AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MARCH 22, 2002
1933 ACT FILE NO. 333-82894
1940 ACT FILE NO. 811-10573
___________________________________________________________
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ PRE-EFFECTIVE AMENDMENT NO. 3
/ / POST-EFFECTIVE AMENDMENT NO.
AND/OR
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
/X/ AMENDMENT NO. 7
EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER:
ALLIANCE NATIONAL MUNICIPAL INCOME FUND, INC.
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES
(NUMBER, STREET, CITY, STATE, ZIP CODE):
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 969-1000
NAME AND ADDRESS (NUMBER, STREET, CITY, STATE, ZIP CODE)
OF AGENT FOR SERVICE:
EDMUND P. BERGAN, JR.
ALLIANCE CAPITAL MANAGEMENT L.P.
1345 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10105
WITH COPIES TO:
PATRICIA A. POGLINCO
SEWARD & KISSEL LLP
ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10004
SARAH COGAN
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF
THIS REGISTRATION STATEMENT.
IF ANY SECURITIES BEING REGISTERED ON THIS FORM WILL BE OFFERED
ON A DELAYED OR CONTINUOUS BASIS IN RELIANCE ON RULE 415 UNDER
THE SECURITIES ACT OF 1933, OTHER THAN SECURITIES OFFERED IN
CONNECTION WITH A DIVIDEND REINVESTMENT PLAN, CHECK THE FOLLOWING
BOX. / /
It is proposed that this filing become effective (check
appropriate box)
/x/ when declared effective pursuant to Section 8(c).
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Maximum
Title of Proposed Maximum Aggregate
Securities Amount Offering Amount of
Being Being Price Offering Registration
Registered Registered Per Unit Price (1) Fee (2)
Preferred Shares,
$.001 par value 7,800 $25,000 $195,000,000 $17,940
The registrant hereby amends this Registration Statement under
the Securities Act of 1933 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 this
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
date as the Commission, acting pursuant to Section 8(a), may
determine.
(1) Estimated solely for the purpose of calculating the
registration fee.
(2) $6,258.30 of the fee is offset by amounts previously paid
pursuant to filing of Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement (File Nos. 333-73130
and 811-10573) on January 25, 2002, and the remaining
amount, $11,681.70, was previously paid pursuant to the
filing of Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on March 19, 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 relating to the
securities filed with the Securities and Exchange Commission is
effective. This statement of additional information 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.
PROSPECTUS
$195,000,000
Alliance National Municipal Income Fund, Inc.
Auction Preferred Shares
1,950 Shares, Series M
1,950 Shares, Series T
1,950 Shares, Series W
1,950 Shares, Series TH
Liquidation Preference $25,000 Per Share
-------------
Investment Objective. The Fund is a recently organized, diversified,
closed-end management investment company. The Fund's investment objective is to
seek to provide high current income exempt from regular federal income tax. The
Fund cannot assure you that it will achieve its investment objective.
Investment Policies. Under normal conditions, the Fund will invest at least
80%, and normally substantially all, of its net assets in municipal bonds
paying interest that is exempt from regular federal income tax. Normally, the
Fund will invest at least 75% of its net assets in investment grade municipal
bonds (i.e., rated Baa or BBB or higher) or unrated municipal bonds considered
to be of comparable quality as determined by the Fund's investment adviser. The
Fund may invest up to 25% of its net assets in municipal bonds rated below
investment grade and unrated municipal bonds considered to be of comparable
quality as determined by the Fund's investment adviser. The Fund intends to
invest primarily in municipal bonds that pay interest that is not subject to
the alternative minimum income tax, but may invest without limit in municipal
bonds paying interest that is subject to the alternative minimum tax.
-------------
Investing in the Fund's preferred shares involves certain risks. Before
buying any preferred shares you should read the discussion of the material
risks of investing in the Fund in "Risks" beginning on page 16. These risks are
summarized in "Prospectus Summary--Special Risk Considerations" beginning on
page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
-------------
Per
Share Total
----- -----
Public Offering Price $25,000 $195,000,000
Sales Load $ 250 $ 1,950,000
Proceeds to the Fund/(1)/ (before expenses) $24,750 $193,050,000
--------
(1) Not including offering expenses payable by the Fund estimated to be
$283,710.
The Underwriters are offering preferred shares subject to certain
conditions. The Underwriters expect to deliver the preferred shares to an
investor's broker-dealer in book-entry form, through the facilities of the
Depository Trust Company, on or about March 27, 2002.
-------------
Salomon Smith Barney
Merrill Lynch & Co.
UBS Warburg
March 22, 2002
(Continued from previous page)
The Fund is offering 1,950 shares of Series M Preferred Shares, 1,950 shares
of Series T Preferred Shares, 1,950 shares of Series W Preferred Shares and
1,950 shares of Series TH Preferred Shares (referred to together in this
Prospectus as "Preferred Shares"). The Preferred Shares have a liquidation
preference of $25,000 per share, plus any accumulated, unpaid dividends. The
Preferred Shares also have priority over the Fund's common shares as to
distribution of assets as described in this Prospectus. The dividend rate for
the initial dividend rate period will be 1.20% for Series M, 1.20% for Series
T, 1.20% for Series W and 1.20% for Series TH. The initial rate period is from
the date of issuance through April 8, 2002 for Series M, through April 9, 2002
for Series T, through April 3, 2002 for Series W and through April 4, 2002 for
Series TH. For subsequent rate periods, Preferred Shares pay dividends based on
a rate set at auction, usually held weekly. Prospective purchasers should
carefully review the auction procedures described in the Prospectus and should
note: (1) a buy order (called a "bid order") or sell order is a commitment to
buy or sell Preferred Shares based on the results of an auction and (2)
purchases and sales will be settled on the next business day after the auction.
Preferred Shares are not listed on an exchange. You may only buy or sell
Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the auction agent and the
Fund, or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not provide
you with liquidity.
The Preferred Shares do not represent a deposit or obligation of, and are
not guaranteed or endorsed by, any bank or other insured depository institution
and are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
You should read this Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
A Statement of Additional Information, dated March 22, 2002, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 39 of this Prospectus. You may request a free copy of the Statement of
Additional Information by calling (800) 227-4618 or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities
and Exchange Commission web site (http://www.sec.gov).
You should rely only on the information contained or incorporated by
reference in this Prospectus. The Fund has not, and the Underwriters have not,
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. The
Fund is not, and the Underwriters are not, making an offer of Preferred Shares
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 date other than
the date on the front of this Prospectus. The Fund's business, financial
condition, results of operations and prospects may have changed since that date.
-------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................................ 1
Financial Highlights...................................................... 7
The Fund.................................................................. 8
Use of Proceeds........................................................... 8
Capitalization............................................................ 9
Portfolio Composition..................................................... 9
The Fund's Investments.................................................... 10
Risks..................................................................... 16
Management of the Fund.................................................... 19
Description of Preferred Shares........................................... 21
The Auction............................................................... 29
Description of Common Shares.............................................. 33
Certain Provisions of the Charter Documents............................... 33
Repurchase of Common Shares; Conversion to Open-End Fund.................. 35
Tax Matters............................................................... 36
Underwriting.............................................................. 37
Custodian, Transfer Agent, Dividend Disbursing Agent and Redemption Agent. 38
Legal Matters............................................................. 38
Table of Contents for the Statement of Additional Information............. 39
-------------
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained in this Prospectus and the Statement of Additional Information
("SAI"), including the Articles Supplementary attached as Appendix A to the SAI
(the "Articles"), which describe the rights and preferences of the Preferred
Shares. Capitalized terms used but not defined in this Prospectus shall have
the meanings described in the Articles.
The Fund.............. Alliance National Municipal Income Fund, Inc. (the
"Fund") is a recently organized, diversified,
closed-end management investment company. The Fund's
common shares ("Common Shares") are traded on the New
York Stock Exchange ("NYSE") under the symbol AFB. As
of March 8, 2002, the Fund had 20,106,667 Common
Shares outstanding and net assets of $285,686,881.
The Offering.......... The Fund is offering 1,950 Series M Preferred Shares,
1,950 Series T Preferred Shares, 1,950 Series W
Preferred Shares and 1,950 Series TH Preferred Shares
at a purchase price of $25,000 per share. The
Preferred Shares are being offered through Salomon
Smith Barney Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and UBS Warburg LLC (the
"Underwriters"). See "Underwriting."
Investment Objective
and Policies........ The Fund's investment objective is to seek to provide
high current income exempt from regular federal
income tax. Under normal conditions, the Fund will
seek to achieve its objective by investing
substantially all of its net assets in municipal
bonds that pay interest that, in the opinion of the
bond counsel to the issuer, is exempt from regular
federal income tax. As a matter of fundamental
policy, the Fund will normally invest at least 80% of
its net assets in municipal bonds paying interest
that is exempt from regular federal income tax. In
addition, the Fund will normally invest at least 75%
of its net assets in municipal bonds that, at the
time of investment, are of investment grade quality.
Investment grade quality municipal bonds are those
rated within the four highest grades (Baa or BBB or
better) by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Rating Service ("S&P")
or Fitch, Inc. ("Fitch"), or, if unrated, determined
to be of comparable quality by the Fund's investment
adviser, Alliance Capital Management L.P.
("Alliance"). The Fund may invest up to 25% of its
net assets in municipal bonds that, at the time of
investment, are rated below investment grade by
Moody's, S&P or Fitch or, if unrated, determined to
be of comparable quality by Alliance. Municipal bonds
of below investment grade quality are regarded as
having predominantly speculative characteristics with
respect to the issuer's capacity to pay interest and
repay principal and are commonly referred to as "junk
bonds." Municipal bonds in the lowest investment
grade category may also be considered to possess some
speculative characteristics.
While the Fund intends to invest primarily in municipal
bonds that pay interest that is not subject to the
federal alternative minimum tax ("AMT"), it may
invest without limit in AMT-subject municipal bonds.
Investors who are subject to the AMT or would become
subject to the AMT by investing in Preferred Shares
should consult with their tax advisers before
purchasing Preferred Shares. See "Tax Matters."
1
The Fund may at times use certain types of investment
techniques in managing the Fund's portfolio, which
themselves may involve additional risks. The
techniques include investment derivatives, such as
futures contracts, options on futures contracts,
options, and interest rate swaps, caps and floors.
The Fund cannot assure you that it will attain its
investment objective. See "The Fund's Investments."
Investment Adviser.... Alliance is the Fund's investment adviser. Subject to
the supervision of the Board of Directors, Alliance
provides investment advisory services and order
placement facilities for the Fund. Alliance receives
an annual fee, payable monthly, in a maximum amount
equal to .65% of the Fund's average daily net assets.
Alliance is a leading global investment management
firm supervising client accounts with assets as of
January 31, 2002 totaling approximately $451 billion.
Alliance provides diversified investment management
and related services globally to a broad range of
clients including: institutional investors such as
corporate and public employee pension funds,
endowment funds, domestic and foreign institutions,
and governments and affiliates; private clients,
consisting of high net worth individuals, trusts and
estates, charitable foundations, partnerships,
private and family corporations, and other entities;
individual investors by means of retail mutual funds
sponsored by Alliance; and institutional investors by
means of in-depth research, portfolio strategy,
trading and brokerage-related services. See
"Management of the Fund."
Trading Market........ The Preferred Shares are not listed on an exchange.
Instead, you may buy or sell Preferred Shares at an
Auction that normally is held weekly by submitting
orders to a Broker-Dealer or to a broker-dealer that
has entered into a separate agreement with a
Broker-Dealer. In addition to the Auctions,
Broker-Dealers and other broker-dealers may maintain
a secondary trading market in Preferred Shares
outside of Auctions, but may discontinue this
activity at any time. There is no assurance that a
secondary market will provide shareholders with
liquidity. You may transfer shares outside of
Auctions only to or through a Broker-Dealer, or a
broker-dealer that has entered into a separate
agreement with a Broker-Dealer.
The table below shows the first Auction Date for each
series of the Preferred Shares and the day on which
each subsequent Auction will normally be held for
each series of the Preferred Shares, which, if not a
Business Day, will be the next preceding Business Day
before a Subsequent Rate Period. The first Auction
Date will be April 8, 2002 for Series M Preferred
Shares, April 9, 2002 for Series T Preferred Shares,
April 3, 2002 for Series W Preferred Shares and April
4, 2002 for Series TH Preferred Shares, in each case
the Business Day before the Dividend Payment Date for
the Initial Rate Period for each series of the
Preferred Shares. The start date for Subsequent Rate
Periods normally will be the next Business Day
following the Auction Date unless the then-current
Rate Period is a Special Rate Period.
2
First Auction Subsequent
Series Date* Auction
------ ------------- ----------
M.............................. April 8 Monday
T.............................. April 9 Tuesday
W.............................. April 3 Wednesday
TH............................. April 4 Thursday
--------
* All dates are 2002.
Dividends and Rate
Periods............. The table below shows the dividend rate for the Initial
Rate Period of the Preferred Shares offered in this
Prospectus. For Subsequent Rate Periods, the
Preferred Shares will pay dividends based on a rate
set at Auctions, normally held weekly, except in the
case of Special Rate Periods. In most instances
dividends are also paid weekly, on the Business Day
following the end of the Rate Period, except in the
case of Special Rate Periods of longer than 28 days.
The rate set at Auction will not exceed the Maximum
Rate. See "Description of Preferred Shares--Dividends
and Dividend Periods--General."
The table below also shows the date from which
dividends on the Preferred Shares will accumulate at
the initial rate, the Dividend Payment Date for the
Initial Rate Period and the day on which dividends
will normally be paid. If dividends are payable on a
day that is not a Business Day, then your dividends
will be paid on the first Business Day that falls
after that day.
Finally, the table below shows the number of days in
the Initial Rate Period for the Preferred Shares.
Subsequent Rate Periods may be as short as seven days
but may be as long as 5 years in the case of a
Special Rate Period. The Dividend Payment Date for
Special Rate Periods of more than 28 days will be set
out in the notice designating a Special Rate Period.
See "Description of Preferred Shares--Dividends and
Dividend Periods--Designation of Special Rate
Periods."
Number
Dividend of Days
Date of Payment Subsequent of
Initial Accumulation Date for Dividend Initial
Dividend at Initial Initial Rate Payment Rate
Series Rate Rate* Period* Day Period
------ -------- ------------ ------------ ---------- -------
M... 1.20 March 27 April 9 Tuesday 13
T... 1.20 March 27 April 10 Wednesday 14
W... 1.20 March 27 April 4 Thursday 8
TH.. 1.20 March 27 April 5 Friday 9
--------
* All dates are 2002.
Special Tax
Considerations...... Because under normal circumstances the Fund will invest
substantially all of its net assets in municipal
bonds that pay interest that is exempt from regular
federal income tax, distributions of the Fund's
interest income that you receive will ordinarily be
exempt from regular federal income taxes. However, a
portion of such distributions may be subject to the
AMT because the Fund may invest in AMT-subject
municipal bonds. Net capital gain and other taxable
income, if any,
3
earned by the Fund will be allocated proportionately
to holders of Common Shares ("Common Shareholders")
and Preferred Shares ("Preferred Shareholders") based
on the percentage of total dividends paid to each
class for that year. Distributions of any such net
capital gain or other taxable income will be taxable
to shareholders. The Fund intends to notify Preferred
Shareholders, before any applicable Auction for a
Rate Period of 28 days or less, of the amount of any
federal taxable income and gain to be paid for the
period relating to that Auction. For longer rate
periods, the Fund may also notify Preferred
Shareholders although it is not required to do so. In
certain circumstances, the Fund will make Preferred
Shareholders whole for taxes owing on dividends paid
to Preferred Shareholders that include taxable income
and gain. The Fund will provide notice of the amount
of taxable income and gain to Preferred Shareholders.
See "Tax Matters."
Ratings............... Shares of each series of the Preferred Shares will be
issued with a rating of Aaa from Moody's and AAA from
S&P. Because the Fund is required to maintain at
least one of these ratings, it must own portfolio
securities of a sufficient value and with adequate
credit quality to meet the rating agencies'
guidelines. See "Description of Preferred
Shares--Rating Agency Guidelines and Asset Coverage."
Redemption............ Although the Fund will not ordinarily redeem the
Preferred Shares, it may be required to redeem shares
if, for example, the Fund does not meet an asset
coverage ratio required by law or to correct a
failure to meet a rating agency guideline in a timely
manner. The Fund voluntarily may redeem the Preferred
Shares in certain circumstances. See "Description of
Preferred Shares--Redemption" and "Description of
Preferred Shares--Rating Agency Guidelines and Asset
Coverage."
Liquidation Preference The liquidation preference of the shares of each series
of the Preferred Shares will be $25,000 per share
plus accumulated but unpaid dividends, if any,
thereon. See "Description of Preferred
Shares--Liquidation."
Voting Rights......... The Preferred Shareholders, voting as a separate class,
have the right to elect at least two Directors at all
times and to elect a majority of the Directors in the
event two years' dividends on the Preferred Shares
are unpaid. In each case, the remaining Directors
will be elected by the Common Shareholders and
Preferred Shareholders voting together as a single
class. The Preferred Shareholders will vote as a
separate class on certain other matters as required
under the Fund's Charter, the Investment Company Act
of 1940 (the "1940 Act") and Maryland law. See
"Description of Preferred Shares--Voting Rights" and
"Certain Provisions of the Charter Documents."
Special Risk
Considerations...... Risks of investing in the Preferred Shares include:
Auction Risk. You may not be able to sell the
Preferred Shares at an Auction if the Auction fails;
that is, if there are more Preferred Shares offered
for sale than there are buyers for those shares. As a
result, your investment in the Preferred Shares may
be illiquid. Neither the
4
Broker-Dealers nor the Fund are obligated to purchase
Preferred Shares in an Auction or otherwise, nor is
the Fund required to redeem the Preferred Shares in
the event of a failed Auction.
Ratings and Asset Coverage Risk. A rating agency
could downgrade the Preferred Shares, which could
affect their liquidity and value. In addition, the
Fund may be forced to redeem the Preferred Shares to
meet regulatory or Rating Agency requirements. The
Fund may also voluntarily redeem the Preferred Shares
under certain circumstances.
Secondary Market Risk. You could receive less than the
price you paid for the Preferred Shares if you sell
them outside of an Auction, especially when market
interest rates are rising. Although the
Broker-Dealers may maintain a secondary trading
market in the Preferred Shares outside of Auctions,
they are not obligated to do so, and no secondary
market may develop or exist at any time for the
Preferred Shares.
General risks of investing in the Fund include:
Limited Operating History. The Fund is a recently
organized, diversified, closed-end management
investment company, which has been operational for
less than three months.
Interest Rate Risk. This is the risk that changes in
interest rates will adversely affect the yield or
value of the Fund's investments in municipal bonds.
Generally, when market interest rates fall, municipal
bond prices rise, and vice versa. Increases in market
interest rates will cause the municipal bonds in the
Fund's portfolio to decline in value. The prices of
longer-term municipal bonds generally fluctuate more
than prices of shorter-term municipal bonds as
interest rates change. Because the Fund will invest
primarily in long-term municipal bonds, the Common
Share net asset value ("NAV") and market price per
share will fluctuate more in response to changes in
market interest rates than if the Fund invested
primarily in shorter-term municipal bonds. If
long-term rates rise, the value of the Fund's
investment portfolio may decline, reducing asset
coverage on the Preferred Shares.
Credit Risk. Credit risk is the risk that one or more
municipal bonds in the Fund's portfolio will decline
in price, or that its issuer will fail to pay
interest or principal when due, because the issuer of
the municipal bond experiences a decline in its
financial status. The Fund may invest up to 25%
(measured at the time of investment) of its net
assets in municipal bonds that are rated below
investment grade or, if unrated, determined to be of
comparable quality by Alliance. The prices of these
lower grade municipal bonds are more sensitive to
negative developments, such as a decline in the
issuer's revenues or a general economic downturn,
than are the prices of higher-grade municipal bonds.
Municipal bonds of below investment grade quality
(commonly referred to as "junk bonds") are
predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal
when due and therefore involve a greater risk of
5
default. Municipal bonds in the lowest investment
grade category may also be considered to possess some
speculative characteristics by certain rating
agencies. Any default by an issuer of a municipal
bond could have a negative impact on the Fund's
ability to pay dividends on the Preferred Shares and
could result in the redemption of some or all of the
Preferred Shares.
Leverage Risk. The Fund uses financial leverage for
investment purposes. Leverage risk includes the risk
associated with the issuance of the Preferred Shares
to leverage the Common Shares. If the dividend rate
on the Preferred Shares exceeds the net rate of
return on the Fund's portfolio, the leverage will
result in a lower NAV than if the Fund were not
leveraged, and the Fund's ability to pay dividends
and to meet its asset coverage tests would be reduced.
Investment by the Fund in derivative instruments may
amplify the effects of leverage. See "The Fund's
Investments" for a discussion of derivative
instruments.
Because the management fees received by Alliance are
based on the total net assets of the Fund (including
assets acquired with the proceeds of the Preferred
Shares), Alliance has a financial incentive for the
Fund to use leverage and issue Preferred Shares.
Municipal Bond Market Risk. This is the risk that
special factors, such as legislative changes and
local and business developments, may adversely affect
the yield or value of the Fund's investments in
municipal bonds or other municipal securities. The
amount of public information available about
municipal bonds is generally less than that for
corporate equities or bonds and the investment
performance of the Fund may therefore be more
dependent on the analytical abilities of Alliance
than would be a stock fund or taxable bond fund. The
secondary market for municipal bonds, particularly
below investment grade municipal bonds in which the
Fund may invest, also tends to be less developed and
less liquid than many other securities markets, which
may adversely affect the Fund's ability to sell its
municipal bonds at attractive prices.
Anti-Takeover Provisions. The Fund's Charter (the
"Charter") and Bylaws (together, the "Charter
Documents") include provisions that could limit (i)
the ability of other entities or persons to acquire
control of the Fund; (ii) the Fund's freedom to
engage in certain transactions; or (iii) the ability
of the shareholders to amend the Charter Documents,
effect changes in the Fund's management, or convert
the Fund to open-end status. See "Certain Provisions
of the Charter Documents."
6
FINANCIAL HIGHLIGHTS
Information contained in the table below under "Per Share Operating
Performance" and "Ratios/Supplemental Data" shows the unaudited operating
performance of the Fund from the commencement of the Fund's operations on
January 29, 2002 until March 8, 2002. Since the Fund was recently organized,
the table covers approximately six weeks of operations, during which a portion
of the Fund's assets was held in temporary investments pending investment in
municipal bonds that meet the Fund's investment objective and policies.
Accordingly, the information may not provide a meaningful picture of the Fund's
operating performance.
For the period
January 29, 2002/(a)/
through
March 8, 2002
(Unaudited)
--------------------
Per Share Operating Performance:
Net asset value, beginning of period......................... $ 14.33
Net investment income/(b)(c)/................................ .04
Net realized and unrealized loss on investment transactions.. (.13)
Offering costs............................................... (.03)
--------
Net asset value, end of period............................... $ 14.21
========
Market value, end of period.................................. $ 15.00
Total investment return based on:/(d)/
Market value................................................. 0.00%
Net asset value.............................................. (.84)%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted).................... $285,687
Ratio of expenses to average net assets before fee waivers... .83%*
Ratio of net investment income to average net assets before
fee waivers ............................................... 2.53%*
Ratio of expenses to average net assets net of fee waivers.. .58%*
Ratio of net investment income to average net assets net of
fee waivers................................................ 2.78%*
Portfolio turnover rate...................................... 3.00%
--------
* Annualized.
(a) Commencement of operations. Net asset value immediately after closing of
the first public offering was $14.30.
(b) Based on average shares outstanding.
(c) Net of fees waived by Alliance.
