As filed with the Securities and Exchange Commission on October 17, 2002
1933 Act File No. _______
1940 Act File No. _______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No. ....................
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Post-Effective Amendment No. ....................
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. .....................................
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FEDERATED MUNICIPAL INCOME FUND
(Exact Name of Registrant as Specified in Charter)
Federated Investors Funds
5800 Corporate Drive
Pittsburgh, Pennsylvania 15237-7000
(Address of Principal Executive Offices)
(412) 288-1900
(Registrant's Telephone Number)
Leslie K. Ross, Esquire
Reed Smith LLP
Federated Investors Tower
1001 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3779
(Name and Address of Agent for Service)
(Notices should be sent to the Agent for Service)
Copies to:
Matthew G. Maloney, Esquire
Dickstein, Shapiro & Morin, L.L.P.
2101 L Street, N.W.
Washington, D.C. 20037
Approximate Date of Proposed Public Offering: As soon as possible after
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the effectiveness of the Registration Statement.
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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
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Being Price Per Unit Price
Registered
Common stock 4,000,000 $15/share $60,000,000
shares
Amount of Registration Fee
$5,520
CROSS-REFERENCE SHEET
PARTS A AND B
ITEM NO. CAPTION LOCATION IN PROSPECTUS
1. Outside Front Cover Page Outside Front Cover Page
2. Inside Front and Outside Back Inside Front and Outside Back
3. Fee Table and Synopsis Summary of Fund Expenses
4. Financial Highlights Not Applicable
5. Plan of Distribution Outside Front Cover Page
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Outside Front Cover Page
Registrant
9. Management Management of the Fund
10. Capital Stock, Long-Term Debt Shares of Beneficial Interests
and Other Securities
11. Defaults and Arrears on Senior Not Applicable
Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of SAI Table of Contents (SAI)
14. Cover Page of SAI Cover Page (SAI)
15. Table of Contents of SAI Table of Contents (SAI)
16. General Information and Appendix A (SAI)
History
17. Investment Objective and Additional Investment
Policies
Policies
18. Management Trustees and Officers (SAI);
Advisory and Other Services
19. Control Persons and Principal Not Applicable
Holders of Securities
20. Investment Adisory and Other Investment Advisory and Other
Services (SAI)
Services
21. Brokerage Allocation and Other Brokerage Commissions (SAI)
Practices
22. Tax Status Not Applicable
23. Financial Statements Financial Statements (SAI)
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and is not soliciting an offer to
buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated October 16, 2002
[Logo]
PROSPECTUS
[4,000,000] SHARES
Federated Municipal Income Fund
Common Shares
$15.00 Per Share
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Investment Objective. Federated Municipal Income Fund (the "Fund")
is a newly organized, diversified, closed-end management investment
company. The Fund's investment objective is to provide current income
exempt from federal income tax, including alternative minimum tax
("AMT"). The Fund cannot assure you that it will achieve its investment
objective.
Investment Portfolio. The Fund will invest primarily in securities
that, in the opinion of bond counsel to the issuer, or on the basis of
another authority believed by Federated Investment Management Company (the
Fund's investment adviser) to be reliable, pay interest exempt from
federal income tax, including AMT. The Fund normally invests
substantially all (at least 90%) of its total assets in tax exempt
securities. The Fund will invest at least 80% of its total assets in
investment grade tax exempt securities. The Fund may invest up to 20% of
its total assets in tax exempt securities of below investment grade
quality. 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." The Fund intends to invest primarily
in long-term tax exempt securities and expects to have a dollar weighted
average portfolio maturity of 15 to 30 years.
No Prior History. Because the Fund is newly organized, its common
shares ("Common Shares") have no history of public trading. Shares of
closed-end investment companies frequently trade at a discount from their
net asset values ("NAV") and investors may lose money by purchasing Common
Shares in the initial public offering. This risk may be greater for
investors expecting to sell their Common Shares in a relatively short
period after completion of the public offering. The Fund intends to file
an application to list its Common Shares on the New York Stock Exchange
under the symbol ["XXX"].
Preferred Shares and Leverage. The Fund intends to use leverage by
issuing shares of preferred stock ("Preferred Shares") representing
approximately 38% of the Fund's capital immediately after their issuance.
The Fund also may add leverage to the portfolio by using inverse floaters
and derivative contracts. By using leverage, the Fund will seek to obtain
higher dividends for holders of Common Shares ("Common Shareholders") than
if the Fund did not use leverage. Leveraging is a speculative technique
and there are special risks involved. There can be no assurance that a
leveraging strategy will be used or that it will be successful during any
period in which it is employed. See "Preferred Shares and Leverage,"
"Risks-Leverage Risk" and "Risks-Derivatives Risk."
Investing in Common Shares involves certain risks. See "Risks" on
page [xx] of this prospectus.
Per Share Total
Public offering price $15.00 $
Sales load $0.675 $
Estimated offering
expenses $0.03 $
Proceeds to the Fund $14.295 $
In addition to the sales load, the Fund will pay organizational and
offering expenses of up to $0.03 per Common Share, estimated to total
[$XXX,XXX], which will reduce the "Proceeds to the Fund" (above).
Federated Investment Management Company has agreed to pay the amount by
which the aggregate of all the Fund's organizational expenses and all
offering costs (other than the Sales Load) exceeds $0.03 per Common Share.
The underwriters may purchase up to [XXX] additional Common Shares
at the public offering price, less the sales load, within 45 days from the
date of this prospectus to cover over-allotments.
The Securities and Exchange Commission ("SEC") has not approved or
disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The underwriters expect to deliver Common Shares to purchasers on or
about December 23, 2002.
[NAMES OF UNDERWRITERS]
The date of this prospectus is , 2002
You should read this prospectus, which contains important
information about the Fund, before deciding whether to invest in Common
Shares and retain it for future reference. A Statement of Additional
Information, dated [XXX], 2002, containing additional information about
the Fund, has been filed with the SEC and is incorporated by reference in
its entirety into this prospectus. You may request a free copy of the
Statement of Additional Information, the table of contents of which is on
page [XX] of this prospectus, by calling 1-800-341-7400 or by writing to
the Fund, or obtain a copy (and other information regarding the Fund) from
the SEC's web site (http://www.sec.gov).
The Fund's Common Shares are not deposits or obligation of any bank,
are not endorsed or guaranteed by any bank and are not insured or
guaranteed by the U.S. government, the Federal Reserve Board or any other
government agency.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.....................................................5
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SUMMARY OF FUND EXPENSES..............................................15
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THE FUND..............................................................17
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USE OF PROCEEDS.......................................................17
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THE FUND'S INVESTMENTS................................................17
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PREFERRED SHARES AND LEVERAGE.........................................22
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RISKS.................................................................25
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HOW THE FUND MANAGES RISK.............................................29
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MANAGEMENT OF THE FUND................................................32
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NET ASSET VALUE.......................................................34
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DISTRIBUTIONS.........................................................34
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DIVIDEND REINVESTMENT PLAN............................................35
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DESCRIPTION OF SHARES.................................................37
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CERTAIN PROVISIONS IN THE AGREEMENT AND...............................40
---------------------------------------
DECLARATION OF TRUST..................................................40
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CLOSED-END FUND STRUCTURE.............................................42
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REPURCHASE OF COMMON SHARES...........................................43
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TAX MATTERS...........................................................44
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UNDERWRITING..........................................................46
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CUSTODIAN AND TRANSFER AGENT..........................................48
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LEGAL OPINIONS........................................................48
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TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION.........49
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You should rely only on the information contained or incorporated by
reference in this prospectus. Neither the Fund nor the underwriters have
authorized anyone to provide you with different information. Neither the
Fund nor the underwriters are making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in this prospectus is accurate as of any other date
than the date on the front of this prospectus.
Until, [MONTH DAY,] 2002 (25 days after the date of this
prospectus), all dealers that buy, sell or trade the Common Shares,
whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in Common Shares.
You should review the more detailed information contained in this
prospectus and in the Statement of Additional Information.
THE FUND..........................Federated Municipal Income Fund is a
newly organized, diversified,
closed-end management investment
company. See "The Fund."
THE OFFERING......................The Fund is offering [4,000,000]
Common Shares, with a par value of
$0.01 per Common Share, at $15.00
per Share, through a group of
underwriters (the "Underwriters")
led by [XXX]. You must purchase at
least 100 Common Shares. The Fund
has given the Underwriters an option
to purchase up to [XXX] additional
Common Shares to cover orders in
excess of [XXX] Common Shares. The
Adviser has agreed to pay
organizational expenses and offering
costs (other than the sales load)
that exceed $0.03 per Common Share].
See "Underwriting."
INVESTMENT OBJECTIVE............ The Fund's investment objective is
to provide current income exempt
from federal income tax, including
AMT.
INVESTMENT POLICIES............... The Fund will invest primarily in
securities that, in the opinion of
bond counsel to the issuer, or on
the basis of another authority
believed by 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
"Investment Ratings." The Fund may
invest up to 20% of its total assets
in tax exempt securities of below
investment grade quality. Tax
exempt securities of below
investment grade quality are
regarded as having predominately
speculative characteristics with
respect to the issuer's capacity to
pay interest and repay principal and
are commonly referred to as "junk
bonds." See "Investment Ratings."
The Fund intends to invest primarily
in long-term bonds and expects to
have a dollar weighted average
portfolio maturity of 15 to 30
years. See "The Fund's Investments."
The Fund may use inverse floaters
and derivative contracts to add
leverage to the portfolio or for
investment or risk management
purposes. See "Risks-Leverage Risk"
and "Risks-Derivatives Risk."
SPECIAL TAX Distributions of any capital gain or
CONSIDERATIONS................... other taxable income will be taxable
to shareholders. In addition,
dividends paid on Common Shares and
Preferred Shares may be subject to
state and local taxes. The Fund
will allocate dividends paid as
exempt interest dividends, capital
gain dividends and ordinary taxable
dividends between Common
Shareholders and Preferred
Shareholders in proportion to the
total dividends paid to each such
class of shares. See "Tax Matters."
PROPOSED OFFERING OF PREFERRED Approximately one to three months
SHARES AND OTHER FORMS OF after completion of this offering of
LEVERAGE..........................Common Shares, the Fund intends to
offer Preferred Shares that will
represent approximately 38% of the
Fund's capital immediately after
their issuance. For purposes of
this prospectus, the Fund's capital
means the total assets of the Fund
less all liabilities and
indebtedness not representing
Preferred Shares or other senior
securities. The issuance of
Preferred Shares will leverage
Common Shares. Leverage involves
special risks. There is no
assurance that the Fund will issue
Preferred Shares or that, if issued,
the Fund's leveraging strategy will
be successful. See "Risks-Leverage
Risk."
The money that the Fund obtains by
selling Preferred Shares will be
invested in accordance with the
Fund's investment objective and
policies, primarily in long-term tax
exempt securities that generally
will pay fixed rates of interest
over the life of the securities.
The Preferred Shares will pay
dividends based on short-term
interest rates, which will reset
frequently. If the yield, after the
payment of applicable Fund expenses,
on the long-term tax exempt
securities and other instruments
purchased by the Fund, is greater
than the Preferred Share dividend
rate as reset periodically, the
investment of the proceeds of the
Preferred Shares will generate more
income than will be needed to pay
dividends on the Preferred Shares.
If so, the excess income may be used
to pay higher dividends to Common
Shareholders.
The Fund also may add leverage to
the portfolio by using inverse
floaters and derivative contracts.
The Fund cannot assure you that the
issuance of Preferred Shares or the
use of other forms of leverage will
result in a higher yield on the
Common Shares. Once Preferred
Shares are issued or other forms of
leverage are used, the NAV and
market price of Common Shares and
the yield to Common Shareholders
will be more volatile. See
"Preferred Shares and Leverage,"
"Description of Shares-Preferred
Shares" "Risks-Leverage Risk," and
"Risks-Derivative Risk."
INVESTMENT ADVISER............. Federated Investment Management
Company (the "Adviser") will be the
Fund's investment adviser. The
Adviser will receive an annual fee,
payable monthly, in a maximum amount
equal to 0.55% of the average weekly
value of the Fund's Managed Assets.
"Managed Assets" means the total
assets of the Fund (including assets
attributable to any Preferred Shares
or borrowings that may be
outstanding) minus the sum of
accrued liabilities (other than debt
representing financial leverage).
The liquidation preference of the
Preferred Shares is not a
liability. The Adviser has
voluntarily 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 weekly values 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). See "Management of the Fund."
DISTRIBUTIONS..................... The Fund intends to distribute
monthly all or a portion of its net
investment income to Common
Shareholders (after it pays accrued
dividends on any Preferred Shares of
the Fund that may be outstanding).
It is expected that the initial
monthly dividend on Common Shares
will be declared approximately 45
days after completion of this
offering and that the initial
monthly dividend will be paid
approximately 60 to 90 days after
completion of this offering. Unless
an election is made to receive
dividends in cash, Common
Shareholders will automatically have
all dividends and distributions
reinvested in Common Shares through
the receipt of additional unissued
but authorized Common Shares from
the Fund or by purchasing Common
Shares in the open market through
the Fund's Dividend Reinvestment
Plan. See "Dividend Reinvestment
Plan."
The Fund will distribute to Common
Shareholders monthly dividends of
all or a portion of its tax exempt
interest income after payment of
dividends on any Preferred Shares of
the Fund that may be outstanding. If
the Fund realizes a capital gain or
other taxable income, it will be
required to allocate such income
between Common Shares and Preferred
Shares in proportion to the total
dividends paid to each class for the
year in which or with respect to
which the income is paid. The Fund
will distribute capital gains, if
any, annually. See "Distributions"
and "Preferred Shares and Leverage."
LISTING.......................................The Fund intends to file an
application to list its Common
Shares on the New York Stock
Exchange under the symbol ["XXX"].
See "Description of Shares-Common
Shares."
CUSTODIAN AND TRANSFER State Street Bank and Trust Company
AGENT.............................will serve as the Fund's Custodian
and EquiServe Trust Company, N.A.
will serve as the Fund's Transfer
Agent. See "Custodian and Transfer
Agent."
MARKET PRICE OF SHARES...... Common Shares of closed-end
investment companies frequently
trade at prices lower than their
NAV. Common Shares of closed-end
investment companies like the Fund
that invest primarily in investment
grade tax exempt securities have
during some periods traded at prices
higher than their NAV and during
other periods traded at prices lower
than their NAV. The Fund cannot
assure you that its Common Shares
will trade at a price higher than or
equal to NAV. The Fund's NAV will
be reduced immediately following
this offering by the sales load and
the amount of the organizational and
offering expenses paid by the Fund.
See "Use of Proceeds." In addition
to NAV, the market price of the
Fund's Common Shares may be affected
by dividend levels, which are in
turn affected by expenses, call
protection for portfolio securities,
dividend stability, portfolio credit
quality, liquidity and market supply
and demand. See "Preferred Shares
and Leverage," "Risks," "Description
of Shares" and the section of the
Statement of Additional Information
with the heading "Repurchase of
Common Shares." The Common Shares
are designed primarily for long-term
investors and you should not
purchase Common Shares of the Fund
if you intend to sell them shortly
after purchase.
SPECIAL RISK No Operating History. The Fund is a
CONSIDERATIONS....................... newly organized, closed-end
management investment company with
no operating history.
Market Discount Risk. Shares of
closed-end management investment
companies frequently trade at a
discount from their NAV.
Interest Rate Risk. Prices of tax
exempt securities rise and fall in
response to changes in the interest
rate paid by similar securities.
Generally, when interest rates rise,
prices of tax exempt securities
fall. However, market factors, such
as the demand for particular tax
exempt securities, may cause the
price of certain fixed income
securities to fall while the prices
of other securities rise or remain
unchanged.
Interest rate changes have a greater
effect on the price of tax exempt
securities with longer maturities.
Because the Fund will invest
primarily in long-term tax exempt
securities, the NAV of the Common
Shares will fluctuate more in
response to changes in market
interest rates than if the Fund
invested primarily in shorter-term
tax exempt securities.
The Fund may use certain strategies
for the purpose of reducing the
interest rate sensitivity of the
portfolio and decreasing the Fund's
exposure to interest rate risk,
although there is no assurance that
it will do so or that such
strategies will be successful.
The Fund's use of leverage, as
described below, tends to increase
the interest rate risk of Common
Shares.
Credit Risk. Credit risk is the
possibility that an issuer of a tax
exempt security will default on a
security by failing to pay interest
or principal when due. If an issuer
defaults, the Fund will lose
money. The Fund's use of
leverage will increase the credit
risk borne by the Common Shares.
Leverage Risk. The use of leverage
through the issuance of Preferred
Shares creates an opportunity for
increased income that may be
distributed as Common Share
dividends, but also creates special
risks for Common Shareholders. The
Fund's leveraging strategy may not
be successful. It is anticipated
that dividends on Preferred Shares
will be based on shorter-term tax
exempt security yields (which will
be redetermined periodically) and
that the Fund will invest the
proceeds of the Preferred Shares
offering in long-term, typically
fixed rate, tax exempt securities.
So long as the Fund's tax exempt
security portfolio provides a higher
yield, net of Fund expenses, than
the Preferred Share dividend rate,
as reset periodically, the leverage
may cause Common Shareholders to
receive higher dividends than if the
Fund were not leveraged. If,
however, short-term rates rise, the
Preferred Share dividend rate could
exceed the yield on long-term tax
exempt securities held by the Fund
that were acquired during periods of
generally lower interest rates,
reducing dividends to Common
Shareholders. In addition, in the
event interest rates rise, the value
of the Fund's holdings in long-term
tax exempt securities likely will
fall, resulting in a decline in the
NAV of Common Shares. Investment by
the Fund in inverse floaters and
derivative contracts may increase
the Fund's leverage and, during
periods of rising interest rates,
may adversely affect the Fund's
income, distributions and total
returns to Common Shareholders. See
"The Fund's Investments" for a
discussion of these instruments.
Preferred Shares are expected to pay
cumulative dividends, which may tend
to increase leverage risk.
Leverage creates two major types of
risks for Common Shareholders:
o the likelihood of greater
volatility of NAV and market price
of Common Shares, because changes in
the value of the Fund's tax exempt
security portfolio (including
securities bought with the proceeds
of the Preferred Shares offering)
are borne entirely by Common
Shareholders; and
o the possibility either that Common
Share income will fall if the
Preferred Share dividend rate rises,
or that Common Share income will
fluctuate because the Preferred
Share dividend rate varies.
Because the fees received by the
Adviser are based on the Managed
Assets of the Fund (including assets
represented by Preferred Shares and
any leverage created thereby), the
Adviser has a financial incentive
for the Fund to issue Preferred
Shares, which may create a conflict
of interest between the Adviser and
Common Shareholders.
Risks Associated with Non-Investment
Grade Securities. Securities rated
below investment grade, also known
as junk bonds, generally entail
greater interest rate and credit
risks than investment grade
securities. For example, their
prices are more volatile, economic
downturns and financial setbacks may
affect their prices more negatively,
and their trading market may be more
limited.
Tax Exempt Securities Market Risk.
The amount of public information
available about tax exempt
securities is generally less than
that for corporate equities or
bonds. Consequently, the Adviser
may make investment decisions based
on information that is incomplete or
inaccurate. The secondary market
for tax exempt securities also tends
to be less well-developed or liquid
than many other securities markets,
which may adversely affect the
Fund's ability to sell its tax
exempt securities at attractive
prices. Special factors, such as
legislative changes and local and
business developments, may adversely
affect the yield or value of the
Fund's investments in tax exempt
securities.
Inverse Floater and Derivatives
Risks. The Fund may use inverse
floaters and a variety of derivative
contracts for investment or risk
management purposes. Inverse
floaters and derivatives contracts
are subject to a number of risks
described elsewhere in this
prospectus, such as interest rate,
credit and liquidity risks. In
addition, investment by the Fund in
inverse floaters and derivative
contracts may increase the Fund's
leverage and, during periods of
rising interest rates, may adversely
affect the Fund's income,
distributions and total returns to
Common Shareholders.
Reinvestment Risk. Income from the
Fund's tax exempt security portfolio
will decline if and when the Fund
invests the proceeds from matured,
traded or called tax exempt
securities at market interest rates
that are below the portfolio's
current earnings rate. A decline in
income could affect the market price
or overall return of Common Shares.
Tax Risk. The federal income tax
treatment of payments in respect of
certain derivative contracts is
unclear. Additionally, the Fund may
not be able to close out certain
derivative contracts when it wants
to. Consequently, the Fund may
receive payments that are treated as
ordinary income for federal income
tax purposes.
In order to be tax exempt, municipal
securities must meet certain legal
requirements. Failure to meet such
requirements may cause the interest
received and distributed by the Fund
to Common Shareholders to be
taxable. Changes or proposed
changes in federal tax laws may
cause the prices of municipal
securities to fall.
Sector Risk. The Fund may invest
25% or more of its Managed Assets in
tax exempt securities of issuers in
the same economic sector, such as
hospitals or life care facilities
and transportation-related issuers.
In addition, a substantial part of
the Fund's portfolio may be
comprised of securities credit
enhanced by banks, insurance
companies or companies with similar
characteristics. As a result, the
Fund will be more susceptible to any
economic, business, political or
other developments which generally
affect these sectors and entities.
Anti-Takeover Provisions. The Fund's
Agreement and Declaration of Trust
includes provisions that could limit
the ability of other entities or
persons to acquire control of the
Fund or convert the Fund to open-end
status. These provisions could
deprive Common Shareholders of
opportunities to sell their Common
Shares at a premium over the then
current market price of Common
Shares or at NAV. In addition, if
the Fund issues Preferred Shares,
Preferred Shareholders will have
voting rights that could deprive
Common Shareholders of such
opportunities.
Inflation Risk. Inflation risk is
the risk that the value of assets or
income from the Fund's investments
will be worth less in the future as
inflation decreases the present
value of payments at future dates.
SUMMARY OF FUND EXPENSES
The following table shows Fund expenses as a percentage of net
assets attributable to Common Shares and assumes the issuance of Preferred
Shares in an amount equal to 38% of the Fund's capital (after their
issuance). Footnote 2 to the table shows these estimated expenses as a
percentage of net assets attributable to Common Shares assuming that
Preferred Shares are not issued.
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price) .........4.50%
Expenses Borne by the Fund..........................................0.20%
Dividend Reinvestment Plan Fees.................................. None(1)
Percentage Of Net Assets
Attributable To Common Shares(2)
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Annual Expenses
Management Fees ...................................................0.89%
Other Expenses ....................................................0.32%
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Total Annual Expenses ............................................ 1.21%
Fee and Expense Waiver (Years 1-5)............................ 0.32%(3)
Total Net Annual Expenses (Years 1-5)........................... 0.89%(3)
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(1) You will pay brokerage charges if you direct the Plan Administrator to
sell your Common Shares held in a dividend reinvestment account.
(2) Stated as percentages of the Fund's estimated net assets attributable
to Common Shares and assuming no issuance of Preferred Shares, the Fund's
estimated expenses would be as follows:
Percentage Of
Net Assets
Attributable To Common Shares
----------------------------------------
Annual Expenses
Management Fees................................................... 0.55%
Other Expenses.....................................................0.20%
Total Annual Expenses............................................. 0.75%
Fee and Expense Waiver (Years 1-5).......................... 0.20%(3)
Total Net Annual Expenses (Years 1-5)....................... 0.55%(3)
(3) The Adviser has agreed to waive a portion of the management fees that
it is entitled to receive from the Fund at the annual rate of 0.20% of the
Fund's Managed Assets from the commencement of operations, through
December 31, 2007 (i.e., approximately the first 5 years of the Fund's
operations), 0.15% of Managed Assets in year 6, 0.10% of Managed Assets in
year 7, and 0.05% of Managed Assets in year 8.
The purpose of the table above is to help you understand all fees
and expenses that you, as a Common Shareholder, would bear directly or
indirectly. The expenses shown in the table under "Other Expenses" and
related footnotes are based on estimated amounts for the Fund's first year
of operation and assume that the Fund issues approximately [XXX] Common
Shares. See "Management of the Fund" and "Dividend Reinvestment Plan."
The following example illustrates the expenses (including the sales
load of $45, estimated offering expenses of this offering of $2 and the
estimated Preferred Share Offering costs assuming Preferred Shares are
issued representing 38% of the Fund's capital (after issuance) of $8 that
you would pay on a $1,000 investment in Common Shares, assuming (a) total
net annual expenses of 0.89%of net assets attributable to Common Shares
(assuming the issuance of Preferred Shares) in years 1 through 5,
increasing to [X.XX%] in years 6 through 10 and (b) a 5% annual return(1):
1 year 3 years 5 years 10
------ ------- ------- ---
years(2)
Total Expenses
Incurred......... [$XX] [$XX] [$XX] [$XX]
(1) The example above should not be considered a representation of future
expenses. Actual expenses may be higher or lower than those shown. The
example assumes that the estimated Other Expenses set forth in the Annual
Expenses table are accurate, that fees and expenses increase as described
in note 2 below, and that all dividends and distributions are reinvested
at NAV. Actual expenses may be greater or less than those assumed.
Moreover, the Fund's actual [rate of return] may be greater or less than
the hypothetical 5% annual return shown in the example.
(2) Assumes waiver of management fees at the annual rate of 0.24% of the
Fund's average weekly net assets attributable to Common Shares in year 6
(0.15% of average weekly Managed Assets), 0.16% (0.10%) in year 7 and
0.08% (0.05%) in year 8. The Adviser has not agreed to waive any portion
of the management fees it is entitled to receive from the Fund beyond
December 31, 2010. See "Management of the Fund-Investment Management
Agreement."
THE FUND
The Fund is a newly organized, diversified, closed-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund was organized as a Delaware business
trust on October 16, 2002, pursuant to an Agreement and Declaration of
Trust, which is governed by the laws of the State of Delaware. As a newly
organized entity, the Fund has no operating history. The Fund's principal
office is located at 5800 Corporate Drive, Pittsburgh, PA 15237-7000, and
its telephone number is 412-288-1900.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be
approximately
[$ __________ ($____________] if the Underwriters exercise the
over-allotment option in full) after payment of the estimated
organizational and offering costs. [Frank: The Adviser has agreed to pay
the amount by which the aggregate of all the Fund's organizational and
offering costs (other than the Sales Load) exceeds [$0.03] per Common
Share.] The Fund will invest the net proceeds of the offering in
accordance with the Fund's investment objective and policies as stated
below. The Fund currently anticipates that it will be able to invest
primarily in tax exempt securities that meet the Fund's investment
objective and policies within approximately [three] months after the
completion of the offering. Pending such investment, it is anticipated
that the proceeds will be invested in short-term, tax exempt or taxable
investment grade securities.
THE FUND'S INVESTMENTS
Investment Objective
The Fund's investment objective is to provide current income exempt
from federal income tax, including AMT.
Investment Policies
The Fund will invest primarily in securities that, in the opinion of
bond counsel to the issuer, or on the basis of another authority believed
by the Adviser to be reliable, pay interest exempt from federal income
tax, including AMT. The Adviser will not conduct its own analysis of the
tax status of the interest paid by tax exempt securities held by the Fund.
The Fund normally invests substantially all (at least 90%) of its
total assets in tax exempt securities. The Fund normally will invest at
least 80% of its total assets in investment grade tax exempt securities.
The Fund may invest up to 20% of its total assets in tax exempt securities
of below investment grade quality. 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.
The Fund will invest primarily in long-term tax exempt securities
and expects to have a dollar-weighted average portfolio maturity of 15
years to 30 years. The Adviser also manages the duration of the Fund.
"Duration" measures the sensitivity of a security's price to changes in
interest rates. The greater a portfolio's duration, the greater the
change in the portfolio's value in response to a change in market interest
rates. The Adviser increases or reduces the Fund's portfolio duration
based on its interest rate outlook. When the Adviser expects interest
rates to fall, it attempts to maintain a longer portfolio duration. When
the Adviser expects interest rates to increase, it attempts to shorten the
portfolio duration. The Adviser considers a variety of factors in
formulating its interest rate outlook, including current and expected U.S.
economic growth; current and expected interest rates and inflation; the
Federal Reserve's monetary policy; and supply and demand factors related
to the municipal market and the effect they may have on the returns
offered for various bond maturities.
For temporary or for defensive purposes, including the period during
which the net proceeds of this offering are being invested, the Fund may
invest up to 100% of its assets in short-term investments, including high
quality, short-term securities that may be either tax exempt or taxable.
The Fund intends to invest in taxable short-term investments only in the
event that suitable tax exempt short-term investments are not available at
reasonable prices and yields. Investments in taxable short-term
investments would result in a portion of your dividends being subject to
federal income taxes. For more information, see "Tax Matters" in the SAI.
Because the Fund refers to municipal investments in its name, it has
an investment policy that it will normally invest so that at least 80% of
the income that it distributes will be exempt from federal regular income
tax. This policy is referred to as the "80% Policy."
