As filed with the Securities and Exchange Commission on February 10, 2003
1933 Act File No. 333-102033
1940 Act File No. 811-21235
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. 2 .................... X
Post-Effective Amendment No. ....................
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 7 ..................................... X
FEDERATED PREMIER MUNICIPAL INCOME FUND
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Leslie K. Ross, Esquire
Reed Smith LLP
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Copies to:
Matthew G. Maloney, Esquire
Dickstein Shapiro Morin & Oshinsky, LLP
2101 L Street, N.W.
Washington, D.C. 20037
Approximate Date of Proposed Public Offering: As soon as possible after the
effectiveness of the Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Title of Amount Being Proposed Proposed Maximum
Securities Registered Maximum Offering Aggregate Offering
Being Price Per Unit Price
Registered
AMPS 2,147 shares $25,000/share $53,675,000
Amount of Registration Fee
$4,938.10*
* $3,680 of which was previously paid on December 20, 2002.
CROSS-REFERENCE SHEET
PARTS A AND B
ITEM NO. CAPTION LOCATION IN PROSPECTUS
1. Outside Front Cover Page Outside Front Cover Page
2. Inside Front and Outside Back Inside Front and Outside Back
3. Fee Table and Synopsis Summary of Fund Expenses
4. Financial Highlights Financial Highlights (unaudited)
5. Plan of Distribution Outside Front Cover Page
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Outside Front Cover Page
Registrant
9. Management Management of the Fund
10. Capital Stock, Long-Term Debt Shares of Beneficial Interests
and Other Securities
11. Defaults and Arrears on Senior Not Applicable
Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of SAI Table of Contents (SAI)
14. Cover Page of SAI Cover Page (SAI)
15. Table of Contents of SAI Table of Contents (SAI)
16. General Information and Appendix A (SAI)
History
17. Investment Objective and Additional Investment Policies
Policies
18. Management Trustees and Officers (SAI);
Advisory and Other Services
19. Control Persons and Principal Not Applicable
Holders of Securities
20. Investment Adisory and Other Investment Advisory and Other
Services Services (SAI)
21. Brokerage Allocation and Other Brokerage Commissions (SAI)
Practices
22. Tax Status Not Applicable
23. Financial Statements Financial Statements (SAI)
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 10, 2003
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
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 $
Sales load $ $
Proceeds to the Fund (before expenses) (1) $ $
(1) Not including offering expenses payable by the Fund estimated to be
$ . 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
MERRILL LYNCH & CO. UBS WARBURG
The date of this prospectus is _______________,2003.
[SIDENOTE]
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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 , 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 %.
The initial rate period is from the date of issuance through , 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 33
Repurchase of Common Shares 35
Tax Matters 35
Underwriting 38
Custodian and Transfer Agent; Auction Agent 39
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 , 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
---- ----- ------------ ----------- -----------
% Friday
* 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 $______________
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
--------------------- -------------------- -------------------
% , 2003
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
---------------- -------------------
, 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
UBS Warburg LCC
-----
Total
=====
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions, including,
without limitation, the receipt by the underwriters of customary closing
certificates, opinions and other documents and the receipt by the Fund of "Aaa"
and "AAA" ratings on the 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 $ per share. The sales load the Fund will pay
of $ 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 , 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 [ ], 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 , 2003
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This Statement of Additional Information is not an offer to sell these
securities in any state where the offer or sale is not permitted.
FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Federated Premier Municipal Income Fund (the "Fund") is a recently organized,
diversified, closed-end management investment company. This Statement of
Additional Information relating to the Fund's 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 ,
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..................................
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....................................................
Appendix A Statement Of Preferences Of Auction Market
Appendix B Investment Ratings........................................101
This Statement of Additional Information is dated February 10, 2003.
34
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 Compensation Compensation
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 Compensation Compensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year)+ Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Thomas G. Principal Occupation: Director or Trustee of $0 $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 Compensation Compensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year)+ Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
John S. Walsh Principal Occupations: Director or Trustee of $0 $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
--------------------------------------------------------------------------------------
Board Committee Committee Functions Meetings
Committee Members Held
During
Last
Fiscal
Year
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
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. For the purposes of the
preceding sentence, AMPS will be placed by a Broker-Dealer if such shares
were (a) the subject of hold orders deemed to have been submitted to the
auction agent by the Broker-Dealer and were acquired by such Broker-Dealer
for its own account or were acquired by such Broker-Dealer for its customers
who are beneficial owners or (b) the subject of an order submitted by such
Broker-Dealer that is (i) a submitted bid of an existing holder that resulted
in the existing holder continuing to hold such shares as a result of the
auction, (ii) a submitted bid of a potential holder that resulted in the
potential holder purchasing such shares as a result of the auction or (iii) a
valid hold order.
The Fund may request the auction agent to terminate one or more Broker-Dealer
agreements at any time, provided that at least one Broker-Dealer agreement is
in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer, other than an
affiliate of the Fund, may submit orders in auctions for its own account,
unless the Fund notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders
for their own accounts. Any Broker-Dealer that is an affiliate of the Fund
may submit orders in auctions, but only if such orders are not for its own
account. If a Broker-Dealer submits an order for its own account in any
auction, it might have an advantage over other bidders because it would have
knowledge of all orders submitted by it in that auction; such Broker-Dealer,
however, would not have knowledge of orders submitted by other Broker-Dealers
in that auction.
DESCRIPTION OF COMMON SHARES
A description of Common Shares is contained in the prospectus. The
Fund intends to hold annual meetings of shareholders so long as the Common
Shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
Other Shares
The Board, subject to applicable law and the Fund's Agreement and
Declaration of Trust, may authorize an offering, without the approval of the
Common Shareholders or 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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
HEFA --Health and Education Facilities Authority
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IDA --Industrial Development Authority
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
INS --Insured
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LOC --Letter of Credit
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LT --Limited Tax
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
MBIA --Municipal Bond Insurance Association
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PCA --Pollution Control Authority
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UT --Unlimited Tax
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
VRDNs --Variable Rate Demand Notes
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
APPENDIX A
FEDERATED PREMIER MUNICIPAL INCOME FUND
STATEMENT OF PREFERENCES OF
AUCTION MARKET PREFERRED SHARES
("AMPS")
TABLE OF CONTENTS
Definitions.............................................................. AA-
Part I................................................................... AA-
1. Number of Authorized Shares........................................... AA-
2. Dividends............................................................. AA-
3. Gross-up Payments..................................................... AA-
4. Designation of Special Rate Periods................................... AA-
5. Voting Rights......................................................... AA-
6. Investment Company Act Preferred Shares Asset Coverage................ AA-
7. Preferred Shares Basic Maintenance Amount............................. AA-
8. Reserved.............................................................. AA-
9. Restrictions on Dividends and Other Distributions..................... AA-
10.............................................Rating Agency Restrictions AA-
11.............................................................Redemption AA-
12.....................................................Liquidation Rights AA-
13..........................................................Miscellaneous AA-
Part II.................................................................. AA-
1. Orders................................................................ AA-
2. Submission of Orders by Broker-Dealers to Auction Agent............... AA-
3. Determination of Sufficient Clearing Bids, Winning Bid Rate and AA-
Applicable Rate.......................................................
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares.............................................. AA-
5. Notification of Allocations........................................... AA-
6. Auction Agent......................................................... AA-
7. Transfer of AMPS...................................................... AA-
8. Global Certificate.................................................... AA-
Exhibit A................................................................ AA-
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. 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 as of [___________], 2003 in its name and on its
behalf by its President and attested by its Secretary. 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:
Name:
Title:
ATTEST:
Name:
Title:
[___________], 2003
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 [___________], 2003 shall, for purposes hereof, be deemed to have a
Date of Original Issue of [___________], 2003; have an Applicable Rate for
its Initial Rate Period equal to [____]% 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
Exhibit (d)(i) under Form N-2
CERTIFICATE NO. 1 ____SHARES
FEDERATED PREMIER MUNICIPAL INCOME FUND
Organized under the Laws of the State of Delaware
Auction Market Preferred Shares - Series A
$.001 Par Value Per Share
$25,000 Liquidation Preference Per Share
Cusip No. 31423P207
This certifies that Cede & Co. is the owner of ----- fully paid and
non-assessable shares of Auction Market Preferred Shares - Series A, $.001 par
value per share, $25,000 liquidation preference per share, of Federated Premier
Municipal Income Fund (the "Trust") transferable only on the books of the Trust
by the holder thereof in person or by duly authorized Attorney upon surrender of
this Certificate properly endorsed. This Certificate is not valid unless
countersigned by the transfer agent and registrar.
A statement in full, of all the designations, preferences, qualifications,
limitations, restrictions and special or relative rights of the shares of each
class authorized to be issued, will be furnished by the Trust to any
shareholders upon request and without charge.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed by
its duly authorized officers this - day of ---------, 2003.
DEUTSCHE BANK TRUST COMPANY FEDERATED PREMIER MUNICIPAL
AMERICAS INCOME FUND
As Transfer Agent and Registrar
By: By:
Attest:
FOR VALUE RECEIVED, ________ hereby sells, assigns and transfers ___ Shares
represented by this Certificate unto ______, and do hereby irrevocably
constitute and appoint ________ Attorney to transfer the said Shares on the
books of the within named Trust with full power of substitution in the premises.
Dated _______, 2003 In presence of _________________________
Shares of Auction Market Preferred Shares evidenced by this Certificate may
be sold, transferred, or otherwise disposed of only pursuant to the provisions
of the Trust's Agreement and Declaration of Trust and the Trust's Statement of
Preferences. The Trust will furnish to any shareholder, upon request and without
charge, the Trust's Agreement and Declaration of Trust and a full statement of
the designations, preferences, limitations and relative rights of the shares of
each class or series of capital stock of the Trust authorized to be issued, so
far as they have been determined, and the authority of the Board of Trustees to
determine the relative rights and preferences of subsequent classes or series.
Any such request should be addressed to the Secretary of the Trust. Unless this
certificate is presented by an authorized representative of The Depository Trust
Company, a New York corporation ("DTC"), to the Trust or its agent for
registration of transfer, exchange, or payment, and any certificate issued is
registered in the name of Cede & Co. or in such other name as is requested by an
authorized representative of DTC (and any payment is made to Cede & Co. or to
such other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.
Exhibit (h)(iv) under Form N-2
Federated Premier Municipal Income Fund
(a Delaware statutory trust)
[ ] Auction Market Preferred Shares ("AMPS")
[ ] Shares [ ]% AMPS, Series A
Liquidation Preference $25,000 per share
FORM OF PURCHASE AGREEMENT
[ ], 2003
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
[other representatives, if any]
c/o Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
4 World Financial Center
New York, New York 10080
Ladies and Gentlemen:
Federated Premier Municipal Income Fund, a Delaware statutory trust (the
"Fund"), proposes, upon the terms and conditions set forth herein, to issue and
sell an aggregate of [ ] Shares of its Auction Market Preferred Shares, Series A
with a liquidation preference of $25,000 per share (the "AMPS"). The AMPS will
be authorized by, and subject to the terms and conditions of, the Declaration of
Trust of the Fund, including the Statement of Preferences of Auction Market
Preferred Shares (the "Statement of Preferences"), as amended through [ ], 2003
(collectively, the "Charter"), in the form filed as an exhibit to the
Registration Statement referred to in the second following paragraph of this
Agreement, as the same may be amended from time to time. The Fund and the Fund's
investment adviser, Federated Investment Management Company, a Delaware
statutory trust (the "Adviser"), each confirms its agreement with Merrill Lynch
& Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
each of the other Underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch is acting as
representative (in such capacity, the "Representative"), with respect to the
issue and sale by the Fund and the purchase by the Underwriters, acting
severally and not jointly, of the respective number of AMPS set forth in said
Schedule A.
The Fund understands that the Underwriters propose to make a public
offering of the AMPS as soon as the Representative deems advisable after this
Agreement has been executed and delivered.
The Fund has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form N-2 (No. 333-102033 and No.
811-21235) covering the registration of the AMPS under the Securities Act of
1933, as amended (the "1933 Act"), including the related preliminary prospectus
or prospectuses. Promptly after execution and delivery of this Agreement, the
Fund will prepare and file a prospectus in accordance with the provisions of
Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the
1933 Act and the Investment Company Act of 1940, as amended (the "1940 Act")
(the "Rules and Regulations") and paragraph (c) or (h) of Rule 497 ("Rule 497")
of the Rules and Regulations. The information included in any such prospectus,
that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective, if applicable, pursuant to paragraph (b) of Rule 430A
is referred to as "Rule 430A Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, including in each
case any statement of additional information incorporated therein by reference,
is herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto and schedules thereto at the time it became
effective and including the Rule 430A Information, is herein called the
"Registration Statement." Any registration statement filed pursuant to Rule
462(b) of the Rules and Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and after such filing the term "Registration Statement"
shall include the Rule 462(b) Registration Statement. The final prospectus in
the form first furnished to the Underwriters for use in connection with the
offering of the AMPS, including the statement of additional information
incorporated therein by reference, is herein called the "Prospectus." For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the Prospectus or any amendment or supplement to any of
the foregoing shall be deemed to include the copy filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval system
("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus or the Prospectus (or other
references of like import) shall be deemed to mean and include all such
financial statements and schedules and other information which is incorporated
by reference in the Registration Statement, any preliminary prospectus or the
Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to mean and include the filing of
any document that is incorporated by reference in the Registration Statement,
such preliminary prospectus or the Prospectus, as the case may be.
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Fund and the Adviser. The Fund
and the Adviser jointly and severally represent and warrant to each Underwriter
as of the date hereof and as of the Closing Time referred to in Section 2(c)
hereof, and agree with each Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of the Registration
Statement and any Rule 462(b) Registration Statement has become effective under
the 1933 Act and no stop order suspending the effectiveness of the Registration
Statement or any Rule 462(b) Registration Statement has been issued under the
1933 Act, or order of suspension or revocation of registration pursuant to
Section 8(e) of the 1940 Act, and no proceedings for any such purpose have been
instituted or are pending or, to the knowledge of the Fund or the Adviser, are
contemplated by the Commission, and any request on the part of the Commission
for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time, the Registration Statement, the Rule 462(b)
Registration Statement, the notification on Form N-8A and any amendments and
supplements thereto complied and will comply in all material respects with the
requirements of the 1933 Act, the 1940 Act and the Rules and Regulations and did
not and will not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading. Neither the Prospectus nor any amendments or
supplements thereto, at the time the Prospectus or any such amendment or
supplement was issued and at the Closing Time, included or will include an
untrue statement of a material fact or omitted or will omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment thereto,
or filed pursuant to Rule 497 under the 1933 Act, complied when so filed in all
material respects with the Rules and Regulations and each preliminary prospectus
and the Prospectus delivered to the Underwriters for use in connection with this
offering was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
If a Rule 462(b) Registration Statement is required in connection with the
offering and sale of the AMPS, the Fund has complied or will comply with the
requirements of Rule 111 under the 1933 Act Regulations relating to the payment
of filing fees thereof.
(ii) Independent Accountants. The accountants who certified the statement
of assets and liabilities included in the Registration Statement are independent
public accountants as required by the 1933 Act and the Rules and Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectus, together with the related notes,
present fairly the financial position of the Fund at the dates indicated; said
statements have been prepared in conformity with generally accepted accounting
principles ("GAAP").
(iv) Expense Summary. The information set forth in the Prospectus in the
Fee Table has been prepared in accordance with the requirements of Form N-2 and
to the extent estimated or projected, such estimates or projections are
reasonably believed to be attainable and reasonably based.
(v) No Material Adverse Change. Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Fund, other than as a result of a change in the
financial markets generally, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Fund, other than those in the ordinary course of business,
which are material with respect to the Fund, and (C) except for a regular
dividend on the Common Shares declared February 10, 2003, there has been no
dividend or distribution of any kind declared, paid or made by the Fund on any
class of its capital shares.
(vi) Good Standing of the Fund. The Fund has been duly organized and is
validly existing as a statutory trust in good standing under the laws of the
State of Delaware and has the statutory trust power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this Agreement;
and the Fund is duly qualified as a foreign statutory trust to transact business
and is in good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect.