(d) Total investment return is calculated assuming a purchase of Common Shares
on the opening of the first day and a sale on the closing of the last day
of the period reported. Dividends and distributions, if any, are assumed
for purposes of this calculation, to be reinvested at prices obtained under
the Fund's dividend reinvestment plan. Generally, total investment return
based on net asset value will be higher than total investment return based
on market value in periods where there is an increase in the discount or a
decrease in the premium of the market value to net asset value from the
beginning to the end of such periods. Conversely, total investment return
based on net asset value will be lower than total investment return based
on market value in periods where there is a decrease in the discount or an
increase in the premium of the market value to the net asset value from the
beginning to the end of the period. Total investment return calculated for
a period of less than one year is not annualized.
7
THE FUND
The Fund is a recently organized, diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Maryland corporation on November 9, 2001. On January 31, 2002, the Fund issued
an aggregate of 18,000,000 Common Shares, par value $.001 per share, pursuant
to the initial public offering thereof. On February 28, 2002, the Fund issued
an additional 1,200,000 Common Shares and on March 15, 2002, the Fund issued an
additional 365,000 Common Shares in connection with the exercise by the
Underwriters of the over-allotment option. The Fund's Common Shares are traded
on the NYSE under the symbol AFB. The Fund's principal office is located at
1345 Avenue of the Americas, New York, New York 10105, and its telephone number
is (212) 969-1000.
The following provides information about the Fund's outstanding shares as of
March 8, 2002:
Amount Held
Amount by the Fund or Amount
Title of Class Authorized for its Account Outstanding
-------------- ------------- --------------- -----------
Common................................. 1,999,992,200 0 20,106,667
Preferred.............................. 7,800 0 0
Series M............................ 1,950 0 0
Series T............................ 1,950 0 0
Series W............................ 1,950 0 0
Series TH........................... 1,950 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $192,766,290 after
payment of the estimated organizational and offering costs. The Fund will
invest the net proceeds of the offering in accordance with the Fund's
investment objective and policies as stated below. The Fund presently
anticipates that it will be able to invest substantially all of the net
proceeds in municipal bonds that meet its investment objective and policies
within three months after the completion of the offering. Pending such
investment, the Fund anticipates that the proceeds of the offering will be
primarily invested in high-quality short-term tax-exempt money market
securities or in high-quality municipal bonds with relatively low volatility
(such as pre-refunded and intermediate term securities), although the Fund may
invest in short-term taxable investments to the extent that suitable tax-exempt
investments are not available.
8
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of March 8, 2002, and as adjusted, to give effect to the issuance of 365,000
Common Shares on March 15, 2002, as well as the issuance of the Preferred
Shares offered hereby.
Actual As Adjusted
------------ ------------
(Unaudited)
Composition of Net Assets:
Preferred Shares, $.001 par value per share,
$25,000 liquidation preference per share; 7,800
authorized (no shares issued, and 7,800 shares
issued as adjusted, respectively)................. $ -- $195,000,000
Common Shares, $.001 par value per share;
1,999,992,200 shares authorized, 20,106,667
shares outstanding and 20,471,667 shares
outstanding as adjusted, respectively*............ 20,107 20,472
Additional paid-in capital**........................ 287,404,698 290,388,298
Undistributed net investment income................. 815,573 815,573
Net unrealized depreciation of investments.......... (2,553,497) (2,553,497)
------------ ------------
Net assets.......................................... $285,686,881 $483,670,846
============ ============
--------
* None of these outstanding shares are held by or for the account of the Fund.
** As adjusted additional paid-in capital reflects the proceeds of the issuance
of 20,471,667 Common Shares ($293,256,630) less the Common Shares at $.001
par value ($20,472) and the offering costs of $.03 per Common Share
($614,150) as well as a reduction for the sales load and estimated offering
costs of the Preferred Share issuance ($2,233,710).
PORTFOLIO COMPOSITION
As of March 8, 2002, 75.50% of the market value of the Fund's portfolio was
invested in long-term municipal bonds and 24.50% of the market value of the
Fund's portfolio was invested in short-term municipal bonds. The following
table sets forth certain information with respect to the composition of the
Fund's investment portfolio as of March 8, 2002.
Moody's/S&P Credit Rating Value Percent
------------------------- ------------ -------
Aaa/AAA............................................. $101,012,400 31.43%
Aaa/NR /(1)/........................................ 35,101,878 10.92%
Aa/AA............................................... 19,218,431 5.98%
A/A................................................. 23,964,988 7.46%
Baa/BBB............................................. 3,261,635 1.02%
NR/AAA /(2)/........................................ 7,115,454 2.21%
NR/AA /(2)/......................................... 12,239,088 3.81%
NR/A /(2)/.......................................... 11,484,375 3.57%
NR/BB /(2)/......................................... 1,558,284 0.48%
Unrated /(3)/....................................... 27,713,527 8.62%
Short-Term.......................................... 78,765,000 24.50%
------------ -------
Total............................................ $321,435,060 100.00%
============ =======
--------
(1) Rated by Moody's but not by S&P.
(2) Not rated by Moody's but rated by S&P.
(3) Refers to securities that have not been rated by Moody's, S&P or Fitch, but
that have been assessed by Alliance as being of comparable credit quality
to rated securities in which the Fund may invest. See "The Fund's
Investments-Investment Objectives and Policies."
9
THE FUND'S INVESTMENTS
Investment Objective and Policies
Investment Objective.
The Fund's investment objective is to seek to provide high current income
exempt from regular federal income tax.
Investment Policies.
Under normal conditions, the Fund will seek to achieve its objective by
investing substantially all of its net assets in municipal bonds that pay
interest that, in the opinion of the bond counsel to the issuer, is exempt from
regular federal income tax. As a matter of fundamental policy, the Fund will
normally invest at least 80% of its net assets in municipal bonds paying
interest that is exempt from regular federal income taxes. The Fund will
normally invest at least 75% of its net assets in municipal bonds that, at the
time of investment, are of investment grade quality. Investment grade quality
municipal bonds are those rated within the four highest grades (Baa or BBB or
better) by Moody's, S&P or Fitch, or, if unrated, determined to be of
comparable quality by Alliance. The Fund may invest up to 25% of its net assets
in municipal bonds that, at the time of investment, are rated below investment
grade by Moody's, S&P or Fitch or, if unrated, determined to be of comparable
quality by Alliance. Municipal bonds of below investment grade quality are
regarded as having predominantly speculative characteristics with respect to
the issuer's capacity to pay interest and repay principal, and are commonly
referred to as "junk bonds." Municipal bonds in the lowest investment grade
category may also be considered to possess some speculative characteristics.
The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency or Alliance subsequently downgrades its assessment of the
credit characteristics of a particular issue. In determining whether to retain
or sell such a security, Alliance may consider such factors as its assessment
of the credit quality of the issuer of the security, the price at which the
security could be sold and the rating, if any, assigned to the security by
other rating agencies. A general description of Moody's, S&P's and Fitch's
ratings of municipal bonds is set forth in Appendix B to the SAI.
While the Fund intends to invest primarily in municipal bonds that pay
interest that is not subject to the AMT, it may invest without limit in
municipal bonds that pay interest that is subject to the AMT. Investors who are
subject to the AMT or would become subject to the AMT by investing in Preferred
Shares should consult with their tax advisers before purchasing Preferred
Shares. Special AMT rules apply to corporate holders of Preferred Shares. In
addition, any capital gain dividends will be subject to capital gains taxes.
See "Tax Matters."
The Fund may also invest in securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the types in
which the Fund may invest directly. As a shareholder in an investment company,
the Fund would bear its ratable share of the investment company's expenses in
addition to the Fund's own expenses. See "--Other Investment Companies" below.
The Fund may purchase municipal bonds that are subject to credit
enhancements, such as insurance, bank credit agreements, or escrow accounts.
The credit quality of companies that provide such credit enhancements will
affect the value of those securities. Although the insurance feature reduces
certain financial risks, the premiums for insurance and the higher market price
paid for insured obligations may reduce the Fund's income. Insurance generally
will be obtained from insurers with a claims-paying ability rated A or higher
by Moody's, S&P or Fitch. The insurance feature does not guarantee the market
value of the insured obligations or the NAV of the Common Shares.
10
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 net 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.
The Fund's investment objective, its policy of investing at least 80% of its
net assets in municipal bonds, and its investment restrictions (see "Investment
Restrictions" in the SAI) are fundamental and, under the 1940 Act, cannot be
changed without the approval of a "majority of the outstanding" voting shares
of the Fund. A "majority of the outstanding" voting shares of the Fund (whether
voting together as a single class or voting as a separate class) means (i) 67%
or more of such shares present at a meeting, if the holders of more than 50% of
those shares are present or represented by proxy, or (ii) more than 50% of such
shares, whichever is less. The Fund's investment objective and fundamental
policies may not be changed without the approval of a majority of the
outstanding Common Shares and Preferred Shares voting together and a majority
of the outstanding Preferred Shares voting separately by class. See
"Description of Preferred Shares--Voting Rights" below for additional
information with respect to the voting rights of Preferred Shareholders. Unless
stated otherwise, the Fund's investment policies are not fundamental and thus
can be changed without a shareholder vote. When an investment policy or
restriction has a percentage limitation, such limitation is applied at the time
of investment. Changes in the market value of securities in the Fund's
portfolio after they are purchased by the Fund will not cause the Fund to be in
violation of such limitations.
Municipal Bonds
Municipal bonds are typically classified as either general obligation or
revenue (or special tax) bonds and are typically issued to finance public
projects (such as roads or public buildings), to pay general operating
expenses, or to refinance outstanding debt. Municipal bonds may also be issued
for private activities, such as housing, medical and educational facility
construction, or for privately owned industrial development and pollution
control projects. General obligation bonds are backed by the full faith and
credit, or taxing authority, of the issuer and may be repaid from any revenue
source; revenue bonds may be repaid only from the revenues of a specific
facility or source. The Fund also may purchase municipal bonds that represent
lease obligations. These carry special risks because the issuer of the bonds
may not be obligated to appropriate money annually to make payments under the
lease. In order to reduce this risk, the Fund will only purchase municipal
bonds representing lease obligations when Alliance believes the issuer has a
strong incentive to continue making appropriations until maturity.
The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of municipal bonds
will vary with changes in interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments.
The Fund will invest primarily in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the
weighted average maturity of obligations held by the Fund may be shortened,
depending on market conditions.
Other Municipal Securities
The Fund intends to invest a substantial portion of its assets in
longer-term municipal bonds, but it may, although it does not currently intend
to do so, invest in municipal notes, which may be either general obligation or
revenue securities. These securities are intended to fulfill short-term capital
needs and generally have original maturities not exceeding one year.
11
Municipal notes in which the Fund may invest include demand notes, which are
tax-exempt obligations that have stated maturities in excess of one year, but
permit the holder to sell back the security (at par) to the issuer within one
to seven days' notice. The payment of principal and interest by the issuer of
these obligations will ordinarily be guaranteed by letters of credit offered by
banks. The interest rate on a demand note may be based upon a known lending
rate, such as a bank's prime rate, and may be adjusted when such rate changes,
or the interest rate on a demand note may be a market rate that is adjusted at
specified intervals.
Other short-term obligations constituting municipal notes include tax
anticipation notes, revenue anticipation notes, bond anticipation notes and
tax-exempt commercial paper. Tax anticipation notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes. Revenue anticipation notes are issued in expectation of receipt
of other types of revenues. Bond anticipation notes are issued to provide
interim financing until long-term financing can be arranged. In most such
cases, long-term municipal bonds provide the money for the repayment of the
notes.
Tax-exempt commercial paper is a short-term obligation with a stated
maturity of 365 days or less (however, issuers typically do not issue such
obligations with maturities longer than seven days). Such obligations are
issued by state and local municipalities to finance seasonal working capital
needs or as short-term financing in anticipation of longer-term financing.
Derivatives
The Fund may use derivatives. Derivatives are financial contracts whose
value depends on, or is derived from, the value of an underlying asset,
reference rate, or index. These assets, rates and indices may include bonds,
stocks, mortgages, commodities, interest rates, bond indices and stock indices.
Generally, there are four types of derivative instruments--options, futures,
forwards and swaps--from which virtually any type of derivative transaction can
be created. While the Fund does not currently intend to utilize any of these
types of derivative instruments, it reserves the flexibility to use these
techniques under appropriate circumstances. Derivatives can be used to earn
income or protect against risk, or both. The Fund may use derivatives to earn
income and enhance returns, to hedge or adjust the risk profile of its
investment portfolio, or to obtain exposure to otherwise inaccessible markets.
The Fund will generally use derivatives primarily as direct investments in
order to enhance yields. Each of these uses entails greater risk than if
derivatives were used solely for hedging purposes. The successful use of
derivatives depends upon Alliance's ability to assess the risk that a
derivative adds to the Fund's portfolio and to forecast price and interest rate
movements correctly. Since many derivatives may have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index
can result in a loss substantially greater than the amount invested in the
derivative.
Futures Contracts and Options on Futures Contracts. While the Fund does not
currently intend to do so, it may buy and sell futures contracts on municipal
securities or U.S. Government securities and contracts based on interest rates
or financial indices, including any index of municipal bonds or U.S. Government
securities.
Options on futures contracts are options that call for the delivery of
futures contracts upon exercise. Options on futures contracts written or
purchased, and futures contracts purchased and sold, by the Fund will be traded
on U.S. exchanges and will be used only for hedging purposes.
Interest Rate Transactions (Swaps, Caps, and Floors). While the Fund does
not currently intend to do so, it may enter into interest rate swap, cap, or
floor transactions primarily for hedging purposes, which may include preserving
a return or spread on a particular investment or portion of its portfolio or
protecting against an increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these transactions
in a speculative manner.
12
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest (e.g., an exchange of
floating rate payments for fixed rate payments) computed based on a
contractually-based principal (or "notional") amount. Interest rate swaps are
entered into on a net basis (i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the
two payments). Interest rate caps and floors are similar to options in that the
purchase of an interest rate cap or floor entitles the purchaser, to the extent
that a specified index exceeds (in the case of a cap) or falls below (in the
case of a floor) a predetermined interest rate, to receive payments of interest
on a notional amount from the party selling the interest rate cap or floor. The
Fund may enter into interest rate swaps, caps, and floors on either an
asset-based or liability-based basis, depending upon whether it is hedging its
assets or liabilities.
Other Investment Companies
The Fund may invest up to 10% of its net assets in securities of other open-
or closed-end investment companies that invest primarily in municipal bonds of
the types in which the Fund may invest directly. The Fund generally expects to
invest in other investment companies either 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 municipal bonds
available in the market, or when Alliance believes that share prices of other
investment companies offer attractive values. As a shareholder in an investment
company, the Fund will bear its ratable share of that investment company's
expenses and would remain subject to payment of the Fund's advisory and other
fees with respect to assets so invested. Common Shareholders would therefore be
subject to duplicative expenses to the extent that the Fund invests in other
investment companies. In addition, the securities of other investment companies
may be leveraged and subject to the same leverage risks described in this
Prospectus, thus effectively subjecting Common Shareholders to increased
leverage. As discussed under the section entitled "Risks," 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.
Alliance will consider all relevant factors, including expenses and leverage
when evaluating the investment merits of an investment in another investment
company relative to available municipal bond investments.
Repurchase Agreements
While the Fund does not currently intend to do so, it may seek additional
income by investing in repurchase agreements pertaining only to U.S. Government
securities. A repurchase agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-upon future date,
normally a day or a few days later. The resale price is greater than the
purchase price, reflecting an agreed-upon interest rate for the period the
buyer's money is invested in the security. Such agreements permit the Fund to
keep all of its assets at work while retaining "overnight" flexibility in
pursuit of investments of a longer-term nature. The Fund will require continual
maintenance of collateral in an amount equal to, or in excess of, the resale
price. If a vendor defaults on its repurchase obligation, the Fund would suffer
a loss to the extent that the proceeds from the sale of the collateral were
less than the repurchase price. If a vendor goes bankrupt, the Fund might be
delayed in, or prevented from, selling the collateral for its benefit. There is
no percentage restriction on the Fund's ability to enter into repurchase
agreements. The Fund may enter into repurchase agreements with member banks of
the Federal Reserve System or "primary dealers" (as designated by the Federal
Reserve Bank of New York).
Variable and Floating Rate Instruments
Fixed-income securities may have fixed, variable, or floating rates of
interest. Variable and floating rate securities pay interest at rates that are
adjusted periodically, according to a specified formula. A
13
"variable" interest rate adjusts at predetermined intervals (e.g., daily,
weekly, or monthly), while a "floating" interest rate adjusts whenever a
specified benchmark rate (such as the bank prime lending rate) changes.
The Fund may invest in variable rate demand notes, which are instruments
whose interest rates change on a specific date (such as coupon date or interest
payment date) or whose interest rates vary with changes in a designated base
rate (such as prime interest rate). This instrument is payable on demand and is
secured by letters of credit or other credit support agreements from major
banks.
The Fund may invest in fixed-income securities that pay interest at a coupon
rate equal to a base rate, plus additional interest for a certain period of
time if short-term interest rates rise above a predetermined level or "cap."
The amount of such an additional interest payment typically is calculated under
a formula based on a short-term interest rate index multiplied by a designated
factor.
When-Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase or sell municipal bonds on a forward commitment basis.
Forward commitments are forward contracts for the purchase or sale of
securities, including purchases on a "when-issued" basis or purchases or sales
on a "delayed delivery" basis. In some cases, a forward commitment may be
conditioned upon the occurrence of a subsequent event, such as approval and
consummation of a merger, corporate reorganization or debt restructuring or
approval of a proposed financing by appropriate authorities (i.e., a "when, as
and if issued" trade).
When forward commitments with respect to fixed-income securities are
negotiated, the price, which is generally expressed in yield terms, is fixed at
the time the commitment is made, but payment for and delivery of the securities
take place at a later date. Normally, the settlement date occurs within two
months after the transaction, but settlements beyond two months may be
negotiated. Securities purchased or sold under a forward commitment are subject
to market fluctuation, and no interest or dividends accrue to the purchaser
prior to the settlement date.
The use of forward commitments may help the Fund protect against anticipated
changes in interest rates and prices. For instance, in periods of rising
interest rates and falling bond prices, the Fund might sell securities in its
portfolio on a forward commitment basis to limit its exposure to falling bond
prices. In periods of falling interest rates and rising bond prices, the Fund
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. No forward commitments will be made by
the Fund if, as a result, the Fund's aggregate forward commitments under such
transactions would be more than 10% of its total assets.
The Fund's right to receive or deliver a security under a forward commitment
may be sold prior to the settlement date. The Fund will enter into forward
commitments, however, only with the intention of actually receiving securities
or delivering them, as the case may be. If the Fund, however, chooses to
dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it
may realize a gain or incur a loss.
Zero Coupon Bonds
Zero coupon bonds are debt securities that have been issued without interest
coupons or stripped of their unmatured interest coupons, and include receipts
or certificates representing interests in such securities. Such a security pays
no interest to its holder during its life. Its value to an investor consists of
the difference between its face value at the time of maturity and the price for
which it was acquired, which is generally an amount significantly less than its
face value. Even though the Fund does not
14
receive any interest on zero coupon bonds during their life, it nonetheless
accrues income with respect to such bonds and thus may have to dispose of
portfolio securities under disadvantageous circumstances in order to obtain
cash needed to pay dividends in amounts necessary to avoid unfavorable tax
consequences. Zero coupon bonds usually trade at a deep discount from their
face or par value and are subject to greater fluctuations in market value in
response to changing interest rates than debt obligations of comparable
maturities and credit quality that make current distributions of interest. On
the other hand, because there are no periodic interest payments to be
reinvested prior to maturity, these securities eliminate reinvestment risk and
"lock in" a rate of return to maturity.
Future Developments
The Fund may, following written notice to its shareholders, take advantage
of other investment practices which are not at present contemplated for use by
the Fund or which currently are not available but which may be developed, to
the extent such investment practices are both consistent with the Fund's
investment objective and legally permissible for the Fund. Such investment
practices, if they arise, may involve risks that exceed those involved in the
activities described above.
15
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risks, including the risks that you may receive little or no
return on your investment or even that you may lose all or part of your
investment. Therefore, you should consider carefully the following risks before
investing in the Preferred Shares.
Risks of Investing in Preferred Shares
Auction Risk
You may not be able to sell the Preferred Shares at an Auction if the
Auction fails; that is, if there are more Preferred Shares offered for sale
than there are buyers for those shares. Also, if you place hold orders (orders
to retain Preferred Shares) at an Auction only at a specified rate, and that
bid rate exceeds the rate set at the Auction, you will not retain your
Preferred Shares. Finally, if you buy shares or elect to retain shares without
specifying a rate below which you would not wish to continue to hold those
shares, and the Auction sets a below-market rate, you may receive a lower rate
of return on your shares than the market rate. See "Description of Preferred
Shares" and "The Auction -- Auction Procedures."
Secondary Market Risk
The Preferred Shares may be illiquid because you may not be able to sell any
or all of your shares if you try to sell the Preferred Shares between Auctions.
Also, you may not be able to sell them for $25,000 per share or $25,000 per
share plus accumulated dividends. If the Fund has designated a Special Rate
Period (a rate period of more than 7 days), changes in interest rates could
affect the price you would receive if you sold your shares in the secondary
market. Broker-Dealers that maintain a secondary trading market for the
Preferred Shares are not required to maintain this market, and the Fund is not
required to redeem shares if either an Auction or an attempted secondary market
sale fails because of a lack of buyers. The Preferred Shares are not registered
on a stock exchange or the NASDAQ stock market. If you sell the Preferred
Shares to a Broker-Dealer between Auctions, you may receive less than the price
you paid for them, especially when market interest rates have risen since the
last Auction. Accrued Preferred Share dividends, however, should at least
partially compensate for any increased market interest rates.
Ratings and Asset Coverage Risk
While Moody's and S&P assign ratings of Aaa or AAA to the Preferred Shares,
the ratings do not eliminate or necessarily mitigate the risks of investing in
the Preferred Shares. A rating agency could downgrade the Preferred Shares,
which may make your shares less liquid at an Auction or in the secondary
market, though probably with higher resulting dividend rates. If a rating
agency downgrades the Preferred Shares, the Fund will alter its portfolio or
redeem the Preferred Shares. The Fund may voluntarily redeem the Preferred
Shares under certain circumstances. See "Description of Preferred
Shares -- Rating Agency Guidelines and Asset Coverage" for a description of the
asset maintenance tests the Fund must meet.
General Risks of Investing in the Fund
Recently Organized
The Fund is a recently organized, diversified, closed-end management
investment company and has limited operating history.
Interest Rate Risk
Interest rate risk is the risk that changes in interest rates will adversely
affect the yield or value of the Fund's investments in municipal bonds.
Generally, when interest rates fall, bond prices rise, and
16
vice versa. Increases in market interest rates will cause the municipal bonds
in the Fund's portfolio to decline in value. The prices of long-term municipal
bonds generally fluctuate more than prices of shorter-term municipal bonds as
interest rates change. Because the Fund will invest primarily in long-term
municipal bonds, the Common Share NAV and market price per share will fluctuate
more in response to changes in market interest rates than if the Fund invested
primarily in shorter-term municipal bonds. The Fund may utilize 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 issues Preferred Shares, which pay dividends based on short-term
interest rates, and uses the proceeds to buy municipal bonds, which pay
interest based on long-term yields. Long-term municipal bond yields are
typically, although not always, higher than short-term interest rates. Both
long-term and short-term interest rates may fluctuate. If short-term interest
rates rise, the Preferred Share rates may rise so that the amount of dividends
paid to the Preferred Shareholders exceeds the income from the portfolio
securities purchased with the proceeds from the sale of the Preferred Shares.