The Fund cannot change its investment objective or the 80% Policy
without the approval of (1) the holders of a majority of the outstanding
Common Shares and, once the Preferred Shares are issued, the Preferred
Shares voting together as a single class, and of (2) the holders of a
majority of the outstanding Preferred Shares voting as a separate class.
A "majority of the outstanding" means (1) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (2) more than 50% of the shares,
whichever is less. See "Description of Shares-Preferred Shares-Voting
Rights" and [the Statement of Additional Information under "Description of
Shares-Preferred Shares"] for additional information with respect to the
voting rights of holders of Preferred Shares.
Investment Ratings
The Adviser will determine whether a security is investment grade
based upon the credit ratings given by one or more NRSROs, such as
Standard & Poor's ("S&P"), Moody's Investors Service ("Moody's") or Fitch,
Inc. ("Fitch"). For example, S&P assigns ratings to investment grade
securities (AAA, AA, A and BBB) based on their assessment of the
likelihood of the issuer's inability to pay interest or principal
(default) when due on each security. Lower credit ratings correspond to
higher credit risk. Securities in the lowest investment grade category
may be considered to possess speculative characteristics by certain
NRSROs. If a security is downgraded below investment grade, the Adviser
will reevaluate the security, but will not be required to sell it.
Tax exempt securities of below investment grade quality are regarded
as having predominately speculative characteristics with respect to the
issuer's capacity to pay interest and repay principal and are commonly
referred to as "junk bonds."
If a security has not received a rating, the Fund must rely entirely
upon the Adviser's credit assessment. See Appendix A to the Statement
of Additional Information for a description of the ratings of the NRSROs.
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.
Inverse Floaters
An inverse floater has a floating or variable interest rate that
moves in the opposite direction of market interest rates. When market
interest rates go up, the interest rate paid on the inverse floater goes
down; when market interest rates go down, the interest rate paid on the
inverse floater goes up. Inverse floaters generally respond with more
volatility to market interest rate changes than fixed rate, tax exempt
securities of the same maturity.
Credit Enhancement
The Fund may invest in securities that have credit enhancement.
Credit enhancement consists of an arrangement in which a company agrees to
pay amounts due on a fixed income security if the issuer defaults. In some
cases the company providing credit enhancement makes all payments directly
to the security holders and receives reimbursement from the issuer.
Normally, the credit enhancer has greater financial resources and
liquidity than the issuer. For this reason, the Adviser usually evaluates
the credit risk of a fixed income security with credit enhancement based
solely upon its credit enhancement.
Delayed Delivery Transactions
The Fund may engage in delayed delivery transactions. Delayed
delivery transactions, including when-issued transactions, are
arrangements in which the Fund buys securities for a set price, with
payment and delivery of the securities scheduled for a future time. During
the period between purchase and settlement, no payment is made by the Fund
to the issuer and no interest accrues to the Fund. The Fund records the
transactions when it agrees to buy the securities and reflects their value
in determining the price of its shares. Settlement dates may be a month or
more after entering into these transactions so that the market values of
the securities bought may vary from the purchase prices. Therefore,
delayed delivery transactions create interest rate risks for the Fund.
Delayed delivery transactions also involve credit risks in the event of a
counterparty default.
Derivative Contracts
The Fund may buy and sell derivative contracts. Derivative
contracts are financial instruments that require payments based upon
changes in the values of designated (or underlying) securities,
commodities, financial indices or other assets or instruments. Some
derivative contracts (such as futures, forwards and options) require
payments relating to a future trade involving the underlying asset. Other
derivative contracts (such as swaps) require payments relating to the
income or returns from the underlying asset or instrument. The other party
to a derivative contract is referred to as a counterparty.
Many derivative contracts are traded on securities or commodities
exchanges. In this case, the exchange sets all the terms of the contract
except for the price. Most exchanges require investors to maintain margin
accounts through their brokers to cover their potential obligations to the
exchange. The Fund may also trade derivative contracts over-the-counter
(OTC) in transactions negotiated directly between the Fund and the
counterparty.
Depending upon how the Fund uses derivative contracts and the
relationships between the market value of a derivative contract and the
underlying asset or instrument, derivative contracts may increase or
decrease the Fund's exposure to interest rate risks, and may also expose
the fund to leverage and tax risks. OTC contracts also expose the Fund to
credit risks in the event that a counterparty defaults on the contract.
Other Investment Companies
The Fund may invest up to 10% of its total assets in securities of
other open- or closed-end investment companies that invest primarily in
tax exempt securities of the types in which the Fund may invest directly.
The Fund generally expects to invest in other investment companies during
periods when it has large amounts of uninvested cash, such as the period
shortly after the Fund receives the proceeds of the offering of its Common
Shares or Preferred Shares, during periods when there is a shortage of
attractive high-yielding tax exempt securities available in the market, or
when the Adviser believes share prices of other investment companies offer
attractive values. The Fund may invest in investment companies advised by
the Adviser to the extent permitted by applicable law or pursuant to
exemptive relief from the SEC. As a shareholder in an investment company,
the Fund will bear its ratable share of that investment company's
expenses, and will remain subject to payment of the Fund's advisory and
other fees and expenses with respect to assets so invested. Common
Shareholders will therefore be subject to duplicative expenses to the
extent that the Fund invests in other investment companies. The Adviser
will take expenses into account when evaluating the investment merits of
an investment in an investment company relative to available tax exempt
securities. In addition, the securities of other investment companies may
also be leveraged and will therefore be subject to the same leverage risks
to which the Fund is subject. As described in this prospectus in the
sections entitled "Risks" and "Preferred Shares and Leverage," the NAV and
market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. The Fund treats its investment in such open- or
closed-end investment companies as investments in tax exempt securities.
PREFERRED SHARES AND LEVERAGE
Subject to market conditions, approximately one to three months
after the completion of the offering of Common Shares, the Fund intends to
offer Preferred Shares representing approximately 38% of the Fund's
capital immediately after their issuance. Preferred Shares will have
complete priority over Common Shares upon distribution of assets in
liquidation of the Fund. The issuance of Preferred Shares will leverage
Common Shares. Leverage involves special risks and there is no assurance
that the Fund's leveraging strategies will be successful. Although the
timing and other terms of the offering of Preferred Shares will be
determined by the Fund's Board of Trustees ("Board"), the Fund expects to
invest the proceeds of a Preferred Shares offering primarily in long-term
tax exempt securities. Preferred Shares will pay dividends based on
short-term rates, which would be redetermined periodically by an auction
process. So long as the Fund's portfolio is invested in securities that
provide a higher yield than the dividend rate of Preferred Shares, after
taking expenses into consideration, the leverage will allow Common
Shareholders to receive higher dividends than if the Fund were not
leveraged.
Changes in the value of the Fund's tax exempt security portfolio,
including securities bought with the proceeds of the Preferred Shares
offering, will be borne entirely by Common Shareholders. If there is a
net decrease (or increase) in the value of the Fund's investment
portfolio, the leverage will decrease (or increase) the NAV per Common
Share to a greater extent than if the Fund were not leveraged. During
periods in which the Fund is using leverage, the fees paid to the Adviser
will be higher than if the Fund did not use leverage because the fees paid
will be calculated on the basis of the Fund's Managed Assets, including
the gross proceeds from the issuance of Preferred Shares.
For tax purposes, the Fund currently is required to allocate net
capital gain and other taxable income, if any, between the Common Shares
and Preferred Shares in proportion to total distributions paid to each
class for the taxable year in which the net capital gain or other taxable
income is realized. If net capital gain or other taxable income is
allocated to Preferred Shares (instead of solely tax exempt income), the
Fund will have to pay higher total dividends to Preferred Shareholders or
make dividend payments intended to compensate Preferred Shareholders for
the unanticipated characterization of a portion of the dividends as
taxable ("Gross-up Dividends"). This would reduce any advantage of the
Fund's leveraged structure to Common Shareholders.
Under the 1940 Act, the Fund is not permitted to issue Preferred
Shares unless immediately after such issuance the value of the Fund's
capital is at least 200% of the liquidation value of the outstanding
Preferred Shares plus the aggregate amount of any senior securities of the
Fund representing indebtedness (i.e., the liquidation value plus the
aggregate amount of senior securities representing indebtedness may not
exceed 50% of the Fund's capital). In addition, the Fund is not permitted
to declare any cash dividend or other distribution on its Common Shares
unless, at the time of such declaration, the value of the Fund's capital
satisfies the above-referenced 200% coverage requirement. If Preferred
Shares are issued, the Fund intends, to the extent possible, to purchase
or redeem Preferred Shares from time to time to the extent necessary in
order to maintain coverage of at least 200%. If the Fund has Preferred
Shares outstanding, two of the Fund's Trustees will be elected by
Preferred Shareholders voting separately as a class. The remaining
Trustees will be elected by Common Shareholders and Preferred Shareholders
voting together as a single class. In the event the Fund failed to pay
dividends on Preferred Shares for two years, Preferred Shareholders would
be entitled to elect a majority of the Trustees of the Fund.
The Fund will be subject to certain restrictions imposed by
guidelines of one or more NRSROs that may issue ratings for Preferred
Shares issued by the Fund. These guidelines are expected to impose asset
coverage or portfolio composition requirements that are more stringent
than those imposed on the Fund by the 1940 Act. It is not anticipated that
these covenants or guidelines will impede the Adviser from managing the
Fund's portfolio in accordance with the Fund's investment objective and
policies.
Preferred Shares may have to be redeemed to the extent that the Fund
fails to comply with the capital or asset coverage requirements imposed
by the 1940 Act or the NRSROs. In order to redeem Preferred Shares, the
Fund may have to liquidate portfolio securities. Such redemptions and
liquidations would cause the Fund to incur related transaction costs and
could result in capital losses to the Fund. Prohibitions on dividends and
other distributions on the Common Shares could impair the Fund's ability
to qualify as a regulated investment company under the Internal Revenue
Code of 1986, as amended (the "Code").
Assuming that the Preferred Shares will represent approximately 38%
of the Fund's capital and pay dividends at an annual average rate of
2.00%, the income generated by the Fund's portfolio (net of estimated
expenses) must exceed 0.76% in order to cover such dividend payments. Of
course, these numbers are merely estimates used for illustration. Actual
Preferred Share dividend rates will vary frequently and may be
significantly higher or lower than the rate estimated above.
The following table is designed to illustrate the effect of leverage
on Common Share total return, assuming investment portfolio total returns
(comprised of income and changes in the value of the tax exempt securities
held in the Fund's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed
investment portfolio returns are hypothetical figures and are not
necessarily indicative of the investment portfolio returns expected to be
experienced by the Fund. The table further assumes the issuance of
Preferred Shares representing 38% of the Fund's total capital and the
Fund's currently projected annual Preferred Share dividend rate of 2.00%.
Assumed Portfolio Total
Return (10)% (5)% 0% 5% 10%
----- ---- -- -- ---
(Net of Expenses)
Common Share Total Return (17.35)% (9.29)% (1.23)% 6.84% 14.90%
Common Share total return is composed of two elements: the Common
Share dividends paid by the Fund (the amount of which is largely
determined by the net investment income of the Fund after paying dividends
on Preferred Shares) and changes in the value of the tax exempt securities
that the Fund owns. The table depicts three cases in which the Fund
suffers capital losses and two in which it enjoys capital appreciation.
For example, to assume a total return of 0%, the Fund must assume that the
tax exempt interest it receives on investments in tax exempt security
investment is entirely offset by losses in the value of those investments.
Other Forms of Leverage and Borrowings
In addition to the issuance of Preferred Shares, the Fund may use a
variety of additional strategies to add leverage to the portfolio. These
include the use of inverse floaters and derivative contracts. By adding
additional leverage, these strategies have the potential to increase
returns to Common Shareholders, but also involve additional risks.
Additional leverage will increase the volatility of the Fund's investment
portfolio and could result in larger losses than if the strategies were
not used.
Under the 1940 Act, the Fund generally is not permitted to engage in
borrowings (including through the use of derivative contracts to the
extent that these instruments constitute senior securities) unless
immediately after a borrowing the value of the Fund's capital is at least
300% of the principal amount of such borrowing. In addition, the Fund is
not permitted to declare any cash dividend or other distribution on Common
Shares unless, at the time of such declaration, the value of the Fund's
capital, is at least 300% of such principal amount. If the Fund borrows,
it intends, to the extent possible, to prepay all or a portion of the
principal amount of the borrowing to the extent necessary in order to
maintain the required capital. Failure to meet the capital requirements
described herein could result in an event of default and entitle Preferred
Shareholders to elect a majority of the Trustees of the Fund. Derivative
contracts used by the Fund will not constitute senior securities (and will
not be subject to the Fund's limitations on borrowings) to the extent that
the Fund segregates liquid assets at least equal in amount to its
obligations under the instruments, or enters into offsetting transactions
or owns positions covering its obligations. For instance, the Fund may
cover its position in a forward purchase commitment by segregating liquid
assets in an amount sufficient to meet the purchase price.
RISKS
The NAV of the Common Shares will fluctuate with and be affected by,
among other things, market discount risk, interest rate risk, credit risk,
leverage risk, risks associated with non-investment grade securities, tax
exempt security market risk, inverse floaters and derivatives risk,
reinvestment risk, tax risk, sector risk and inflation risk. An
investment in Common Shares will also be subject to the risk associated
with the fact that the Fund is newly organized.
Newly Organized. The Fund is a newly organized, closed-end management
investment company and has no operating history.
Market Discount Risk. As with any stock, the price of the Common Shares
will fluctuate with market conditions and other factors. If Common Shares
are sold, the price received may be more or less than the original
investment.
NAV will be reduced immediately following the initial public
offering by the amount of the sales load and organizational and selling
expenses paid by the Fund. Shares of closed-end management investment
companies frequently trade at a discount from their NAV. This risk may be
greater for investors who sell Common Shares in a relatively short period
of time after completion of the initial public offering.
Interest Rate Risk. Prices of tax exempt securities rise and fall in
response to changes in the interest rate paid by similar securities.
Generally, when interest rates rise, prices of tax exempt securities fall.
However, market factors, such as the demand for particular tax exempt
securities, may cause the price of certain fixed income securities to fall
while the prices of other securities rise or remain unchanged. Interest
rate changes have a greater effect on the price of tax exempt securities
with longer maturities. Because the Fund will invest primarily in
long-term tax exempt securities, the NAV of Common Shares will fluctuate
more in response to changes in market interest rates than if the Fund
invested primarily in shorter-term tax exempt securities.
The Fund may use certain strategies for the purpose of reducing the
interest rate sensitivity of the portfolio and decreasing the Fund's
exposure to interest rate risk, although there is no assurance that it
will do so or that such strategies will be successful.
The Fund's use of leverage will increase the interest rate risk of
Common Shares.
Credit Risk. Credit risk is the possibility that an issuer will default
on a security by failing to pay interest or principal when due. If an
issuer defaults, the Fund will lose money. Many tax exempt securities
receive credit ratings from NRSROs such as S&P and Moody's. These NRSROs
assign ratings to securities by assessing the likelihood of issuer
default. Lower credit ratings correspond to higher perceived credit risk
and higher credit ratings correspond to lower perceived credit risk.
Credit ratings do not provide assurance against default or other loss of
money. If a security has not received a rating, the Fund must rely
entirely upon the Adviser's credit assessment.
Credit risk includes the possibility that a party to a transaction
involving the Fund will fail to meet its obligations. This could cause the
Fund to lose the benefit of the transaction or prevent the Fund from
selling or buying other securities to implement its investment strategy.
Leverage Risk. Leverage risk includes the risk associated with the
issuance of the Preferred Shares or the use of inverse floaters and
derivative contracts in order to leverage the Fund's portfolio. There is
no assurance that the Fund's leveraging strategies involving Preferred
Shares or inverse floaters and derivatives will be successful. Once the
Preferred Shares are issued or other forms of leverage are used, the NAV
and market value of Common Shares will be more volatile, and the yield
distribution to Common Shareholders will tend to fluctuate more in
response to changes in interest rates and with changes in the short-term
dividend rates on Preferred Shares. If the dividend rate on Preferred
Shares approaches the yield on the Fund's investment portfolio, the
benefit of leverage to Common Shareholders would be reduced. If the
dividend rate on Preferred Shares exceeds the yield on the Fund's
portfolio, the leverage will result in a lower dividend to Common
Shareholders than if the Fund were not leveraged. Because the long-term
bonds included in the Fund's portfolio will typically pay fixed rates of
interest while the dividend rate on Preferred Shares will be adjusted
periodically, this could occur even when both long-term and short-term
municipal rates rise. In addition, the Fund will pay (and the Common
Shareholders will bear) any costs and expenses relating to the issuance
and ongoing maintenance of the Preferred Shares. Furthermore, if the Fund
has net capital gain or other taxable income that is allocated to
Preferred Shares (instead of solely tax-exempt income), the Fund may have
to pay higher total dividends or Gross-up Dividends to Preferred
Shareholders, which would reduce any advantage of the Fund's leveraged
structure to Common Shareholders without reducing the associated risk.
See "Preferred Shares and Leverage." The Fund cannot assure you that it
will issue Preferred Shares or use other forms of leverage or, if used,
that these strategies will result in a higher yield or return to Common
Shareholders.
Similarly, any decline in the NAV of the Fund's investments will be
borne entirely by Common Shareholders. Therefore, if the market value of
the Fund's portfolio declines, the leverage will result in a greater
decrease in NAV to Common Shareholders than if the Fund were not
leveraged. This greater NAV decrease will also tend to cause a greater
decline in the market price for Common Shares. The Fund might be in
danger of failing to maintain the 200% capital requirement or of losing
its ratings on Preferred Shares or, in an extreme case, the Fund's current
investment income might not be sufficient to meet the dividend
requirements on Preferred Shares. In order to counteract such an event,
the Fund might need to liquidate investments in order to fund a redemption
of some or all of the Preferred Shares. Liquidation at times of low tax
exempt securities prices may result in capital loss and may reduce returns
to Common Shareholders.
While the Fund may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in an effort
to mitigate the increased volatility of current income and NAV associated
with leverage, there can be no assurance that the Fund will actually
reduce leverage in the future or that any reduction, if undertaken, will
benefit the Common Shareholders. Changes in the future direction of
interest rates are very difficult to predict accurately. If the Fund were
to reduce leverage based on a prediction about future changes to interest
rates, and that prediction turned out to be incorrect, the reduction in
leverage likely would operate to reduce the income and/or total returns to
Common Shareholders relative to the circumstance where the Fund had not
reduced leverage. The Fund may decide that this risk outweighs the
likelihood of achieving the desired reduction to volatility in income and
Common Share price if the prediction were to turn out to be correct, and
determine not to reduce leverage as described above.
The Fund may invest up to 10% of its total assets in the securities
of other investment companies. Such securities may also be leveraged and
will therefore be subject to the leverage risks described above. This
additional leverage may in certain market conditions reduce the NAV of the
Fund's Common Shares and the returns to Common Shareholders.
The Fund may also invest up to 10% of its total assets in inverse
floaters and may also invest in derivative contracts, which may increase
the Fund's leverage and, during periods of rising short-term interest
rates, may adversely affect the Fund's NAV per share and distributions to
Common Shareholders. See "Inverse Floaters and Derivatives" under "The
Fund's Investments" and the section of the Statement of Additional
Information with the heading "Derivative Contracts."
Risks Associated With Non-Investment Grade Securities. Securities rated
below investment grade, also known as junk bonds, generally entail greater
credit, interest rate and liquidity risks than investment grade
securities. For example, their prices are more volatile, economic
downturns and financial setbacks may affect their prices more negatively,
and their trading market may be more limited.
Tax Exempt Security Market Risk. Investing in the tax exempt securities
market involves certain risks. The amount of public information available
about the tax exempt securities in the Fund's portfolio is generally less
than that for corporate equities or bonds. Consequently, the Adviser may
make investment decisions based on information that is incomplete or
inaccurate. The secondary market for tax exempt securities tends to be
less well-developed or liquid than many other securities markets, which
may adversely affect the Fund's ability to sell its bonds at attractive
prices. Special factors, such as legislative changes and local and
business developments, may adversely affect the yield or value of the
Fund's Investments in tax exempt securities.
The ability of municipal issuers to make timely payments of interest
and principal may be diminished in general economic downturns and as
governmental cost burdens are reallocated among Federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations or on the ability of municipalities to levy taxes.
Inverse Floaters and Derivative Contracts. The Fund may use inverse
floaters and a variety of derivative contracts for investment or risk
management purposes. Inverse floaters and derivative contracts are
subject to a number of risks described elsewhere in this prospectus, such
as, interest rate risk and credit risk. In addition, investment by the
Fund in inverse floaters and derivative contracts may increase the Fund's
leverage and, during periods of rising interest rates, may adversely
affect the Fund's income, distributions and total returns to Common
Shareholders. Derivative contracts also involve the risk of mispricing or
improper valuation, the risk of ambiguous documentation, and the risk that
changes in the value of a derivative may not correlate perfectly with an
underlying asset, interest rate or index. Suitable inverse floaters and
derivative contracts may not be available in all circumstances and there
can be no assurance that the Fund will engage in these transactions to
reduce exposure to other risks when that would be beneficial.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's bond portfolio will decline if and when the Fund invests the
proceeds from matured, traded, prepaid or called bonds at market interest
rates that are below the portfolio's current earnings rate. A decline in
income could affect the market price or overall returns of Common Shares.
Tax Risk. The federal income tax treatment of payments in respect of
certain derivative contracts is unclear. Additionally, the Fund may not
be able to close out certain derivative contracts when it wants to.
Consequently, the Fund may receive payments that are treated as ordinary
income for federal income tax purposes.
In 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 shareholders to be
taxable. Changes or proposed changes in federal tax laws may cause the
prices of municipal securities to fall.
In certain circumstances a portion of the Fund's dividends may be
subject to AMT.
Sector Risk. The Fund may invest 25% or more of its total assets in tax
exempt securities of issuers in the same economic sector, including
without limitation the following: bonds issued by state and local health
finance, housing finance, pollution control, industrial development and
other authorities or municipal entities for the benefit of hospitals, life
care facilities, educational institutions, housing facilities,
transportation systems, industrial corporations or utilities. In
addition, a substantial part of the Fund may be comprised of securities
that are credit enhanced by insurance companies, banks or other similar
financial institutions. As a result, the performance of the Fund will be
more susceptible to any economic, business, political or other
developments that generally affect these sectors or entities.
Anti-Takeover Provisions. The Fund's Agreement and Declaration of Trust
includes provisions that could limit the ability of other entities or
persons to acquire control of the Fund or convert the Fund to open-end
status. These provisions could deprive Common Shareholders of
opportunities to sell their Common Shares at a premium over the then
current market price of Common Shares or at NAV. In addition, if the Fund
issues Preferred Shares, Preferred Shareholders will have voting rights
that could deprive Common Shareholders of such opportunities.
Inflation Risk. Inflation risk is the risk that the value of assets or
income from investment will be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of,
and distribution of, Common Shares can decline. In addition, during any
periods of rising inflation, Preferred Share dividend rates would likely
increase, which would tend to further reduce returns to Common
Shareholders.
Recent Developments. As a result of the terrorist attacks on the World
Trade Center and the Pentagon on September 11, 2001, some of the U.S.
securities markets were closed for a four-day period. These terrorist
attacks and related events have led to increased market volatility and may
have long-term effects on U.S. and world economies and markets. A similar
disruption of the financial markets would impact interest rates, auctions,
secondary trading, ratings, credit risk, inflation and other factors
relating to the securities.
HOW THE FUND MANAGES RISK
Investment Limitations
The Fund has adopted certain investment limitations designed to
limit investment risk and maintain portfolio diversification. These
limitations are fundamental and may not be changed without the approval of
(1) the holders of a majority of the outstanding Common Shares and, if
issued, Preferred Shares voting together as a single class, and (2) the
approval of the holders of a majority of the outstanding Preferred Shares
voting as a separate class.
o 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.
o 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.
The Fund may become subject to guidelines which are more limiting
than its investment restrictions in order to obtain and maintain ratings
from an NRSRO on the Preferred Shares that it intends to issue. The Fund
does not anticipate that such guidelines would have a material adverse
effect on the Fund's Common Shareholders or the Fund's ability to achieve
its investment objective. See "Investment Objective and Policies" in the
Statement of Additional Information for a complete list of the fundamental
and non-fundamental investment policies of the Fund.
Quality of Investments
The Fund will invest at least 80% of its total assets in investment
grade tax exempt securities.
Limited Issuance of Preferred Shares
Under the 1940 Act, the Fund could issue Preferred Shares having a
total liquidation value (original purchase price of the shares being
liquidated plus any accrued and unpaid dividends) of up to 50% of the
value of the capital of the Fund. To the extent that the Fund has
outstanding any senior securities representing indebtedness (such as
through the use of derivative contracts that constitute senior
securities), the aggregate amount of such senior securities will be added
to the total liquidation value of any outstanding Preferred Shares for
purposes of this capital requirement. If the total liquidation value of
the Preferred Shares plus the aggregate amount of such other senior
securities were ever more than 50% of the value of the capital of the
Fund, the Fund would not be able to declare dividends on the Common Shares
until the liquidation value and/or aggregate amount of other senior
securities, as a percentage of the Fund's assets, was reduced.
Approximately one to three months after the completion of the offering of
the Common Shares, the Fund intends to issue Preferred Shares representing
about 38% of the Fund's capital immediately after the time of issuance of
the Preferred Shares. This higher than required margin of NAV provides a
cushion against later fluctuations in the value of the Fund's portfolio
and will subject Common Shareholders to less income and NAV volatility
than if the Fund were more highly leveraged through Preferred Shares. It
also gives the Fund flexibility to use other forms of leverage in addition
to Preferred Shares from time to time in accordance with the 1940 Act
asset coverage requirements (such as inverse floaters and derivative
contracts) that may be more efficient or cost effective sources of
leverage than Preferred Shares under the circumstances. The Fund intends
to purchase or redeem Preferred Shares, if necessary, to keep the
liquidation value of the Preferred Shares plus the aggregate amount of
other senior securities representing indebtedness below 50% of the value
of the
Fund's capital.
Management of Investment Portfolio and Capital Structure to Limit Leverage
Risk
The Fund may take certain actions if short-term interest rates
increase, or market conditions otherwise change (or the Fund anticipates
such an increase or change) and the Fund's leverage begins (or is
expected) to adversely affect Common Shareholders. In order to attempt to
offset such a negative impact of leverage on Common Shareholders, the Fund
may shorten the average maturity or duration of its investment portfolio
(by selling long-term securities and investing in short-term, high quality
securities or implementing certain hedging strategies) or may extend the
auction period of outstanding Preferred Shares. The Fund may also attempt
to reduce the leverage by redeeming or otherwise purchasing Preferred
Shares or redeeming holdings in derivative contracts or other instruments
that create leverage. As explained above under "Risks-Leverage Risk," the
success of any such attempt to limit leverage risk depends on the
Adviser's ability to accurately predict interest rate or other market
changes. Because of the difficulty of making such predictions, the Fund
may never attempt to manage its capital structure in the manner described
in this paragraph.
If market conditions suggest that additional leverage would be
beneficial, the Fund may sell previously unissued Preferred Shares or
Preferred Shares that the Fund previously issued but later repurchased, or
use other forms of leverage, such as derivative contracts.
Hedging and Related Strategies
The Fund may use various investment strategies designed to limit the
risk of price fluctuations of its portfolio securities and to preserve
capital. These hedging strategies may include using financial futures
contracts; short sales; swap agreements or options thereon; options on
financial futures; options based on either an index of municipal
securities or on taxable debt securities whose prices, in the opinion of
the Adviser, correlate with the prices of the Fund's investments. Income
earned by the Fund from many hedging activities will be treated as capital
gain and, if not offset by net realized capital loss, will be distributed
to shareholders as taxable distributions. If effectively used, hedging
strategies will offset in varying percentages losses incurred on the
Fund's investments due to adverse interest rate changes. There is no
assurance that these hedging strategies will be available at anytime or
that the Adviser will determine to use them for the Fund or, if used, that
the strategies will be successful.
MANAGEMENT OF THE FUND
Trustees And Officers
The Board is responsible for the overall management of the Fund,
including supervision of the duties performed by the Adviser. There are
twelve Trustees of the Fund. Three of the Trustees are "interested
persons" (as defined in the 1940 Act). The name and business addresses of
the Trustees and officers of the Fund and their principal occupations and
other affiliations during the past five years are set forth under
"Management of the Fund" in the Statement of Additional Information.
Investment Adviser
Federated Investment Management Company acts as the Fund's
investment adviser. The Adviser's address is Federated Investors Tower,
1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The Adviser and other subsidiaries of Federated Investors, Inc.