(vii) No Subsidiaries. The Fund has no subsidiaries.
(viii) Investment Company Status. The Fund is duly registered with the
Commission under the 1940 Act as a closed-end diversified management investment
company, and no order of suspension or revocation of such registration has been
issued or proceedings therefor initiated or threatened by the Commission.
(ix) Officers and Trustees. No person is serving or acting as an officer,
trustee or investment adviser of the Fund except in accordance with the
provisions of the 1940 Act and the Rules and Regulations and the Investment
Advisers Act of 1940, as amended (the "Advisers Act"), and the rules and
regulations of the Commission promulgated under the Advisers Act (the "Advisers
Act Rules and Regulations"). Except as disclosed in the Registration Statement
and the Prospectus (or any amendment or supplement to either of them), no
trustee of the Fund is an "interested person" (as defined in the 1940 Act) of
the Fund or an "affiliated person" (as defined in the 1940 Act) of any
Underwriter.
(x) Capitalization. The authorized, issued and outstanding shares of
beneficial interest of the Fund are as set forth in the Prospectus. All issued
and outstanding shares of beneficial interest of the Fund have been duly
authorized and validly issued and are fully paid and non-assessable, except as
provided for in the Fund's declaration of trust, and have been offered and sold
or exchanged by the Fund in compliance with all applicable laws (including,
without limitation, federal and state securities laws); none of the outstanding
shares of beneficial interest of the Fund was issued in violation of the
preemptive or other similar rights of any securityholder of the Fund.
(xi) Authorization and Description of AMPS. The AMPS to be purchased by the
Underwriters from the Fund have been duly authorized for issuance and sale to
the Underwriters pursuant to this Agreement and, when issued and delivered by
the Fund pursuant to this Agreement against payment of the consideration set
forth herein, will be validly issued and fully paid and non-assessable, except
as provided for in the Fund's declaration of trust. The AMPS conform to all
statements relating thereto contained in the Prospectus and such description
conforms to the rights of holders of AMPS set forth in the Charter; no holder of
the AMPS will be subject to personal liability by reason of being such a holder;
and the issuance of the AMPS is not subject to the preemptive or other similar
rights of any securityholder of the Fund.
(xii) Absence of Defaults and Conflicts. The Fund is not in violation of
its Charter or by-laws, or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
other agreement or instrument to which it is a party or by which it may be
bound, or to which any of the property or assets of the Fund is subject
(collectively, "Agreements and Instruments") except for such violations or
defaults that would not result in a Material Adverse Effect; and the execution,
delivery and performance of this Agreement, the Investment Management Agreement,
the Amended and Restated Agreement for Fund Accounting Services, Administrative
Services, Transfer Agency Services and Custody Services Procurement, the
Custodian Contract, the Transfer Agency and Service Agreement and the Auction
Agency Agreement referred to in the Registration Statement (as used herein, the
"Management Agreement," the "Administration Agreement," the "Custodian
Agreement," the "Transfer Agency and Service Agreement" and the "Auction Agency
Agreement," respectively) and the consummation of the transactions contemplated
herein and in the Registration Statement (including the issuance and sale of the
AMPS and the use of the proceeds from the sale of the AMPS as described in the
Prospectus under the caption "Use of Proceeds") and compliance by the Fund with
its obligations hereunder have been duly authorized by all necessary action and
do not and will not, whether with or without the giving of notice or passage of
time or both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Fund pursuant to,
the Agreements and Instruments (except for such conflicts, breaches or defaults
or liens, charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions of the
Charter or by-laws of the Fund or any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Fund or any of its
assets, properties or operations. As used herein, a "Repayment Event" means any
event or condition which gives the holder of any note, debenture or other
evidence of indebtedness (or any person acting on such holder's behalf) the
right to require the repurchase, redemption or repayment of all or a portion of
such indebtedness by the Fund.
(xiii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental agency
or body, domestic or foreign, now pending, or, to the knowledge of the Fund or
the Adviser, threatened, against or affecting the Fund, which is required to be
disclosed in the Registration Statement (other than as disclosed therein), or
which might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect the
properties or assets of the Fund or the consummation of the transactions
contemplated in this Agreement or the performance by the Fund of its obligations
hereunder. The aggregate of all pending legal or governmental proceedings to
which the Fund is a party or of which any of its property or assets is the
subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, could not reasonably be
expected to result in a Material Adverse Effect.
(xiv) Accuracy of Exhibits. There are no contracts or documents which are
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits thereto by the 1933 Act, the 1940 Act or by the Rules and
Regulations which have not been so described and filed as required.
(xv) Possession of Intellectual Property. The Fund owns or possesses, or
can acquire on reasonable terms, adequate patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks, trade names or other intellectual
property (collectively, "Intellectual Property") necessary to carry on the
business now operated by the Fund, and the Fund has not received any notice or
is not otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any Intellectual Property or of any facts or
circumstances which would render any Intellectual Property invalid or inadequate
to protect the interest of the Fund therein, and which infringement or conflict
(if the subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material Adverse
Effect.
(xvi) Absence of Further Requirements. No filing with, or authorization,
approval, consent, license, order, registration, qualification or decree of, any
court or governmental authority or agency is necessary or required for the
performance by the Fund of its obligations hereunder, in connection with the
offering, issuance or sale of the AMPS hereunder or the consummation of the
transactions contemplated by this Agreement, except such as have been already
obtained or as may be required under the 1933 Act, the 1940 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), or as may be required under
state securities laws.
(xvii) Possession of Licenses and Permits. The Fund possesses such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to operate its properties and to
conduct the business as contemplated in the Prospectus; the Fund is in
compliance with the terms and conditions of all such Governmental Licenses,
except where the failure so to comply would not, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect; and the Fund has not received
any notice of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material Adverse
Effect.
(xviii) Subchapter M. The Fund intends to direct the investment of the
proceeds of the offering described in the Registration Statement in such a
manner as to comply with the requirements of Subchapter M of the Internal
Revenue Code of 1986, as amended ("Subchapter M of the Code" and the "Code,"
respectively), and intends to qualify as a regulated investment company under
Subchapter M of the Code.
Distribution of Offering Materials. The Fund has not distributed and, prior
to the later to occur of (A) the Closing Time and (B) completion of the
distribution of the AMPS, will not distribute any offering material in
connection with the offering and sale of the AMPS other than the Registration
Statement, a preliminary prospectus, the Prospectus or other materials, if any,
permitted by the 1933 Act or the 1940 Act or the Rules and Regulations.
Accounting Controls. The Fund maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific authorization and
with the applicable requirements of the 1940 Act, the Rules and Regulations and
the Code; (B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting principles
and to maintain accountability for assets and to maintain compliance with the
books and records requirements under the 1940 Act and the Rules and Regulations;
(C) access to assets is permitted only in accordance with management's general
or specific authorization; and (D) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
Absence of Undisclosed Payments. To the Fund's knowledge, except as
disclosed in the Prospectus, neither the Fund nor any employee or agent of the
Fund has made any payment of funds of the Fund or received or retained any
funds, which payment, receipt or retention of funds is of a character required
to be disclosed in the Prospectus.
(xix) Material Agreements. This Agreement, the Management Agreement, the
Administration Agreement, the Custodian Agreement, the Transfer Agency and
Service Agreement and the Auction Agency Agreement have each been executed and
delivered by the Fund, as of the dates noted therein, and each complies with all
applicable provisions of the 1940 Act. Assuming due authorization, execution and
delivery by the other parties thereto with respect to the Management Agreement,
the Administration Agreement, the Custodian Agreement, the Transfer Agency and
Service Agreement and the Auction Agency Agreement, each of the Management
Agreement, the Administration Agreement, the Custodian Agreement, the Transfer
Agency and Service Agreement and the Auction Agency Agreement constitutes a
valid and binding agreement of the Fund, enforceable in accordance with its
terms, except as affected by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, and general equitable principles (whether
considered in a proceeding in equity or at law).
(xx) Registration Rights. There are no persons with registration rights or
other similar rights to have any securities registered pursuant to the
Registration Statement or otherwise registered by the Fund under the 1933 Act.
(xxi) NYSE Listing. The Fund's common shares of beneficial interest are
duly listed on the New York Stock Exchange ("NYSE").
(b) Representations and Warranties by the Adviser. The Adviser represents
and warrants to each Underwriter as of the date hereof, and as of the Closing
Time referred to in
Section 2(c) hereof, as follows:
(i) Good Standing of the Adviser. The Adviser has been duly organized and
is validly existing and in good standing as a statutory trust under the laws of
the State of Delaware with full statutory trust power and authority to own,
lease and operate its properties and to conduct its business as described in the
Prospectus and is duly qualified as a foreign trust to transact business and is
in good standing in each other jurisdiction in which such qualification is
required, except as would not, individually or in the aggregate, result in a
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of such Adviser, whether or not
arising in the ordinary course of business (an "Adviser Material Adverse
Effect").
(ii) Investment Adviser Status. The Adviser is duly registered and in good
standing with the Commission as an investment adviser under the Advisers Act,
and is not prohibited by the Advisers Act or the 1940 Act, or the rules and
regulations under such acts, from acting under the Management Agreement for the
Fund as contemplated by the Prospectus.
(iii) Description of Adviser. The description of the Adviser in the
Registration Statement and the Prospectus (and any amendment or supplement to
either of them) complied and comply in all material respects with the provisions
of the 1933 Act, the 1940 Act, the Advisers Act, the Rules and Regulations and
the Advisers Act Rules and Regulations and is true and correct and does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(iv) Capitalization. The Adviser has the financial resources available to
it necessary for the performance of its services and obligations as contemplated
in the Prospectus, this Agreement and under the Management Agreement to which it
is a party.
(v) Authorization of Agreements; Absence of Defaults and Conflicts. This
Agreement and the Management Agreement have each been duly authorized, executed
and delivered by the Adviser, and the Management Agreement constitutes a valid
and binding obligation of the Adviser, enforceable in accordance with its terms,
except as affected by bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally and general equitable principles (whether considered
in a proceeding in equity or at law); and neither the execution and delivery of
this Agreement or the Management Agreement nor the performance by the Adviser of
its obligations hereunder or thereunder will conflict with, or result in a
breach of any of the terms and provisions of, or constitute, with or without the
giving of notice or lapse of time or both, a default under, any agreement or
instrument to which the Adviser is a party or by which it is bound, the
agreement and declaration of trust, the by-laws or other organizational
documents of the Adviser, or to the Adviser's knowledge, by any law, order,
decree, rule or regulation applicable to it of any jurisdiction, court, federal
or state regulatory body, administrative agency or other governmental body,
stock exchange or securities association having jurisdiction over the Adviser or
its properties or operations; and no consent, approval, authorization or order
of any court or governmental authority or agency is required for the
consummation by the Adviser of the transactions contemplated by this Agreement
and the Management Agreement, except as have been obtained or may be required
under the 1933 Act, the 1940 Act, the 1934 Act or state securities laws.
(vi) No Material Adverse Change. Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
otherwise stated therein, there has not occurred any event which should
reasonably be expected to have a material adverse effect on the ability of the
Adviser to perform its respective obligations under this Agreement and the
Management Agreement to which it is a party.
(vii) Absence of Proceedings. There is no action, suit, proceeding, inquiry
or investigation before or brought by any court or governmental agency or body,
domestic or foreign, now pending, or, to the knowledge of the Adviser,
threatened against or affecting the Adviser or any "affiliated person" of the
Adviser (as such term is defined in the 1940 Act) or any partners, trustees,
officers or employees of the foregoing, whether or not arising in the ordinary
course of business, which would reasonably be expected to result in any Adviser
Material Adverse Effect or materially and adversely affect the ability of the
Adviser to function as an investment adviser or perform its obligations under
the Management Agreement, or which is required to be disclosed in the
Registration Statement and the Prospectus.
(viii) Absence of Violation or Default. The Adviser is not in violation of
its agreement and declaration of trust, by-laws or other organizational
documents or in default under any agreement, indenture or instrument, except for
such violations or defaults that would not result in an Adviser Material Adverse
Effect.
(c) Officer's Certificates. Any certificate signed by any officer of the
Fund or the Adviser delivered to the Representatives or to counsel for the
Underwriters shall be deemed a representation and warranty by the Fund or the
Adviser, as the case may be, to each Underwriter as to the matters covered
thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
(a) AMPS. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Fund
agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Fund, at the
price per share set forth in Schedule B, the number of AMPS set forth in
Schedule A opposite the name of such Underwriter, plus any additional number of
AMPS which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
(b) Commission. The Fund agrees to pay to the Underwriters the commission
set forth in Schedule B as compensation to the Underwriters for their
commitments under this Agreement.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the AMPS shall be made at the offices of Clifford Chance US
LLP, 200 Park Avenue, New York, New York 10166 or at such other place as shall
be agreed upon by the Representatives and the Fund, at 10:00 A.M. (Eastern time)
on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on
any given day) business day after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later than
ten business days after such date as shall be agreed upon by the Representatives
and the Fund (such time and date of payment and delivery being herein called
"Closing Time").
Payment shall be made to the Fund by wire transfer of immediately available
funds to a bank account designated by the Fund, against delivery to the
Representatives for the respective accounts of the Underwriters of certificates
for the AMPS to be purchased by them. It is understood that each Underwriter has
authorized the Representatives, for its account, to accept delivery of, receipt
for, and make payment of the purchase price for, the AMPS that it has agreed to
purchase. Merrill Lynch, individually and not as representative of the
Underwriters, may (but shall not be obligated to) make payment of the purchase
price for the AMPS to be purchased by any Underwriter whose funds have not been
received by the Closing Time, but such payment shall not relieve such
Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the AMPS shall be in such
denominations and registered in such names as the Representatives may request in
writing at least one full business day before the Closing Time. The certificates
for the AMPS will be made available for examination and packaging by the
Representatives in the City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time.
SECTION 3. Covenants.
(a) The Fund and the Adviser, jointly and severally, covenant with each
Underwriter as
follows:
(i) Compliance with Securities Regulations and Commission Requests. The
Fund, subject to Section 3(a)(ii), will comply with the requirements of Rule
430A and will notify the Representatives immediately, and confirm the notice in
writing, (i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the AMPS for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for any of
such purposes. The Fund will promptly effect the filings necessary pursuant to
Rule 497 and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 497 was
received for filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Fund will make reasonable efforts to prevent
the issuance of any stop order, or order of suspension or revocation of
registration pursuant to Section 8(e) of the 1940 Act, and, if any such stop
order or order of suspension or revocation of registration is issued, to obtain
the lifting thereof at the earliest possible moment.
(ii) Filing of Amendments. The Fund will give the Representatives notice of
its intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)) or any amendment, supplement or
revision to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, will furnish the Representatives
with copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any such
document to which the Representatives or counsel for the Underwriters shall
reasonably object.
(iii) Delivery of Registration Statements. The Fund has furnished or will
deliver to the Representatives and counsel for the Underwriters, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(iv) Delivery of Prospectuses. The Fund has delivered to each Underwriter,
without charge, as many copies of each preliminary prospectus as such
Underwriter reasonably requested, and the Fund hereby consents to the use of
such copies for purposes permitted by the 1933 Act. The Fund will furnish to
each Underwriter, without charge, during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the Prospectus (as amended or supplemented) as such Underwriter may
reasonably request. The Prospectus and any amendments or supplements thereto
furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR, except
to the extent permitted by Regulation S-T.
(v) Continued Compliance with Securities Laws. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection with sales
of the AMPS, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the Underwriters or for the Fund,
to amend the Registration Statement or amend or supplement the Prospectus in
order that the Prospectus will not include any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
therein not misleading in the light of the circumstances existing at the time it
is delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of the 1933
Act or the Rules and Regulations, the Fund will promptly prepare and file with
the Commission, subject to Section 3(a)(ii), such amendment or supplement as may
be necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Fund will
furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(vi) Blue Sky Qualifications. The Fund will use its best efforts, in
cooperation with the Underwriters, to qualify the AMPS for offering and sale
under the applicable securities laws of such states and other jurisdictions of
the United States as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Fund shall not be obligated
to file any general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is not
so qualified or to subject itself to taxation in respect of doing business in
any jurisdiction in which it is not otherwise so subject. In each jurisdiction
in which the AMPS have been so qualified, the Fund will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b) Registration
Statement.
