AMPS may submit
the following types of orders with respect to AMPS to that Broker-Dealer.
1. HOLD ORDER - indicating its desire to hold AMPS without regard to
the applicable rate for the next rate period.
2. BID - indicating its desire to sell AMPS at $25,000 per share if
the applicable rate for the next rate period is less than the rate
specified in the bid.
3. SELL ORDER - indicating its desire to sell AMPS at $25,000 per
share without regard to the applicable rate for the next rate period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to AMPS then held by the beneficial owner. A
beneficial owner that submits a bid to its Broker-Dealer having a rate higher
than the maximum applicable rate for the AMPS on the auction date will be
treated as having submitted a sell order. A beneficial owner that fails to
submit an order to its Broker-Dealer with respect to any AMPS beneficially owned
will ordinarily be deemed to have submitted a hold order with respect to such
shares. However, if a beneficial owner fails to submit to its Broker-Dealer an
order with respect to any AMPS for an auction relating to a special rate period
of more than 28 rate period days, such beneficial owner will be deemed to have
submitted a sell order to its Broker-Dealer with respect to such shares. A sell
order constitutes an irrevocable offer to sell the AMPS subject to the sell
order. A beneficial owner that offers to become the beneficial owner of
additional AMPS is, for purposes of such offer, a potential beneficial owner as
discussed below.
A potential beneficial owner is a customer of a Broker-Dealer either that
is not a beneficial owner of AMPS but wishes to purchase AMPS or that is a
beneficial owner of AMPS and wishes to purchase additional AMPS. A potential
beneficial owner may submit bids to its Broker-Dealer in which it offers to
purchase AMPS at $25,000 per share if the applicable rate for the next rate
period is not less than the rate specified in such bid. A bid placed by a
potential beneficial owner specifying a rate higher than the maximum applicable
rate for the AMPS on the auction date will not be accepted.
The Broker-Dealers in turn will submit to the auction agent the orders of
their respective customers who are beneficial owners and potential beneficial
owners. 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 beneficial owners.
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 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 beneficial owner. Similarly, any failure by a
Broker-Dealer to submit to the auction agent an order in respect of any AMPS
held by its customers who are beneficial owners will be treated in the same
manner as a beneficial owner's failure to submit to its Broker-Dealer an order
in respect of AMPS held by it. A Broker-Dealer may also
30
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 in an auction if the number of AMPS
subject to bids submitted or deemed submitted to the auction agent by
Broker-Dealers for potential holders with rates equal to or lower than the
maximum applicable rate is at least equal to the number of AMPS subject to sell
orders submitted or deemed submitted to the auction agent by Broker-Dealers for
existing holders. If there are sufficient clearing bids in an auction, the
applicable rate for the next succeeding rate period will be the lowest rate
specified in the submitted bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as existing holders and potential holders,
would result in existing holders and potential holders owning the AMPS available
for purchase in the auction.
If there are not sufficient clearing bids in an auction, the applicable
rate for the next rate period will be the maximum applicable rate for the AMPS
on the auction date. If this happens, beneficial owners of AMPS that have
submitted or are deemed to have submitted sell orders may not be able to sell in
the auction all shares subject to such sell orders.
If all of the outstanding AMPS are the subject of submitted or deemed
submitted hold orders, then the applicable rate for the next rate period will
then be the product of:
- (i) if the applicable rate period is less than 183 days, the "AA"
Financial Composite Commercial Paper Rate, (ii) if the applicable
rate period is more than 182 days but fewer than 365 days, the
Treasury Bill Rate or (iii) if the applicable rate period is more
than 364 days, the Treasury Note Rate (such rate, as applicable,
being referred to as the "Benchmark Rate"); multiplied by
- 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 (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 (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.
31
If all of the AMPS are subject to hold orders and the Fund has notified the
auction agent of its intent to allocate to the AMPS any net capital gains or
other income taxable for federal income tax purposes ("Taxable Income"), the
applicable rate for the AMPS 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 lesser of the Kenny Index (if the
applicable rate period is less than 183 days) or 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 share of the AMPS 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 dividend period of 7 rate period days) or 360 (in the case
of any other dividend 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 AMPS that is different
than the number of shares 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 the AMPS will normally be held every Thursday, and each
subsequent rate period will normally begin on the following Friday.
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:
- the dividend payment date for the affected dividend period will be
the next business day on which the Fund and its paying agent, if
any, can pay the dividend;
- the affected dividend period will end on the day it otherwise would
have ended; and
- the next dividend 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 the AMPS, the Fund
may notify the auction agent of the amount to
32
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 beneficial owners 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 to the auction agent, the Fund will not be required to pay any Gross-up
Payment with respect to such dividend.
SECONDARY MARKET TRADING AND TRANSFERS OF AMPS
The Broker-Dealers are expected to maintain a secondary trading market in
the AMPS 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 the AMPS will provide owners with liquidity of
investment. The AMPS are not listed on any stock exchange or authorized for
trading 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.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of AMPS only in whole shares and only:
- pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
- to a Broker-Dealer; or
- to such other persons as may be permitted by the Fund;
provided, however, that
- a sale, transfer or other disposition of AMPS from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer as
the holder of such shares to that Broker-Dealer or another customer
of that Broker-Dealer shall not be deemed to be a sale, transfer or
other disposition if such Broker-Dealer remains the existing holder
of the shares; and
- in the case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Fund) to whom
such transfer is made shall advise the auction agent of such
transfer.
DESCRIPTION OF COMMON SHARES
In addition to the AMPS, 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 of the AMPS are outstanding, Common Shareholders
will not be entitled to receive any distributions from the Fund unless all
accrued dividends on the AMPS have been paid, unless asset coverage, as defined
in the Investment Company Act, with respect to the AMPS would be at least 200%
after giving effect to the distributions and unless certain other requirements
imposed by any NRSROs rating the AMPS 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".
33
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:
- the merger or consolidation of the Fund or any subsidiary of the
Fund with or into any Principal Shareholder;
- the issuance of any securities of the Fund to any Principal
Shareholder for cash other than pursuant to any automatic dividend
reinvestment plan;
- the sale, lease or exchange of all or any substantial part of the
assets of the 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
- the sale, lease or exchange to the Fund or any subsidiary of the
Fund, in exchange for securities of the Fund, of any assets of any
Principal Shareholder, except assets having an aggregate fair market
value of less than $1,000,000, aggregating for purposes of such
computation all assets sold, leased or exchanged in any series of
similar transactions within a twelve-month period.
To convert the Fund to an open-end investment company, the Fund's
Agreement and Declaration of Trust requires the favorable vote of a majority of
the Board followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of shares of the Fund,
voting separately as a class or series, unless such amendment has been approved
by at least 80% of the trustees, in which case "a majority of the outstanding
voting securities," as defined in the 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. 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 AMPS. 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.
34
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 AMPS to maintain asset coverage
requirements imposed by the Investment Company Act or any NRSRO rating the AMPS
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 AMPS. 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 AMPS at any time in
the future, the Fund intends to take the position that under present law the
AMPS 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 AMPS constitute debt of the Fund. If that
position was upheld, distributions on the AMPS 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
35
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 AMPS in proportion to total dividends paid to each
class for the year. The Fund intends to notify holders of AMPS 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 holders of AMPS to offset the tax effects of the taxable
distribution. See "Description of the AMPS--Dividends and Rate Periods--Gross-up
Payments."
The Bush Administration has announced a proposal to eliminate the federal
income tax on dividends of income previously taxed at the corporate level. In
addition, under the proposal, shareholders may be provided with basis
adjustments to reflect income taxed at the corporate level which is not
distributed. Basis adjustments may not be allocated to shares which are
preferred and limited as to dividends. Under the proposal, regulated investment
companies such as the Fund may be permitted to pass through to its shareholders
the excludable dividends and basis adjustments. It is anticipated that
excludable dividends and basis adjustments will be treated similar to tax exempt
interest under many of the rules applicable to regulated investment companies.
Under the proposal, excludable dividends will not be a tax preference for
alternative minimum tax purposes. At this time, however, some of the details of
the proposal have not been specified. In addition, it is uncertain if, and in
what form, the proposal will ultimately be adopted. Accordingly, it is not
possible to evaluate how this proposal might affect the tax discussion above.
The sale or other disposition of Common Shares or AMPS 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 AMPS, 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 AMPS on the deductibility of interest
payable by such holders.
-------------------
(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 Bush Administration has announced a
tax proposal which would accelerate the changes in tax rates and
apply the maximum 35% tax rate in 2003.
36
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.
Under recently adopted temporary regulations regarding tax shelters, every
taxpayer that has participated directly or indirectly in a reportable
transaction must provide a statement with its tax return disclosing certain
information with respect to the transaction. The scope of the regulations and
the definition of a "reportable transaction" are being reconsidered by the
Treasury Department. However, it is possible that certain terms of the AMPS
(e.g., additional dividends in the event of retroactive taxable allocations) and
certain investment activities of the Fund may result in "reportable
transactions." Shareholders of the Fund should consult their tax advisers
regarding the applicability of these disclosure requirements to their
investments in the Fund.
This summary of tax consequences is intended for general information only.
You should consult a tax adviser 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.
37
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as a
representative of the underwriters named below. Subject to the terms and
conditions of a purchase 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 AMPS set forth opposite the name of such underwriter.
NUMBER OF
UNDERWRITER AMPS
----------- ---------
Merrill Lynch, Pierce, Fenner & Smith Incorporated 1,610
UBS Warburg LCC 537
-----
Total 2,147
=====
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 AMPS by Moody's and Fitch, respectively, as of the time
of the offering. The underwriters are obligated to purchase all the AMPS if they
purchase any shares. In the purchase agreement, the Fund and the Adviser have
agreed to indemnify the underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, 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 AMPS directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not in excess of $137.50 per share. The sales load the Fund
will pay of $250 per share is equal to 1% of the initial offering price of the
AMPS. After the initial public offering, the underwriters may change the public
offering price and the concession. Investors must pay for any AMPS purchased in
the initial public offering on or before February 18, 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York 10080. The
principal business address of UBS Warburg LCC is 299 Park Avenue, New York, New
York 10171.
The settlement date for the purchase of the AMPS will be February 18, 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.
38
Deutsche Bank Trust Company Americas, 280 Park Avenue, New York, New York
10017, a banking corporation organized under the laws of New York , is the
auction agent with respect to the AMPS 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 AMPS offered hereby will be
passed upon for the Fund by Dickstein Shapiro Morin & Oshinsky LLP and for the
underwriters by Clifford Chance US LLP. Dickstein Shapiro Morin & Oshinsky LLP
and Clifford Chance US LLP may rely as to certain matters of Delaware law on the
opinion of Reed Smith LLP.
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
Securities and Exchange Commission's public reference room, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Securities and Exchange Commission'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 content of any contract or other document are not
necessarily complete and in each instance reference is made to the copy of the
contract 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 the AMPS can be found in the
Fund's registration statement, including amendments, exhibits, and schedules, on
Form N-2 filed with the Securities and Exchange Commission. The Securities and
Exchange Commission 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.
39
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds 3
Investment Strategies 3
Fundamental Investment Objective, Policy and Limitations 4
Non-Fundamental Investment Limitations 6
Investment Securities 6
Management of the Fund 13
Brokerage Transactions 20
Additional Information Concerning the Auctions for AMPS 21
Description of Common Shares 23
Repurchase of Common Shares 23
Tax Matters 25
Experts 30
Additional Information 30
Independent Auditors' Report 31
Financial Statements 32
APPENDIX A--Statement of Preferences of Auction Market Preferred Shares AA-1
APPENDIX B--Ratings of Investments BB-1
40
$53,675,000
FEDERATED PREMIER MUNICIPAL INCOME FUND
ACTION MARKET PREFERRED SHARES ("AMPS")
2,147 SHARES, SERIES A
LIQUIDATION PREFERENCE $25,000 PER SHARE
PROSPECTUS
MERRILL LYNCH & CO.
UBS WARBURG
CUSIP 31423P 207 February 13, 2003
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 Auction Market Preferred Shares
Series A (the "AMPS") does not constitute a prospectus, but should be read in
conjunction with the prospectus relating thereto dated February 13, 2003. This
Statement of Additional Information does not include all information that a
prospective investor should consider before purchasing AMPS, and investors
should obtain and read the prospectus prior to purchasing such AMPS. 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........................................................3
Investment Strategies..................................................3
Fundamental Investment Objective, Policy And Limitations...............4
Non-Fundamental Investment Limitations.................................6
Investment Securities..................................................6
Management Of The Fund................................................13
Brokerage Transactions................................................20
Additional Information Concerning
The Auctions For AMPS.................................................21
Description Of Common Shares..........................................23
Repurchase Of Common Shares...........................................23
Tax Matters...........................................................25
Experts...............................................................30
Additional Information................................................30
Independent Auditors' Report..........................................31
Financial Statements..................................................32
Appendix A Statement Of Preferences Of Auction Market ..............AA-1
Appendix B Investment Ratings.......................................BB-1
This Statement of Additional Information is dated February 13, 2003.
46
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 AMPS and any preferred shares
that may in the future be issued voting together as a class, and (2) the
outstanding AMPS 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, policy 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 LIMITATIONS
The Fund is also subject to the following non-fundamental investment
limitations, 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 138 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--nine portfolios; Riggs Funds--eight portfolios; and WesMark Funds--five
portfolios.
Interested Trustees Background And Compensation
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous Positions CompensationCompensation
Positions Held From From
with Fund Fund + Fund and
Federated
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 $148,500.00
Ellis, M.D.* the Federated Fund Complex; Professor of
Birth Date: Medicine, University of Pittsburgh; Medical
October11, 1932 Director, University of Pittsburgh Medical
3471 Fifth Center Downtown; Hematologist, Oncologist and
Avenue Suite Internist, University of Pittsburgh Medical
1111 Center. Other Directorships Held: Member,
Pittsburgh, PA National Board of Trustees, Leukemia Society of
TRUSTEE(1)(2) America. Previous Positions: Trustee,
University of Pittsburgh; Director, University
of Pittsburgh Medical Center.
*Family relationships and reasons for "interested" status: John F. Donahue is the father of
J. Christopher Donahue; both are "interested" due to the positions they hold with Federated
Investors, Inc. and its subsidiaries. Lawrence D. Ellis, M.D. is "interested" because his
son-in-law is employed by, Federated Securities Corp., a subsidiary of Federated Investors,
Inc.
+ Board members will not receive compensation from the Fund during the Fund's first fiscal
year. Thereafter, the Fund will be subject to a base charge of $250 per quarter; the
remainder of the "Total Compensation" in column two will be allocated to each fund in the
Federated Fund Complex based on the net assets of each such fund.
Independent Trustees Background And Compensation
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous CompensationCompensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year)+ Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Thomas G. Principal Occupation: Director or Trustee of $0 $163,350.00
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, University of
Trail Pittsburgh. Previous Position: Senior Partner,
Pittsburgh, PA Ernst & Young LLP.
TRUSTEE(1)(2)
John T. Conroy, Principal Occupations: Director or Trustee of $0 $163,350.00
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 $163,350.00
Constantakis the Federated Fund Complex; Previous
Birth Date: Position: Partner, Andersen Worldwide SC.
September3, Other Directorships Held: Director, Michael
1939 175 Baker Corporation (engineering and energy
Woodshire Drive services worldwide).
Pittsburgh, PA
TRUSTEE (1)(2)
John F. Principal Occupation: Director or Trustee of $0 $148,500.00
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 $148,500.00
Birth Date: the Federated Fund Complex; Management
March16, 1942 Consultant.
One Royal Palm Other Directorships Held: Board of Overseers,
Way 100 Royal Babson College
Palm Way Palm
Beach, FL Previous Positions: Representative,
TRUSTEE(1)(2) Commonwealth of Massachusetts General Court;
President, State Street Bank and Trust Company
and State Street Corporation (retired);
Director, VISA USA and VISA 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 $163,350.00
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 $178,200.00
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 $148,500.00
Smuts Birth the Federated Fund Complex; Public Relations/
Date: June21, Marketing Consultant/Conference Coordinator.
1935 4905 Previous Positions: National Spokesperson,
Bayard Street Aluminum Company of America; television
Pittsburgh, PA producer; President, Marj Palmer Assoc.;
TRUSTEE(1)(2) Owner, Scandia Bord.
+ Board members will not receive compensation from the Fund during the
Fund's first fiscal year. Thereafter, the Fund will be subject to a base charge
of $250 per quarter; the remainder of the "Total Compensation" in column two
will be allocated to each fund in the Federated Fund Complex based on the net
assets of each such fund.
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous CompensationCompensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year)+ Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
John S. Walsh Principal Occupations: Director or Trustee of $0 $148,500.00
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.
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
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Board Committee Committee Functions Meetings
Committee Members Held
During
Last
Fiscal
Year
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Executive John F. In between meetings of the full Board, the None
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 One
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 as of December 31, 2002
--------------------------------------------
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 $50,001- Over
Donahue 100,000 $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
The Trustees and Officers of the Fund beneficially and as a group owned
less than 1% of the outstanding Shares of the Fund as of January 31, 2003.
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 AMPS, 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 indebtedness attributable to financial
leverage. The liquidation preference of AMPS or any other preferred shares that
may be issued in the future is not a liability.
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.
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 AMPS
General
Securities Depository. The Depository Trust Company ("DTC") will act as the
Securities Depository with respect to the AMPS. One certificate for all of the
AMPS will be registered in the name of Cede & Co., 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 AMPS
contained in the Statement of Preferences of Auction Market Preferred Shares.
The Fund will also issue stop-transfer instructions to the transfer agent for
AMPS. Prior to the commencement of the right of holders of AMPS to elect a
majority of the Fund's trustees, as described under "Description of the
AMPS--Voting Rights" in the prospectus, Cede & Co. will be the holder of record
of the AMPS and owners of AMPS 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 AMPS, whether for its own
account or as a nominee for another person.
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 AMPS, 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 AMPS" 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 3:30 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. 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 AMPS 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 before a rate period of seven
days, or a percentage agreed to by the Fund and the Broker-Dealer in the case of
any auction before a special rate period, of the purchase price of the AMPS
placed by such Broker-Dealer at such auction.
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. 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 holders of AMPS, of other classes or series of shares, as
it determines 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 AMPS.
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 AMPS are outstanding, the
Fund may not purchase, redeem or otherwise acquire any of its Common Shares
unless (1) all accrued AMPS 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 AMPS (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 events or conditions 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 AMPS 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 acquiring, holding and disposing of AMPS. 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 earnings 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 holders of AMPS 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 holders of AMPS.
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 AMPS 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 holders of AMPS 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 holders of
AMPS as items of interest excluded from their gross income, each holder of AMPS
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
holders of AMPS to be subject to or result in an increased liability under the
AMT. The Fund will annually supply holders of AMPS a report indicating the
amount and nature of amounts distributed to them.
The redemption, sale or exchange of AMPS normally will result in capital
gain or loss to holders of AMPS who hold their AMPS as capital assets.
Generally, a holder of AMPS 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 holders of AMPS. 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 AMPS 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 AMPS
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 AMPS if the holder of AMPS purchases other AMPS
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 AMPS 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 AMPS held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to such AMPS 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 AMPS.
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 Bush
Administration has announced a tax proposal which would accelerate the
changes in tax rates and apply the maximum 35% tax rate in 2003.
---------
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 AMPS 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 the
AMPS--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 AMPS 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 AMPS in whole or in part, and is
required to redeem AMPS 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 AMPS will be
taxed as gain or loss from the sale or exchange of AMPS 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 holder of AMPS
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 AMPS at any time in the future, the Fund intends to take the position
that under present law the AMPS 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 AMPS constitutes debt of the
Fund. If that position was upheld, distributions in the AMPS 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. Holders of AMPS 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 statements of the Fund at December 16, 2002 appearing in this
Statement of Additional Information have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A registration statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Securities and Exchange Commission, Washington, D.C. The prospectus and this
Statement of Additional Information do not contain all of the information set
forth in the registration statement, including any exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
hereby, reference is made to the registration statement. Statements contained in
the prospectus and this Statement of Additional Information as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference. A copy of the registration
statement may be inspected without charge on the EDGAR Database at the
Commission's website at http://www.sec.gov or at the Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Commission upon the payment of certain fees prescribed by the
Commission.