See "--Leverage Risk." Because income from the Fund's entire investment
portfolio (not just the portion of the portfolio purchased with the proceeds of
the Preferred Share offering) is available to pay the Preferred Share
dividends, however, the Preferred Share dividend rates would need to greatly
exceed the Fund's net portfolio income before the Fund's ability to pay the
Preferred Share dividends would be jeopardized. If long-term rates rise, the
value of the Fund's investment portfolio will decline, reducing the amount of
assets serving as asset coverage for the Preferred Shares.
Credit Risk
Credit risk is the risk that one or more municipal bonds in the Fund's
portfolio will decline in price or that the issuer will fail to pay interest or
principal when due because the issuer of the bond experiences a decline in its
financial status. Because the primary source of income for the Fund is the
interest and principal payments on the municipal bonds in which it invests, any
default by an issuer of a municipal bond could have a negative impact on the
Fund's ability to pay dividends on the Preferred Shares and could result in
redemption of some or all of the Preferred Shares. In general, lower-rated
municipal bonds carry a greater degree of risk that the issuer will lose its
ability to make interest and principal payments, which could have a negative
impact on the Fund's NAV or dividends. The Fund may invest up to 25% of its net
assets in municipal bonds that are rated below investment grade by Moody's, S&P
or Fitch or that are unrated but determined to be of comparable quality by
Alliance. The prices of these lower-grade municipal bonds are more sensitive to
negative developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher-grade securities. Municipal
bonds of below investment grade quality (commonly referred to as "junk bonds")
are predominately speculative with respect to the issuer's capacity to pay
interest and repay principal when due, and therefore involve a greater risk of
default. Municipal bonds in the lowest investment grade category may also be
considered to possess some speculative characteristics by certain rating
agencies.
Leverage Risk
The Fund uses leverage for investment purposes. Leverage risk includes the
risk associated with the issuance of Preferred Shares to leverage the Common
Shares. Long-term municipal bond rates of return are typically, although not
always, higher than shorter-term municipal bond rates of return. If the
dividend rate on the Preferred Shares exceeds the net rate of return on the
Fund's portfolio, the leverage will result in a lower NAV than if the Fund were
not leveraged and the Fund's ability to pay dividends and meet its asset
coverage on the Preferred Shares would be reduced. Because the long-term
municipal bonds in the Fund's portfolio will typically pay fixed rates of
interest while the dividend rate on the Preferred Shares will be adjusted
periodically, this could occur even when both long-term and short-term
municipal rates rise. Similarly, any decline in the value of the Fund's
investments could
17
result in the Fund being in danger of failing to maintain the required 200%
asset coverage or of losing its ratings on the Preferred Shares or, in an
extreme case, the Fund's current investment income might not be sufficient to
meet the dividend requirements on the 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.
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.
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 would likely operate to reduce the income
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 NAV if the prediction were to turn out to
be correct, and determine not to reduce leverage as described above.
The Fund may also invest in derivative instruments, which may amplify the
effects of leverage and, during periods of rising short-term interest rates,
may adversely affect the Fund's NAV per share and income and distributions to
Common Shareholders. See "The Fund's Investments" and the SAI under "Investment
Objective and Policies--Derivative Investments."
Derivatives Risk
The Fund may use derivatives to achieve its investment objective. In
addition to the credit risk of the counterparty to a derivatives transaction,
derivatives involve the risk of difficulties in pricing and valuation and the
risks that changes in value of a derivative may not correlate perfectly with
relevant underlying assets, rate or indexes.
Municipal Bond Market Risk
This is the risk that special factors, such as legislative changes and local
and business developments, may adversely affect the yield or value of the
Fund's investments in municipal bonds or other municipal securities. The amount
of public information available about the municipal bonds in the Fund's
portfolio is generally less than that for corporate equities or bonds, and the
investment performance of the Fund may therefore be more dependent on the
analytical abilities of Alliance than would be the case for a stock fund or
taxable bond fund. The secondary market for municipal bonds, particularly the
below investment grade municipal bonds in which the Fund may invest, also tends
to be less developed and less liquid than many other securities markets, which
may adversely affect the Fund's ability to sell its municipal bonds at
attractive prices.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished during 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 municipal issuers to levy taxes. Issuers of municipal bonds
might seek protection under the bankruptcy laws. In the event of bankruptcy
18
of such an issuer, the Fund could experience delays in collecting principal and
interest and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may take possession of and manage any assets securing the
issuer's obligations on such securities, which may increase the Fund's
operating expenses. Any income derived from the Fund's ownership or operation
of such assets may not be tax-exempt.
Reinvestment Risk
Reinvestment risk is the risk that income from the Fund's municipal bond
portfolio will decline if and when the Fund invests the proceeds from matured,
traded or called municipal bonds at market interest rates that are below the
portfolio's current earnings rate. A decline in income could affect the Fund's
NAV or reduce asset coverage on the Preferred Shares.
Inflation Risk
Inflation risk is the risk that the value of assets or income from an
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Preferred Shares or the
income from that investment will be less in the future. During any periods of
rising inflation, however, Preferred Share dividend rates are expected, through
the auction process, to increase, tending to reduce this risk.
MANAGEMENT OF THE FUND
Directors and Officers
The Fund's business and affairs are managed under the direction of the
Fund's Board of Directors. There are currently eight Directors of the Fund, one
of whom is an "interested person" (as defined in the 1940 Act) and seven of
whom are not "interested persons." The names and business addresses of the
Directors 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 SAI.
Investment Advisory Services
Alliance, 1345 Avenue of the Americas, New York, New York 10105, is the
Fund's investment adviser. Alliance is a leading global investment management
firm supervising client accounts with assets as of January 31, 2002 totaling
approximately $451 billion. Alliance provides diversified investment management
and related services globally to a broad range of clients including:
institutional investors such as corporate and public employee pension funds,
endowment funds, domestic and foreign institutions, and governments and
affiliates; private clients, consisting of high net worth individuals, trusts
and estates, charitable foundations, partnerships, private and family
corporations, and other entities; individual investors by means of retail
mutual funds sponsored by Alliance; and institutional investors by means of
in-depth research, portfolio strategy, trading and brokerage-related services.
Alliance provides investment advisory services and order placement
facilities for the Fund. For these services, the Fund pays Alliance a monthly
advisory fee at an annual rate of .65% of the Fund's average daily net assets
and also reimburses Alliance for the cost of providing certain administrative
services. For the first nine full years of the Fund's operations, Alliance will
voluntarily waive a portion
19
of its fees or reimburse the Fund for certain expenses in the amounts, and for
the time periods, described below:
PERCENTAGE
WAIVED OR
REIMBURSED
(AS A PERCENTAGE
OF AVERAGE
YEAR ENDING JANUARY 31 DAILY NET ASSETS)*
---------------------- ------------------
2003**..................................................... .25%
2004....................................................... .25%
2005....................................................... .25%
2006....................................................... .25%
2007....................................................... .25%
2008....................................................... .20%
2009....................................................... .15%
2010....................................................... .10%
2011....................................................... .05%
--------
* Including net assets attributable to the Preferred Shares.
** From the commencement of operations.
Alliance has not agreed to waive its fees or reimburse the Fund for any
portion of its expenses beyond January 31, 2011.
The employees of Alliance principally responsible for the Fund's investment
program will be Mr. David M. Dowden and Mr. Terrance T. Hults. Mr. Dowden is a
Vice President of Alliance Capital Management Corporation ("ACMC"), the general
partner of Alliance, with which he has been associated since 1994 serving in
the capacity of management of municipal securities investments. Mr. Hults is a
Vice President of ACMC with which he has been associated since 1995 serving in
the capacity of management of municipal securities investments.
The Fund's SAI includes more detailed information about Alliance and other
Fund service providers.
Legal Proceedings
On April 25, 2001, an amended class action complaint entitled Miller et al.
v. Mitchell Hutchins Asset Management, Inc. et al. (the "amended Miller
complaint"), was filed in federal district court in the Southern District of
Illinois against Alliance, Alliance Fund Distributors, Inc. ("AFD") and other
defendants alleging violations of the 1940 Act and breaches of common law
fiduciary duty.
The allegations in the amended Miller complaint concern six mutual funds
with which Alliance has investment advisory agreements, including the Alliance
Premier Growth Fund, Alliance Health Care Fund, Alliance Growth Fund, Alliance
Quasar Fund, The Alliance Fund and Alliance Disciplined Value Fund. The
principal allegations of the amended complaint are that (i) certain advisory
agreements concerning these funds were negotiated, approved and executed in
violation of the 1940 Act, in particular because certain directors of these
funds should be deemed interested persons under the 1940 Act, (ii) the
distribution plans for these funds were negotiated, approved and executed in
violation of the 1940 Act, and (iii) the advisory fees and distribution fees
paid to Alliance and AFD, respectively, are excessive and, therefore,
constitute a breach of fiduciary duty.
Alliance has informed the Fund that it believes that the plaintiffs'
allegations are without merit and intends to vigorously defend against these
allegations. At the present time, management of Alliance and AFD are unable to
estimate the impact, if any, that the outcome of this action may have on
Alliance's results of operations or financial condition. On March 13, 2002, the
Court granted the defendants' motion to dismiss and dismissed the complaint
without prejudice. The plaintiffs have until April, 2002 to file an amended
complaint.
20
On December 7, 2001, a complaint entitled Benak v. Alliance Capital
Management L.P. and Alliance Premier Growth Fund ("Benak Complaint") was filed
in federal district court in the District of New Jersey against Alliance and
Alliance Premier Growth Fund ("Premier Growth Fund") alleging violation of the
1940 Act. The principal allegations of the Benak Complaint are that Alliance
breached its duty of loyalty to Premier Growth Fund because one of the
directors of Alliance served as a director of Enron Corp. ("Enron") when
Premier Growth Fund purchased shares of Enron and, as a consequence thereof,
the investment advisory fees paid to Alliance by the Premier Growth Fund should
be returned as a means of recovering for Premier Growth Fund the losses
plaintiffs alleged were caused by the alleged breach of the duty of loyalty.
Plaintiffs seek recovery of fees paid by Premier Growth Fund to Alliance during
the twelve months preceding the lawsuit. On December 21, 2001, a complaint
entitled Roy v. Alliance Capital Management L.P. and Alliance Premier Growth
Fund ("Roy Complaint") was filed in federal district court in the Middle
District of Florida, Tampa Division, against Alliance and Premier Growth Fund.
The allegations and relief sought in the Roy Complaint are virtually identical
to the Benak Complaint. On December 26, 2001, a complaint entitled Roffe v.
Alliance Capital Management L.P. and Alliance Premier Growth Fund ("Roffe
Complaint") was filed in federal district court in the District of New Jersey
against Alliance and Premier Growth Fund. On February 14, 2002, a complaint
entitled Tatem v. Alliance Capital Management L.P. and Alliance Premier Growth
Fund ("Tatem Complaint") was filed in federal district court in the District of
New Jersey against Alliance and Premier Growth Fund. The allegations and relief
sought in the Roffe Complaint and the Tatem Complaint are virtually identical
to the Benak Complaint. Alliance has informed the Fund that it believes the
plaintiffs' allegations in the Benak Complaint, Roy Complaint, Roffe Complaint
and Tatem Complaint are without merit and intends to vigorously defend against
these allegations.
The Fund is not a party to the above litigation and does not currently own
bonds or other securities of Enron. The Fund may, however, in the future
determine to invest in accordance with its investment objective and strategies
in municipal bonds issued for private activities that fund industrial
development or other projects that may be sponsored by Enron or its affiliates.
While Alliance has no knowledge of additional litigation involving issues
concerning Enron similar to those alleged in the litigation described above, it
is unable to conclude whether or not additional actions may be filed or, if
filed, to evaluate the impact of these actions on Alliance's results of
operations or financial condition.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the more detailed description of the
Preferred Shares in the Articles attached as Appendix A to the SAI.
General
The Articles currently authorize the issuance of 1,950 Series M Preferred
Shares, 1,950 Series T Preferred Shares, 1,950 Series W Preferred Shares and
1,950 Series TH Preferred Shares. The Fund's Charter provides that the Board of
Directors may classify or reclassify, from time to time, any unissued shares of
stock of the Fund, whether now or hereafter authorized, by setting, changing or
eliminating the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends and other distributions,
qualifications or terms and conditions of or rights to require redemption of
the stock. All Preferred Shares will have a liquidation preference of $25,000
per share plus an amount equal to accumulated but unpaid dividends (whether or
not earned or declared).
Each series of Preferred Shares will rank on parity with any other series of
Preferred Shares, and with any other series of preferred stock of the Fund, as
to the payment of dividends and the distribution of assets upon liquidation.
All Preferred Shares have one vote per share on all matters on which such
shares are entitled to be voted. Preferred Shares are, when issued, fully paid
and, subject to matters discussed in the Articles, non-assessable and have no
preemptive or conversion rights or rights to cumulative voting.
21
Dividends and Dividend Periods
General. Preferred Shareholders will be entitled to receive dividends that
may vary for successive Dividend Periods. The Initial Rate Period of a series
of Preferred Shares will be a period consisting of 13 days for Series M
Preferred Shares, 14 days for Series T Preferred Shares, 8 days for Series W
Preferred Shares and 9 days for Series TH Preferred Shares. In general,
subsequent Rate Periods of a series of Preferred Shares will be a Minimum Rate
Period of seven days in length. The Applicable Rate for a particular Dividend
Period will be determined by an Auction conducted on a Business Day next
preceding the start of the Dividend Period.
Dividends with respect to the Initial Rate Period shall be payable, when, as
and if authorized by the Board and declared by the Fund on (a) Series M
Preferred Shares, on April 9, 2002, and thereafter on each Tuesday, (b) Series
T Preferred Shares, on April 10, 2002, and thereafter on each Wednesday,
(c) Series W Preferred Shares on April 4, 2002 and thereafter on each Thursday
and (d) Series TH Preferred Shares on April 5, 2002 and thereafter on each
Friday; provided, however, that if dividends are payable on a day that is not a
Business Day, then such dividends will be paid on such shares on the first
Business Day that falls after that day. The Fund may specify different Dividend
Payment Dates in respect of any Special Rate Period of more than 28 Rate Period
Days.
The amount of dividends per share of a series of Preferred Shares on any
date on which dividends shall be payable shall be computed by multiplying (i)
the Applicable Rate for the shares in effect for such Dividend Period or
Dividend Periods or part thereof for which dividends have not been paid, (ii) a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall
be 365 if such Dividend Period consists of 7 Rate Period Days or 360 for all
other Dividend Periods, and (iii) $25,000.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Securities Depository's normal procedures provide for it to
distribute dividends in same day funds to Agent Members, who are in turn
expected to distribute such dividend payments to the persons for whom they are
acting as agents.
Dividends on each series of Preferred Shares will accumulate from the Date
of Original Issue. The dividend rate for Preferred Shares of a particular
series for the Initial Rate Period shall be 1.20% per annum for Series M, 1.20%
per annum for Series T, 1.20% per annum for Series W and 1.20% per annum for
Series TH. For each Subsequent Rate Period of a series of Preferred Shares, the
dividend rate for such shares will be the Applicable Rate that the Auction
Agent advises the Fund results from an Auction.
Except during a Non-Payment Period, the Applicable Rate for any Dividend
Period for the Preferred Shares will not be more than the Maximum Rate
applicable to such shares. The Maximum Rate for each series of Preferred Shares
will depend on the credit rating assigned to such shares and on the duration of
the Dividend Period. The Maximum Rate for a series of Preferred Shares will be:
(a) for any Auction Date that is not immediately prior to any proposed
Special Rate Period, the product of (x) the Reference Rate and (y) the
Rate Multiple, unless the series has or had a Special Rate Period of
more than 28 days and an Auction, at which Sufficient Clearing Bids
existed, has not occurred for a Minimum Rate Period, in which case the
Maximum Rate will be the higher of:
(i) the dividend rate for the then-ending Rate Period; or
(ii) the product of (x) the higher of (1) if the then-ending Rate Period
was 364 days or less, the Reference Rate, or if the then-ending Rate
Period was more than 364 days, the Treasury Note Rate, and (2) for a
Special Rate Period of 364 days or less, the Reference Rate, or for a
Special Rate Period of more than 364 days, the Treasury Note Rate and
(y) the Rate Multiple;
22
(b) for any Auction Date that is immediately prior to any proposed Special
Rate Period, the product of:
(i) the highest of (x) if the then-ending Rate Period was 364 days or
less, the Reference Rate, or if the then-ending Rate Period was more
than 364 days, the Treasury Note Rate, (y) for a Special Rate Period
of 364 days or less, the Reference Rate, or for a Special Rate Period
of more than 364 days, the Treasury Note Rate, or (z) for Minimum
Rate Periods, the Reference Rate; and
(ii) the Rate Multiple.
If an Auction for any Subsequent Rate Period of any series of Preferred
Shares is not held for any reason other than as described below, the dividend
rate on shares of the series for the Subsequent Rate Period will be the Maximum
Rate.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any series of Preferred
Shares during any Rate Period thereof (other than any Special Rate Period of
more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured):
(a) but if, prior to 12:00 Noon on the third Business Day next succeeding
the date on which such failure occurred, the failure shall have been
cured and the Fund shall have paid a Late Charge, no Auction will be
held in respect of the shares of the series for the first Subsequent
Rate Period thereafter and the dividend rate will be the Maximum Rate
for that Subsequent Rate Period;
(b) and if, prior to 12:00 Noon on the third Business Day next succeeding
the date on which such failure occurred, the failure shall not have been
cured or the Fund shall not have paid a Late Charge, no Auction will be
held in respect of the shares of the series for the first Subsequent
Rate Period thereafter (or for any Rate Period thereafter to and
including the Rate Period during which the failure is cured and the Late
Charge is paid, which may be paid only in the event Moody's is rating
the shares at the time the Fund cures the failure) and the dividend rate
for shares of the series for each Subsequent Rate Period shall be at a
rate per annum equal to the Maximum Rate for that Subsequent Rate Period
(but with the prevailing rating for shares of the series, for purposes
of determining the Maximum Rate, being deemed to be below 'ba3'/BB2).
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, any series of Preferred
Shares during a Special Rate Period thereof of more than 364 Rate Period Days,
or during any Rate Period thereof succeeding any Special Rate Period of more
than 364 Rate Period Days during which such a failure occurred that has not
been cured, and such failure shall not have been cured or the Fund shall not
have paid a Late Charge, as described more fully in the Articles, no Auction
will be held in respect of shares of such series for the first Subsequent Rate
Period thereof (or for any Rate Period thereof thereafter to and including the
Rate Period during which such failure is so cured and such Late Charge so paid)
(such Late Charge to be paid only in the event Moody's is rating such shares at
the time the Fund cures such failure), and the dividend rate for shares of such
series for each such Subsequent Rate Period shall be a rate per annum equal to
the Maximum Rate for shares of such series on the Auction Date for each such
Subsequent Rate Period (but with the prevailing rating for shares of such
series, for purposes of determining such Maximum Rate, being deemed to be
"Below 'ba3'/BB2").
A failure to pay dividends on, or the redemption price of, any series of
Preferred Shares shall have been cured with respect to any Rate Period thereof
if, within the respective time periods described in the Articles, the Fund
shall have paid to the Auction Agent (a) all accumulated and unpaid dividends
on the shares of such series and (b) without duplication, the redemption price
for shares, if any, of such series for which notice of redemption has been
mailed by the Fund; provided, however, that the
23
foregoing clause (b) shall not apply to the Fund's failure to pay the
redemption price in respect of Preferred Shares when the related notice of
redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such notice of
redemption.
Gross-up Payments. Holders of Preferred Shares are entitled to receive,
when, as and if authorized by the Board, out of funds legally available
therefor in accordance with the Charter, including the Articles, and applicable
law, dividends in an amount equal to the aggregate Gross-up Payments in
accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period of 28
Rate Period Days or fewer, the Fund allocates any net capital gain or other
income taxable for regular federal income tax purposes to a dividend paid on
shares of Preferred Shares without having given advance notice thereof to the
Auction Agent as described below under "The Auction--Auction Procedures" (a
"Taxable Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding Preferred Shares or the liquidation of the Fund, the Fund will,
prior to the end of the calendar year in which such dividend was paid, provide
notice thereof to the Auction Agent and direct the Fund's dividend disbursing
agent to send such notice with a Gross-up Payment to each holder of shares
(initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment during such calendar year at such holder's
address as the same appears or last appeared on the stock books of the Fund.
If, in the case of any Special Rate Period of more than 28 Rate Period Days,
the Fund makes a Taxable Allocation to a dividend paid on shares of Preferred
Shares, the Fund shall, prior to the end of the calendar year in which such
dividend was paid, provide notice thereof to the Auction Agent and direct the
Fund's dividend disbursing agent to send such notice with a Gross-up Payment to
each holder of shares that was entitled to such dividend payment during such
calendar year at such holder's address as the same appears or last appeared on
the stock books of the Fund.
A Gross-up Payment means payment to a holder of Preferred Shares of an
amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payments relates, would
cause such holder's dividends in dollars (after federal income tax
consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such holder if the amount of the aggregate Taxable
Allocations would have been excludable from the gross income of such holder.
Such Gross-up Payment will be calculated: (a) without consideration being given
to the time value of money; (b) assuming that no holder of Preferred Shares is
subject to the federal alternative minimum tax with respect to dividends
received from the Fund; and (c) assuming that each Taxable Allocation and each
Gross-up Payment (except to the extent such Gross-up Payment is designated as
an exempt-interest dividend under Section 852(b)(5) of the Internal Revenue
Code or successor provisions) would be taxable in the hands of each holder of
Preferred Shares at the maximum marginal regular federal personal income tax
rate applicable to ordinary income or net capital gain, as applicable, or the
maximum marginal regular federal corporate income tax rate applicable to
ordinary income or net capital gain, as applicable, whichever is greater, in
effect at the time such Gross-up Payment is made.
Restrictions on Dividends and Other Distributions. Except as otherwise
described herein, for so long as any of the Preferred Shares are outstanding,
the Fund may not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to the Preferred Shares as to the payment
of dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to, or on parity with, Preferred Shares as to the payments of dividends
or the distribution of assets upon dissolution, liquidation or winding up, or
call for redemption, redeem, purchase or
24
otherwise acquire for consideration any Common Shares or any other such junior
shares or other such parity shares (except by conversion into or exchange for
shares of the Fund ranking junior to the shares of Preferred Shares as to the
payment of dividends and the distribution of assets upon liquidation), unless
(a) full cumulative dividends on shares of each series of Preferred Shares
through its most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
and (b) the Fund shall have redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory redemption pertaining
thereto. Except as otherwise described herein, for so long as any of the
Preferred Shares are outstanding, the Fund may not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or in options, warrants or rights to subscribe
for or purchase, Common Shares or other shares, if any, ranking junior to
Preferred Shares as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up) in respect of Common Shares or any
other shares of the Fund ranking junior to shares of Preferred Shares as to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or
otherwise acquire for consideration any Common Shares or any other such junior
shares (except by conversion into or exchange for shares of the Fund ranking
junior to shares of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), unless
immediately after such transaction the Discounted Value of the Fund's portfolio
would at least equal the Preferred Shares Basic Maintenance Amount in
accordance with guidelines of the rating agency or agencies then rating the
Preferred Shares.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of Fund
shares ranking, as to the payment of dividends, on a parity with Preferred
Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on each series of Preferred Shares
through its most recent Dividend Payment Date. When dividends are not paid in
full upon the shares of each series of Preferred Shares through its most recent
Dividend Payment Date or upon the shares of any other class or series of shares
ranking on a parity as to the payment of dividends with Preferred Shares
through their most recent respective dividend payment dates, all dividends
declared upon Preferred Shares and any such other class or series of shares
ranking on a parity as to the payment of dividends with Preferred Shares shall
be declared pro rata so that the amount of dividends declared per share on
Preferred Shares and such other class or series of shares shall in all cases
bear to each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund, at its option, may designate
any succeeding Subsequent Rate Period of shares of a particular series of
Preferred Shares as a Special Rate Period consisting of a specified number of
Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to certain adjustments. A designation of a
Special Rate Period shall be effective only if, among other things, (a) the
Fund shall have given certain notices to holders of such series and the Auction
Agent, (b) an Auction for shares of such series shall have been held on the
Auction Date immediately preceding the first day of such proposed Special Rate
Period and Sufficient Clearing Bids for shares of such series shall have
existed in such Auction and (c) if the Fund shall have mailed a notice of
redemption with respect to any shares of such series, the redemption price with
respect to such shares shall have been deposited with the Auction Agent. The
Fund will give Preferred Shareholders notice of a Special Rate Period as
provided in the Articles.