(vii) Rule 158. The Fund will timely file such reports pursuant to the 1934
Act as are necessary in order to make generally available to its securityholders
as soon as practicable an earning statement for the purposes of, and to provide
the benefits contemplated by, the last paragraph of Section 11(a) of the 1933
Act.
(viii) Use of Proceeds. The Fund will use the net proceeds received by it
from the sale of the AMPS in the manner specified in the Prospectus under "Use
of Proceeds."
(ix) Reporting Requirements. The Fund, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1940
Act and the 1934 Act within the time periods required by the 1940 Act and the
Rules and Regulations and the 1934 Act and the rules and regulations of the
Commission thereunder, respectively.
(x) Subchapter M. The Fund will comply with the requirements of Subchapter
M of the Code to qualify as a regulated investment company under the Code.
(xi) No Manipulation of Market for AMPS. The Fund will not (a) take,
directly or indirectly, any action designed to cause or to result in, or that
might reasonably be expected to constitute, the stabilization or manipulation of
the price of any security of the Fund to facilitate the sale or resale of the
AMPS, and (b) until the Closing Time, (i) sell, bid for or purchase the AMPS or
pay any person any compensation for soliciting purchases of the AMPS or (ii) pay
or agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Fund .
(xii) Rule 462(b) Registration Statement. If the Fund elects to rely upon
Rule 462(b), the Fund shall file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time,
on the date of this Agreement, and the Fund shall at the time of filing either
pay to the Commission the filing fee for the Rule 462(b) Registration Statement
or give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the 1933 Act.
(xiii) Accountant's Confirmation. The Fund will furnish to the
Representative, on the date on which delivery is made to the rating agencies
rating the AMPS, the Accountant's Confirmation (as defined in the Statement of
Preferences) corresponding to the Preferred Shares Basic Maintenance Report (as
defined in the Statement of Preferences) for the first Quarterly Valuation Date
(as defined in the Statement of Preferences) following the Closing Time.
(b) Except as provided in this Agreement, the Fund will not sell, contract
to sell or otherwise dispose of any of its shares of preferred shares of the
same series as the AMPS or any securities convertible into or exercisable or
exchangeable for its shares of preferred shares of the same series as the AMPS,
or grant any options or warrants to purchase its shares of preferred shares of
the same series as the AMPS, for a period of 180 days after the date of the
Prospectus, without the prior written consent of Merrill Lynch.
(c) On the date of the purchase and sale contemplated by this Agreement
(the "Closing Date"), and assuming on the receipt of the proceeds of the
issuance of the AMPS on such date, the Fund will use all or a portion of such
proceeds to repay any liability that the Fund has for borrowed money outstanding
on the Closing Date (except for short-term liabilities in connection with
settling sales or purchases of portfolio securities), including interest
thereon, including for this purpose any liability of the Fund outstanding on
such date under any reverse repurchase agreement.
SECTION 4. Payment of Expenses.
(a) Expenses. The Fund will pay all expenses incident to the performance of
its obligations under this Agreement, including (i) the preparation, printing
and filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the
preparation, printing and delivery to the Underwriters of this Agreement, any
Agreement among Underwriters and such other documents as may be required in
connection with the offering, purchase, sale, issuance or delivery of the AMPS,
(iii) the preparation, issuance and delivery of the certificates for the AMPS to
the Underwriters, including any shares or other transfer taxes and any stamp or
other duties payable upon the sale, issuance or delivery of the AMPS to the
Underwriters, (iv) the fees and disbursements of the Fund's counsel, accountants
and other advisers, (v) the qualification of the AMPS under securities laws in
accordance with the provisions of Section 3(a)(vi) hereof, including filing fees
and the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, Prospectus and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the AMPS and
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the NASD of the
terms of the sale of the AMPS.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section 9(a)
hereof, the Fund and the Adviser, jointly and severally, agree that they shall
reimburse the Underwriters for all of their out-of-pocket expenses, including
the reasonable fees and disbursements of counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations.
The obligations of the several Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Fund and the Adviser
contained in Section 1 hereof or in certificates of any officer of the Fund or
the Adviser delivered pursuant to the provisions hereof, to the performance by
the Fund and the Adviser of their respective covenants and other obligations
hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act, no notice or order pursuant
to Section 8(e) of the 1940 Act shall have been issued, and no proceedings with
respect to either shall have been initiated or threatened by the Commission, and
any request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
Underwriters. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 497 (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A).
(b) Opinion of Counsel for the Fund and the Adviser. At Closing Time, the
Representatives shall have received the favorable opinions, dated as of Closing
Time, of Dickstein Shapiro Morin & Oshinsky LLP, counsel for the Fund, and Reed
Smith LLP, counsel for the Adviser, in form and substance satisfactory to
counsel for the Underwriters, together with signed or reproduced copies of such
letters for each of the other Underwriters substantially to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Clifford Chance US LLP, counsel for the Underwriters, together with
signed or reproduced copies of such letter for each of the other Underwriters
with respect to the matters set forth in clauses (A) (i), (ii), (vi), (vii)
(solely as to preemptive or other similar rights arising by operation of law or
under the charter or by-laws of the Fund), (viii) through (x), inclusive, (xiv)
(solely as to the information in the Prospectus under "Description of AMPS") and
the last paragraph of Exhibit A hereto. In giving such opinion such counsel may
rely, as to all matters governed by the laws of jurisdictions other than the law
of the State of New York and the federal law of the United States, upon the
opinions of counsel satisfactory to the Representatives. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Fund and
certificates of public officials.
(d) Officers' Certificates. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Fund, whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of a duly authorized officer
of the Fund and of the chief financial or chief accounting officer of the Fund
and of the President or a Vice President or Managing Director of the Adviser,
dated as of Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Sections 1(a) and (b)
hereof are true and correct with the same force and effect as though expressly
made at and as of Closing Time, (iii) each of the Fund and the Adviser,
respectively, has complied with all agreements and satisfied all conditions on
its part to be performed or satisfied at or prior to Closing Time, and (iv) no
stop order suspending the effectiveness of the Registration Statement, or order
of suspension or revocation of registration pursuant to Section 8(e) of the 1940
Act, has been issued and no proceedings for any such purpose have been
instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Ernst & Young LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial and other information
contained in the Registration Statement and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from Ernst & Young LLP a letter, dated as of Closing Time, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (e) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to Closing Time.
(g) Rating. The Fund shall have delivered and the Representative shall have
received evidence satisfactory to the Representative that the AMPS are rated
`Aaa' by Moody's and `AAA' by Fitch as of the Closing Time, and there shall not
have been given any written notice of any intended or potential downgrading, or
of any review for a potential downgrading, in the rating accorded to the AMPS by
Moody's or by Fitch.
(h) Asset Coverage. As of the Closing Time, and assuming the receipt of the
net proceeds from the sale of the AMPS, and, with respect to the Preferred
Shares Basic Maintenance Amount requirement only, using portfolio holdings and
valuations as of the close of business on any day not more than six business
days preceding the Closing Time (provided that the total net assets of the Fund
as of the Closing Time have not declined by 5% or more from such valuation
date), the Investment Company Act Preferred Shares Asset Coverage and the
Preferred Shares Basic Maintenance Amount (each as defined in the Statement of
Preferences) requirements of Sections 6 and 7(a) of the Statement of Preferences
each will be met.
(i) Additional Documents. At Closing Time, counsel for the Underwriters
shall have been furnished with such documents and opinions as they may require
for the purpose of enabling them to pass upon the issuance and sale of the AMPS
as herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Fund and the Adviser in
connection with the issuance and sale of the AMPS as herein contemplated shall
be satisfactory in form and substance to the Representatives and counsel for the
Underwriters.
(j) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement may be terminated by the Representatives by notice to the Fund at any
time at or prior to Closing Time and such termination shall be without liability
of any party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7, 8 and 13 shall survive any such termination and remain in full
force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Fund and the Adviser, jointly and
severally, agree to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act, and any director, officer, employee
or affiliate thereof as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), including the Rule 430A Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein not misleading or arising
out of any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Fund; and
(iii) against any and all expense whatsoever, as incurred (including the
fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred
in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the extent that
any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the Fund
or the Adviser by any Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information, if applicable, or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto).
(b) Indemnification of Fund, Adviser, Trustees and Officers. Each
Underwriter severally agrees to indemnify and hold harmless the Fund and the
Adviser, their respective trustees, each of the Fund's officers who signed the
Registration Statement, and each person, if any, who controls the Fund or the
Adviser within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act against any and all loss, liability, claim, damage and expense
described in the indemnity contained in subsection (a) of this Section, as
incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Fund or the Adviser by such Underwriter through Merrill Lynch expressly
for use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Fund and the Adviser. An
indemnifying party may participate at its own expense in the defense of any such
action; provided, however, that counsel to the indemnifying party shall not
(except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for fees
and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever in
respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are actual
or potential parties thereto), unless such settlement, compromise or consent (i)
includes an unconditional release of each indemnified party from all liability
arising out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution.
If the indemnification provided for in Section 6 hereof is for any reason
unavailable to or insufficient to hold harmless an indemnified party in respect
of any losses, liabilities, claims, damages or expenses referred to therein,
then each indemnifying party shall contribute to the aggregate amount of such
losses, liabilities, claims, damages and expenses incurred by such indemnified
party, as incurred, (i) in such proportion as is appropriate to reflect the
relative benefits received by the Fund and the Adviser on the one hand and the
Underwriters on the other hand from the offering of the AMPS pursuant to this
Agreement or (ii) if the allocation provided by clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Fund and the Adviser on the one hand and of the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Fund and the Adviser on the one hand
and the Underwriters on the other hand in connection with the offering of the
AMPS pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the AMPS pursuant to
this Agreement (before deducting expenses) received by the Fund and the total
underwriting discount received by the Underwriters (whether from the Fund or
otherwise), in each case as set forth on the cover of the Prospectus bear to the
aggregate initial public offering price of the AMPS as set forth on such cover.
The relative fault of the Fund and the Adviser on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Fund or the Adviser or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Fund, the Adviser and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the AMPS underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of any such untrue or alleged
untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each trustee of the Fund and each director of the Adviser, respectively, each
officer of the Fund who signed the Registration Statement, and each person, if
any, who controls the Fund or the Adviser, within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act shall have the same rights to
contribution as the Fund and the Adviser, respectively. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of AMPS set forth opposite their respective names in
Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement
or in certificates of officers of the Fund or the Adviser submitted pursuant
hereto, shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or controlling person, or
by or on behalf of the Fund or the Adviser, and shall survive delivery of the
AMPS to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this Agreement,
by notice to the Fund, at any time at or prior to Closing Time (i) if there has
been, since the time of execution of this Agreement or since the respective
dates as of which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Fund or the Adviser, whether or not arising
in the ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representatives, impracticable or inadvisable to market the AMPS
or to enforce contracts for the sale of the AMPS, or (iii) if trading in the
common shares of the Fund has been suspended or materially limited by the
Commission or the NYSE, or if trading generally on the NYSE or the American
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the NASD or any other governmental authority, or
a material disruption has occurred in commercial banking or securities
settlement or clearance services in the United States, or (iv) if a banking
moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7, 8 and 13 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters.
If one or more of the Underwriters shall fail at Closing Time to purchase
the AMPS which it or they are obligated to purchase under this Agreement (the
"Defaulted AMPS"), the Representatives shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted AMPS in such amounts as may be agreed upon and upon the terms
herein set forth; if, however, the Representatives shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted AMPS does not exceed 10% of the number of
AMPS to be purchased on such date, each of the non-defaulting Underwriters shall
be obligated, severally and not jointly, to purchase the full amount thereof in
the proportions that their respective underwriting obligations hereunder bear to
the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted AMPS exceeds 10% of the number of AMPS to be
purchased on such date, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, either the Representatives or the Fund shall have the right to
postpone Closing Time for a period not exceeding seven days in order to effect
any required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
SECTION 11. Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication. Notices to the Underwriters shall be directed to the
Representatives, Merrill Lynch & Co., North Tower, 4 World Financial Center, New
York, New York 10080, attention of Equity Capital Markets; and notices to the
Fund or the Adviser shall be directed, as appropriate, to the office of
Federated Investors, Inc., Attention: Lisa E. Peternel, Federated Investors
Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779; with copies to Dickstein
Shapiro Morin & Oshinsky LLP, Attention: Matthew G. Maloney, Esq., 2101 L Street
NW, Washington, DC 20037-1526 and to Federated Investors, Inc., Stephen A. Keen,
Esq., Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
SECTION 12. Parties.
This Agreement shall each inure to the benefit of and be binding upon the
Underwriters, the Fund, the Adviser and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person, firm or corporation, other than the Underwriters, the Fund, the
Adviser and their respective successors and the controlling persons and officers
and trustees referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters, the Fund, the Adviser and their
respective successors, and said controlling persons and officers, trustees and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of AMPS from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
IN SAID STATE. UNLESS OTHERWISE EXPLICITLY PROVIDED, SPECIFIED TIMES OF DAY
REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a binding agreement among the
Underwriters, the Fund and the Adviser in accordance with its terms.
Very truly yours,
FEDERATED PREMIER MUNICIPAL INCOME FUND
By:
Name:
Title:
FEDERATED INVESTMENT MANAGEMENT COMPANY
By:
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
[other representatives, if any]
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
Authorized Signatory
For themselves and as Representatives of the
other Underwriters named in Schedule A hereto.
Sch A-1
SCHEDULE A
Number of
Name of Underwriter AMPS
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................[ ]
[Other underwriters]..................................................[ ]
Total...........................................................[ ]
SCHEDULE B
Federated Premier Municipal Income Fund
[ ] Auction Market Preferred Shares
[ ] Shares, Series A
Liquidation Preference $25,000 per Share
1. The liquidation preference per share for the AMPS shall be $25,000.
2. The purchase price per share for the AMPS to be paid by the several
Underwriters shall be $[ ], such discount from the liquidation preference
representing the commission to be paid to the Underwriters for their commitment
hereunder of $[ ].
3. The initial dividend rate of the AMPS, Series A shall be [ ]% per annum.
Exhibit (k)(iii) under Form N-2
FEDERATED PREMIER MUNICIPAL INCOME FUND
_______________________________________________
AUCTION AGENCY AGREEMENT
dated as of [February 18], 2003
Relating to
Auction Market Preferred Shares
Series A
of
FEDERATED PREMIER MUNICIPAL INCOME FUND
______________________________________________
DEUTSCHE BANK TRUST COMPANY AMERICAS,
as Auction Agent
This Auction Agency Agreement (this "Agreement"), dated as of [February
18], 2003, is by and between FEDERATED PREMIER MUNICIPAL INCOME FUND, a Delaware
statutory trust (the "Trust") and Deutsche Bank Trust Company Americas, a New
York banking corporation.
The Trust proposes to issue an aggregate of 2,147 preferred shares, par
value $0.01 per share, liquidation preference $25,000 per share, designated as
Auction Market Preferred Shares, Series A (the "AMPS"), pursuant to the
Statement (as defined below).
The Trust desires that Deutsche Bank Trust Company Americas perform certain
duties as agent in connection with each Auction (as defined below) (in such
capacity, the "Auction Agent"), and as the transfer agent, registrar, dividend
paying agent and redemption agent with respect to the AMPS (in such capacity,
the "Paying Agent"), upon the terms and conditions of this Agreement, and the
Trust hereby appoints Deutsche Bank Trust Company Americas as said Auction Agent
and Paying Agent.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Trust and the Auction Agent agree as follows:
Definitions and Rules of Construction.
Terms Defined By Reference to Statement.
Capitalized terms not defined herein shall have the respective meanings
specified in the Statement.
Terms Defined Herein.
As used herein and in the Settlement Procedures, the following terms shall
have the following meanings, unless the context otherwise requires:
"Agent Member" of any Person shall mean the member of, or participant in,
the Securities Depository that will act on behalf of a Bidder.