INDEPENDENT AUDITORS' REPORT
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and
Board of Trustees of
Federated Premier Municipal Income Fund
We have audited the accompanying statement of assets and liabilities of
Federated Premier Municipal Income Fund (the Fund) as of December 16, 2002. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with the auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly,
in all material respects, the financial position of Federated Premier Municipal
Income Fund at December 16, 2002, in conformity with accounting principles
generally accepted in the United States of America.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Boston, Massachusetts
December 16, 2002
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES December 16, 2002
Assets:
Cash $100,003
Deferred Offering Costs 200,000
Total Assets 300,003
Liabilities:
Offering Costs Payable (200,000)
Total Liabilities (200,000)
Net Assets (6,981 shares of $0.01 par value shares of beneficial interest
issued and outstanding; unlimited authorized shares) $100,003
Net Asset Value Per Share $14.33
Maximum Offering Price Per Share (100/95.50 of $14.33) $15.00
NOTES TO FINANCIAL STATEMENTS
1. Organization
Federated Premier Municipal Income Fund ("the Fund") was organized as a
Delaware Statutory Trust on October 16, 2002. The Fund has had no operations to
date other than matters relating to its organization and registration as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended, and the sale and issuance to Federated
Investment Management Company ("the Investment Adviser"), a wholly owned
subsidiary of Federated Investors, Inc., of 6,981 shares of beneficial interest
at an aggregate purchase price of $100,003.
2. Accounting Policies
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results could differ from
those estimates.
3. Investment Adviser and Related Parties
The Fund has entered into an Investment Management Agreement (the
"Agreement") with the Investment Adviser to serve as investment manager to the
Fund. Pursuant to the Agreement, the Fund pays the Investment Adviser an annual
management fee, payable daily, at the annual rate of 0.55 % of the Fund's
average daily net assets.
In order to reduce fund expenses, the Investment Adviser has contractually
agreed to waive a portion of its management fee at the annual rate of 0.20% of
the Fund's average daily net assets, not inclusive of any net assets
attributable to any preferred shares that may be issued, from the commencement
of operations through December 31, 2007, and for a declining amount thereafter
through December 31, 2010.
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on a scale that ranges from 0.150% to 0.075% of the
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors, Inc., subject to a $125,000 minimum per portfolio and
$30,000 per each additional class.
4. Organization Expenses and Offering Costs
Based on an estimated Fund offering of 5,850,000 shares, organization
expenses and offering costs are estimated to be $461,114. The Investment Advisor
has agreed to pay i) all organizational costs; and ii) the amount by which the
aggregate of all of the Fund's offering costs (other than sales load) exceed
$0.03 per share. Such amount to be paid by the Investment Adviser is $285,614.
The Fund will pay offering costs estimated at $175,500 from the proceeds of the
offering. Offering costs paid by the Fund will be charged as a reduction of
paid-in capital at the completion of the Fund offering.
5. Federal Income Taxes
The Fund intends to comply with the provisions of the Internal Revenue
Code, as amended, applicable to regulated investment companies and to distribute
to shareholders each year substantially all of its income. Accordingly, no
provision for federal tax is necessary. In addition, by distributing
substantially all of its ordinary income and long-term capital gains, if any,
during each calendar year, the Fund intends not to be subject to federal excise
tax.
6. Contingent Receivable from Investment Adviser
In the event that the public offering of the Fund does not occur, the
Investment Adviser has agreed to reimburse the Fund for all offering costs.
FEDERATED PREMIER MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
(For a Common Share Outstanding Throughout the Period)
Period Ended February 3
(Unaudited) 20031
Net Asset Value, Beginning of $14.32
Period
Income From Investment
Operations:
Net investment income 0.06 2
Net realized and unrealized
loss on investments (0.04 )
Total from investment
operations 0.02
Capital charge with respect to
issuance of common shares (0.03 )
Net Asset Value, End of Period $14.31
Market Value, End of Period $14.55
Total Investment Return3 (3.00 )%
Ratios to Average Net Assets:
Expenses 0.55 %
Net investment income 3.81 %
Expense waiver/reimbursement4 0.35 %
Supplemental Data:
Net assets, end of period (000 $87,421
omitted)
Portfolio turnover 16 %
(1) Reflects operations for the period from December 20, 2002 (commencement of
investment operations) to February 3, 2003.
(2) Calculated using average shares outstanding.
(3) 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. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Fund's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions or sales
charges. Returns for a period less than one year are not annualized.
(4) This voluntary expense decrease is reflected in both the expense and the
net investment income ratios shown above.
See Notes which are an integral part of the Financial Statements
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
Federated Premier Municipal Income Fund
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
February 3, 2003 (Unaudited)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Principal Amount Value
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LONG-TERM MUNICIPALS - 103.0%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Alabama - 4.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$2,000,000 Alabama Water PCA, Revolving Fund Loan $ 1,992,180
Revenue Bonds (Series 2003A), 4.80% (AMBAC
INS)/(Original Issue Yield: 4.90%), 8/15/2022
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Jefferson County, AL Sewer Revenue Bonds
2,000,000 (Series 2002D), 5.25%, 2/1/2026 2,062,600
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
4,054,780
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Arizona - 2.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Salt River, AZ Agricultural Improvements and
1,500,000 Power System Distribution, Electric System 1,513,365
Revenue Bonds (Series 2002A), 5.00% (Salt
River Project), 1/1/2031
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Tempe, AZ IDA, Senior Living Revenue Bonds
750,000 (Series A), 6.75% (Friendship Village of 717,360
Tempe), 12/1/2030
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
2,230,725
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
California - 8.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
California State Department of Water
2,000,000 Resources Power Supply Program, Power Supply 2,040,900
Revenue Bonds (Series A), 5.375% (Original
Issue Yield: 5.48%), 5/1/2022
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
California State Public Works Board,
3,000,000 Department of General Services, Revenue 3,001,170
Bonds, 5.000%, 12/1/2027
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Golden State, CA Tobacco Securitization
2,000,000 Corp., Tobacco Settlement Revenue Bonds 1,950,880
(Series 2003A1), 6.75%, 6/1/2039
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
La Verne, CA, Revenue Certificates of
500,000 Participation (Series 2003B), 6.625% 494,845
(Brethren Hillcrest Homes)/(Original Issue
Yield: 6.70%), 2/15/2025
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
7,487,795
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Colorado - 1.1%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Colorado Health Facilities Authority, Revenue
1,000,000 Bonds (Series 2002A), 6.125% (Covenant 998,520
Retirement Communities, Inc.)/(Original Issue
Yield: 6.40%), 12/1/2033
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Connecticut - 3.2%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Connecticut State Transportation
2,750,000 Infrastructure Authority, Transportation 2,826,148
Infrastructure Special Tax Revenue Bonds
(Series 2002B), 5.00% (AMBAC INS), 12/1/2022
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
District of Columbia - 2.7%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
District of Columbia, (Series 2000) Weekly
2,500,000 VRDNs (Public Welfare Foundation, 2,399,300
Inc.)/(SunTrust Bank LOC)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Florida - 4.4%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Capital Trust Agency, FL, Revenue Bonds
1,000,000 (Series 2001), 10.00% (Seminole Tribe of 1,028,230
Florida Convention and Resort Hotel
Facilities), 10/1/2033
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Citrus County, FL Hospital Board Revenue
1,490,000 Bonds, 6.375% (Citrus Memorial Hospital), 1,472,373
8/15/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Harbor Bay, FL Community Development
1,320,000 District, Special Assessment Revenue Bonds, 1,320,330
6.75%, 5/1/2034
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
3,820,933
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Georgia - 3.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Athens, GA Housing Authority, Lease Revenue
1,500,000 Bonds, 5.25% (University of Georgia-East 1,556,460
Campus)/(AMBAC INS), 12/1/2023
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Athens, GA Housing Authority, Student Housing
1,500,000 Lease Revenue Bonds , 5.25% (University of 1,572,060
Georgia-East Campus)/(AMBAC INS), 12/1/2021
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
3,128,520
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Hawaii - 1.1%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Hawaii State Department of Budget and
1,000,000 Finance, Special Purpose Revenue Bonds 983,420
(Series 2003A), 8.00% (Kahala Nui Project),
11/15/2033
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Illinois - 2.3%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Chicago, IL Special Assessment , Improvement
1,000,000 Revenue Bonds , 6.75% (Lakeshore East 997,960
Project)/(Original Issue Yield: 6.769%),
12/1/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Illinois Educational Facilities Authority
1,000,000 Revenue Bonds (Series 2003A), 5.70% 974,920
(Augustana College), 10/1/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
1,972,880
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Kentucky - 2.3%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Kentucky Economic Development Finance
2,000,000 Authority, Health System Revenue Bonds 2,051,380
(Series 2000A), 6.625% (Norton Healthcare,
Inc.), 10/1/2028
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Massachusetts - 4.7%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Commonwealth of Massachusetts, Construction
3,000,000 Loan LT GO Bonds (Series 2002E), 5.25% (FGIC 3,135,450
INS), 1/1/2022
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Commonwealth of Massachusetts, Development
1,000,000 Financing Agency Revenue Bonds, 5.75% 969,250
(Pharmacy & Allied Health Sciences), 7/1/2033
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
4,104,700
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Michigan - 2.3%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cornell Township, MI Economic Development
2,000,000 Revenue Bonds, 5.875% (Meadwestvaco-Escanaba 2,002,760
Project), 5/1/2018
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Missouri - 1.1%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Missouri State Finance Board, Infrastructure
1,000,000 Facilities Revenue Bonds (Series 2003A), 1,000,290
5.50%, 12/1/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Mississippi - 2.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Lowndes County, MS Solid Waste Disposal and
2,000,000 Pollution Control Revenue Bonds, 6.70% 2,236,140
(Weyerhauser Co. Project), 4/1/2022
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
North Carolina - 1.2%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Haywood County, NC Industrial Facilities and
1,000,000 Pollution Control Financing Authority, 1,009,980
Revenue Bonds, 6.00% (Champion International
Corp. Project), 3/1/2020
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
North Dakota - 2.3%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Ward County, ND Health Care Facilities
2,000,000 Revenue Bonds, 6.25% (Trinity Obligated 2,012,960
Group), 7/1/2026
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Pennsylvania - 5.1%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Allegheny County, PA HDA, Health System
1,000,000 Revenue Bonds (Series 2000), 9.25% (West Penn 1,099,770
Allegheny Health System)/(Original Issue
Yield: 9.70%), 11/15/2030
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cumberland County, PA Municipal Authority,
1,295,000 Retirement Community Revenue Bonds (Series 1,268,103
2002A), 7.25% (Wesley Affiliated Services,
Inc. Obligated Group)/(Original Issue Yield:
7.50%), 1/1/2035
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Pennsylvania State Higher Education
2,000,000 Facilities Authority, Revenue Bonds, Series 2,064,880
A, 6.00% (UPMC Health System)/(Original Issue
Yield: 6.16%), 1/15/2031
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
4,432,753
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
South Carolina - 5.2%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
South Carolina Jobs-EDA, Health System
2,500,000 Revenue Bonds (Series A), 5.625% (Bon Secours 2,478,925
Health System)/(Original Issue Yield: 5.84%),
11/15/2030
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
South Carolina State Public Service
2,000,000 Authority, Refunding Revenue Bonds (Series 2,067,040
2002D), 5.00% (FSA INS), 1/1/2020
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
4,545,965
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Tennessee - 7.8%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Johnson City, TN Health and Educational
2,000,000 Facilities Board, Hospital Revenue Bonds, 2,169,300
7.50%,7/1/2025
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Knox County, TN Health Education & Housing
1,500,000 Facilities Board, Revenue Bonds , 6.375% 1,527,615
(Baptist Health System of East
Tennessee)/(Original Issue Yield: 6.50%),
4/15/2022
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Knox County, TN Health Education & Housing
1,000,000 Facilities Board, Revenue Bonds , 6.50% 1,021,170
(Baptist Health System of East
Tennessee)/(Original Issue Yield: 6.50%),
4/15/2031
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shelby County, TN Health Education & Housing
2,000,000 Facilities Board, Revenue Bonds , 6.50% 2,112,940
(Methodist Healthcare)/(Original Issue Yield:
6.60%), 9/1/2026
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
6,831,025
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Texas - 7.6%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Leander, TX Independent School District,
1,900,000 Refunding UT GO Bonds , 5.375% (PSFG INS), 2,048,314
8/15/2017
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
North Central Texas Health Facilities
1,000,000 Development Revenue Bonds (Series 1999A), 1,020,420
7.50% (Retirement Facilities, Northwest
Senior Housing), 11/15/2029
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Spring Branch, TX Independent School
2,000,000 District, Refunding LT GO Bonds , 5.20% (PSFG 2,076,800
INS)/(Original Issue Yield: 5.23%), 2/1/2020
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Texas State University System, Refunding
1,500,000 Revenue Bonds , 5.00% (FSA INS), 3/15/2020 1,540,260
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
6,685,794
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Utah - 6.2%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Emery County, UT Pollution Control Revenue
3,400,000 Bonds, Daily VRDNs (Pacificorp 3,400,000
Project)/(AMBAC INS)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Utah Transit Authority, Sales Tax Revenue
2,000,000 Bonds (Series 2002A), 5.00% (FSA INS), 2,011,640
6/15/2027
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
5,411,640
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Virginia - 3.8%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Hampton, VA Convention Center, Revenue Bonds,
1,280,000 5.125%, 1/15/2028 1,308,198
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Peninsula Ports Authority, VA, Residential Care Facilit972,870
1,000,000 Revenue Bonds, 7.375% (Virginia Baptist Homes), 12/1/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Richmond, VA, UT GO Bonds (Series 2002A),
1,000,000 5.00% (FSA INS), 7/15/2019 1,047,670
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
3,328,738
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Washington - 9.7%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Everett, WA, LT GO Refunding Bonds, 5.00%
1,000,000 (MBIA Insurance Corp. INS), 12/1/2020 1,029,280
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Seattle, WA Municipal Light & Power,
3,915,000 Improvement & Refunding Revenue Bonds , 3,956,616
5.125% (FSA INS)/(Original Issue Yield:
5.30%), 3/1/2026
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Tobacco Settlement Authority, WA, Tobacco
1,500,000 Settlement Asset Backed Revenue Bonds , 1,452,780
6.625% (Original Issue Yield: 6.875%),
6/1/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Washington State, UT GO Bonds (Series B),
2,000,000 5.00% (FSA INS)/(Original Issue Yield: 2,042,460
5.05%), 1/1/2021
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
8,481,136
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Wisconsin - 6.9%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Wisconsin State HEFA, Health Facilities
4,000,000 Revenue Bonds (Series A), 5.25% (Ministry 4,041,560
Health Care)/(MBIA INS)/(Original Issue
Yield: 5.38%), 2/15/2032
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Wisconsin State HEFA, Health Facilities
1,000,000 Revenue Bonds, 6.00% (Synergyhealth, 992,620
Inc.)/(Original Issue Yield: 6.100%),
11/15/2023
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Wisconsin State HEFA, Health Facilities
1,000,000 Revenue Bonds, 7.25% (Community Memorial 978,910
Hospital, Inc. Project)/(Original Issue
Yield: 7.45%), 1/15/2033
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL
6,013,090
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL LONG-TERM MUNICIPALS (IDENTIFIED COST $90,272,90,051,372
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The cost of investments for federal tax purposes amounts to
1 $90,272,010. The net unrealized depreciation of investments
on a federal tax basis amounts to $220,638 which is comprised
of $158,065 appreciation and $378,703 depreciation at
February 3, 2003.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Note: The categories of investments are shown as a percentage of net assets
($87,420,823) at February 3, 2003.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
The following acronyms were used throughout this portfolio:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AMBAC --American Municipal Bond Assurance Corporation
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EDA --Economic Development Authority
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FGIC --Financial Guaranty Insurance Corporation
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FSA --Financial Security Assurance
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
GO --General Obligation
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
GTD --Guaranteed
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
HDA --Hospital Development Authority
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HEFA --Health and Education Facilities Authority
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IDA --Industrial Development Authority
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INS --Insured
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LOC --Letter of Credit
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LT --Limited Tax
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MBIA --Municipal Bond Insurance Association
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PCA --Pollution Control Authority
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UT --Unlimited Tax
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VRDNs --Variable Rate Demand Notes
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FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
February 3, 2003 (Unaudited)
Assets:
Total investments in securities, at value
(identified cost $90,272,010) $ 90,051,372
Cash 7,787
Receivable for investments sold 1,244,348
Income receivable 1,052,814
Total assets 92,356,321
Liabilities:
Payable for investments purchased $ 4,899,838
Accrued expenses 35,660
Total liabilities 4,935,498
Net assets for 6,106,981 shares outstanding $ 87,420,823
Net Assets Consist of:
Paid in capital $ 87,268,792
Net unrealized depreciation of investments (220,638 )
Accumulated net realized loss on
investments (4,072 )
Undistributed net investment income 376,741
Total Net Assets $ 87,420,823
Net Asset Value Per Share
$87,420,823 / 6,106,981 shares outstanding $14.31
Market Value Per Share $14.55
See Notes which are an integral part of the Financial Statements
--------------------------------------------------------------------------------------------
FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF OPERATIONS
Period Ended February 3, 2003 (Unaudited) (1)
Investment Income:
Interest $ 431,031
Expenses:
Investment adviser fee $ 54,290
Administrative personnel and
services fee 14,726
Custodian fees 543
Transfer and dividend
disbursing agent fees and
expenses 3,455
Auditing fees 2,122
Legal fees 987
Portfolio accounting fees 5,430
Printing and postage 1,974
Insurance premiums 148
Miscellaneous 5,083
Total expenseS 88,758
Waivers and Expense Reduction:
Waiver of investment adviser fee $ (19,742 )
Waiver of administrative
personnel and services fee (14,726 )
Total waivers and expense
reduction (34,468 )
Net expenses 54,290
Net investment income 376,741
Realized and Unrealized Gain
(Loss) on Investments:
Net realized loss on
investments (4,072 )
Net change in unrealized
depreciation of investments (220,638 )
Net realized and unrealized
loss on investments (224,710 )
Change in net assets resulting
from operations $ 152,031
(1) Reflects operations for the period from December 20, 2002 (commencement of
investment operations) to February 3, 2003.
==============================================================================
See Notes which are an integral part of the Financial Statements
FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
Period
Ended
February 3, 2003 (1)
Unaudited
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 376,741
Net realized loss on investments (4,072 )
Net change in unrealized depreciation of
investments (220,638 )
Change in net assets resulting from operations 152,031
Distributions to Shareholders:
Distributions from net investment income --
Share Transactions:
Net proceeds from the issuance of common shares 87,268,792
Change in net assets 87,420,823
Net Assets:
Beginning of period --
End of period (including undistributed net
investment income of $376,741) $ 83,420,823
(1) Reflects operations for the period from December 20, 2002 (commencement of
investment operations) to February 4, 2003.
===============================================================================
See Notes which are an integral part of the Financial Statements
Federated Premier Municipal Income Fund
NOTES TO FINANCIAL STATEMENTS
February 3, 2003 (Unaudited)
------------------------------------------------------------------------------
ORGANIZATION
Federated Premier Municipal Income Fund (the "Fund") was organized as a
Delaware statutory trust on October 16, 2002 and is registered under the
Investment Company Act of 1940, as amended (the "Act") as a diversified,
closed-end management investment company. The investment objective of the Fund
is to provide current income exempt from federal regular income tax, including
alternative minimum tax.