Redemption
Mandatory Redemption. In the event the Fund does not timely cure a failure
to maintain (a) a Discounted Value of its eligible portfolio securities equal
to the Preferred Shares Basic Maintenance Amount or (b) the 1940 Act Preferred
Shares Asset Coverage, in each case in accordance with the requirements of the
rating agency or agencies then rating the Preferred Shares, Preferred Shares
will be subject to mandatory redemption on a date specified by the Board out of
funds legally available therefor
25
in accordance with the Charter, including the Articles, and applicable law, at
the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited
to the lesser of (a) the number of Preferred Shares necessary to restore the
required Discounted Value or the 1940 Act Preferred Shares Asset Coverage, as
the case may be, or (b) the number of Preferred Shares that can be redeemed out
of funds expected to be legally available therefor in accordance with the
Charter, including the Articles, and applicable law.
Optional Redemption. Preferred Shares of each series are redeemable, at the
option of the Fund:
(a) as a whole or from time to time in part, on the second Business Day
preceding any Dividend Payment Date for shares of such series, out of funds
legally available therefor in accordance with the Charter, including the
Articles, and applicable law, at the redemption price of $25,000 per share
plus an amount equal to accumulated but unpaid dividends thereon (whether or
not earned or declared) to (but not including) the date fixed for
redemption; provided, however, that (i) shares of such series may not be
redeemed in part if after such partial redemption fewer than 250 shares of
such series would remain outstanding; (ii) a series of Preferred Shares are
redeemable by the Fund during the Initial Rate Period only on the second
Business Day next preceding the last Dividend Payment Date for the Initial
Rate Period; and (iii) the notice establishing a Special Rate Period of
shares of the series, as delivered to the Auction Agent and filed with the
Secretary of the Fund, may provide that shares of the series shall not be
redeemable during the whole or any part of such Special Rate Period (except
as provided in clause (b) below) or shall be redeemable during the whole or
any part of such Special Rate Period only upon payment of such redemption
premium or premiums as shall be specified therein; and
(b) as a whole but not in part, out of funds legally available therefor
in accordance with the Charter, including the Articles, and applicable law,
on the first day following any Dividend Period thereof included in a Rate
Period of more than 364 Rate Period Days if, on the date of determination of
the Applicable Rate for shares of such series for such Rate Period, such
Applicable Rate equaled or exceeded on such date of determination the
Treasury Note Rate for such Rate Period, at a redemption price of $25,000
per share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed
for redemption.
Notwithstanding the foregoing, if any dividends on a series of Preferred
Shares (whether or not earned or declared) are in arrears, no shares of such
series shall be redeemed unless all outstanding shares of such series are
simultaneously redeemed, and the Fund shall not purchase or otherwise acquire
any shares of such series; provided, however, that the foregoing shall not
prevent the purchase or acquisition of all outstanding shares of such series
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series.
Liquidation
Subject to the rights of holders of any series or class or classes of shares
ranking on a parity with Preferred Shares with respect to the distribution of
assets upon liquidation of the Fund, upon a liquidation of the Fund, whether
voluntary or involuntary, the holders of Preferred Shares then outstanding will
be entitled to receive and to be paid out of the assets of the Fund available
for distribution to its shareholders, before any payment or distribution shall
be made on the Common Shares or on any other class of stock of the Fund ranking
junior to the Preferred Shares, an amount equal to the liquidation preference
with respect to such shares ($25,000 per share), plus an amount equal to all
dividends thereon (whether or not earned or declared) accumulated but unpaid to
(but not including) the date of final distribution in same-day funds, together
with any applicable Gross-up
26
Payments in connection with the liquidation of the Fund. After the payment to
the holders of Preferred Shares of the full preferential amounts provided for
as described herein, the holders of Preferred Shares as such shall have no
right or claim to any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business of the
Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for
the purposes of the foregoing paragraph.
In determining whether a distribution (other than upon voluntary or
involuntary liquidation) by dividend, redemption or other acquisition of shares
of the Fund or otherwise, is permitted under Maryland law, amounts that would
be needed if the Fund were to be dissolved at the time of the distribution, to
satisfy the preferential rights upon dissolution of holders of the Preferred
Shares will not be added to the Fund's total liabilities.
Rating Agency Guidelines and Asset Coverage
The Fund is required under the 1940 Act and Moody's and S&P guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to
the Preferred Shares Basic Maintenance Amount. Moody's and S&P have each
established separate guidelines for determining Discounted Value. To the extent
any particular portfolio holding does not satisfy the applicable rating
agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and S&P guidelines do not impose any limitations on the
percentage of the Fund's assets that may be invested in holdings not eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. The amount of such assets included in the portfolio at any time may
vary depending upon the rating, diversification and other characteristics of
the eligible assets included in the portfolio, although it is not anticipated
that in the normal course of business the value of such assets would exceed 20%
of the Fund's total assets. The Preferred Shares Basic Maintenance Amount
includes, among other things, the sum of (a) the aggregate liquidation
preference of Preferred Shares then outstanding and (b) certain accrued and
projected payment obligations of the Fund.
The Fund is also required under the 1940 Act and rating agency guidelines to
maintain, with respect to Preferred Shares, as of the last Business Day of each
month in which any such shares are outstanding, asset coverage of at least 200%
with respect to senior securities that are shares, including Preferred Shares
(or such other asset coverage as may in the future be specified in or under the
1940 Act as the minimum asset coverage for senior securities that are shares of
a closed-end investment company as a condition of declaring dividends on its
common shares or 1940 Act Preferred Shares Asset Coverage). Based on the
composition of the portfolio of the Fund and market conditions as of March 8,
2002, and as adjusted, to give effect to the issuance of 365,000 Common Shares
on March 15, 2002, 1940 Act Preferred Shares Asset Coverage with respect to
Preferred Shares, assuming the issuance on the date thereof of all Preferred
Shares offered hereby and giving effect to the deduction of sales load and
offering costs related thereto estimated at $2,233,710, would have been
computed as follows:
Value of Fund assets less liabilities
not constituting senior securities $483,670,846
------------------------------------------------------------- = ------------ = 248%
Senior securities representing indebtedness plus liquidation $195,000,000
value of the Preferred Shares
In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, the Fund will be required to redeem Preferred
Shares as described under "--Redemption--Mandatory Redemption" above.
27
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or S&P. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for the Preferred Shares may, at any time, change or
withdraw any such rating. The Board may in its sole discretion modify the
definitions and related provisions that have been adopted by the Fund pursuant
to the rating agency guidelines if necessary or appropriate with respect to the
Preferred Shares if the Fund receives written confirmation from Moody's or S&P,
or both, as appropriate, that any such modification would not impair the
ratings then assigned by Moody's and S&P to the Preferred Shares.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the Preferred Shares are not recommendations to
purchase, hold or sell those shares, inasmuch as the ratings do not comment as
to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
Preferred Shares will be able to sell such shares in an Auction or otherwise.
The ratings are based on current information furnished to Moody's and S&P by
the Fund and the Adviser and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
the unavailability of, such information. The Common Shares have not been rated
by a nationally recognized statistical rating organization.
A rating agency's guidelines will apply to the Preferred Shares only so long
as such rating agency is rating such shares. The Fund will pay certain fees to
Moody's or S&P, or both, for rating the Preferred Shares.
Voting Rights
Except as otherwise provided in this Prospectus and in the SAI, in the
Charter or as otherwise required by law, Preferred Shareholders will have equal
voting rights with Common Shareholders (one vote per share) and will vote
together with Common Shareholders and any other Preferred Shareholders as a
single class.
In connection with the election of the Fund's Directors, holders of
outstanding Preferred Shares, voting as a separate class, are entitled to elect
two of the Fund's Directors, and the remaining Directors are elected by Common
Shareholders and Preferred Shareholders, voting together as a single class. In
addition, if at any time dividends (whether or not earned or declared) on
outstanding Preferred Shares shall be due and unpaid in an amount equal to two
full years' dividends thereon, and sufficient cash or specified securities
shall not have been deposited with the Auction Agent for the payment of such
dividends, then, as the sole remedy of the Preferred Shareholders, the number
of Directors constituting the Board shall be automatically increased by the
smallest number that, when added to the two Directors elected exclusively by
the Preferred Shareholders as described above, would constitute a majority of
the Board as so increased by such smallest number, and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which Directors are to be elected, the Preferred
Shareholders voting as a separate class, will be entitled to elect the smallest
number of additional Directors that together with the two Directors which such
holders will be in any event entitled to elect, constitutes a majority of the
total number of Directors of the Fund as so increased. The terms of office of
the persons who are Directors at the time of that election will continue. If
the Fund thereafter shall pay or declare and set apart for payment, in full,
all dividends payable on all outstanding Preferred Shares the voting rights
stated in the second preceding sentence shall cease, and the terms of office of
all of the additional Directors elected by the Preferred Shareholders (but not
of the Directors with respect to whose election the Common Shareholders were
entitled to vote or the two Directors the Preferred Shareholders have the right
to elect in any event), will terminate automatically.
28
So long as any Preferred Shares are outstanding, the Fund will not, without
the affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time (voting as a separate class):
(a) authorize, create or issue any class or series of stock ranking prior
to or on a parity with the Preferred Shares with respect to the payment of
dividends or the distribution of assets upon liquidation, or authorize,
create or issue additional shares of any series of Preferred Shares (except
that, notwithstanding the foregoing, but subject to certain rating agency
approvals, the Board, without the vote or consent of the Preferred
Shareholders, may from time to time authorize and create, and the Fund may
from time to time issue, shares of any classes or series of preferred stock
of the Fund (including Preferred Shares) ranking on a parity with shares of
Preferred Shares with respect to the payment of dividends and the
distribution of assets upon liquidation; provided, however, that if Moody's
or S&P is not then rating the Preferred Shares, the aggregate liquidation
preference of all Preferred Shares of the Fund outstanding after any such
issuance, exclusive of accumulated and unpaid dividends, may not exceed
$195,000,000); or
(b) amend, alter or repeal the provisions of the Charter, including the
Articles, whether by merger, consolidation or otherwise, so as to affect any
preference, right or power of the Preferred Shares or the holders thereof;
provided, however, that (i) none of the actions permitted by the exception
to (a) above will be deemed to affect such preferences, rights or powers,
(ii) a division of a share of Preferred Shares will be deemed to affect such
preferences, rights or powers only if the terms of such division adversely
affect the Preferred Shareholders and (iii) the authorization, creation and
issuance of classes or series of stock ranking junior to Preferred Shares
with respect to the payment of dividends and the distribution of assets upon
liquidation will be deemed to affect such preferences, rights or powers only
if Moody's or S&P is then rating Preferred Shares and such issuance would,
at the time thereof, cause the Fund not to satisfy the 1940 Act Preferred
Shares Asset Coverage or the Preferred Shares Basic Maintenance Amount. So
long as any Preferred Shares are outstanding, the Fund shall not without the
affirmative vote or consent of the holders of at least a majority of the
Preferred Shares outstanding at the time, voting as a separate class, file a
voluntary application for relief under federal bankruptcy law or any similar
application under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.
The Board may modify any or all of the definitions and related provisions
which have been adopted by the Fund pursuant to the rating agency guidelines in
the event the Fund receives written confirmation from Moody's or S&P, or both,
as appropriate, that any such modification would not impair the ratings then
assigned by Moody's and S&P to the Preferred Shares. The affirmative vote of
75% of the outstanding Preferred Shares, voting as a separate class, shall be
required to approve any conversion of the Fund from a closed-end to an open-end
investment company, and the affirmative vote of a majority of the Preferred
Shareholders, voting as a separate class, shall be required to approve any plan
of reorganization (as such term is used in the 1940 Act) adversely affecting
such shares. The affirmative vote of a majority of the Preferred Shareholders,
voting as a separate class, shall be required to approve any action not
described in the preceding sentence requiring a vote of security holders of the
Fund under Section 13(a) of the 1940 Act.
The foregoing voting provisions will not apply with respect to the Preferred
Shares if, at or prior to the time when a vote is required, such shares shall
have been (i) redeemed or (ii) called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
THE AUCTION
General
The Articles provide that, except as otherwise described herein, the
Applicable Rate for the shares of each series of Preferred Shares, for each
Rate Period of shares of such series after the Initial Rate
29
Period thereof, shall be equal to the rate per annum that the Auction Agent
advises has resulted on the Business Day preceding the first day of such
Subsequent Rate Period (an "Auction Date") from implementation of the auction
procedures (the "Auction Procedures"), in which persons determine to hold or
offer to sell or, based on dividend rates bid by them, offer to purchase or
sell shares of such series. Each periodic implementation of the Auction
Procedures is referred to herein as an Auction. See the Articles for a more
complete description of the Auction process.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement with the Auction Agent (currently, The Bank of New York) that
provides, among other things, that the Auction Agent will follow the Auction
Procedures for purposes of determining the Applicable Rate for each series of
Preferred Shares so long as the Applicable Rate for shares of such series is to
be based on the results of an Auction. The Fund will pay the Auction Agent
compensation for its services under the Auction Agency Agreement.
The Auction Agent may terminate the Auction Agency Agreement upon notice to
the Fund on a date no earlier than 45 days after such notice, except that if
the Auction Agent has not received amounts due to it under the terms of the
Auction Agency Agreement, the Auction Agent may terminate on a date 30 days
after delivering to the Fund notice of its failure to receive such amounts. If
the Auction Agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agency Agreement. The Fund may remove
the Auction Agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of one or
more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for Preferred Shares.
The Auction Agent after each Auction for Preferred Shares will pay from
funds provided by the Fund a service charge to each Broker-Dealer on the basis
of the purchase price of the Preferred Shares placed by the Broker-Dealer at
the Auction. The service charge will be paid at the annual rate of .25% in the
case of any Minimum Rate Period or a Rate Period of less than one year, or a
percentage agreed to by the Fund and the Broker-Dealers in the case of any
Auction for a Rate Period of one year or longer. For the purposes of the
preceding sentence, Preferred Shares will be placed by a Broker-Dealer if such
shares were (a) the subject of Hold Orders deemed to have been submitted to the
Auction Agent by the Broker-Dealer and were acquired by such Broker-Dealer for
its own account or were acquired by such Broker-Dealer for its customers who
are Beneficial Owners or (b) the subject of an Order submitted by such
Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that resulted
in such Existing Holder continuing to hold such shares as a result of the
Auction or (ii) a Submitted Bid of a Potential Holder that resulted in such
Potential Holder purchasing such shares as a result of the Auction or (iii) a
valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.
Auction Procedures
Prior to the Submission Deadline on each Auction Date for a series of
Preferred Shares, each customer of a Broker-Dealer who is listed on the records
of that Broker-Dealer (or, if applicable, the Auction Agent) as holder of
shares of the series, or a Beneficial Owner, may submit Orders with respect to
shares of such series to that Broker-Dealer as follows:
. Hold Order--indicating its desire to hold shares of the series without
regard to the Applicable Rate for shares of the series for the next Rate
Period thereof.
. Bid--indicating its desire to sell shares of the series at $25,000 per
share if the Applicable Rate for the shares for the next Rate Period
thereof is less than the rate specified in such Bid (also known as a
hold-at-a-rate order).
30
. Sell Order--indicating its desire to sell shares of the series at $25,000
per share without regard to the Applicable Rate for shares of such series
for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to a series of Preferred Shares then held by such Beneficial
Owner. A Beneficial Owner of shares of such series that submits a Bid with
respect to shares of such series to its Broker-Dealer having a rate higher than
the Maximum Rate for shares of such series on the Auction Date therefor will be
treated as having submitted a Sell Order with respect to such shares to its
Broker-Dealer. A Beneficial Owner of shares of such series that fails to submit
an Order with respect to such shares to its Broker-Dealer will be deemed to
have submitted a Hold Order with respect to such shares of such series to its
Broker-Dealer; provided, however, that if a Beneficial Owner of shares of such
series fails to submit an Order with respect to shares of such series to its
Broker-Dealer for an Auction relating to a Rate Period of more than 28 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell
Order with respect to such shares to its Broker-Dealer. A Sell Order shall
constitute an irrevocable offer to sell the Preferred Shares subject thereto. A
Beneficial Owner that offers to become the Beneficial Owner of additional
Preferred Shares is, for purposes of such offer, a Potential Beneficial Owner
as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of a series of
Preferred Shares but that wishes to purchase shares of such series, or that is
a Beneficial Owner of shares of such series that wishes to purchase additional
shares of such series (in each case, a "Potential Beneficial Owner"), may
submit Bids to its Broker-Dealer in which it offers to purchase shares of such
series at $25,000 per share if the Applicable Rate for shares of such series
for the next Rate Period thereof is not less than the rate specified in such
Bid. A Bid placed by a Potential Benefit Owner of shares of such series
specifying a rate higher than the Maximum Rate for shares of such series on the
Auction Date therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Fund)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any Preferred Shares held by it or customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of Preferred Shares held by it.
A Broker-Dealer may also submit Orders to the Auction Agent for its own account
as an Existing Holder or Potential Holder, provided it is not an affiliate of
the Fund.
If Sufficient Clearing Bids for a series of Preferred Shares exist (that is,
the number of shares of such series subject to Bids submitted or deemed
submitted to the Auction Agent by Broker-Dealers as or on behalf of Potential
Holders with rates equal to or lower than the Maximum Rate for shares of such
series is at least equal to the number of shares of such series subject to Sell
Orders submitted or deemed submitted to the Auction Agent by Broker-Dealers as
or on behalf of Existing Holders), the Applicable Rate for shares of such
series for the next succeeding Rate Period thereof will be the lowest rate
specified in the Submitted Bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as or on behalf of Existing Holders and
Potential Holders, would result in Existing Holders and Potential Holders
owning the shares of such series available for purchase in the Auction. If
Sufficient Clearing Bids for a series of Preferred Shares do not exist, the
Applicable Rate for shares of such series for the next succeeding Rate Period
thereof will be the Maximum Rate for shares of such series on the Auction Date
therefor. In such event, Beneficial Owners of shares of such series that have
31
submitted or are deemed to have submitted Sell Orders may not be able to sell
in such Auction all shares of such series subject to such Sell Orders. If
Broker-Dealers submit or are deemed to have submitted to the Auction Agent Hold
Orders with respect to all Existing Holders of a series of Preferred Shares,
the Applicable Rate for shares of such series for the next succeeding Rate
Period thereof will be the All Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of a series of Preferred Shares that
is fewer than the number of shares of such series specified in its Order. To
the extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as Existing Holders or Potential Holders in respect of
customer Orders will be required to make appropriate pro rata allocations among
their respective customers.
Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in the
same-day funds to the Securities Depository against delivery to their
respective Agent Members. The Securities Depository will make payment to the
sellers' Agent Members in accordance with the Securities Depository's normal
procedures, which now provide for payment against delivery by their Agent
Members in same-day funds.
The Auction for Series M Preferred Shares will normally be held every
Monday, and each Subsequent Rate Period of shares of such series will normally
begin on the following Tuesday. The Auction for Series T Preferred Shares will
normally be held every Tuesday, and each Subsequent Rate Period of shares of
such series will normally begin on the following Wednesday. The Auction for
Series W Preferred Shares will normally be held every Wednesday, and each
Subsequent Rate Period of shares of such series will normally begin on the
following Thursday. The Auction for Series TH Preferred Shares will normally be
held every Thursday, and each Subsequent Rate Period of shares of such series
will normally begin on the following Friday.
Whenever the Fund intends to include any net capital gain or other income
taxable for regular federal income tax purposes in any dividend on Preferred
Shares, the Fund shall, in the case of Minimum Rate Periods or Special Rate
Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn
to notify each Broker-Dealer, who, on or prior to such Auction Date, in
accordance with its Broker-Dealer Agreement, will be required to notify its
customers who are Beneficial Owners and Potential Beneficial Owners believed by
it to be interested in submitting an Order in the Auction to be held on such
Auction Date.
Secondary Trading Market and Transfer of Preferred Shares
The Broker-Dealers are expected to maintain a secondary trading market in
Preferred Shares outside of Auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that such
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. The Preferred Shares are not registered on any stock exchange or
on the NASDAQ Stock Market. Investors who purchase shares in an Auction for a
Special Rate Period should note that because the dividend rate on such shares
will be fixed for the length of such Rate Period, the value of the shares may
fluctuate in response to changes in interest rates, and may be more or less
than their original cost if sold on the open market in advance of the next
Auction therefor, depending upon market conditions.
32
A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of Preferred Shares only in whole shares and only (1) pursuant to a Bid
or Sell Order placed with the Auction Agent in accordance with the Auction
Procedures, (2) to a Broker-Dealer or (3) to such other persons as may be
permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of Preferred Shares from a customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer as the holder of such shares to
that Broker-Dealer or another customer of that Broker-Dealer shall not be
deemed to be a sale, transfer or other disposition for purposes of the
foregoing if such Broker-Dealer remains the Existing Holder of the shares so
sold, transferred or disposed of immediately after such sale, transfer or
disposition and (b) in the case of all transfers other than pursuant to
Auctions, the Broker-Dealer (or other person, if permitted by the Fund) to whom
such transfer is made shall advise the Auction Agent of such transfer.
DESCRIPTION OF COMMON SHARES
The Charter authorizes the issuance of up to 1,999,992,200 Common Shares,
$.001 par value per share. All Common Shares will be duly authorized, fully
paid, and nonassessable. Common Shareholders are entitled to receive dividends
when authorized by the Board of Directors out of assets legally available for
the payment of dividends. They are also entitled to share ratably in the Fund's
assets legally available for distribution to the Fund's shareholders in the
event of the Fund's liquidation, dissolution or winding up, after payment of or
adequate provision for all of the Fund's known debts and liabilities. These
rights are subject to the preferential rights of any other class or series of
the Fund's stock. At any time when the Fund's Preferred Shares are outstanding,
Common Shareholders will not be entitled to receive any distributions from the
Fund unless all accrued dividends on Preferred Shares have been paid, and
unless asset coverage (as defined in the 1940 Act) with respect to Preferred
Shares would be at least 200% after giving effect to such distributions.
CERTAIN PROVISIONS OF THE CHARTER DOCUMENTS
The Fund has provisions in its Charter Documents that could limit (i) the
ability of other entities or persons to acquire control of the Fund, (ii) the
Fund's freedom to engage in certain transactions, or (iii) the ability of the
Fund's shareholders to amend the Charter Documents, or effect changes in the
Fund's management, or convert the Fund to open-end status. These provisions in
the Charter Documents may be regarded as "anti-takeover" provisions.
Pursuant to the Charter, at the first annual meeting of shareholders after
this public offering, the Board of Directors will be divided into three classes
of Directors. The initial terms of the first, second and third classes will
expire in 2003, 2004 and 2005, respectively. Beginning in 2003, Directors of
each class will be elected for three-year terms upon the expiration of their
current terms and each year one class of Directors will be elected by the
Fund's shareholders. The Fund believes that classification of the Board of
Directors will help to assure the continuity and stability of the Fund's
business strategies and policies as determined by the Board of Directors.