"Agreement" shall mean this Agreement relating to the AMPS.
"AMPS" shall mean the preferred shares, $0.01 par value per share, of the
Trust designated as its "Auction Market Preferred Shares" and bearing such
further designation as to series as the Trust shall specify.
"Auction" shall have the meaning specified in Section 2.1 hereof.
"Auction Procedures" shall mean the auction procedures constituting Part II
of the form of Statement.
"Authorized Officer" of the Auction Agent shall mean each Vice President,
Assistant Vice President, and Associate Vice President of the Auction Agent
assigned to its Corporate Trust and Agency Group and every other officer or
employee of the Auction Agent designated as an "Authorized Officer" for purposes
hereof in a communication to the Trust.
"Broker-Dealer Agreement" shall mean each agreement between the Auction
Agent and a Broker-Dealer substantially in the form attached hereto as Exhibit
A.
"Settlement Procedures" shall mean the Settlement Procedures attached
hereto as Exhibit B.
"Statement" shall mean the Trust's Statement of Preferences of Auction
Market Preferred Shares, as the same may be amended, supplemented or modified
from time to time.
(j) "Treasury Index Rate" shall mean a Treasury Bill Rate and/or a Treasury
Note Rate, each as defined in the Statement.
(k) "Trust Officer" shall mean the Chairman, the President, each Vice
President (whether or not designated by a number or word or words added before
or after the title "Vice President"), the Secretary, the Treasurer, each
Assistant Secretary and each Assistant Treasurer of the Trust and every other
officer or employee of the Trust designated as a "Trust Officer" for purposes
hereof in a notice to the Auction Agent.
Rules of Construction.
Unless the context or use indicates another or different meaning or intent,
the following rules shall apply to the construction of the Agreement:
words importing the singular number shall include the plural number and
vice versa.
the captions and headings herein are solely for convenience of reference
and shall not constitute a part of the Agreement nor shall they affect its
meaning, construction or effect.
the words "hereof", "herein", "hereto" and other words of similar import
refer to the Agreement as a whole.
to the extent that this Agreement conflicts with the Statement, the
Statement shall control.
all references herein to a particular time of day shall be to New York City
time.
The Auction.
Purpose; Incorporation by Reference of Auction Procedures and Settlement
Procedures.
The Board of Trustees of the Trust has adopted a resolution appointing
Deutsche Bank Trust Company Americas as Auction Agent for purposes of the
Auction Procedures. The Auction Agent hereby accepts such appointment and agrees
that, on each Auction Date, it shall follow the procedures set forth in this
Section 2 and the Auction Procedures for the purpose of determining the
Applicable Rate for any Subsequent Rate Period of the AMPS for which the
Applicable Rate is to be determined by auction. Each periodic operation of such
procedures is hereinafter referred to as an "Auction."
All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part hereof to the same extent as if such provisions
were fully set forth herein.
Preparation for Each Auction; Maintenance of Registry of Beneficial Owners.
Not later than seven days prior to the first Auction Date for the AMPS, the
Trust shall provide the Auction Agent with a list of the Broker-Dealers. Not
later than seven days prior to any Auction Date for the AMPS for which any
change in such list of Broker-Dealers is to be effective, the Trust will notify
the Auction Agent in writing of such change and, if any such change involves the
addition of a Broker-Dealer to such list, shall cause to be delivered to the
Auction Agent for execution by the Auction Agent a Broker-Dealer Agreement
signed by such Broker-Dealer; provided, however, that if the Trust proposes to
designate any Special Rate Period of AMPS pursuant to Section 4 of Part I of the
Statement, not later than 11:00 A.M. on the Business Day next preceding the
Auction Date next preceding the first day of such Rate Period or by such later
time or date, or both, as may be agreed to by the Auction Agent, the Trust shall
provide the Auction Agent with a list of the Broker-Dealers for such series and
a manually signed copy of each Broker-Dealer Agreement with each Broker-Dealer
for such series. The Auction Agent shall have entered into a Broker-Dealer
Agreement with each Broker-Dealer prior to the participation of any such
Broker-Dealer in any Auction.
In the event that any Auction Date for the AMPS shall be changed after the
Auction Agent shall have given the notice referred to in paragraph (a) of the
Settlement Procedures, or after the notice referred to in Section 2.3 hereof, if
applicable, the Auction Agent, by such means as the Auction Agent deems
practicable, shall give notice of such change to the Broker-Dealers for such
series not later than the earlier of 9:15 A.M. on the new Auction Date or 9:15
A.M. on the old Auction Date.
(ii) The Auction Agent shall maintain a registry of the beneficial owners
of the AMPS who shall constitute Existing Holders of AMPS for purposes of
Auctions. The Auction Agent shall indicate thereon the identity of the
respective Broker-Dealer of each Existing Holder on whose behalf such
Broker-Dealer submitted the most recent Order in any Auction which resulted in
such Existing Holder continuing to hold or purchasing AMPS of such series. The
Auction Agent shall keep such registry current and accurate based on the
information provided to it from time to time by the Broker-Dealer. The Trust
shall provide or cause to be provided to the Auction Agent at or prior to the
Date of Original Issue of the AMPS a list of the initial Existing Holders of the
shares of AMPS, the number of shares purchased by each such Existing Holder and
the respective Broker-Dealer of each such Existing Holder or the affiliate
thereof through which each such Existing Holder purchased such shares. The
Auction Agent may rely upon, as conclusive evidence of the identities of the
Existing Holders of AMPS of any series (A) such list, (B) the results of
Auctions, (C) notices from any Broker-Dealer as described in the first sentence
of Section 2.2(c)(iii) hereof and (D) the results of any procedures approved by
the Trust that have been devised for the purpose of determining the identities
of Existing Holders in situations where AMPS may have been transferred without
compliance with any restriction on the transfer thereof set forth in the Auction
Procedures.
In the event of any partial redemption of AMPS, the Auction Agent shall, at
least two Business Days prior to the next Auction for such series, request each
Broker-Dealer to provide the Auction Agent with a list of Persons whom such
Broker-Dealer believes are Existing Holders after giving effect to such
redemption based upon inquiries of the Persons reflected in such Broker-Dealer's
records as Beneficial Owners as a result of the most recent Auction and with
respect to each such Person, the number of AMPS such Broker-Dealer believes are
owned by such Person after giving effect to such redemption. In the absence of
receiving any such information from any Broker-Dealer, the Auction Agent may
continue to treat the Persons listed in its registry of Existing Holders as the
beneficial owner of the number of AMPS shown in such registry.
The Auction Agent shall be required to register a transfer of AMPS from an
Existing Holder of such AMPS only if such transfer is to another Existing
Holder, or other Person if permitted by the Trust, and only if such transfer is
made (A) pursuant to an Auction, (B) if the Auction Agent has been notified in
writing (I) in a notice substantially in the form of Exhibit B to the
Broker-Dealer Agreements by a Broker-Dealer of such transfer or (II) in a notice
substantially in the form of Exhibit C to the Broker-Dealer Agreements by the
Broker-Dealer of any Existing Holder, or other Person if permitted by the Trust,
that purchased or sold such AMPS in an Auction of the failure of such AMPS to be
transferred as a result of such Auction or (C) pursuant to procedures approved
by both the Trust and the Auction Agent that have been devised for the purpose
of determining the identities of Existing Holders in situations where AMPS may
have been transferred without compliance with any restriction on the transfer
thereof set forth in the Auction Procedures. The Auction Agent is not required
to accept any notice described in clause (B) of the preceding sentence for an
Auction unless the Auction Agent receives it by 3:30 P.M. on the Business Day
preceding such Auction. The Auction Agent shall rescind a transfer made on the
registry of the Existing Holders of any AMPS if the Auction Agent has been
notified in writing by the Broker Dealer of any Person that (i) purchased any
AMPS and the seller failed to deliver such shares or (ii) sold any AMPS and the
purchaser failed to make payment to such Person upon delivery to the purchaser
of such shares.
The Auction Agent may, but shall have no obligation to, request the
Broker-Dealers, as set forth in the Broker-Dealer Agreements, to provide the
Auction Agent with a list of Persons who such Broker-Dealer believes are
Existing Holders based upon inquiries of those Persons such Broker-Dealer's
records indicate are Beneficial Owners as a result of the most recent Auction
and with respect to each such Person, the number of shares of AMPS such
Broker-Dealer believes to be owned by such Person. The Auction Agent shall keep
confidential such registry of Existing Holders and shall not disclose the
identities of the Existing Holders of such AMPS to any Person other than the
Trust and the Broker-Dealer that provided such information; provided, however,
that the Auction Agent reserves the right and is authorized to disclose any such
information if (a) it is ordered to do so by a court of competent jurisdiction
or a regulatory body, judicial or quasi-judicial agency or authority having the
authority to compel such disclosure, (b) it is advised by its counsel that its
failure to do so would be unlawful or (c) failure to do so would expose the
Auction Agent to loss, liability, claim, damage or expense for which it has not
received indemnity or security satisfactory to it. Auction Schedule.
The Auction Agent shall conduct Auctions in accordance with the schedule
set forth below. Such schedule may be changed by the Auction Agent with the
consent of the Trust, which consent shall not be unreasonably withheld. The
Auction Agent shall give written notice of any such change to each
Broker-Dealer. Such notice shall be given prior to the close of business on the
Business Day next preceding the first Auction Date on which any such change
shall be effective.
Time Event
By 9:30 A.M. Auction Agent advises the Trust and
Broker-Dealers of the applicable Maximum Rate
and the Reference Rate(s) and Treasury Note
Rate(s), as the case may be, used in
determining such Maximum Rate as set forth in
Section 2.7 hereof.
9:30 A.M. - 1:30 P.M. Auction Agent assembles information
communicated to it by Broker-Dealers as
provided in Section 1(a) of the Auction
Procedures. Submission Deadline is 1:30 P.M.
Not earlier than 1:30 P.M. Auction Agent makes determinations pursuant to
Section 3(a) of the Auction Procedures.
By approximately 3:30 P.M. Auction Agent advises Trust of results of
Auction as provided in Section 3(b) of the
Auction Procedures.
Submitted Bids and Submitted Sell Orders are
accepted and rejected and AMPS allocated as
provided in Section 4 of the Auction
Procedures. Auction Agent gives notice of
Auction results as set forth Section 2.4
hereof.
The Auction Agent shall follow the notification procedures set forth in
paragraph (a) of the Settlement Procedures.
Notice of Auction Results.
The Auction Agent will advise each Broker-Dealer who submitted a Bid or
Sell Order in an Auction whether such Bid or Sell Order was accepted or rejected
in whole or in part and of the Applicable Rate for the next Rate Period for the
related AMPS by telephone or through its Auction Processing System as set forth
in paragraph (a) of the Settlement Procedures.
Broker-Dealers.
Not later than 12:00 Noon on each Auction Date of AMPS, the Trust shall pay
to the Auction Agent an amount in cash equal to the aggregate fees payable to
the Broker-Dealers for the AMPS pursuant to Section 2.6 of the Broker-Dealer
Agreements for the AMPS. The Auction Agent shall apply such moneys as set forth
in Section 2.6 of each such Broker-Dealer Agreement.
The Trust shall obtain the consent of the Auction Agent prior to selecting
any Person to act as a Broker-Dealer, which consent shall not be unreasonably
withheld. The Trust may designate an Affiliate of Merrill Lynch, Pierce, Fenner
& Smith Incorporated to act as a Broker-Dealer.
The Auction Agent shall terminate any Broker-Dealer Agreement as set forth
therein if so directed by the Trust, provided that at least one Broker-Dealer
Agreement would be in effect for the AMPS after such termination.
Subject to the Auction Agent's having consented to the selection of the
relevant Broker-Dealer pursuant to Section 2.5(b) hereof, the Auction Agent
shall from time to time enter into such Broker-Dealer Agreements with one or
more Broker-Dealers as the Trust shall request.
Special Rate Periods.
The provisions contained in Section 4 of Part I of the Statement concerning
Special Rate Periods and the notification of a Special Rate Period will be
followed by the Trust and, to the extent applicable, the Auction Agent, and the
provisions contained therein are incorporated herein by reference in their
entirety and shall be deemed to be a part of this Agreement to the same extent
as if such provisions were set forth fully herein.
Determination of Maximum Rate.
(iii) On each Auction Date, the Auction Agent shall determine the Maximum
Rate. If any "AA" Financial Composite Commercial Paper Rate, Treasury Note Rate
or Reference Rate, as the case may be, is not quoted on an interest or bond
equivalent, as the case may be, basis, the Auction Agent shall convert the
quoted rate to the interest or bond equivalent thereof as set forth in the
definition of such rate in the Statement if the rate obtained by the Auction
Agent is quoted on a discount basis, or if such rate is quoted on a basis other
than an interest or bond equivalent or discount basis the Auction Agent shall
convert the quoted rate to an interest or bond equivalent rate after
consultation with the Fund as to the method of such conversion.
If any "AA" Financial Composite Commercial Paper Rate is to be based on
rates supplied by Commercial Paper Dealers and one or more of the Commercial
Paper Dealers shall not provide a quotation for the determination of such "AA"
Financial Composite Commercial Paper Rate, the Auction Agent shall immediately
notify the Trust so that the Trust can determine whether to select a Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers to provide the
quotation or quotations not being supplied by any Commercial Paper Dealer or
Commercial Paper Dealers. The Trust shall promptly advise the Auction Agent of
any such selection.
If any Treasury Index Rate is to be based on rates supplied by U.S.
Government Securities Dealers and one or more of the U.S. Government Securities
Dealers shall not provide a quotation for the determination of such Treasury
Index Rate, the Auction Agent shall immediately notify the Trust so that the
Trust can determine whether to select a Substitute U.S. Government Securities
Dealer or Substitute U.S. Government Securities Dealers to provide the quotation
or quotations not being supplied by any U.S. Government Securities Dealer or
U.S. Government Securities Dealers. The Trust shall promptly advise the Auction
Agent of any such selection.
Ownership of Shares of AMPS.
The Trust shall notify the Auction Agent if the Trust or any affiliate of
the Trust acquires any AMPS. Neither the Trust nor any affiliate of the Trust
shall submit any Order in any Auction for AMPS, except as set forth in the next
sentence. Any Broker-Dealer that is an affiliate of the Trust may submit Orders
in Auctions, but only if such Orders are not for its own account. For purposes
of this Section 2.8, a Broker-Dealer shall not be deemed to be an affiliate of
the Trust solely because one or more of the directors or executive officers of
such Broker-Dealer or of any Person controlled by, in control of or under common
control with such Broker-Dealer is also a director of the Trust. The Auction
Agent shall have no duty or liability with respect to enforcement of this
Section 2.8.
Access to and Maintenance of Auction Records.
The Auction Agent shall afford to the Trust, its agents, independent public
accountants and counsel and the Broker-Dealers, access at reasonable times
during normal business hours to review and make extracts or copies of all books,
records, documents and other information concerning the conduct and results of
Auctions (at no cost to the Auction Agent), provided that any such agent,
accountant, counsel or Broker-Dealer shall furnish the Auction Agent with a
letter from the Trust requesting that the Auction Agent afford such person
access. The Auction Agent shall maintain records relating to any Auction for a
period of six years after such Auction, and such records shall, in reasonable
detail, accurately and fairly reflect the actions taken by the Auction Agent
hereunder.
The Auction Agent as Dividend and Redemption Price Disbursing Agent.
The Auction Agent, as dividend and redemption price disbursing agent, shall
pay to the Holders of AMPS (i) on each Dividend Payment Date for the AMPS,
dividends on the AMPS, (ii) on any date fixed for redemption of AMPS, the
Redemption Price of any shares called for redemption and (iii) any Late Charge
related to any payment of dividends or Redemption Price, in each case after
receipt of the necessary funds from the Trust with which to pay such dividends,
Redemption Price or Late Charge. The amount of dividends for any Rate Period for
the AMPS to be paid by the Auction Agent to the Holders of such shares will be
determined by the Trust as set forth in Section 2 of Part I of the Statement
with respect to the AMPS. The Redemption Price of any shares to be paid by the
Auction Agent to the Holders will be determined by the Trust as set forth in
Section 11 of Part I of the Statement with respect to the AMPS. The Trust shall
notify the Auction Agent in writing of a decision to redeem shares of AMPS at
least five days prior to the date a notice of redemption is required to be
mailed to the Holders of the shares to be redeemed by paragraph (c) of Section
11 of Part I of the Statement. Such notice by the Trust to the Auction Agent
shall contain the information required by paragraph (c) of Section 11 of Part I
of the Statement to be stated in the notice of redemption required to be mailed
by the Trust to such Holders.