Prior to commencing operations on December 20, 2002, the Fund had no
operations other than matters relating to their organization and registration
and the sales and issuance of 6,981 shares of common stock to Federated
Investment Management Company. The Fund issued 5,850,000 shares of common stock
in its initial public offering on December 20, 2002. These shares were issued at
$15.00 per share before underwriting discount of $0.68 per share. Offering costs
of $175,709 (representing $0.03 per share) were offset against proceeds of the
offering and have been charged to paid-in capital. The Investment Adviser has
paid all offering cost (other than sales load) and organizational expenses
exceeding $0.03 per share of the Fund. An additional 250,000 shares were issued
on February 3, 2003 at $15.00 per share.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles
("GAAP") in the United States of America.
Investment Valuation
Municipal bonds are valued by an independent pricing service, taking into
consideration yield, liquidity, risk, credit quality, coupon, maturity, type of
issue, and any other factors or market data the pricing service deems relevant.
Short-term securities are valued at the prices provided by an independent
pricing service. However, short-term securities with remaining maturities of 60
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value. Securities for which no quotations are readily
available are valued at fair value as determined in good faith using methods
approved by the Board of Trustees (the "Trustees").
Investment Income, Expenses and Distributions
Interest income and expenses are accrued daily. All discount/premiums are
accreted/amortized for financial reporting purposes as required. Dividend income
and distributions to shareholders are recorded on the ex-dividend date. Non-cash
dividends included in dividend income, if any, are recorded at fair value.
Federal Taxes
It is the Fund's policy to comply with the provisions of the Internal
Revenue Code, as amended, (the "Code"), applicable to regulated investment
companies and to distribute to shareholders each year substantially all of its
income. Accordingly, no provision for federal tax is necessary.
When-Issued and Delayed Delivery Transactions
The Fund may engage in when-issued or delayed delivery transactions. The
Fund records when-issued securities on the trade date and maintains security
positions such that sufficient liquid assets will be available to make payment
for the securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date. Losses may occur on these transactions due to changes in market
conditions or the failure of counterparties to perform under the contract.
Restricted Securities
Restricted securities are securities that may only be resold upon
registration under federal securities laws or in transactions exempt from such
registration. In some cases, the issuer of restricted securities has agreed to
register such securities for resale, at the issuer's expense either upon demand
by the Fund or in connection with another registered offering of the securities.
Many restricted securities may be resold in the secondary market in transactions
exempt from registration. Such restricted securities may be determined to be
liquid under criteria established by the Trustees. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no market
prices are available, at the fair value as determined in good faith using
methods approved by the Trustees.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts of assets,
liabilities, expenses and revenues reported in the financial statements. Actual
results could differ from those estimated.
Other
Investment transactions are accounted for on a trade date basis.
CAPITAL STOCK
At February 3, 2003, there is an unlimited number of par value shares
($0.01 per share) authorized. Of the 6,106,981 common shares outstanding at
February 3, 2003, the advisor owned 6,981 shares.
INVESTMENT ADVISER FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Adviser Fee
The Fund has entered into an Investment Management Agreement (the
"Agreement") with the Federated Investment Management Company (the "Adviser") to
serve as investment manager to the Fund. Pursuant to the Agreement, the Fund
pays the Adviser an annual management fee, payable daily, at the annual rate of
0.55% of the Fund's managed assets.
In order to reduce fund expenses, the Adviser has contractually agreed to
waive a portion of its investment adviser fee at the annual rate of 0.20% of the
averaged daily value of the Fund's managed assets, not inclusive of any assets
attributable to any preferred shares that may be issued, from the commencement
of operations through December 31, 2007, and for a declining amount thereafter
through December 31, 2010.
Administrative Fee
Federated Services Company ("FServ"), under the Administrative Services
Agreement, provides the Fund with administrative personnel and services. The fee
paid to FServ is based on a scale that ranges from 0.150% to 0.075% of the
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors, Inc., subject to a $125,000 minimum per portfolio and
$30,000 per each additional class. FServ may voluntarily choose to waive any
portion of its fee. FServ can modify or terminate this voluntary waiver at any
time at its sole discretion.
Transfer and Dividend Disbursing Agent Fees and Expenses
EquiServe Trust Company, N.A. ("EquiServe") serves as transfer and dividend
disbursing agent for the Fund. The fee paid to EquiServe is based on the size,
type and number of accounts and transactions made by shareholders.
Portfolio Accounting Fees
FServ maintains the Fund's accounting records for which it receives a fee.
The fee is based on the level of the Fund's average daily net assets for the
period, plus out-of-pocket expenses.
Interfund Transactions
During the period ended February 3, 2003, the Fund engaged in purchase and
sale transactions with funds that have a common investment adviser (or
affiliated investment advisers), common Trustees/Trustees, and/or common
Officers. These purchase and sale transactions complied with Rule 17a-7 under
the Act and amounted to $36,477,250 and $55,960,000, respectively.
General
Certain of the Officers and Trustees of the Corporation are Officers and
Trustees or Trustees of the above companies.
INVESTMENT TRANSACTIONS
Purchases and sales of investments, excluding short-term securities (and
in-kind contributions), for the period ended February 3, 2003, were as follows:
-----------------------------------------------------------------
Purchases $ 98,863,982
-----------------------------------------------------------------
-----------------------------------------------------------------
Sales $ 11,974,404
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APPENDIX A
FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF PREFERENCES OF
AUCTION MARKET PREFERRED SHARES
("AMPS")
TABLE OF CONTENTS
Definitions.............................................................. AA-2
Part I................................................................... AA-19
1. Number of Authorized Shares........................................... AA-19
2. Dividends............................................................. AA-19
3. Gross-up Payments..................................................... AA-23
4. Designation of Special Rate Periods................................... AA-24
5. Voting Rights......................................................... AA-26
6. Investment Company Act Preferred Shares Asset Coverage................ AA-30
7. Preferred Shares Basic Maintenance Amount............................. AA-30
8. Reserved.............................................................. AA-31
9. Restrictions on Dividends and Other Distributions..................... AA-32
10.............................................Rating Agency Restrictions AA-33
11.............................................................Redemption AA-38
12.....................................................Liquidation Rights AA-41
13..........................................................Miscellaneous AA-42
Part II.................................................................. AA-43
1. Orders................................................................ AA-43
2. Submission of Orders by Broker-Dealers to Auction Agent............... AA-45
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and AA-47
Applicable Rate.......................................................
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares.............................................. AA-49
5. Notification of Allocations........................................... AA-51
6. Auction Agent......................................................... AA-51
7. Transfer of AMPS...................................................... AA-52
8. Global Certificate.................................................... AA-52
Exhibit A................................................................ AA-54
FEDERATED PREMIER MUNICIPAL INCOME FUND, a Delaware statutory trust (the
"Fund"), certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees of
the Fund by Article VI of the Fund's Agreement and Declaration of Trust, as
amended and restated (which, as hereafter restated, amended and supplemented
from time to time is, together with this Statement, herein called the
"Declaration"), the Board of Trustees has, by resolution, authorized the
issuance of shares of the Fund's authorized preferred shares, liquidation
preference $25,000 per share, having such designation or designations as to
series as is set forth in Section 1 of Exhibit A hereto and such number of
shares per such series as is set forth in Section 2 of Exhibit A hereto.
Second: The preferences, rights, voting powers, restrictions, limitations
as to dividends, qualifications, and terms and conditions of redemption, of the
shares of each series of preferred shares now or hereafter described in Section
1 of Exhibit A hereto ("AMPS") are as follows (each such series being referred
to herein as a series of AMPS, and shares of all such series being referred to
herein individually and collectively as AMPS).
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Exhibit A hereto,
as used in this Statement, the following terms shall have the following meanings
(with terms defined in the singular having comparable meanings when used in the
plural and vice versa), unless the context otherwise requires:
(1) "'AA' FINANCIAL COMPOSITE COMMERCIAL PAPER RATE," on any date for any
Rate Period of shares of a series of AMPS, shall mean (i) (A) in the case of any
Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Financial Composite
Commercial Paper Rate is being used to determine the Applicable Rate for shares
of such series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven- day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more but
fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99 Rate
Period Days, the interest equivalent of the 90-day rate; (4) 99 or more but
fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the interest
equivalents of the 120-day and 180-day rates; and (7) 162 or more but fewer than
183 Rate Period Days, the interest equivalent of the 180-day rate, in each case
on commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or the equivalent of such rating by S&P or another rating agency, as
made available on a discount basis or otherwise by the Board of Governors of the
Federal Reserve System ("Federal Reserve") for the Business Day next preceding
such date; or (ii) in the event that the Federal Reserve does not make available
any such rate, then the arithmetic average of such rates, as quoted on a
discount basis or otherwise, by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day next preceding such date. If
any Commercial Paper Dealer does not quote a rate required to determine the "AA"
Financial Composite Commercial Paper Rate, the "AA" Financial Composite
Commercial Paper Rate shall be determined on the basis of the quotation or
quotations furnished by the remaining Commercial Paper Dealer or Commercial
Paper Dealers and any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Fund to provide such rate or rates not
being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as
the case may be, or, if the Fund does not select any such Substitute Commercial
Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial
Paper Dealer or Commercial Paper Dealers. For purposes of this definition, the
"interest equivalent" of a rate stated on a discount basis (a "discount rate")
for commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction,
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360.
(2) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.
(3) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Fund; provided, however, that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate, nor shall any Person, or any Person
controlled by, in control of or under common control with such Person, one of
the trustees, directors or executive officers of which is a Trustee of the Fund
be deemed to be an Affiliate solely because such trustee, director or executive
officer is also a Trustee of the Fund.
(4) "AGENT MEMBER" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
(5) "AMPS" shall have the meaning set forth on the first page of this
Statement.
(6) "APPLICABLE RATE" shall have the meaning specified in subparagraph (e)
(i) of Section 2 of Part I of this Statement.
(7) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(8) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the Fund
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of AMPS so long as the Applicable Rate for shares of
such series is to be based on the results of an Auction.
(9) "AUCTION AGENT" shall mean the entity appointed as such by a resolution
of the Board of Trustees or the Executive Committee of the Board of Trustees in
accordance with Section 6 of Part II of this Statement.
(10) "AUCTION DATE," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(11) "AUCTION PROCEDURES" shall mean the procedures for conducting Auctions
set forth in Part II of this Statement.
(12) "AVAILABLE AMPS" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
(13) "BENCHMARK RATE" shall have the meaning specified in paragraph
(b)(iii) of Section 3 of Part II of this Statement.
(14) "BENEFICIAL OWNER," with respect to shares of a series of AMPS, means
a customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of shares of such series.
(15) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(16) "BIDDER" and "BIDDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Fund nor any affiliate thereof shall be permitted to be a Bidder in
an Auction, except that any Broker-Dealer that is an affiliate of the Fund may
be a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer
are not for its own account.
(17) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Fund or
any duly authorized committee thereof.
(18) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Statement, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has been
selected by the Fund and has entered into a Broker-Dealer Agreement that remains
effective.
(19) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Fund, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Statement.
(20) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange
is open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.
(21) "CODE" means the Internal Revenue Code of 1986, as amended.
(22) "COMMERCIAL PAPER DEALERS" shall mean Merrill Lynch Money Markets
Inc., Lehman Brothers Inc. and Goldman Sachs Group, Inc., and any other
commercial paper dealer selected by the Fund as to which Moody's, Fitch or any
substitute rating agency then rating the AMPS shall not have objected or, in
lieu of any thereof, their respective affiliates or successors, if such entity
is a commercial paper dealer.
(23) "COMMON SHARES" shall mean the common shares of beneficial interest,
par value $.01 per share, of the Fund.
(24) "CURE DATE" shall mean the Preferred Shares Basic Maintenance Cure
Date or the Investment Company Act Cure Date, as the case may be.
(25) "DATE OF ORIGINAL ISSUE," with respect to shares of a series of AMPS,
shall mean the date on which the Fund initially issued such shares.
(26) "DECLARATION" shall have the meaning specified on the first page of
this Statement.
(27) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations rated
at least P-1, MIG-1 or VMIG-1 by Moody's, or F1 by Fitch.
(28) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Moody's Discount Factor, or (b) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or next call price thereof, including any call
premium, divided by (2) the applicable Moody's Discount Factor, and (ii) with
respect to a Fitch Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Fitch Discount Factor, or (b) with
respect to a Fitch Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or next call price thereof, including any call
premium, divided by (2) the applicable Fitch Discount Factor.
(29) "DIVIDEND PAYMENT DATE," with respect to shares of a series of AMPS,
shall mean any date on which dividends are payable on shares of such series
pursuant to the provisions of paragraph (d) of Section 2 of Part I of this
Statement.
(30) "DIVIDEND PERIOD," with respect to shares of a series of AMPS, shall
mean the period from and including the Date of Original Issue of shares of such
series to but excluding the initial Dividend Payment Date for shares of such
series and any period thereafter from and including one Dividend Payment Date
for shares of such series to but excluding the next succeeding Dividend Payment
Date for shares of such series.
(31) "EXISTING HOLDER," with respect to shares of a series of AMPS, shall
mean a Broker-Dealer (or any such other Person as may be permitted by the Fund)
that is listed on the records of the Auction Agent as a holder of shares of such
series.
(32) "EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.
(33) "FAILURE TO DEPOSIT," with respect to shares of a series of AMPS,
shall mean a failure by the Fund to pay to the Auction Agent, not later than
12:00 noon, New York City time, (A) on the Business Day next preceding any
Dividend Payment Date for shares of such series, in funds available on such
Dividend Payment Date in The City of New York, New York, the full amount of any
dividend (whether or not earned or declared) to be paid on such Dividend Payment
Date on any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in The City of New York, New York, the Redemption Price to be paid on
such redemption date for any share of such series after notice of redemption is
mailed pursuant to paragraph (c) of Section 11 of Part I of this Statement;
provided, however, that the foregoing clause (B) shall not apply to the Fund's
failure to pay the Redemption Price in respect of AMPS when the related Notice
of Redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(34) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in the
definition of "Fitch Volatility Factor" and "Moody's Volatility Factor."
(35) "FITCH" shall mean Fitch Ratings and its successors.
(36) "FITCH DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Fitch Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Exposure
Period, in accordance with the table set forth below.
RATING CATEGORY
Exposure Period AAA* AA* A* BBB* F1** UNRATED***
7 weeks.............. 151% 159% 166% 173% 136% 225%
8 weeks or less but
greater than 7 weeks. 154% 161% 168% 176% 137% 231%
9 weeks or less but
greater than 8 weeks. 158% 163% 170% 177% 138% 240%
___________
* Fitch rating (or, if not rated by Fitch, see the definition of "Fitch
Eligible Asset" below).
** Municipal Obligations rated F1 by Fitch (or, if not rated by Fitch, see
the definition of "Fitch Eligible Asset" below), which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a long-term
rating.
*** Municipal Obligations rated less than BBB by Fitch (or, if not rated by
Fitch, see the definition of "Fitch Eligible Asset" below) or unrated.
Notwithstanding the foregoing, (i) the Fitch Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated at least F2 by Fitch (or, if not rated by Fitch, rated MIG-1, VMIG-1 or
P-1 by Moody's or at least A-1+ or SP-1+ by S&P) and mature or have a demand
feature at par exercisable in 30 days or less, and (ii) no Fitch Discount Factor
will be applied to cash or to Receivables for Municipal Obligations Sold.
(37).. "FITCH ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Fitch rating, as applicable, suspended by Fitch, and (iii) is
part of an issue of Municipal Obligations of at least $10,000,000. Municipal
Obligations issued by any one issuer and rated BB or lower or not rated (for the
purposes of this definition only, "Other Securities") may comprise no more than
4% of total Fitch Eligible Assets; such Other Securities, if any, together with
any Municipal Obligations issued by the same issuer and rated BBB by Fitch may
comprise no more than 6% of total Fitch Eligible Assets; such Other Securities
and BBB-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by the same issuer and rated A by Fitch, may comprise no more
than 10% of total Fitch Eligible Assets; and such Other Securities, and BBB and
A-rated Municipal Obligations, if any, together with any Municipal Obligations
issued by the same issuer and rated AA by Fitch, may comprise no more than 20%
of total Fitch Eligible Assets. For purposes of the foregoing sentence (i) any
Municipal Obligation backed by the guaranty, letter of credit or insurance
issued by a third party shall be deemed to be issued by such third party if the
issuance of such third party credit is the sole determinant of the rating on
such Municipal Obligation; and (ii) any Municipal Obligation for which the
nominal issuer is a conduit for a third party the obligations of which are the
sole source of revenues for the payment of such Municipal Obligation shall be
deemed to be issued by such third party. Other Securities issued by issuers
located within a single state or territory may comprise no more than 12% of
total Fitch Eligible Assets; such Other Securities, if any, together with any
Municipal Obligations issued by issuers located within the same state or
territory and rated BBB by Fitch, may comprise no more than 20% of total Fitch
Eligible Assets; such Other Securities, BBB-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located within the
same state or territory and rated A by Fitch, may comprise no more than 40% of
total Fitch Eligible Assets; and such Other Securities and BBB and A-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated AA by Fitch, may
comprise no more than 60% of total Fitch Eligible Assets. For purposes of
applying the foregoing requirements and applying the applicable Fitch Discount
Factor, if a Municipal Obligation is not rated by Fitch but is rated by Moody's
and S&P, such Municipal Obligation (excluding short-term Municipal Obligations)
will be deemed to have the Fitch rating which is the lower of the Moody's and
S&P rating. If a Municipal Obligation is not rated by Fitch but is rated by
Moody's or S&P, such Municipal Obligation (excluding short-term Municipal
Obligations) will be deemed to have such rating. For the purposes of applying
the foregoing percentage test requirements, Eligible Assets shall be calculated
without including cash; and Municipal Obligations rated F1 by Fitch or, if not
rated by Fitch, rated MIG-1, VMIG-1 or P-1 by Moody's; or, if not rated by
Moody's, rated A-1+/AA or SP-1+/AA by S&P shall be considered to have a
long-term rating of A. When the Fund sells a Municipal Obligation and agrees to
repurchase such Municipal Obligation at a future date, such Municipal Obligation
shall be valued at its Discounted Value for purposes of determining Fitch
Eligible Assets, and the amount of the repurchase price of such Municipal
Obligation shall be included as a liability for purposes of calculating the
Preferred Shares Basic Maintenance Amount. When the Fund purchases a Fitch
Eligible Asset and agrees to sell it at a future date, such Fitch Eligible Asset
shall be valued at the amount of cash to be received by the Fund upon such
future date, provided that the counterparty to the transaction has a long-term
debt rating of at least A by Fitch and the transaction has a term of no more
than 30 days; otherwise, such Fitch Eligible Asset shall be valued at the
Discounted Value of such Fitch Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Fitch
Eligible Asset for purposes of determining the Preferred Shares Basic
Maintenance Amount to the extent it is (i) subject to any material lien,
mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in good
faith by appropriate proceedings and which Fitch (if Fitch is then rating the
AMPS) has indicated to the Fund will not affect the status of such asset as a
Fitch Eligible Asset, (b) Liens for taxes that are not then due and payable or
that can be paid thereafter without penalty, (c) Liens to secure payment for
services rendered or cash advanced to the Fund by the Fund's investment adviser,
custodian or the Auction Agent, (d) Liens by virtue of any repurchase agreement,
and (e) Liens in connection with any futures margin account; or (ii) deposited
irrevocably for the payment of any liabilities for purposes of determining the
Preferred Shares Basic Maintenance Amount.
(38) "FITCH HEDGING TRANSACTIONS" shall have the meaning specified in
paragraph (b)(1) of Section 10 of Part I of this Statement.
(39) "FITCH VOLATILITY FACTOR" shall mean, as of any Valuation Date, (i) in
the case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period
Days or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; and (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date described in (i) above in this definition instead shall
be determined by reference to the following table:
Federal Tax Rate Increase Fitch Volatility Factor
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
(40) "FORWARD COMMITMENTS" shall have the meaning specified in paragraph
(a)(iv) of Section 10 of Part I of this Statement.
(41) "FUND" shall mean the entity named on the first page of this
Statement, which is the issuer of the AMPS.