The classified board provision could have the effect of making the
replacement of incumbent Directors more time-consuming and difficult. At least
two annual meetings of shareholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors. Thus, the
classified board provision could increase the likelihood that incumbent
Directors will retain their positions. The staggered terms of Directors may
delay, defer, or prevent a tender offer or an attempt to change control of the
Fund, although the tender offer or change in control might be in the best
interest of the shareholders.
33
Removal of Directors
A Director may be removed only for cause and only by the affirmative vote of
at least 75% of the votes entitled to be cast in the election of such director.
This provision, when coupled with the provision in the Charter authorizing the
Board of Directors to fill vacant directorships, precludes shareholders from
removing incumbent Directors except for cause and by a substantial affirmative
vote.
Amendment to the Charter
Certain provisions of the Charter, including its provisions on
classification of the Board of Directors and removal of Directors, may be
amended only by the affirmative vote of the holders of not less than 75% of all
of the votes entitled to be cast on the matter. Other provisions of the Charter
may be amended by the affirmative vote of a majority of the aggregate number of
votes entitled to be cast on the amendment. The required vote shall be in
addition to the vote of the holders of shares of the Fund otherwise required by
law or any agreement between the Fund and any national securities exchange.
Dissolution of the Company
Subject to Board approval, the liquidation or dissolution of the Fund or an
amendment to the Charter to terminate the Fund must be approved by the
affirmative vote of the holders of not less than 75% of all of the votes
entitled to be cast on the matter. However, if a majority of the Continuing
Directors (as such term is defined below) approves the liquidation or
dissolution of the Fund, such action requires the affirmative vote of a
majority of the votes entitled to be cast on the matter.
Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter
and Bylaws
The affirmative vote of 75% (which is higher than that required under
Maryland law or the 1940 Act) of the Fund's Common Shares and Preferred Shares
voting together as a single class will be required to authorize the liquidation
or dissolution of the Fund in the absence of approval of the liquidation or
dissolution by a majority of the Continuing Directors of the Fund (defined for
this purpose as those Directors who were either members of the Board of
Directors on the date of closing of the initial offering of Common Shares or
who subsequently become Directors and whose election or nomination is approved
by a majority of the Continuing Directors then on the Board). In addition, the
affirmative vote of 75% (which is higher than that required under Maryland law
or the 1940 Act) of the outstanding Common Shares and Preferred Shares is
required generally to authorize any of the following transactions involving a
corporation, person or entity that will be directly, or indirectly through
affiliates, the beneficial owner of more than 5% of the outstanding shares of
the Fund (a "Principal Shareholder"), or to amend the provisions of the Charter
relating to such transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any Principal Shareholder;
(ii) the issuance of any securities of the Fund to any Principal
Shareholder for cash except upon (a) reinvestment of dividends pursuant to a
dividend reinvestment plan of the Fund, (b) issuance of any securities of
the Fund upon the exercise of any stock subscription rights distributed by
the Fund, or (c) a public offering by the Fund registered under the
Securities Act of 1933;
(iii) 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); and
(iv) the sale, lease or exchange to the Fund or any subsidiary thereof,
in exchange for securities of the Fund, of any assets of any Principal
Shareholders (except assets having an
34
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 transaction within a twelve-month period).
However, such vote would not be required when, under certain conditions, the
Continuing Directors approve the transactions described in (i)-(iv) above,
although in certain cases involving merger, consolidation or statutory share
exchange or sale of all or substantially all of the Fund's assets, the
affirmative vote of a majority of the Common Shares and Preferred Shares voting
together as a single class would nevertheless be required. The affirmative vote
of 75% (which is higher than that required under Maryland law or the 1940 Act)
of the outstanding Common Shares and Preferred Shares voting separately by
class is required to convert the Fund to an open-end investment company and to
amend the Fund's Charter to effect any such conversion. See "Repurchase of
Common Shares; Conversion to Open-End Fund."
The overall effect of these provisions is to render difficult the
accomplishment of a merger or the assumption of control by a Principal
Shareholder. The Board of Directors of the Fund has considered the foregoing
anti-takeover provisions and concluded that they are in the best interests of
the Fund and its shareholders.
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND
Shares of closed-end investment companies frequently trade at a discount
from NAV. The Fund may, from time to time, repurchase or make a tender offer
for its Common Shares, or convert to an open-end investment company in an
attempt to reduce or eliminate significant market discounts from NAV. Subject
to the Fund's policy with respect to borrowings, the Fund may incur debt to
finance repurchases and tenders. The Fund will comply with the 1940 Act asset
coverage requirements if such borrowings are made. Interest on such borrowing
will reduce the Fund's net income.
The Fund anticipates that the market price of its Common Shares will
generally vary from NAV. The market price of the Fund's Common Shares will,
among other things, be determined by the relative demand for and supply of such
shares in the market, the Fund's investment performance, the Fund's
distributions, and investor perception of the Fund's overall attractiveness as
an investment as compared with other investment alternatives. Nevertheless, the
fact that the Fund's Common Shares may be the subject of repurchases or tender
offers at NAV from time to time may reduce the spread between market price and
NAV that might otherwise exist. There can be no assurance that share
repurchases, tender offers, or conversion to an open-end investment company
will take place or that, if they occur, they will result in the Fund's Common
Shares trading at a price that is equal to their NAV or reduce or eliminate any
market value discount.
It should be recognized that any acquisition of Common Shares by the Fund
would decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratio and may also require the redemption of a
portion of any outstanding Preferred Shares in order to maintain coverage
ratios. Because of the nature of the Fund's investment objective, policies and
portfolio, the Fund does not anticipate that repurchases and tenders should
have an adverse effect on the Fund's investment performance and does not
anticipate any material difficulty in disposing of portfolio securities in
order to consummate Common Share repurchases or tenders.
Common Shares that have been purchased by the Fund will be returned to the
status of authorized but unissued Common Shares. Depending upon the existing
market price, the purchase of Common Shares by the Fund could reduce the Fund's
NAV.
35
If the Fund converted to an open-end investment company, it would be
required to redeem all Preferred Shares then outstanding (requiring that it
liquidate a portion of its investment portfolio), and the Common Shares would
no longer be listed on the NYSE. In contrast to a closed-end investment
company, 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 any redemption charge
that is in effect at the time of the redemption.
Before deciding whether to take any action if the Common Shares trade
significantly below NAV, the Board of Directors would consider all factors that
it deemed relevant. Such factors may include 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 Common Shares should trade at
a significant discount, for a significant period of time, the Board of
Directors may determine that no action should be taken. See the SAI under
"Repurchase of Fund Shares; Conversion to Open-End Fund" for a further
discussion of possible action to reduce or eliminate a discount to NAV.
TAX MATTERS
The following federal income tax discussion is based on the advice of Seward
& Kissel LLP, counsel to the Fund, and reflects provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing Treasury regulations,
rulings published by the Internal Revenue Service (the "Service"), and other
applicable authority, all as of the date of this Prospectus. These authorities
are subject to change by legislative or administrative action, possibly on a
retroactive basis. The following discussion is only a summary of some of the
important tax considerations generally applicable to investments in the Fund.
For more detailed information regarding tax considerations, see the SAI. There
may be other tax considerations applicable to particular investors. In
addition, income earned through an investment in the Fund may be subject to
state and local taxes.
The Fund intends to qualify each year for taxation as a regulated investment
company eligible for treatment under the provisions of Subchapter M of the
Code. If the Fund so qualifies and satisfies certain annual distribution
requirements, the Fund will not be subject to federal income or excise taxes on
income distributed in a timely manner to its shareholders in the form of
dividends or capital gain distributions. As noted above, the Fund intends to
distribute to its shareholders all of its net investment income (and net
capital gain, if any) for each taxable year.
Because the Fund primarily invests in municipal obligations the interest on
which is exempt from federal income tax, distributions to you out of tax-exempt
interest income earned by the Fund will not be subject to federal income tax
(other than the AMT). Any exempt-interest dividends derived from interest on
municipal securities subject to the AMT may be a specific preference item for
purposes of the federal individual and corporate AMT.
The Fund's distributions of net income (including any short-term capital
gains) that are not tax-exempt will be taxable to you as ordinary income.
Distributions of long-term capital gains generally will be taxable to you as
long-term capital gains regardless of how long you have held your Preferred
Shares. The Fund will allocate distributions to shareholders that are treated
as tax-exempt interest and as long-term capital gain and ordinary income, if
any, among the Common Shares and Preferred Shares in proportion to total
dividends paid to each class for the year.
Distributions are taxable to you in the manner discussed above even if the
distributions are paid from income or gains earned by the Fund before you
bought shares (and thus were included in the price you paid for the shares).
36
The sale or exchange of Fund shares is a taxable transaction for federal
income tax purposes.
Each year shortly after December 31, the Fund will send you tax information
stating the amount and type of all its distributions for the year. Consult your
tax adviser about the federal, state and local tax consequences of an
investment in the Fund in your particular circumstances.
UNDERWRITING
Subject to the terms and conditions stated in the Fund's underwriting
agreement dated March 22, 2002, each Underwriter named below has severally
agreed to purchase, and the Fund has agreed to sell to such Underwriter, the
number of Preferred Shares set forth opposite the name of such Underwriter.
Number Number Number Number
of Series M of Series T of Series W of Series TH
Underwriters Preferred Shares Preferred Shares Preferred Shares Preferred Shares
------------ ---------------- ---------------- ---------------- ----------------
Salomon Smith Barney Inc............. 1,170 1,170 1,170 1,170
Merrill Lynch, Pierce, Fenner & Smith 585 585 585 585
Incorporated................
UBS Warburg LLC...................... 195 195 195 195
----- ----- ----- -----
Total............................. 1,950 1,950 1,950 1,950
===== ===== ===== =====
The underwriting agreement provides that the obligations of the Underwriters
to purchase the Preferred Shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The Underwriters
are obligated to purchase all the Preferred Shares if they purchase any of the
Preferred Shares.
The Underwriters propose to offer some of the Preferred Shares directly to
the public at the public offering price set forth on the cover of this
Prospectus and some of the Preferred Shares to dealers at the public offering
price less a concession not to exceed $137.50 per Preferred Share. The sales
load the Fund will pay of $250 per Preferred Share is equal to 1.00% of the
initial offering price. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed $37.50 per Preferred Share on sales to
certain other dealers. After the initial public offering, the Underwriters may
change the public offering price and other selling terms. Investors must pay
for any Preferred Shares purchased on or before March 27, 2002.
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, municipal securities and act as market makers in a number of
such securities, and therefore can be expected to engage in portfolio
transactions with, and perform services for, the Fund.
The Fund anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in Auctions as Broker-Dealers and
receive the fees set forth under "The Auction'' or in the SAI.
The Fund and Alliance have each agreed to indemnify the several Underwriters
or contribute to losses arising out of certain liabilities, including
liabilities under the Securities Act of 1933, as amended. In addition, the Fund
has agreed to reimburse the Underwriters for certain expenses incurred by the
Underwriters in the offering.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013.
37
CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND REDEMPTION AGENT
The Fund's securities and cash will be held under a Custodian Agreement by
State Street Bank & Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. The Fund's assets will be held under bank custodianship in compliance
with the 1940 Act. Equiserve Trust Company, N.A., 150 Royall Street, Canton,
Massachusetts 02021, will act as the Fund's transfer agent, dividend-paying
agent and registrar for its Common Shares. The Bank of New York, 5 Penn Plaza,
13th Floor, New York, New York 10001, is the Auction Agent with respect to the
Preferred Shares and acts as transfer agent, registrar, dividend disbursing
agent, and redemption agent for such shares.
LEGAL MATTERS
Certain legal matters in connection with the Preferred Shares will be passed
upon for the Fund by Seward & Kissel LLP and for the Underwriters by Simpson
Thacher & Bartlett. Seward & Kissel LLP and Simpson Thacher & Bartlett will
rely upon the opinion of Ballard Spahr Andrews & Ingersoll, LLP for certain
matters of Maryland law.
38
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
Investment Objective and Policies.................................... 3
Investment Restrictions.............................................. 18
Management of the Fund............................................... 20
Portfolio Transactions............................................... 29
Net Asset Value...................................................... 30
Additional Information Concerning the Auctions....................... 30
Description of Shares................................................ 33
Certain Provisions in the Charter.................................... 36
Repurchase of Fund Shares; Conversion to Open-End Fund............... 38
Tax Matters.......................................................... 40
Experts.............................................................. 46
Registration Statement............................................... 46
Financial Statements................................................. 46
Appendix A - Articles Supplementary............................... A-1
Appendix B - Bond Ratings......................................... B-1
Appendix C - Futures Contracts and Related Options................ C-1
39
================================================================================
$195,000,000
Alliance National Municipal Income Fund, Inc.
Auction Preferred Shares
1,950 Shares, Series M
1,950 Shares, Series T
1,950 Shares, Series W
1,950 Shares, Series TH
--------
P R O S P E C T U S
March 22, 2002
--------
Salomon Smith Barney
Merrill Lynch & Co.
UBS Warburg
================================================================================
ALLIANCE NATIONAL MUNICIPAL INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
March 22, 2002
Alliance National Municipal Income Fund, Inc., a
Maryland corporation (the "Fund"), is a recently organized,
diversified, closed-end management investment company.
This Statement of Additional Information ("SAI")
relating to the Fund's Auction Preferred Shares, Series M,
Auction Preferred Shares, Series T, Auction Preferred Shares,
Series W and Auction Preferred Shares, Series TH, par value $.001
per share,(referred to together in this SAI as "Preferred
Shares") is not a prospectus, but should be read in conjunction
with the Fund's prospectus dated March 22, 2002 (the
"Prospectus"). This SAI does not include all information that a
prospective investor should consider before purchasing Preferred
Shares, and investors should obtain and read the Prospectus prior
to purchasing such shares. A copy of the Prospectus may be
obtained without charge by calling (800) 227-4618. You may also
obtain a copy of the Prospectus on the Securities and Exchange
Commission's ("SEC") web site (http://www.sec.gov). Capitalized
terms used but not defined in this SAI have the meanings ascribed
to them in the Prospectus or the Articles Supplementary attached
as Appendix A (the "Articles").
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT RESTRICTIONS
MANAGEMENT OF THE FUND
PORTFOLIO TRANSACTIONS
NET ASSET VALUE
ADDITIONAL INFORMATION CONCERNING THE AUCTIONS
2
DESCRIPTION OF SHARES
CERTAIN PROVISIONS IN THE CHARTER
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
TAX MATTERS
EXPERTS
REGISTRATION STATEMENT
FINANCIAL STATEMENTS
APPENDIX A - Articles Supplementary A-1
APPENDIX B - Bond Ratings B-1
APPENDIX C - Futures Contracts and Related Options C-1
This Statement of Additional Information is dated March 22, 2002
3
INVESTMENT OBJECTIVE AND POLICIES
The investment objective and general investment policies
of the Fund are described in the Prospectus. Additional
information concerning the characteristics of certain of the
Fund's investments is set forth below.
Municipal Bonds
Municipal bonds share the attributes of debt/fixed
income securities in general, but are generally issued by states,
municipalities and other political subdivisions, agencies,
authorities and instrumentalities of states and multi-state
agencies or authorities. Municipal bonds have two principal
classifications: general obligation bonds and revenue or special
obligation bonds. General obligation bonds are secured by an
issuer's pledge of its faith, credit, and taxing power for the
payment of principal and interest. They are payable from such
issuer's general revenues and not from any particular source.
Revenue or special obligation bonds are payable only from the
revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special
excise or other specific revenue source. Tax-exempt private
activity bonds and industrial development bonds generally are
also revenue bonds and thus are not payable from the issuer's
general revenues. The credit and quality of private activity
bonds and industrial development bonds are usually related to the
credit of the corporate user of the facilities. Payment of
interest on and repayment of principal of such bonds is the
responsibility of the corporate user (and/or any guarantor).
The Fund will primarily invest in municipal bonds with
long-term maturities in order to maintain a weighted average
maturity of 15-30 years, but the average weighted maturity of
obligations held by the Fund may be shortened, depending on
market conditions. As a result, the Fund's portfolio at any
given time may include both long-term and intermediate-term
municipal bonds. Moreover, during temporary or defensive periods
(e.g., times when Alliance believes that temporary imbalances of
supply and demand or other temporary dislocations in the tax-
exempt bond market adversely affect the price at which long-term
or intermediate-term municipal bonds are available), and in order
to keep the Fund's cash fully invested, including the period
during which the net proceeds of the offering are being invested,
the Fund may invest any percentage of its net assets in short-
term investments including high quality, short-term securities
that may be either tax-exempt or taxable. See "--Short-Term
Investments/Temporary Defensive Strategies."
Also included within the general category of municipal
bonds in which the Fund may invest are participations in lease
4
obligations or installment purchase contract obligations of
municipal authorities or entities ("Municipal Lease
Obligations"). Although a Municipal Lease Obligation does not
constitute a general obligation of the municipality for which the
municipality's taxing power is pledged, a Municipal Lease
Obligation is ordinarily backed by the municipality's covenant to
budget for, appropriate and make the payments due under the
Municipal Lease Obligation. However, certain Municipal Lease
Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In the case of
a "non-appropriation" lease, the Fund's ability to recover under
the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and
disposition or releasing of the property might prove difficult.
There have been challenges to the legality of lease financing in
numerous states, and, from time to time, certain municipalities
have considered not appropriating money for lease payments. In
deciding whether to purchase a Municipal Lease Obligation, the
Fund will consider all relevant factors including the financial
condition of the borrower, the merits of the project, the level
of public support for the project, and the legislative history of
lease financing in the state. These securities may be less
readily marketable than other municipal bonds. The Fund may also
purchase unrated lease obligations if determined by Alliance to
be of comparable quality to rated securities in which the Fund is
permitted to invest.
Some longer-term municipal bonds give the investor the
right to "put" or sell the security at par (face value) within a
specified number of days following the investor's request-
-usually one to seven days. This demand feature enhances a
security's liquidity by shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If
a demand feature terminates prior to being exercised, the Fund
would hold the longer-term security, which could experience
substantially more volatility.
The Fund may invest in municipal bonds with credit
enhancements such as letters of credit, municipal bond insurance
and Standby Bond Purchase Agreements ("SBPAs"). Letters of
credit are issued by a third party, usually a bank, to enhance
liquidity and ensure repayment of principal and any accrued
interest if the underlying municipal bond should default.
Municipal bond insurance, which is usually purchased by the bond
issuer from a private, nongovernmental insurance company,
provides an unconditional and irrevocable guarantee that the
insured bond's principal and interest will be paid when due.
Insurance does not guarantee the price of the bond or the share
5
price of the Fund. The credit rating of an insured bond reflects
the credit rating of the insurer, based on its claims-paying
ability. The obligation of a municipal bond insurance company to
pay a claim extends over the life of each insured bond. Although
defaults on insured municipal bonds have been low to date and
municipal bond insurers have met their claims, there is no
assurance this will continue. A higher-than-expected default
rate could strain the insurer's loss reserves and adversely
affect its ability to pay claims to bondholders. The number of
municipal bond insurers is relatively small, and not all of them
have the highest rating. An SBPA is a liquidity facility
provided to pay the purchase price of bonds that cannot be re-
marketed. The obligation of the liquidity provider (usually a
bank) is only to advance funds to purchase tendered bonds that
cannot be remarketed and does not cover principal or interest
under any other circumstances. The liquidity provider's
obligations under the SBPA are usually subject to numerous
conditions, including the continued creditworthiness of the
underlying borrower.
Unless otherwise indicated, all limitations applicable
to the Fund's investments (as stated above and elsewhere in this
SAI) apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a
security (or, if unrated, determined by Alliance to be of
comparable quality), or change in the percentage of the Fund's
assets invested in certain securities or other instruments, or
change in the average maturity or duration of the Fund's
investment portfolio, resulting from market fluctuations or other
changes in the Fund's total assets, will not require the Fund to
dispose of a particular investment. In determining whether to
sell such a security, Alliance may consider such factors as its
assessment of the credit quality of the issuer of the security,
the price at which the security could be sold and the rating, if
any, assigned to the security by other rating agencies. In the
event that ratings services assign different ratings to the same
security, Alliance will determine which rating it believes best
reflects the security's quality and risk at that time, which may
be the higher of the several assigned ratings.
Municipal bonds are subject to credit and market risk.
Generally, prices of higher quality issues tend to fluctuate less
with changes in market interest rates than prices of lower
quality issues and prices of longer maturity issues tend to
fluctuate more than prices of shorter maturity issues.
The Fund may purchase and sell portfolio investments to
take advantage of changes or anticipated changes in yield
relationships, markets or economic conditions. The Fund may also
sell municipal bonds due to changes in Alliance's evaluation of
the issuer. The secondary market for municipal bonds typically
6
has been less liquid than that for taxable debt/fixed income
securities, and this may affect the Fund's ability to sell
particular municipal bonds at then-current market prices,
especially in periods when other investors are attempting to sell
the same securities.
Prices and yields on municipal bonds are dependent on a
variety of factors, including general money-market conditions,
the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. A number
of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the
financial condition of an issuer of municipal bonds may not be as
extensive as that which is made available by corporations whose
securities are publicly traded.
Obligations of issuers of municipal bonds are subject to
the provisions of bankruptcy, insolvency, and other laws
affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Code. In addition, the obligations of such
issuers may become subject to laws enacted in the future by
Congress, state legislatures, or referenda extending the time for
payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon the
ability of municipalities to levy taxes. There is also the
possibility that, as a result of litigation or other conditions,
the ability of any issuer to pay, when due, the principal or the
interest on its municipal bonds may be materially affected.
Short-Term Investments/Temporary Defensive Strategies
For temporary or for defensive purposes, including the
period during which the net proceeds of the offering are being
invested, the Fund may invest up to 100% of its net 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. Tax-exempt short-term
investments include various obligations issued by state and local
governmental issuers, such as tax-exempt notes (bond anticipation
notes, tax anticipation notes and revenue anticipation notes or
other such municipal bonds maturing in three years or less from
the date of issuance) and municipal commercial paper. The Fund
will invest only in taxable short-term investments that are U.S.
Government securities or securities rated within the highest
grade by Moody's Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Service ("S&P") or Fitch, Inc. ("Fitch"), and
which mature within one year from the date of purchase or carry a
variable or floating rate of interest. See Appendix B for a
7
general description of Moody's, S&P's and Fitch's ratings of
securities in such categories. The Fund's taxable short-term
investments may include certificates of deposit issued by U.S.
banks with assets of at least $1 billion, or commercial paper or
corporate notes, bonds or debentures with a remaining maturity of
one year or less, or repurchase agreements. To the extent the
Fund invests in taxable short-term investments, the Fund may not
achieve its investment objective of providing current income
exempt from federal income tax.
Other Municipal Securities
Municipal notes in which the Fund may invest include
demand notes, which are tax-exempt obligations that have stated
maturities in excess of one year, but permit the holder to sell
back the security (at par) to the issuer within one to seven days
notice. The payment of principal and interest by the issuer of
these obligations will ordinarily be guaranteed by letters of
credit offered by banks. The interest rate on a demand note may
be based upon a known lending rate, such as a bank's prime rate,
and may be adjusted when such rate changes, or the interest rate
on a demand note may be a market rate that is adjusted at
specified intervals.
Other short-term obligations constituting municipal
notes include tax anticipation notes, revenue anticipation notes,
bond anticipation notes and tax-exempt commercial paper. Tax
anticipation notes are issued to finance working capital needs of
municipalities. Generally, they are issued in anticipation of
various seasonal tax revenues, such as ad valorem, income, sales,
and use and business taxes. Revenue anticipation notes are
issued in expectation of receipt of other types of revenues, such
as federal revenues available under the Federal Revenue Sharing
Programs. Bond anticipation notes are issued to provide interim
financing until long-term financing can be arranged. In most
such cases, the long-term bonds provide the money for the
repayment of the notes.