The Auction Agent as Transfer Agent and Registrar.
Issue of Stock or Shares Certificates.
Upon the Date of Original Issue of AMPS, one or more certificates
representing all of the shares issued on such date shall be issued by the Trust
and, at the request of the Trust, registered in the name of Cede & Co. and
countersigned by the Auction Agent.
Registration of Transfer of Shares.
Prior to the commencement of a Voting Period, shares of AMPS shall be
registered solely in the name of the Securities Depository or its nominee.
Removal of Legend on Restricted Shares.
All requests for removal of legends on AMPS indicating restrictions on
transfer shall be accompanied by an opinion of counsel stating that such legends
may be removed and such shares freely transferred, such opinion to be delivered
under cover of a letter from a Trust Officer authorizing the Auction Agent to
remove the legend on the basis of said opinion.
Lost Stock or Share Certificates.
The Auction Agent shall issue and register replacement certificates for
certificates represented to have been lost, stolen or destroyed upon the
fulfillment of such requirements as shall be deemed appropriate by the Trust and
the Auction Agent, subject at all times to provisions of law, the Declaration
and By-Laws of the Trust governing such matters and resolutions adopted by the
Trust with respect to lost securities. The Auction Agent may issue new
certificates in exchange for and upon the cancellation of mutilated
certificates. Any request by the Trust to the Auction Agent to issue a
replacement or new certificate pursuant to this Section 4.4 shall be deemed to
be a representation and warranty by the Trust to the Auction Agent that such
issuance will comply with such provisions of law and the By-Laws and resolutions
of the Trust.
Disposition of Cancelled Certificates; Record Retention.
The Auction Agent shall retain all stock or share certificates which have
been cancelled in transfer or exchange and all accompanying documentation in
accordance with applicable rules and regulations of the Securities and Exchange
Commission for two calendar years. The Trust shall also undertake to furnish to
the Securities and Exchange Commission and to the Board of Governors of the
Federal Reserve System, upon demand, at either the principal office or at any
regional office, complete, correct and current hard copies of any and all such
records. The Auction Agent, upon written request from the Trust, shall afford to
the Trust, its agent and counsel access at reasonable times during normal
business hours to review and make extracts or copies of such certificates and
accompanying documentation. Upon the expiration of this two-year period, the
Auction Agent shall deliver to the Trust the canceled certificates and
accompanying documentation.
Stock or Record Books.
For so long as the Auction Agent is acting as the transfer agent for the
AMPS pursuant to the Agreement, it shall maintain a stock or record book
containing a list of the Holders of the AMPS. In case of any request or demand
for the inspection of the stock or record books of the Trust or any other books
in the possession of the Auction Agent, the Auction Agent will notify the Trust
and secure instructions as to permitting or refusing such inspection. The
Auction Agent reserves the right, however, to exhibit the stock or record books
or other books to any Person if (a) it is ordered to do so by a court of
competent jurisdiction or a regulatory body, judicial or quasi-judicial agency
or authority having the authority to compel such disclosure, (b) it is advised
by its counsel that its failure to do so would be unlawful or (c) failure to do
so would expose the Auction Agent to loss, liability, claim, damage or expense
for which it has not received indemnity or security satisfactory to it.
Return of Funds.
Any funds deposited with the Auction Agent hereunder by the Trust for any
reason, including but not limited to redemption of AMPS, that remain unpaid
after sixty days shall be repaid to the Trust upon the written request of the
Trust.
Representations and Warranties.
Representations and Warranties of the Trust.
The Trust represents and warrants to the Auction Agent that:
the Trust is duly organized and existing statutory trust in good standing
under the laws of the State of its organization and has full trust power or all
requisite power to execute and deliver the Agreement and to authorize, create
and issue the AMPS, and the AMPS when issued, will be duly authorized, validly
issued, fully paid and nonassessable;
the Agreement has been duly and validly authorized, executed and delivered
by the Trust and constitutes the legal, valid and binding obligation of the
Trust enforceable against the Auction Agent in accordance with its terms,
subject to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles;
the form of the certificate evidencing the AMPS complies or will comply
with all applicable laws of the State of its organization;
when issued, the AMPS will have been duly registered under the Securities
Act of 1933, as amended, and no further action by or before any governmental
body or authority of the United States or of any state thereof is required of
the Trust in connection with the execution and delivery of the Agreement or will
have been required of the Trust in connection with the issuance of AMPS;
the execution and delivery of the Agreement and the issuance and delivery
of the AMPS do not and will not conflict with, violate or result in a breach of,
the terms, conditions or provisions of, or constitute a default under, the
Declaration or the By-Laws of the Trust, any law or regulation, any order or
decree of any court or public authority having jurisdiction, or any mortgage,
indenture, contract, agreement or undertaking to which the Trust is a party or
by which it is bound the effect of which conflict, violation, default or breach
would be material to the Trust; and
no taxes are payable upon or in respect of the execution of the Agreement
or the issuance of the AMPS.
Representations and Warranties of the Auction Agent.
The Auction Agent represents and warrants to the Trust that:
the Auction Agent is duly organized and is validly existing as a banking
corporation in good standing under the laws of New York and has the corporate
power to enter into and perform its obligations under this Agreement; and
this Agreement has been duly and validly authorized, executed and delivered
by the Auction Agent and constitutes the legal, valid and binding obligation of
the Auction Agent, enforceable against the Auction Agent in accordance with its
terms, subject to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to general
equitable principles.
The Auction Agent.
Duties and Responsibilities.
The Auction Agent is acting solely as agent for the Trust hereunder and
owes no fiduciary duties to any Person, other than the Trust, by reason of the
Agreement.
The Auction Agent undertakes to perform such duties and only such duties as
are specifically set forth in the Agreement (including the Auction and
Settlement Procedures incorporated herein), and no implied covenants or
obligations shall be read into the Agreement against the Auction Agent.
In the absence of bad faith or negligence on its part, the Auction Agent
shall 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 Agreement. The
Auction Agent shall not be liable for any error of judgment made in good faith
unless the Auction Agent shall have been negligent in ascertaining the pertinent
facts.
Rights of the Auction Agent.
The Auction Agent may conclusively rely and shall be protected in acting or
refraining from acting in reliance upon any communication authorized hereby and
upon any written instruction, notice, request, direction, consent, report,
certificate, share certificate or other instrument, paper or document believed
in good faith by it to be genuine. The Auction Agent shall not be liable for
acting in reliance upon any telephone communication authorized hereby which the
Auction Agent believes in good faith to have been given by the Trust or by a
Broker-Dealer. The Auction Agent may record telephone communications with the
Trust or with the Broker-Dealers or both.
The Auction Agent may consult with counsel of its choice and the advice of
such counsel shall be full and complete authorization and protection in respect
of any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
The Auction Agent shall not be required to advance, expend or risk its own
funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.
The Auction Agent may perform its duties and exercise its rights hereunder
either directly or by or through agents or attorneys and shall not be
responsible for any misconduct or negligence on the part of any agent or
attorney appointed by it with due care hereunder.
The Auction Agent shall not be responsible or liable for any failure or
delay in the performance of its obligations under this Agreement arising out of
or caused, directly or indirectly, by circumstances beyond its reasonable
control, it being understood that the Auction Agent shall use reasonable efforts
which are consistent with accepted practices in the banking industry to resume
performance as soon as practicable under the circumstances.
Compensation, Expenses and Indemnification.
The Trust shall pay the Auction Agent an annual fee as compensation for all
services rendered by it under the Agreement and the Broker-Dealer Agreements as
the Trust and the Auction Agent have agreed to from time to time.
The Trust shall reimburse the Auction Agent upon its request for all
reasonable out-of-pocket expenses, disbursements and advances incurred or made
by the Auction Agent in accordance with any provision of the Agreement and the
Broker-Dealer Agreements (including the reasonable compensation and the
reasonable expenses and disbursements of its agents (unless such agent is
providing a service for which the Auction Agent is already being compensated by
the Trust) and counsel), except any expense or disbursement attributable to its
negligence or bad faith. In no event shall the Auction Agent be responsible or
liable for special, indirect or consequential loss or damage of any kind
whatsoever (including, but not limited to, loss of profit), even if the Auction
Agent has been advised of the likelihood of such loss or damage and regardless
of the form of action.
The Trust shall indemnify the Auction Agent for and hold it harmless
against any loss, liability or expense incurred without negligence or bad faith
on its part, arising out of or in connection with its agency under the Agreement
and the Broker-Dealer Agreements, including the costs and expenses of defending
itself against any such claim or liability in connection with its exercise or
performance of any of its duties hereunder and thereunder.
Auction Agent's Disclaimer.
The Auction Agent makes no representation as to the validity or adequacy of
the Agreement, the Broker-Dealer Agreements or the AMPS except that the Auction
Agent hereby represents that the Agreement has been duly authorized, executed
and delivered by the Auction Agent and constitutes a legal and binding
obligation of the Auction Agent.
Miscellaneous.
Term of Agreement.
The term of the Agreement is unlimited unless it shall be terminated as
provided in this Section 7.1. The Trust may terminate the Agreement at any time
by so notifying the Auction Agent, provided that the Trust has entered into an
agreement with a successor Auction Agent. The Auction Agent may terminate the
Agreement upon written notice to the Trust on the date specified in such notice,
which date shall be no earlier than 45 days after the date of delivery of such
notice.
Except as otherwise provided in this paragraph (b), the respective rights
and duties of the Trust and the Auction Agent under the Agreement shall cease
upon termination of the Agreement. The representations, warranties, covenants
and obligations under Sections 5 and 6.3 hereof shall survive the termination of
the Agreement. Upon termination of the Agreement, the Auction Agent shall, at
the Trust's request, promptly deliver to the Trust copies of all books and
records maintained by it with respect to AMPS in connection with its duties
hereunder and to any successor Auction Agent any funds then held by the Auction
Agent for the benefit of the Holders of AMPS or the Trust.
Communications.
Except for (i) communications authorized to be by telephone pursuant to the
Agreement or the Auction Procedures and (ii) communications in connection with
Auctions (other than those expressly required to be in writing), all notices,
requests and other communications to any party hereunder shall be in writing
(including telecopy or similar writing) and shall be given to such party,
addressed to it, at its address or telecopy number set forth below:
If to the Trust: Federated Premier Municipal Income Fund
c/o Beverly Pirker
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Facsimile No: (412) 288-6788
Telephone No: (412) 288-1770
with a copy to: Stephen A. Keen, General Counsel
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Facsimile No: (412) 288-3939
Telephone No: (412) 288-1567
If to the Auction Agent:Deutsche Bank Trust Company Americas
Corporate Trust & Agency Services
280 Park Avenue, 9th Floor
New York, NY 10017
Attention: Auction Rate Securities
Facsimile No.: (212) 454-2030
Telephone No.: (212) 454-4042
Each such notice, request or communication shall be effective when
delivered at the address specified herein. Communications shall be given on
behalf of the Trust by a Trust Officer and on behalf of the Auction Agent by
telephone (confirmed by telecopy or in writing) by an Authorized Officer.
Entire Agreement.
The Agreement (including the Auction and Settlement Procedures incorporated
herein) contains the entire agreement between the parties relating to, and
superseding any prior agreement between the parties relating to, the subject
matter hereof, and there are no other representations, endorsements, promises,
agreements or understandings, oral, written or implied, between the parties
relating to the subject matter hereof except for agreements relating to the
compensation of the Auction Agent.
Benefits.
Nothing herein, express or implied, shall give to any Person, other than
the Trust, the Auction Agent and their respective successors and assigns, any
benefit of any legal or equitable right, remedy or claim hereunder.
Amendment; Waiver.
The Agreement shall not be deemed or construed to be modified, amended,
rescinded, cancelled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of the party to be
charged.
Failure of either party hereto to exercise any right or remedy hereunder in
the event of a breach hereof by the other party shall not constitute a waiver of
any such right or remedy with respect to any subsequent breach.
Successors and Assigns.
The Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the respective successors and assigns of each of the Trust and
the Auction Agent. The Auction Agent may not assign this Agreement, whether by
merger or otherwise, without the prior written consent of the Trust.
Severability.
If any clause, provision or section hereof shall be ruled invalid or
unenforceable by any court of competent jurisdiction, the invalidity or
unenforceability of such clause, provision or section shall not affect any of
the remaining clauses, provisions or sections hereof.
Disclosure of Information.
The Auction Agent agrees that it will not disclose or use any "non-public
personal information" about the Fund's shareholders other than such uses or
disclosures as are permitted by Regulation S-P under Section 504 of the
Gramm-Leach Biley Act ("Regulation S-P"). "Nonpublic personal information" about
a shareholder shall mean: (i) personally identifiable financial information;
(ii) any list, description, or other grouping of consumers that is derived from
using any personally identifiable information that is not publicly available;
and (iii) any other information that a Customer or the Transfer Agent is
prohibited from using or disclosing pursuant to Regulation S-P.
Governing Law.
The Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us a counterpart hereof, whereupon this instrument,
along with all counterparts, will become a binding agreement among the Trust and
the Auction Agent in accordance with its terms.
FEDERATED PREMIER MUNICIPAL INCOME FUND
By:
Name
Title
DEUTSCHE BANK TRUST COMPANY AMERICAS
By:
Name
Title
A-1
EXHIBIT A
FORM OF
BROKER-DEALER AGREEMENT
EXHIBIT B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the procedures
expected to be followed in connection with the settlement of each Auction and
will be incorporated by reference in the Auction Agency Agreement and each
Broker-Dealer Agreement. Nothing contained in this Appendix constitutes a
representation by the Trust that in each Auction each party referred to herein
will actually perform the procedures described herein to be performed by such
party.