(42) "GROSS-UP PAYMENT" means payment to a Holder of AMPS of an amount
which, when taken together with the aggregate amount of Taxable Allocations made
to such Holder to which such Gross-up Payment relates, would cause such Holder's
dividends in dollars (after Federal income tax consequences) from the aggregate
of such Taxable Allocations and the related Gross-up Payment to be at least
equal to the dollar amount of the dividends which would have been received by
such Holder if the amount of such aggregate Taxable Allocations had been
excludable from the gross income of such Holder. Such Gross-up Payment shall be
calculated (i) without consideration being given to the time value of money;
(ii) assuming that no Holder of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Fund; and (iii) assuming
that each Taxable Allocation and each Gross-up Payment (except to the extent
such Gross-up Payment is designated as an exempt-interest dividend under Section
852(b)(5) of the Code or successor provisions) would be taxable in the hands of
each Holder of AMPS at the maximum marginal regular Federal individual income
tax rate applicable to ordinary income or net capital gain, as applicable, or
the maximum marginal regular Federal corporate income tax rate applicable to
ordinary income or net capital gain, as applicable, whichever is greater, in
effect at the time such Gross-up Payment is made.
(43) "HOLDER," with respect to shares of a series of AMPS, shall mean the
registered holder of such shares as the same appears on the record books of the
Fund.
(44) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(45) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Fund an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
(46) "INITIAL RATE PERIOD," with respect to shares of a series of AMPS,
shall have the meaning specified with respect to shares of such series in
Section 5 of Exhibit A hereto.
(47) "INTEREST EQUIVALENT" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
(48) "INVESTMENT COMPANY ACT" shall mean the Investment Company Act of
1940, as amended from time to time.
(49) "INVESTMENT COMPANY ACT CURE DATE," with respect to the failure by the
Fund to maintain the Investment Company Act Preferred Shares Asset Coverage (as
required by Section 6 of Part I of this Statement) as of the last Business Day
of each month, shall mean the last Business Day of the following month.
(50) "INVESTMENT COMPANY ACT PREFERRED SHARES ASSET COVERAGE" shall mean
asset coverage, as defined in Section 18(h) of the Investment Company Act, of at
least 200% with respect to all outstanding senior securities of the Fund which
are shares of beneficial interest, including all outstanding AMPS (or such other
asset coverage as may in the future be specified in or under the Investment
Company Act as the minimum asset coverage for senior securities which are shares
or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock).
(51) "KENNY INDEX," shall mean the Kenny S&P 30 day High Grade Index or any
successor index (provided, however, that any such successor index must be
approved by Moody's (if Moody's is then rating the AMPS) and Fitch (if Fitch is
then rating the AMPS)), made available by Kenny S&P Evaluation Services or any
successor thereto, based upon 30-day yield evaluations at par of short-term
bonds the interest on which is excludable for regular Federal income tax
purposes under the Code of "high grade" component issuers selected by Kenny S&P
Evaluation Services or any such successor from time to time in its discretion,
which component issuers shall include, without limitation, issuers of general
obligation bonds, but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57 (a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax."
(52) "LATE CHARGE" shall have the meaning specified in subparagraph (e) (1)
(B) of Section 2 of Part I of this Statement.
(53) "LIQUIDATION PREFERENCE," with respect to a given number of AMPS,
means $25,000 times that number.
(54) "MARKET VALUE" of any asset of the Fund shall be the market value
thereof determined by J.J. Kenny or any other pricing service or services
designated by the Board of Trustees of the Fund, provided that the Fund obtains
written assurance from Moody's and Fitch, if Moody's and Fitch are then rating
the AMPS, and from any substitute rating agency then rating the AMPS that such
designation will not impair the rating then assigned by Moody's, Fitch or such
substitute rating agency to the AMPS (the "Pricing Service"). Market Value of
any asset shall include any interest accrued thereon. The Pricing Service shall
value portfolio securities at the mean between the quoted bid and ask price or
the yield equivalent when quotations are not readily available. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the Pricing Service using methods which include consideration of:
yields or prices of municipal obligations of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. The Pricing Service may employ electronic data processing
techniques and/or a matrix system to determine valuations. If the Pricing
Service fails to provide the Market Value of any Municipal Obligation, such
Municipal Obligation shall be valued at the lower of two bid quotations (one of
which shall be in writing) obtained by the Fund from two dealers who are members
of the National Association of Securities Dealers, Inc. and are making a market
in such Municipal Obligations. Futures contracts and options are valued at
closing prices for such instruments established by the exchange or board of
trade on which they are traded, or if market quotations are not readily
available, are valued at fair value as determined by the Pricing Service or if
the Pricing Service is not able to value such instruments, they shall be valued
at fair value on a consistent basis using methods determined in good faith by
the Board of Trustees.
(55) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Fund were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Fund, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
(56) "MAXIMUM RATE," for shares of a series of AMPS on any Auction Date for
shares of such series, shall mean:
(i) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Fund pursuant to Section 4 of Part I of this Statement, the
product of (A) the Reference Rate on such Auction Date for the next Rate Period
of shares of such series and (B) the Rate Multiple on such Auction Date, unless
shares of such series have or had a Special Rate Period (other than a Special
Rate Period of 28 Rate Period Days or fewer) and an Auction at which Sufficient
Clearing Bids existed has not yet occurred for a Minimum Rate Period of shares
of such series after such Special Rate Period, in which case the higher of:
(A) the dividend rate on shares of such series for the then-ending Rate
Period; and
(B) the product of (1) the higher of (x) the Reference Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was 364 Rate Period Days or
fewer, or the Treasury Note Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was more than 364 Rate Period Days, and (y) the
Reference Rate on such Auction Date for a Rate Period equal in length to such
Special Rate Period of shares of such series, if such Special Rate Period was
364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction Date
for a Rate Period equal in length to such Special Rate Period, if such Special
Rate Period was more than 364 Rate Period Days and (2) the Rate Multiple on such
Auction Date; or
(ii) in the case of any Auction Date which is the Auction Date immediately
prior to the first day of any proposed Special Rate Period designated by the
Fund pursuant to Section 4 of Part I of this Statement, the product of (A) the
highest of (1) the Reference Rate on such Auction Date for a Rate Period equal
in length to the then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the Treasury Note
Rate on such Auction Date for a Rate Period equal in length to the then-ending
Rate Period of shares of such series, if such then-ending Rate Period was more
than 364 Rate Period Days, (2) the Reference Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special Rate
Period is 364 Rate Period Days or fewer or the Treasury Note Rate on such
Auction Date for the Special Rate Period for which the Auction is being held if
such Special Rate Period is more than 364 Rate Period Days, and (3) the
Reference Rate on such Auction Date for Minimum Rate Periods and (B) the Rate
Multiple on such Auction Date.
(57) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7 Rate
Period Days.
(58) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(59) "MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Exposure
Period, in accordance with the table set forth below:
RATING CATEGORY
Exposure Period Aaa* Aa* A* Baa* Other**(V)MIG-1***SP-1+**** UNRATED*****
7 weeks........... 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less
but greater than 154% 161% 168% 176% 190% 137% 149% 231%
7 weeks...........
9 weeks or less
but greater than 158% 163% 170% 177% 192% 138% 150% 240%
8 weeks...........
___________
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
have a demand feature at par exercisable in 30 days and which do not have a
long-term rating.
**** Municipal Obligations not rated by Moody's but rated A-1+ or SP-1+ by
S&P, which do not mature or have a demand feature at par exercisable in 30 days
and which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than
BBB by S&P or not rated by Moody's or S&P. These Municipal Obligations may not
exceed 10% of Moody's Eligible Assets.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for short-
term Municipal Obligations will be 115%, so long as such Municipal Obligations
are rated at least MIG-1, VMIG-l or P-1 by Moody's and mature or have a demand
feature at par exercisable in 30 days or less or 125% as long as such Municipal
Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and mature or have a
demand feature at par exercisable in 30 days or less and (ii) no Moody's
Discount Factor will be applied to cash or to Receivables for Municipal
Obligations Sold.
(60) "MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Moody's rating, as applicable, suspended by Moody's, and (iii)
is part of an issue of Municipal Obligations of at least $10,000,000. Municipal
Obligations issued by any one issuer and rated BBB or lower by S&P, or Ba or
lower by Moody's or not rated by S&P or Moody's (for the purposes of this
definition only, "Other Securities") may comprise no more than 4% of total
Moody's Eligible Assets; such Other Securities, if any, together with any
Municipal Obligations issued by the same issuer and rated Baa by Moody's or A by
S&P, may comprise no more than 6% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated A by Moody's or AA by
S&P, may comprise no more than 10% of total Moody's Eligible Assets; and such
Other Securities, Baa, A and AA-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by the same issuer and rated Aa by Moody's
or AAA by S&P, may comprise no more than 20% of total Moody's Eligible Assets.
For purposes of the foregoing sentence (i) any Municipal Obligation backed by
the guaranty, letter of credit or insurance issued by a third party shall be
deemed to be issued by such third party if the issuance of such third party
credit is the sole determinant of the rating on such Municipal Obligation; and
(ii) any Municipal Obligation for which the nominal issuer is a conduit for a
third party the obligations of which are the sole source of revenues for the
payment of such Municipal Obligation shall be deemed to be issued by such third
party. Other Securities issued by issuers located within a single state or
territory may comprise no more than 12% of total Moody's Eligible Assets; such
Other Securities, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated Baa by Moody's or A
by S&P, may comprise no more than 20% of total Moody's Eligible Assets; such
Other Securities, Baa and A-rated Municipal Obligations, if any, together with
any Municipal Obligations issued by issuers located within the same state or
territory and rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated Aa by Moody's or
AAA by S&P, may comprise no more than 60% of total Moody's Eligible Assets. For
purposes of applying the foregoing requirements, a Municipal Obligation shall be
deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by S&P, Moody's
Eligible Assets shall be calculated without including cash, and Municipal
Obligations rated MIG-1, VMIG- 1 or P-1 or, if not rated by Moody's, rated
A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-term rating of A.
When the Fund sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the Preferred Shares Basic
Maintenance Amount. When the Fund purchases a Moody's Eligible Asset and agrees
to sell it at a future date, such Eligible Asset shall be valued at the amount
of cash to be received by the Fund upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at least A2 from
Moody's and the transaction has a term of no more than 30 days; otherwise, such
Eligible Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Fund will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Fund by the Fund's investment adviser, custodian or the Auction Agent, (d)
Liens by virtue of any repurchase agreement or (e) Liens in connection with any
futures margin account; or (ii) deposited irrevocably for the payment of any
liabilities for purposes of determining the Preferred Shares Basic Maintenance
Amount.
(61) "MOODY'S HEDGING TRANSACTIONS" shall have the meaning specified in
paragraph (a)(i) of Section 10 of Part I of this Statement.
(62) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation Date, (i)
in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
Volatility
Federal Tax Rate Increase Factor
5%......................... 295%
10%........................ 317%
15%........................ 341%
20%........................ 369%
25%........................ 400%
30%........................ 436%
35%........................ 477%
40%........................ 525%
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(63).. "MUNICIPAL INDEX" shall have the meaning specified in paragraph
(a)(i) of Section 10 of Part I of this Statement.
(64) "MUNICIPAL OBLIGATIONS" shall mean any and all instruments that pay
interest or make other distributions that are exempt from regular Federal income
tax and in which the Fund may invest consistent with the investment policies and
restrictions contained in its registration statement on Form N-2 (333-102033)
("Registration Statement"), as the same may be amended from time to time.
(65) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of AMPS pursuant to paragraph (c) of Section 11 of Part I of this
Statement.
(66) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with respect to
a Special Rate Period of AMPS pursuant to subparagraph (d)(i) of Section 4 of
Part I of this Statement.
(67) "ORDER" and "ORDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(68) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of AMPS, the number of shares of such series theretofore
issued by the Fund except, without duplication, (i) any shares of such series
theretofore cancelled or delivered to the Auction Agent for cancellation or
redeemed by the Fund, (ii) any shares of such series as to which the Fund or any
Affiliate thereof shall be an Existing Holder and (iii) any shares of such
series represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Fund.
(69) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(70) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series of
AMPS, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner of
shares of such series 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.
(71) "POTENTIAL HOLDER," with respect to shares of a series of AMPS, shall
mean a Broker-Dealer (or any such other person as may be permitted by the Fund)
that is not an Existing Holder of shares of such series or that is an Existing
Holder of shares of such series that wishes to become the Existing Holder of
additional shares of such series.
(72) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT," as of any Valuation Date,
shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of AMPS outstanding on such date multiplied by $25,000 (plus the product
of the number of shares of any other series of preferred shares outstanding on
such date multiplied by the liquidation preference of such shares), plus any
redemption premium applicable to the AMPS (or other preferred shares) then
subject to redemption; (B) the aggregate amount of dividends that will have
accumulated at the respective Applicable Rates (whether or not earned or
declared) to (but not including) the first respective Dividend Payment Dates for
the AMPS outstanding that follow such Valuation Date (plus the aggregate amount
of dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding preferred shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of the AMPS outstanding from such first respective
Dividend Payment Date therefor through the 49th day after such Valuation Date,
at the Maximum Rate (calculated as if such Valuation Date were the Auction Date
for the Rate Period commencing on such Dividend Payment Date) for a Minimum Rate
Period of shares of such series to commence on such Dividend Payment Date,
assuming, solely for purposes of the foregoing, that if on such Valuation Date
the Fund shall have delivered a Notice of Special Rate Period to the Auction
Agent pursuant to Section 4(d)(i) of this Part I with respect to shares of such
series, such Maximum Rate shall be the higher of (a) the Maximum Rate for the
Special Rate Period of shares of such series to commence on such Dividend
Payment Date and (b) the Maximum Rate for a Minimum Rate Period of shares of
such series to commence on such Dividend Payment Date, multiplied by the
Volatility Factor applicable to a Minimum Rate Period, or, in the event the Fund
shall have delivered a Notice of Special Rate Period to the Auction Agent
pursuant to section 4(d)(i) of this Part I with respect to shares of such series
designating a Special Rate Period consisting of 56 Rate Period Days or more, the
Volatility Factor applicable to a Special Rate Period of that length (plus the
aggregate amount of dividends that would accumulate at the maximum dividend rate
or rates on any other preferred shares outstanding from such respective dividend
payment dates through the 56th day after such Valuation Date, as established by
or pursuant to the respective statements establishing and fixing the rights and
preferences of such other preferred shares) (except that (1) if such Valuation
Date occurs at a time when a Failure to Deposit (or, in the case of preferred
shares other than the AMPS, a failure similar to a Failure to Deposit) has
occurred that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days during the period
described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of preferred shares other than the AMPS, in respect of which
the dividend rate or rates in effect immediately prior to such respective
dividend payment dates will remain in effect), the dividend for purposes of
calculation would accumulate at such Applicable Rate (or other rate or rates, as
the case may be) in respect of those days); (D) the amount of anticipated
expenses of the Fund for the 90 days subsequent to such Valuation Date; (E) the
amount of the Fund's Maximum Potential Gross-up Payment Liability in respect of
AMPS (and similar amounts payable in respect of other preferred shares pursuant
to provisions similar to those contained in Section 3 of Part I of this
Statement) as of such Valuation Date; (F) the amount of any indebtedness or
obligations of the Fund senior in right of payment to the AMPS; and (G) any
current liabilities as of such Valuation Date to the extent not reflected in any
of (i)(A) through (i)(F) (including, without limitation, any payables for
Municipal Obligations purchased as of such Valuation Date and any liabilities
incurred for the purpose of clearing securities transactions) less (ii) the
value (i.e., for purposes of current Moody's guidelines, the face value of cash,
short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short-term
securities that are the direct obligation of the U.S. Government, provided in
each case that such securities mature on or prior to the date upon which any of
(i) (A) through (i) (G) become payable, otherwise the Moody's Discounted Value)
of any of the Fund's assets irrevocably deposited by the Fund for the payment of
any of (i)(A) through (i)(G).
(73) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Fund to satisfy the Preferred Shares Basic Maintenance Amount (as
required by paragraph (a) of Section 7 of Part I of this Statement) as of a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.
(74) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report signed
by the President, Treasurer or any Senior Vice President or Vice President of
the Fund which sets forth, as of the related Valuation Date, the assets of the
Fund, the Market Value and the Discounted Value thereof (seriatim and in
aggregate), and the Preferred Shares Basic Maintenance Amount.
(75) "PRICING SERVICE" shall have the meaning specified in the definition
of "Market Value" above.
(76) "QUARTERLY VALUATION DATE" shall mean the last Business Day of each
February, May, August and November of each year, commencing on the date set
forth in Section 6 of Exhibit A hereto.
(77) "RATE MULTIPLE," for a series of AMPS on any Auction Date for such
series, shall mean the percentage, determined as set forth in the columns below
(depending on whether the Fund has notified the Auction Agent of its intent to
allocate income taxable for Federal income tax purposes to shares of such series
prior to the Auction establishing the Applicable Rate for such series as
provided in this Statement) based on the lower of the prevailing ratings of
shares of such series by Moody's or Fitch in effect at the close of business on
the Business Day next preceding such Auction Date:
PREVAILING RATING APPLICABLE APPLICABLE PERCENTAGE
PERCENTAGE- -
NO NOTIFICATION NOTIFICATION
MOODY'S FITCH
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%
-------------------------------------------------------------------------------
If such shares are rated by only one such rating agency, the prevailing
rating will be determined without reference to the rating of any other rating
agency. If neither Moody's nor Fitch shall make such a rating available, the
Rate Multiple shall be based on the equivalent rating or ratings by S&P and/or
another nationally recognized statistical rating organization (as that term is
used in the rules and regulations of the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended from time, to time) that
acts as a substitute rating agency in respect of the AMPS of such series, and
the Fund shall take all reasonable action to enable at least one such rating
agency to provide a rating for the AMPS.
(78) "RATE PERIOD," with respect to shares of a series of AMPS, shall mean
the Initial Rate Period of shares of such series and any Subsequent Rate Period,
including any Special Rate Period, of shares of such series.
(79) "RATE PERIOD DAYS," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of paragraph (d) of Section 2 of Part I of this Statement or
paragraph (b) of Section 4 of Part I of this Statement.
(80) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean for purposes
of calculation of Moody's Eligible Assets and Fitch Eligible Assets as of any
Valuation Date, no more than the aggregate of the following: (i) the book value
of receivables for Municipal Obligations sold as of or prior to such Valuation
Date if such receivables are due within five business days of such Valuation
Date, and if the trades which generated such receivables are (x) settled through
clearing house firms with respect to which the Fund has received prior written
authorization from Moody's (if Moody's is then rating the AMPS) and Fitch (if
Fitch is then rating the AMPS) or (y) with counterparties having a Moody's
long-term debt rating of at least Baa3 (if Moody's is then rating the AMPS) and
a Fitch long-term debt rating of at least BBB (if Fitch is then rating the
AMPS); and (ii) the Discounted Value of Municipal Obligations sold as of or
prior to such Valuation Date which generated receivables, if such receivables
are due within five business days of such Valuation Date but do not comply with
either of the conditions specified in (i) above.
(81) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Statement.
(82) "REFERENCE RATE" shall mean (i) the "AA" Financial Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of fewer than 183 Rate Period Days; and (ii) the Treasury Bill Rate in
the case of Special Rate Periods of more than 182 Rate Period Days but fewer
than 365 Rate Period Days.
(83) "REGISTRATION STATEMENT" has the meaning specified in the definition
of "Municipal Obligations."
(84) "S&P" shall mean Standard & Poor's Ratings Group, and its successors.
(85) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by the
Fund which agrees to follow the procedures required to be followed by such
securities depository in connection with the AMPS.
(86) "SELL ORDER" and "SELL ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(87) "SPECIAL RATE PERIOD," with respect to shares of a series of AMPS,
shall have the meaning specified in paragraph (a) of Section 4 of Part I of this
Statement.
(88) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified in
subparagraph (a)(i) of Section 11 of Part I of this Statement.