Tax-Exempt Commercial Paper ("Municipal Paper") is a
short-term obligation with a stated maturity of 365 days or less
(however, issuers typically do not issue such obligations with
maturities longer than seven days). Such obligations are issued
by state and local municipalities to finance seasonal working
capital needs or as short-term financing in anticipation of
longer-term financing.
Certain municipal bonds may carry variable or floating
rates of interest whereby the rate of interest is not fixed but
varies with changes in specified market rates or indices, such as
a bank prime rate or a tax-exempt money market index.
8
While the various types of notes described above as a
group represent the major portion of the tax-exempt note market,
other types of notes are available in the marketplace and the
Fund may invest in such other types of notes to the extent
permitted under its investment objective, policies and
limitations. Such notes may be issued for different purposes and
may be secured differently from those mentioned above.
High Yield Securities ("Junk Bonds")
Bonds of below investment grade quality (Ba/BB or below)
are commonly referred to as "high yield securities" or "junk
bonds." Issuers of bonds rated below investment grade are
regarded as having current capacity to make principal and
interest payments but are subject to business, financial or
economic conditions that could adversely affect such payment
capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities, although such bonds may be
considered to possess some speculative characteristics.
Municipal bonds rated AAA in which the Fund may invest may have
been so rated on the basis of the existence of insurance
guaranteeing the timely payment, when due, of all principal and
interest.
High yield securities are regarded as predominantly
speculative with respect to the issuer's continuing ability to
meet principal and interest payments and, therefore, carry
greater price volatility and principal and income risk, including
the possibility of issuer default and bankruptcy and increased
market price volatility.
High yield securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions
than investment grade securities. A projection of an economic
downturn or of a period of rising interest rates, for example,
could cause a decline in high yield security prices because the
advent of a recession could lessen the ability of an issuer to
make principal and interest payments on its debt securities. If
an issuer of high yield securities defaults, in addition to
risking payment of all or a portion of interest and principal,
the Fund may incur additional expenses to seek recovery. Market
prices of high yield securities structured as zero-coupon bonds
are affected to a greater extent by interest rate changes, and
therefore tend to be more volatile than securities which pay
interest periodically and in cash. Alliance seeks to reduce
these risks through diversification, credit analysis and
attention to current developments and trends in both the economy
and financial markets.
The secondary market on which high yield securities are
traded may be less liquid than the market for higher-grade
9
securities. Less liquidity in the secondary trading market could
adversely affect the price at which the Fund could sell a high
yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a
thinly traded market. When secondary markets for high yield
securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities
because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there
is less reliable objective data available. During periods of
thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly and the Fund may have
greater difficulty selling its portfolio securities. The Fund
will be more dependent on Alliance's research and analysis when
investing in high yield securities. Alliance seeks to minimize
the risks of investing in all securities through diversification,
in-depth credit analysis and attention to current developments in
interest rates and market conditions.
A general description of Moody's, S&P's and Fitch's
ratings of municipal bonds is set forth in Appendix B hereto.
The ratings of Moody's, S&P and Fitch represent their opinions as
to the quality of the municipal bonds they rate. It should be
emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, municipal bonds
with the same maturity, coupon and rating may have different
yields while obligations with the same maturity and coupon with
different ratings may have the same yield. For these reasons,
the use of credit ratings as the sole method of evaluating high
yield securities can involve certain risks. For example, credit
ratings evaluate the safety of principal and interest payments,
not the market value risk of high yield securities. Also, credit
rating agencies may fail to change credit ratings in a timely
fashion to reflect events since the security was last rated.
Alliance does not rely solely on credit ratings when selecting
securities for the Fund and develops its own independent analysis
of issuer credit quality.
Variable and Floating Rate Securities
Variable and floating rate securities provide for a
periodic adjustment in the interest rate paid on the obligations.
The terms of such obligations must provide that interest rates
are adjusted periodically based upon an interest rate adjustment
index as provided in the respective obligations. The adjustment
intervals may be regular, and range from daily up to annually, or
may be event based, such as based on a change in the prime rate.
10
Derivative Instruments
The Fund may enter into interest rate and index futures
contracts and purchase and sell options on such futures contracts
("futures options"). The Fund also may enter into swap
agreements with respect to interest rates and indexes of
securities. While the Fund does not currently intend to utilize
any of these types of derivative instruments, it reserves the
flexibility to use these techniques under appropriate
circumstances and without limitation, except as described herein.
If other types of financial instruments, including other types of
options, futures contracts, or futures options are traded in the
future, the Fund may also determine to use those instruments.
The value of some derivative instruments in which the
Fund may invest may be particularly sensitive to changes in
prevailing interest rates, and, like the other investments of the
Fund, the ability of the Fund to successfully utilize these
instruments may depend in part upon the ability of Alliance to
forecast interest rates and other economic factors correctly. If
Alliance incorrectly forecasts such factors and has taken
positions in derivative instruments contrary to prevailing market
trends, the Fund could be exposed to the risk of loss. The Fund
might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If
Alliance incorrectly forecasts interest rates, market values or
other economic factors in utilizing a derivatives strategy for
the Fund, the Fund might have been in a better position if it had
not entered into the transaction. Also, suitable derivative
transactions may not be available in all circumstances. The use
of these strategies involves certain special risks, including a
possible imperfect correlation, or even no correlation, between
price movements of derivative instruments and price movements of
related investments. While some strategies involving derivative
instruments can reduce the risk of loss, they can also reduce the
opportunity for gain or even result in losses by offsetting
favorable price movements in related investments or otherwise,
due to the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable or
the possible need to sell a portfolio security at a
disadvantageous time because the Fund is required to maintain
asset coverage or offsetting positions in connection with
transactions in derivative instruments, and the possible
inability of the Fund to close out or to liquidate its
derivatives positions. Income earned by the Fund from many
derivative strategies will be treated as capital gain and, if not
offset by net realized capital loss, will be distributed to
shareholders in taxable distributions.
11
Futures Contracts and Options on Futures Contracts
While the Fund does not currently intend to do so, it
may enter into contracts for the purchase or sale for future
delivery of municipal securities or obligations of the U.S.
Government or securities or contracts based on financial indices,
including an index of municipal securities or U.S. Government
securities ("futures contracts") and may purchase and write put
and call options to buy or sell futures contracts ("options on
futures contracts"). A "sale" of a futures contract means the
acquisition of a contractual obligation to deliver the securities
called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the incurring of
a contractual obligation to acquire the securities called for by
the contract at a specified price on a specified date. The
purchaser of a futures contract on an index agrees to take or
make delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the index on
the expiration date of the contract ("current contract value")
and the price at which the contract was originally struck. No
physical delivery of the fixed-income securities underlying the
index is made. Options on futures contracts written or
purchased, and futures contracts purchased or sold, by the Fund
will be traded on U.S. exchanges. These investment techniques
will be used only to hedge against anticipated future changes in
interest rates which otherwise might either adversely affect the
value of the securities held by the Fund or adversely affect the
prices of securities which a Fund intends to purchase at a later
date.
The correlation between movements in the price of
futures contracts or options on futures contracts and movements
in the price of the securities hedged or used for cover will not
be perfect and could produce unanticipated losses. If the value
of the index increases, the purchaser of the futures contract
thereon will be entitled to a cash payment. Conversely, if the
value of the index declines, the seller of a futures contract
will be entitled to a cash payment. In connection with its
purchase of index futures the Fund will deposit liquid assets
equal to the market value of the futures contract (less related
margin) in a segregated account with the Fund's custodian or a
futures margin account with a broker. If Alliance were to
forecast incorrectly, the Fund might suffer a loss arising from
adverse changes in the current contract values of the bond
futures or index futures which it had purchased or sold. A
Fund's ability to hedge its positions through transactions in
index futures depends on the degree of correlation between
fluctuations in the index and the values of the securities which
the Fund owns or intends to purchase, or general interest rate
movements.
12
For additional information on the use, risks and costs
of futures contracts and options on futures contracts, see
Appendix C.
Risks Associated with Futures and Futures Options
There are several risks associated with the use of
futures contracts and futures options as hedging techniques. A
purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can
be no guarantee that there will be a correlation between price
movements in the hedging vehicle and in the Fund securities being
hedged. In addition, there are significant differences between
the securities and futures markets that could result in an
imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as variations in
speculative market demand for futures and futures options on
securities, including technical influences in futures trading and
futures options, and differences between the financial
instruments being hedged and the instruments underlying the
standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of
issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-
conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
Futures contracts on U.S. Government securities
historically have reacted to an increase or decrease in interest
rates in a manner similar to that in which the underlying U.S.
Government securities reacted. To the extent, however, that the
Fund enters into such futures contracts, the value of such
futures may not vary in direct proportion to the value of the
Fund's holdings of municipal bonds. Thus, the anticipated spread
between the price of the futures contract and the hedged security
may be distorted due to differences in the nature of the markets.
The spread also may be distorted by differences in initial and
variation margin requirements, the liquidity of such markets and
the participation of speculators in such markets.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a
futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may
13
work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial
losses.
There can be no assurance that a liquid market will
exist at a time when the Fund seeks to close out a futures or a
futures option position, and the Fund would remain obligated to
meet margin requirements until the position is closed. In
addition, many of the contracts discussed above are relatively
new instruments without a significant trading history. As a
result, there can be no assurance that an active secondary market
will develop or continue to exist.
Interest Rate Transactions (Swaps, Caps, and Floors)
While the Fund does not currently intend to do so, it
may enter into interest rate swaps and may purchase or sell
interest rate caps and floors.
The Fund would enter into these transactions primarily
to preserve a return or spread on a particular investment or
portion of the Fund. The Fund may also enter into these
transactions to protect against price increases of securities
Alliance anticipates purchasing for the Fund at a later date. The
Fund does not intend to use these transactions in a speculative
manner. Interest rate swaps involve the exchange by the Fund
with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for
fixed rate payments. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party
selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount
from the party selling such interest rate floor.
Interest rate swaps, caps and floors may be entered into on
either an asset-based or liability-based basis, depending upon
whether they are hedging their assets or their liabilities, and
will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest
rate swap will be accrued daily, and an amount of liquid assets
having an aggregate net asset value at least equal to the accrued
14
excess will be maintained in a segregated account by the
custodian. If the Fund enters into an interest rate swap on
other than a net basis, the Fund will maintain in a segregated
account with the custodian the full amount, accrued daily, of the
Fund's obligations with respect to the swap. The Fund will not
enter into any interest rate swap, cap or floor unless the
unsecured senior debt or the claims paying ability of the other
party thereto is then rated in the highest rating category of at
least one nationally recognized rating organization. Alliance
will monitor the creditworthiness of counterparties on an ongoing
basis. If there were a default by such a counterparty, the Fund
would have contractual remedies. The swap market has grown
substantially in recent years, with a large number of banks and
investment banking firms acting both as principals and agents
utilizing standardized swap documentation. Alliance has
determined that, as a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been developed
and, accordingly they are less liquid than swaps. To the extent
the Fund sells (i.e., writes) caps and floors it will maintain in
a segregated account with the custodian liquid assets equal to
the full amount, accrued daily, of the Fund's obligations with
respect to any caps or floors.
The use of interest rate swaps is a highly specialized
activity which involves investment techniques and risks different
from those associated with ordinary Fund securities transactions.
If Alliance were incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what they
would have been if these investment techniques were not used.
Moreover, even if Alliance is correct in its forecasts, there is
a risk that the swap position may correlate imperfectly with the
price of the asset or liability being hedged.
Interest rate swap transactions do not involve the
delivery of securities or other underlying assets of principal.
Accordingly, the risk of loss with respect to interest rate swaps
is limited to the net amount of interest payments that the Fund
is contractually obligated to make. If the other party to an
interest rate swap defaults, the Fund's risk of loss consists of
the net amount of interest payments that the Fund contractually
is entitled to receive. The Fund may purchase and sell (i.e.,
write) caps and floors without limitation, subject to the
segregated account requirement described above.
Repurchase Agreements
While the Fund does not currently intend to do so, it
may seek additional income by investing in repurchase agreements
pertaining only to U.S. Government securities. A repurchase
15
agreement arises when a buyer purchases a security and
simultaneously agrees to resell it to the vendor at an agreed-
upon future date, normally one day or a few days later. The
resale price is greater than the purchase price, reflecting an
agreed-upon market rate which is effective for the period of time
the buyer's money is invested in the security and which is not
related to the coupon rate on the purchased security. Such
agreements would permit the Fund to keep all of its assets at
work while retaining "overnight" flexibility in pursuit of
investments of a longer-term nature. In addition, the Fund will
require continual maintenance of collateral held by the Fund's
custodian in an amount equal to, or in excess of, the market
value of the securities which are the subject of the agreement.
In the event that a vendor defaulted on its repurchase
obligation, the Fund would suffer a loss to the extent that the
proceeds from the sale of the collateral were less than the
repurchase price. In the event of a vendor's bankruptcy, the
Fund might be delayed in, or prevented from, selling the
collateral for its benefit. Repurchase agreements may be entered
into with member banks of the Federal Reserve System including
the Fund's custodian or "primary dealers" (as designated by the
Federal Reserve Bank of New York) in U.S. Government securities.
The Fund's current practice would be to enter into repurchase
agreements only with such primary dealers.
Illiquid Securities
The Fund may invest in illiquid securities. Illiquid
securities include, among others, (a) direct placements or other
securities which are subject to legal or contractual restrictions
on resale or for which there is no readily available market
(e.g., trading in the security is suspended or, in the case of
unlisted securities, market makers do not exist or will not
entertain bids or offers), (b) options purchased by the Fund
over-the-counter and the cover for options written by the Fund
over-the-counter, and (c) repurchase agreements not terminable
within seven days. Securities that have legal or contractual
restrictions on resale but have a readily available market are
not deemed illiquid for purposes of this limitation.
Illiquid securities generally include securities subject
to contractual or legal restrictions on resale because they have
not been registered under the Securities Act of 1933, as amended
(the "Securities Act"), securities which are otherwise not
readily marketable and repurchase agreements having a maturity of
longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly
from the issuer or in the secondary market.
16
Rule 144A under the Securities Act permits a broader
institutional trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of
the Securities Act for resales of certain securities to qualified
institutional buyers. An insufficient number of qualified
institutional buyers interested in purchasing certain restricted
securities held by the Fund, however, could affect adversely the
marketability of such Fund securities. Alliance, acting under
the supervision of the Board of Directors, will monitor the
liquidity of restricted securities in the Fund that are eligible
for resale pursuant to Rule 144A. In reaching liquidity
decisions, Alliance will consider, among others, the following
factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers issuing quotations to purchase or sell
the security; (3) the number of other potential purchasers of the
security; (4) the number of dealers undertaking to make a market
in the security; (5) the nature of the security (including its
unregistered nature) and the nature of the marketplace for the
security (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer);
and (6) any applicable Commission interpretation or position with
respect to such type of securities.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the
investment objective of the Fund in relation to actual and
anticipated movements in interest rates. In addition, a security
may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what Alliance
believes to be a temporary price disparity between the two
securities. Temporary price disparities between two comparable
securities may result from supply and demand imbalances where,
for example, a temporary oversupply of certain bonds may cause a
temporarily low price for such bonds, as compared with other
bonds of like quality and characteristics. The Fund may also
engage to a limited extent in short-term trading consistent with
its investment objective. Securities may be sold in anticipation
of a market decline (a rise in interest rates) or purchased in
anticipation of a market rise (a decline in interest rates) and
later sold, or to recognize a gain.
A change in the securities held by the Fund is known as
"portfolio turnover." Alliance manages the Fund without regard
generally to restrictions on portfolio turnover. The use of
certain derivative instruments with relatively short maturities
may tend to exaggerate the portfolio turnover rate for the Fund.
Trading in fixed income securities does not generally involve the
payment of brokerage commissions, but does involve indirect
transaction costs. The use of futures contracts may involve the
17
payment of commissions to futures commission merchants. Higher
portfolio turnover involves correspondingly greater expenses to
the Fund, including brokerage commissions or dealer mark-ups and
other transaction costs on the sale of securities and
reinvestments in other securities. Transactions in the Fund's
portfolio securities may result in realization of taxable capital
gains (including short-term capital gains which are generally
taxed to shareholders at ordinary income tax rates). The trading
costs and tax effects associated with portfolio turnover may
adversely affect the Fund's performance.
Other Investment Companies
The Fund may invest in other investment companies either
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 Preferred Shares, during periods when there is a
shortage of attractive, high-yielding municipal bonds available
in the market, or when Alliance believes share prices of other
investment companies offer attractive values. The Fund may
invest in investment companies that are advised by Alliance or
its affiliates to the extent permitted by applicable law and/or
pursuant to exemptive relief from the SEC. As a stockholder in
an investment company, the Fund will bear its ratable share of
that investment company's expenses and would remain subject to
payment of the Fund's management and other fees with respect to
assets so invested. Holders of Preferred Shares ("Preferred
Shareholders") would therefore be subject to duplicative expenses
to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage
risks described herein. As described in the Fund's Prospectus in
the section entitled "Risks," the net asset value 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. Alliance will consider all relevant
factors including expenses and leverage when evaluating the
investment merits of an investment in an investment company
relative to available municipal bond investments.
When-Issued, Delayed Delivery and Forward Commitment Transactions
The Fund may purchase or sell municipal bonds on a
"forward commitment" basis. When such transactions are
negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date.
Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be
negotiated. During the period between a commitment by the Fund
and settlement, no payment is made for the securities purchased
18
by the purchaser, and, thus, no interest accrues to the purchaser
from the transaction. The use of forward commitments enables the
Fund to hedge against anticipated changes in interest rates and
prices. For instance, in periods of rising interest rates and
falling bond prices, the Fund might sell municipal bonds which it
owned on a forward commitment basis to limit its exposure to
falling bond prices. In periods of falling interest rates and
rising bond prices, the Fund might sell a municipal security held
by the Fund and purchase the same or a similar security on a
when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields. However, if Alliance
were to forecast incorrectly the direction of interest rate
movements, the Fund might be required to complete such when-
issued or forward transactions at prices less favorable than the
current market value.
When-issued municipal securities and forward commitments
may be sold prior to the settlement date, but the Fund enters
into when-issued and forward commitment transactions only with
the intention of actually receiving or delivering the municipal
securities, as the case may be. To facilitate such transactions,
the Fund's custodian bank will maintain, in a separate account of
the Fund, liquid assets having value equal to, or greater than,
any commitments to purchase municipal securities on a when-issued
or forward commitment basis and, with respect to forward
commitments to sell portfolio securities of the Fund, the
portfolio securities themselves. If the Fund, however, chooses
to dispose of the right to acquire a when-issued security prior
to its acquisition or dispose of its right to deliver or receive
against a forward commitment, it can incur a gain or loss. When-
issued municipal securities may include bonds purchased on a
"when, as and if issued" basis under which the issuance of the
securities depends upon the occurrence of a subsequent event,
such as approval of a proposed financing by appropriate municipal
authorities. Any significant commitment of Fund assets to the
purchase of securities on a "when, as and if issued" basis may
increase the volatility of the Fund's net asset value. At the
time the Fund makes the commitment to purchase or sell a
municipal security on a when-issued or forward commitment basis,
it records the transaction and reflects the value of the security
purchased or, if a sale, the proceeds to be received, in
determining its net asset value. No forward commitments will be
made by the Fund if, as a result, more than 10% of the value of
such Fund's total assets would be committed to such transactions.
Zero Coupon Bonds
The Fund may invest in zero coupon bonds, which are debt
obligations that do not entitle the holder to any periodic
payments prior to maturity and are issued and traded at a
discount from their face amounts. The discount varies depending
19
on the time remaining until maturity, prevailing interest rates,
liquidity of the security and perceived credit quality of the
issuer. Even though the Fund does not receive any interest on
zero coupon bonds during their life, the Fund accrues income with
respect to such bonds and thus may have to dispose of portfolio
securities under disadvantageous circumstances in order to obtain
cash needed to pay dividends in amounts necessary to avoid
unfavorable tax consequences. The market prices of zero coupon
bonds are generally more volatile than the market prices of
securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do
securities having similar maturities and credit quality that do
pay periodic interest.
General
The successful use of the foregoing investment
practices, all of which are highly specialized investment
activities, draws upon the Adviser's special skill and experience
with respect to such instruments and usually depends on the
Adviser's ability to forecast interest rate movements correctly.
Should interest rates move in an unexpected manner, the Fund may
not achieve the anticipated benefits of futures contracts,
options, interest rate transactions or forward commitment
contracts, or may realize losses and thus be in a worse position
than if such strategies had not been used. Unlike many exchange-
traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to forward
contracts, and adverse market movements could therefore continue
to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of such instruments
and movements in the price of the securities hedged or used for
cover may not be perfect and could produce unanticipated losses.
The Fund's ability to dispose of its position in futures
contracts, options on futures contracts, interest rate
transactions and forward commitment contracts will depend on the
availability of liquid markets in such instruments. Markets for
all these vehicles with respect to municipal securities are
relatively new and still developing. It is impossible to predict
the amount of trading interest that may exist in various types of
futures contracts and options on futures contracts. No assurance
can be given that the Fund will be able to utilize these
instruments effectively for the purposes set forth above.
Furthermore, the Fund's ability to engage in futures or other
types of derivative transactions may be limited by tax
considerations.
20
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions
Unless specified to the contrary, the Fund cannot change
its investment objective or fundamental policies without the
approval of the holders of a "majority of the outstanding" voting
shares of the Fund and of the holders of a "majority of the
outstanding" Preferred Shares voting as a separate class. A
"majority of the outstanding" shares (whether voting together as
a single class or voting as a separate class) means (i) 67% or
more of such shares present at a meeting, if the holders of more
than 50% of those shares are present or represented by proxy, or
(ii) more than 50% of such shares, whichever is less. The Fund
may not:
(1) Concentrate its investments in a particular
industry, as that term is used in the 1940 Act and as
interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time.
(2) Purchase or sell real estate, although it may
purchase securities(including municipal bonds) secured by real
estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein.
(3) Make loans except through (i) the purchase of debt
obligations in accordance with its investment objectives and
policies; or (ii) the use of repurchase agreements.
(4) Purchase or sell commodities or commodities
contracts or oil, gas or mineral programs. This restriction
shall not prohibit the Fund, subject to restrictions described in
the Prospectus and elsewhere in this SAI, from purchasing,
selling or entering into futures contracts, options on futures
contracts, forward contracts, or any interest rate, securities-
related or other hedging instruments, including swap agreements
and other derivative instruments, subject to compliance with any
applicable provisions of the federal securities or commodities
laws.
(5) Borrow money or issue any senior security, except
in accordance with provisions of the 1940 Act and specifically
the Fund may (a) borrow from a bank or other entity in a
privately arranged transaction and issue commercial paper, bonds,
debentures or notes, in series or otherwise, with such interest
rates, conversion rights and other terms and provisions as are
determined by the Fund's Board of Directors, if after such
borrowing or issuance there is asset coverage of at least 300% as
defined in the 1940 Act; and (b) issue Preferred Shares with such
preferences, conversion and other rights, voting powers,
21
restrictions, limitations as to dividends and other
distributions, qualifications, and terms and conditions of
redemption as are determined by the Fund's Board of Directors, if
after such issuance there is asset coverage of at least 200% as
defined in the 1940 Act.
(6) Pledge, hypothecate, mortgage or otherwise encumber
its assets, except (i) to secure permitted borrowings, (ii) in
connection with initial and variation margin deposits relating to
futures contracts and (iii) any segregated accounts established
in accordance with its investment objective and policies.
(7) Act as an underwriter of securities of other
issuers, except to the extent that in connection with the
disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
The Fund's industry concentration policy does not
preclude it from focusing investments in issuers in a group of
related industries (such as different types of utilities).
22
MANAGEMENT OF THE FUND
Board of Director Information
The business and affairs of the Fund are managed under
the direction of the Board of Directors. Certain information
concerning the Fund's Directors is set forth below.