(a) On each Auction Date, the Auction Agent shall notify by telephone the
Broker-Dealers that participated in the Auction held on such Auction Date and
submitted an order on behalf of any Existing Holder or Potential Holder of:
(i) the Applicable Rate fixed for the next succeeding Rate Period;
(ii) whether Sufficient Clearing Bids existed for the determination of the
Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted a Bid or
Sell Order on behalf of an Existing Holder, the number of shares, if any, of
AMPs to be sold by such Existing Holder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid on
behalf of a Potential Holder, the number of shares, if any, of AMPs to be
purchased by such Potential Holder;
(v) if the aggregate number of AMPs to be sold by all Existing Holders on
whose behalf such Broker-Dealer submitted a Bid or a Sell Order exceeds the
aggregate number of AMPs to be purchased by all Potential Holders on whose
behalf such Broker-Dealer submitted a Bid, the name or names of one or more
Buyer's Broker-Dealers (and the name of the Agent Member, if any, of each such
Buyer's Broker-Dealer) acting for one or more purchasers of such excess number
of AMPs and the number of such shares to be purchased from one or more Existing
Holders on whose behalf such Broker-Dealer acted by one or more Potential
Holders on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of AMPs to be purchased by all Potential
Holders on whose behalf such Broker-Dealer submitted a Bid exceeds the aggregate
number of AMPs to be sold by all Existing Holders on whose behalf such
Broker-Dealer submitted a Bid or a Sell Order, the name or names of one or more
Seller's Broker Dealers ( and the name of the Agent Member, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess number of
AMPs and the number of such shares to be sold to one or more Potential holders
on whose behalf such Broker-Dealer acted by one or more Existing Holders on
whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with respect to the
AMPs.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Holder or Potential Holder shall:
(i) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
instruct each Potential Holder on whose behalf such Broker-Dealer submitted a
Bid that was accepted, in whole or in part, to instruct such Potential Holder's
Agent Member to pay to such Broker-Dealer (or its Agent Member) through the
Securities Depository the amount necessary to purchase the number of AMPs to be
purchased pursuant to such Bid against receipt of such shares and advise such
Potential Holder of the Applicable Rate for the next succeeding Rate Period;
(ii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Holder on whose behalf such Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, to instruct such Existing
Holder's Agent Member to deliver to such Broker-Dealer (or its Agent Member)
through the Securities Depository the number of AMPs to be sold pursuant to such
Order against payment therefor and advise any such Existing Holder that will
continue to hold AMPs of the Applicable Rate for the next succeeding Rate
Period;
(iii) advise each Existing Holder on whose behalf such Broker-Dealer
submitted a Hold Order of the Applicable Rate for the next succeeding Dividend
Period;
(iv) advise each Existing Holder on whose behalf such Broker-Dealer
submitted an Order of the Auction Date for the next succeeding Auction; and
(v) advise each Potential Holder on whose behalf such Broker-Dealer
submitted a Bid that was accepted, in whole or in part, of the Auction Date for
the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a) above,
each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a Potential
Holder or an Existing Holder shall, in such manner and at such time or times as
in its sole discretion it may determine, allocated any funds received by it
pursuant to (b)(i) above and any AMPs received by it pursuant to (b)(ii) above
among the Potential Holders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Holders, if any, on whose behalf such Broker-Dealer
submitted Bids that were accepted or Sell Orders, and any Broker-Dealer or
Broker-Dealers identified to it by the Auction Agent pursuant to (a)(v) or
(a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder shall instruct its Agent
Member as provided in (b)(i) or (ii) above, as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Existing Holder delivering
shares to such Broker-Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker-Dealer (or its Agent
Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of the
Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a) (vi) above the amount necessary to purchase the
shares to be purchased pursuant to (b) (i) above against receipt of such shares,
and (B) deliver such shares through the Securities Depository to the Agent
Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d) (i) above shall instruct
the Securities Depository to execute the transactions described under (b) (i) or
(ii) above, and the Securities Depository shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d) (ii) above,
and the Securities Depository shall execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Agent Member shall instruct the
Securities Depository to execute the transactions described in (d) (iii) above,
and the Securities Depository shall execute such transactions.
(f) If an Existing Holder selling AMPs in an Auction fails to deliver such
shares (by authorized book-entry), a Broker-Dealer may deliver to the Potential
Holder on behalf of which it submitted a Bid that was accepted a number of whole
AMPs that is less than the number of shares that otherwise was to be purchased
by such Potential Holder. In such event, the number of AMPs to be so delivered
shall be determined solely by such Broker-Dealer. Delivery of such lesser number
of shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall represent
any departure from the results of an Auction, as determined by the Auction
Agent, shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or non-delivery in accordance with the provisions of
the Auction Agent Agreement and the Broker-Dealer Agreements.
Exhibit (k)(iv) under Form N-2
================================================================================
BROKER-DEALER AGREEMENT
Among
DEUTSCHE BANK TRUST COMPANY AMERICAS
as Auction Agent
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
as Broker-Dealer
Dated as of [February 18], 2003
Relating to
AUCTION MARKET PREFERRED SHARES
SERIES A
of
FEDERATED PREMIER MUNICIPAL INCOME FUND
================================================================================
BROKER-DEALER AGREEMENT dated as of [February 18], 2003 (this "Agreement"),
among (i) Deutsche Bank Trust Company Americas, a New York banking corporation,
as auction agent (the "Auction Agent") (not in its individual capacity but
solely as agent of FEDERATED PREMIER MUNICIPAL INCOME FUND, a Delaware statutory
trust (the "Trust")) pursuant to authority granted to it in the Auction Agency
Agreement and (ii) Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
broker-dealer (together with its successors and assigns as such hereinafter
referred to as "BD").
The Trust intends to issue one series of Auction Market Preferred Shares,
par value $0.01 per share, liquidation preference $25,000 per share, designated
Series A (the "AMPS"). The AMPS shall be issued in book-entry form through the
facilities of the Securities Depository. References to "Shares of AMPS" or
"AMPS" in this Agreement shall refer only to the beneficial interests in the
AMPS unless the context otherwise requires.
The Auction Procedures require the participation of a Broker-Dealer.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Auction Agent, the Trust and BD
agree as follows:
Definitions and Rules of Construction
Terms Defined by Statement of Preferences. Capitalized terms not defined
herein shall have the respective meanings specified in the Statement.
Terms Defined Herein. As used herein and in the Settlement Procedures, the
following terms shall have the following meanings, unless the context otherwise
requires:
"Agent Member" of any Person shall mean the member of, or participant in,
the Securities Depository that will act on behalf of a Bidder.
"Agreement" with respect to the Trust shall mean this Agreement as may be
amended in writing with written consent of the Trust.
"AMPS" shall mean the preferred shares, $0.01 par value per share, of the
Trust designated as its "Auction Market Preferred Shares" and bearing such
further designation as to series as the Trust shall specify.
"Auction" shall have the meaning specified in Section 2.1 hereof.
"Auction Agency Agreement" shall mean the Auction Agency Agreement dated as
of [February 18], 2003 between the Auction Agent and the Trust.
"Auction Procedures" shall mean the auction procedures constituting Part II
of the Statement.
"BD Officer" shall mean the Chairman, the President, each Vice President
(whether or not designated by a number or word or words added before or after
the title "Vice President"), the Secretary, the Treasurer, each Assistant Vice
President, each Assistant Secretary and each Assistant Treasurer of the Trust
and every other officer or employee of BD designated as a "BD Officer" for
purposes hereof in a notice to the Auction Agent.
"Authorized Officer" of the Auction Agent shall mean each Senior Vice
President, Vice President, Assistant Vice President, and Associate Vice
President of the Auction Agent assigned to its Corporate Trust and Agency Group
and every other officer or employee of the Auction Agent designated as an
"Authorized Officer" for purposes hereof in a communication to the Trust.
"Settlement Procedures" shall mean the Settlement Procedures attached to
the Auction Agency Agreement as Exhibit B.
"Statement" shall mean the Trust's Statement of Preferences of Auction
Market Preferred Shares, as the same may be amended, supplemented or modified
from time to time.
"Trust Officer" shall mean the Chairman, the President, each Vice President
(whether or not designated by a number or word or words added before or after
the title "Vice President"), the Secretary, the Treasurer, each Assistant
Secretary and each Assistant Treasurer of the Trust and every other officer or
employee of the Trust designated as a "Trust Officer" for purposes hereof in a
notice to the Auction Agent.
Rules of Construction. Unless the context or use indicates another or
different meaning or intent, the following rules shall apply to the construction
of this Agreement:
Words importing the singular number shall include the plural number and
vice versa.
The captions and headings herein are solely for convenience of reference
and shall not constitute a part of this Agreement nor shall they affect its
meaning, construction or effect.
The words "hereof," "herein," "hereto" and other words of similar import
refer to this Agreement as a whole.
All references herein to a particular time of day shall be to New York City
time.
This Agreement shall apply separately but equally to all series of AMPS
that may be issued. Section 1 and 2 hereof shall be read in conjunction with the
Statement and in the event of any conflict with the Statement, the Statement
shall take precedence.
Warranties of BD. BD hereby represents and warrants that this Broker-Dealer
Agreement has been duly authorized, executed and delivered by BD and that,
assuming the due authorization, execution and delivery hereof by the Auction
Agent, this Broker-Dealer Agreement constitutes a valid and binding agreement of
BD, enforceable against it in accordance with its terms. BD's representations
and warranties in this Section 1.4 shall survive the termination of this
Agreement.
The Auctions.
Purpose; Incorporation by Reference of Auction Procedures and Settlement
Procedures.
On each Auction Date, the provisions of the Auction Procedures will be
followed by the Auction Agent for the purpose of determining the Applicable Rate
for the AMPS for the next Rate Period. Each periodic implementation of such
procedures is hereinafter referred to as an "Auction."
All of the provisions contained in the Auction Procedures and the
Settlement Procedures are incorporated herein by reference in their entirety and
shall be deemed to be a part of this Agreement to the same extent as if such
provisions were fully set forth herein.
BD agrees to act as, and assumes the obligations of and limitations and
restrictions placed upon, a Broker-Dealer under this Agreement.
BD acknowledges and agrees that each provision of the Auction Procedures
that requires BD to perform an obligation or procedure is hereby incorporated
herein by reference and that this Agreement shall constitute the Trust's
instruction, and BD hereby agrees, to perform such obligations and procedures
without further request by or instructions from the Trust.
BD may participate in Auctions for its own account.
Preparation for Each Auction.
Not later than 9:30 a.m. on each Auction Date, the Auction Agent shall
advise BD by telephone or other electronic means, to be confirmed in writing by
the Auction Agent, of the Maximum Rate, Reference Rate(s) and Treasury Note
Rate(s).
BD shall cause the Maximum Rate to be communicated as promptly as
practicable to its customers who hold or may be interested in acquiring AMPS.
If required by applicable law, or requested by the Auction Agent, BD shall
provide a list of Existing Holders based upon inquiries of those Persons such
Broker-Dealer believes are Beneficial Owners as a result of the most recent
Auction to the Auction Agent promptly after any date so requested by the Auction
Agent. The Auction Agent shall keep confidential any such information, including
information received as to the identity of Bidders in any Auction, and shall not
disclose any such information so provided to any Person other than the other
parties hereto, provided that the Auction Agent each reserves the right to
disclose any such information if (a) it is ordered to do so by a court of
competent jurisdiction or a regulatory, judicial or quasi-judicial agency, (b)
it is advised by its counsel that its failure to do so would be unlawful or (c)
failure to do so would expose the Auction Agent to loss, liability, claim,
damage or expense for which it has not received indemnity satisfactory to it.
BD agrees to maintain a list of customers relating to the AMPS and to use
its best efforts, subject to existing laws and regulations, to contact the
customers on such list whom BD believes may be interested in participating in
the Auction on each Auction Date, as a Potential Holder or a Potential
Beneficial Owner, for the purposes set forth in the Auction Procedures. Nothing
herein shall require BD to submit an Order for any customer in any Auction.
The Auction Agent's registry of Existing Holders of shares of the AMPS
shall be conclusive and binding on BD. BD may inquire of the Auction Agent
between 3:00 P.M. on the Business Day preceding an Auction for shares of 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 BD to be an Existing Holder. If BD believes it is the Existing Holder
of fewer shares of such series than specified by the Auction Agent in response
to BD's inquiry, BD may so inform the Auction Agent of that belief. BD 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 BD's inquiry.
Auction Schedule; Method of Submission of Orders.
The Auction Agent shall conduct Auctions in accordance with the schedule
set forth below. Such schedule may be changed at any time by the Auction Agent
with the consent of the Trust, which consent shall not be unreasonably withheld.
The Auction Agent shall give written notice of any such change to BD which shall
have the right to review such change. Such notice shall be received one Business
Day prior to the first Auction Date on which any such change shall be effective.
Time Event
By 9:30 a.m. Auction Agent advises the Trust and the
Broker-Dealer of the applicable Maximum
Rate and the Reference Rate(s) and
Treasury Note Rate(s) as set forth in
Section 2.2(a) hereof.
9:30 a.m. - 1:30 p.m. Auction Agent assembles information
communicated to it by Broker-Dealer as
provided in Section 1(a) of the Auction
Procedures. Submission Deadline is
1:30 p.m.
Not earlier than Auction Agent makes determinations
1:30 p.m. pursuant to 3(a) of the Auction
Procedures.
By approximately Auction Agent advises the Trust of
3:30 p.m. results of Auction as provided in
Section 3(b) of the Auction
Procedures. Submitted Bids and
Submitted Sell Orders are accepted and
rejected in whole or in part and AMPS
are allocated as provided in Section 4
of the Auction Procedures. Auction
Agent gives notice of Auction results
as set forth in Section 2.4(a) hereof.
BD may designate one or more individuals in its organization who will
coordinate its procedures in connection with Auctions and purchases and sales of
shares of the AMPS.
BD agrees to handle its customers' order in accordance with its duties
under applicable securities laws and rules.
To the extent that pursuant to Section 4 of the Auction Procedures of the
Trust, BD continues to hold, sells or purchases a number of shares that is fewer
than the number of shares in an Order submitted by BD to the Auction Agent in
which BD designated itself as an Existing Holder or Potential Holder in respect
of customer Orders, BD shall make appropriate pro rata allocations among its
customers for which it submitted Orders of similar tenor. If as a result of such
allocations, any Beneficial Owner would be entitled or required to sell, or any
Beneficial Owner would be entitled or required to purchase, a fraction of a
Share of AMPS on any Auction Date, BD shall, in such manner as it shall
determine in its sole discretion, round up or down the number of AMPS to be
purchased or sold on such Auction Date by any Beneficial Owner or Potential
Beneficial Owner on whose behalf BD submitted an Order so that the number of
shares so purchased or sold by each such Beneficial Owner or Potential
Beneficial Owner on such Auction Date shall be whole shares.
BD shall submit Orders to the Auction Agent in writing in substantially the
form attached hereto as Exhibit A. BD shall submit separate Orders to the
Auction Agent for each Potential Holder or Existing Holder on whose behalf BD is
submitting an Order and shall not net or aggregate the Orders of Potential
Holders or Existing Holders on whose behalf BD is submitting Orders.
BD shall deliver to the Auction Agent (i) a written notice, substantially
in the form attached hereto as Exhibit B, of transfers of AMPS made through BD
by an Existing Holder to another Person other than pursuant to an Auction and
(ii) a written notice, substantially in the form attached hereto as Exhibit C,
of the failure of any AMPS to be transferred to or by any Person that purchased
or sold AMPS through BD pursuant to an Auction. The Auction Agent is not
required to accept any notice delivered pursuant to the terms of the foregoing
sentence with respect to an Auction unless the Auction Agent receives it by 3:30
p.m. on the Business Day preceding such Auction.
Notices.
On each Auction Date, the Auction Agent shall notify BD by telephone or
facsimile (or other electronic means acceptable to both parties) of the results
of the Auction as set forth in paragraph (a) of the Settlement Procedures. By
approximately 11:30 A.M. on the Business Day next succeeding such Auction Date,
the Auction Agent shall notify BD in writing of the disposition of all Orders
submitted by BD in the Auction held on such Auction Date.
BD shall notify each Existing Holder or Potential Holder on whose behalf BD
has submitted an Order as set forth in paragraph (b) of the Settlement
Procedures and take such other action as is required of BD pursuant to the
Settlement Procedures.
Notification of Dividend.
The provisions contained in Section 4 of Part I of the Statement concerning
the notification of a Special Rate Period will be followed by the Auction Agent
and BD, and the provisions contained therein are incorporated herein by
reference in their entirety and shall be deemed to be a part of this Agreement
to the same extent as if such provisions were set forth fully herein.
Service Charge to Be Paid to BD.
No later than 12:00 noon on each Dividend Payment Date, the Auction Agent
after each Auction will pay a service charge from funds provided by the Trust to
each Broker-Dealer on the basis of the purchase price of AMPS placed by such
Broker-Dealer at such Auction. The service charge shall be (i) in the case of
any Auction Date immediately preceding a Rate Period other than a Special Rate
Period, the product of (A) a fraction the numerator of which is the number of
days in such Rate Period (calculated by counting the date of original issue of
such shares to but excluding the next succeeding dividend payment date of such
shares) and the denominator of which is 360, times (B) 1/4 of 1%, times (C)
$25,000 times (D) the sum of the aggregate number of shares of outstanding AMPS
for which the Auction is conducted and (ii) in the case of any Special Rate
Period the amount determined by mutual consent of the Trust and any such
Broker-Dealers and shall be based upon a selling concession that would be
applicable to an underwriting of fixed rate AMPS with a similar final maturity
at the commencement of the Rate Period with respect to such Auction (the
"Broker-Dealer Fee").
If the Trust determines to change the rate at which the Broker-Dealer Fee
accrues, the Trust shall mail to the Auction Agent a notice thereof within two
Business Days of such change. Any change in the Broker-Dealer Fee shall be
effective on the Auction Date next succeeding the Auction Agent's receipt of
notice of such change.