(89) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
(90) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(91) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(92) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(93) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(94) "SUBSEQUENT RATE PERIOD," with respect to shares of a series of AMPS,
shall mean the period from and including the first day following the Initial
Rate Period of shares of such series to but excluding the next Dividend Payment
Date for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series; provided, however,
that if any Subsequent Rate Period is also a Special Rate Period, such term
shall mean the period commencing on the first day of such Special Rate Period
and ending on the last day of the last Dividend Period thereof.
(95) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean any commercial paper
dealer selected by the Fund as to which Moody's, Fitch or any substitute rating
agency then rating the AMPS shall not have objected; provided, however, that
none of such entities shall be a Commercial Paper Dealer.
(96) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" any U.S. Government
securities dealer selected by the Fund as to which Moody's, Fitch or any
substitute rating agency then rating the AMPS shall not have objected; provided,
however, that none of such entities shall be a U.S. Government Securities
Dealer.
(97) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(98) "TAXABLE ALLOCATION" shall have the meaning specified in Section 3 of
Part I of this Statement.
(99) "TAXABLE INCOME" shall have the meaning specified in paragraph
(b)(iii) of Section 3 of Part II of this Statement.
(100) "TREASURY BILL" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
(101) "TREASURY BILL RATE," on any date for any Rate Period, shall mean (i)
the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent.
(102) "TREASURY FUTURES" shall have the meaning specified in paragraph
(a)(i) of Section 10 of Part I of this Statement.
(103) "TREASURY NOTE" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.
(104) "TREASURY NOTE RATE," on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street Journal, then the yield
as calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction Agent. If
any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any substitute U.S. Government Securities
Dealers selected by the Fund to provide such rate or rates not being supplied by
any U.S. Government Securities Dealer or U.S. Government Securities Dealers, as
the case may be, or, if the Fund does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
(105) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Merrill Lynch
Government Securities, Inc., Salomon Smith Barney Inc., UBS Warburg LLC, and any
other U.S. Government securities dealer selected by the Fund as to which Moody's
(if Moody's is then rating the AMPS) or Fitch (if Fitch is then rating the AMPS)
shall not have objected or their respective affiliates or successors, if such
entity is a U.S. Government securities dealer.
(106) "VALUATION DATE" shall mean, for purposes of determining whether the
Fund is maintaining the Preferred Shares Basic Maintenance Amount, the last
Business Day of each month.
(107) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the Moody's
Volatility Factor and the Fitch Volatility Factor.
(108) "VOTING PERIOD" shall have the meaning specified in paragraph (b) of
Section 5 of Part I of this Statement.
(109) "WINNING BID RATE" shall have the meaning specified in paragraph (a)
of Section 3 of Part II of this Statement.
Any additional definitions specifically set forth in Section 4 of Exhibit A
hereto
shall be incorporated herein and made part hereof by reference thereto.
PART I.
1. Number of Authorized Shares.
The number of authorized shares constituting a series of the AMPS shall be
as set forth with respect to such series in Section 2 of Exhibit A hereto.
2. Dividends.
(a) Ranking. The shares of a series of the AMPS shall rank on a parity with
each other, with shares of any other series of the AMPS and with shares of any
other series of preferred shares as to the payment of dividends by the Fund.
(b) Cumulative Cash Dividends. The Holders of any series of AMPS shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration and
applicable law, cumulative cash dividends at the Applicable Rate for shares of
such series, determined as set forth in paragraph (e) of this Section 2, and no
more (except to the extent set forth in Section 3 of this Part I), payable on
the Dividend Payment Dates with respect to shares of such series determined
pursuant to paragraph (d) of this Section 2. Holders of AMPS shall not be
entitled to any dividend, whether payable in cash, property or shares, in excess
of full cumulative dividends, as herein provided, on AMPS. No interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on AMPS which may be in arrears, and, except to the extent
set forth in subparagraph (e)(i) of this Section 2, no additional sum of money
shall be payable in respect of any such arrearage.
(c) Dividends Cumulative From Date of Original Issue. Dividends on any
series of AMPS shall accumulate at the Applicable Rate for shares of such series
from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustment Thereof. The Dividend Payment
Dates with respect to shares of a series of AMPS shall be as set forth with
respect to shares of such series in Section 7 of Exhibit A hereto; provided,
however, that:
(i) if the day on which dividends would otherwise be payable on shares of
such series is not a Business Day, then such dividends shall be payable on such
shares on the first Business Day that falls after such day; provided, however,
that if the day on which dividends would otherwise be payable is not a Business
Day because the New York Stock Exchange is closed for business for more than
three consecutive normal trading 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 cannot be paid for any such reason, then:
(A) the Dividend Payment Date for the affected Dividend Period will be the
next Business Day (determined without regard to the closure of the New York
Stock Exchange) on which the Fund and its paying agent, if any, can pay the
dividend;
(B) the affected Dividend Period will end on the day it otherwise would
have ended; and
(C) the next Dividend Period will begin and end on the dates on which it
otherwise would have begun and ended; and
(ii) notwithstanding Section 7 of Exhibit A hereto, the Fund in its
discretion may establish the Dividend Payment Dates in respect of any Special
Rate Period of shares of a series of AMPS consisting of more than 28 Rate Period
Days; provided, however, that such dates shall be set forth in the Notice of
Special Rate Period relating to such Special Rate Period, as delivered to the
Auction Agent, which Notice of Special Rate Period shall be filed with the
Secretary of the Fund; and further provided that (1) any such Dividend Payment
Date shall be a Business Day and (2) the last Dividend Payment Date in respect
of such Special Rate Period shall be the Business Day immediately following the
last day thereof, as such last day is determined in accordance with paragraph
(b) of Section 4 of this Part I.
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on AMPS of any series during the
period from and after the Date of Original Issue of shares of such series to and
including the last day of the Initial Rate Period of shares of such series shall
be equal to the rate per annum set forth with respect to shares of such series
under "Designation as to Series" in Section 1 of Exhibit A hereto. For each
Subsequent Rate Period of shares of such series thereafter, the dividend rate on
shares of such series shall be equal to the rate per annum that results from an
Auction for shares of such series on the Auction Date next preceding such
Subsequent Rate Period; provided, however, that if:
(A) an Auction for any such Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on shares of such series
for such Subsequent Rate Period will be the Maximum Rate for shares of such
series on the Auction Date therefor; provided, however, that if the day which
would otherwise be an Auction Date is not a Business Day because the New York
Stock Exchange is closed for business for more than three consecutive normal
trading 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, then the Applicable Rate for the
Subsequent Rate Period will be the Applicable Rate determined on the previous
Auction Date;
(B) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
consisting of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), but, prior to 12:00 Noon,
New York City time, on the third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to Deposit shall have been cured
in accordance with paragraph (f) of this Section 2 and the Fund shall have paid
to the Auction Agent a late charge ("Late Charge") equal to the sum of (1) if
such Failure to Deposit consisted of the failure timely to pay to the Auction
Agent the full amount of dividends with respect to any Dividend Period of the
shares of such series, an amount computed by multiplying (x) 200% of the
Reference Rate for the Rate Period during which such Failure to Deposit occurs
on the Dividend Payment Date for such Dividend Period by (y) a fraction, the
numerator of which shall be the number of days for which such Failure to Deposit
has not been cured in accordance with paragraph (f) of this Section 2 (including
the day such Failure to Deposit occurs and excluding the day such Failure to
Deposit is cured) and the denominator of which shall be 360, and applying the
rate obtained against the aggregate Liquidation Preference of the outstanding
shares of such series and (2) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the Redemption Price of the shares,
if any, of such series for which Notice of Redemption has been mailed by the
Fund pursuant to paragraph (c) of Section 11 of this Part I, an amount computed
by multiplying (x) 200% of the Reference Rate for the Rate Period during which
such Failure to Deposit occurs on the redemption date by (y) a fraction, the
numerator of which shall be the number of days for which such Failure to Deposit
is not cured in accordance with paragraph (f) of this Section 2 (including the
day such Failure to Deposit occurs and excluding the day such Failure to Deposit
is cured) and the denominator of which shall be 360, and applying the rate
obtained against the aggregate Liquidation Preference of the outstanding shares
of such series to be redeemed, no Auction will be held in respect of shares of
such series for the Subsequent Rate Period thereof and the dividend rate for
shares of such series for such Subsequent Rate Period will be the Maximum Rate
for shares of such series on the Auction Date for such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with respect to shares of
such series during any Rate Period thereof (other than any Special Rate Period
consisting of more than 364 Rate Period Days or any Rate Period succeeding any
Special Rate Period consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured), and, prior to 12:00 Noon,
New York City time, on the third Business Day next succeeding the date on which
such Failure to Deposit occurred, such Failure to Deposit shall not have been
cured in accordance with paragraph (f) of this Section 2 or the Fund shall not
have paid the applicable Late Charge to the Auction Agent, no Auction will be
held in respect of shares of such series for the first Subsequent Rate Period
thereof thereafter (or for any Rate Period thereof thereafter to and including
the Rate Period during which (1) such Failure to Deposit is cured in accordance
with paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late
Charge to the Auction Agent (the condition set forth in this clause (2) to apply
only in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, New York City time,
on the fourth Business Day prior to the end of such Rate Period), and the
dividend rate for shares of such series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares of such series on
the Auction Date for such Subsequent Rate Period (but with the prevailing rating
for shares of such series, for purposes of determining such Maximum Rate, being
deemed to be "Below "Ba3"/BB-"); or
(D) any Failure to Deposit shall have occurred with respect to shares of
such series during a Special Rate Period thereof consisting of more than 364
Rate Period Days, or during any Rate Period thereof succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which a Failure to
Deposit occurred that has not been cured, and, prior to 12:00 Noon, New York
City time, on the fourth Business Day preceding the Auction Date for the Rate
Period subsequent to such Rate Period, such Failure to Deposit shall not have
been cured in accordance with paragraph (f) of this Section 2 or, in the event
Moody's is then rating such shares, the Fund shall not have paid the applicable
Late Charge to the Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the Reference Rate, the
Reference Rate applicable to a Rate Period (x) consisting of more than 182 Rate
Period Days but fewer than 365 Rate Period Days and (y) commencing on the date
on which the Rate Period during which Failure to Deposit occurs commenced), no
Auction will be held in respect of shares of such series for such Subsequent
Rate Period (or for any Rate Period thereof thereafter to and including the Rate
Period during which (1) such Failure to Deposit is cured in accordance with
paragraph (f) of this Section 2 and (2) the Fund pays the applicable Late Charge
to the Auction Agent (the condition set forth in this clause (2) to apply only
in the event Moody's is rating such shares at the time the Fund cures such
Failure to Deposit), in each case no later than 12:00 Noon, New York City time,
on the fourth Business Day prior to the end of such Rate Period), and the
dividend rate for shares of such series for each such Subsequent Rate Period
shall be a rate per annum equal to the Maximum Rate for shares of such series on
the Auction Date for such Subsequent Rate Period (but with the prevailing rating
for shares of such series, for purposes of determining such Maximum Rate, being
deemed to be "Below "Ba3"/BB-") (the rate per annum at which dividends are
payable on shares of a series of AMPS for any Rate Period thereof being herein
referred to as the "Applicable Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per share payable on
shares of a series of AMPS on any date on which dividends shall be payable on
shares of such series shall be computed by multiplying the Applicable Rate for
shares of such series in effect for such Dividend Period or Dividend Periods or
part thereof for which dividends have not been paid by a fraction, the numerator
of which shall be the number of days in such Dividend Period or Dividend Periods
or part thereof and the denominator of which shall be 365 if such Dividend
Period consists of 7 Rate Period Days and 360 for all other Dividend Periods,
and applying the rate obtained against $25,000.
(f) Curing a Failure to Deposit. A Failure to Deposit shall have been cured
(if such Failure to Deposit is not solely due to the willful failure of the Fund
to make the required payment to the Auction Agent) with respect to any Rate
Period of a series of AMPS if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Fund shall have paid to the Auction
Agent (A) all accumulated and unpaid dividends on shares of such series and (B)
without duplication, the Redemption Price for shares, if any, of such series for
which Notice of Redemption has been mailed by the Fund pursuant to paragraph (c)
of Section 11 of Part I of this Statement; provided, however, that the foregoing
clause (B) shall not apply to the Fund's failure to pay the Redemption Price in
respect of AMPS when the related Redemption Notice provides that redemption of
such shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.
(g) Dividend Payments by Fund to Auction Agent. The Fund shall pay to the
Auction Agent, not later than 12:00 Noon, New York City time, on the Business
Day next preceding each Dividend Payment Date for shares of a series of AMPS, an
aggregate amount of funds available on the next Business Day in The City of New
York, New York, equal to the dividends to be paid to all Holders of shares of
such series on such Dividend Payment Date.
(h) Auction Agent as Trustee of Dividend Payments by Fund. All moneys paid
to the Auction Agent for the payment of dividends (or for the payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
in paragraph (i) of this Section 2. Any moneys paid to the Auction Agent in
accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any such Late Charge) will, to the extent permitted by
law, be repaid to the Fund at the end of 90 days from the date on which such
moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on AMPS shall be paid on the
Dividend Payment Date therefor to the Holders thereof as their names appear on
the record books of the Fund on the Business Day next preceding such Dividend
Payment Date.
(j) Dividends Credited Against Earliest Accumulated but Unpaid Dividends.
Any dividend payment made on AMPS shall first be credited against the earliest
accumulated but unpaid dividends due with respect to such shares. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the Holders as their
names appear on the record books of the Fund on such date, not exceeding 15 days
preceding the payment date thereof, as may be fixed by the Board of Trustees.
(k) Dividends Designated as Exempt-Interest Dividends. Dividends on AMPS
shall be designated as exempt-interest dividends up to the amount of tax-exempt
income of the Fund, to the extent permitted by, and for purposes of, section 852
of the Code.
3. Gross-Up Payments.
Holders of AMPS shall be entitled to receive, when, as and if declared by
the Board of Trustees, out of funds legally available therefor in accordance
with the Declaration and applicable law, dividends in an amount equal to the
aggregate Gross-up Payments as follows:
(a) Taxable Allocation Without Notice. If, but only if, the Fund allocates
any net capital gain or other income taxable for Federal income tax purposes to
a dividend paid on AMPS without having given advance notice thereof to the
Auction Agent as provided in Section 5 of Part II of this Statement (such
allocation being referred to herein as a "Taxable Allocation"), whether or not
by reason of the fact that such allocation is made retroactively as a result of
the redemption of all or a portion of the outstanding AMPS or the liquidation of
the Fund, the Fund shall, during the Fund's fiscal year in which the Taxable
Allocation was made or within 90 days after the end of such fiscal year, provide
notice thereof to the Auction Agent and direct the Fund's dividend disbursing
agent to send such notice and a Gross-up Payment to each Holder of such shares
that was entitled to such dividend payment during such fiscal year at such
Holder's address as the same appears or last appeared on the record books of the
Fund.
(b) Reserved.
(c) No Gross-Up Payments in the Event of a Reallocation. The Fund shall not
be required to make Gross-up Payments with respect to any net capital gains or
other taxable income determined by the Internal Revenue Service to be allocable
in a manner different from that allocated by the Fund.
4. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The Fund, at its
option, may designate any succeeding Subsequent Rate Period of a series of AMPS
as a Special Rate Period consisting of a specified number of Rate Period Days
evenly divisible by seven and not more than 1,820, subject to adjustment as
provided in paragraph (b) of this Section 4. A designation of a Special Rate
Period shall be effective only if (A) notice thereof shall have been given in
accordance with paragraph (c) and subparagraph (d)(i) of this Section 4, (B) an
Auction for shares of such series shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids shall have existed in such Auction, and (C) if any
Notice of Redemption shall have been mailed by the Fund pursuant to paragraph
(c) of Section 11 of this Part I with respect to any shares of such series, the
Redemption Price with respect to such shares shall have been deposited with the
Auction Agent. In the event the Fund wishes to designate any succeeding
Subsequent Rate Period for a series of AMPS as a Special Rate Period consisting
of more than 28 Rate Period Days, the Fund shall notify Moody's (if Moody's is
then rating such series) and Fitch (if Fitch is then rating such series) in
advance of the commencement of such Subsequent Rate Period that the Fund wishes
to designate such Subsequent Rate Period as a Special Rate Period and shall
provide Moody's (if Moody's is then rating such series) and Fitch (if Fitch is
then rating such series) with such documents as it may request.
(b) Adjustment of Length of Special Rate Period. The length of a Special
Rate Period for any series of AMPS shall be subject to adjustment as provided
for such series in Section 8 of Exhibit A.
(c) Notice of Proposed Special Rate Period. If the Fund proposes to
designate any succeeding Subsequent Rate Period of shares of a series of AMPS as
a Special Rate Period pursuant to paragraph (a) of this Section 4, not less than
20 (or such lesser number of days as may be agreed to from time to time by the
Auction Agent) nor more than 30 days prior to the date the Fund proposes to
designate as the first day of such Special Rate Period (which shall be such day
that would otherwise be the first day of a Minimum Rate Period), notice shall be
(i) published or caused to be published by the Fund in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) mailed by the Fund by first-class mail, postage
prepaid, to the Holders of shares of such series. Each such notice shall state
(A) that the Fund may exercise its option to designate a succeeding Subsequent
Rate Period of shares of such series as a Special Rate Period, specifying the
first day thereof and (B) that the Fund will, by 11:00 A.M., New York City time,
on the second Business Day next preceding such date (or by such later time or
date, or both, as may be agreed to by the Auction Agent) notify the Auction
Agent of either (x) its determination, subject to certain conditions, to
exercise such option, in which case the Fund shall specify the Special Rate
Period designated, or (y) its determination not to exercise such option.
(d) Notice of Special Rate Period. No later than 11:00 A.M., New York City
time, on the second Business Day next preceding the first day of any proposed
Special Rate Period of a series of AMPS as to which notice has been given as set
forth in paragraph (c) of this Section 4 (or such later time or date, or both,
as may be agreed to by the Auction Agent), the Fund shall deliver to the Auction
Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the Fund
has determined to designate the next succeeding Rate Period of such series as a
Special Rate Period, specifying the same and the first day thereof, (B) the
Auction Date immediately prior to the first day of such Special Rate Period, (C)
that such Special Rate Period shall not commence if (1) an Auction for shares of
such series shall not be held on such Auction Date for any reason or (2) an
Auction for shares of such series shall be held on such Auction Date but
Sufficient Clearing Bids shall not exist in such Auction, (D) the scheduled
Dividend Payment Dates for shares of such series during such Special Rate Period
and (E) the Special Redemption Provisions, if any, applicable to shares of such
series in respect of such Special Rate Period, such notice to be accompanied by
a Preferred Shares Basic Maintenance Report showing that, as of the third
Business Day next preceding such proposed Special Rate Period, Moody's Eligible
Assets (if Moody's is then rating such series) and Fitch Eligible Assets (if
Fitch is then rating such series) each have an aggregate Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount as of such Business
Day (assuming for purposes of the foregoing calculation that (a) the Maximum
Rate is the Maximum Rate on such Business Day as if such Business Day were the
Auction Date for the proposed Special Rate Period, and (b) the Moody's Discount
Factors applicable to Moody's Eligible Assets and the Fitch Discount Factors
applicable to Fitch Eligible Assets are determined by reference to the first
Exposure Period longer than the Exposure Period then applicable to the Fund, as
described in the definitions of Moody's Discount Factor and Fitch Discount
Factor herein); or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Rate Period of shares of such series and that the
next succeeding Rate Period of shares of such series shall be a Minimum Rate
Period.
(e) Failure to Deliver Notice of Special Rate Period. If the Fund fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect set
forth in such subparagraph (if either Moody's or Fitch is then rating the series
in question)) with respect to any designation of any proposed Special Rate
Period to the Auction Agent by 11:00 A.M., New York City time, on the second
Business Day next preceding the first day of such proposed Special Rate Period
(or by such later time or date, or both, as may be agreed to by the Auction
Agent), the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to such Special Rate Period to the effect set forth in subparagraph
(d)(ii) of this Section 4. In the event the Fund delivers to the Auction Agent a
notice described in subparagraph (d)(i) of this Section 4, it shall file a copy
of such notice with the Secretary of the Fund, and the contents of such notice
shall be binding on the Fund. In the event the Fund delivers to the Auction
Agent a notice described in subparagraph (d)(ii) of this Section 4, the Fund
will provide Moody's (if Moody's is then rating the series in question) and
Fitch (if Fitch is then rating the series in question) a copy of such notice.