("Federated") advise approximately 139 mutual funds and a variety of
separate accounts, which totaled approximately $180 billion in assets as
of December 31, 2001. Federated was established in 1955 and is one of the
largest mutual fund investment managers in the United States, with
approximately 1,800 employees. More than 4,000 investment professionals
make Federated Funds available to their customers. In the municipal
sector, as of December 31, 2001, Federated managed 12 bond funds with
approximately $2.3 billion in assets and 22 money market funds with
approximately $44.8 billion in total assets.
The Fund's Portfolio Managers are:
Mary Jo Ochson
Mary Jo Ochson is the Fund's Portfolio Manager. Ms. Ochson joined
Federated in 1982 and has been a Senior Portfolio Manager and a Senior
Vice President of the Fund's Adviser since 1996. From 1988 through 1995,
Ms. Ochson served as a Portfolio Manager and a Vice President of the
Fund's Adviser. Ms. Ochson is a Chartered Financial Analyst and received
her M.B.A. in Finance from the University of Pittsburgh.
Lee R. Cunningham II
Lee R. Cunningham II is the Fund's Portfolio Manager. Mr.
Cunningham joined Federated in 1995 as an Investment Analyst and has been
a Portfolio Manager since 1998. He was named an Assistant Vice President
of the Fund's Adviser in January 1998 and became a Vice President of the
Fund's Adviser in July 2000. From 1986 through 1994, Mr. Cunningham was a
Project Engineer with Pennsylvania Power and Light Company. Mr.
Cunningham received his M.B.A. with concentration in finance and
operations from the University of Pittsburgh.
RJ Gallo
RJ Gallo is the Fund's Portfolio Manager. Mr. Gallo joined
Federated in 2000 as an Investment Analyst. He was named an Assistant
Vice President of the Fund's Adviser in January 2002. From 1996 to 2000,
Mr. Gallo was a Financial Analyst and Trader at the Federal Reserve Bank
of New York. Mr. Gallo received a Master's in Public Affairs with a
concentration in economics and public policy from Princeton University.
Investment Management Agreement
Pursuant to an investment management agreement between the Adviser
and the Fund, the Fund has agreed to pay for the investment advisory
services and facilities provided by the Adviser a fee payable monthly in
arrears at an annual rate equal to 0.55% of the average weekly value of
the Fund's Managed Assets (the "Management Fee"). The Adviser has
voluntarily agreed to waive receipt of a portion of its Management Fee in
the amount of 0.20% of the average weekly value of the Fund's Managed
Assets for the first five years of the Fund's operations (through December
31, 2007), and for a declining amount for an additional three years
(through December 31, 2010). Managed Assets means the total assets of the
Fund including any assets attributable to any Preferred Shares or
borrowings that may be outstanding minus the sum of accrued liabilities
(other than indebtedness attributable to financial leverage). The
liquidation preference on the Preferred Shares is not a liability. This
means that during periods in which the Fund is using leverage, the fee
paid to the Adviser will be higher than if the Fund did not use leverage
because the fee is calculated as a percentage of the Fund's Managed
Assets, which include those assets purchased with leverage.
In addition to the Management Fee of the Adviser, the Fund pays all
other costs and expenses of its operations, including compensation of its
trustees (other than those affiliated with the Adviser), custodian,
transfer and dividend disbursing agent expenses, legal fees, leverage
expenses, rating agency fees, listing fees and expenses, expenses of
independent auditors, expenses of repurchasing shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
For the first 8 years of the Fund's operation, the Adviser has
undertaken to waive its investment advisory fees and expenses payable by
the Fund in the amounts, and for the time periods, set forth below:
Percentage Waived (as A
Percentage Of Average
Weekly Managed Assets)
Twelve Month
Period Ending
Month Date, Year**
December 31, 2003 0.20%
December 31, 2004 0.20%
December 31, 2005 0.20%
December 31, 2006 0.20%
December 31, 2007 0.20%
December 31, 2008 0.15%
December 31, 2009 0.10%
December 31, 2010 0.05%
** From the commencement of operations.
The Adviser has not undertaken to waive any portion of the Fund's
fees and expenses beyond December 31, 2010 or after termination of the
investment management agreement.
NET ASSET VALUE
The Fund's NAV per Common Share is determined as of the close of
regular trading (normally 4:00 p.m. Eastern time) on each day the New York
Stock Exchange is open for business. To calculate NAV, the Fund's assets
are valued and totaled, liabilities and the aggregate liquidation value of
the outstanding Preferred Shares, if any, are subtracted, and the balance
is divided by the total number of the Fund's Common Shares then
outstanding.
The Fund values its fixed income securities by using market
quotations, prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with
similar characteristics in accordance with procedures established by the
Board. A substantial portion of the Fund's fixed income investments will
be valued according to the mean between bid and asked prices as furnished
by an independent pricing service. Debt securities with remaining
maturities of 60 days or less will be valued at amortized cost. Any
securities or other assets for which current market quotations are not
readily available are valued at their fair value as determined in good
faith by or under the direction of the Board.
DISTRIBUTIONS
The Fund will distribute to Common Shareholders monthly dividends of
all or a portion of its tax exempt interest income after payment of
dividends on any Preferred Shares of the Fund which may be outstanding.
It is expected that the initial monthly dividend on the Fund's Common
Shares will be declared approximately 45 days and paid approximately 60 to
90 days after completion of this offering. The Fund expects that all or a
portion of any capital gain and other taxable income will be distributed
at least annually.
Various factors will affect the level of the Fund's income,
including the asset mix, the amount of leverage utilized by the Fund and
the effects thereof and the Fund's use of hedging. To permit the Fund to
maintain a more stable monthly distribution, the Fund may from time to
time distribute less than the entire amount of tax exempt interest income
earned in a particular period. The undistributed tax exempt interest
income would be available to supplement future distributions. As a result,
the distributions paid by the Fund for any particular monthly period may
be more or less than the amount of tax exempt interest income actually
earned by the Fund during the period. Undistributed tax exempt interest
income will add to the Fund's NAV and, correspondingly, distributions from
undistributed tax exempt interest income will be deducted from the Fund's
NAV. Shareholders will automatically have all dividends and distributions
reinvested in Common Shares of the Fund issued by the Fund or purchased in
the open market in accordance with the Fund's Dividend Reinvestment Plan
unless an election is made to receive cash. See "Dividend Reinvestment
Plan."
DIVIDEND REINVESTMENT PLAN
Unless the registered owner of Common Shares elects to receive cash
by contacting the Plan Administrator, all dividends declared on Common
Shares of the Fund will be automatically reinvested by EquiServe Trust
Co., N.A. (the "Plan Administrator"), the administrator for shareholders
in the Fund's Dividend Reinvestment Plan (the "Plan"), in additional
Common Shares of the Fund. Common Shareholders who elect not to
participate in the Plan will receive all dividends and other distributions
in cash paid by check mailed directly to the shareholder of record (or, if
the Common Shares are held in street or other nominee name, then to such
nominee) by the Plan Administrator, as dividend disbursing agent. You may
elect not to participate in the Plan and to receive all dividends in cash
by contacting the Plan Administrator at the address set forth below.
Participation in the Plan is completely voluntary and may be terminated or
resumed at any time without penalty by notice if received and processed by
the Plan Administrator prior to the dividend record date; otherwise such
termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution. Some brokers may
automatically elect to receive cash on your behalf and may re-invest that
cash in additional Common Shares of the Fund for you. If you wish for all
dividends declared on your Common Shares to be automatically reinvested
pursuant to the Plan, please contact your broker. The Plan Administrator
will open an account for each Common Shareholder under the Plan in the
same name in which such Common Shareholder's Common Shares are registered.
Whenever the Fund declares a dividend or other distribution (together, a
"Dividend") payable in cash, non-participants in the Plan will receive
cash and participants in the Plan will receive the equivalent in Common
Shares. The Common Shares will be acquired by the Plan Administrator for
the participants' accounts, depending upon the circumstances described
below, either (i) through receipt of additional unissued but authorized
Common Shares from the Fund ("Newly Issued Common Shares") or (ii) by
purchase of outstanding Common Shares on the open market ("Open-Market
Purchases") on the New York Stock Exchange or elsewhere. If, on the
payment date for any Dividend, the closing market price plus estimated
brokerage commissions per common share is equal to or greater than the NAV
per common share, the Plan Administrator will invest the Dividend amount
in Newly Issued Common Shares on behalf of the participants. The number of
Newly Issued Common Shares to be credited to each participant's account
will be determined by dividing the dollar amount of the Dividend by the
NAV per common share on the payment date; provided that, if the NAV is
less than or equal to 95% of the closing market value on the payment date,
the dollar amount of the Dividend will be divided by 95% of the closing
market price per common share on the payment date. If, on the payment date
for any Dividend, the NAV per common share is greater than the closing
market value plus estimated brokerage commissions, the Plan Administrator
will invest the Dividend amount in Common Shares acquired on behalf of the
participants in Open-Market Purchases. In the event of a market discount
on the payment date for any Dividend, the Plan Administrator will have
until the last business day before the next date on which the Common
Shares trade on an "ex-dividend" basis or 30 days after the payment date
for such Dividend, whichever is sooner (the "Last Purchase Date"), to
invest the Dividend amount in Common Shares acquired in Open-Market
Purchases. It is contemplated that the Fund will pay monthly income
Dividends. Therefore, the period during which Open-Market Purchases can be
made will exist only from the payment date of each Dividend through the
date before the next "ex-dividend" date which typically will be
approximately ten days. If, before the Plan Administrator has completed
its Open-Market Purchases, the market price per common share exceeds the
NAV per common share, the average per common share purchase price paid by
the Plan Administrator may exceed the NAV of the Common Shares, resulting
in the acquisition of fewer Common Shares than if the Dividend had been
paid in Newly Issued Common Shares on the Dividend payment date. Because
of the foregoing difficulty with respect to Open-Market Purchases, the
Plan provides that if the Plan Administrator is unable to invest the full
Dividend amount in Open-Market Purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period,
the Plan Administrator may cease making Open-Market Purchases and may
invest the uninvested portion of the Dividend amount in Newly Issued
Common Shares at the NAV per common share at the close of business on the
Last Purchase Date provided that, if the NAV is less than or equal to 95%
of the then current market price per common share; the dollar amount of
the Dividend will be divided by 95% of the market price on the payment
date.
The Plan Administrator maintains all shareholders' accounts in the
Plan and furnishes written confirmation of all transactions in the
accounts, including information needed by shareholders for tax records.
Common Shares in the account of each Plan participant will be held by the
Plan Administrator on behalf of the Plan participant, and each shareholder
proxy will include those shares purchased or received pursuant to the
Plan. The Plan Administrator will forward all proxy solicitation materials
to participants and vote proxies for shares held under the Plan in
accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which
hold shares for others who are the beneficial owners, the Plan
Administrator will administer the Plan on the basis of the number of
Common Shares certified from time to time by the record shareholder and
held for the account of beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to Common Shares
issued directly by the Fund. However, each participant will pay a pro rata
share of brokerage commissions incurred in connection with Open-Market
Purchases. The automatic reinvestment of Dividends will not relieve
participants of any Federal, state or local income tax that may be payable
(or required to be withheld) on such Dividends. See "Tax Matters."
Participants that request a sale of shares through the Plan Administrator
are subject to a $[X.XX] sales fee and a $[X.XX] per share sold brokerage
commission.
The Fund reserves the right to amend or terminate the Plan. There is
no direct service charge to participants with regard to purchases in the
Plan; however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence or questions concerning the Plan should be
directed to the Plan Administrator, EquiServe Trust Company, N.A., P.O.
Box 43011, Providence, RI 02940-3011 or by telephone at (800) 219-4218.
DESCRIPTION OF SHARES
Common Shares
The Fund is an unincorporated business trust organized under the
laws of Delaware pursuant to an Agreement and Declaration of Trust dated
as of October 16, 2002. The Fund is authorized to issue an unlimited
number of Common Shares of beneficial interest, par value $0.01 per Common
Share. Each Common Share has one vote and, when issued and paid for in
accordance with the terms of this offering, will be fully paid and
non-assessable, except that the Board has the power to cause Common
Shareholders to pay expenses of the Fund by setting off charges due from
Common Shareholders from declared but unpaid dividends or distributions
owed the Common Shareholders and/or by reducing the number of Common
Shares owned by each respective Common Shareholder. Whenever Preferred
Shares are outstanding, Common Shareholders will not be entitled to
receive any distributions from the Fund unless (1) all accrued dividends
on Preferred Shares have been paid, (2) capital with respect to Preferred
Shares would be at least 200% after giving effect to the distributions and
(3) certain other requirements imposed by any NRSROs rating the Preferred
Shares have been met. See "Preferred Shares" below. All Common Shares are
equal as to dividends, assets and voting privileges and have no
conversion, preemptive or other subscription rights. The Fund will send
annual and semi-annual reports, including financial statements, to all
holders of its shares.
The Fund has no present intention of offering any additional shares
other than the Preferred Shares and Common Shares issued under the Fund's
Dividend Reinvestment Plan. Any additional offerings of shares will
require approval by the Board. Any additional offering of shares will be
subject to the requirements of the 1940 Act, which provides that shares
may not be issued at a price below the then current NAV, exclusive of
sales load, except in connection with an offering to existing Common
Shareholders or with the consent of a majority of the Fund's outstanding
voting securities.
The Fund intends to file an application to list its Common Shares on
the New York Stock Exchange under the symbol "XXX".
The Fund's NAV per share generally increases when interest rates
decline and decreases when interest rates rise, and these changes are
likely to be greater because the Fund intends to have a leveraged capital
structure. NAV will be reduced immediately following the offering of
Common Shares by the amount of the sales load and organizational and
offering expenses paid by the Fund. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not
continuously offer shares and do not provide daily redemptions. Rather,
if a Common Shareholder determines to buy additional Common Shares or sell
Common Shares already held, the Common Shareholder may do so by trading
through a broker on the New York Stock Exchange or otherwise. Shares of
closed-end investment companies frequently trade on an exchange at prices
lower than NAV. Shares of closed-end investment companies like the Fund
that invest primarily in investment grade tax exempt securities have
during some periods traded at prices higher than NAV and during other
periods have traded at prices lower than NAV. Because the market value of
the Common Shares may be influenced by such factors as dividend levels
(which are in turn affected by expenses), call protection on its portfolio
securities, dividend stability, portfolio credit quality, NAV, relative
demand for and supply of such shares in the market, general market and
economic conditions and other factors beyond the control of the Fund, the
Fund cannot assure you that Common Shares will trade at a price equal to
or higher than NAV in the future. The Common Shares are designed primarily
for long-term investors and you should not purchase the Common Shares if
you intend to sell them soon after purchase. See "Preferred Shares and
Leverage" and the Statement of Additional Information under "Repurchase of
Common Shares."
Preferred Shares
The Agreement and Declaration of Trust provides that the Board may
authorize and issue Preferred Shares with rights as determined by the
Board, by action of the Board without the approval of the Common
Shareholders. Common Shareholders have no preemptive right to purchase any
Preferred Shares that might be issued.
The Board has indicated its intention to authorize an offering of
Preferred Shares, representing approximately 38% of the Fund's capital,
immediately after the Preferred Shares are issued, within approximately
one to three months after completion of this offering of Common Shares,
subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of Preferred
Shares is likely to achieve the potential benefits to the Common
Shareholders described in this prospectus. The Fund may conduct other
offerings of Preferred Shares in the future subject to the same percentage
restriction, after giving effect to previously issued Preferred Shares.
The Board also reserves the right to change the foregoing percentage
limitation and may issue Preferred Shares to the extent permitted by the
1940 Act, which currently limits the aggregate liquidation preference of
all outstanding Preferred Shares to 50% of the value of the Fund's
capital. We cannot assure you, however, that any Preferred Shares will be
issued. Although the terms of any Preferred Shares, including dividend
rate, liquidation preference and redemption provisions, will be determined
by the Board, subject to applicable law and the Agreement and Declaration
of Trust, it is likely that the Preferred Shares will be structured to
carry a relatively short-term dividend rate reflecting interest rates on
short-term tax exempt debt securities, by providing for the periodic
redetermination of the dividend rate at relatively short intervals through
an auction, remarketing or other procedure. The Fund also believes that it
is likely that the liquidation preference, voting rights and redemption
provisions of the Preferred Shares will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the Preferred
Shareholders will be entitled to receive a preferential liquidating
distribution, which is expected to equal the original purchase price per
Preferred Share plus accrued and unpaid dividends, whether or not
declared, before any distribution of assets is made to Common
Shareholders. After payment of the full amount of the liquidating
distribution to which they are entitled, the Preferred Shareholders will
not be entitled to any further participation in any distribution of assets
by the Fund.
Voting Rights. The 1940 Act requires that Preferred Shareholders,
voting separately as a single class, have the right to elect at least two
Trustees at all times. The remaining Trustees will be elected by Common
Shareholders and Preferred Shareholders, voting together as a single
class. In addition, subject to the prior rights, if any, of the holders of
any other class of senior securities outstanding, the Preferred
Shareholders have the right to elect a majority of the Trustees of the
Fund at any time two years' dividends on any Preferred Shares are unpaid.
The 1940 Act also requires that, in addition to any approval by
shareholders that might otherwise be required, the approval of the holders
of a majority of any outstanding Preferred Shares, voting separately as a
class, would be required to (1) adopt any plan of reorganization that
would adversely affect the Preferred Shares, and (2) take any action
requiring a vote of security holders under Section 13(a) of the 1940 Act,
including, among other things, changes in the Fund's subclassification as
a closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Agreement and Declaration of
Trust." As a result of these voting rights, the Fund's ability to take
any such actions may be impeded to the extent that there are any Preferred
Shares outstanding. The Board presently intends that, except as otherwise
indicated in this prospectus and except as otherwise required by
applicable law, Preferred Shareholders will have equal voting rights with
Common Shareholders (one vote per share, unless otherwise required by the
1940 Act) and will vote together with Common Shareholders as a single
class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend,
alter or repeal any of the preferences, rights or powers of Preferred
Shareholders so as to affect materially and adversely such preferences,
rights or powers, or to increase or decrease the authorized number of
Preferred Shares. The class vote of Preferred Shareholders described
above will in each case be in addition to any other vote required to
authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The
terms of the Preferred Shares are expected to provide that (1) they are
redeemable by the Fund in whole or in part at the original purchase price
per share plus accrued dividends per share, (2) the Fund may tender for or
purchase Preferred Shares and (3) the Fund may subsequently resell any
shares so tendered for or purchased. Any redemption or purchase of
Preferred Shares by the Fund will reduce the leverage applicable to the
Common Shares, while any resale of shares by the Fund will increase that
leverage.
The discussion above describes the possible offering of Preferred
Shares by the Fund. If the Board determines to proceed with such an
offering, the terms of the Preferred Shares may be the same as, or
different from, the terms described above, subject to applicable law and
the Fund's Agreement and Declaration of Trust. The Board, without the
approval of the Common Shareholders, may authorize an offering of
Preferred Shares or may determine not to authorize such an offering, and
may fix the terms of the Preferred Shares to be offered.
CERTAIN PROVISIONS IN THE AGREEMENT AND
DECLARATION OF TRUST
The 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 by the action of a majority of the remaining Trustees
followed by a vote of the holders of at least 75% of the shares then
entitled to vote for the election of the respective trustee.
In addition, the Fund's Agreement and Declaration of Trust requires
the favorable vote of a majority of the Fund's Board followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Fund, voting separately as a class or
series, to approve, adopt or authorize certain transactions with 5% or
greater holders of a class or series of shares and their associates,
unless the transaction has been approved by at least 80% of the Trustees.
For purposes of these provisions, a 5% or greater holder of a class or
series of shares (a "Principal Shareholder") refers to any person,
including its affiliates and associates, who, whether directly or
indirectly and whether alone or together with its affiliates and
associates, beneficially owns 5% or more of the outstanding shares of any
class or series of shares of beneficial interest of the Fund. The 5%
holder transactions subject to these special approval requirements are:
o the merger or consolidation of the Fund or any subsidiary of the
Fund with or into any Principal Shareholder;
o the issuance of any securities of the Fund to any Principal
Shareholder for cash (other than pursuant to any automatic dividend
reinvestment plan);
o the sale, lease or exchange of all or any substantial part of the
assets of the Fund to any Principal Shareholder, except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the
purpose of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month
period; or
o the sale, lease or exchange to the Fund or any subsidiary of the
Fund, in exchange for securities of the Fund, of any assets of any
Principal Shareholder, except assets having an aggregate fair market value
of less than $1,000,000, aggregating for purposes of such computation all
assets sold, leased or exchanged in any series of similar transactions
within a twelve-month period.
To convert the Fund to an open-end investment company, the Fund's
Agreement and Declaration of Trust requires the favorable vote of a
majority of the Board followed by the favorable vote of the holders of at
least 75% of the outstanding shares of each affected class or series of
shares of the Fund, voting separately as a class or series, unless such
amendment has been approved by at least 80% of the Trustees, in which case
"a majority of the outstanding voting securities" (as defined in the 1940
Act) of the Fund will be required. The foregoing vote would satisfy a
separate requirement in the 1940 Act that any conversion of the Fund to an
open-end investment company be approved by the shareholders. If approved
in the foregoing manner, conversion of the Fund to an open-end investment
company could not occur until 90 days after the shareholders' meeting at
which such conversion was approved and would also require at least 30
days' prior notice to all shareholders. Conversion of the Fund to an
open-end investment company would require the redemption of any
outstanding Preferred Shares, which could eliminate or alter the leveraged
capital structure of the Fund with respect to the Common Shares.
Following any such conversion, it is also possible that certain of the
Fund's investment policies and strategies would have to be modified to
assure sufficient portfolio liquidity. In the event of conversion, the
Common Shares would cease to be listed on the New York Stock Exchange or
other national securities exchanges or market systems. Shareholders of an
open-end investment company may require the company to redeem their shares
at any time, except in certain circumstances as authorized by or under the
1940 Act, at their NAV, less such redemption charge, if any, as might be
in effect at the time of a redemption. The Fund expects to pay all such
redemption requests in cash, but reserves the right to pay redemption
requests in a combination of cash or securities. If such partial payment
in securities were made, investors may incur brokerage costs in converting
such securities to cash. If the Fund were converted to an open-end fund,
it is likely that new shares would be sold at NAV plus a sales load. The
Board believes, however, that the closed-end structure is desirable in
light of the Fund's investment objective and policies. Therefore, you
should assume that it is not likely that the Board would vote to convert
the Fund to an open-end fund.
To liquidate the Fund, the Fund's Agreement and Declaration of Trust
requires the favorable vote of a majority of the Board followed by the
favorable vote of the holders of at least 75% of the outstanding shares of
each affected class or series of the Fund, voting separately as a class or
series, unless such liquidation has been approved by at least 80% of the
Trustees, in which case "a majority of the outstanding voting securities"
(as defined in the 1940 Act) of the Fund will be required.
For the purposes of calculating "a majority of the outstanding
voting securities" under the Fund's Agreement and Declaration of Trust,
each class and series of the Fund will vote together as a single class,
except to the extent required by the 1940 Act or the Fund's Agreement and
Declaration of Trust with respect to any class or series of shares. If a
separate vote is required, the applicable proportion of shares of the
class or series, voting as a separate class or series, also will be
required. The Board has determined that provisions with respect to the
Board and the shareholder voting requirements described above, which
voting requirements are greater than the minimum requirements under
Delaware law or the 1940 Act, are in the best interest of shareholders
generally. Reference should be made to the Agreement and Declaration of
Trust on file with the Securities and Exchange Commission for the full
text of these provisions.
CLOSED-END FUND STRUCTURE
The Fund is a newly organized, diversified, closed-end management
investment company (commonly referred to as a closed-end fund).
Closed-end funds differ from open-end funds (which are generally referred
to as mutual funds) in that closed-end funds generally list their shares
for trading on a stock exchange and do not redeem their shares at the
request of the shareholder. This means that if you wish to sell your
shares of a closed-end fund you must trade them on the market like any
other stock at the prevailing market price at that time. In a mutual fund,
if the shareholder wishes to sell shares of the fund, the mutual fund will
redeem or buy back the shares at " NAV." Also, mutual funds generally
offer new shares on a continuous basis to new investors, and closed-end
funds generally do not. The continuous inflows and outflows of assets in a
mutual fund can make it difficult to manage the fund's investments. By
comparison, closed-end funds are generally able to stay more fully
invested in securities that are consistent with their investment
objective, and also have greater flexibility to make certain types of
investments, and to use certain investment strategies, such as financial
leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their
NAV. Because of this possibility and the recognition that any such
discount may not be in the interest of shareholders, the Fund's Board
might consider from time to time engaging in open-market repurchases,
tender offers for shares or other programs intended to reduce the
discount. There is no guarantee or assurance that the Fund's Board will
decide to engage in any of these actions. Nor is there any guarantee or
assurance that such actions, if undertaken, would result in the shares
trading at a price equal or close to NAV per share. The Board might also
consider converting the Fund to an open-end mutual fund, which would also
require a vote of the shareholders of the Fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount
to their NAVs, and the Fund's Common Shares may also trade at a discount
to their NAV, although it is possible that they may trade at a premium
above NAV. The market price of the Fund's Common Shares will be determined
by such factors as relative demand for and supply of such Common Shares in
the market, the Fund's NAV, general market and economic conditions and
other factors beyond the control of the Fund. See "Net Asset Value."
Although the Fund's common shareholders will not have the right to redeem
their Common Shares, the Fund may take action to repurchase Common Shares
in the open market or make tender offers for its Common Shares. This may
have the effect of reducing any market discount from NAV. There is no
assurance that, if action is undertaken to repurchase or tender for Common
Shares, such action will result in the Common Shares trading at a price
which approximates their NAV. Although share repurchases and tenders could
have a favorable effect on the market price of the Fund's Common Shares,
you should be aware that the acquisition of Common Shares by the Fund will
decrease the capital of the Fund and, therefore, may have the effect of
increasing the Fund's expense ratio and decreasing the asset coverage with
respect to any Preferred Shares outstanding. Any share repurchases or
tender offers will be made in accordance with requirements of the
Securities Exchange Act of 1934, as amended, the 1940 Act and the
principal stock exchange on which the Common Shares are traded.
TAX MATTERS
Federal Tax Matters
The discussion below and in the Statement of Additional Information
provides general tax information related to an investment in the Common
Shares. The discussion reflects applicable tax laws of the United States
as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue
Service retroactively or prospectively. Because tax laws are complex and
often change, you should consult your tax advisor about the tax
consequences of an investment in the Fund.
The Fund invests primarily in tax exempt securities the income of
which is exempt from Federal income tax, including AMT. Consequently, the
regular monthly dividends you receive will generally be exempt from
Federal income tax, including AMT. A portion of these dividends, however,
may be subject to AMT. In addition, dividends may be subject to state and
local taxes. Finally, if the Fund leverages through borrowings, a larger
portion of the dividends may be subject to Federal income tax
Although the Fund does not seek to realize taxable income or capital
gains, the Fund may realize and distribute taxable income or capital gains
from time to time as a result of the Fund's normal investment activities.
The Fund will distribute at least annually any taxable income or realized
capital gains. Distributions of net short-term gains are taxable as
ordinary income. Distributions of net long-term capital gains are taxable
to you as long-term capital gains regardless of how long you have owned
your Common Shares. Dividends will not qualify for a dividends received
deduction generally available to corporate shareholders.
Each year, you will receive a year-end statement designating the
amounts of tax exempt dividends, capital gain dividends and ordinary
income dividends paid to you during the preceding year, including the
source of investment income by state. You will receive this statement from
the firm where you purchased your Common Shares if you hold your
investment in street name; the Fund will send you this statement if you
hold your shares in registered form.
The tax status of your dividends is not affected by whether you
reinvest your dividends or receive them in cash.
In order to avoid corporate taxation of its taxable income and be
permitted to pay tax exempt dividends, the Fund must elect to be treated
as a regulated investment company under Subchapter M of the Code and meet
certain requirements that govern the Fund's sources of income,
diversification of assets and distribution of earnings to shareholders.
The Fund intends to make such an election and meet these requirements. If
the Fund failed to do so, the Fund would be required to pay corporate
taxes on its taxable income and all the distributions would be taxable as
ordinary income to the extent of the
Fund's earnings and profits. In particular, in order for the Fund to pay
tax exempt dividends, at least 50% of the value of the Fund's total assets
must consist of tax exempt obligations on a quarterly basis. The Fund
intends to meet this requirement. If the Fund failed to do so, it would
not be able to pay tax exempt dividends and your distributions
attributable to interest received by the Fund from any source would be
taxable as ordinary income to the extent of the Fund's earnings and
profits.