PORTFOLIOS
PRINCIPAL IN FUND OTHER
OCCUPATIONS(S) COMPLEX DIRECTORSHIPS
DURING PAST OVERSEEN BY HELD BY
Name, Address and Age 5 YEARS DIRECTOR DIRECTOR
of Director -------- ---------- -------------
---------------------
INTERESTED DIRECTOR**
President, Chief 114 None
1345 Avenue of the Operating Officer
Americas, New York, NY and a Director of
10105 ACMC, with which he
has been associated
since prior to 1997.
DISINTERESTED DIRECTORS
Ruth Block,#+ 71, Formerly an 87 Ecolab Incorp.
P.O. Box 4623, Executive Vice (specialty
Stamford, CT 06903 President and the chemicals);
Chief Insurance BP Amoco Corp. (oil
Officer of The and gas)
Equitable Life
Assurance Society of
the United States;
Chairman and Chief
Executive Officer of
Evlico; a Director
of Avon, Tandem
Financial Group and
Donaldson, Lufkin &
Jenrette Securities
Corporation. She is
currently a Director
of Ecolab
Incorporated
(specialty
chemicals) and BP
23
Amoco Corporation
(oil and gas).
David H. Dievler,#+ Independent 94 None
72, consultant. Until
P.O. Box 167, Spring December 1994,
Lake, Senior Vice
New Jersey 07762 President of ACMC
responsible for
mutual fund
administration.
Prior to joining
ACMC in 1984, Chief
Financial Officer of
Eberstadt Asset
Management since
1968. Prior to
that, Senior Manager
at Price Waterhouse
& Co. Member of
American Institute
of Certified Public
Accountants since
1953.
John H. Dobkin,#+ Consultant. 91 None
60, Currently, President
P.O. Box 12, of the Board of Save
Annandale, New York Venice, Inc.
12504 (preservation
organization).
Formerly a Senior
Advisor from June
1999 - June 2000 and
President from
December 1989 - May
1999 of Historic
Hudson Valley
(historic
preservation).
Previously, Director
of the National
Academy of Design.
During 1988-92,
Director and
Chairman of the
Audit Committee of
ACMC.
24
William H. Foulk, Investment Adviser 110 None
Jr.,#+ 69, Room 100, and an independent
2 Greenwich Plaza, consultant.
Greenwich, Formerly Senior
Connecticut 06830 Manager of Barrett
Associates, Inc., a
registered
investment adviser,
with which he had
been associated
since prior to 1997.
Formerly Deputy
Comptroller of the
State of New York
and, prior thereto,
Chief Investment
Officer of the New
York Bank for
Savings.
Dr. James President of the 81 None
Hester,#+77 The Harry Frank
Harry Frank Guggenheim
Guggenheim Foundation, with
Foundation, 527 which he has been
Madison Avenue, New associated since
York, NY 10022-4301 prior to 1997. He
was formerly
President of New
York University and
the New York
Botanical Garden,
Rector of the United
Nations University
and Vice Chairman of
the Board of the
Federal Reserve Bank
of New York.
Clifford L. Member of the law 91 Placer Dome, Inc.
Michel,#+ 62, firm of Cahill (mining)
St. Bernard's Road, Gordon & Reindel,
Gladstone, with which he has
New Jersey 07934 been associated
since prior to 1997.
President and Chief
Executive Officer of
Wenonah Development
25
Company
(investments) and a
Director of Placer
Dome, Inc. (mining).
Donald J. Senior Counsel to 103 None
Robinson,#+ 67, the law firm of
98 Hell's Peak Road, Orrick, Herrington &
Weston, Vermont Sutcliffe LLP since
05161 January 1997.
Formerly a senior
partner and a member
of the Executive
Committee of that
firm. Member of the
Municipal Securities
Rulemaking Board and
a Trustee of the
Museum of the City
of New York.
________________
* There is no stated term of office for the Fund's Directors.
** Mr. Carifa is an "interested director", as defined in the
1940 Act, due to his position as President and Chief
Operating Officer of ACMC, the Fund's investment adviser.
# Member of the Audit Committee.
+ Member of the Nominating Committee.
The Fund's Board of Directors has two standing
committees of the Board - an Audit Committee and a Nominating
Committee. The members of the Audit and Nominating Committees
are identified above. The function of the Audit Committee is to
assist the Board of Directors in its oversight of the Fund's
financial reporting process. The function of the Nominating
Committee is to nominate persons to fill any vacancies on the
Board of Directors. The Nominating Committee does not currently
consider for nomination candidates proposed by stockholders for
election as Directors.
In approving the Fund's investment advisory agreement
("Advisory Agreement"), the Directors considered all information
they deemed reasonably necessary to evaluate the terms of the
Advisory Agreement. The principal areas of review by the
Directors were the nature and quality of the services to be
provided by the Adviser and the reasonableness of the fees to be
charged for those services. These matters were considered by the
disinterested directors meeting separately from the full Board of
26
Directors with experienced counsel that is independent of the
Adviser.
The Directors' evaluation of the quality of the
Adviser's services took into account their knowledge and
experience gained as directors of other investment companies in
the Alliance Fund Complex, including the scope and quality of the
Adviser's in-house research capability, other resources dedicated
to performing its services and the quality of its administrative
and other services.
In reviewing the fees payable under the Advisory
Agreement, the Directors compared the fees of the Fund to those
of competitive funds and other funds with similar investment
objectives. The Directors also considered the Adviser's
voluntary agreement to waive a portion of its fees or reimburse a
portion of the Fund's expenses for the first nine full years of
its operations, and to pay a portion of the Fund's organizational
and offering costs. For these purposes, the Directors took into
account not only the fees payable by the Fund, but also so-called
"fallout benefits" to the Adviser, such as the proposed
engagement of an affiliate of the Adviser to provide shareholder
inquiry services to the Fund and that the Advisory Agreement
provides that the Fund will reimburse the Adviser for the cost of
providing certain administrative services. In evaluating the
Fund's advisory fees, the Directors also took into account the
demands and complexity of the investment management of the Fund.
The Directors also considered the business reputation of
the Adviser and its financial resources. The Directors evaluated
the procedures and systems of the Adviser that are designed to
fulfill the Adviser's fiduciary duty to the Fund with respect to
possible conflicts of interest, including the Adviser's code of
ethics (regulating the personal trading of its officers and
employees) and the allocation of trades among its various
investment advisory clients. The Directors also considered
information concerning the proposed policies and procedures of
the Adviser with respect to the execution of portfolio
transactions.
No single factor was considered in isolation or to be
determinative to the decision of the Directors to approve the
Advisory Agreement. Rather, the Directors concluded in light of
a weighing and balancing of all factors considered that it was in
the best interests of the Fund to approve the Advisory Agreement,
including the fees to be charged for services thereunder.
The dollar range of the Fund's securities owned by each
Director and the aggregate dollar range of securities owned in
the Alliance Fund Complex is set forth below.
27
Dollar Range of Aggregate Dollar Range
Equity Securities of Equity Securities in
in the Fund as of the Alliance Fund Complex
December 31, 2001 as of December 31, 2001
----------------- --------------------------
John D. Carifa $0 over $100,000
Ruth Block $0 over $100,000
David H. Dievler $0 over $100,000
John H. Dobkin $0 over $100,000
William H. Foulk, Jr. $0 over $100,000
Dr. James Hester $0 over $100,000
Clifford L. Michel $0 over $100,000
Donald J. Robinson $0 over $100,000
Officer Information
Certain information concerning the Fund's officers is set forth
below.
Name, Address,* Position(s) Held Principal Occupation(s)
and (Age) with Fund During Past 5 Years
--------------- --------------- -----------------------
John D. Carifa, (56) Chairman and President President, Chief
Operating Officer and
Director of ACMC,** with
which he has been
associated since prior to
1997.
David M. Dowden, (36) Vice President Vice President of ACMC,**
with which he has been
associated since 1997.
Terrence T. Hults, (35) Vice President Vice President of ACMC,**
with which he has been
associated since prior to
1997.
Edmund P. Bergan, Jr., (51) Secretary Senior Vice President and
the General Counsel of
Alliance Fund
Distributors, Inc.
("AFD")** and AGIS**,
with which he has been
associated since prior to
1997.
28
Mark D. Gersten, (51) Treasurer and Chief
Financial Officer Senior Vice President of
AFD** and Senior Vice
President of AGIS,** with
which he has been
associated since prior to
1997.
Thomas R. Manley, (50) Controller Vice President of ACMC,**
with which he has been
associated since prior to
1997.
Andrew L. Gangolf, (47) Assistant Secretary Senior Vice President and
Assistant General Counsel
of AFD,** with which he
has been associated since
prior to 1997.
Domenick Pugliese, (40) Assistant Secretary Senior Vice President and
Assistant General Counsel
of AFD,** with which he
has been associated since
prior to 1997.
___________________
* The address for each of the Fund's officers is 1345 Avenue of
the Americas, New York, NY 10105.
** ACMC, AFD, and AGIS are affiliates of the Fund.
The Fund does not pay any fees to, or reimburse expenses
of, its Directors who are considered "interested persons" of the
Fund.
The aggregate compensation paid to each of the Directors
during calendar year 2001 by all of the funds to which the
Investment Adviser provides investment advisory services
(collectively, the "Alliance Fund Complex"), and the total number
of registered investment companies (and separate investment
portfolios within those companies) in the Alliance Fund Complex
with respect to which each of the Directors serves as a director
or trustee are set forth below. Neither the Fund nor any other
fund in the Alliance Fund Complex provides compensation in the
form of pension or retirement benefits to any of its directors or
trustees. Each of the Directors is a director or trustee of one
or more other registered investment companies in the Alliance
Fund Complex.
29
Total Number
Total Number of Investment
of Funds in Portfolios
the Alliance Within the
Total Fund Complex, Funds,
Compensation Including the Including the
from the Fund, as to Fund, as to
Alliance Fund which the which the
Aggregate Complex, Director is a Director is a
Name of Compensation Including the Director or Director or
Director from the Fund* Fund Trustee Trustee
-------- -------------- ------------- ------------- -------------
John D. Carifa $ -0- $ -0- 49 114
Ruth Block -0- $186,050 38 87
David H. Dievler -0- $244,350 44 94
John H. Dobkin -0- $210,900 41 91
William H. Foulk, Jr. -0- $249,400 45 110
Dr. James Hester -0- $90,650 8 81
Clifford L. Michel -0- $199,087.50 39 91
Donald J. Robinson -0- $186,050 41 103
_________________________
* The information presented is for the period March 8, 2002.
As of March 1, 2002, the Directors and officers of the
Fund as a group owned less than 1% of the shares of the Fund.
The Adviser
Alliance, 1345 Avenue of the Americas, New York, New
York 10105, is the Fund's investment adviser. The Adviser is a
leading global investment management firm supervising client
accounts with assets as of January 31, 2002 totaling
approximately $451 billion. The Adviser provides diversified
investment management and related services globally to a broad
range of clients including: institutional investors such as
corporate and public employee pension funds, endowment funds,
domestic and foreign institutions and governments and affiliates;
private clients, consisting of high net worth individuals, trusts
and estates, charitable foundations, partnerships, private and
family corporations and other entities; individual investors by
means of retail mutual funds sponsored by the Adviser; and
institutional investors by means of in-depth research, portfolio
strategy, trading and brokerage-related services.
Alliance Capital Management Corporation is the general
partner of the Adviser and an indirect wholly-owned subsidiary of
AXA Financial, Inc. ("AXA Financial"). As of December 31, 2001,
AXA, its wholly-owned subsidiaries, AXA Financial and The
30
Equitable Life Assurance Society of the United States
("Equitable") and some subsidiaries of Equitable (other than the
Adviser and its subsidiaries) were the beneficial owners of
approximately 51.7% of the issued and outstanding units of the
Adviser and approximately 2.1% of the issued and outstanding
units of Alliance Capital Management Holding L.P. ("Alliance
Holding"). Alliance Holding is an entity the business of which
consists of holding units of the Adviser and engaging in related
activities. As of December 31, 2001, Alliance Holding owned
approximately 30.1% of the outstanding units of limited
partnership interest in the Adviser.
As of December 31, 2001, AXA and its subsidiaries owned
all of the issued and outstanding shares of the common stock of
AXA Financial. AXA Financial owns all of the issued and
outstanding shares of Equitable. For insurance regulatory
purposes all shares of common stock of AXA Financial beneficially
owned by AXA and its affiliates have been deposited into a voting
trust.
AXA, a French company, is the holding company for an
international group of insurance and related financial services
companies. AXA's insurance operations include activities in life
insurance, property and casualty insurance and reinsurance. The
insurance operations are diverse geographically with activities
principally in Western Europe, North America, the Asia/Pacific
area, and, to a lesser extent, in Africa and South America. AXA
is also engaged in asset management, real estate and other
financial services activities principally in the United States,
as well as in Western Europe and the Asia/Pacific area.
Under the Advisory Agreement, Alliance furnishes advice
and recommendations with respect to the Fund's portfolio of
securities, order placement facilities and investments and
provides persons satisfactory to the Board of Directors to act as
officers and employees of the Fund. Such officers and employees,
as well as certain Directors of the Fund may be employees of
Alliance or its affiliates.
Alliance is, under the Advisory Agreement, responsible
for certain expenses incurred by the Fund, including, for
example, office space and certain other equipment, investment
advisory and administrative services, and any expenses incurred
in promoting the sale of Fund shares (other than the costs of
printing Fund prospectuses and other reports to shareholders and
fees related to registration with the SEC and with state
regulatory authorities).
The Fund has, under the Advisory Agreement, assumed the
obligation for payment of all of its other expenses. As to the
obtaining of clerical, accounting and other services not required
31
to be specifically provided to the Fund by Alliance under the
Advisory Agreement, the Fund may utilize personnel employed by
Alliance or its affiliates. The Fund may employ its own
personnel or contract for services to be performed by third
parties. In the event the Fund utilizes personnel employed by
Alliance or its affiliates (as expected), the services will be
provided to the Fund at no more than cost and the payments
specifically approved by the Fund's Board of Directors.
Under the terms of the Advisory Agreement, the Fund pays
the Adviser a monthly advisory fee at an annual rate of .65% of
the Fund's average daily net assets and will reimburse Alliance
for the cost of providing certain administrative services. For
the first nine full years of the Fund's Operations, Alliance will
voluntarily waive a portion of its fees or reimburse the Fund for
certain expenses in the amount and for the time periods described
below.
PERCENTAGE WAIVED
OR REIMBURSED
(AS A PERCENTAGE
OF AVERAGE
YEAR ENDING JANUARY 31 DAILY NET ASSETS)*
---------------------- ------------------
2003** .25%
2004 .25%
2005 .25%
2006 .25%
2007 .25%
2008 .20%
2009 .15%
2010 .10%
2011 .05%
________________________
* Including net assets attributable to the Preferred Shares.
** From the commencement of operations.
Alliance has not agreed to waive its fees or reimburse
the Fund for any portion of its expenses beyond January 31, 2011.
The Adviser also provides administrative services to the
Fund. These services include, among others, preparation and
dissemination of shareholder reports and proxy materials,
accounting and bookkeeping, calculation of net asset value,
monitoring compliance, and negotiating certain terms and
conditions of custodian and dividend disbursing services.
The Advisory Agreement has been approved by the Fund's
Board of Directors and its initial shareholder. The Advisory
Agreement by its terms continues in effect from year to year
32
after January 28, 2004 if such continuance is specifically
approved, at least annually, by a majority vote of the Directors
who neither are interested persons of the Fund nor have any
direct or indirect financial interest in the Advisory Agreement,
cast in person at a meeting called for the purpose of voting on
such approval.
The Advisory Agreement may be terminated without penalty
on 60 days' written notice by a vote of a majority of the
outstanding voting securities, by a vote of the majority of the
Directors or by Alliance on 60 days'' written notice, and will
automatically terminate in the event of assignment. The Advisory
Agreement provides that Alliance shall not be liable under the
Advisory Agreement for any mistake of judgment, or in any event
whatsoever, except for lack of good faith, provided that Alliance
shall be liable to the Fund and security holders by reason of
willful misfeasance, bad faith or gross negligence or of reckless
disregard of its obligations and duties under the Advisory
Agreement.
Certain other clients of Alliance may have investment
objectives and policies similar to those of the Fund. Alliance
and any of its affiliates may, from time to time, make
recommendations which result in the purchase or sale of a
particular security by their other clients simultaneously with
the Fund. If transactions on behalf of more than one client
during the same period increase the demand for securities being
purchased or the supply of securities being sold, there may be an
adverse effect on price or quantity. It is the policy of Alliance
and any of its affiliates to allocate advisory recommendations
and the placing of orders in a manner which is deemed equitable
by Alliance and any of its affiliates to the accounts involved,
including the Fund. When two or more of the clients of Alliance
and any of its affiliates (including the Fund) are purchasing or
selling the same security on a given day from the same broker-
dealer, such transactions may be averaged as to price.
The Adviser may act as an investment adviser to other
persons, firms or corporations, including investment companies,
and is the investment adviser to the following registered
investment companies: AFD Exchange Reserves, Alliance All-Asia
Investment Fund, Inc., Alliance Balanced Shares, Inc., Alliance
Bond Fund, Inc., Alliance Capital Reserves, Alliance Global
Dollar Government Fund, Inc., Alliance Global Small Cap Fund,
Inc., Alliance Global Strategic Income Trust, Inc., Alliance
Government Reserves, Alliance Greater China ''97 Fund, Inc.,
Alliance Growth and Income Fund, Inc., Alliance Health Care Fund,
Inc., Alliance High Yield Fund, Inc., Alliance Institutional
Funds, Inc., Alliance Institutional Reserves, Inc., Alliance
International Fund, Alliance International Premier Growth Fund,
Inc., Alliance Money Market Fund, Alliance Multi-Market Strategy
33
Trust, Inc., Alliance Municipal Income Fund, Inc., Alliance
Municipal Income Fund II, Alliance Municipal Trust, Alliance New
Europe Fund, Inc., Alliance North American Government Income
Trust, Inc., Alliance Premier Growth Fund, Inc., Alliance Quasar
Fund, Inc., Alliance Select Investor Series, Inc., Alliance
Technology Fund, Inc., Alliance Variable Products Series Fund,
Inc., Alliance Worldwide Privatization Fund, Inc.,
AllianceBernstein Disciplined Value Fund, Inc., AllianceBernstein
Real Estate Investment Fund, Inc., AllianceBernstein Utility
Income Fund, Inc., The Alliance Fund, Inc., The Alliance Funds,
The AllianceBernstein Trust, The Korean Investment Fund, Inc.,
Sanford C. Bernstein Fund, Inc. and EQ Advisors Trust, all
registered open-end investment companies; and to ACM Government
Opportunity Fund, Inc., ACM Income Fund, Inc., ACM Managed Dollar
Income Fund, Inc., ACM Managed Income Fund, Inc., ACM Municipal
Securities Income Fund, Inc., Alliance All-Market Advantage Fund,
Inc., Alliance World Dollar Government Fund, Inc., Alliance World
Dollar Government Fund II, Inc., The Austria Fund, Inc., The
Southern Africa Fund, Inc. and The Spain Fund, Inc., all
registered closed-end investment companies.
Codes of Ethics
The Fund and Alliance have each adopted codes of ethics
pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics
permit personnel subject to the codes to invest in securities,
including securities that may be purchased or held by the Fund.
Text-only versions of the codes of ethics can be viewed on line
or downloaded from the EDGAR Database on the SEC's web site at
http://www.sec.gov. You may also review and copy those documents
by visiting the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the Public Reference Room may be
obtained by calling the SEC at 202-942-8090. In addition, copies
of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public
Reference Section, 450 5th Street, N.W., Washington, D.C. 20549-
0102 or by e-mail request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of
Directors of the Fund, the Adviser is responsible for the
investment decisions and the placing of the orders for portfolio
transactions for the Fund. The Fund's portfolio transactions
occur primarily with issuers, underwriters or major dealers
acting as principals. Such transactions are normally on a net
basis which do not involve payment of brokerage commissions. The
cost of securities purchased from an underwriter usually includes
a commission paid by the issuer to the underwriters; transactions
with dealers normally reflect the spread between bid and asked
prices. Premiums are paid with respect to options purchased by
34
the Fund and brokerage commissions are payable with respect to
transactions in exchange-traded futures contracts.
The Fund has no obligation to enter into transactions in
portfolio securities with any dealer, issuer, underwriter or
other entity. In placing orders, it is the policy of the Fund to
obtain the best price and execution for its transactions. Where
best price and execution may be obtained from more than one
dealer, the Adviser may, in its discretion, purchase and sell
securities through dealers who provide research, statistical and
other information to the Adviser. Such services may be used by
the Adviser for all of its investment advisory accounts and,
accordingly, not all such services may be used by the Adviser in
connection with the Fund. The supplemental information received
from a dealer is in addition to the services required to be
performed by the Adviser under the Advisory Agreement, and the
expenses of the Adviser will not necessarily be reduced as a
result of the receipt of such information. Consistent with the
Conduct Rules of the National Association of Securities Dealers,
Inc., and subject to seeking best price and execution, the Fund
may consider sales of its shares as a factor in the selection of
dealers to enter into portfolio transactions with the Fund.
The Fund may deal in some instances in securities which
are not listed on a national stock exchange but are traded in the
over-the-counter market. The Fund may also purchase listed
securities through the third market, i.e., from a dealer which is
not a member of the exchange on which a security is listed. Where
transactions are executed in the over-the-counter market or third
market, the Fund will seek to deal with the primary market
makers; but when necessary in order to obtain the best price and
execution, it will utilize the services of others. In all cases,
the Fund will attempt to negotiate best execution.
The Fund may from time to time place orders for the
purchase or sale of securities with Sanford C. Bernstein & Co.,
LLC ("SCB & Co."), an affiliate of Alliance. In such instances,
the placement of orders would be consistent with the Fund's
objective of obtaining best execution and would not be dependent
upon the fact that SCB & Co. is an affiliate of Alliance. With
respect to orders placed by SCB & Co. for execution on a national
securities exchange, commissions received must conform to Section
17(e)(2)(A) of the 1940 Act and Rule 17e-1 thereunder, which
permit an affiliated person of a registered investment company
(such as the Fund), or any affiliated person of such person, to
receive a brokerage commission from such registered investment
company provided that such commission is reasonable and fair
compared to the commissions received by other brokers in
connection with comparable transactions involving similar
securities during a comparable period of time.
35
NET ASSET VALUE
The Fund's net asset value per share is determined as of
the close of trading (normally 4:00 p.m. Eastern time) on each
day the New York Stock Exchange is open for business. Net asset
value is calculated by taking the fair value of the Fund's total
assets, including interest or dividends accrued but not yet
collected, less all liabilities, and dividing by the total number
of shares outstanding. The result, rounded to the nearest cent,
is the net asset value per share.
In determining net asset value, expenses are accrued and
applied daily and securities and other assets for which market
quotations are available are valued at market value. The prices
of municipal bonds are provided by a pricing service and based on
the mean between the bid and asked price. When price quotes are
not readily available (which is usually the case for municipal
bonds), the pricing service establishes a fair market value based
on prices of comparable municipal bonds. All valuations are
subject to review by the Fund's Directors or their delegate,
Alliance.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS
GENERAL
Auction Agency Agreement. The Fund has entered into an
Auction Agency Agreement (the "Auction Agency Agreement") with
the Auction Agent (currently, The Bank of New York) which
provides, among other things, that the Auction Agent will follow
the Auction Procedures for purposes of determining the Applicable
Rate for Series M Preferred Shares, Series T Preferred Shares,
Series W Preferred Shares and Series TH Preferred Shares so long
as the Applicable Rate for shares of each such series is to be
based on the results of an Auction.