5. Voting Rights.
(a) One Vote Per Share of AMPS. Except as otherwise provided in the
Declaration or as otherwise required by law, (i) each Holder of AMPS shall be
entitled to one vote for each AMPS held by such Holder on each matter submitted
to a vote of shareholders of the Fund, and (ii) the holders of outstanding
preferred shares, including the AMPS, and of Common Shares shall vote together
as a single class; provided, however, that, at any meeting of the shareholders
of the Fund held for the election of Trustees, the holders of outstanding
preferred shares, including the AMPS, represented in person or by proxy at said
meeting, shall be entitled, as a class, to the exclusion of the holders of all
other securities and classes of shares of beneficial interest of the Fund, to
elect two Trustees of the Fund, each preferred share entitling the holder
thereof to one vote. Subject to paragraph (b) of this Section 5, the holders of
outstanding Common Shares and preferred shares, voting together as a single
class, shall elect the balance of the Trustees.
(b) Voting for Additional Trustees.
(i) Voting Period. Except as otherwise provided in the Declaration or as
otherwise required by law, during any period in which any one or more of the
conditions described in subparagraphs (A) or (B) of this subparagraph (b)(i)
shall exist (such period being referred to herein as a "Voting Period"), the
number of Trustees constituting the Board of Trustees shall be automatically
increased by the smallest number that, when added to the two Trustees elected
exclusively by the holders of preferred shares, including the AMPS, would
constitute a majority of the Board of Trustees as so increased, and the holders
of preferred shares, including the AMPS, shall be entitled, voting as a class on
a one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest of the Fund), to elect
such smallest number of additional Trustees, together with the two Trustees that
such holders are in any event entitled to elect. A Voting Period shall commence:
(A) if at the close of business on any dividend payment date accumulated
dividends (whether or not earned or declared) on any outstanding preferred
shares, including the AMPS, equal to at least two full years' dividends shall be
due and unpaid and sufficient cash or specified securities shall not have been
deposited with the Auction Agent for the payment of such accumulated dividends;
or
(B) if at any time holders of preferred shares, including the AMPS, are
entitled under the Investment Company Act to elect a majority of the Trustees of
the Fund.
If the Fund shall thereafter pay, or declare and set apart for payment (or
in the case of the AMPS deposit with the Auction Agent) all dividends
accumulated on all outstanding preferred shares, including the AMPS, through the
most recent payment date therefor, then such Voting Period shall terminate. Upon
the termination of a Voting Period, the voting rights described in this
subparagraph (b)(i) shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after the accrual of
any right of the holders of preferred shares, including the AMPS, to elect
additional Trustees as described in subparagraph (b)(i) of this Section 5, the
Fund shall notify the Auction Agent and shall call a special meeting of such
holders by mailing a notice of such special meeting to such holders, such
meeting to be held not less than 10 nor more than 30 days after the date of
mailing of such notice. If the Fund fails to send such notice to the Auction
Agent or does not call such a special meeting, it may be called by any such
holder on like notice. The record date for determining the holders entitled to
notice of and to vote at such special meeting shall be the close of business on
the fifth Business Day preceding the day on which such notice is mailed. At any
such special meeting and at each meeting of holders of preferred shares,
including the AMPS, held during a Voting Period at which Trustees are to be
elected, such holders, voting together as a class (to the exclusion of the
holders of all other securities and classes of shares of beneficial interest of
the Fund), shall be entitled to elect the number of Trustees prescribed in
subparagraph (b)(i) of this Section 5 on a one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of office of all
persons who are Trustees of the Fund at the time of a special meeting of Holders
and holders of other preferred shares to elect Trustees shall continue,
notwithstanding the election at such meeting by the Holders and such other
holders of the number of Trustees that they are entitled to elect, and the
persons so elected by the Holders and such other holders, together with the two
incumbent Trustees elected by the Holders and such other holders of preferred
shares and the remaining incumbent Trustees elected by the holders of the Common
Shares and preferred shares, shall constitute the duly elected Trustees of the
Fund.
(iv) Terms of Office of Certain Trustees to Terminate Upon Termination of
Voting Period. Simultaneously with the termination of a Voting Period, the terms
of office of the additional Trustees elected by the Holders and holders of other
preferred shares pursuant to subparagraph (b)(i) of this Section 5 shall
terminate, the remaining Trustees shall constitute the Trustees of the Fund and
the voting rights of the Holders and such other holders to elect additional
Trustees pursuant to subparagraph (b)(i) of his Section 5 shall cease, subject
to the provisions of the last sentence of subparagraph (b)(i) of this Section 5.
(c) Holders of AMPS to Vote on Certain Other Matters.
(i) Increases in Capitalization; Bankruptcy. So long as any AMPS are
outstanding, the Fund shall not, without the affirmative vote or consent of the
Holders of at least a majority of the AMPS outstanding at the time, in person or
by proxy, either in writing or at a meeting, voting as a separate class: (a)
authorize, create or issue any class or series of shares ranking prior to or on
a parity with the AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund, or authorize, create or issue additional shares of any
series of AMPS (except that, notwithstanding the foregoing, but subject to the
provisions of paragraph (c)(ii) of Section 10 of this Part I, the Board of
Trustees, without the vote or consent of the Holders of AMPS, may from time to
time authorize and create, and the Fund may from time to time issue, additional
shares of any series of AMPS or classes or series of other preferred shares
ranking on a parity with AMPS with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Fund if the Fund receives written confirmation from Moody's (if
Moody's is then rating the AMPS) and Fitch (if Fitch is then rating the AMPS) or
any substitute rating agency (if such agency is then rating the AMPS) that such
authorization, creation and issuance would not impair the rating then assigned
by such rating agency to the AMPS; and if, in any event, the Fund would, after
giving effect thereto, continue to maintain the Investment Company Act Preferred
Shares Asset Coverage; or (b) amend, alter or repeal the provisions of the
Declaration or this Statement, whether by merger, consolidation or otherwise, so
as to adversely affect any preference, right or power of such AMPS or the
Holders thereof; 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 or split of AMPS will be deemed to affect such
preferences, rights or powers only if the terms of such division or split
adversely affect the Holders of AMPS and (iii) the authorization, creation and
issuance of classes or series of shares ranking junior to the AMPS 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
AMPS 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. So long as any AMPS are outstanding, the Fund
shall not, without the affirmative vote or consent of the Holders of at least a
majority of the AMPS 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.
(ii) Investment Company Act Matters. Unless a higher percentage is provided
for in the Declaration, (A) the affirmative vote of the Holders of a "majority
of the outstanding" (as such term is defined in the Investment Company Act)
preferred stock of the Fund, including the AMPS, voting as a separate class,
shall be required to approve (A) any plan of reorganization (as such term is
used in the Investment Company Act) adversely affecting such shares and (B) any
action requiring a vote of security holders of the Fund under Section 13(a) of
the Investment Company Act. In the event a vote of Holders of AMPS is required
pursuant to the provisions of section 13(a) of the Investment Company Act, the
Fund shall, not later than ten Business Days prior to the date on which such
vote is to be taken, notify Moody's (if Moody's is then rating the AMPS) and
Fitch (if Fitch is then rating the AMPS) that such vote is to be taken and the
nature of the action with respect to which such vote is to be taken. The Fund
shall, not later than ten Business Days after the date on which such vote is
taken, notify Moody's (if Moody's is then rating the AMPS) and Fitch (if Fitch
is then rating the AMPS) of the results of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The Board
of Trustees, without the vote or consent of the Holders of the AMPS, may from
time to time amend, alter or repeal any or all of the definitions of the terms
listed below, or any provision of this Statement viewed by Moody's or Fitch as a
predicate for any such definition, and any such amendment, alteration or repeal
will not be deemed to affect the preferences, rights or powers of AMPS or the
Holders thereof; provided that the Board of Trustees receives written
confirmation from Moody's (if Moody's is then rating the AMPS) and Fitch (if
Fitch is then rating the AMPS) that any such amendment, alteration or repeal
would not impair the ratings then assigned to the AMPS by such rating agency:
Accountant's Confirmation Maximum Potential Gross-up Payment
Liability
Deposit Securities Moody's Discount Factor
Discounted Value Moody's Eligible Asset
Exposure Period Moody's Hedging Transactions
Fitch Discount Factor Moody's Volatility Factor
Fitch Eligible Asset
Fitch Hedging Transactions Municipal Index
Fitch Volatility Factor Preferred Shares Basic Maintenance
Amount
Forward Commitments Preferred Shares Basic Maintenance
Cure Date
Preferred Shares Basic Maintenance
Report
Independent Accountant Quarterly Valuation Date
Investment Company Act Cure Date Receivables for Municipal Obligations
Sold
Investment Company Act Preferred Shares Treasury Futures
Asset Coverage Valuation Date
Market Value Volatility Factor
(e) Rights Set Forth Herein Are Sole Rights. Unless otherwise required by
law or otherwise provided in the Declaration, the Holders of AMPS shall not have
any relative rights or preferences or other special rights other than those
specifically set forth herein.
(f) No Preemptive Rights or Cumulative Voting. The Holders of AMPS shall
have no preemptive rights or rights to cumulative voting.
(g) Voting for Trustees Sole Remedy for Fund's Failure to Pay Dividends. In
the event that the Fund fails to pay any dividends on the AMPS, the exclusive
remedy of the Holders shall be the right to vote for Trustees pursuant to the
provisions of this Section 5.
(h)...Holders Entitled to Vote. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by this
Statement, by the other provisions of the Declaration, by statute or otherwise,
no Holder shall be entitled to vote any AMPS and no AMPS shall be deemed to be
"outstanding" for the purpose of voting or determining the number of shares
required to constitute a quorum if, prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding for quorum
purposes, as the case may be, the requisite Notice of Redemption with respect to
such shares shall have been mailed as provided in paragraph (c) of Section 11 of
this Part I and the Redemption Price for the redemption of such shares shall
have been deposited in trust with the Auction Agent for that purpose. No AMPS
held by the Fund or any affiliate of the Fund (except for shares held by a
Broker-Dealer that is an affiliate of the Fund for the account of its customers)
shall have any voting rights or be deemed to be outstanding for voting or other
purposes.
6. Investment Company Act Preferred Shares Asset Coverage.
The Fund shall maintain, as of the last Business Day of each month in which
any AMPS are outstanding, the Investment Company Act Preferred Shares Asset
Coverage.
7. Preferred Shares Basic Maintenance Amount.
(a) So long as AMPS are outstanding, the Fund shall maintain, on each
Valuation Date, and shall verify to its satisfaction that it is maintaining on
such Valuation Date (i) Moody's Eligible Assets having an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance Amount (if
Moody's is then rating the AMPS) and (ii) Fitch Eligible Assets having an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount (if Fitch is then rating the AMPS).
(b) On or before 5:00 P.M., New York City time, on the seventh Business Day
after a Valuation Date on which the Fund fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the seventh Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the Fund
shall complete and deliver to Moody's (if Moody's is then rating the AMPS),
Fitch (if Fitch is then rating the AMPS) and the Auction Agent (if either
Moody's or Fitch is then rating the AMPS) a Preferred Shares Basic Maintenance
Report as of the date of such failure or such Preferred Shares Basic Maintenance
Cure Date, as the case may be, which will be deemed to have been delivered to
the Auction Agent if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof and on the same day the Fund mails to the
Auction Agent for delivery on the next Business Day the full Preferred Shares
Basic Maintenance Report. The Fund shall also deliver a Preferred Shares Basic
Maintenance Report as of the last Business Day of each month to the Auction
Agent (if either Moody's or Fitch is then rating the AMPS), Moody's (if Moody's
is then rating the AMPS) and Fitch (if Fitch is than rating the AMPS) on or
before the seventh Business Day after such Valuation Date. A failure by the Fund
to deliver a Preferred Shares Basic Maintenance Report pursuant to the preceding
sentence shall be deemed to be delivery of a Preferred Shares Basic Maintenance
Report indicating the Discounted Value for all assets of the Fund is less than
the Preferred Shares Basic Maintenance Amount, as of the relevant Valuation
Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to a Quarterly Valuation Date, the Fund shall cause the Independent
Accountant to confirm in writing to Moody's (if Moody's is then rating the
AMPS), Fitch (if Fitch is then rating the AMPS) and the Auction Agent (if either
Moody's or Fitch is then rating the AMPS) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Preferred Shares Basic
Maintenance Report, randomly selected by the Independent Accountant, that was
prepared by the Fund during the quarter ending on such Quarterly Valuation
Date), (ii) that, in such Report (and in such randomly selected Report), the
Fund determined in accordance with this Statement whether the Fund had, at such
Quarterly Valuation Date (and at the Valuation Date addressed in such randomly
selected Report), Moody's Eligible Assets (if Moody's is then rating the AMPS)
and Fitch Eligible Assets (if Fitch is then rating the AMPS) of an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
(such confirmation being herein called the "Accountant's Confirmation"), (iii)
with respect to the Fitch ratings on Municipal Obligations, the issuer name,
issue size and coupon rate listed in such Report, that the Independent
Accountant has sought to verify such information by reference to Bloomberg
Financial Services or another independent source approved in writing by Fitch
(if Fitch is then rating the AMPS), and the Independent Accountant shall provide
a listing in its letter of any differences, (iv) with respect to the Moody's
ratings on Municipal Obligations, the issuer name, issue size and coupon rate
listed in such Report, that the Independent Accountant has sought to verify such
information by reference to Bloomberg Financial Services or another independent
source approved in writing by Moody's (if Moody's is then rating the AMPS), and
the Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the bid or mean price (or such alternative
permissible factor used in calculating the Market Value) provided by the
custodian of the Fund's assets to the Fund for purposes of valuing securities in
the Fund's portfolio, the Independent Accountant has traced the price used in
such Report to the bid or mean price listed in such Report as provided to the
Fund and verified that such information agrees (in the event such information
does not agree, the Independent Accountant will provide a listing in its letter
of such differences) and (vi) with respect to such confirmation to Moody's (if
Moody's is then rating the AMPS) and Fitch (if Fitch is then rating the AMPS),
that the Fund has satisfied the requirements of Section 10 of this Part I.
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to any Valuation Date on which the Fund failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Fund shall cause the Independent
Accountant to provide to Moody's (if Moody's is then rating the AMPS), Fitch (if
Fitch is then rating the AMPS) and the Auction Agent (if either Moody's or Fitch
is then rating the AMPS) an Accountant's Confirmation as to such Preferred
Shares Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 7 shows that an error was made in the Preferred Shares Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation was required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all Moody's Eligible Assets (if Moody's is
then rating the AMPS) or Fitch Eligible Assets (if Fitch is then rating the
AMPS), as the case may be, of the Fund was determined by the Independent
Accountant, the calculation or determination made by such Independent Accountant
shall be final and conclusive and shall be binding on the Fund, and the Fund
shall accordingly amend and deliver the Preferred Shares Basic Maintenance
Report to Moody's (if Moody's is then rating the AMPS), Fitch (if Fitch is then
rating the AMPS) and the Auction Agent (if either Moody's or Fitch is then
rating the AMPS) promptly following receipt by the Fund of such Accountant's
Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any AMPS, the Fund shall complete and
deliver to Moody's (if Moody's is then rating the AMPS) and Fitch (if Fitch is
then rating the AMPS) a Preferred Shares Basic Maintenance Report as of the
close of business on such Date of Original Issue.
(g) On or before 5:00 p.m., New York City time, on the seventh Business Day
after either (i) the Fund shall have redeemed Common Shares or (ii) the ratio of
the Discounted Value of the Moody's Eligible Assets or the Fitch Eligible Assets
to the Preferred Shares Basic Maintenance Amount on any Valuation Date is less
than or equal to 105%, or (iii) whenever requested by Moody's or Fitch, the Fund
shall complete and deliver to Moody's (if Moody's is then rating the AMPS) or
Fitch (if Fitch is then rating the AMPS), as the case may be, a Preferred Shares
Basic Maintenance Report as of the date of such event.
8. [Reserved].
9. Restrictions on Dividends and Other Distributions.
(a) Dividends on Shares other than the AMPS. Except as set forth in the
next sentence, no dividends shall be declared or paid or set apart for payment
on the shares of any class or series of shares of beneficial interest of the
Fund ranking, as to the payment of dividends, on a parity with the AMPS for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid on the shares of each series of the AMPS through its most
recent Dividend Payment Date. When dividends are not paid in full upon the
shares of each series of the AMPS through its most recent Dividend Payment Date
or upon the shares of any other class or series of shares of beneficial interest
of the Fund ranking on a parity as to the payment of dividends with the AMPS
through their most recent respective dividend payment dates, all dividends
declared upon the AMPS and any other such class or series of shares of
beneficial interest ranking on a parity as to the payment of dividends with AMPS
shall be declared pro rata so that the amount of dividends declared per share on
AMPS and such other class or series of shares of beneficial interest shall in
all cases bear to each other the same ratio that accumulated dividends per share
on the AMPS and such other class or series of shares of beneficial interest bear
to each other (for purposes of this sentence, the amount of dividends declared
per share of AMPS shall be based on the Applicable Rate for such share for the
Dividend Periods during which dividends were not paid in full).
(b) Dividends and Other Distributions with Respect to Common Shares Under
the Investment Company Act. The Board of Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other distribution,
upon the Common Shares, or purchase Common Shares, unless in every such case the
AMPS have, at the time of any such declaration or purchase, an asset coverage
(as defined in and determined pursuant to the Investment Company Act) of at
least 200% (or such other asset coverage as may in the future be specified in or
under the Investment Company Act as the minimum asset coverage for senior
securities which are shares or stock of a closed-end investment company as a
condition of declaring dividends on its common shares or stock) after deducting
the amount of such dividend, distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so long as
any AMPS are outstanding, and except as set forth in paragraph (a) of this
Section 9 and paragraph (c) of Section 12 of this Part I, (A) the Fund shall not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or in options, warrants or
rights to subscribe for or purchase, Common Shares or other shares, if any,
ranking junior to the AMPS as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up) in respect of the Common
Shares or any other shares of the Fund ranking junior to or on a parity with the
AMPS as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption, redeem, purchase
or otherwise acquire for consideration any Common Shares or any other such
junior shares (except by conversion into or exchange for shares of the Fund
ranking junior to the AMPS as to the payment of dividends and the distribution
of assets upon dissolution, liquidation or winding up), or any such parity
shares (except by conversion into or exchange for shares of the Fund ranking
junior to or on a parity with AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), unless (i)
full cumulative dividends on shares of each series of AMPS through its most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
and (ii) the Fund has redeemed the full number of AMPS required to be redeemed
by any provision for mandatory redemption pertaining thereto, and (B) the Fund
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of Common Shares or any other shares of the Fund ranking junior to AMPS as to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Fund ranking junior to
AMPS as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the AMPS) and Fitch Eligible Assets (if Fitch is then rating the AMPS)
would each at least equal the Preferred Shares Basic Maintenance Amount.
10. Rating Agency Restrictions.
(a) If Moody's is rating any AMPS, then:
(i) For so long as any AMPS are rated by Moody's, the Fund will not buy or
sell futures contracts, write, purchase or sell call options on futures
contracts or purchase put options on futures contracts or write call options
(except covered call options) on portfolio securities unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to such AMPS by Moody's, except that the Fund may
purchase or sell exchange-traded futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds,
Bills or Notes ("Treasury Futures"), and purchase, write or sell exchange-traded
put options on such futures contracts and purchase, write or sell
exchange-traded call options on such futures contracts (collectively, "Moody's
Hedging Transactions"), subject to the following limitations:
(A) the Fund will only engage in Moody's Hedging Transactions for the
purpose of hedging against changes in the value of the Fund's portfolio
securities due to anticipated changes in interest rates or market conditions;
the amount hedged will vary from time to time and may involve the purchase and
sale of futures contracts based on the Municipal Index or Treasury Futures to
reduce or eliminate the amount hedged;
(B) the Fund will not engage in any Moody's Hedging Transaction which would
cause the Fund, at the time of such transaction, to own or have sold net
outstanding futures contracts having an aggregate Market Value exceeding 33 1/3%
of the aggregate Market Value of assets owned by the Fund; and
(C) the Fund will not enter into an option unless, after giving effect
thereto, the Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount.