The Fund may at times buy tax exempt securities at a discount from
the price at which they were originally issued, especially during periods
of rising interest rates. For federal income tax purposes, some or all of
any market discount that is other than de minimis will be included in the
Fund's ordinary income and will be taxable to shareholders as such when it
is distributed.
The Fund may be required to withhold taxes on certain of your
dividends if you have not provided the Fund with your correct taxpayer
identification number (if you are an individual, normally your Social
Security number), or if you are otherwise subject to back-up withholding.
If you receive Social Security benefits, you should be aware that tax
exempt dividend income is taken into account in calculating the amount of
these benefits that may be subject to Federal income tax. If you borrow
money to buy Fund shares, you may not be permitted to deduct the interest
on that loan. Under Federal income tax rules, Fund shares may be treated
as having been bought with borrowed money even if the purchase of the Fund
shares cannot be traced directly to borrowed money. Holders are urged to
consult their own tax advisors regarding the impact of an investment in
Common Shares upon the deductibility of interest payable by the holder.
State and Local Tax Matters
The exemption from Federal income tax for exempt-interest dividends
does not necessarily result in exemption for such dividends under the
income or other tax laws of any state or local taxing authority. In some
states, the portion of any exempt-interest dividend that is derived from
interest received by a regulated investment company on its holdings of
that state's securities and its political subdivisions and
instrumentalities is exempt from that state's income tax. Therefore, the
Fund will report annually to its shareholders the percentage of interest
income earned by the Fund during the preceding year on tax exempt
obligations indicating, on a state-by-state basis, the source of such
income. Shareholders of the Fund are advised to consult with their own tax
advisors about state and local tax matters.
Please refer to the Statement of Additional Information for more
detailed information. You are urged to consult your tax advisor.
UNDERWRITING
Subject to the terms and conditions of a purchase agreement dated
[ ], 2003, each underwriter named below has severally agreed
to purchase, and the Fund has agreed to sell to such underwriter the
number of Common Shares set forth opposite the name of such underwriter.
Underwriter Number of Common Shares
Total..............................................[ ]
---------------------
The purchase agreement provides that the obligations of the
underwriters to purchase the Common Shares included in this offering are
subject to the approval of certain legal matters by counsel under the
purchase agreement and to certain other conditions. The underwriters are
obligated to purchase all of the Common shares (other than those covered
by the over-allotment described below) if any of the Common Shares are
purchased. In the purchase agreement, the Fund and the Adviser have
agreed to indemnify the underwriters against certain liabilities,
including liabilities arising under the Securities Act of 1933, as
amended, or to contribute to payments the underwriters may be required to
make for any of those liabilities.
The underwriters propose to initially offer some of the Common
Shares directly to the public at the public offering price set forth on
the cover page of this prospectus and some of the Common Shares to certain
dealers at the public offering price less a concession not in excess of
$[X.XX] per share. The sales load the Fund will pay of $.675 per Common
Share is equal to 4.5% of the initial offering price. The underwriters
may allow, and the dealers may reallow, a discount not in excess of
$[X.XX] per share on sales to other dealers. After the initial public
offering, the public offering price, concession and discount may be
changed.
The following table shows the public offering price, sales load and
proceeds before expenses to the Fund. The information assumes either no
exercise or full exercise by the underwriters of their over-allotment
option.
Without With
Per Share Option Option
Public offering price $15 $ $
Sales load $ $ $
Proceeds, before expenses, to
the Fund $ $ $
The expenses of the offering are estimated at $[X.XX] and are
payable by the Fund. The Fund has agreed to pay the underwriters $0.005
per Common Share as a partial reimbursement of expenses incurred in
connection with the offering. The Adviser has agreed to pay
organizational expenses and offering costs of the Fund (other than sales
load) that exceed $.003 per Common Share.
The Fund has granted the underwriters an option to purchase up to
[XXX] additional Common Shares at the public offering price, less the
sales load, within 45 days from the date of this prospectus solely to
cover any over-allotments. If the underwriters exercise this option, each
will be obligated, subject to conditions contained in the purchase
agreement, to purchase a number of additional shares proportionate to that
underwriter's initial amount reflected in the above table.
Until the distribution of the Common Shares is complete, SEC rules
may limit underwriters and selling group members from bidding for and
purchasing our Common Shares. However, the representatives may engage in
transactions that stabilize the price of our Common Shares, such as bids
or purchases to peg, fix or maintain that price.
If the underwriters create a short position in our Common Shares in
connection with the offering, i.e., if they sell more Common Shares than
are listed on the cover of this prospectus, the representatives may reduce
that short position by purchasing Common Shares in the open market. The
representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above. Purchases of
Common Shares to stabilize its price or to reduce a short position may
cause the price of our Common Shares to be higher than it might be in the
absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of our Common Shares.
In addition, neither we nor any of the underwriters make any
representation that the representatives will engage in these transactions
or that these transactions, once commenced, will not be discontinued
without notice.
[The Fund has agreed not to offer or sell any additional Common
Shares for a period of 180 days after the date of the purchase agreement
without the prior written consent of the underwriters, except for the sale
of the Common Shares to the underwriters pursuant to the purchase
agreement and the sale of Common Shares pursuant to the Fund's Dividend
Reinvestment Plan.]
The Fund anticipates that the underwriters may from time to time act
as brokers or dealers in executing the Fund's portfolio transactions after
they have ceased to be underwriters. The underwriters are active
underwriters of, and dealers in, securities and act as market markers in a
number of such securities, and therefore can be expected to engage in
portfolio transactions with the Fund.
The Common Shares will be sold to ensure that New York Stock
Exchange distribution standards (round lots, public shares and aggregate
market value) will be met.
The Adviser has also agreed to pay from its own assets an additional
commission to [XXX]. This additional commission will be payable quarterly
at the annual rate of 0.10% of the Fund's Managed Assets during the
continuance of the investment management agreement or other advisory
agreement between the Adviser and the Fund. The total amount of these
additional commission payments will not exceed 4.5% of the total price to
public of the Common Shares offered hereby; provided, that in determining
when the maximum additional commission amount has been paid, the value of
each of the quarterly payments shall be discounted at the annual rate of
10% to the closing date of this offering. [XXX] has agreed to provide
certain after-market services to the Adviser designed to maintain the
visibility of the Fund on an ongoing basis, and [XXX] to provide relevant
information, studies or reports regarding the Fund and the closed-end
investment company industry.
CUSTODIAN ANDTRANSFER AGENT
The Custodian of the assets of the Fund is State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The
Custodian performs custodial, fund accounting and portfolio accounting
services. EquiServe Trust Company, N.A., P.O. Box 43011, Providence, RI
02940-3011, will serve as the Fund's Transfer Agent and Dividend
Disbursing Agent.
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be
passed upon for the Fund by Dickstein Shapiro Morin & Oshinsky LLP and for
the Underwriters by [XXX], New York, New York. Dickstein Shapiro Morin &
Oshinsky LLP and [XXX] may rely as to certain matters of Delaware law on
the opinion of [__________].
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Page
Use of Proceeds
Fundamental Investment Objective, Policy and Limitations
Non-fundamental Investment Policies
Investment Securities
Management of the Fund
Brokerage Transactions
Description of Shares
Repurchase of Common Shares
Tax Matters
Performance Related and Comparative Information
Federated Investors, Inc.
Experts
Additional Information
Independent Auditors' Report
Statement of Assets and Liabilities
APPENDIX A Ratings of Investments
4,000,000 Shares
Federated Municipal Income Fund
Common Shares
---------------------------------------------------
PROSPECTUS
---------------------------------------------------
[Month Day, 2002]
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 MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Federated Municipal Income Fund (the "Fund") is a newly organized,
diversified, closed-end management investment company. This Statement of
Additional Information relating to Common Shares does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto dated [MONTH DAY], 2002. This Statement of Additional Information
does not include all information that a prospective investor should
consider before purchasing Common Shares, and investors should obtain and
read the prospectus prior to purchasing such Common Shares. A copy of the
prospectus may be obtained without charge by calling 1-800-341-7400. You
may also obtain a copy of the prospectus on the Securities and Exchange
Commission's web site (http://www.sec.gov). Capitalized terms used but not
defined in this Statement of Additional Information have the meanings
ascribed to them in the prospectus.
TABLE OF CONTENTS
Page
Use of Proceeds
Fundamental Investment Objective, Policy and Limitations
Non-fundamental Investment Policies
Investment Securities
Management of the Fund
Brokerage Transactions
Description of Shares
Repurchase of Common Shares
Tax Matters
Performance Related and Comparative Information
Federated Investors, Inc.
Experts
Additional Information
Independent Auditors' Report
Statement of Assets and Liabilities
APPENDIX A Ratings of Investments
This Statement of Additional Information is dated October 16, 2002.
USE OF PROCEEDS
Pending investment in tax exempt securities that meet the Fund's
investment objective and policies, the net proceeds of the offering will
be invested in high-quality, short-term tax-exempt money market securities
or in high-quality tax exempt securities with relatively low volatility
(such as pre-refunded and intermediate-term bonds), to the extent such
securities are available. If necessary to invest fully the net proceeds of
the offering immediately, the Fund may also purchase, as temporary
investments, short-term taxable investments of the type described under
"Investment Policies and Techniques--Short-Term Taxable Fixed Income
Securities," 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.
FUNDAMENTAL INVESTMENT OBJECTIVE, POLICY AND LIMITATIONS
The following fundamental investment objective, policy and
limitations may not be changed by the Fund's Board without the approval of
the holders of a majority of (1) the outstanding Common Shares and
Preferred Shares voting together as a class, and (2) the outstanding
Preferred Shares, voting as a separate class. When used with respect to
particular shares of the Fund, "majority of the outstanding" means (i) 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 (ii) more than
50% of the shares, whichever is less.
Investment Objectives
The Fund's investment objective is to provide current income exempt from
federal income tax, including AMT.
Investment Policy
The Fund will invest its assets so that at least 80% of the income that it
distributes will be exempt from federal 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.
Diversification of Investments
With respect to securities comprising 75% of the value of its total
assets, the Fund will not purchase the securities of any one issuer
(other than cash, cash items, securities issued or guaranteed by the
government of the United States or its agencies or instrumentalities
and repurchase agreements collateralized by such U.S. government
securities, and securities of other investment companies) if as a
result more than 5% of the value of its total assets would be invested
in the securities of that issuer, or it would own more than 10% of the
outstanding voting securities of that issuer.
Underwriting
The Fund will not underwrite any issue of securities, except as it may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies and limitations.
Investing in Real Estate
The Fund will not buy or sell real estate, although it may invest in
municipal securities secured by real estate or interests in real estate.
Investing in Commodities
The Fund will not buy or sell commodities or commodity contracts but
may engage in transactions in financial futures contracts.
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.
Issuing Senior Securities
The Fund may issue senior securities as permitted by 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. It is nonetheless possible that the Fund may
invest more than 25% of its Managed Assets in a broader economic sector of
the market for tax exempt obligations, such as revenue obligations of
hospitals and other health care facilities or electrical utility revenue
obligations.
For the purpose of applying the concentration limitation, a
non-governmental issuer will be deemed the sole issuer of a security when
its assets and revenues are separate from other governmental entities and
its securities are backed only by its assets and revenues. Similarly, in
the case of a non-governmental issuer, such as an industrial corporation
or a privately owned or operated hospital, if the security is backed only
by the assets and revenues of the non-governmental issuer, then such
non-governmental issuer would be deemed to be the sole issuer. Where a
security is also backed by the enforceable obligation of a superior or
unrelated governmental or other entity (other than a bond insurer), it
will also be included in the computation of securities owned that are
issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank.
NON-FUNDAMENTAL INVESTMENT POLICIES
The Fund is also subject to the following non-fundamental investment
policies, which may be changed by the Board without shareholder approval.
Short Sales
The Fund will not make any short sale of securities except in conformity
with applicable laws, rules and regulations and unless after giving effect
to such sale, the market value of all securities sold short does not
exceed 25% of the value of the Fund's Managed 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 federal regular income taxes. 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.
Inverse Floaters. An inverse floater has a floating or variable
interest rate that moves in the opposite direction of market interest
rates. When market interest rates go up, the interest rate paid on the
inverse floater goes down; when market interest rates go down, the
interest rate paid on the inverse floater goes up. Inverse floaters
generally respond more rapidly to market interest rate changes than fixed
rate tax exempt securities. Inverse floaters are subject to interest rate
risks and leverage risks.
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 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 for loss.
The Fund currently intends that any use of structured notes will be for
the purpose or 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.
Delayed Delivery Transactions
Investing In Securities Of Other Investment Companies
The Fund may invest its assets in securities of other open-end or
closed-end investment companies, including the securities of affiliated
investment companies, as an efficient means of carrying out its investment
policies and managing its uninvested cash.
Temporary Defensive Investments
The Fund may make temporary defensive investments in the following taxable
securities:
Treasury Securities. Treasury securities are direct obligations of
the federal government of the United States.
Agency Securities. Agency securities are issued or guaranteed by a
federal agency or other government sponsored entity ("GSE") acting under
federal authority. The United States supports some GSEs with its full
faith and credit. Other GSEs receive support through federal
subsidies, loans or other benefits. A few GSEs have no explicit financial
support, but are regarded as having implied support because the federal
government sponsors their activities.
Bank Instruments. Bank instruments are unsecured interest bearing
deposits with banks. Bank instruments include bank accounts, time
deposits, certificates of deposit and banker's acceptances.
Corporate Debt Securities. Corporate debt securities are fixed
income securities issued by businesses. Notes, bonds, debentures and
commercial paper are the most prevalent types of corporate debt securities.
Commercial Paper. Commercial paper is an issuer's obligation with a
maturity of less than nine months. Companies typically issue commercial
paper to pay for current expenditures. Most issuers constantly reissue
their commercial paper and use the proceeds (or bank loans) to repay
maturing paper. If the issuer cannot continue to obtain liquidity in this
fashion, its commercial paper may default. The short maturity of
commercial paper reduces both the market and credit risks as compared to
other debt securities of the same issuer.
Repurchase Agreements. Repurchase agreements are transactions in
which the Fund buys a security from a dealer or bank and agrees to sell
the security back at a mutually agreed upon time and place. The repurchase
price exceeds the sale price, reflecting the Fund's return on the
transaction. This return is unrelated to the interest rate on the
underlying security. The Fund will enter into repurchase agreements only
with banks and other recognized financial institutions, such as securities
dealers, deemed creditworthy by the Adviser.
The Fund's custodian or subcustodian will take possession of the
securities subject to repurchase agreements. The Adviser or subcustodian
will monitor the value of the underlying security each day to ensure that
the value of the security always equals or exceeds the repurchase price.
Repurchase agreements are subject to credit risks.
MANAGEMENT OF THE FUND
Board of Trustees
The Board is responsible for managing the Fund's business affairs
and for exercising all the Fund's powers except those reserved for the
shareholders. The following tables give information about each Board
member and the senior officers of the Fund. Where required, the tables
separately list Board members who are "interested persons" of the Fund
(i.e., "Interested" Board members) and those who are not (i.e.,
"Independent" Board members). Unless otherwise noted, the address of each
person listed is Federated Investors Tower, 1001 Liberty Avenue,
Pittsburgh, PA. The Federated Fund Complex consists of 44 investment
companies (comprising 139 portfolios). Unless otherwise noted, each Board
member oversees all portfolios in the Federated Fund Complex; serves for
an indefinite term; and also serves as a Board member of the following
investment company complexes: Banknorth Funds--five portfolios; CCMI
Funds--two portfolios; Regions Funds--eight portfolios; Riggs Funds--nine
portfolios; and WesMark Funds--five portfolios.
Interested Trustees Background And Compensation
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Total
Compensation
Aggregate From
Name Birth Date CompensationFund and
Address Principal Occupation(s) for Past Five Years, From Federated
Positions Held Other Directorships Held and Previous Positions Fund + Fund
with Fund Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
John F. Principal Occupations: Chairman and Director or $0 $0
Donahue* Birth Trustee of the Federated Fund Complex; Chairman
Date: July28, and Director, Federated Investors, Inc.;
1924 CHAIRMAN Chairman, Federated Investment Management
AND Company, Federated Global Investment Management
TRUSTEE(1)(2) Corp. and Passport Research, Ltd. Previous
Positions: Trustee, Federated Investment
Management Company and Chairman and Director,
Federated Investment Counseling.
J. Christopher Principal Occupations: President and Chief $0 $0
Donahue* Birth Executive Officer of the Federated Fund
Date: April11, Complex; Director or Trustee of some of the
1949 PRESIDENT Funds in the Federated Fund Complex; President,
AND Chief Executive Officer and Director, Federated
TRUSTEE(1)(2) Investors, Inc.; President, Chief Executive
Officer and Trustee, Federated Investment
Management Company; Trustee, Federated
Investment Counseling; President, Chief
Executive Officer and Director, Federated
Global Investment Management Corp.; President
and Chief Executive Officer, Passport Research,
Ltd.; Trustee, Federated Shareholder Services
Company; Director, Federated Services Company.
Previous Position: President, Federated
Investment Counseling.
Lawrence D. Principal Occupations: Director or Trustee of NA $117,117.17
Ellis, M.D.* the Federated Fund Complex; Professor of
Birth Date: Medicine, University of Pittsburgh; Medical
October11, 1932 Director, University of Pittsburgh Medical
3471 Fifth Center Downtown; Hematologist, Oncologist and
Avenue Suite Internist, University of Pittsburgh Medical
1111 Center. Other Directorships Held: Member,
Pittsburgh, PA National Board of Trustees, Leukemia Society of
TRUSTEE(1)(2) America. Previous Positions: Trustee,
University of Pittsburgh; Director, University
of Pittsburgh Medical Center.
* Family relationships and reasons for "interested" status: John F.
Donahue is the father of J. Christopher Donahue; both are "interested" due
to the positions they hold with Federated Investors, Inc. and its
subsidiaries. Lawrence D. Ellis, M.D. is "interested" because his
son-in-law is employed by, Federated Securities Corp., a subsidiary of
Federated Investors, Inc.
+ Because the Fund is a newly established entity, compensation has not yet
been earned and will be reported following the Fund's next fiscal year.
[Explain basis for Trustees compensation.]
Independent Trustees Background And Compensation
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous CompensationCompensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year) Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Thomas G. Principal Occupation: Director or Trustee of NA $128,847.72
Bigley Birth the Federated Fund Complex. Other
Date: Directorships Held: Director, Member of
February3, 1934 Executive Committee, Children's Hospital of
15 Old Timber Pittsburgh; Director, Member of Executive
Trail Committee, University of Pittsburgh. Previous
Pittsburgh, PA Position: Senior Partner, Ernst & Young LLP.
TRUSTEE(1)(2)
John T. Conroy, Principal Occupations: Director or Trustee of NA $128,847.66
Jr. Birth Date: the Federated Fund Complex; Chairman of the
June23, 1937 Board, Investment Properties Corporation;
Grubb & Partner or Trustee in private real estate
Ellis/Investment ventures in Southwest Florida. Previous
Properties Positions: President, Investment Properties
Corporation Corporation; Senior Vice President, John R.
3838 Tamiami Wood and Associates, Inc., Realtors;
Trail North President, Naples Property Management, Inc.
Naples, FL and Northgate Village Development Corporation.
TRUSTEE(1)(2)
Nicholas P. Principal Occupation: Director or Trustee of NA $126,923.53
Constantakis the Federated Fund Complex; Previous
Birth Date: Position: Partner, Andersen Worldwide SC
September3, (prior to 9/1/97). Other Directorships Held:
1939 175 Director, Michael Baker Corporation
Woodshire Drive (engineering and energy services worldwide).
Pittsburgh, PA
TRUSTEE (1)(2)
John F. Principal Occupation: Director or Trustee of NA $115,368.16
Cunningham the Federated Fund Complex. Other
Birth Date: Directorships Held: Chairman, President and
March5, 1943 Chief Executive Officer, Cunningham & Co.,
353 El Brillo Inc. (strategic business consulting); Trustee
Way Palm Beach, Associate, Boston College. Previous Positions:
FL TRUSTEE(1)(2) Director, Redgate Communications and EMC
Corporation (computer storage systems);
Chairman of the Board and Chief Executive
Officer, Computer Consoles, Inc.; President
and Chief Operating Officer, Wang
Laboratories; Director, First National Bank of
Boston; Director, Apollo Computer, Inc.
Peter E. Madden Principal Occupation: Director or Trustee of NA $117,117.14
Birth Date: the Federated Fund Complex; Management
March16, 1942 Consultant. Previous Positions:
One Royal Palm Representative, Commonwealth of Massachusetts
Way 100 Royal General Court; President, State Street Bank
Palm Way Palm and Trust Company and State Street Corporation
Beach, FL (retired); Director, VISA USA and VISA
TRUSTEE(1)(2) International; Chairman and Director,
Massachusetts Bankers Association; Director,
Depository Trust Corporation; Director, The
Boston Stock Exchange.
Charles F. Principal Occupations: Director or Trustee of NA $128,847.66
Mansfield, Jr. the Federated Fund Complex; Management
Birth Date: Consultant; Executive Vice President, DVC
April10, 1945 Group, Inc. (marketing, communications and
80 South Road technology) (prior to 9/1/00). Previous
Westhampton Positions: Chief Executive Officer, PBTC
Beach, NY International Bank; Partner, Arthur Young &
TRUSTEE(1)(2) Company (now Ernst & Young LLP); Chief
Financial Officer of Retail Banking Sector,
Chase Manhattan Bank; Senior Vice President,
HSBC Bank USA (formerly, Marine Midland Bank);
Vice President, Citibank; Assistant Professor
of Banking and Finance, Frank G. Zarb School
of Business, Hofstra University.
John E. Murray, Principal Occupations: Director or Trustee of NA $117,117.14
Jr., J.D., the Federated Fund Complex; Chancellor and Law
S.J.D. Birth Professor, Duquesne University; Consulting
Date: Partner, Mollica & Murray. Other Directorships
December20, Held: Director, Michael Baker Corp.
1932 (engineering, construction, operations and
Chancellor, technical services). Previous Positions:
Duquesne President, Duquesne University; Dean and
University Professor of Law, University of Pittsburgh
Pittsburgh, PA School of Law; Dean and Professor of Law,
TRUSTEE(1)(2) Villanova University School of Law.
Marjorie P. Principal Occupations: Director or Trustee of NA $117,117.17
Smuts Birth the Federated Fund Complex; Public Relations/
Date: June21, Marketing Consultant/Conference Coordinator.
1935 4905 Previous Positions: National Spokesperson,
Bayard Street Aluminum Company of America; television
Pittsburgh, PA producer; President, Marj Palmer Assoc.;
TRUSTEE(1)(2) Owner, Scandia Bord.
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Date Principal Occupation(s) for Past Five Years, Aggregate Total
Address Other Directorships Held and Previous CompensationCompensation
Positions Held Positions From From
with Fund Fund Fund and
(past Federated
fiscal Fund
year) Complex
(past
calendar
year)
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
John S. Walsh Principal Occupations: Director or Trustee of NA $117,117.17
Birth Date: the Federated Fund Complex; President and
November28, Director, Heat Wagon, Inc. (manufacturer of
1957 2604 construction temporary heaters); President and
William Drive Director, Manufacturers Products, Inc.
Valparaiso, IN (distributor of portable construction
TRUSTEE(1)(2) heaters); President, Portable Heater Parts, a
division of Manufacturers Products, Inc. Other
Directorships Held: Director, Walsh & Kelly,
Inc. (heavy highway contractor). Previous
Position: Vice President, Walsh & Kelly, Inc.
OFFICERS**
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Name Birth Principal Occupation(s) and Previous Positions
Date Address
Positions Held
with Fund
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Edward C. Principal Occupations: President, Executive Vice President and
Gonzales Birth Treasurer of some of the Funds in the Federated Fund Complex; Vice
Date: Chairman, Federated Investors, Inc.; Trustee, Federated
October22, Administrative Services. Previous Positions: Trustee or Director of
1930 EXECUTIVE some of the Funds in the Federated Fund Complex; CEO and Chairman,
VICE PRESIDENT Federated Administrative Services; Vice President, Federated
Investment Management Company, Federated Investment Counseling,
Federated Global Investment Management Corp. and Passport Research,
Ltd.; Director and Executive Vice President, Federated Securities
Corp.; Director, Federated Services Company; Trustee, Federated
Shareholder Services Company.
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
_________ been a Senior Portfolio Manager and a Senior Vice President of the
SENIOR VICE Fund's Adviser since 1996. From 1988 through 1995, Ms. Ochson served
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.
(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
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 200[X] 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 200[X] 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 200[X]
meeting of shareholders.
** Officers do not receive any compensation from the Fund.
Thomas R. Donahue, Chief Financial Officer, Vice President, Treasurer and
Assistant Secretary of Federated Investors, Inc. and an officer of its
various advisory and underwriting subsidiaries, has served as a Term
Member on the Board of Directors of Duquesne University, Pittsburgh,
Pennsylvania, since May 12, 2000. Mr. John E. Murray, Jr., an Independent
Trustee of the Fund, served as President of Duquesne from 1988 until his
retirement from that position in 2001, and became Chancellor of Duquesne
on August 15, 2001. It should be noted that Mr. Donahue abstains on any
matter that comes before Duquesne's Board that affects Mr. Murray
personally.
Committees of the Board
--------------------------------------------------------------------------------------
Meetings
Held
During
Last
Board Committee Fiscal
Committee Members Committee Functions Year
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Executive John F. In between meetings of the full Board, the NA
Donahue John Executive Committee generally may exercise all
E. Murray, the powers of the full Board in the management
Jr., J.D., and direction of the business and conduct of the
S.J.D. affairs of the Corporation in such manner as the
Executive Committee shall deem to be in the best
interests of the Corporation. However, the
Executive Committee cannot elect or remove Board
members, increase or decrease the number of
Trustees, elect or remove any Officer, declare
dividends, issue shares or recommend to
shareholders any action requiring shareholder
approval.
Audit Thomas G. The Audit Committee reviews and recommends to NA
Bigley John T. the full Board the independent auditors to be
Conroy, Jr. selected to audit the Fund's financial
Nicholas P. statements; meets with the independent auditors
Constantakis periodically to review the results of the audits
Charles F. and report the results to the full Board;
Mansfield, Jr. evaluates the independence of the auditors,
reviews legal and regulatory matters that may
have a material effect on the financial
statements, related compliance policies and
programs, and the related reports received from
regulators; reviews the Fund's internal audit
function; review compliance with the Fund's code
of conduct/ethics; review valuation issues;
monitors inter-fund lending transactions;
reviews custody services and issues and
investigate any matters brought to the
Committee's attention that are within the scope
of its duties.
Board Ownership of Shares in the Fund and in the Federated Family of
Investment Companies
--------------------------------------------
Aggregate
Dollar
Range of
Dollar Shares
Range Owned in
of Federated
Interested Board Shares Family of
Member Name Owned Investment
in Fund Companies
--------------------------------------------
--------------------------------------------
John F. Donahue $0 Over
$100,000
J. Christopher $0 Over
Donahue $100,000
Lawrence D. Ellis, $0 Over
M.D. $100,000
Independent Board
Member Name
Thomas G. Bigley $0 Over
$100,000
John T. Conroy, Jr. $0 Over
$100,000
Nicholas P. $0 Over
Constantakis $100,000
John F. Cunningham $0 Over
$100,000
Peter E. Madden $0 Over
$100,000
Charles F. $0 $50,001 -
Mansfield, Jr. $100,000
John E. Murray, $0 Over
Jr., J.D., S.J.D. $100,000
Marjorie P. Smuts $0 Over
$100,000
John S. Walsh $0 Over
$100,000
Code of Ethics
As required by SEC rules, the Fund, its Adviser, and the Fund's
principal underwriters have adopted codes of ethics. These codes permit
personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund. These codes can be
reviewed and copied at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Securities and
Exchange Commission at 1-202-942-8090. The codes of ethics are available
on the EDGAR Database on the Security and Exchange Commission's web site
(http://www.sec.gov), and copies of these codes may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the Security and Exchange
Commission's Public Reference Section, Washington, D.C. 20549-0102.
Investment Adviser
The Adviser conducts investment research and makes investment decisions
for the Fund.
The Adviser is a wholly owned subsidiary of Federated.
Pursuant to an investment management agreement between the Adviser and the
Fund, the Fund has agreed to pay for the investment advisory services and
facilities provided by the Adviser a fee payable monthly in arrears at an
annual rate equal to 0.55% of the average weekly value of the Fund's
Managed Assets (the "Management Fee"). The Adviser has voluntarily agreed
to waive receipt of a portion of its Management Fee in the amount of 0.20%
of the average weekly value of the Fund's Managed Assets for the first
five years of the Fund's operations (through December 31, 2007), and for a
declining amount for an additional three years (through December 31,
2010). Managed Assets means the total assets of the Fund including any
assets attributable to any Preferred Shares or borrowings that may be
outstanding, minus the sum of accrued liabilities (other than indebtedness
attributable to financial leverage). The liquidation preference on the
Preferred Shares is not a liability. This means that during periods in
which the Fund is using leverage, the fee paid to the Adviser will be
higher than if the Fund did not use leverage because the fee is calculated
as a percentage of the Fund's Managed Assets, which include those assets
purchased with leverage.