Settlement.
If any Existing Holder selling AMPS in an Auction fails to deliver such
AMPS (by authorized book-entry), the BD of any Person that was to have purchased
AMPS in such Auction may deliver to such Person a number of Shares of AMPS that
is less than the number of Shares of AMPS that otherwise were to be purchased by
such Person. In such event, the number of Shares of AMPS to be so delivered
shall be determined by BD. Delivery of such lesser number of Shares of AMPS
shall constitute good delivery. Upon the occurrence of any such failure to
deliver Shares of AMPS, BD shall deliver to the Auction Agent the notice
required by Section 2.3(f)(ii) hereof. Notwithstanding the foregoing provisions
of this Section 2.7(a), any delivery or non-delivery of AMPS which represents
any departure from the results of an Auction, as determined by the Auction
Agent, shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or non-delivery in accordance with the terms of
Section 2.3(f) hereof. The Auction Agent shall have no duty or liability with
respect to enforcement of this Section 2.7(a).
Neither the Auction Agent nor the Trust shall have any responsibility or
liability with respect to the failure of an Existing Holder, a Potential Holder
or an Agent Member or any of them to deliver AMPS or to pay for AMPS sold or
purchased pursuant to the Auction Procedures or otherwise.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event BD is an Existing Holder with respect
to shares of AMPS and the Auction procedures provide that BD shall be deemed to
have submitted a Sell Order in an Auction with respect to such shares if BD
fails to submit an Order in that Auction with respect to such shares, BD shall
have no liability to any Person for failing to sell such shares pursuant to such
a deemed Sell Order if (i) such shares were transferred by the beneficial owner
thereof without notification of such transfer in compliance with the Auction
Procedures or (ii) BD has indicated to the Auction Agent pursuant to Section
2.2(e) of this Agreement that, according to BD's records, BD is not the Existing
Holder of such shares.
Notwithstanding any provision of the Auction Procedures or the Settlement
Procedures to the contrary, in the event an Existing Holder or Beneficial Owner
of shares 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 therefore, 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.
The Auction Agent.
Duties and Responsibilities.
The Auction Agent is acting solely as agent for the Trust hereunder and
owes no duties, fiduciary or otherwise, to any other Person.
The Auction Agent undertakes to perform such duties and only such duties as
are specifically set forth in this Agreement, and no implied covenants or
obligations shall be read into this Agreement, the Auction Agency Agreement,
Auction Procedures or the Settlement Procedures against the Auction Agent.
In the absence of bad faith or negligence on its part, the Auction Agent
shall 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 this Agreement.
The Auction Agent shall not be liable for any error resulting from the use or
reliance on a source of information used in good faith and without negligence to
make any determination, calculation or declaration hereunder. The Auction Agent
shall not be liable for any error of judgment made in good faith unless the
Auction Agent shall have been negligent in ascertaining or failing to ascertain
the pertinent facts.
The Auction Agent shall not be: (i) required to, and does not, make any
representations or have any responsibilities as to the validity, accuracy, value
or genuineness of any signatures or endorsements, other than its own; (ii)
obligated to take any legal action hereunder that might, in its judgment,
involve any expense or liability, unless it has been furnished with indemnity
satisfactory to the Auction Agent; and (iii) responsible for or liable in any
respect on account of the identity, Trust or rights of any Person (other than
itself and its agents and attorneys) executing or delivering or purporting to
execute or deliver any document under this Agreement or any Broker-Dealer
Agreement.
Rights of the Auction Agent.
The Auction Agent may conclusively rely and shall be fully protected in
acting or refraining from acting upon any communication authorized by this
Agreement and upon any written instruction, notice, request, direction, consent,
report, certificate, share certificate or other instrument, paper or document
believed by it to be genuine. The Auction Agent shall not be liable for acting
upon any communication authorized by this Agreement (including, but not limited
to, any made by telephone, telecopier or other means of electronic communication
acceptable to the parties hereto) which the Auction Agent believes in good faith
to have been given by the Trust or by BD. The Auction Agent may record telephone
communications with BD.
The Auction Agent may consult with counsel of its own choice, and the
advice of such counsel shall be full and complete authorization and protection
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
The Auction Agent shall not be required to advance, expend or risk its own
funds or otherwise incur or become exposed to financial liability in the
performance of its duties hereunder.
The Auction Agent may perform its duties and exercise its rights hereunder
either directly or by or through agents or attorneys and shall not be
responsible for any misconduct or negligence on the part of any agent or
attorney appointed by it with due care.
Auction Agent's Disclaimer. The Auction Agent makes no representation as
to, and shall have no liability with respect to, the correctness of the recitals
in, or the validity, adequacy or accuracy of, this Agreement, the Auction Agency
Agreement, the Auction Procedures, the offering material used in connection with
the offer and sale of the AMPS or any other agreement or instrument executed in
connection with the transactions contemplated herein or in any thereof.
Miscellaneous.
Termination. (b) Any party may terminate this Agreement at any time upon
five (5) days written notice to the other parties, which notice may be given by
facsimile as provided in Section 4.3 hereof. This Agreement shall automatically
terminate upon the redemption of all outstanding AMPS or upon termination of the
Auction Agency Agreement.
BD represents that it (or if BD does not act as Agent Member, one of its
affiliates) shall make all dividend payments on the AMPS available in same-day
funds on each Dividend Payment Date to customers that use BD or affiliate as
Agent Member.
Agent Member. BD is, and shall remain for the term of this Agreement, a
member of, or participant in, the Securities Depository (or an affiliate of such
a member or participant).
Communications. Except for (i) communications authorized to be by telephone
pursuant to this Agreement or the Auction Procedures and (ii) communications in
connection with the Auctions (other than those expressly required to be in
writing), all notices, requests and other communications to any party hereunder
shall be in writing (for the purposes of this Agreement, telecopy or other means
of electronic communication acceptable to the parties shall be deemed to be in
writing) and shall be given to such party, addressed to it, at its address or
facsimile number set forth below and, where appropriate reference the particular
Auction to which such notice relates:
If to BD,
addressed: Merrill Lynch, Pierce Fenner & Smith Incorporated
4 World Financial Center
New York, NY 10080
Attention: Francis Constable, Variable Rate Preferred
Desk
Telephone No.: (212) 449-4941
Facsimile No.: (212) 449-2761
If to the Auction
Agent, addressed: Deutsche Bank Trust Company Americas
Corporate Trust & Agency Services
280 Park Avenue, 9th Floor
New York, NY 10017
Attention: Auction Rate Securities
Telephone No.: (212) 454-4042
Facsimile No.: (212) 454-2030
If to the Trust,
addressed: Federated Premier Municipal Income Fund
Beverly Pirker
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone No: (412) 288-1770
Facsimile No.: (212) 288-6788
With copies to: Stephen A. Keen, General Counsel
Federated Investors, Inc.
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
Telephone No: (412) 288-1567
Facsimile No.: (412) 288-3939
or such other address or facsimile number as such party may hereafter
specify for such purpose by notice to the other parties. Each such notice,
request or communication shall be effective when delivered at the address
specified herein. Communications shall be given on behalf of BD by a BD Officer,
on behalf of the Auction Agent by an Authorized Officer and on behalf of the
Trust by an Authorized Trust Officer. Telephone communications may be recorded.
Entire Agreement. This Agreement contains the entire agreement between the
parties relating to the subject matter hereof, and there are no other
representations, endorsements, promises, agreements or understandings, oral,
written or inferred, between the parties relating to the subject matter hereof.
Benefits. Nothing in this Agreement, express or implied, shall give to any
person, other than the Auction Agent, the Trust and BD and their respective
successors and permitted assigns, any benefit of any legal or equitable right,
remedy or claim under this Agreement.
Amendment; Waiver.
This Agreement shall not be deemed or construed to be modified, amended,
rescinded, cancelled or waived, in whole or in part, except by a written
instrument signed by a duly authorized representative of each of the parties
hereto.
Failure of any party to this Agreement to exercise any right or remedy
hereunder in the event of a breach of this Agreement by any other party shall
not constitute a waiver of any such right or remedy with respect to any
subsequent breach.
Successors and Assigns. This Agreement shall be binding upon, inure to the
benefit of, and be enforceable by, the respective successors and permitted
assigns of each of the parties hereto. This Agreement may not be assigned by any
party hereto absent the prior written consent of the other parties.
Severability. If any clause, provision or section of this Agreement shall
be ruled invalid or unenforceable by any court of competent jurisdiction, the
invalidity or unenforceability of such clause, provision or section shall not
affect any remaining clause, provision or section hereof.
Execution in Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY
PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW, OTHER THAN SECTION 5-1401 OF
THE GENERAL OBLIGATIONS LAW OF NEW YORK).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their proper and duly authorized officers as of
the date first above written.
DEUTSCHE BANK TRUST COMPANY AMERICAS
as Auction Agent
By:
Name:
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
as Broker-Dealer
By:
Name:
Title:
A-2
Exhibit A
To BROKER-DEALER
AGREEMENT
AUCTION BID FORM
(Submit only one Order on this Order Form)
FEDERATED PREMIER MUNICIPAL INCOME FUND
Auction Market Preferred Shares ("AMPS")
To: Deutsche Bank Trust Company Americas Date of Auction
280 Park Avenue, 9th Floor ____________
New York, NY 10017 Series of AMPS (Series
Attn: Auction Rate Securities A)
Facsimile No. (212) 454-2030
The undersigned Broker-Dealer submits the following Order on behalf of the
Bidder listed below:
Name of Bidder:
Bidder placed the Order listed below covering the number of shares indicated
(complete only one blank):
number of Shares of AMPS now held by
Bidder (an Existing Holder), and the Order is a (check one):
|_| Hold Order; or
|_| Bid at a rate of ____%; or
|_| Sell Order;
- or -
number of Shares of AMPS not now held
by Bidder (a Potential Holder), and the Order is
a Bid at a rate of ______%
Notes:
(1) If submitting more than one Bid for one Bidder, use additional Order Forms.
(2) If one or more Bids covering in the aggregate more than the outstanding
number of Shares of AMPS held by any Existing Holder are submitted, such
Bids shall be considered valid in the order of priority set forth in the
Auction Procedures.
(3) A Hold or Sell Order may be placed only by an Existing Holder covering a
number of Shares of AMPS not greater than the number of Shares of AMPS
currently held by such Existing Holder.
(4) Potential Holders may make Bids only, each of which must specify a rate. If
more than one Bid is submitted on behalf of any Potential Holder, each Bid
submitted shall be a separate Bid with the rate specified.
(5) Bids may contain no more than three figures to the right of the decimal
point (.001 of 1%).
(6) An Order must be submitted in whole Shares of AMPS with an aggregate
liquidation preference of $25,000.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By:
B-20
Exhibit B
To BROKER-DEALER
AGREEMENT
(To be used only for transfers made other than
pursuant to an Auction)
TRANSFER FORM
FEDERATED PREMIER MUNICIPAL INCOME FUND
Auction Market Preferred Shares ("AMPS")
Series A AMPS
(indicate by Number Designation)
We are (check one):
|_| the Existing Holder named below; or
|_| the Broker-Dealer for such Existing Holder; or
|_| the Agent Member for such Existing Holder.
We hereby notify you that such Existing Holder will transfer ___ Shares of
AMPS to ____________________ and represent that such transfer complies with the
requirements of the Agreement and Declaration of Trust of FEDERATED PREMIER
MUNICIPAL INCOME FUND, the Statement of Preferences of Auction Market Preferred
Shares and applicable federal and state law. Upon the request of the Trust or
the Auction Agent the undersigned will provide such documentation as shall be
reasonably requested to demonstrate such compliance as a condition of the
registration of such transfer.
(Name of Existing Holder)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Name of Broker-Dealer)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(Name of Agent Member)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
By: _______________________________
Name:
Title:
-----------------------------------------
Exhibit C
To BROKER-DEALER
AGREEMENT
(To be used only for failures to deliver
AMPS sold pursuant to an Auction)
NOTICE OF A FAILURE TO DELIVER
FEDERATED PREMIER MUNICIPAL INCOME FUND
Auction Market Preferred Shares ("AMPS")
Series A AMPS
(indicate by Number Designation)
Complete either I. or II.
I. We are a Broker-Dealer for ______________ (the "Purchaser"), which
purchased ____ Shares of AMPS in the Auction held on __________________
from the seller of such AMPS.
II. We are a Broker-Dealer for _____________ (the "Seller"), which sold ____
Shares of AMPS in the Auction held on ____________________ to the purchaser
of such AMPS.
We hereby notify you that (check one):
__________ the Seller failed to deliver such AMPS to the Purchaser; or
__________ the Purchaser failed to make payment to the Seller upon delivery of
such AMPS.
Name: ________________________________
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
By:
____________________________________
Printed Name:
Title:
-----------------------------------------
Exhibit (k)(v) under Form N-2
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT made as of the [____] of February, 2003 by and
between Federated Premier Municipal Income Fund, a Delaware statutory trust (the
"Fund") and Federated Investment Management Company, a Delaware statutory trust
(the "Adviser").
WHEREAS, the Fund has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement") on
Form N-2 pursuant to the Securities Act of 1933, as amended (the "1933 Act')
(File No. 333-102033) and the Investment Company Act of 1940, as amended (the
"1940 Act") (File No. 811-21235) pursuant to which the Fund proposes to sell to
the public an aggregate of [__________] shares of the Fund's Municipal Auction
Market Preferred Shares through several underwriters led by [______________] and
others (collectively, the "Underwriters") in connection with an offering
pursuant to a purchase agreement (the "Purchase Agreement") to be entered into
by the Fund, the Adviser and the Underwriters.
WHEREAS, the Purchase Agreement contains certain provisions with respect to
the obligations and liabilities between the Fund and the Adviser on the one hand
and the Underwriters on the other.
WHEREAS, the Underwriters require the Fund and the Adviser to agree to
jointly and
severally indemnify the Underwriters for certain liabilities.
WHEREAS, the Fund and the Adviser desire to set forth their understanding
and agreement concerning certain liabilities arising out of their obligations to
the Underwriters under the Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
The Adviser agrees to indemnify and hold harmless the Fund, its trustees
and each of the Fund's officers who signed the Registration Statement, against
any and all loss, liability, claim, damage and expense described in the
indemnity contained in Section6(a) of the Purchase Agreement, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Registration Statement (or any amendment
thereto), including the Rule 430A Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the Fund
by the Adviser expressly for use in the Registration Statement (or any amendment
thereto) or such preliminary prospectus or the Prospectus (or any amendment or
supplement thereto).
An indemnified party shall give notice as promptly as reasonably
practicable to the Adviser of any action commenced against it in respect of
which indemnity may be sought hereunder, but failure to so notify shall not
relieve the Adviser from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this
Indemnification Agreement. In respect of any such proceeding, counsel shall be
selected by the Fund. The Adviser may participate at its own expense in the
defense of any such action; provided, however, that counsel to the Adviser shall
not (except with the consent of the Fund) also be counsel to the Fund. In no
event shall the Adviser be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from its own counsel in connection
with any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Without the prior written consent of an indemnified party, the Adviser shall not
settle or compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification could be sought under this Indemnification Agreement (whether or
not the indemnified party is an actual or potential party thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of the
indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of the
indemnified party.
If at any time an indemnified party shall have requested the Adviser to
reimburse an indemnified party for fees and expenses of counsel, the Adviser
agrees that it shall be liable for any settlement effected without its written
consent if (i) such settlement is entered into more than 45 days after receipt
by the Adviser of the aforesaid request, (ii) the Adviser shall have received
notice of the terms of such settlement at least 30 days prior to such settlement
being entered into and (iii) the Adviser shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement.
Any notice, claim or demand hereunder shall be made in writing and if
required to be given to an indemnified party shall be sufficient if given as
provided in the Purchase Agreement for notices to the Fund and any notice, claim
or demand hereunder to be given to the Adviser shall be made in writing and
likewise shall be sufficient if given as provided in the Purchase Agreement.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, executors, administrators, successors
and assigns.