(ii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets
which the Fund is obligated to deliver or receive pursuant to an outstanding
option shall be as follows:
(A) assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:
(I) Discounted Value and
(II) the exercise price of the call option written by the Fund;
(B) assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) assets subject to put options written by the Fund shall be valued at
the lesser of:
(I) the exercise price and
(II) the Discounted Value of the subject security; and
(D) where delivery may be made to the Fund with any security of a class of
securities, the Fund shall assume that it will take delivery of the security
with the lowest Discounted Value.
(iii) For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract; and
(D) 105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.
(iv) For so long as any AMPS are rated by Moody's, the Fund may enter into
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time ("Forward Commitments"), provided that:
(A) the Fund will maintain in a segregated account with its custodian cash,
cash equivalents or short-term, fixed-income securities rated P-1, MTG-1, MIG-1,
or Baa or higher by Moody's or, if not rated by Moody's, rated A1+/AA, SP-1+/AA,
A or AA or higher by S&P, and maturing prior to the date of the Forward
Commitment with a Market Value that equals or exceeds the amount of the Fund's
obligations under any Forward Commitment to which it is from time to time a
party or long-term fixed income securities with a Market Value that equals or
exceeds the amount of the Fund's obligations under any Forward Commitment to
which it is from time to time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after giving
effect thereto, the Fund would continue to have Moody's Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Forward Commitments will be
the Discounted Value as calculated by applying the respective Moody's Discount
Factor.
(b) If Fitch is rating any AMPS, then:
(i) For so long as any AMPS are rated by Fitch, the Fund will not buy or
sell futures contracts, write, purchase or sell call options on futures
contracts or purchase put options on futures contracts or write call options
(except covered call options) on portfolio securities unless it receives written
confirmation from Fitch that engaging in such transactions would not impair the
ratings then assigned to such AMPS by Fitch, except that the Fund may purchase
or sell exchange-traded futures contracts based on the Municipal Index or
Treasury Futures, and purchase, write or sell exchange-traded put options on
such futures contracts and purchase, write or sell exchange-traded call options
on such futures contracts (collectively, "Fitch Hedging Transactions"), subject
to the following limitations:
(A) the Fund will only engage in Fitch Hedging Transactions for the purpose
of hedging against changes in the value of the Fund's portfolio securities due
to anticipated changes in interest rates or market conditions; the amount hedged
will vary from time to time and may involve the purchase and sale of futures
contracts based on the Municipal Index or Treasury Futures to reduce or
eliminate the amount hedged;
(B) the Fund will not engage in any Fitch Hedging Transaction which would
cause the Fund, at the time of such transaction, to own or have sold net
outstanding futures contracts having an aggregate Market Value exceeding 33 1/3%
of the aggregate Market Value of assets owned by the Fund; and
(C) the Fund will not enter into an option unless, after giving effect
thereto, the Fund would continue to have Fitch Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic Maintenance
Amount.
(ii) For purposes of determining whether the Fund has Fitch Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Fitch Eligible Assets which
the Fund is obligated to deliver or receive pursuant to an outstanding option
shall be as follows:
(A) assets subject to call options written by the Fund which are either
exchange-traded and "readily reversible" or which expire within 49 days after
the date as of which such valuation is made shall be valued at the lesser of:
(I) Discounted Value and
(II) the exercise price of the call option written by the Fund;
(B) assets subject to call options written by the Fund not meeting the
requirements of clause (A) of this sentence shall have no value;
(C) assets subject to put options written by the Fund shall be valued at
the lesser of:
(I) the exercise price and
(II) the Discounted Value of the subject security; and
(D) where delivery may be made to the Fund with any security of a class of
securities, the Fund shall assume that it will take delivery of the security
with the lowest Discounted Value.
(iii) For purposes of determining whether the Fund has Fitch Eligible
Assets with an aggregate Discounted Value that equals or exceeds the Preferred
Shares Basic Maintenance Amount, the following amounts shall be subtracted from
the aggregate Discounted Value of the Fitch Eligible Assets held by the Fund:
(A) 10% of the exercise price of a written call option;
(B) the exercise price of any written put option;
(C) the settlement price of the underlying futures contract if the Fund
writes put options on a futures contract; and
(D) 105% of the Market Value of the underlying futures contracts if the
Fund writes call options on a futures contract and does not own the underlying
contract.
(iv) For so long as any AMPS are rated by Fitch, the Fund may enter into
Forward Commitments, provided that:
(A) the Fund will maintain in a segregated account with its custodian cash,
cash equivalents or short-term, fixed-income securities rated F-1 or BBB or
higher by Fitch (or, if not rated by Fitch, rated P-1, MTG-1 or MIG-1, or Baa or
higher by Moody's) and maturing prior to the date of the Forward Commitment with
a Market Value that equals or exceeds the amount of the Fund's obligations under
any Forward Commitment to which it is from time to time a party or long-term
fixed income securities with a Market Value that equals or exceeds the amount of
the Fund's obligations under any Forward Commitment to which it is from time to
time a party; and
(B) the Fund will not enter into a Forward Commitment unless, after giving
effect thereto, the Fund would continue to have Fitch Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount.
For purposes of determining whether the Fund has Fitch Eligible Assets with
an aggregate Discounted Value that equals or exceeds the Preferred Shares Basic
Maintenance Amount, the Discounted Value of Forward Commitments will be the
Discounted Value as calculated by applying the respective Fitch Discount Factor.
(c) For so long as any AMPS are outstanding and Moody's or Fitch or both is
rating such shares, the Fund will not, unless it has received written
confirmation from Moody's or Fitch or both, as applicable, that any such action
would not impair the rating then assigned by such rating agency to such shares,
engage in any one or more of the following transactions:
(i) borrow money, except that the Fund may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions if
(A) the Preferred Shares Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing and
(B) such borrowing
(I) is privately arranged with a bank or other person and is evidenced by a
promissory note or other evidence of indebtedness that is not intended to be
publicly distributed or
(II) is for "temporary purposes," is evidenced by a promissory note or
other evidence of indebtedness and is in an amount not exceeding 5% of the value
of the total assets of the Fund at the time of the borrowing (for purposes of
the foregoing, "temporary purposes" means that the borrowing is to be repaid
within sixty days and is not to be extended or renewed);
(ii) except as provided in Section 5 of this Part I, issue additional
shares of any series of AMPS or any class or series of shares ranking prior to
or on a parity with AMPS with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the Fund,
or reissue any AMPS previously purchased or redeemed by the Fund;
(iii) engage in any short sales of securities;
(iv) lend securities;
(v) merge or consolidate into or with any other corporation or entity;
(vi) change the Pricing Service; or
(vii) enter into reverse repurchase agreements.
In the event any AMPS are outstanding and another nationally-recognized
statistical rating organization is rating such shares in addition to or in lieu
of Moody's or Fitch, the Fund shall comply with any restrictions imposed by such
rating agency, which restrictions may be more restrictive than those imposed by
Moody's or Fitch.
11. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (v) of this paragraph (a),
AMPS of any series may be redeemed, at the option of the Fund, as a whole or
from time to time in part, on the second Business Day preceding any Dividend
Payment Date for shares of such series, out of funds legally available therefor,
at a redemption price per share equal to the sum of $25,000 plus an amount equal
to accumulated but unpaid dividends thereon (whether or not earned or declared)
to (but not including) the date fixed for redemption; provided, however, that
(1) shares of a series of AMPS may not be redeemed in part if after such partial
redemption fewer than 300 shares of such series remain outstanding; (2) unless
otherwise provided in Section 9 of Exhibit A hereto, shares of a series of AMPS
are redeemable by the Fund during the Initial Rate Period thereof only on the
second Business Day next preceding the last Dividend Payment Date for such
Initial Rate Period; and (3) subject to subparagraph (ii) of this paragraph (a),
the Notice of Special Rate Period relating to a Special Rate Period of shares of
a series of AMPS, as delivered to the Auction Agent and filed with the Secretary
of the Fund, may provide that shares of such series shall not be redeemable
during the whole or any part of such Special Rate Period (except as provided in
subparagraph (iv) of this paragraph (a)) or shall be redeemable during the whole
or any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein ("Special Redemption
Provisions").
(ii) A Notice of Special Rate Period relating to shares of a series of AMPS
for a Special Rate Period thereof may contain Special Redemption Provisions only
if the Fund's Board of Trustees, after consultation with the Broker-Dealer or
Broker-Dealers for such Special Rate Period of shares of such series, determines
that such Special Redemption Provisions are in the best interest of the Fund.
(iii) If fewer than all of the outstanding shares of a series of AMPS are
to be redeemed pursuant to subparagraph (i) of this paragraph (a), the number of
shares of such series to be redeemed shall be determined by the Board of
Trustees, and such shares shall be redeemed pro rata from the Holders of shares
of such series in proportion to the number of shares of such series held by such
Holders.
(iv) Subject to the provisions of subparagraph (v) of this paragraph (a),
shares of any series of AMPS may be redeemed, at the option of the Fund, as a
whole but not in part, out of funds legally available therefor, on the first
Business Day following any Dividend Period thereof included in a Rate Period
consisting of more than 364 Rate Period Days if, on the date of determination of
the Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the Treasury
Note Rate for such Rate Period, at a redemption price per share equal to the sum
of $25,000 plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed for
redemption.
(v) The Fund may not on any date mail a Notice of Redemption pursuant to
paragraph (c) of this Section 11 in respect of a redemption contemplated to be
effected pursuant to this paragraph (a) unless on such date (a) the Fund has
available Deposit Securities with maturity or tender dates not later than the
day preceding the applicable redemption date and having a value not less than
the amount (including any applicable premium) due to Holders of AMPS by reason
of the redemption of such shares on such redemption date and (b) the Discounted
Value of Moody's Eligible Assets (if Moody's is then rating the AMPS) and Fitch
Eligible Assets (if Fitch is then rating the AMPS) each at least equals the
Preferred Shares Basic Maintenance Amount, and would at least equal the
Preferred Shares Basic Maintenance Amount immediately subsequent to such
redemption if such redemption were to occur on such date. The Fund shall not be
required to have available Deposit Securities as described in clause (a) of this
subparagraph (v) in respect of a redemption of any shares of AMPS, as a whole or
in part, contemplated to be effected pursuant to paragraph 11(a) where such
redemption is subject to the issuance of shares of any other series of preferred
stock of the Fund. For purposes of determining in clause (b) of the preceding
sentence whether the Discounted Value of Moody's Eligible Assets and Fitch
Eligible Assets at least equals the Preferred Shares Basic Maintenance Amount,
the Moody's Discount Factor applicable to Moody's Eligible Assets and the Fitch
Discount Factor applicable to Fitch Eligible Assets shall be determined by
reference to the first Exposure Period longer than the Exposure Period then
applicable to the Fund, as described in the definitions of Moody's Discount
Factor and Fitch Discount Factor herein.
(b) Mandatory Redemption. The Fund shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the AMPS, if the Fund fails to have
either Moody's Eligible Assets or Fitch Eligible Assets with a Discounted Value
greater than or equal to the Preferred Shares Basic Maintenance Amount or fails
to maintain the Investment Company Act Preferred Shares Asset Coverage, in
accordance with the requirements of the rating agency or agencies then rating
the AMPS, and such failure is not cured on or before the Preferred Shares Basic
Maintenance Cure Date or the Investment Company Act Cure Date, as the case may
be. The number of AMPS to be redeemed shall be equal to the lesser of (i) the
minimum number of AMPS, together with all other preferred shares subject to
redemption or retirement, the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, would have
resulted in the Fund's having Moody's Eligible Assets and Fitch Eligible Assets
with a Discounted Value greater than or equal to the Preferred Shares Basic
Maintenance Amount or maintaining the Investment Company Act Preferred Shares
Asset Coverage, as the case may be, on such Cure Date (provided, however, that
if there is no such minimum number of AMPS and other preferred shares the
redemption or retirement of which would have had such result, all AMPS then
outstanding shall be redeemed), and (ii) the maximum number of AMPS, together
with all other preferred shares subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor in accordance
with the Declaration and applicable law. In determining the AMPS required to be
redeemed in accordance with the foregoing, the Fund shall allocate the number
required to be redeemed to satisfy the Preferred Shares Basic Maintenance Amount
or the Investment Company Act Preferred Shares Asset Coverage, as the case may
be, pro rata among AMPS and other preferred shares (and, then, pro rata among
each series of AMPS) subject to redemption or retirement. The Fund shall effect
such redemption on the date fixed by the Fund therefor, which date shall not be
earlier than 20 days nor later than 40 days after such Cure Date, except that if
the Fund does not have funds legally available for the redemption of all of the
required number of the AMPS and other preferred shares which are subject to
redemption or retirement or the Fund otherwise is unable to effect such
redemption on or prior to 40 days after such Cure Date, the Fund shall redeem
those AMPS and other preferred shares which it was unable to redeem on the
earliest practicable date on which it is able to effect such redemption. If
fewer than all of the outstanding shares of a series of AMPS are to be redeemed
pursuant to this paragraph (b), the number of shares of such series to be
redeemed shall be redeemed pro rata from the Holders of shares of such series in
proportion to the number of shares of such series held by such Holders.
(c) Notice of Redemption. If the Fund shall determine or be required to
redeem shares of a series of AMPS pursuant to paragraph (a) or (b) of this
Section 11, it shall mail a Notice of Redemption with respect to such redemption
by first-class mail, postage prepaid, to each Holder of the AMPS to be redeemed,
at such Holder's address as the same appears on the record books of the Fund on
the record date established by the Board of Trustees. Such Notice of Redemption
shall be so mailed not less than 20 nor more than 45 days prior to the date
fixed for redemption. Each such Notice of Redemption shall state: (i) the
redemption date; (ii) the number of AMPS to be redeemed and the series thereof;
(iii) the CUSIP number for shares of such series; (iv) the Redemption Price; (v)
the place or places where the certificate(s) for such shares (properly endorsed
or assigned for transfer, if the Board of Trustees shall so require and the
Notice of Redemption shall so state) are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease to
accumulate on such redemption date; and (vii) the provisions of this Section 11
under which such redemption is made. If fewer than all shares of a series of
AMPS held by any Holder are to be redeemed, the Notice of Redemption mailed to
such Holder shall also specify the number of shares of such series to be
redeemed from such Holder. The Fund may provide in any Notice of Redemption
relating to a redemption contemplated to be effected pursuant to paragraph (a)
of this Section 11 that such redemption is subject to one or more conditions
precedent and that the Fund shall not be required to effect such redemption
unless each such condition shall have been satisfied at the time or times and in
the manner specified in such Notice of Redemption.
(d) No Redemption Under Certain Circumstances. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of AMPS (whether or not earned or declared) are in arrears,
no shares of such series shall be redeemed unless all outstanding shares of such
series are simultaneously redeemed, and the Fund shall not purchase or otherwise
acquire any shares of such series; provided, however, that the foregoing shall
not prevent the purchase or acquisition of all outstanding shares of such series
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, Holders of all
outstanding shares of such series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem AMPS
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Fund shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been mailed;
provided, however, that the foregoing shall not apply in the case of the Fund's
failure to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Fund may not have redeemed AMPS for which a
Notice of Redemption has been mailed, dividends may be declared and paid on AMPS
and shall include those AMPS for which a Notice of Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Fund. All moneys
paid to the Auction Agent for payment of the Redemption Price of AMPS called for
redemption shall be held in trust by the Auction Agent for the benefit of
Holders of shares so to be redeemed.
(g) Shares for Which Notice of Redemption Has Been Given Are No Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the AMPS that are the subject of such notice, dividends on
such shares shall cease to accumulate and such shares shall no longer be deemed
to be outstanding for any purpose, and all rights of the Holders of the shares
so called for redemption shall cease and terminate, except the right of such
Holders to receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph (e)(i) of Section 2 of
this Part I and in Section 3 of this Part I. Upon surrender in accordance with
the Notice of Redemption of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Trustees shall so
require and the Notice of Redemption shall so state), the Redemption Price shall
be paid by the Auction Agent to the Holders of AMPS subject to redemption. In
the case that fewer than all of the shares represented by any such certificate
are redeemed, a new certificate shall be issued, representing the unredeemed
shares, without cost to the Holder thereof. The Fund shall be entitled to
receive from the Auction Agent, promptly after the date fixed for redemption,
any cash deposited with the Auction Agent in excess of (i) the aggregate
Redemption Price of the AMPS called for redemption on such date and (ii) all
other amounts to which Holders of AMPS called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of 90 days from such
redemption date shall, to the extent permitted by law, be repaid to the Fund,
after which time the Holders of AMPS so called for redemption may look only to
the Fund for payment of the Redemption Price and all other amounts to which they
may be entitled. The Fund shall be entitled to receive, from time to time after
the date fixed for redemption, any interest on the funds so deposited.
(h) Compliance with Applicable Law. In effecting any redemption pursuant to
this Section 11, the Fund shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the
Investment Company Act and any applicable Delaware law, but shall effect no
redemption except in accordance with the Investment Company Act and any
applicable Delaware law.
(i) Only Whole AMPS may be Redeemed. In the case of any redemption pursuant
to this Section 11, only whole AMPS shall be redeemed, and in the event that any
provision of the Declaration would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
12. Liquidation Rights.
(a) Ranking. The shares of a series of AMPS shall rank on a parity with
each other, with shares of any other series of AMPS and with shares of any other
series of preferred shares as to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund.
(b) Distributions Upon Liquidation. Upon the dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of AMPS then outstanding shall be entitled to receive and to be paid out
of the assets of the Fund available for distribution to its shareholders, before
any payment or distribution shall be made on the Common Shares or on any other
class of shares of the Fund ranking junior to the AMPS upon dissolution,
liquidation or winding up, an amount equal to the Liquidation Preference with
respect to such shares plus an amount equal to all dividends thereon (whether or
not earned or declared) accumulated but unpaid to (but not including) the date
of final distribution in same day funds, together with any payments required to
be made pursuant to Section 3 of this Part I in connection with the liquidation
of the Fund. After the payment to the Holders of the AMPS of the full
preferential amounts provided for in this paragraph (b), the Holders of AMPS as
such shall have no right or claim to any of the remaining assets of the Fund.
(c) Pro Rata Distributions. In the event the assets of the Fund available
for distribution to the Holders of AMPS upon any dissolution, liquidation, or
winding up of the affairs of the Fund, whether voluntary or involuntary, shall
be insufficient to pay in full all amounts to which such Holders are entitled
pursuant to paragraph (b) of this Section 12, no such distribution shall be made
on account of any shares of any other class or series of preferred shares
ranking on a parity with the AMPS with respect to the distribution of assets
upon such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the AMPS, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
(d) Rights of Junior Shares. Subject to the rights of the holders of shares
of any series or class or classes of shares ranking on a parity with the AMPS
with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund, after payment shall have been made in
full to the Holders of the AMPS as provided in paragraph (b) of this Section 12,
but not prior thereto, any other series or class or classes of shares ranking
junior to the AMPS with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the Holders
of the AMPS shall not be entitled to share therein.
(e) Certain Events not Constituting Liquidation. Neither the sale of all or
substantially all the property or business of the Fund, nor the merger or
consolidation of the Fund into or with any business trust or corporation nor the
merger or consolidation of any business trust or corporation into or with the
Fund shall be a dissolution, liquidation or winding up, whether voluntary or
involuntary, for the purposes of this Section 12.