The Adviser shall not be liable to the Fund or any Fund shareholder for
any losses that may be sustained in the purchase, holding, or sale of any
security or for anything done or omitted by it, except acts or omissions
involving willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its contract with the Fund.
As required by the 1940 Act, the Board has reviewed the Fund's investment
advisory contract. During its review of the contract, the Board considers
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.
Custodian
State Street Bank and Trust Company, Boston, Massachusetts,
is custodian for the securities and cash of the Fund. Foreign instruments
purchased by the Fund are held by foreign banks participating in a network
coordinated by State Street Bank.
Transfer Agent and Dividend Disbursing Agent
EquiServe Trust Company, N.A. maintains all necessary shareholder
records. The Fund pays the transfer agent a fee based on the size, type
and number of accounts and transactions made by shareholders.
Independent Auditors
The independent auditor for the Fund, [XXXXXXX], conducts its audits
in accordance with auditing standards generally accepted in the United
States of America, which require it to plan and perform its audits to
provide reasonable assurance about whether the Fund's financial statements
and financial highlights are free of material misstatement.
Brokerage Transactions
When selecting brokers and dealers to handle the purchase and sale
of portfolio instruments, the Adviser looks for prompt execution of the
order at a favorable price. The Adviser will generally use those who are
recognized dealers in specific portfolio instruments, except when a better
price and execution of the order can be obtained elsewhere. In selecting
among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling Shares of the
Fund and other funds under common control with the Fund. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to review by the Fund's Board.
Investment decisions for the Fund are made independently from those
of other accounts managed by the Adviser. When the Fund and one or more
of those accounts invests in, or disposes of, the same security, available
investments or opportunities for sales will be allocated among the Fund
and the accounts(s) in a manner believed by the Adviser to be equitable.
While the coordination and ability to participate in volume transactions
may benefit the Fund, it is possible that this procedure could adversely
impact the price paid or received and/or the position obtained or disposed
of by the Fund.
DESCRIPTION OF SHARES
Common Shares
The Fund intends to hold annual meetings of shareholders so long as
the Common Shares are listed on a national securities exchange and such
meetings are required as a condition to such listing.
Preferred Shares
Although the terms of any Preferred Share issued by the Fund,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board (subject to
applicable law and the Fund's Agreement and Declaration of Trust) when it
authorizes a Preferred Shares offering, the Fund currently expects that
the preference on distributions, liquidation preference, voting rights and
redemption provisions of any such Preferred Shares will likely be as
stated in the prospectus.
If the Board determines to proceed with an offering of Preferred
Shares, the terms of Preferred Shares may be the same as, or different
from, the terms described in the prospectus, subject to applicable law and
the Fund's Agreement and Declaration of Trust. The Board, without the
approval of Common Shareholders, may authorize an offering of Preferred
Shares or may determine not to authorize such an offering, and may fix the
terms of the Preferred Shares to be offered.
Other Shares
The Board (subject to applicable law and the Fund's Agreement and
Declaration of Trust) may authorize an offering, without the approval of
the Common Shareholder or Preferred Shareholder, of other classes of
shares, or other classes or series of shares, as they determine to be
necessary, desirable or appropriate, having such terms, rights,
preferences, privileges, limitations and restrictions as the board of
trustees see fit. The Fund currently does not expect to issue any other
classes of shares, or series of shares, except for the Common Shares and
the Preferred Shares.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end management investment company and as such
its Common Shareholders will not have the right to cause the Fund to
redeem their shares. Instead, the Fund's Common Shares will trade in the
open market at a price that will be a function of several factors,
including dividend levels (which are in turn affected by expenses), NAV,
call protection, dividend stability, relative demand for and supply of
such shares in the market, general market and economic conditions and
other factors. Because shares of a closed-end investment company may
frequently trade at prices lower than NAV, the Fund's Board may consider
action that might be taken to reduce or eliminate any material discount
from NAV in respect of Common Shares, which may include the repurchase of
such Common Shares in the open market or in private transactions, the
making of a tender offer for such Common Shares, or the conversion of the
Fund to an open-end investment company. The Board may decide not to take
any of these actions. In addition, there can be no assurance that share
repurchases or tender offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's Preferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise
acquire any of its Common Shares unless (1) all accrued Preferred Shares
dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the NAV of the Fund's portfolio (determined after
deducting the acquisition price of the Common Shares) is at least 200% of
the liquidation value of the outstanding Preferred Shares (expected to
equal the original purchase price per share plus any accrued and unpaid
dividends thereon). Any service fees incurred in connection with any
tender offer made by the Fund will be borne by the Fund and will not
reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Fund may borrow to
finance the repurchase of shares or to make a tender offer. Interest on
any borrowings to finance share repurchase transactions or the
accumulation of cash by the Fund in anticipation of share repurchases or
tenders will reduce the Fund's net income. Any share repurchase, tender
offer or borrowing that might be approved by the Fund's Board would have
to comply with the Securities Exchange Act of 1934, as amended, the 1940
Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from
NAV will be made by the Board at the time it considers such issue, it is
the Board's present policy, which may be changed by the Board, not to
authorize repurchases of Common Shares or a tender offer for such Common
Shares if: (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the New York Stock Exchange, or (b)
impair the Fund's status as a regulated investment company under the Code,
(which would make the Fund a taxable entity, causing the Fund's income to
be taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund) or as a registered
closed-end investment company under the Investment Company Act; (2) the
Fund would not be able to liquidate portfolio securities in an orderly
manner and consistent with the Fund's investment objective and policies in
order to repurchase shares; or (3) there is, in the Board's judgment, any
(a) material legal action or proceeding instituted or threatened
challenging such transactions or otherwise materially adversely affecting
the Fund, (b) general suspension of or limitation on prices for trading
securities on the New York Stock Exchange, (c) declaration of a banking
moratorium by Federal or state authorities or any suspension of payment by
United States or New York banks, (d) material limitation affecting the
Fund or the issuers of its portfolio securities by Federal or state
authorities on the extension of credit by lending institutions or on the
exchange of foreign currency, (e) commencement of war, armed hostilities
or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would
have a material adverse effect (including any adverse tax effect) on the
Fund or its shareholders if shares were repurchased. The Board may in the
future modify these conditions in light of experience.
The repurchase by the Fund of its shares at prices below NAV will
result in an increase in the NAV of those shares that remain outstanding.
However, there can be no assurance that share repurchases or tender offers
at or below NAV will result in the Fund's shares trading at a price equal
to their net asset value. Nevertheless, the fact that the Fund's shares
may be the subject of repurchase or tender offers from time to time, or
that the Fund may be converted to an open-end investment company, may
reduce any spread between market price and NAV that might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will
decrease the Fund's Managed Assets which would likely have the effect of
increasing the Fund's expense ratio. Any purchase by the Fund of its
Common Shares at a time when Preferred Shares are outstanding will
increase the leverage applicable to the outstanding Common Shares then
remaining.
Before deciding whether to take any action if the Common Shares
trade below NAV, the Fund's Board would likely consider all relevant
factors, including the extent and duration of the discount, the liquidity
of the Fund's portfolio, the impact of any action that might be taken on
the Fund or its shareholders and market considerations. Based on these
considerations, even if the Fund's shares should trade at a discount, the
Board may determine that, in the interest of the Fund and its
shareholders, no action should be taken.
TAX MATTERS
The following is a description of certain Federal income tax
consequences to a shareholder of acquiring, holding and disposing of
Common Shares. The discussion reflects applicable tax laws of the United
States as of the date of this prospectus, which tax laws may be changed or
subject to new interpretations by the courts or the Internal Revenue
Service retroactively or prospectively.
The Fund intends to elect to be treated and to qualify to be taxed
as a regulated investment company under Subchapter M of the Code. In order
to qualify as a regulated investment company, the Fund must satisfy
certain requirements relating to the source of its income, diversification
of its assets, and distributions of its income to its shareholders. First,
the Fund must derive at least 90% of its annual gross income (including
tax-exempt interest) from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock or
securities or foreign currencies, or other income (including but not
limited to gains from options, futures and forward contracts) derived with
respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"). Second, the Fund must diversify
its holdings so that, at the close of each quarter of its taxable year,
(i) 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 (ii) 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 (i) 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 (ii) 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, (i) will be
required to include in income for Federal income tax purposes, as
long-term capital gain, their share of such undistributed amount and (ii)
will be entitled to credit their proportionate shares of the tax paid by
the Fund against their Federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds such liabilities. For
Federal income tax purposes, the tax basis of shares owned by a
shareholder of the Fund will be increased by the amount of undistributed
capital gains included in the gross income of the shareholder less the tax
deemed paid by the shareholder under clause (ii) of the preceding
sentence. The Fund intends to distribute at least annually to its
shareholders all or substantially all of its net tax-exempt interest and
any investment company taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain, to
elect (unless it has made a taxable year election for excise tax purposes
as discussed below) to treat all or part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
Distributions by the Fund of investment company taxable income, if
any, whether received in cash or additional shares, will be taxable to
shareholders as ordinary income (to the extent of the current or
accumulated earning and profits of the Fund) and generally will not
qualify for the dividends received deduction in the case of corporate
shareholders. Net long-term capital gains realized by the Fund and
distributed to shareholders in cash or additional shares will be taxable
to shareholders as long-term capital gains regardless of the length of
time investors have owned shares of the Fund. Distributions by the Fund
that do not constitute ordinary income dividends, capital gain
distributions or exempt-interest dividends (as defined below) will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his or her shares. Any excess will be treated
as gain from the sale of his or her shares, as discussed below.
The Fund intends to invest in sufficient tax exempt securities to
permit payment of "exempt-interest dividends" (as defined in the Code).
Except as provided below, exempt-interest dividends paid to holders of
common shares are not includable in the holder's gross income for Federal
income tax purposes.
If the Fund engages in hedging transactions involving financial
futures and options, these transactions will be subject to special tax
rules, the effect of which may be to accelerate income to the Fund, defer
the Fund's losses, cause adjustments in the holding periods of the Fund's
securities, convert long-term capital gains into short-term capital gains
and convert short-term capital losses into long-term capital losses. These
rules could therefore affect the amount, timing and character of
distributions to Common Shareholders.
Prior to purchasing shares in the Fund, an investor should carefully
consider the impact of dividends which are expected to be or have been
declared, but not paid. Any dividend declared shortly after a purchase of
such shares prior to the record date will have the effect of reducing the
per share net asset value by the per share amount of the dividend.
Although dividends generally will be treated as distributed when
paid, dividends declared in October, November or December, payable to
holders of common shares of record on a specified date in one of those
months and paid during the following January, will be treated as having
been distributed by the Fund (and received by the holder of common shares)
on December 31.
The Internal Revenue Service's position in a published revenue
ruling indicates that the Fund is required to designate distributions paid
with respect to its Common Shares and its Preferred Shares as consisting
of a portion of each type of income distributed by the Fund. The portion
of each type of income deemed received by the holders of each class of
shares will be equal to the portion of total Fund dividends received by
such class. Thus, the Fund will designate dividends paid as
exempt-interest dividends in a manner that allocates such dividends
between Common Shareholders and Preferred Shareholders in proportion to
the total dividends paid to each such class during or with respect to the
taxable year, or otherwise as required by applicable law. Capital gain
dividends and ordinary income dividends will similarly be allocated
between the two classes.
Exempt-interest dividends are included in determining what portion,
if any, of a person's Social Security and railroad retirement benefits
will be includable in gross income subject to Federal income tax.
Although exempt-interest dividends generally may be treated by
Common Shareholders as items of interest excluded from their gross income,
each Common Shareholder is advised to consult his tax advisor with respect
to whether exempt-interest dividends retain their exclusion if the
shareholder would be treated as a "substantial user," or a "related
person" of a substantial user, of the facilities financed with respect to
any of the tax-exempt obligations held by the Fund.
Federal income tax law imposes an alternative minimum tax with
respect to both corporations and individuals based on certain items of tax
preference. Interest on certain "private activity bonds" is an item of tax
preference subject to the alternative minimum tax on individuals and
corporations. In addition, for corporations alternative minimum taxable
income is increased by 75% of the difference between an alternative
measure of income ("adjusted current earnings") and the amount otherwise
determined to be the alternative minimum taxable income. Interest on
municipal bonds, and therefore all exempt-interest dividends received from
the Fund, are included in calculating adjusted current earnings.
Accordingly, investment in the Fund could cause Common Shareholders to be
subject to or result in an increased liability under the AMT. The Fund
will annually supply Common Shareholders a report indicating the amount
and nature of amounts distributed to them.
The redemption, sale or exchange of Common Shares normally will
result in capital gain or loss to Common Shareholders who hold their
Common Shares as capital assets. Generally, a Common Shareholder's gain or
loss will be long-term capital gain or loss if the shares have been held
for more than one year even though the increase in value in such common
shares is attributable to tax exempt interest income. In addition, gain
realized by the Fund from the disposition of a tax exempt security that is
attributable to accrued market discount will be treated as ordinary income
rather than capital gain, and thus may increase the amount of ordinary
income dividends received by Common Shareholders. Present law taxes both
long- and short-term capital gains of corporations at the rates applicable
to ordinary income. For non-corporate taxpayers, however, long-term
capital gains will be taxed at a maximum rate of 20% (or 18% for capital
assets that have been held for more than five years and whose holding
periods began after December 31, 2000), while short-term capital gains and
other ordinary income will currently be taxed at a maximum rate of
38.6%1. Because of the limitations on itemized deductions and the
deduction for personal exemptions applicable to higher income taxpayers,
the effective tax rate may be higher in certain circumstances.
All or a portion of a sales charge paid in purchasing Common Shares
cannot be taken into account for purposes of determining gain or loss on
the redemption, sale or exchange of such Shares within 90 days after their
purchase to the extent Common Shares or shares of another fund are
subsequently acquired without payment of a sales charge pursuant to the
reinvestment or exchange privilege. Any disregarded portion of such charge
will result in an increase in the shareholder's tax basis in the shares
subsequently acquired. In addition, no loss will be allowed on the
redemption, sale or exchange of Common Shares if the Common Shareholder
purchases other Common Shares of the Fund (whether through reinvestment of
distributions or otherwise) or the shareholder acquires or enters into a
contract or option to acquire shares that are substantially identical to
Common Shares of the Fund within a period of 61 days beginning 30 days
before and ending 30 days after such redemption, sale or exchange. If
disallowed, the loss will be reflected in an adjustment to the basis of
the shares acquired. Further, any losses realized on the redemption, sale
or exchange of Common Shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received with
respect to such Common Shares and, if not disallowed, such losses will be
treated as long-term capital losses to the extent of any capital gain
dividends received (or amounts credited as undistributed capital gains)
with respect to such Common Shares.
In order to avoid a 4% Federal excise tax, the Fund must distribute
or be deemed to have distributed by December 31 of each calendar year the
sum of at least 98% of its taxable ordinary income for such year, at least
98% of its capital gain net income (the excess of its realized capital
gains over its realized capital losses, generally computed on the basis of
the one-year period ending on October 31 of such year) and 100% of any
taxable ordinary income and capital gain net income for the prior year
that was not distributed during such year and on which the Fund paid no
Federal income tax. For purposes of the excise tax, a regulated investment
company may reduce its capital gain net income (but not below its net
capital gain) by the amount of any net ordinary loss for the calendar
year. The Fund intends to make timely distributions in compliance with
these requirements and consequently it is anticipated that it generally
will not be required to pay the excise tax.
If in any tax year the Fund should fail to qualify under Subchapter
M for tax treatment as a regulated investment company, the Fund would
incur a regular corporate Federal income tax upon its taxable income for
that year, and distributions to its shareholders would be taxable to
shareholders as ordinary dividend income for Federal income tax purposes
to the extent of the Fund's earnings and profits.
----------
1 The Economic Growth and Tax Relief Reconciliation Act of 2001, effective
for taxable years beginning after December 31, 2000, creates a new 10
percent income tax bracket and reduces the tax rates applicable to
ordinary income over a six year phase-in period. Beginning in the
taxable year 2006, ordinary income will be subject to a 35% maximum
rate, with approximately proportionate reductions in the other ordinary
rates.
---------
The Fund is required to withhold tax at a rate equal to the fourth
lowest rate applicable to unmarried individuals (currently, 30%) on
taxable dividends and certain other payments paid to non-corporate
shareholders who have not furnished to the Fund their correct taxpayer
identification number (in the case of individuals, their Social Security
number) and certain certifications, or who are otherwise subject to backup
withholding. Backup withholding is not an additional tax and any amount
withheld may be refunded or credited against the shareholder's Federal
income tax liability, provided the required information is furnished to
the Internal Revenue Service.
The foregoing is a general and abbreviated summary of the provisions
of the Code and the Treasury Regulations presently in effect as they
directly govern the taxation of the Trust 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 Trust transactions. Holders
of common shares are advised to consult their own tax advisors for more
detailed information concerning the Federal income taxation of the Trust
and the income tax consequences to its holders of common shares.
Performance and related comparative information
Municipal bonds can provide tax-free income.
[INSERT TAX EQUIVALENT TABLES]
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other
substantially similar closed-end funds as categorized by Lipper, Inc.
("Lipper"), Morningstar Inc. or other independent services. Comparison of
the fund to an alternative investment should be made with consideration of
differences in features and expected performance. The Fund may obtain
data from sources or reporting services, such as Bloomberg Financial and
Lipper, that the Fund believes to be generally accurate. In our sales
materials, we may quote company rankings from Fortune Magazine and other
national publications.
Past performance is not indicative of future results. At the time
Common Shareholders sell their shares, they may be worth more or less than
their original investment
[Insert other information as needed to support marketing materials.]
Federated Investors, Inc.
Federated is dedicated to meeting investor needs by making
structured, straightforward and consistent investment decisions. Federated
investment products have a history of competitive performance and have
gained the confidence of thousands of financial institutions and
individual investors.
Federated's disciplined investment selection process is rooted in
sound methodologies backed by fundamental and technical research. At
Federated, success in investment management does not depend solely on the
skill of a single portfolio manager. It is a fusion of individual talents
and state-of-the-art industry tools and resources. Federated's investment
process involves teams of portfolio managers and analysts, and investment
decisions are executed by traders who are dedicated to specific market
sectors and who handle trillions of dollars in annual trading volume.
Municipal Funds. In the municipal sector, as of December 31, 2001,
Federated managed 12 bond funds with approximately $2.3 billion in assets
and 22 money market funds with approximately $44.8 billion in total
assets. In 1976, Federated introduced one of the first municipal bond
mutual funds in the industry and is now one of the largest institutional
buyers of municipal securities. The Funds may quote statistics from
organizations including The Tax Foundation and the National Taxpayers
Union regarding the tax obligations of Americans.
The Chief Investment Officers responsible for oversight of the
various investment sectors within Federated are: William D. Dawson
III--Global and Fixed Income; Stephen F. Auth--Federated Global and Equity.
The Chief Investment Officers are Executive Vice Presidents of the
Federated advisory companies.
EXPERTS
The Statement of Net Assets of the Fund as of [XXX] appearing in
this Statement of Additional Information has been audited by [XXXX],
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing. [XXX]
provides accounting and auditing services to the Fund.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Fund with the
Securities and Exchange Commission (the "Commission"), Washington, D.C.
The prospectus and this Statement of Additional Information do not contain
all of the information set forth in the Registration Statement, including
any exhibits and schedules thereto. For further information with respect
to the Fund and the shares offered hereby, reference is made to the
Registration Statement. Statements contained in the prospectus and this
Statement of Additional Information as to the contents of any contract or
other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge on the EDGAR
Database at the Commission's website at http://www.sec.gov or at the
Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
INDEPENDENT AUDITORS' REPORT
[To be provided.]
STATEMENT OF ASSETS AND LIABILITIES
[To be provided.]
APPENDIX A
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 Municipal Income Trust
Exhibit 24(a) under Form N-2
FEDERATED MUNICIPAL INCOME FUND
AGREEMENT AND DECLARATION OF TRUST
Dated as of October 16, 2002
-iii-
TABLE OF CONTENTS
Page
ARTICLE I
Name and Definitions
1.1 Name............................................................. 1
1.2 Definitions...................................................... 1
ARTICLE II
Trustees
2.1 Number and Qualification......................................... 3
2.2 Term and Election................................................ 3
2.3 Resignation and Removal.......................................... 3
2.4 Vacancies........................................................ 4
2.5 Meetings......................................................... 4
2.6 Trustee Action by Written Consent................................ 4
2.7 Officers......................................................... 5
ARTICLE III
Powers and Duties of Trustees
3.1 General.......................................................... 5
3.2 Investments...................................................... 5
3.3 Legal Title...................................................... 5
3.4 Issuance and Repurchase of Shares................................ 5
3.5 Borrow Money or Utilize Leverage................................. 5
3.6 Delegation; Committees........................................... 6
3.7 Collection and Payment........................................... 6
3.8 Expenses......................................................... 6
3.9 By-Laws.......................................................... 6
3.10 Miscellaneous Powers............................................. 6
3.11 Further Powers................................................... 7
ARTICLE IV
Advisory, Management and Distribution Arrangements
4.1 Advisory and Management Arrangements............................. 7
4.2 Distribution Arrangements........................................ 7
4.3 Other Arrangements............................................... 8
4.4 Parties to Contract.............................................. 8
ARTICLE V
Limitations of Liability and Indemnification
5.1 No Personal Liability of Shareholders, Trustees, etc............. 8
5.2 Mandatory Indemnification........................................ 9
5.3 No Bond Required of Trustees..................................... 10
5.4 No Duty of Investigation; Notice in Trust Instruments, etc....... 10
5.5 Reliance on Experts, etc......................................... 10
5.6 Insurance........................................................ 10
5.7 Derivative Actions............................................... 11
ARTICLE VI
Shares of Beneficial Interest
6.1 Beneficial Interest.............................................. 11
6.2 Other Securities................................................. 11
6.3 Rights of Shareholders........................................... 11
6.4 Trust Only....................................................... 11
6.5 Issuance of Shares............................................... 12
6.6 Register of Shares............................................... 12
6.7 Transfer Agent and Registrar..................................... 12
6.8 Transfer of Shares............................................... 12
6.9 Notices.......................................................... 12
ARTICLE VII
Custodians
7.1 Appointment and Duties........................................... 13
7.2 Central Certificate System....................................... 13
ARTICLE VIII
Redemption
8.1 Redemptions...................................................... 13
8.2 Disclosure of Holding............................................ 13
ARTICLE IX
Determination of Net Asset Value Net Income and Distributions
9.1 Net Asset Value.................................................. 14
9.2 Distributions to Shareholders.................................... 14
9.3 Power to Modify Foregoing Procedures............................. 14
ARTICLE X
Shareholders
10.1 Meetings of Shareholders......................................... 14
10.2 Voting........................................................... 15
10.3 Notice of Meeting................................................ 15
10.4 Quorum and Required Vote......................................... 15
10.5 Proxies, etc..................................................... 15
10.6 Reports.......................................................... 16
10.7 Shareholder Action by Written Consent............................ 16
10.8 Record Dates..................................................... 16
10.9 Additional Provisions............................................ 17
ARTICLE XI
Duration; Termination of Trust; Amendment; Mergers, Etc
11.1 Duration......................................................... 17
11.2 Termination...................................................... 17
11.3 Amendment Procedure.............................................. 18
11.4 Merger, Consolidation and Sale of Assets......................... 18
11.5 Subsidiaries..................................................... 18
11.6 Conversion....................................................... 19
11.7 Certain Transactions............................................. 19
ARTICLE XII
Miscellaneous
12.1 Filing........................................................... 20
12.2 Resident Agent................................................... 20
12.3 Governing Law.................................................... 21
12.4 Counterparts..................................................... 21
12.5 Reliance by Third Parties........................................ 21
12.6 Provisions in Conflict with Law or Regulation.................... 21
Federated Municipal Income Fund
AGREEMENT AND DECLARATION OF TRUST
AGREEMENT AND DECLARATION OF TRUST made as of the 16th day of
October, 2002, by the Trustees hereunder, and by the holders of shares of
beneficial interest issued hereunder as hereinafter provided.
WHEREAS, this Trust has been formed to carry on business of an
investment company;
WHEREAS, this Trust is authorized to issue an unlimited number of
its shares of beneficial interest all in accordance with the provisions
hereinafter set forth;
WHEREAS, the Trustees have agreed to manage all property coming into
their hands as Trustees of a Delaware business trust in accordance with
the provisions hereinafter set forth; and
WHEREAS, the parties hereto intend that the Trust created by this
Declaration and the Certificate of Trust filed with the Secretary of State
of the State of Delaware on October 16, 2002 shall constitute a business
trust under the Delaware Business Trust Act and that this Declaration
shall constitute the governing instrument of such business trust.
NOW, THEREFORE, the Trustees hereby declare that they will hold all
cash, securities, and other assets which they may from time to time
acquire in any manner as Trustees hereunder IN TRUST to manage and dispose
of the same upon the following terms and conditions for the benefit of the
holders from time to time of shares of beneficial interest in this Trust
as hereinafter set forth.
ARTICLE I
Name and Definitions
1.1 Name. This Trust shall be known as the "Federated Municipal
Income Fund" and the Trustees shall conduct the business of the Trust
under that name, or any other name or names as they may from time to time
determine.
1.2 Definitions. As used in this Declaration, the following terms
shall have the following meanings:
"1940 Act" shall mean the Investment Company Act of 1940 and
the rules and regulations thereunder and exemptions granted
therefrom, all as adopted or amended from time to time.
"Affiliated Person" shall have the meaning given to it in
Section 2(a)(3) of the 1940 Act when used with reference to a
specified person.
"Assignment" shall have the meaning given to it in Section
2(a)(4) of the 1940 Act.
"By-Laws" shall mean the By-Laws of the Trust as amended from
time to time by the Trustees.
"Code" shall mean the Internal Revenue Code of 1986, as
amended, and the regulations promulgated thereunder.
"Commission" shall mean the Securities and Exchange
Commission.
"Declaration" shall mean this Agreement and Declaration of
Trust, as amended, supplemented or amended and restated from time to
time.
"DBTA" shall mean the Delaware Business Trust Act, 12 Del. C.
ss.ss. 3801, et. seq., as amended from time to time.
"Delaware General Corporation Law" means the Delaware General
Corporation Law, 8 Del. C.ss.ss. 100, et. seq., as amended from time to
time.
"Fundamental Policies" shall mean the investment policies and
restrictions as set forth from time to time in any Prospectus or
contained in any current Registration Statement of the Trust filed
with the Commission or as otherwise adopted by the Trustees and the
Shareholders in accordance with the requirements of the 1940 Act and
designated as fundamental policies therein as they may be amended
from time to time in accordance with the requirements of the 1940
Act.
"Interested Person" shall have the meaning given to it in
Section 2(a)(19) of the 1940 Act.
"Investment Adviser" or "Adviser" shall mean a party
furnishing services to the Trust pursuant to any contract described
in Section 4.1 hereof.
"Majority Shareholder Vote" shall mean a vote of "a majority
of the outstanding voting securities" (as such term is defined in
the 1940 Act) of the Trust with each class and series of Shares
voting together as a single class, except to the extent otherwise
required by the 1940 Act or this Declaration with respect to any one
or more classes or series of Shares, in which case the applicable
proportion of such classes or series of Shares voting as a separate
class or series, as case may be, also will be required.
"Person" shall mean and include individuals, corporations,
partnerships, trusts, limited liability companies, associations,
joint ventures and other entities, whether or not legal entities,
and governments and agencies and political subdivisions thereof.
"Principal Underwriter" shall have the meaning given to it in
Section 2(a)(29) of the 1940 Act.
"Prospectus" shall mean the Prospectus of the Trust, if any,
as in effect from time to time under the Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Shareholders" shall mean as of any particular time the
holders of record of outstanding Shares of the Trust, at such time.
"Shares" shall mean the transferable units of beneficial
interest into which the beneficial interest in the Trust shall be
divided from time to time and includes fractions of Shares as well
as whole Shares. In addition, Shares also means any preferred
shares or preferred units of beneficial interest which may be issued
from time to time, as described herein. All references to Shares
shall be deemed to be Shares of any or all series or classes as the
context may require.
"Trust" shall mean the Delaware business trust established by
this Declaration, as amended from time to time.
"Trust Property" shall mean as of any particular time any and
all property, real or personal, tangible or intangible, which at
such time is owned or held by or for the account of the Trust or the
Trustees in such capacity.