This Agreement shall be governed by the laws of the State of New York
without regard to such jurisdiction's conflicts of laws principles.
This Agreement may be executed by one or more parties hereto in any number
of counterparts, each of which shall be deemed to be an original, but all of
which shall be deemed to be one and the same instrument.
Except as otherwise specifically defined herein, all capitalized terms used
in this Agreement shall have the meanings assigned such terms in the Purchase
Agreement.
IN WITNESS WHEREOF, the parties below have caused the foregoing to be
executed on their behalf this [____] day of February, 2003.
FEDERATED PREMIER MUNCIPAL INCOME FUND
By: _______________________________
Name:
Title:
FEDERATED INVESTMENT MANAGEMENT COMPANY
By: _______________________________
Name:
Title:
Exhibit (l) under Form N-2
February 10, 2003
Federated Premier Municipal Income Fund
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237
Ladies and Gentlemen:
We have acted as special counsel for Federated Premier Municipal Income
Fund, a Delaware statutory trust (the "Fund"), in connection with the
registration under the Securities Act of 1933 (the "Act") of certain of its
Auction Market Preferred Shares of beneficial interest (the "Shares") in
registration statement no. 333-102033 on Form N-2 as amended by pre-effective
amendment no. 1, as proposed to be amended by pre-effective amendment no. 2 and
as may be further amended (as amended and as proposed to be amended, the
"Registration Statement").
In this connection we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate and other
records, certificates and other papers as we deemed it necessary to examine for
the purpose of this opinion, including (i) the amended and restated agreement
and declaration of trust and the statement of preferences of the Shares adopted
pursuant to Section 6.2 thereof (the "Statement of Preferences"), (ii) the
by-laws of the Fund, (iii) actions of the board of trustees of the Fund (the
"Board of Trustees") authorizing the issuance of the Shares and (iv) the
Registration Statement.
We assume that, upon sale of the Shares, the Fund will receive the
authorized consideration therefor, as determined by the Board of Trustees and
described in the
Statement of Preferences.
Based upon the foregoing, we are of the opinion that the Fund is authorized
to issue the Shares, and that, when the Shares are issued and sold after the
Registration Statement has been declared effective and the authorized
consideration therefor is received by the Fund, they will be validly issued,
fully paid and nonassessable by the Fund.
We consent to the filing of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not admit that we are in the category
of persons whose consent is required under section 7 of the Act.
Very truly yours,
/s/ Dickstein Shapiro Morin & Oshinsky LLP
Exhibit (n) under Form N-2
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "Independent
Auditors" and "Experts" in the Statement of Additional Information and to the
inclusion of our report on the seed money balance sheet dated December 16, 2002
in Pre-effective Amendment Number 2 to the Registration Statement (Form N-2, No.
333-102033) of Federated Premier Municipal Income Fund.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 7, 2003
PART C. OTHER INFORMATION.
Item 24. Exhibits:
(a) (i) Copy of Amended and Restated Declaration of Trust of
the Registrant; (3)
(ii)Conformed copy of Amended and Restated Certificate of
Trust of the Registrant; (4)
(iii) Copy of Statement of Preferences of the Registrant
(incorporated by reference to Appendix A of Registrant's
Statement of Additional Information;
(b) Copy of Amended and Restated By-Laws of the Registrant;
(3)
(c) Not applicable;
(d) Form of Stock Certificate of the Registrant; (3)
(i) Form of Preferred Shares certificate of the Registrant;
+
(e) Copy of Registrant's dividend reinvestment plan; (3)
(f) Not applicable;
(g) Conformed copy of Investment Management Agreement of
the Registrant; (3)
____________________________________________________________
+ All exhibits are being filed electronically.
3. Response is incorporated to Registrant's Pre-Effective Amendment No. 3 to
its Registration Statement filed on Form N-2 on December 17, 2002 (File
Nos. 333-100605 and 811-21235).
4. Response is incorporated to Registrant's Pre-Effective Amendment No. 4 to
its Registration Statement filed on Form N-2 on December 19, 2002 (File
Nos. 333-100605 and 811-21235).
(h) Conformed Copy of Master Agreement Among Underwriters; (3)
(i)Form of Purchase Agreement (Common Shares); (3)
(ii)Form of Standard Dealer Agreement of Merrill
Lynch and Co.; (3)
(iii)Form of Additional Compensation Agreement; (3)
(iv)Form of Purchase Agreement (Preferred Shares); +
(i) Not applicable;
(j) Conformed copy of custodian agreement; (3)
(i)Copy of Global Custody Fee Schedule; (3)
(ii) Copy of Addendum to Global Custody Fee
Schedule; (3)
(iii) Copy of Portfolio Recordkeeping Fee Schedule; (3)
(iv) Copy of Domestic Custody Fee Schedule; (3)
(k) Conformed copy of Amended and Restated Agreement for Fund Accounting
Services, Administrative Services, Transfer Agency Services and Custody
Services Procurement; (3)
(i)Form of Indemnification Agreement
(Common Shares) between the Registrant and the Adviser; (3)
(ii)Form of Transfer Agency Agreement of the Registrant; (4)
(iii)Form of Auction Agency Agreement; +
(iv)Form of Broker/Dealer Agreement; +
(v)Form of Indemnification Agreement (Preferred Shares) between the
Registrant and the Adviser; +
(l) Conformed copy of Opinion and Consent of Counsel as to legality of
shares being registered; +
(m) Not applicable;
(n) Conformed copy of Consent of Independent Auditors; +
(o) Not applicable;
(p) Form of Letter Agreement between the Registrant and the Adviser to
Purchase Shares; (4)
(q) Not applicable;
(r) The Registrant hereby incorporates the conformed copy of the Code of Ethics
for Access Persons from Item 23(p) of the Federated Managed Allocation
Portfolios Registration Statement on Form N-1A filed with the Commission on
January 25, 2001. (File Nos. 33-51247 and 811-7129).
(s) Conformed copy of the Power of Attorney of the Registrant. (3)
Item 25. Marketing Arrangements
Reference is made to the Master Agreement Among Underwriters filed as exhibit
(h) to Pre-Effective Amendment No. 3 on December 17, 2002.
________________________________________________________
+ All exhibits are being filed electronically.
3. Response is incorporated to Registrant's Pre-Effective Amendment No. 3 to
its Registration Statement filed on Form N-2 on December 17, 2002 (File
Nos. 333-100605 and 811-21235).
4. Response is incorporated to Registrant's Pre-Effective Amendment No. 4 to
its Registration Statement filed on Form N-2 on December 19, 2002 (File
Nos. 333-100605 and 811-21235).
Item 26. Other Expenses of Issuance and Distribution*
Registration Fee: $4,938.10
Rating Fees: $65,000.00
Printing: $5,000.00
Legal fees and expenses: $110,000.00
*Estimated
Item 27. Persons Controlled by or Under Common Control with the Fund:
None
Item 28. Number of Holders of Securities
As of February 3, 2003, set forth below is information concerning
record holders of the Fund's securities:
Title of Class Number of Record Holders
Common Shares ______
AMPS 0
Item 29. Indemnification:
Indemnification is provided to Officers and Trustees of the Registrant
pursuant to Article V of Registrant's Declaration of Trust. The
Investment Management Agreement between the Registrant and Federated
Investment Management Company ("Adviser") provides that, in the
absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties under the Investment
Management Agreement on the part of Adviser, Adviser shall not be
liable to the Registrant or to any shareholder for any act or omission
in the course of or connected in any way with rendering services or
for any losses that may be sustained in the purchase, holding, or sale
of any security. Registrant's Trustees and Officers are covered by an
Investment Trust Errors and Omissions Policy. The Purchase Agreement
between the Registrant, the Adviser and the Underwriters named therein
provides for indemnification of the Underwriters by the Registrant and
the Adviser and of the Registrant and the Adviser and their officers
and trustees for certain liabilities and also provides for
contribution under certain circumstances. The Indemnification
Agreement between the Registrant and the Adviser provides for
indemnification of the Registrant and its officers and trustees for
certain liabilities.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, Officers, and
controlling persons of the Registrant by the Registrant pursuant to
the Declaration of Trust or otherwise, the Registrant is aware that in
the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and,
therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by Trustees), Officers, or
controlling persons of the Registrant in connection with the
successful defense of any act, suit, or proceeding) is asserted by
such Trustees, Officers, or controlling persons in connection with the
shares being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issues.
Insofar as indemnification for liabilities may be permitted pursuant
to Section 17 of the Investment Company Act of 1940 for Trustees,
Officers, and controlling persons of the Registrant by the Registrant
pursuant to the Declaration of Trust or otherwise, the Registrant is
aware of the position of the Securities and Exchange Commission as set
forth in Investment Company Act Release No. IC-11330. Therefore, the
Registrant undertakes that in addition to complying with the
applicable provisions of the Declaration of Trust or otherwise, in the
absence of a final decision on the merits by a court or other body
before which the proceeding was brought, that an indemnification
payment will not be made unless in the absence of such a decision, a
reasonable determination based upon factual review has been made (i)
by a majority vote of a quorum of non-party Trustees who are not
interested persons of the Registrant or (ii) by independent legal
counsel in a written opinion that the indemnitee was not liable for an
act of willful misfeasance, bad faith, gross negligence, or reckless
disregard of duties. The Registrant further undertakes that
advancement of expenses incurred in the defense of a proceeding (upon
undertaking for repayment unless it is ultimately determined that
indemnification is appropriate) against an Officer, Trustee or
controlling person of the Registrant will not be made absent the
fulfillment of at least one of the following conditions: (i) the
indemnitee provides security for his undertaking; (ii) the Registrant
is insured against losses arising by reason of any lawful advances; or
(iii) a majority of a quorum of disinterested non-party Trustees or
independent legal counsel in a written opinion makes a factual
determination that there is reason to believe the indemnitee will be
entitled to indemnification.
Item 30. Business and Other Connections of Investment Adviser:
For a description of the other business of the investment adviser, see
the section entitled "Management of the Fund" in Part A. The
affiliations with the Registrant of four of the Trustees and one of
the Officers of the investment adviser are included in Part B of this
Registration Statement under "Management of the Fund." The remaining
Trustees of the investment adviser and, in parentheses, their
principal occupations are: Thomas R. Donahue, (Chief Financial
Officer, Federated Investors, Inc.), 1001 Liberty Avenue, Pittsburgh,
PA, 15222-3779 and Mark D. Olson (a principal of the firm, Mark D.
Olson & Company, L.L.C. and Partner, Wilson, Halbrook & Bayard, P.A.),
800 Delaware Avenue, P.O. Box 2305, Wilmington, DE 19899-2305.
The remaining Officers of the investment adviser are:
Vice Chairman: J. Thomas Madden
President/ Chief Executive
Officer: Keith M. Schappert
Executive Vice Presidents:
Stephen F. Auth
William D. Dawson, III
Senior Vice Presidents:
Joseph M. Balestrino
David A. Briggs
Jonathan C. Conley
Christopher F. Corapi
Deborah A. Cunningham
Linda A. Duessel
Mark E. Durbiano
James E. Grefenstette
Robert M. Kowit
Jeffrey A. Kozemchak
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Frank Semack
Richard Tito
Peter Vutz
Vice Presidents:
Todd A. Abraham
J. Scott Albrecht
Randall S. Bauer
Nancy J.Belz
G. Andrew Bonnewell
David M. Bruns
Robert E. Cauley
Regina Chi
Ross M. Cohen
Fred B. Crutchfield
Lee R. Cunningham, II
Alexandre de Bethmann
Anthony Delserone, Jr.
Donald T. Ellenberger
Eamonn G. Folan
Kathleen M. Foody-Malus
Thomas M. Franks
John T. Gentry
David P. Gilmore
Marc Halperin
John W. Harris
Patricia L. Heagy
Susan R. Hill
Nikola A. Ivanov
William R. Jamison
Constantine J. Kartsonas
Nathan H. Kehm
John C. Kerber
Steven Lehman
Marian R. Marinack
Natalie F. Metz
Thomas J. Mitchell
Joseph M. Natoli
John L. Nichol
Mary Kay Pavuk
Jeffrey A. Petro
John P. Quartarolo
Ihab L. Salib
Roberto Sanchez-Dahl, Sr.
Aash M. Shah
John Sidawi
Michael W. Sirianni, Jr.
Christopher Smith
Timothy G. Trebilcock
Leonardo A. Vila
Paige M. Wilhelm
Richard M. Winkowski, Jr.
Lori A. Wolff
George B. Wright
Assistant Vice Presidents:
Catherine A. Arendas
Angela A. Auchey
Nicholas P. Besh
Hanan Callas
David W. Cook
James R. Crea, Jr.
Karol M. Crummie
David Dao
Richard J. Gallo
James Grant
Anthony Han
Kathryn P. Heagy
Carol B. Kayworth
J. Andrew Kirschler
Robert P. Kozlowski
Ted T. Lietz, Sr.
Monica Lugani
Tracey L. Lusk
Theresa K. Miller
Bob Nolte
Rae Ann Rice
Jennifer G. Setzenfand
Diane R. Startari
Kyle D. Stewart
Mary Ellen Tesla
Michael R. Tucker
Steven J. Wagner
Mark Weiss
Secretary: G. Andrew Bonnewell
Treasurer: Thomas R. Donahue
Assistant Secretaries:
Jay S. Neuman
Leslie K. Ross
Assistant Treasurer: Denis McAuley, III
The business address of each of the Officers of the investment adviser is
Federated Investors Tower, 1001 Liberty Avenue, Pittsburgh, Pennsylvania
15222-3779. These individuals are also officers of a majority of the investment
advisers to the investment companies in the Federated Fund Complex described in
Part B of this Registration Statement.
Item 31. Location of Accounts and Records:
All accounts and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated
thereunder are maintained at one of the following locations:
Registrant Reed Smith LLP
Investment and Asset Management Group
(IAMG)
Federated Investors Tower
12th Floor
1001 Liberty Avenue
Pittsburgh, PA 15222-3779
(Notices should be sent to the
Agent for Service at above
address)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, PA 15237-7000
EquiServe Trust Co., N.A. P.O. Box 43011
("Transfer Agent and Dividend Providence, RI 02940-3011
Disbursing Agent")
Federated Services Federated Investors Tower
Company 1001 Liberty Avenue
("Administrator") Pittsburgh, PA 15222-3779
Federated Investment Federated Investors Tower
Management Company 1001 Liberty Avenue
("Adviser") Pittsburgh, PA 15222-3779
State Street Bank and P.O. Box 8600
Trust Company Boston, MA 02266-8600
("Custodian")
Item 32. Management Services: Not applicable.
Item 33. Undertakings:
The Registrant undertakes to suspend the offering of shares until the
prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value declines more than ten percent from
its net asset value as of the effective date of the registration statement.
The Registrant undertakes that:
(a) for purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) for the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, the Registrant's Statement of Additional
Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FEDERATED PREMIER MUNICIPAL
INCOME FUND, has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of Pittsburgh
and Commonwealth of Pennsylvania, on the 10th day of February, 2003.
FEDERATED PREMIER MUNICIPAL INCOME FUND
BY: /s/ Leslie K. Ross
Leslie K. Ross, Assistant Secretary
Attorney in Fact for John F. Donahue
February 10, 2003
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacity and on the date indicated:
NAME TITLE DATE
By: /s/ Leslie K. Ross Attorney In Fact February 10, 2003
Leslie K. Ross For the Persons
ASSISTANT SECRETARY Listed Below
NAME TITLE
John F. Donahue* Chairman and Trustee
J. Christopher Donahue* President and Trustee
(Principal Executive Officer)
Richard J. Thomas* Treasurer
(Principal Financial Officer)
William D. Dawson, III* Chief Investment Officer
Thomas G. Bigley* Trustee
John T. Conroy, Jr.* Trustee
Nicholas P. Constantakis* Trustee
John F. Cunningham* Trustee
Lawrence D. Ellis, M.D.* Trustee
Peter E. Madden* Trustee
Charles F. Mansfield, Jr.* Trustee
John E. Murray, Jr.* Trustee
Marjorie P. Smuts* Trustee
John S. Walsh* Trustee
*by power of attorney