13. Miscellaneous.
(a) Amendment of Exhibit A to Add Additional Series. Subject to the
provisions of paragraph (c)(ii) of Section 10 of this Part I, the Board of
Trustees may, by resolution duly adopted, without shareholder approval (except
as otherwise provided by this Statement or required by applicable law), amend
Exhibit A hereto to (1) reflect any amendments hereto which the Board of
Trustees is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of AMPS or additional shares
of a series of AMPS (and terms relating thereto) to the series and AMPS
theretofore described therein. Each such additional series and all such
additional shares shall be governed by the terms of this Statement.
(b) Exhibit A Incorporated by Reference. Exhibit A hereto is incorporated
in and made a part of this Statement by reference thereto.
(c) No Fractional Shares. No fractional shares of AMPS shall be issued.
(d) Status of AMPS Redeemed, Exchanged or Otherwise Acquired by the Fund.
AMPS which are redeemed, exchanged or otherwise acquired by the Fund shall
return to the status of authorized and unissued preferred shares without
designation as to series.
(e) Board may Resolve Ambiguities. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of AMPS prior to
the issuance of shares of such series.
(f) Headings not Determinative. The headings contained in this Statement
are for convenience of reference only and shall not affect the meaning or
interpretation of this Statement.
(g) Notices. All notices or communications, unless otherwise specified in
the By-Laws of the Fund or this Statement, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage prepaid.
PART II.
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of AMPS:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such series for the next succeeding
Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell if the Applicable
Rate for shares of such series for the next succeeding Rate Period of shares of
such series shall be less than the rate per annum specified by such Beneficial
Owner; and/or
(C) the number of Outstanding shares, if any, of such series held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to
the Applicable Rate for the next succeeding Rate Period of shares of such
series; and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive Auction
in a commercially reasonable manner, contact Potential Beneficial Owners (by
telephone or otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such series which each
such Potential Beneficial Owner offers to purchase if the Applicable Rate for
the next succeeding Rate Period of shares of such series shall not be less than
the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A), (i) (B), (i) (C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
Order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders;" an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders;" an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids;" and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of AMPS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such Bid
if the Applicable Rate for shares of such series determined on such Auction Date
shall be less than the rate specified therein;
(B) such number or a lesser number of Outstanding shares of such series to
be determined as set forth in clause (iv) of paragraph (a) of Section 4 of this
Part II if the Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in such Bid
if the rate specified therein shall be higher than the Maximum Rate for shares
of such series, or such number or a lesser number of Outstanding shares of such
series to be determined as set forth in clause (iii) of paragraph (b) of Section
4 of this Part II if the rate specified therein shall be higher than the Maximum
Rate for shares of such series and Sufficient Clearing Bids for shares of such
series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares of
a series of AMPS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified in such Sell
Order; or
(B) such number or a lesser number of Outstanding shares of such series as
set forth in clause (iii) of paragraph (b) of Section 4 of this Part II if
Sufficient Clearing Bids for shares of such series do not exist; provided,
however, that a Broker-Dealer that is an Existing Holder with respect to AMPS
shall not be liable to any Person for failing to sell such shares pursuant to a
Sell Order described in the proviso to paragraph (c) of Section 2 of this Part
II if (1) such shares were transferred by the Beneficial Owner thereof without
compliance by such Beneficial Owner or its transferee Broker-Dealer (or other
transferee person, if permitted by the Fund) with the provisions of Section 7 of
this Part II or (2) such Broker-Dealer has informed the Auction Agent pursuant
to the terms of its Broker-Dealer Agreement that, according to such
Broker-Dealer's records, such Broker-Dealer believes it is not the Existing
Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder of
shares of a series of AMPS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified in such Bid
if the Applicable Rate for shares of such series determined on such Auction Date
shall be higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding shares of such series as
set forth in clause (v) of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such Auction Date shall
be equal to the rate specified therein.
(c) No Order for any number of AMPS other than whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for AMPS of a series
subject to an Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and shall specify with
respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Fund);
(ii) the aggregate number of shares of such series that are the subject of
such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares of
such series:
(A) the number of shares, if any, of such series subject to any Hold Order
of such Existing Holder;
(B) the number of shares, if any, of such series subject to any Bid of such
Existing Holder and the rate specified in such Bid; and
(C) the number of shares, if any, of such series subject to any Sell Order
of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of shares of such
series, the rate and number of shares of such series specified in such Potential
Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding AMPS of a series
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline for an Auction relating to a Special Rate Period consisting of more
than 28 Rate Period Days, the Auction Agent shall deem a Sell Order to have been
submitted by or on behalf of such Existing Holder covering the number of
outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding AMPS of a
series subject to an Auction held by such Existing Holder, such Orders shall be
considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered valid,
but only up to and including in the aggregate the number of Outstanding shares
of such series held by such Existing Holder, and if the number of shares of such
series subject to such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares subject to each
such Hold Order shall be reduced pro rata to cover the number of Outstanding
shares of such series held by such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered valid up to
and including the excess of the number of Outstanding shares of such series held
by such Existing Holder over the number of shares of such series subject to any
Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an Existing Holder
for shares of such series is submitted to the Auction Agent with the same rate
and the number of Outstanding shares of such series subject to such Bids is
greater than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to cover the
number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid of an Existing
Holder for shares of such series is submitted to the Auction Agent with
different rates, such Bids shall be considered valid in the ascending order of
their respective rates up to and including the amount of such excess; and
(D) in any such event, the number, if any, of such Outstanding shares of
such series subject to any portion of Bids considered not valid in whole or in
part under this clause (ii) shall be treated as the subject of a Bid for shares
of such series by or on behalf of a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the sum of shares of such series
subject to valid Hold Orders referred to in clause (i) above and valid Bids
referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of AMPS is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of shares
therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bids Rate and
Applicable Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of AMPS, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series over the
number of Outstanding shares of such series subject to Submitted Hold Orders
(such excess being hereinafter referred to as the "Available AMPS");
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject to Submitted
Bids of Potential Holders specifying one or more rates equal to or lower than
the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject to Submitted
Bids of Existing Holders specifying one or more rates higher than the Maximum
Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject to Submitted
Sell Orders
(in the event such excess or such equality exists (other than because the
number of shares of such series in subclauses (B) and (C) above is zero because
all of the Outstanding shares of such series are subject to Submitted Hold
Orders), such Submitted Bids in subclause (A) above being hereinafter referred
to collectively as "Sufficient Clearing Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist, the
lowest rate specified in such Submitted Bids (the "Winning Bid Rate") which if:
(A) (I) each such Submitted Bid of Existing Holders specifying such lowest
rate and (II) all other such Submitted Bids of Existing Holders specifying lower
rates were rejected, thus entitling such Existing Holders to continue to hold
the shares of such series that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders specifying such lowest
rate and (II) all other such Submitted Bids of Potential Holders specifying
lower rates were accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series
which, when added to the number of Outstanding shares of such series to be
purchased by such Potential Holders described in subclause (B) above, would
equal not less than the Available AMPS of such series.
(b) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (a) of this Section 3, the Auction Agent shall advise the Fund of
the Maximum Rate for shares of the series of AMPS for which an Auction is being
held on the Auction Date and, based on such determination the Applicable Rate
for shares of such series for the next succeeding Rate Period thereof as
follows:
(i) if Sufficient Clearing Bids for shares of such series exist, that the
Applicable Rate for all shares of such series for the next Succeeding Rate
Period thereof shall be equal to the Winning Bid Rate for shares of such series
so determined;
(ii) if sufficient Clearing Bids for shares of such series do not exist
(other than because all of the Outstanding shares of such series are subject to
Submitted Hold Orders), that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be equal to the Maximum Rate
for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of such series
for the next succeeding Rate Period thereof shall be equal to the lesser of the
Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days) or
the product of (A)(I) the "AA" Financial Composite Commercial Paper Rate on such
Auction Date for such Rate Period, if such Rate Period consists of fewer than
183 Rate Period Days; (II) the Treasury Bill Rate on such Auction Date for such
Rate Period, if such Rate Period consists of more than 182 but fewer than 365
Rate Period Days; or (III) the Treasury Note Rate on such Auction Date for such
Rate Period, if such Rate Period is more than 364 Rate Period Days (the rate
described in the foregoing clause (A)(I), (II) or (III), as applicable, being
referred to herein as the "Benchmark Rate") and (B) 1 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater; provided, however, that if the Fund has
notified the Auction Agent of its intent to allocate to shares of such series in
such Rate Period any net capital gains or other income taxable for Federal
income tax purposes ("Taxable Income"), the Applicable Rate for shares of such
series for such Rate Period will be (i) if the Taxable Yield Rate (as defined
below) is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if
the Taxable Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax applicable to ordinary income, whichever is greater, multiplied by
the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate means
the rate determined by (a) dividing the amount of Taxable Income available for
distribution per such share of AMPS by the number of days in the Dividend Period
in respect of which such Taxable Income is contemplated to be distributed, (b)
multiplying the amount determined in (a) above by 365 (in the case of a Dividend
Period of 7 Rate Period Days) or 360 (in the case of any other Dividend Period),
and (c) dividing the amount determined in (b) above by $25,000.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares.
Existing Holders shall continue to hold the AMPS that are subject to
Submitted Hold Orders, and, based on the determinations made pursuant to
paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of AMPS have been
made, all Submitted Sell Orders with respect to shares of such series shall be
accepted and, subject to the provisions of paragraphs (d) and (e) of this
section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series specifying
any rate that is higher than the Winning Bid Rate for shares of such series
shall be accepted, thus requiring each such Existing Holder to sell the AMPS
subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series specifying
any rate that is lower than the Winning Bid Rate for shares of such series shall
be rejected, thus entitling each such Existing Holder to continue to hold the
AMPS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of such
series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue to
hold the AMPS subject to such Submitted Bid, unless the number of Outstanding
AMPS subject to all such Submitted Bids shall be greater than the number of AMPS
("remaining shares") in the excess of the Available AMPS of such series over the
number of AMPS subject to Submitted Bids described in clauses (ii) and (iii) of
this paragraph (a), in which event such Submitted Bid of such Existing Holder
shall be rejected in part, and such Existing Holder shall be entitled to
continue to hold AMPS subject to such Submitted Bid, but only in an amount equal
to the number of AMPS of such series obtained by multiplying the number of
remaining shares by a fraction, the numerator of which shall be the number of
Outstanding AMPS held by such Existing Holder subject to such Submitted Bid and
the denominator of which shall be the aggregate number of Outstanding AMPS
subject to such Submitted Bids made by all such Existing Holders that specified
a rate equal to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of shares of
such series obtained by multiplying the number of shares in the excess of the
Available AMPS of such series over the number of AMPS subject to Submitted Bids
described in clauses (ii) through (iv) of this paragraph (a) by a fraction, the
numerator of which shall be the number of Outstanding AMPS subject to such
Submitted Bid and the denominator of which shall be the aggregate number of
Outstanding AMPS subject to such Submitted Bids made by all such Potential
Holders that specified a rate equal to the Winning Bid Rate for shares of such
series.
(b) If Sufficient Clearing Bids for shares of a series of AMPS have not
been made (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), subject to the provisions of paragraph (d) of
this Section 4, Submitted Orders for shares of such series shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series specifying
any rate that is equal to or lower than the Maximum Rate for shares of such
series shall be rejected, thus entitling such Existing Holders to continue to
hold the AMPS subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series specifying
any rate that is equal to or lower than the Maximum Rate for shares of such
series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of such
series and the Submitted Sell Orders for shares of such series of each Existing
Holder shall be accepted, thus entitling each Existing Holder that submitted or
on whose behalf was submitted any such Submitted Bid or Submitted Sell Order to
sell the shares of such series subject to such Submitted Bid or Submitted Sell
Order, but in both cases only in an amount equal to the number of shares of such
series obtained by multiplying the number of shares of such series subject to
Submitted Bids described in clause (ii) of this paragraph (b) by a fraction, the
numerator of which shall be the number of Outstanding shares of such series held
by such Existing Holder subject to such Submitted Bid or Submitted Sell Order
and the denominator of which shall be the aggregate number of Outstanding shares
of such series subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of AMPS are subject to
Submitted Hold Orders, all Submitted Bids for shares of such series shall be
rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of a series of AMPS on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, round up or down the number of AMPS of such series to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date as a result of such procedures so that the number of shares so purchased or
sold by each Existing Holder or Potential Holder on such Auction Date shall be
whole AMPS.
(e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of AMPS on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate AMPS of such series for purchase among Potential Holders so
that only whole shares of AMPS of such series are purchased on such Auction Date
as a result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing AMPS of such series on
such Auction Date.
(f) Based on the results of each Auction for shares of a series of AMPS,
the Auction Agent shall determine the aggregate number of shares of such series
to be purchased and the aggregate number of shares of such series to be sold by
Potential Holders and Existing Holders and, with respect to each Potential
Holder and Existing Holder, to the extent that such aggregate number of shares
to be purchased and such aggregate number of shares to be sold differ, determine
to which other Potential Holder(s) or Existing Holder(s) they shall deliver, or
from which other Potential Holder(s) or Existing Holder(s) they shall receive,
as the case may be, AMPS of such series. Notwithstanding any provision of the
Auction Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of a series of AMPS with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of AMPS that
have been made in respect of Potential Holders' or Potential Beneficial Owners'
Submitted Bids for shares of such series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
(g) Neither the Fund nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver AMPS of any series or to pay for
AMPS of any series sold or purchased pursuant to the Auction Procedures or
otherwise.
5. Notification of Allocations.
Whenever the Fund intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on AMPS, the Fund may,
but shall not be required to, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from the Fund, it will be
required in turn to notify each Broker-Dealer, who, on or prior to such Auction
Date, in accordance with its Broker-Dealer Agreement, will be required to notify
its Beneficial Owners and Potential Beneficial Owners of AMPS believed by it to
be interested in submitting an Order in the Auction to be held on such Auction
Date.
6. Auction Agent.
For so long as any AMPS are outstanding, the Auction Agent, duly appointed
by the Fund to so act, shall be in each case a commercial bank, trust company or
other financial institution independent of the Fund and its affiliates (which
however may engage or have engaged in business transactions with the Fund or its
affiliates) and at no time shall the Fund or any of its affiliates act as the
Auction Agent in connection with the Auction Procedures. If the Auction Agent
resigns or for any reason its appointment is terminated during any period that
any AMPS are outstanding, the Board of Trustees shall use its best efforts
promptly thereafter to appoint another qualified commercial bank, trust company
or financial institution to act as the Auction Agent. The Auction Agent's
registry of Existing Holders of a series of AMPS shall be conclusive and binding
on the Broker-Dealers. A Broker-Dealer may inquire of the Auction Agent between
3:00 p.m. on the Business Day preceding an Auction for a series of AMPS and 9:30
a.m. on the Auction Date for such Auction to ascertain the number of shares of
such series in respect of which the Auction Agent has determined such Broker-
Dealer to be an Existing Holder. If such Broker-Dealer believes it is the
Existing Holder of fewer shares of such series than specified by the Auction
Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer may so
inform the Auction Agent of that belief. Such Broker-Dealer shall not, in its
capacity as Existing Holder of shares of such series, submit Orders in such
Auction in respect of shares of such series covering in the aggregate more than
the number of shares of such series specified by the Auction Agent in response
to such Broker-Dealer's inquiry.
7. Transfer of AMPS.
Unless otherwise permitted by the Fund, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of AMPS only in whole shares and
only pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the procedures described in this Part II or to a Broker-Dealer; provided,
however, that (a) a sale, transfer or other disposition of AMPS from a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 7 if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the Fund) to
whom such transfer is made shall advise the Auction Agent of such transfer.
8. Global Certificate.
Prior to the commencement of a Voting Period, (i) all of the shares of a
series of AMPS outstanding from time to time shall be represented by one global
certificate registered in the name of the Securities Depository or its nominee
and (ii) no registration of transfer of shares of a series of AMPS shall be made
on the books of the Fund to any Person other than the Securities Depository or
its nominee.
IN WITNESS WHEREOF, FEDERATED PREMIER MUNICIPAL INCOME FUND, has caused
these presents to be signed in its name and attested on its behalf by its duly
authorized officers as of February 13, 2003. Said officers of the Fund have
executed this Statement as officers and not individually, and the obligations
and rights set forth in this Statement are not binding upon any such officers,
or the Trustees or shareholders of the Fund, individually, but are binding only
upon the assets and property of the Fund.
FEDERATED PREMIER MUNICIPAL INCOME FUND
By: /s/ Mary Jo Ochson
Name: Mary Jo Ochson
Title: Vice President
ATTEST:
/s/ Nelson W. Winter
Name: Nelson W. Winter
Title: Assistant Secretary
EXHIBIT A
FEDERATED PREMIER MUNICIPAL INCOME FUND
SECTION 1
Designation as to Series.
SERIES A: A series of 2,147 AMPS, par value $.01 per share, liquidation
preference $25,000 per share, is hereby designated "Auction Market Preferred
Shares, Series A." Each of the 2,147 shares of Series A AMPS issued on February
18, 2003 shall, for purposes hereof, be deemed to have a Date of Original Issue
of February 18, 2003; have an Applicable Rate for its Initial Rate Period equal
to 1.05% per annum; have an initial Dividend Payment Date of February 28, 2003;
and have such other preferences, rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption, in addition to those required by applicable law or set forth in the
Declaration, applicable to preferred shares of the Fund, as set forth in Part I
and Part II of this Statement. Any shares of Series A AMPS issued thereafter
shall be issued on the first day of a Rate Period of the then outstanding shares
of Series A AMPS, shall have, for such Rate Period, an Applicable Rate equal to
the Applicable Rate for shares of such series established in the first Auction
for shares of such series preceding the date of such issuance; and shall have
such other preferences, rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption, in addition to
those required by applicable law or set forth in the Declaration applicable to
preferred shares of the Fund, as set forth in Part I and Part II of this
Statement. The Series A AMPS shall constitute a separate series of AMPS of the
Fund, and each share of Series A AMPS shall be identical except as provided in
Section 11 of Part I of this Statement.
SECTION 2
Number of Authorized Shares Per Series.
The number of authorized shares constituting Series A AMPS is 2,147.
SECTION 3
Exceptions to Certain Definitions.
Notwithstanding the definitions contained under the heading "Definitions"
in this Statement, the following terms shall have the following meanings for
purposes of this Statement:
Not applicable.
SECTION 4
Certain Definitions.
For purposes of this Statement, the following terms shall have the
following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:
Not applicable.
SECTION 5
Initial Rate Periods.
The Initial Rate Period for shares of Series A AMPS shall be the period
from and including the Date of Original Issue thereof to but excluding February
28, 2003.
SECTION 6
Date for Purposes of the Definition of "Quarterly Valuation Date" Contained
Under the Heading "Definitions" in this Statement.
May 30, 2003
SECTION 7
Dividend Payment Dates.
Except as otherwise provided in paragraph (d) of Section 2 of Part I of
this Statement, dividends shall be payable on shares of Series A AMPS, for the
Initial Rate Period on February 28, 2003, and on each Friday thereafter.
SECTION 8
Adjustment of Length of Special Rate Period.
In the event the Fund wishes to designate a Subsequent Rate Period for any
Series A AMPS as a Special Rate Period, but the day following what would
otherwise be the last day of such Special Rate Period is not a Friday that is a
Business Day, then the Fund shall designate such Subsequent Rate Period as a
Special Rate Period consisting of the period commencing on the first day
following the end of the immediately preceding Rate Period and ending on the
first Thursday that is followed by a Friday that is a Business Day preceding
what would otherwise be such last day.
SECTION 9
Redemption Provisions Applicable to Initial Rate Periods.
Not applicable.
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 FUND
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
Underwriter
Merrill Lynch, Pierce, Fenner & Smith Incorporated
4 World Financial Center
New York, NY 10080
Investment Adviser
Federated Investment Management Company
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Custodian
State Street Bank and Trust Company
P. O. Box 8600
Boston, MA 02266-8600
Independent Auditors
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
CUSIP 31423P207