"Trustees" shall mean the signatories to this Declaration, so
long as they shall continue in office in accordance with the terms
hereof, and all other persons who at the time in question have been
duly elected or appointed and have qualified as trustees in
accordance with the provisions hereof and are then in office.
ARTICLE II
Trustees
2.1 Number and Qualification. Prior to a public offering of Shares
there may be a sole Trustee. Thereafter, the number of Trustees shall be
determined by a written instrument signed by a majority of the Trustees
then in office, provided that the number of Trustees shall be no less than
3 or more than 19. No reduction in the number of Trustees shall have the
effect of removing any Trustee from office prior to the expiration of his
term. An individual nominated as a Trustee shall be at least 21 years of
age and not older than 80 years of age at the time of nomination and not
under legal disability. Trustees need not own Shares and may succeed
themselves in office.
2.2 Term and Election. The Board of Trustees shall be divided into
three classes, designated Class I, Class II and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the total
number of trustees constituting the entire Board of Trustees. Within the
limits above specified, the number of the Trustees in each class shall be
determined by resolution of the Board of Trustees. The term of office of
the first class shall expire on the date of the first annual meeting of
Shareholders or special meeting in lieu thereof following the effective
date of the Registration Statement relating to the Shares under the
Securities Act. The term of office of the second class shall expire on
the date of the second annual meeting of Shareholders or special meeting
in lieu thereof following the effective date of the Registration Statement
relating to the Shares under the Securities Act. The term of office of
the third class shall expire on the date of the third annual meeting of
Shareholders or special meeting in lieu thereof following the effective
date of the Registration Statement relating to the Shares under the
Securities Act. Upon expiration of the term of office of each class as
set forth above, the number of Trustees in such class, as determined by
the Board of Trustees, shall be elected for a term expiring on the date of
the third annual meeting of Shareholders or special meeting in lieu
thereof following such expiration to succeed the Trustees whose terms of
office expire. The Trustees shall be elected at an annual meeting of the
Shareholders or special meeting in lieu thereof called for that purpose,
except as provided in Section 2.3 of this Article, and each Trustee
elected shall hold office until his or her successor shall have been
elected and shall have qualified. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death,
resignation, removal, bankruptcy, adjudicated incompetence or other
incapacity to perform the duties of the office, or removal, of a Trustee.
2.3 Resignation and Removal. Any of the Trustees may resign their
trust (without need for prior or subsequent accounting) by an instrument
in writing signed by such Trustee and delivered or mailed to the Trustees
or the Chairman, if any, the President or the Secretary and such
resignation shall be effective upon such delivery, or at a later date
according to the terms of the instrument. Any of the Trustees may be
removed (provided the aggregate number of Trustees after such removal
shall not be less than the minimum number required by Section 2.1 hereof)
for cause only, and not without cause, and only by action taken by a
majority of the remaining Trustees followed by the holders of at least
seventy-five percent (75%) of the Shares then entitled to vote in an
election of such Trustee. Upon the resignation or removal of a Trustee,
each such resigning or removed Trustee shall execute and deliver such
documents as the remaining Trustees shall require for the purpose of
conveying to the Trust or the remaining Trustees any Trust Property held
in the name of such resigning or removed Trustee. Upon the incapacity or
death of any Trustee, such Trustee's legal representative shall execute
and deliver on such Trustee's behalf such documents as the remaining
Trustees shall require as provided in the preceding sentence.
2.4 Vacancies. Whenever a vacancy in the Board of Trustees shall
occur, the remaining Trustees may fill such vacancy by appointing an
individual having the qualifications described in this Article by a
written instrument signed by a majority of the Trustees then in office or
may leave such vacancy unfilled or may reduce the number of Trustees;
provided the aggregate number of Trustees after such reduction shall not
be less than the minimum number required by Section 2.1 hereof; provided,
further, that if the Shareholders of any class or series of Shares are
entitled separately to elect one or more Trustees, a majority of the
remaining Trustees or the sole remaining Trustee elected by that class or
series may fill any vacancy among the number of Trustees elected by that
class or series. Any vacancy created by an increase in Trustees may be
filled by the appointment of an individual having the qualifications
described in this Article made by a written instrument signed by a
majority of the Trustees then in office. No vacancy shall operate to
annul this Declaration or to revoke any existing agency created pursuant
to the terms of this Declaration. Whenever a vacancy in the number of
Trustees shall occur, until such vacancy is filled as provided herein, the
Trustees in office, regardless of their number, shall have all the powers
granted to the Trustees and shall discharge all the duties imposed upon
the Trustees by this Declaration.
2.5 Meetings. Meetings of the Trustees shall be held from time to
time upon the call of the Chairman, if any, or the President or such other
persons as may be specified in the By-Laws. Regular meetings of the
Trustees may be held without call or notice at a time and place fixed by
the By-Laws or by resolution of the Trustees. Notice of any other meeting
shall be given to the Trustees before the meeting at the time and in the
manner specified in the By-Laws, but may be waived in writing by any
Trustee either before or after such meeting. The attendance of a Trustee
at a meeting shall constitute a waiver of notice of such meeting except
where a Trustee attends a meeting for the express purpose of objecting to
the transaction of any business on the ground that the meeting has not
been properly called or convened. A quorum for all meetings of the
Trustees shall be one-third, but not less than two, of the Trustees or
such greater number as may be specified in the By-Laws. Unless provided
otherwise in this Declaration and except as required under the 1940 Act,
any action of the Trustees may be taken at a meeting by vote of a majority
of the Trustees present (a quorum being present) or without a meeting by
written consent of a majority of the Trustees.
Any committee of the Trustees, including an executive committee, if
any, may act with or without a meeting. A quorum for all meetings of any
such committee shall be one-third, but not less than two, of the members
thereof. Unless provided otherwise in this Declaration, any action of any
such committee may be taken at a meeting by vote of a majority of the
members present (a quorum being present) or without a meeting by written
consent of all of the members.
With respect to actions of the Trustees and any committee of the
Trustees, Trustees who are Interested Persons in any action to be taken
may be counted for quorum purposes under this Section and shall be
entitled to vote to the extent not prohibited by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the
Trustees or any committee thereof by means of a conference telephone or
similar communications equipment by means of which all persons
participating in the meeting can hear each other; participation in a
meeting pursuant to any such communications system shall constitute
presence in person at such meeting.
2.6 Trustee Action by Written Consent. Any action which may be
taken by Trustees by vote may be taken without a meeting if that number of
the Trustees, or members of a committee, as the case may be, required for
approval of such action at a meeting of the Trustees or of such committee
at which all members of the Board or such committee are present consent to
the action in writing and the written consents are filed with the records
of the meetings of Trustees. Such consent shall be treated for all
purposes as a vote taken at a meeting of Trustees.
2.7 Officers. The Trustees shall elect a President, a Secretary
and a Treasurer and may elect a Chairman who shall serve at the pleasure
of the Trustees or until their successors are elected. The Trustees may
elect or appoint or may authorize the Chairman, if any, or President to
appoint such other officers or agents with such powers as the Trustees may
deem to be advisable. A Chairman shall, and the President, Secretary and
Treasurer may, but need not, be a Trustee.
ARTICLE III
Powers and Duties of Trustees
3.1 General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the
same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may
be permitted by this Declaration. The Trustees may perform such acts as
in their sole discretion are proper for conducting the business of the
Trust. The enumeration of any specific power herein shall not be
construed as limiting the aforesaid power. Such powers of the Trustees
may be exercised without order of or resort to any court.
3.2 Investments. The Trustees shall have power, subject to the
Fundamental Policies in effect from time to time with respect to the Trust
to:
(a) manage, conduct, operate and carry on the business of an
investment company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of any and all sorts of property, tangible or
intangible, including but not limited to securities of any type
whatsoever, whether equity or non-equity, of any issuer, evidences of
indebtedness of any person and any other rights, interests, instruments or
property of any sort and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation,
the right to consent and otherwise act with respect thereto, with power to
designate one or more Persons to exercise any of said rights, powers and
privileges in respect of any of said investments. The Trustees shall not
be limited by any law limiting the investments which may be made by
fiduciaries.
3.3 Legal Title. Legal title to all of the Trust Property shall at
all times be considered to be vested in the Trust, except that the Board
of Trustees shall have the power to cause legal title to any Trust
Property to be held by or in the name of any Person as nominee, on such
terms as the Board of Trustees may determine, in accordance with
applicable law.
3.4 Issuance and Repurchase of Shares. The Trustees shall have the
power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in, Shares,
including Shares in fractional denominations, and, subject to the more
detailed provisions set forth in Articles VIII and IX, to apply to any
such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or property whether capital or surplus or otherwise.
3.5 Borrow Money or Utilize Leverage. Subject to the Fundamental
Policies in effect from time to time with respect to the Trust, the
Trustees shall have the power to borrow money or otherwise obtain credit
or utilize leverage to the maximum extent permitted by law or regulation
as such may be needed from time to time and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, including the lending of portfolio securities, and to endorse,
guarantee, or undertake the performance of any obligation, contract or
engagement of any other person, firm, association or corporation.
3.6 Delegation; Committees. The Trustees shall have the power,
consistent with their continuing exclusive authority over the management
of the Trust and the Trust Property, to delegate from time to time to such
of their number or to officers, employees or agents of the Trust the doing
of such things and the execution of such instruments either in the name of
the Trust or the names of the Trustees or otherwise as the Trustees may
deem expedient, to at least the same extent as such delegation is
permitted to directors of corporations formed under the Delaware General
Corporation Law and is permitted by the 1940 Act, as well as any further
delegations the Trustees may determine to be desirable, expedient or
necessary in order to effect the purpose hereof. The Trustees may
designate an executive committee which shall have all authority of the
entire Board of Trustees except such committee cannot declare dividends
except to the extent specifically delegated by the Board of Trustees and
cannot authorize removal of a trustee or any merger, consolidation or sale
of substantially all of the assets of the Trust.
3.7 Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property or the Trust, the Trustees or any officer,
employee or agent of the Trust; to prosecute, defend, compromise or
abandon any claims relating to the Trust Property or the Trust, or the
Trustees or any officer, employee or agent of the Trust; to foreclose any
security interest securing any obligations, by virtue of which any
property is owed to the Trust; and to enter into releases, agreements and
other instruments.
3.8 Expenses. The Trustees shall have power to incur and pay out
of the assets or income of the Trust any expenses which in the opinion of
the Trustees are necessary or incidental to carry out any of the purposes
of this Declaration, and the business of the Trust, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The
Trustees shall fix the compensation of all officers, employees and
Trustees. The Trustees may pay themselves such compensation for special
services, including legal, underwriting, syndicating and brokerage
services, as they in good faith may deem reasonable and reimbursement for
expenses reasonably incurred by themselves on behalf of the Trust. The
Trustees shall have the power, as frequently as they may determine, to
cause each Shareholder to pay directly, in advance or arrears, for charges
of distribution, of the custodian or transfer, Shareholder servicing or
similar agent, a pro rata amount as defined from time to time by the
Trustees, by setting off such charges due from such Shareholder from
declared but unpaid dividends or distributions owed such Shareholder
and/or by reducing the number of shares in the account of such Shareholder
by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.
3.9 By-Laws. The Trustees shall have the exclusive authority to
adopt and from time to time amend or repeal By-Laws for the conduct of the
business of the Trust.
3.10 Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem
desirable for the transaction of the business of the Trust; (b) enter into
joint ventures, partnerships and any other combinations or associations;
(c) purchase, and pay for out of Trust Property, insurance policies
insuring the Shareholders, Trustees, officers, employees, agents,
investment advisors, distributors, selected dealers or independent
contractors of the Trust against all claims arising by reason of holding
any such position or by reason of any action taken or omitted by any such
Person in such capacity, whether or not constituting negligence, or
whether or not the Trust would have the power to indemnify such Person
against such liability; (d) establish pension, profit-sharing, share
purchase, and other retirement, incentive and benefit plans for any
Trustees, officers, employees and agents of the Trust; (e) make donations,
irrespective of benefit to the Trust, for charitable, religious,
educational, scientific, civic or similar purposes; (f) to the extent
permitted by law, indemnify any Person with whom the Trust has dealings,
including without limitation any advisor, administrator, manager, transfer
agent, custodian, distributor or selected dealer, or any other person as
the Trustees may see fit to such extent as the Trustees shall determine;
(g) guarantee indebtedness or contractual obligations of others; (h)
determine and change the fiscal year of the Trust and the method in which
its accounts shall be kept; (i) notwithstanding the Fundamental Policies
of the Trust, convert the Trust to a master- feeder structure; provided,
however, the Trust obtains the approval of shareholders holding at least a
majority of the Trust's Shares present at a meeting of Shareholders at
which a quorum is present and (j) adopt a seal for the Trust but the
absence of such seal shall not impair the validity of any instrument
executed on behalf of the Trust.
3.11 Further Powers. The Trustees shall have the power to conduct
the business of the Trust and carry on its operations in any and all of
its branches and maintain offices both within and without the State of
Delaware, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such
other things and execute all such instruments as they deem necessary,
proper or desirable in order to promote the interests of the Trust
although such things are not herein specifically mentioned. Any
determination as to what is in the interests of the Trust made by the
Board of Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration, the presumption shall be in favor of a
grant of power to the Trustees. Neither the Trust nor the Trustees shall
be required to obtain any court order to deal with any of the Trust
Property or take any other action hereunder.
ARTICLE IV
Service Contracts
4.1 Advisory and Management Arrangements. Subject to such
requirements and restrictions as may be set forth in the By-Laws and/or
the 1940 Act, the Board of Trustees may, at any time and from time to
time, contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any
corporation, trust, association or other organization, including any
Affiliated Person; and any such contract may contain such other terms as
the Board of Trustees may determine, including without limitation,
authority for the Investment Adviser or administrator to determine from
time to time without prior consultation with the Board of Trustees what
securities and other instruments or property shall be purchased or
otherwise acquired, owned, held, invested or reinvested in, sold,
exchanged, transferred, mortgaged, pledged, assigned, negotiated, or
otherwise dealt with or disposed of, and what portion, if any, of the
Trust Property shall be held uninvested and to make changes in the Trust's
or a particular Series' investments, or such other activities as may
specifically be delegated to such party.
4.2 Distribution Arrangements. Subject to compliance with the 1940
Act, the Board of Trustees may retain underwriters and/or placement agents
to sell Trust Shares. The Board of Trustees may in its discretion from
time to time enter into one or more contracts, providing for the sale of
the Shares of the Trust, whereby the Trust may either agree to sell such
Shares to the other party to the contract or appoint such other party its
sales agent for such Shares. In either case, the contract shall be on
such terms and conditions as the Board of Trustees may in its discretion
determine, not inconsistent with the provisions of this Article IV or the
By-Laws; and such contract may also provide for the repurchase or sale of
Shares of the Trust by such other party as principal or as agent of the
Trust and may provide that such other party may enter into selected dealer
agreements with registered securities dealers and brokers and servicing
and similar agreements with persons who are not registered securities
dealers to further the purposes of the distribution or repurchase of the
Shares of the Trust.
4.3 Other Arrangements. The Board of Trustees is further
empowered, at any time and from time to time, to contract with any Persons
to provide such other services to the Trust, as the Board of Trustees
determines to be in the best interests of the Trust, including appointing
it or them to act as the custodian, transfer agent, dividend disbursing
agent, fund accountant, and/or shareholder servicing agent for the Trust
or one or more of the series or classes of its Shares.
4.4 Parties to Contracts. The fact that:
(i) any of the Shareholders, Trustees, employees or officers
of the Trust is a shareholder, director, officer, partner, trustee,
employee, manager, Adviser, Principal Underwriter, distributor, or
Affiliated Person or agent of or for any corporation, trust,
association, or other organization, or for any parent or Affiliated
Person of any organization with which an Adviser's, management or
administration contract, or Principal Underwriter's or distributor's
contract, or custodian, transfer, dividend disbursing, fund
accounting, shareholder servicing or other type of service contract
may have been or may hereafter be made, or that any such
organization, or any parent or Affiliated Person thereof, is a
Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization
with which an Adviser's, management or administration contract or
Principal Underwriter's or distributor's contract, or custodian,
transfer, dividend disbursing, fund accounting, shareholder
servicing or other type of service contract may have been or may
hereafter be made also has an Adviser's, management or
administration contract, or Principal Underwriter's or distributor's
contract, or custodian, transfer, dividend disbursing, shareholder
servicing or other service contract with one or more other
corporations, trusts, associations, or other organizations, or has
other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee, employee or officer of the Trust from voting upon or
executing the same, or create any liability or accountability to the Trust
or its Shareholders, provided that the establishment of and performance
under each such contract is permissible under the provisions of the 1940
Act.
ARTICLE V
Limitations of Liability and Indemnification
5.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person in connection with Trust Property or
the acts, obligations or affairs of the Trust. As provided in the DBTA,
Shareholders shall have the same limitation of personal liability as is
extended to stockholders of a private corporation for profit incorporated
under the Delaware General Corporation Law. No Trustee or officer of the
Trust shall be subject in such capacity to any personal liability
whatsoever to any Person, save only liability to the Trust or its
Shareholders arising from bad faith, willful misfeasance, gross negligence
or reckless disregard for his duty to such Person; and, subject to the
foregoing exception, all such Persons shall look solely to the Trust
Property for satisfaction of claims of any nature arising in connection
with the affairs of the Trust. If any Shareholder, Trustee or officer, as
such, of the Trust, is made a party to any suit or proceeding to enforce
any such liability, subject to the foregoing exception, he shall not, on
account thereof, be held to any personal liability. Any repeal or
modification of this Section 5.1 shall not adversely affect any right or
protection of a Trustee or officer of the Trust existing at the time of
such repeal or modification with respect to acts or omissions occurring
prior to such repeal or modification.
The Trustees may provide that every note, bond, contract,
instrument, certificate or undertaking made or issued by the Trustees or
by any officer or officers shall give notice that a Certificate of Trust
in respect of the Trust is on file with the Secretary of State of the
State of Delaware and may recite to the effect that the same was executed
or made by or on behalf of the Trust or by them as Trustee or Trustees or
as officer or officers, and not individually, and that the obligations of
any instrument made or issued by the Trustees or by any officer or
officers of the Trust are not binding upon any of them or the Shareholders
individually but are binding only upon the assets and property of the
Trust The omission of any statement to such effect from such instrument
shall not operate to bind any Trustee or Trustees or officer or officers
or Shareholder or Shareholders individually.
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to
indemnify each person who at any time serves as a Trustee or officer of
the Trust (each such person being an "indemnitee") against any liabilities
and expenses, including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in
which he may be or may have been involved as a party or otherwise or with
which he may be or may have been threatened, while acting in any capacity
set forth in this Article V by reason of his having acted in any such
capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the
best interest of the Trust or, in the case of any criminal proceeding, as
to which he shall have had reasonable cause to believe that the conduct
was unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence, or (iv) reckless disregard of the duties involved
in the conduct of his position (the conduct referred to in such clauses
(i) through (iv) being sometimes referred to herein as "disabling
conduct"). Notwithstanding the foregoing, with respect to any action,
suit or other proceeding voluntarily prosecuted by any indemnitee as
plaintiff, indemnification shall be mandatory only if the prosecution of
such action, suit or other proceeding by such indemnitee (1) was
authorized by a majority of the Trustees or (2) was instituted by the
indemnitee to enforce his or her rights to indemnification hereunder in a
case in which the indemnitee is found to be entitled to such
indemnification. The rights to indemnification set forth in this
Declaration shall continue as to a person who has ceased to be a Trustee
or officer of the Trust and shall inure to the benefit of his or her
heirs, executors and personal and legal representatives. No amendment or
restatement of this Declaration or repeal of any of its provisions shall
limit or eliminate any of the benefits provided to any person who at any
time is or was a Trustee or officer of the Trust or otherwise entitled to
indemnification hereunder in respect of any act or omission that occurred
prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on
the merits by a court or other body of competent jurisdiction before whom
the issue of entitlement to indemnification hereunder was brought that
such indemnitee is entitled to indemnification hereunder or, (ii) in the
absence of such a decision, by (1) a majority vote of a quorum of those
Trustees who are neither "interested persons" of the Trust (as defined in
Section 2(a)(19) of the 1940 Act) nor parties to the proceeding
("Disinterested Non-Party Trustees"), that the indemnitee is entitled to
indemnification hereunder, or (2) if such quorum is not obtainable or even
if obtainable, if such majority so directs, independent legal counsel in a
written opinion concludes that the indemnitee should be entitled to
indemnification hereunder. All determinations to make advance payments in
connection with the expense of defending any proceeding shall be
authorized and made in accordance with the immediately succeeding
paragraph (c) below.
(c) The Trust shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification
might be sought hereunder if the Trust receives a written affirmation by
the indemnitee of the indemnitee's good faith belief that the standards of
conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined
that the indemnitee is entitled to such indemnification and if a majority
of the Trustees determine that the applicable standards of conduct
necessary for indemnification appear to have been met. In addition, at
least one of the following conditions must be met: (i) the indemnitee
shall provide adequate security for his undertaking, (ii) the Trust shall
be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or
if a majority vote of such quorum so direct, independent legal counsel in
a written opinion, shall conclude, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that there is substantial
reason to believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions
shall not exclude any other right which any person may have or hereafter
acquire under this Declaration, the By-Laws of the Trust, any statute,
agreement, vote of stockholders or Trustees who are "disinterested
persons" (as defined in Section 2(a)(19) of the 1940 Act) or any other
right to which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this
Declaration, the Trust shall have the power and authority to indemnify and
provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Trust or serving in any capacity at the
request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such indemnification
has been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or other security for the performance of any of
his duties hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the
Trustees or with any officer, employee or agent of the Trust shall be
bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or
agent or be liable for the application of money or property paid, loaned,
or delivered to or on the order of the Trustees or of said officer,
employee or agent. Every obligation, contract, undertaking, instrument,
certificate, Share, other security of the Trust, and every other act or
thing whatsoever executed in connection with the Trust shall be
conclusively taken to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their
capacity as officers, employees or agents of the Trust. The Trustees may
maintain insurance for the protection of the Trust Property, its
Shareholders, Trustees, officers, employees and agents in such amount as
the Trustees shall deem adequate to cover possible tort liability, and
such other insurance as the Trustees in their sole judgment shall deem
advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee
of the Trust shall, in the performance of its duties, be fully and
completely justified and protected with regard to any act or any failure
to act resulting from reliance in good faith upon the books of account or
other records of the Trust, upon an opinion of counsel, or upon reports
made to the Trust by any of the Trust's officers or employees or by any
advisor, administrator, manager, distributor, selected dealer, accountant,
appraiser or other expert or consultant selected with reasonable care by
the Trustees, officers or employees of the Trust, regardless of whether
such counsel or expert may also be a Trustee.
5.6 Insurance. To the fullest extent permitted by applicable law,
the officers and Trustees shall be entitled and have the authority to
purchase with Trust Property, insurance for liability and for all expenses
reasonably incurred or paid or expected to be paid by a Trustee or officer
in connection with any claim, action, suit or proceeding in which such
Person becomes involved by virtue of such Person's capacity or former
capacity with the Trust, whether or not the Trust would have the power to
indemnify such Person against such liability under the provisions of this
Article.
5.7. Derivative Actions. Subject to the requirements set forth in
Section 3816 of the DBTA, a Shareholder or Shareholders may bring a
derivative action on behalf of the Trust only if the Shareholder or
Shareholders first make a pre-suit demand upon the Board of Trustees to
bring the subject action unless an effort to cause the Board of Trustees
to bring such action is excused. A demand on the Board of Trustees shall
only be excused if a majority of the Board of Trustees, or a majority of
any committee established to consider the merits of such action, has a
material personal financial interest in the action at issue. A Trustee
shall not be deemed to have a material personal financial interest in an
action or otherwise be disqualified from ruling on a Shareholder demand by
virtue of the fact that such Trustee receives remuneration from his
service on the Board of Trustees of the Trust or on the boards of one or
more investment companies with the same or an affiliated investment
advisor or underwriter.
ARTICLE VI
Shares of Beneficial Interest
6.1 Beneficial Interest. The interest of the beneficiaries
hereunder shall be divided into an unlimited number of transferable shares
of beneficial interest, par value $.01 per share. All Shares issued in
accordance with the terms hereof, including, without limitation, Shares
issued in connection with a dividend in Shares or a split of Shares, shall
be fully paid and, except as provided in the last sentence of Section 3.8,
nonassessable when the consideration determined by the Trustees (if any)
therefor shall have been received by the Trust.
6.2 Other Securities. The Trustees may, subject to the Fundamental
Policies and the requirements of the 1940 Act, authorize and issue such
other securities of the Trust as they determine to be necessary, desirable
or appropriate, having such terms, rights, preferences, privileges,
limitations and restrictions as the Trustees see fit, including preferred
interests, debt securities or other senior securities. To the extent that
the Trustees authorize and issue preferred shares of any class or series,
they are hereby authorized and empowered to amend or supplement this
Declaration as they deem necessary or appropriate, including to comply
with the requirements of the 1940 Act or requirements imposed by the
rating agencies or other Persons, all without the approval of
Shareholders. Any such supplement or amendment shall be filed as is
necessary. The Trustees are also authorized to take such actions and
retain such persons as they see fit to offer and sell such securities.
6.3 Rights of Shareholders. The Shares shall be personal property
giving only the rights in this Declaration specifically set forth. The
ownership of the Trust Property of every description and the right to
conduct any business herein before described are vested exclusively in the
Trustees, and the Shareholders shall have no interest therein other than
the beneficial interest conferred by their Shares, and they shall have no
right to call for any partition or division of any property, profits,
rights or interests of the Trust nor can they be called upon to share or
assume any losses of the Trust or, subject to the right of the Trustees to
charge certain expenses directly to Shareholders, as provided in the last
sentence of Section 3.8, suffer an assessment of any kind by virtue of
their ownership of Shares. The Shares shall not entitle the holder to
preference, preemptive, appraisal, conversion or exchange rights (except
as specified in this Section 6.3, in Section 11.4 or as specified by the
Trustees when creating the Shares, as in preferred shares).
6.4 Trust Only. It is the intention of the Trustees to create only
the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock
association, corporation, bailment or any form of legal relationship other
than a trust. Nothing in this Declaration shall be construed to make the
Shareholders, either by themselves or with the Trustees, partners or
members of a joint stock association.
6.5 Issuance of Shares. The Trustees, in their discretion, may
from time to time without vote of the Shareholders issue Shares including
preferred shares that may have been established pursuant to Section 6.2,
in addition to the then issued and outstanding Shares and Shares held in
the treasury, to such party or parties and for such amount and type of
consideration, including cash or property, at such time or times, and on
such terms as the Trustees may determine, and may in such manner acquire
other assets (including the acquisition of assets subject to, and in
connection with the assumption of, liabilities) and businesses. The
Trustees may from time to time divide or combine the Shares into a greater
or lesser number without thereby changing the proportionate beneficial
interest in such Shares. Issuances and redemptions of Shares may be made
in whole Shares and/or l/l,000ths of a Share or multiples thereof as the
Trustees may determine.
6.6 Register of Shares. A register shall be kept at the offices of
the Trust or any transfer agent duly appointed by the Trustees under the
direction of the Trustees which shall contain the names and addresses of
the Shareholders and the number of Shares held by them respectively and a
record of all transfers thereof. Separate registers shall be established
and maintained for each class or series of Shares. Each such register
shall be conclusive as to who are the holders of the Shares of the
applicable class or series of Shares and who shall be entitled to receive
dividends or distributions or otherwise to exercise or enjoy the rights of
Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein
provided, until he has given his address to a transfer agent or such other
officer or agent of the Trustees as shall keep the register for entry
thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the
issuance of share certificates and promulgate appropriate fees therefor
and rules and regulations as to their use.
6.7 Transfer Agent and Registrar. The Trustees shall have power to
employ a transfer agent or transfer agents, and a registrar or registrars,
with respect to the Shares. The transfer agent or transfer agents may
keep the applicable register and record therein, the original issues and
transfers, if any, of the said Shares. Any such transfer agents and/or
registrars shall perform the duties usually performed by transfer agents
and registrars of certificates of stock in a corporation, as modified by
the Trustees.
6.8 Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by its agent
thereto duly authorized in writing, upon delivery to the Trustees or a
transfer agent of the Trust of a duly executed instrument of transfer,
together with such evidence of the genuineness of each such execution and
authorization and of other matters as may reasonably be required. Upon
such delivery the transfer shall be recorded on the applicable register of
the Trust. Until such record is made, the Shareholder of record shall be
deemed to be the holder of such Shares for all purposes hereof and neither
the Trustees nor any transfer agent or registrar nor any officer, employee
or agent of the Trust shall be affected by any notice of the proposed
transfer.
Any person becoming entitled to any Shares in consequence of the
death, bankruptcy, or incompetence of any Shareholder, or otherwise by
operation of law, shall be recorded on the applicable register of Shares
as the holder of such Shares upon production of the proper evidence
thereof to the Trustees or a transfer agent of the Trust, but until such
record is made, the Shareholder of record shall be deemed to be the holder
of such for all purposes hereof, and neither the Trustees nor any transfer
agent or registrar nor any officer or agent of the Trust shall be affected
by any notice of such death, bankruptcy or incompetence, or other
operation of law.
6.9 Notices. Any and all notices to which any Shareholder
hereunder may be entitled and any and all communications shall be deemed
duly served or given if mailed, postage prepaid, addressed to any
Shareholder of record at his last known address as recorded on the
applicable register of the Trust.
ARTICLE VII
Custodians
7.1 Appointment and Duties. The Trustees shall at all times employ
a custodian or custodians, meeting the qualifications for custodians for
portfolio securities of investment companies contained in the 1940 Act, as
custodian with respect to the assets of the Trust. Any custodian shall
have authority as agent of the Trust with respect to which it is acting as
determined by the custodian agreement or agreements, but subject to such
restrictions, limitations and other requirements, if any, as may be
contained in the By-Laws of the Trust and the 1940 Act:
(1) to hold the securities owned by the Trust and deliver the
same upon written order;
(2) to receive any receipt for any moneys due to the Trust and
deposit the same in its own banking department (if a bank) or
elsewhere as the Trustees may direct;
(3) to disburse such funds upon orders or vouchers;
(4) if authorized by the Trustees, to keep the books and
accounts of the Trust and furnish clerical and accounting services;
and
(5) if authorized to do so by the Trustees, to compute the net
income or net asset value of the Trust;
all upon such basis of compensation as may be agreed upon between the
Trustees and the custodian.
The Trustees may also authorize each custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services
of the custodian and upon such terms and conditions, as may be agreed upon
between the custodian and such sub-custodian and approved by the Trustees,
provided that in every case such sub-custodian shall meet the
qualifications for custodians contained in the 1940 Act.
7.2 Central Certificate System. Subject to such rules, regulations
and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust
in a system for the central handling of securities established by a
national securities exchange or a national securities association
registered with the Commission under the Securities Exchange Act of 1934,
or such other Person as may be permitted by the Commission, or otherwise
in accordance with the 1940 Act, pursuant to which system all securities
of any particular class of any issuer deposited within the system are
treated as fungible and may be transferred or pledged by bookkeeping entry
without physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Trust.
ARTICLE VIII
Redemption
8.1 Redemptions. The Shares of the Trust are not redeemable by the
holders.
8.2 Disclosure of Holding. The holders of Shares or other
securities of the Trust shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of
Shares or other securities of the Trust as the Trustees deem necessary to
comply with the provisions of the Code, the 1940 or other applicable laws
or regulations, or to comply with the requirements of any other taxing or
regulatory authority.
ARTICLE IX
Determination of Net Asset Value Net Income and Distributions
9.1 Net Asset Value. The net asset value of each outstanding Share
of the Trust shall be determined at such time or times on such days as the
Trustees may determine, in accordance with the 1940 Act. The method of
determination of net asset value shall be determined by the Trustees and
shall be as set forth in the Prospectus or as may otherwise be determined
by the Trustees. The power and duty to make the net asset value
calculations may be delegated by the Trustees and shall be as generally
set forth in the Prospectus or as may otherwise be determined by the
Trustees.
9.2 Distributions to Shareholders. (a) The Trustees shall from
time to time distribute ratably among the Shareholders of any class of
Shares, or any series of any such class, in accordance with the number of
outstanding full and fractional Shares of such class or any series of such
class, such proportion of the net profits, surplus (including paid-in
surplus), capital, or assets held by the Trustees as they may deem proper
or as may otherwise be determined in accordance with this Declaration.
Any such distribution may be made in cash or property (including without
limitation any type of obligations of the Trust or any assets thereof) or
Shares of any class or series or any combination thereof, and the Trustees
may distribute ratably among the Shareholders of any class of shares or
series of any such class, in accordance with the number of outstanding
full and fractional Shares of such class or any series of such class,
additional Shares of any class or series in such manner, at such times,
and on such terms as the Trustees may deem proper or as may otherwise be
determined in accordance with this Declaration.
(b) Distributions pursuant to this Section 9.2 may be among the
Shareholders of record of the applicable class or series of Shares at the
time of declaring a distribution or among the Shareholders of record at
such later date as the Trustees shall determine and specify.
(c) The Trustees may always retain from the net profits such amount
as they may deem necessary to pay the debts or expenses of the Trust or to
meet obligations of the Trust, or as they otherwise may deem desirable to
use in the conduct of its affairs or to retain for future requirements or
extensions of the business.
(d) Inasmuch as the computation of net income and gains for Federal
income tax purposes may vary from the computation thereof on the books,
the above provisions shall be interpreted to give the Trustees the power
in their discretion to distribute for any fiscal year as ordinary
dividends and as capital gains distributions, respectively, additional
amounts sufficient to enable the Trust to avoid or reduce liability for
taxes.
9.3 Power to Modify Foregoing Procedures. Notwithstanding any of
the foregoing provisions of this Article IX, the Trustees may prescribe,
in their absolute discretion except as may be required by the 1940 Act,
such other bases and times for determining the per share asset value of
the Trust's Shares or net income, or the declaration and payment of
dividends and distributions as they may deem necessary or desirable for
any reason, including to enable the Trust to comply with any provision of
the 1940 Act, or any securities exchange or association registered under
the Securities Exchange Act of 1934, or any order of exemption issued by
the Commission, all as in effect now or hereafter amended or modified.
ARTICLE X
Shareholders
10.1 Meetings of Shareholders. The Trust shall hold annual
meetings of the Shareholders (provided that the Trust's initial annual
meeting of Shareholders may occur up to one year after the completion of
its initial fiscal year). A special meeting of Shareholders may be called
at any time by a majority of the Trustees or the President and shall be
called by any Trustee for any proper purpose upon written request of
Shareholders of the Trust holding in the aggregate not less than 51% of
the outstanding Shares of the Trust or class or series of Shares having
voting rights on the matter, such request specifying the purpose or
purposes for which such meeting is to be called. Any shareholder meeting,
including a Special Meeting, shall be held within or without the State of
Delaware on such day and at such time as the Board of Trustees shall
designate.
10.2 Voting. Shareholders shall have no power to vote on any
matter except matters on which a vote of Shareholders is required by
applicable law, this Declaration or resolution of the Trustees. Except as
otherwise provided herein, any matter required to be submitted to
Shareholders and affecting one or more classes or series of Shares shall
require approval by the required vote of all the affected classes and
series of Shares voting together as a single class; provided, however,
that as to any matter with respect to which a separate vote of any class
or series of Shares is required by the 1940 Act, such requirement as to a
separate vote by that class or series of Shares shall apply in addition to
a vote of all the affected classes and series voting together as a single
class. Shareholders of a particular class or series of Shares shall not
be entitled to vote on any matter that affects only one or more other
classes or series of Shares. There shall be no cumulative voting in the
election or removal of Trustees.
10.3 Notice of Meeting. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees to each Shareholder of record entitled to vote thereat at the
time and in the manner specified in the By-Laws. Only the business stated
in the notice of the meeting shall be considered at such meeting. Any
adjourned meeting may be held as adjourned one or more times without
further notice not later than 180 days after the record date.
10.4 Quorum and Required Vote. (a) Except where a higher quorum
is required by applicable law, the By-Laws or this Declaration, the
holders of one third (33-1/3%) of the Shares entitled to vote on any
matter at a meeting present in person or by proxy shall constitute a
quorum at such meeting of the Shareholders for purposes of conducting
business on such matter. The absence from any meeting, in person or by
proxy, of a quorum of Shareholders for action upon any given matter shall
not prevent action at such meeting upon any other matter or matters which
may properly come before the meeting, if there shall be present thereat,
in person or by proxy, a quorum of Shareholders in respect of such other
matters.
(b) Subject to any provision of applicable law or stock exchange
rules, this Declaration or a resolution of the Trustees specifying a
greater or a lesser vote requirement for the transaction of any item of
business at any meeting of Shareholders, (i) in all matters other than the
election of Trustees, the affirmative vote of a majority of votes cast by
the Shareholders entitled to vote on the subject matter at a meeting at
which a quorum is present shall be the act of the Shareholders entitled to
vote with respect to such matter, and (ii) in an election of Trustees, the
qualified nominees receiving the highest numbers of votes cast by the
shareholders entitled to vote at a meeting at which a quorum is present,
up to the number of Trustees to be elected at such meeting, shall be
elected.
10.5 Proxies, etc. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by properly executed proxy,
provided that no proxy shall be voted at any meeting unless it shall have
been placed on file with the Secretary, or with such other officer or
agent of the Trust as the Secretary may direct, for verification prior to
the time at which such vote shall be taken. Pursuant to a resolution of a
majority of the Trustees, proxies may be solicited in the name of one or
more Trustees or one or more of the officers or employees of the Trust.
No proxy shall be valid after the expiration of 11 months from the date
thereof, unless otherwise provided in the proxy. Only Shareholders of
record shall be entitled to vote. Each full Share shall be entitled to
one vote and fractional Shares shall be entitled to a vote of such
fraction. When any Share is held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such
Share, but if more than one of them shall be present at such meeting in
person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in
respect of such Share. A proxy purporting to be executed by or on behalf
of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise, and the burden of proving invalidity shall rest on the
challenger. If the holder of any such Share is a minor or a person of
unsound mind, and subject to guardianship or to the legal control of any
other person as regards the charge or management of such Share, he may
vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
10.6 Reports. The Trustees shall cause to be prepared at least
annually and more frequently to the extent and in the form required by
law, regulation or any exchange on which Trust Shares are listed a report
of operations containing a balance sheet and statement of income and
undistributed income of the Trust prepared in conformity with generally
accepted accounting principles and an opinion of an independent public
accountant on such financial statements. Copies of such reports shall be
mailed to all Shareholders of record within the time required by the 1940
Act, and in any event within a reasonable period preceding the meeting of
Shareholders. The Trustees shall, in addition, furnish to the
Shareholders at least semi-annually to the extent required by law, interim
reports containing an unaudited balance sheet of the Trust as of the end
of such period and an unaudited statement of income and surplus for the
period from the beginning of the current fiscal year to the end of such
period.
10.7 Shareholder Action by Written Consent. Any action which may
be taken at any meeting of Shareholders may be taken without a meeting and
without prior notice if a consent or consents in writing setting forth the
action so taken is signed by the holders of Shares having not less than
the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all Shares entitled to vote on that
action were present and voted. All such consents shall be filed with the
secretary of the Trust and shall be maintained in the Trust's records.
Any Shareholder giving a written consent or the Shareholder's
proxy-holders or a transferee of the Shares or a personal representative
of the Shareholder or its respective proxy-holder may revoke the consent
by a writing received by the secretary of the Trust before written
consents of the number of Shares required to authorize the proposed action
have been filed with the secretary.
If the consents of all Shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
Shareholders shall not have been received, the secretary shall give prompt
notice of the action taken without a meeting to such Shareholders. This
notice shall be given in the manner specified in the By-Laws.
10.8 Record Dates. For purposes of determining the Shareholders
entitled to notice of any meeting or to vote or entitled to give consent
to action without a meeting, the Board of Trustees may fix in advance a
record date which shall not be more than 120 days nor less than 10 days
before the date of any such meeting.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining Shareholders entitled to notice
of or to vote at a meeting of Shareholders shall be at the close of
business on the business day before the notice is given or, if notice is
waived, at the close of business on the business day which is five (5)
business days before the day on which the meeting is held.
(b) The record date for determining Shareholders entitled to give
consent to action in writing without a meeting, (i) when no prior action
by the Board of Trustees has been taken, shall be the day on which the
first written consent is given, or (ii) when prior action of the Board of
Trustees has been taken, shall be at the close of business on the day on
which the Board of Trustees adopts the resolution taking such prior action.
For the purpose of determining the Shareholders of any Series or
class who are entitled to receive payment of any dividend or of any other
distribution, the Board of Trustees may from time to time fix a date,
which shall be before the date for the payment of such dividend or such
other distribution, as the record date for determining the Shareholders of
such Series or class having the right to receive such dividend or
distribution. Nothing in this Section shall be construed as precluding
the Board of Trustees from setting different record dates for different
Series or classes.
10.9 Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes, meetings and related matters.
ARTICLE XI
Duration; Termination of Trust; Amendment; Mergers, Etc.
11.1 Duration. Subject to possible termination in accordance with
the provisions of Section 11.2 hereof, the Trust created hereby shall have
perpetual existence.
11.2 Termination. (a) The Trust may be dissolved, after a
majority of the Trustees have approved a resolution therefor, upon
approval by not less than 75% of the Shares of each class or series
outstanding and entitled to vote, voting as separate classes or series,
unless such resolution has been approved by 80% of the Trustees, in which
case approval by a Majority Shareholder Vote shall be required. Upon the
dissolution of the Trust:
(i) The Trust shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the
Trust and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust shall have been wound
up, including the power to fulfill or discharge the contracts of the
Trust, collect its assets, sell, convey, assign, exchange, merge
where the Trust is not the survivor, transfer or otherwise dispose
of all or any part of the remaining Trust Property to one or more
Persons at public or private sale for consideration which may
consist in whole or in part in cash, securities or other property of
any kind, discharge or pay its liabilities, and do all other acts
appropriate to liquidate its business; provided that any sale,
conveyance, assignment, exchange, merger in which the Trust is not
the survivor, transfer or other disposition of all or substantially
all the Trust Property of the Trust shall require approval of the
principal terms of the transaction and the nature and amount of the
consideration by Shareholders with the same vote as required to
open-end the Trust.
(iii) After paying or adequately providing for the payment of
all liabilities, and upon receipt of such releases, indemnities and
refunding agreements, as they deem necessary for their protection,
the Trustees may distribute the remaining Trust Property, in cash or
in kind or partly each, among the Shareholders according to their
respective rights.
(b) After the winding up and termination of the Trust and
distribution to the Shareholders as herein provided, a majority of the
Trustees shall execute and lodge among the records of the Trust an
instrument in writing setting forth the fact of such termination and shall
execute and file a certificate of cancellation with the Secretary of State
of the State of Delaware. Upon termination of the Trust, the Trustees
shall thereupon be discharged from all further liabilities and duties
hereunder, and the rights and interests of all Shareholders shall
thereupon cease.
11.3 Amendment Procedure. (a) Except as provided in subsection
(b) of this Section 11.3, this Declaration may be amended, after a
majority of the Trustees have approved a resolution therefor, by the
affirmative vote of the holders of not less than a majority of the
affected Shares. The Trustees also may amend this Declaration without any
vote of Shareholders of any class of series to divide the Shares of the
Trust into one or more classes or additional classes, or one or more
series of any such class or classes, to change the name of the Trust or
any class or series of Shares, to make any change that does not adversely
affect the relative rights or preferences of any Shareholder, as they may
deem necessary, or to conform this Declaration to the requirements of the
1940 Act or any other applicable federal laws or regulations including
pursuant to Section 6.2 or the requirements of the regulated investment
company provisions of the Code, but the Trustees shall not be liable for
failing to do so.
(b) No amendment may be made to Section 2.1, Section 2.2, Section
2.3, Section 3.9, Section 5.1, Section 5.2, Section 11.2(a), this Section
11.3, Section 11.4, Section 11.6 or Section 11.7 of this Declaration and
no amendment may be made to this Declaration which would change any rights
with respect to any Shares of the Trust by reducing the amount payable
thereon upon liquidation of the Trust or by diminishing or eliminating any
voting rights pertaining thereto (except that this provision shall not
limit the ability of the Trustees to authorize, and to cause the Trust to
issue, other securities pursuant to Section 6.2), except after a majority
of the Trustees have approved a resolution therefor, by the affirmative
vote of the holders of not less than 75% of the Shares of each affected
class or series outstanding, voting as separate classes or series, unless
such amendment has been approved by 80% of the Trustees, in which case
approval by a Majority Shareholder Vote shall be required. Nothing
contained in this Declaration shall permit the amendment of this
Declaration to impair the exemption from personal liability of the
Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.
(c) An amendment duly adopted by the requisite vote of the Board of
Trustees and, if required, the Shareholders as aforesaid, shall become
effective at the time of such adoption or at such other time as may be
designated by the Board of Trustees or Shareholders, as the case may be.
A certification in recordable form signed by a majority of the Trustees
setting forth an amendment and reciting that it was duly adopted by the
Trustees and, if required, the Shareholders as aforesaid, or a copy of the
Declaration, as amended, in recordable form, and executed by a majority of
the Trustees, shall be conclusive evidence of such amendment when lodged
among the records of the Trust or at such other time designated by the
Board.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act, covering the first public
offering of Shares of the Trust shall have become effective, this
Declaration may be terminated or amended in any respect by the affirmative
vote of a majority of the Trustees or by an instrument signed by a
majority of the Trustees.
11.4 Merger, Consolidation and Sale of Assets. Except as provided
in Section 11.7, the Trust may merge or consolidate with any other
corporation, association, trust or other organization or may sell, lease
or exchange all or substantially all of the Trust Property or the
property, including its good will, upon such terms and conditions and for
such consideration when and as authorized by two- thirds of the Trustees
and approved by a Majority Shareholder Vote and any such merger,
consolidation, sale, lease or exchange shall be determined for all
purposes to have been accomplished under and pursuant to the statutes of
the State of Delaware.
11.5 Subsidiaries. Without approval by Shareholders, the Trustees
may cause to be organized or assist in organizing one or more
corporations, trusts, partnerships, associations or other organizations to
take over all of the Trust Property or to carry on any business in which
the Trust shall directly or indirectly have any interest, and to sell,
convey and transfer all or a portion of the Trust Property to any such
corporation, trust, limited liability company, association or organization
in exchange for the shares or securities thereof, or otherwise, and to
lend money to, subscribe for the shares or securities of, and enter into
any contracts with any such corporation, trust, limited liability company,
partnership, association or organization, or any corporation, partnership,
trust, limited liability company, association or organization in which the
Trust holds or is about to acquire shares or any other interests.
11.6 Conversion. Notwithstanding any other provisions of this
Declaration or the By-Laws of the Trust, a favorable vote of a majority of
the Trustees then in office followed by the favorable vote of the holders
of not less than 75% of the Shares of each affected class or series
outstanding, voting as separate classes or series, shall be required to
approve, adopt or authorize an amendment to this Declaration that makes
the Shares a "redeemable security" as that term is defined in the 1940
Act, unless such amendment has been approved by 80% of the Trustees, in
which case approval by a Majority Shareholder Vote shall be required.
Upon the adoption of a proposal to convert the Trust from a "closed-end
company" to an "open-end company" as those terms are defined by the 1940
Act and the necessary amendments to this Declaration to permit such a
conversion of the Trust's outstanding Shares entitled to vote, the Trust
shall, upon complying with any requirements of the 1940 Act and state law,
become an "open-end" investment company. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of the Shares
otherwise required by law, or any agreement between the Trust and any
national securities exchange.
11.7 Certain Transactions. (a) Notwithstanding any other
provision of this Declaration and subject to the exceptions provided in
paragraph (d) of this Section, the types of transactions described in
paragraph (c) of this Section shall require the affirmative vote or
consent of a majority of the Trustees then in office followed by the
affirmative vote of the holders of not less than 75% of the Shares of each
affected class or series outstanding, voting as separate classes or
series, when a Principal Shareholder (as defined in paragraph (b) of this
Section) is a party to the transaction. Such affirmative vote or consent
shall be in addition to the vote or consent of the holders of Shares
otherwise required by law or by the terms of any class or series of
preferred stock, whether now or hereafter authorized, or any agreement
between the Trust and any national securities exchange.
(b) The term "Principal Shareholder" shall mean any corporation,
Person or other entity which is the beneficial owner, directly or
indirectly, of 5% or more of the outstanding Shares of any class or series
and shall include any affiliate or associate, as such terms are defined in
clause (ii) below, of a Principal Shareholder. For the purposes of this
Section, in addition to the Shares which a corporation, Person or other
entity beneficially owns directly, (a) any corporation, Person or other
entity shall be deemed to be the beneficial owner of any Shares (i) which
it has the right to acquire pursuant to any agreement or upon exercise of
conversion rights or warrants, or otherwise (but excluding share options
granted by the Trust) or (ii) which are beneficially owned, directly or
indirectly (including Shares deemed owned through application of clause
(i) above), by any other corporation, Person or entity with which it or
its "affiliate" or "associate" (as defined below) has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting
or disposing of Shares, or which is its "affiliate" or "associate" as
those terms are defined in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, and (b) the outstanding Shares
shall include Shares deemed owned through application of clauses (i) and
(ii) above but shall not include any other Shares which may be issuable
pursuant to any agreement, or upon exercise of conversion rights or
warrants, or otherwise.
(c) This Section shall apply to the following transactions:
(i) The merger or consolidation of the Trust or any
subsidiary of the Trust with or into any Principal Shareholder.
(ii) The issuance of any securities of the Trust to any
Principal Shareholder for cash (other than pursuant to any automatic
dividend reinvestment plan).
(iii) The sale, lease or exchange of all or any substantial
part of the assets of the Trust to any Principal Shareholder (except
assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation all
assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period.)
(iv) The sale, lease or exchange to the Trust or any
subsidiary thereof, in exchange for securities of the Trust, of any
assets of any Principal Shareholder (except assets having an
aggregate fair market value of less than $1,000,000, aggregating for
the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a
twelve-month period).
(d) The provisions of this Section shall not be applicable to (i)
any of the transactions described in paragraph (c) of this Section if 80%
of the Trustees shall by resolution have approved a memorandum of
understanding with such Principal Shareholder with respect to and
substantially consistent with such transaction, in which case no
shareholder vote shall be required by this Section, or (ii) any such
transaction with any entity of which a majority of the outstanding shares
of all classes and series of a stock normally entitled to vote in
elections of directors is owned of record or beneficially by the Trust and
its subsidiaries.
(e) The Board of Trustees shall have the power and duty to
determine for the purposes of this Section on the basis of information
known to the Trust whether (i) a corporation, person or entity
beneficially owns 5% or more of the outstanding Shares of any class or
series, (ii) a corporation, person or entity is an "affiliate" or
"associate" (as defined above) of another, (iii) the assets being acquired
or leased to or by the Trust or any subsidiary thereof constitute a
substantial part of the assets of the Trust and have an aggregate fair
market value of less than $1,000,000, and (iv) the memorandum of
understanding referred to in paragraph (d) hereof is substantially
consistent with the transaction covered thereby. Any such determination
shall be conclusive and binding for all purposes of this Section.
ARTICLE XII
Miscellaneous
12.1 Filing. (a) This Declaration and any amendment or supplement
hereto shall be filed in such places as may be required or as the Trustees
deem appropriate. Each amendment or supplement shall be accompanied by a
certificate signed and acknowledged by a Trustee stating that such action
was duly taken in a manner provided herein, and shall, upon insertion in
the Trust's minute book, be conclusive evidence of all amendments
contained therein. A restated Declaration, containing the original
Declaration and all amendments and supplements theretofore made, may be
executed from time to time by a majority of the Trustees and shall, upon
insertion in the Trust's minute book, be conclusive evidence of all
amendments and supplements contained therein and may thereafter be
referred to in lieu of the original Declaration and the various amendments
and supplements thereto.
(b) The Trustees hereby authorize and direct a Certificate of
Trust, in the form attached hereto as Exhibit A, to be executed and filed
with the Office of the Secretary of State of the State of Delaware in
accordance with the Delaware Business Trust Act.
12.2 Resident Agent. The Trust shall maintain a resident agent in
the State of Delaware, which agent shall initially be SR Services, LLC,
919 North Market Street, Suite 600, Wilmington, Delaware 19801. The
Trustees may designate a successor resident agent, provided, however, that
such appointment shall not become effective until written notice thereof
is delivered to the office of the Secretary of the State.
12.3 Governing Law. This Declaration is executed by the Trustees
and delivered in the State of Delaware and with reference to the laws
thereof, and the rights of all parties and the validity and construction
of every provision hereof shall be subject to and construed according to
laws of said State and reference shall be specifically made to the
Delaware General Corporation Law as to the construction of matters not
specifically covered herein or as to which an ambiguity exists, although
such law shall not be viewed as limiting the powers otherwise granted to
the Trustees hereunder and any ambiguity shall be viewed in favor of such
powers.
12.4 Counterparts. This Declaration may be simultaneously executed
in several counterparts, each of which shall be deemed to be an original,
and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
12.5 Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust, or of any recording
office in which this Declaration may be recorded, appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the name of the Trust, (c) the due authorization of the
execution of any instrument or writing, (d) the form of any vote passed at
a meeting of Trustees or Shareholders, (e) the fact that the number of
Trustees or Shareholders present at any meeting or executing any written
instrument satisfies the requirements of this Declaration, (f) the form of
any By Laws adopted by or the identity of any officers elected by the
Trustees, or (g) the existence of any fact or facts which in any manner
relate to the affairs of the Trust, shall be conclusive evidence as to the
matters so certified in favor of any person dealing with the Trustees and
their successors.
12.6 Provisions in Conflict with Law or Regulation. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of
the Internal Revenue Code or with other applicable laws and regulations,
the conflicting provision shall be deemed never to have constituted a part
of this Declaration; provided, however, that such determination shall not
affect any of the remaining provisions of this Declaration or render
invalid or improper any action taken or omitted prior to such
determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability
shall attach only to such provision in such jurisdiction and shall not in
any manner affect such provision in any other jurisdiction or any other
provision of this Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned has caused these presents to be
executed as of the day and year first above written.
By:
---------------------------------
Nelson W. Winter
Sole Trustee
Exhibit 24(a)(i) under Form N-2
CERTIFICATE OF TRUST
OF
FEDERATED MUNICIPAL INCOME FUND
a Delaware Statutory Trust
This Certificate of Trust of Federated Municipal Income Fund (the
"Trust") is being duly executed and filed, in order to form a business
trust pursuant to the Delaware Statutory Trust Act (the "Act"), Del. Code
Ann. tit. 12,ss.ss.3801-3819.
1. NAME. The name of the business trust formed hereby is
"Federated Municipal Income Fund."
2. REGISTERED OFFICE AND REGISTERED AGENT. The Trust will become,
prior to the issuance of shares of beneficial interest, a registered
management investment company under the Investment Company Act of 1940, as
amended. Therefore, in accordance with Section 3807(b) of the Act, the
Trust has and shall maintain in the State of Delaware a registered office
and a registered agent for service of process.
(a) REGISTERED OFFICE. The registered office of the Trust in
Delaware is c/o SR Services, LLC, 919 North Market Street, Suite
600, Wilmington, Delaware 19801.
(b) REGISTERED AGENT. The registered agent for service of
process on the Trust in Delaware is SR Services, LLC, 919 North
Market Street, Suite 600, Wilmington, Delaware 19801.
IN WITNESS WHEREOF, the Trustee named below does hereby execute this
Certificate of Trust as of the _____ day of October, 2002.
[name]
Sole Trustee
Exhibit 24(b) under Form N-2
BY-LAWS
of
FEDERATED MUNICIPAL INCOME FUND
A Delaware Business Trust
Dated as of October 16, 2002
INTRODUCTION
A. Agreement and Declaration of Trust. These by-laws shall be
subject to the Agreement and Declaration of Trust, as from time to time,
in effect (the "Declaration of Trust"), of Federated Municipal Income
Fund, a Delaware business trust (the "Trust"). In the event of any
inconsistency between the terms hereof and the terms of the Declaration of
Trust, the terms of the Declaration of Trust shall control.
B. Definitions. Capitalized terms used herein and not herein
----------
defined are used as defined in the Declaration of Trust.
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICES. The Trustees shall fix and, from time
to time, may change the location of the principal executive office of the
Trust at any place within or outside the State of Delaware.
Section 2. DELAWARE OFFICE. The Trustees shall establish a
---------------
registered office in the State of Delaware and shall appoint a registered
agent for service of process in the State of Delaware.
Section 3. OTHER OFFICES. The Board may at any time establish
-------------
branch or subordinate offices at any place or places where the Trust
intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be
held at any place within or outside the State of Delaware designated by
the Board. In the absence of any such designation by the Board,
shareholders' meetings shall be held at the principal executive office of
the Trust. For purposes of these By-Laws, the term "shareholder" shall
mean a record owner of shares of the Trust.
Section 2. CALL OF MEETING. Meetings of the shareholders shall be
---------------
called as provided in Section 10.1 of the Declaration.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of
meetings of shareholders shall be sent or otherwise given in accordance
with Section 4 of this Article II not less than seven (7) nor more than
ninety-three (93) days before the date of the meeting. The notice shall
specify (i) the place, date and hour of the meeting, and (ii) the general
nature of the business to be transacted. The notice of any meeting at
which trustees are to be elected also shall include the name of any
nominee or nominees who at the time of the notice are intended to be
presented for election. Except with respect to adjournments as provided
herein, no business shall be transacted at such meeting other than that
specified in the notice.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of
any meeting of shareholders shall be given either personally or by
first-class mail, courier, telegraphic, facsimile or electronic mail, or
other written communication, charges prepaid, addressed to the shareholder
at the address of that shareholder appearing on the books of the Trust or
its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is
given, notice shall be deemed to have been given if sent to that
shareholder by first-class mail, courier, telegraphic, facsimile or
electronic mail, or other written communication to the Trust's principal
executive office. Notice shall be deemed to have been given at the time
when delivered personally, deposited in the mail or with a courier, or
sent by telegram, facsimile, electronic mail or other means of written
communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust
marked to indicate that the notice to the shareholder cannot be delivered
at that address, all future notices or reports shall be deemed to have
been duly given without further mailing, or substantial equivalent
thereof, if such notices shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the Trust
for a period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of
any shareholders' meeting shall be executed by the secretary, assistant
secretary, transfer agent, or solicitation agent of the Trust giving the
notice and shall be filed and maintained in the records of the Trust.
Such affidavit shall, in the absence of fraud, be prima facie evidence of
the facts stated therein.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholders' meeting,
whether or not a quorum is present, may be adjourned from time to time
(and at any time during the course of the meeting) by a majority of the
votes cast by those shareholders present in person or by proxy, or by the
chairperson of the meeting. Any adjournment may be with respect to one or
more proposals, but not necessarily all proposals, to be voted or acted
upon at such meeting and any adjournment will not delay or otherwise
affect the effectiveness and validity of a vote or other action taken at a
shareholders' meeting prior to adjournment.
When any shareholders' meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting at which the
adjournment is taken, unless a new record date of the adjourned meeting is
fixed or unless the adjournment is for more than one hundred eighty (180)
days from the record date set for the original meeting, in which case the
Board shall set a new record date. If notice of any such adjourned
meeting is required pursuant to the preceding sentence, it shall be given
to each shareholder of record entitled to vote at the adjourned meeting in
accordance with the provisions of Sections 3 and 4 of this Article II. At
any adjourned meeting, the Trust may transact any business that might have
been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any
meeting of shareholders shall be determined in accordance with the
provisions of the Declaration of Trust and these By-Laws, as in effect at
such time. The shareholders' vote may be by voice vote or by ballot;
provided, however, that any election of trustees must be by ballot if
demanded by any shareholder before the voting has begun. Any shareholder
may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or vote them against the proposal, but if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the
shareholder's approving vote is with respect to the total shares that the
shareholder is entitled to vote on such proposal.
Abstentions and broker non-votes will be included for purposes of
determining whether a quorum is present at a shareholders' meeting.
Abstentions and broker non-votes will be treated as votes present at a
shareholders' meeting, but will not be treated as votes cast. Abstentions
and broker non-votes, therefore, will have no effect on proposals which
require a plurality or majority of votes cast for approval, but will have
the same effect as a vote "against" on proposals requiring a majority or
other specified percentage of outstanding voting securities for approval.
Section 7. QUORUM. Except when a larger quorum is required by
applicable law, the Declaration of Trust or these By-Laws, thirty-three
and one-third percent (33-1/3%) of the shares outstanding and entitled to
vote present in person or represented by proxy at a shareholders' meeting
shall constitute a quorum at such meeting. When a separate vote by one or
more series or classes is required, thirty-three and one-third percent
(33-1/3%) of the outstanding shares of each such series or class entitled
to vote present in person or represented by proxy at a shareholders'
meeting shall constitute a quorum of such series or class.
Section 8. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of a meeting of shareholders, however called and noticed and
wherever held, shall be valid as though transacted at a meeting duly held
after regular call and notice if a quorum is present either in person or
by proxy. Attendance by a person at a meeting shall also constitute a
waiver of notice of that meeting with respect to that person, except when
the person objects at the beginning of the meeting to the transaction of
any business because the meeting is not lawfully called or convened and
except that such attendance is not a waiver of any right to object to the
consideration of matters not included in the notice of the meeting if that
objection is expressly made at the beginning of the meeting. Whenever
notice of a meeting is required to be given to a shareholder under the
Declaration of Trust or these By-Laws, a written waiver thereof, executed
before or after the meeting by such shareholder or his or her attorney
thereunto authorized and filed with the records of the meeting, shall be
deemed equivalent to such notice.
Section 9. PROXIES. Every shareholder entitled to vote for
trustees or on any other matter shall have the right to do so either in
person or by one or more agents authorized by a written proxy signed by
the shareholder and filed with the secretary of the Trust; provided, that
an alternative to the execution of a written proxy may be permitted as
provided in the second paragraph of this Section 9. A proxy shall be
deemed signed if the shareholder's name is placed on the proxy (whether by
manual signature, typewriting, telegraphic transmission or otherwise) by
the shareholder or the shareholder's attorney-in-fact. A validly executed
proxy which does not state that it is irrevocable shall continue in full
force and effect unless (i) revoked by the shareholder executing it by a
written notice delivered to the Trust prior to the exercise of the proxy
or by the shareholder's execution of a subsequent proxy or attendance and
vote in person at the meeting; or (ii) written notice of the death or
incapacity of the shareholder is received by the Trust before the proxy's
vote is counted; provided, however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless
otherwise provided in the proxy. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
the General Corporation Law of the State of Delaware.
With respect to any shareholders' meeting, the Board may act to
permit the Trust to accept proxies by any electronic, telephonic,
computerized, telecommunications or other reasonable alternative to the
execution of a written instrument authorizing the proxy to act, provided
the shareholder's authorization is received within eleven (11) months
before the meeting. A proxy with respect to shares held in the name of
two or more persons shall be valid if executed by any one of them unless
at or prior to exercise of the proxy the Trust receives a specific written
notice to the contrary from any one of them. A proxy purporting to be
executed by or on behalf of a shareholder shall be deemed valid unless
challenged at or prior to its exercise and the burden of proving
invalidity shall rest with the challenger.
Section 10. INSPECTORS OF ELECTION. Before any meeting of
shareholders, the Board may appoint any person other than nominees for
office to act as inspector of election at the meeting or its adjournment.
If no inspector of election is so appointed, the chairperson of the
meeting may, and on the request of any shareholder or a shareholder's
proxy shall, appoint an inspector of election at the meeting. If any
person appointed as inspector fails to appear or fails or refuses to act,
the chairperson of the meeting may, and on the request of any shareholder
or a shareholder's proxy shall, appoint a person to fill the vacancy.
The inspector shall:
(a) determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the existence
of a quorum and the authenticity, validity and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any
way arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result of voting or consents; and
(g) do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
Section 1. VACANCIES. Vacancies in the Board may be filled by a
majority of the remaining trustees, though less than a quorum, or by a
sole remaining trustee, unless the Board calls a meeting of shareholders
for the purpose of filling such vacancies. In the event that all Trustee
offices become vacant, an authorized officer of the Investment Adviser
shall serve as the sole remaining Trustee effective upon the vacancy in
the office of the last Trustee, subject to the provisions of the 1940
Act. In such case, the Investment Adviser, as the sole remaining Trustee,
shall, as soon as practicable, fill all of the vacancies on the Board;
provided, however, that the percentage of Trustees who are not Interested
Persons of the Trust shall be no less than that permitted by the 1940
Act. Thereupon, the Investment Adviser shall resign as Trustee and a
meeting of the Shareholders shall be called, as required by the 1940 Act,
for the election of Trustees.
Section 2. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All
meetings of the Board may be held at any place within or outside the State
of Delaware that has been designated from time to time by the Board. In
the absence of such a designation, regular meetings shall be held at the
principal executive office of the Trust. Subject to any applicable
requirements of the 1940 Act, any meeting, regular or special, may be held
by conference telephone or similar communication equipment, so long as all
trustees participating in the meeting can hear one another, and all such
trustees shall be deemed to be present in person at such meeting for
purposes of the DBTA and, to the extent permitted, the 1940 Act.
Section 3. REGULAR MEETINGS. Regular meetings of the Board shall
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be held without call at such time as shall from time to time be fixed by
the Board. Such regular meetings may be held without notice.
Section 4. SPECIAL MEETINGS. Special meetings of the Board for any
----------------
purpose or purposes may be called at any time by the chairperson of the
Board, the president, any vice president, the secretary or any trustee.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each trustee or sent by first-class mail,
courier or telegram, charges prepaid, or by facsimile or electronic mail,
addressed to each trustee at that trustee's address as it is shown on the
records of the Trust. In case the notice is mailed, it shall be deposited
in the United States mail at least seven (7) days before the time of the
holding of the meeting. In case the notice is delivered personally, by
telephone, by courier, to the telegraph company, or by express mail,
facsimile, electronic mail or similar service, it shall be delivered at
least forty-eight (48) hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be
communicated either to the trustee or to a person at the office of the
trustee who the person giving the notice has reason to believe will
promptly communicate it to the trustee. The notice need not specify the
purpose of the meeting or the place if the meeting is to be held at the
principal executive office of the Trust.
Section 5. ACTION WITHOUT A MEETING. Unless the 1940 Act requires
that a particular action be taken only at a meeting at which the Trustees
are present in person, any action to be taken by the Trustees at a meeting
may be taken without such meeting by the written consent of a majority of
the Trustees then in office. Any such written consent may be executed and
given by telecopy or similar electronic means. Such written consents
shall be filed with the minutes of the proceedings of the Trustees. If
any action is so taken by the Trustees by the written consent of less than
all of the Trustees, prompt notice of the taking of such action shall be
furnished to each Trustee who did not execute such written consent,
provided that the effectiveness of such action shall not be impaired by
any delay or failure to furnish such notice.
Section 6. QUORUM. A majority of the authorized number of Trustees
shall constitute a quorum for the transaction of business, except to
adjourn as provided in Sections 8 and 9 of this Article III. Every act or
decision done or made by a majority of the Trustees present at a meeting
duly held at which a quorum is present shall be regarded as the act of the
Board, subject to the provisions of the Declaration of Trust. A meeting
at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of Trustees if any action taken is approved
by at least a majority of the required quorum for that meeting.
Section 7. WAIVER OF NOTICE. Notice of any meeting need not be
given to any Trustee who either before or after the meeting signs a
written waiver of notice, a consent to holding the meeting, or an approval
of the minutes. The waiver of notice or consent need not specify the
purpose of the meeting. All such waivers, consents, and approvals shall
be filed with the records of the Trust or made a part of the minutes of
the meeting. Notice of a meeting shall also be deemed given to any
Trustee who attends the meeting without protesting before or at its
commencement about the lack of notice to that Trustee.
Section 8. ADJOURNMENT. A majority of the Trustees present,
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whether or not constituting a quorum, may adjourn any matter at any
meeting to another time and place.
Section 9. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is
adjourned for more than seven (7) days, in which case notice of the time
and place shall be given before the time of the recommencement of an
adjourned meeting to the Trustees who were present at the time of the
adjournment.
Section 10. FEES AND COMPENSATION OF TRUSTEES. Trustees and
members of committees may receive such compensation, if any, for their
services and such reimbursement of expenses as may be fixed or determined
by resolution of the Board. This Section 10 shall not be construed to
preclude any trustee from serving the Trust in any other capacity as an
officer, agent, employee, or otherwise and receiving compensation for
those services.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board may, by resolution
adopted by a majority of the authorized number of Trustees, designate one
or more committees as set forth in the Declaration of Trust, to serve at
the pleasure of the Board. The Board may designate one or more Trustees
or other persons as alternate members of any committee who may replace any
absent member at any meeting of the committee. Any committee, to the
extent provided in the resolution of the Board, shall have the authority
of the Board, except with respect to:
(a) the approval of any action which under the Declaration of
Trust or applicable law also requires shareholders' approval or
requires approval by a majority of the entire Board or certain
members of the Board;
(b) the filling of vacancies on the Board or on any
committee. However, a committee may nominate trustees and, if
required by the 1940 Act, elect trustees who are not "interested
persons" as defined in the 1940 Act;
(c) the fixing of compensation of the trustees for serving on
the Board or on any committee;
(d) the amendment or repeal of the Declaration of Trust or of
these By-Laws or the adoption of a new Declaration of Trust or new
By-Laws; or
(e) the amendment or repeal of any resolution of the Board
which by its express terms is not so amendable or repealable.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action
of any committee shall be governed by and held and taken in accordance
with the provisions of the Declaration of Trust and Article III of these
By-Laws, with such changes in the context thereof as are necessary to
substitute the committee and its members for the Board and its members,
except that the time of regular meetings of any committee may be
determined either by the Board or by the committee. Special meetings of
any committee may also be called by resolution of the Board, and notice of
special meetings of any committee shall also be given to all alternate
members who shall have the right to attend all meetings of the committee.
The Board may adopt rules for the government of any committee not
inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a
president, a secretary, and a treasurer. The Trust may also have, at the
discretion of the Board, one or more vice presidents, one or more
assistant vice presidents, one or more assistant secretaries, one or more
assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 3 of this Article V. Any number
of offices may be held by the same person. Any officer may be, but need
not be, a Trustee or Shareholder.
Section 2. ELECTION OF OFFICERS. The officers of the Trust shall
be chosen by the Board, and each shall serve at the pleasure of the Board,
subject to the rights, if any, of an officer under any contract of
employment.
Section 3. SUBORDINATE OFFICERS. The Board may appoint and may
empower the president to appoint such other officers as the business of
the Trust may require, each of whom shall hold office for such period,
have such authority and perform such duties as are provided in these
By-Laws or as the Board may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an officer under any contract of employment, any
officer may be removed, either with or without cause, by the Board at any
regular or special meeting of the Board, or by an officer upon whom such
power of removal may be conferred by the Board.
Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in such notice. Unless
otherwise specified in such notice, the acceptance of the resignation
shall not be necessary to make it effective. Any resignation is without
prejudice to the rights, if any, of the Trust under any contract to which
the officer is a party.
Section 5. VACANCIES IN OFFICES. A vacancy in any office because
of death, resignation, removal, disqualification or other cause shall be
filled in the manner prescribed in these By-Laws for regular appointment
to that office.
Section 6. CHAIRPERSON OF THE BOARD. The chairperson of the Board
shall, if present, preside at meetings of the Board and the shareholders
and exercise and perform such other powers and duties as may be from time
to time assigned to the chairperson by the Board or prescribed by these
By-Laws. In the absence, resignation, disability or death of the
president, the chairperson shall exercise all the powers and perform all
the duties of the president until his or her return, such disability shall
be removed or a new president shall have been elected.
Section 7. PRESIDENT. Subject to such supervisory powers, if any,
as may be given by the Board to the chairperson of the Board, the
president shall be the chief operating and executive officer of the Trust
and shall, subject to the control of the Board, have general supervision,
direction and control of the business and the officers of the Trust. In
the absence of the chairperson of the Board, the president or his designee
shall preside at all meetings of the shareholders and at all meetings of
the Board. The president shall have the general powers and duties of
management usually vested in the office of president of a corporation and
shall have such other powers and duties as may be prescribed by the Board
or these By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
president and the chairperson of the Board, the executive vice presidents
or vice presidents, if any, in order of their rank as fixed by the Board
or if not ranked, a vice president designated by the Board, shall perform
all the duties of the president and when so acting shall have all powers
of, and be subject to all the restrictions upon, the president. The
executive vice president or vice presidents, whichever the case may be,
shall have such other powers and perform such other duties as from time to
time may be prescribed for them respectively by the Board, these By-Laws,
the president or the chairperson of the Board.
Section 9. SECRETARY. The secretary shall keep or cause to be kept
at the principal executive office of the Trust or such other place as the
Board may direct a book of minutes of all meetings and actions of
trustees, committees of trustees and shareholders with the time and place
of holding, whether regular or special, and if special, how authorized,
the notice given, the names of those present at trustees' meetings or
committee meetings, the number of shares present or represented at
shareholders' meetings, and the proceedings.
The secretary shall cause to be kept at the principal executive
office of the Trust or at the office of the Trust's administrator,
transfer agent or registrar, as determined by resolution of the Board, a
share register or a duplicate share register showing the names of all
shareholders and their addresses, the number, series and classes of shares
held by each, the number and date of certificates, if any, issued for the
same and the number and date of cancellation of every certificate
surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings
of the shareholders and of the Board required by these By-Laws or by
applicable law to be given and shall have such other powers and perform
such other duties as may be prescribed by the Board or by these By-Laws.
Section 10. TREASURER. The treasurer shall be the chief financial
officer of the Trust and shall keep and maintain or cause to be kept and
maintained adequate and correct books and records of accounts of the
properties and business transactions of the Trust, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any trustee.
The treasurer shall deposit all monies and other valuables in the
name and to the credit of the Trust with such depositories as may be
designated by the Board. The treasurer shall disburse the funds of the
Trust as may be ordered by the Board, shall render to the president and
trustees, whenever they request it, an account of all of the treasurer's
transactions as chief financial officer and of the financial condition of
the Trust and shall have other powers and perform such other duties as may
be prescribed by the Board or these By-Laws.
ARTICLE VI
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Trust
shall keep at its offices or at the office of its transfer or other duly
authorized agent, records of its Shareholders, that provide the names and
addresses of all Shareholders and the number, series and classes, if any,
of Shares held by each Shareholder. Such records may be inspected during
the Trust's regular business hours by any Shareholder, or its duly
authorized representative, upon reasonable written demand to the Trust,
for any purpose reasonably related to such Shareholder's interest as a
Shareholder.
Section 2. MAINTENANCE AND INSPECTION OF DECLARATION OF TRUST AND
BY-LAWS. The Trust shall keep at its offices the original or a copy of
the Declaration of Trust and these By-Laws, as amended or restated from
time to time, where they may be inspected during the Trust's regular
business hours by any Shareholder, or its duly authorized representative,
upon reasonable written demand to the Trust, for any purpose reasonably
related to such Shareholder's interest as a Shareholder.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The
accounting books and records and minutes of proceedings of the
Shareholders, the Board, any committee of the Board or any advisory
committee shall be kept at such place or places designated by the Board
or, in the absence of such designation, at the offices of the Trust. The
minutes and the accounting books and records shall be kept either in
written form or in any other form capable of being converted into written
form.
If information is requested by a Shareholder, the Board, or, in case
the Board does not act, the president, any vice president or the
secretary, shall establish reasonable standards governing, without
limitation, the information and documents to be furnished and the time and
the location, if appropriate, of furnishing such information and
documents. Costs of providing such information and documents shall be
borne by the requesting Shareholder. The Trust shall be entitled to
reimbursement for its direct, out-of-pocket expenses incurred in declining
unreasonable requests (in whole or in part) for information or documents.
The Board, or, in case the Board does not act, the president, any
vice president or the secretary, may keep confidential from Shareholders
for such period of time as the Board or such officer, as applicable, deems
reasonable any information that the Board or such officer, as applicable,
reasonably believes to be in the nature of trade secrets or other
information that the Board or such officer, as the case may be, in good
faith believes would not be in the best interests of the Trust to disclose
or that could damage the Trust or its business or that the Trust is
required by law or by agreement with a third party to keep confidential.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the
absolute right during the Trust's regular business hours to inspect all
books, records, and documents of every kind and the physical properties of
the Trust. This inspection by a Trustee may be made in person or by an
agent or attorney and the right of inspection includes the right to copy
and make extracts of documents.
ARTICLE VII
DIVIDENDS
Section 1. DECLARATION OF DIVIDENDS. Dividends upon the shares of
beneficial interest of the Trust may, subject to the provisions of the
Declaration of Trust, if any, be declared by the Board at any regular or
special meeting, pursuant to applicable law. Dividends may be paid in
cash, in property, or in shares of the Trust.
Section 2. RESERVES. Before payment of any dividend, there may be
set aside out of any funds of the Trust available for dividends such sum
or sums as the Board may, from time to time, in its absolute discretion,
think proper as a reserve fund to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Trust, or
for such other purpose as the Board shall deem to be in the best interests
of the Trust, and the Board may abolish any such reserve in the manner in
which it was created.
ARTICLE VIII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes or other evidences of
indebtedness issued in the name of or payable to the Trust shall be signed
or endorsed by such person or persons and in such manner as from time to
time shall be determined by the Board or as may be contracted to service
providers.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board,
except as otherwise provided in these By-Laws, may authorize any officer
or officers or agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Trust and this authority
may be general or confined to specific instances; and unless so authorized
or ratified by the Board or within the agency power of an officer, no
officer, agent, or employee shall have any power or authority to bind the
Trust by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
Section 3. CERTIFICATES FOR SHARES. No certificates for shares of
beneficial interest in any series shall be issued except as the Board of
Trustees may otherwise determine from time to time. Should the Board of
Trustees authorize the issuance of such certificates, a certificate or
certificates for shares of beneficial interest in any series of the Trust
may be issued to a shareholder upon the shareholder's request when such
shares are fully paid. All certificates shall be signed in the name of
the Trust by the chairperson of the Board or the president or vice
president and by the treasurer or an assistant treasurer or the secretary
or any assistant secretary, certifying the number of shares and the series
and class of shares owned by the shareholders. Any or all of the
signatures on the certificate may be facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature
has been placed on a certificate shall have ceased to be such officer,
transfer agent, or registrar before such certificate is issued, it may be
issued by the Trust with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
Notwithstanding the foregoing, the Trust may adopt and use a system of
issuance, recordation and transfer of its shares by electronic or other
means.
Section 4. LOST CERTIFICATES. Except as provided in Section 3 or
this Section 4, no new certificates for shares shall be issued to replace
an old certificate unless the latter is surrendered to the Trust and
cancelled at the same time. The Board may, in case any share certificate
or certificate for any other security is lost, stolen, or destroyed,
authorize the issuance of a replacement certificate on such terms and
conditions as the Board may require, including a provision for
indemnification of the Trust secured by a bond or other adequate security
sufficient to protect the Trust against any claim that may be made against
it, including any expense or liability on account of the alleged loss,
theft, or destruction of the certificate or the issuance of the
replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY
TRUST. The chairperson of the Board, the president or any vice president
or any other person authorized by resolution of the Board or by any of the
foregoing designated officers, is authorized to vote or represent on
behalf of the Trust any and all shares of any corporation, partnership,
trust, or other entity, foreign or domestic, standing in the name of the
Trust. The authority granted may be exercised in person or by a proxy
duly executed by such designated person.
Section 6. TRANSFER OF SHARES. Shares of the Trust shall be
transferable only on the record books of the Trust by the person in whose
name such shares are registered, or by his or her duly authorized attorney
or representative. In all cases of transfer by an attorney-in-fact, the
original power of attorney, or an official copy thereof duly certified,
shall be deposited and remain with the Trust, its transfer agent or other
duly authorized agent. In case of transfers by executors, administrators,
guardians or other legal representatives, duly authenticated evidence of
their authority shall be presented to the Trust, transfer agent or other
duly authorized agent, and may be required to be deposited and remain with
the Trust, its transfer agent or other duly authorized agent. No transfer
shall be made unless and until the certificate issued to the transferor,
if any, shall be delivered to the Trust, its transfer agent or other duly
authorized agent, properly endorsed.
Section 7. HOLDERS OF RECORD. The Trust shall be entitled to treat
the holder of record of any share or shares of the Trust as the owner
thereof and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any
other person, whether or not the Trust shall have express or other notice
thereof.
Section 8. FISCAL YEAR. The fiscal year of the Trust shall be
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established, re-established or changed from time to time by resolution of
the Board. The fiscal year of the Trust shall be the taxable year of the
Trust.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENT. These By-Laws may be restated and/or amended
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at any time, without the approval of the shareholders, by an instrument in
writing signed by, or a resolution of, a majority of the then Board.
PART C. OTHER INFORMATION.
Item 24. Exhibits:
(a) Form of Declaration of Trust of the Registrant; +
(i) Form of Certificate of Trust of the Registrant; +
(b) Copy of By-Laws of the Registrant; +
(c) Not applicable;
(d) Not applicable;
(e) Copy of Registrant's dividend reinvestment plan, if
applicable (to be filed by amendment);
(f) Not applicable;
(g) Form of investment advisory contract (to be filed by
amendment);
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+ All exhibits are being filed electronically.
(h) Copy of underwriting or distribution contract (to be
filed by amendment);
(i) Not applicable;
(j) Form of custodian agreement (to be filed by
amendment);
(k) Copies of all other material contracts not made in
the ordinary course of business (to be filed by
amendment);
(l) Form of Opinion and Consent of Counsel as to
legality of shares being registered (to be filed by
amendment);
(m) Not applicable;
(n) Not applicable;
(o) Not applicable;
(p) Form of Initial Capital Understanding (to be filed by
amendment);
(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).
Item 25. Marketing Arrangements
To be filed by amendment
Item 26. Other Expenses of Issuance and Distribution
To be filed by amendment
Item 27. Persons Controlled by or Under Common Control with the Fund:
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To be filed by amendment
Item 28. Number of Holders of Securities
Not applicable
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+ All exhibits are being filed electronically.
Item 29. Indemnification:
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Indemnification is provided to Officers and Trustees of the
Registrant pursuant to Article V of Registrant's Declaration of
Trust. The Investment Advisory Contract 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 Advisory Contract 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.
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:
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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:
Executive Vice Presidents: William D. Dawson, III
Henry A. Frantzen
J. Thomas Madden
Senior Vice Presidents: Stephen F. Auth
Joseph M. Balestrino
David A. Briggs
Jonathan C. Conley
Deborah A. Cunningham
Michael P. Donnelly
Linda A. Duessel
Mark E. Durbiano
James E. Grefenstette
Robert M. Kowit
Jeffrey A. Kozemchak
Richard J. Lazarchic
Susan M. Nason
Mary Jo Ochson
Robert J. Ostrowski
Frank Semack
Richard Tito
Peter Vutz
Vice Presidents: Todd A. Abraham
J. Scott Albrecht
Randall S. Bauer
Nancy J.Belz
G. Andrew Bonnewell
David Burns
Robert E. Cauley
Regina Chi
Ross M. Cohen
Fred B. Crutchfield
Lee R. Cunningham, II
Alexandre de Bethmann
Anthony Delserone, Jr.
Donald T. Ellenberger
Eamonn G. Folan
Kathleen M. Foody-Malus
Thomas M. Franks
John T. Gentry
David P. Gilmore
Marc Halperin
John W. Harris
Patricia L. Heagy
Susan R. Hill
Nikola A. Ivanov
William R. Jamison
Constantine J. Kartsonas
Nathan H. Kehm
John C. Kerber
Steven Lehman
Marian R. Marinack
Natalie F. Metz
Thomas J. Mitchell
Joseph M. Natoli
John L. Nichol
Mary Kay Pavuk
Jeffrey A. Petro
John P. Quartarolo
Ihab L. Salib
Roberto Sanchez-Dahl, Sr.
Aash M. Shah
John Sidawi
Michael W. Sirianni, Jr.
Christopher Smith
Timothy G. Trebilcock
Leonardo A. Vila
Paige M. Wilhelm
Richard M. Winkowski, Jr.
Lori A. Wolff
George B. Wright
Assistant Vice Presidents: Catherine A. Arendas
Angela A. Auchey
Nicholas P. Besh
Hanan Callas
David W. Cook
James R. Crea, Jr.
Karol M. Crummie
David Dao
Richard J. Gallo
James Grant
Anthony Han
Kathryn P. Heagy
Carol B. Kayworth
J. Andrew Kirschler
Robert P. Kozlowski
Ted T. Lietz, Sr.
Monica Lugani
Tracey L. Lusk
Theresa K. Miller
Bob Nolte
Rae Ann Rice
James W. Schaub
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: C. Grant Anderson
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:
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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.
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Item 33. Undertakings:
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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 MUNICIPAL INCOME
FUND, has duly caused this Initial Registration Statement to be signed on
its behalf by the undersigned, thereto duly authorized, in the City of
Pittsburgh and Commonwealth of Pennsylvania, on the 17th day of October,
2002.
FEDERATED MUNICIPAL INCOME FUND
BY: /s/ Leslie K. Ross
Leslie K. Ross, Assistant Secretary
Attorney in Fact for John F. Donahue
October 17, 2002
Pursuant to the requirements of the Securities Act of 1933, this
Initial Registration Statement has been signed below by the following
person in the capacity and on the date indicated:
NAME TITLE DATE
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By: /s/ Leslie K. Ross Attorney In Fact October 17, 2002
Leslie K. Ross For the Persons
ASSISTANT SECRETARY Listed Below
NAME TITLE
John F. Donahue Chairman and Trustee
J. Christopher Donahue President and Trustee
(Chief Executive Officer)
Richard J. Thomas Treasurer
(Principal Financial and
Accounting 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