Broker-Dealer Agreements. Each Auction requires the
participation of one or more Broker-Dealers. The Auction Agent
has entered into agreements (collectively, the "Broker-Dealer
Agreements") with several Broker-Dealers selected by the Fund,
which provide for the participation of those Broker-Dealers in
Auctions for Preferred Shares. See "Broker-Dealers" below.
Securities Depository. The Depository Trust Company
("DTC") will act as the Securities Depository for the Agent
Members with respect to each series of Preferred Shares. One
certificate for all of the shares of each series of Preferred
Shares will be registered in the name of Cede, as nominee of the
Securities Depository. Such certificate will bear a legend to
the effect that such certificate is issued subject to the
36
provisions restricting transfers of Preferred Shares contained in
the Articles. The Fund will also issue stop-transfer
instructions to the transfer agent for shares of each series of
Preferred Shares to elect a majority of the Fund's Directors, as
described under "Description of Preferred Shares - Voting Rights"
in the Prospectus, Cede will be the holder of record of all
shares of each series of Preferred Shares, and owners of such
shares will not be entitled to receive certificates representing
their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company,
performs services for its participants (including the Agent
Members), some of whom (and/or their representatives) own DTC.
DTC maintains lists of its participants and will maintain the
positions (ownership interests) held by each such participant
(the "Agent Member") in Preferred Shares, whether for its own
account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in
connection with Auctions. In the absence of willful misconduct
or gross negligence on its part, the Auction Agent will not be
liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties
under the Auction Agency Agreement and will not be liable for any
error of judgment made in good faith unless the Auction Agent
will have been grossly negligent in ascertaining the pertinent
facts.
The Auction Agent conclusively may rely upon, as
evidence of the identities of the Existing Holders of Preferred
Shares, the Auction Agent's registry of Existing Holders, the
results of Auctions and notices from any Broker-Dealer (or other
Person, if permitted by the Fund) with respect to transfers
described under "The Auction - Secondary Market Trading and
Transfer of Preferred Shares" in the Prospectus and notices from
the Fund. The Auction Agent is not required to accept any such
notice for an Auction unless it is received by the Auction Agent
by 3:00 p.m., New York City time, on the Business Day preceding
such Auction.
The Auction Agent may terminate the Auction Agency
Agreement upon notice to the Fund on a date no earlier than 45
days after such notice. If the Auction Agent should resign, the
Fund will use its best efforts to enter into an agreement with a
successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may
remove the Auction Agent provided that prior to such removal the
Fund shall have entered into such an agreement with a successor
Auction Agent.
37
BROKER-DEALERS
The Auction Agent after each Auction for Preferred
Shares will pay to each Broker-Dealer, from funds provided by the
Fund, a service charge at the annual rate of .25 of 1% in the
case of any Auction immediately preceding a Rate Period of less
than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a
Rate Period of one year or longer, of the purchase price of
Preferred Shares placed by such Broker-Dealer at such Auction.
For the purposes of the preceding sentence, Preferred Shares will
be placed by a Broker-Dealer if such shares were (a) the subject
of Hold Orders deemed to have been submitted to the Auction Agent
by the Broker-Dealer and were acquired by such Broker-Dealer for
its own account or were acquired by such Broker-Dealer for its
customers who are Beneficial Owners or (b) the subject of an
Order submitted by such Broker-Dealer that is (i) a Submitted Bid
of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or
(ii) a Submitted Bid of a Potential Holder that resulted in such
Potential Holder purchasing such shares as a result of the
Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one
or more Broker-Dealer Agreements at any time, provided that at
least one Broker-Dealer Agreement is in effect after such
termination.
The Broker-Dealer Agreement provides that a Broker-
Dealer (other than an affiliate of the Fund) may submit Orders in
Auctions for its own account, unless the Fund notifies all
Broker-Dealers that they may no longer do so, in which case
Broker-Dealers may continue to submit Hold Orders and Sell Orders
for their own accounts. Any Broker-Dealer that is an affiliate
of the Fund may submit Orders in Auctions, but only if such
Orders are not for its own account. If a Broker-Dealer submits
an Order for its own account in any Auction, it might have an
advantage over other Bidders because it would have knowledge of
all Orders submitted by it in that Auction; such Broker-Dealer,
however, would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.
DESCRIPTION OF SHARES
Preferred Shares
The Articles authorize the issuance of up to 1,950
Series M Preferred Shares, up to 1,950 Series T Preferred Shares,
up to 1,950 Series W Preferred Shares and up to 1,950 Series TH
Preferred Shares. The Fund's Charter (the "Charter") provides
that the Board of Directors of the Fund may classify or
38
reclassify, from time to time, any unissued shares of stock of
the Fund, whether now or hereafter authorized, by setting,
changing or eliminating the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends
and other distributions, qualifications or terms and conditions
or rights to require redemption of the stock. Upon completion of
this offering, 20,471,667 Common Shares, $.001 par value per
share, and up to 7,800 Preferred Shares will be issued and
outstanding. The Board of Directors, without any action by the
shareholders of the Fund, may amend the Charter from time to time
to increase or decrease the aggregate number of shares of stock
or the number of shares of stock of any class or series that the
Fund has the authority to issue. Under Maryland law, the Fund's
shareholders generally are not liable for the Fund's debts or
obligations.
All Preferred Shares offered by the Prospectus will be
duly authorized, fully paid and nonassessable. Preferred
Shareholders are entitled to receive dividends when authorized by
the Board of Directors out of assets legally available for the
payment of dividends in accordance with the Charter, including
the Articles. They are also entitled to share ratably in the
Fund's assets legally available for distribution to the Fund's
shareholders in the event of the Fund's liquidation, dissolution
or winding up, after payment of or adequate provision for all of
the Fund's known debts and liabilities.
Each outstanding Preferred Share entitles the holder to
one vote on all matters submitted to a vote of shareholders of
the Fund, including the election of directors. There is no
cumulative voting in the election of directors, which means that
the holders of a majority of the outstanding shares entitled to
vote in the election of directors can elect all of the directors
then standing for election, and the holders of the remaining
shares will not be able to elect any directors.
Preferred Shareholders have no conversion, exchange,
sinking fund, redemption or appraisal rights and have no
preemptive rights to subscribe for any of the Fund's securities.
All Preferred Shares will have equal dividend, liquidation and
other rights.
Under Maryland law, a Maryland corporation generally
cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or
engage in similar transactions outside the ordinary course of
business, unless approved by the affirmative vote of shareholders
holding at least two-thirds of the shares entitled to vote on the
matter. However, a Maryland corporation may provide in its
charter for approval of these matters by a lesser percentage, but
not less than a majority of all of the votes entitled to be cast
39
on the matter. The Fund's Charter provides for the approval of
such actions by the concurrence of a majority of the aggregate
number of votes entitled to be cast on the matter, subject to the
applicable requirements of the 1940 Act, or rules, regulations or
orders issued by the SEC under the 1940 Act, and pursuant to
certain exceptions in the Charter.
Power to Reclassify Shares of Stock
The Charter authorizes the Board of Directors to
classify and reclassify any unissued shares into other classes or
series of stock. Prior to issuance of shares of each class or
series, the Board is required by Maryland law and by the Charter
to set the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption for each class or series.
Power to Issue Additional Shares of Stock
The Fund believes that the power to increase the
authorized shares of stock, to issue additional shares of stock
and to classify or reclassify unissued shares of stock and
thereafter to issue the classified or reclassified shares
provides it with increased flexibility in structuring possible
future financings and acquisitions and in meeting other needs
that might arise. These actions can be taken without shareholder
approval, unless shareholder approval is required by applicable
law or the rules of any stock exchange or automated quotation
system on which the Fund's securities may be listed or traded.
The Fund will hold annual meetings of shareholders.
Limited Issuance of Preferred Shares
Under the 1940 Act, the Fund is permitted to issue
Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured
immediately after issuance of the Preferred Shares. "Liquidation
value" means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition,
the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless the liquidation value of
the Preferred Shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of
such dividend or distribution) immediately after the
distribution. If the Fund sells all the Preferred Shares
discussed in the Prospectus, the liquidation value of the
Preferred Shares is expected to be approximately 40% of the value
of the Fund's total net assets. The Fund intends to purchase or
40
redeem Preferred Shares, if necessary, to keep that fraction
below one-half.
Distribution Preference
The Preferred Shares have complete priority over the
Common Shares as to distribution of assets.
Liquidation Preference
In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Fund, Preferred Shareholders will be entitled to receive a
preferential liquidating distribution (expected to equal the
original purchase price per share plus accumulated and unpaid
dividends thereon, whether or not earned or 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, Preferred Shareholders will not be
entitled to any further participation in any distribution of
assets by the Fund. A consolidation or merger of the Fund with
or into any trust or corporation or a sale of all or
substantially all of the assets of the Fund shall not be deemed
to be a liquidation, dissolution or winding up of the Fund.
Voting Rights
In connection with issuance of Preferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which
requires, among other things, that Preferred Shares be voting
shares. Except as otherwise provided in the Charter or the
Fund's Bylaws (together, the "Charter Documents") or otherwise
required by applicable law, Preferred Shareholders will vote
together with Common Shareholders as a single class.
In connection with the election of the Fund's Directors,
Preferred Shareholders, voting as a separate class, will also be
entitled to elect two of the Fund's Directors. The remaining
Directors will be elected by Common and Preferred Shareholders,
voting together as a single class. In the unlikely event that
two full years of dividends are not paid on the Preferred Shares,
the holders of the outstanding Preferred Shares, voting as a
separate class, will be entitled to elect a majority of the
Fund's Directors until all dividends in default have been paid or
declared and set apart for payment.
Unless a higher percentage is provided for under the
Charter Documents, the affirmative vote of the holders of a
majority of the outstanding Preferred Shares, voting as a
separate class, shall be required to approve any action requiring
a vote of security holders under Section 13(a) of the 1940 Act
41
including, among other things, changes in the Fund's investment
objective or fundamental policies. The affirmative vote of 75%
(which is higher than that required under Maryland law or the
1940 Act) of the outstanding Common Shares and Preferred Shares
voting separately by class, is required to convert the Fund from
a closed-end to an open-end fund. The class or series vote of
Preferred Shareholders described above shall in each case be in
addition to any separate vote of the requisite percentage of
Common Shares and Preferred Shares voting together as a single
class necessary to authorize the action in question.
The foregoing voting provisions will not apply with
respect to the Fund's Preferred Shares if, at or prior to the
time when a vote is required, such shares shall have been (1)
redeemed or (2) called for redemption and sufficient funds shall
have been deposited in trust to effect such redemption.
Redemption of Preferred Shares by the Fund
The Articles provide that, at certain times, the
Preferred Shares are redeemable by the Fund, in whole or in part,
at the original purchase price per share plus accumulated
dividends. Any redemption or purchase of Preferred Shares by the
Fund will reduce the leverage applicable to Common Shares, while
any resale of shares by the Fund will increase such leverage.
CERTAIN PROVISIONS IN THE CHARTER
Pursuant to the Charter, at the first annual meeting of
shareholders after this public offering, the Board of Directors
will be divided into three classes of Directors. The initial
terms of the first, second and third classes will expire in 2003,
2004 and 2005, respectively. Beginning in 2003, Directors of
each class will be chosen for three-year terms upon the
expiration of their current terms and each year one class of
Directors will be elected by the shareholders. The Fund believes
that classification of the Board of Directors will help to assure
the continuity and stability of our business strategies and
policies as determined by the Board of Directors.
The classified board provision could have the effect of
making the replacement of incumbent Directors more time-consuming
and difficult. At least two annual meetings of shareholders,
instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board
provision could increase the likelihood that incumbent Directors
will retain their positions. The staggered terms of Directors
may delay, defer or prevent a tender offer or an attempt to
change control of the Fund, even though the tender offer or
change in control might be in the best interest of the
shareholders.
42
Removal of Directors
A Director may be removed only for cause and only by the
affirmative vote of at least 75% of the votes entitled to be cast
in the election of such Director. This provision, when coupled
with the provision in the Charter authorizing the Board of
Directors to fill vacant directorships, precludes shareholders
from removing incumbent Directors except for cause and by a
substantial affirmative vote.
Amendment to the Charter
Certain provisions of the Charter, including its
provisions on classification of the Board of Directors and
removal of Directors, may be amended only by the affirmative vote
of the holders of not less than 75% of all of the votes entitled
to be cast on the matter. Other provisions of the Charter may be
amended by a majority of the aggregate number of votes entitled
to be cast on the amendment. The required vote shall be in
addition to the vote of the holders of shares of the Fund
otherwise required by law or any agreement between the Fund and
any national securities exchange.
Dissolution of the Company
Subject to Board approval, the liquidation or
dissolution of the Fund or an amendment to the Charter to
terminate the Fund must be approved by the affirmative vote of
the holders of not less than 75% of all of the votes entitled to
be cast on the matter. However, if a majority of the Continuing
Directors (as such term is defined in the Charter) approves the
liquidation or dissolution of the Fund, such action requires the
affirmative vote of a majority of the votes entitled to be cast.
Other Charter Provisions
The affirmative vote of 75% (which is higher than that
required under Maryland law or the 1940 Act) of the Fund's
outstanding Common Shares and Preferred Shares voting together as
a single class is required generally to authorize any of the
following involving a corporation, person or entity that is
directly, or indirectly through affiliates, the beneficial owner
of more than 5% of the outstanding shares of the Fund (a
"Principal Shareholder"), or to amend the provisions of the
Charter relating to such transactions:
(i) merger, consolidation or statutory share exchange
of the Fund with or into any Principal Shareholder;
(ii) the issuance of any securities of the Fund to any
Principal Shareholder for cash except upon (1) reinvestment of
43
dividends pursuant to a dividend reinvestment plan of the Fund or
(2) issuance of any securities of the Fund upon the exercise of
any stock subscription rights distributed by the Fund or (3) a
public offering by the Fund registered under the Securities Act;
(iii) 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
(iv) the sale, lease or exchange to the Fund or any
subsidiary thereof, 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 the purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-
month period).
As noted, the voting provisions described above could
have the effect of depriving Preferred Shareholders of an
opportunity to sell their Preferred Shares at a premium over
prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or
similar transaction. In the view of the Fund's Board of
Directors, however, these provisions offer several possible
advantages, including: (1) requiring persons seeking control of
the Fund to negotiate with its management regarding the price to
be paid for the amount of Preferred Shares required to obtain
control; (2) promoting continuity and stability; and (3)
enhancing the Fund's ability to pursue long-term strategies that
are consistent with its investment objective and management
policies. The Board of Directors has determined that the voting
requirements described above are in the best interests of the
Fund and its shareholders generally.
The foregoing is intended only as a summary and is
qualified in its entirety by reference to the full text of the
Charter Documents, which have been filed as exhibits to the
Fund's registration statement on file with the SEC.
Liability of Directors
Maryland law permits a Maryland corporation to include
in its charter a provision limiting the liability of its
directors and officers to the corporation and its shareholders
for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or
services or (b) active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. The
44
Charter contains such a provision which eliminates directors' and
officers' liability to the maximum extent permitted by Maryland
law. Nothing in the Charter, however, protects a Director
against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his
office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such
its 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 prices that will be a function of
several factors, including dividend levels (which are in turn
affected by expenses), net asset value, quality, average maturity
and call protection of its portfolio securities, price, dividend
stability, relative demand for and supply of such shares in the
market, general market and economic conditions and other factors.
Shares of a closed-end investment company may frequently trade at
prices lower than net asset value. The Fund's Board of Directors
will regularly monitor the relationship between the market price
and net asset value of the Common Shares. If the Common Shares
were to trade at a substantial discount to net asset value for an
extended period of time, the Fund may consider the repurchase by
the Fund of its Common Shares or the making of a tender offer for
such shares. The Fund has no present intention to repurchase its
Common Shares.
Notwithstanding the foregoing, at any time when
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 net
asset value 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).
Subject to its investment limitations, 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 by the Fund would have to comply with the Securities
Exchange Act of 1934, as amended, and the 1940 Act and the rules
and regulations thereunder.
45
The Fund's Board of Directors may also from time to time
consider submitting for a shareholder vote a proposal to convert
the Fund to an open-end investment company in an attempt to
reduce or eliminate the significant market discounts from net
asset value. The Charter requires the affirmative vote or
consent of holders of at least seventy-five percent (75%) of each
class of the Fund's shares entitled to vote on the matter to
authorize a conversion of the Fund from a closed-end to an open-
end investment company. This seventy-five percent (75%)
shareholder approval requirement is higher than is required under
the 1940 Act.
If the Fund converted to an open-end company, it would
be required to redeem all Preferred Shares then outstanding
(requiring in turn that it liquidate a portion of its investment
portfolio), and the Fund's Common Shares likely would no longer
be listed on the Exchange. Shareholders of an open-end
investment company may require the company to redeem their shares
on any business day (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the
time of redemption. In order to avoid maintaining large cash
positions or liquidating favorable investments to meet
redemptions, open-end companies typically engage in a continuous
offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate
portfolio management.
The repurchase by the Fund of its shares at prices below
net asset value will result in an increase in the net asset value
of those shares that remain outstanding. However, there can be
no assurance that share repurchases or tender offers at or below
net asset value 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 at net asset value from time to time, or that the Fund may
be converted to an open-end company, may reduce any spread
between market price and net asset value that might otherwise
exist.
In addition, a purchase by the Fund of its shares would
decrease the Fund's total assets which would likely have the
effect of increasing the Fund's expense ratio and may also
require the redemption of a portion of any outstanding Preferred
Shares in order to maintain coverage ratios. 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. See the Fund's
Prospectus under "Risks--Leverage Risk."
46
Before deciding whether to take any action if the Fund's
Common Shares trade substantially below net asset value, the
Board of Directors would consider all factors that it deemed
relevant. Such factors may include the extent and duration of
the discount, the liquidity of the Fund's portfolio, the
relationship of the market price of the Common Shares to net
asset value, the extent to which the Fund's capital structure is
leveraged and the possibility of re-leveraging, the spread, if
any, between the yields on securities in the Fund's portfolio and
interest and dividend charges on Preferred Shares issued by the
Fund, the impact of any action that might be taken on the Fund or
its shareholders and general market and economic considerations.
Based on these considerations, even if the Fund's shares should
trade at a substantial discount for a significant period of time,
the Board of Directors may determine that no action should be
taken.
TAX MATTERS
Taxation of the Fund. The Fund intends to qualify each
year as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). In order
to qualify for the special tax treatment accorded regulated
investment companies and their shareholders, the Fund must, among
other things:
(a) derive at least 90% of its gross income from
dividends, interest, payments with respect to
certain securities loans, gains from the sale of
stock, securities or foreign currencies, or other
income (including but not limited to gains from
options, futures, or forward contracts) derived
with respect to its business of investing in such
stock, securities, or currencies;
(b) distribute with respect to each taxable year at
least 90% of the sum of its taxable net investment
income (which includes the excess, if any, of net
short-term capital gains over net long-term capital
losses) and its net tax-exempt income for such
year; and
(c) diversify its holdings so that, at the end of each
quarter of the Fund's taxable year, (i) at least
50% of the market value of the Fund's assets is
represented by cash and cash items, U.S. Government
securities, securities of other regulated
investment companies, and other securities limited
in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and
not more than 10% of the outstanding voting
47
securities of such issuer, and (ii) not more than
25% of the value of the Fund's assets is invested
in the securities (other than those of the U.S.
Government or other regulated investment companies)
of any one issuer or of two or more issuers which
the Fund controls and which are engaged in the
same, similar, or related trades or businesses.
If the Fund qualifies as a regulated investment company that is
accorded special tax treatment, the Fund will not be subject to
federal income tax on income distributed in a timely manner to
its shareholders in the form of dividends (including capital gain
dividends).
If the Fund failed to qualify as a regulated investment
company accorded special tax treatment in any taxable year, the
Fund would be subject to tax on its taxable income at corporate
rates, and all distributions from earnings and profits, including
any distributions of net tax-exempt income and net long-term
capital gains, would be taxable to shareholders as ordinary
income. Such distributions generally would be eligible for the
dividends received deduction in the case of corporate
shareholders. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest
and make substantial distributions before requalifying as a
regulated investment company that is accorded special tax
treatment.
The Fund may retain for investment its net capital gain.
However, if the Fund retains any net capital gain or any net
investment income, it will be subject to tax at regular corporate
rates on the amount retained. The Fund intends to distribute at
least annually to its shareholders all or substantially all of
its net tax-exempt interest and any net investment income and net
capital gain.
If the Fund fails to distribute in a calendar year at
least an amount equal to the sum of 98% of its ordinary income
for such year and 98% of its capital gain net income for the one-
year period ending October 31 of such calendar year, plus any
undistributed ordinary income and capital gain net income from
previous years, the Fund will be subject to a 4% excise tax on
the undistributed amounts. For this purpose, any income or gain
retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year end. A dividend paid
to shareholders in January of a year generally is deemed to have
been paid by the Fund on December 31 of the preceding year, if
the dividend was declared and payable to shareholders of record
on a date in October, November or December of that preceding
year. The Fund intends generally to make distributions
sufficient to avoid imposition of the 4% excise tax.
48
If at any time when Preferred Shares are outstanding the
Fund does not meet applicable asset coverage requirements, it
will be required to suspend distributions to Common Shareholders
until the requisite asset coverage is restored. Any such
suspension may cause the Fund to pay the 4% federal excise tax
and may, in certain circumstances, prevent the Fund from
qualifying for treatment as a regulated investment company. The
Fund may redeem Preferred Shares in an effort to comply with the
distribution requirement applicable to regulated investment
companies and to avoid income and excise taxes. There can be no
assurance, however, that any such action would achieve such
objectives.
Fund Distributions. Distributions from the Fund (other
than exempt-interest dividends, as discussed below) will be
taxable to shareholders as ordinary income to the extent derived
from net investment income (which includes any net short-term
capital gains). Distributions of net capital gain (that is, the
excess of net gains from the sale of capital assets held more
than one year over net losses from the sale of capital assets
held for not more than one year) will be taxable to shareholders
as long-term capital gain, regardless of how long a shareholder
has held the shares in the Fund. The Fund's distributions will
not qualify for the dividends received deduction for corporate
shareholders.
Exempt-interest dividends. The Fund will be qualified
to pay exempt-interest dividends to its shareholders only if, at
the close of each quarter of the Fund's taxable year, at least
50% of the total value of the Fund's assets consists of
obligations the interest on which is exempt from federal income
tax under Code Section 103(a). Distributions from the Fund will
constitute exempt-interest dividends to the extent of the Fund's
tax-exempt interest income (net of expenses and amortized bond
premium). Distributions that the Fund properly designates as
exempt-interest dividends are treated as interest excludable from
shareholders' gross income for federal income tax purposes,
although such distributions are required to be reported on the
shareholders' federal income tax returns and may be taxable for
state and local purposes. Because the Fund intends to qualify to
pay exempt-interest dividends, the Fund may be limited in its
ability to enter into taxable transactions involving forward
commitments, repurchase agreements, financial futures and options
contracts on financial futures, tax-exempt bond indices and other
assets.
The Fund designates distributions made to the share
classes as consisting of a portion of each type of income
distributed by the Fund. The portion of each type of income
deemed received by each class of shareholders is equal to the
portion of total Fund dividends received by such class for that
49
taxable year. Thus, the Fund will designate dividends paid as
exempt-interest dividends in a manner that allocates such
dividends between the Preferred and Common Shareholders in
proportion to the total dividends paid to each class during or
with respect to the taxable year, or otherwise as required by
applicable law. Long-term capital gain distributions and other
income subject to regular federal income tax will similarly be
allocated between the two (or more) classes.
Dividend and capital gains distributions will be taxable
as described above whether received in cash or in shares. A
shareholder whose distributions are reinvested in shares will be
treated as having received a dividend equal to the fair market
value of the new shares issued to the shareholder, or the amount
of cash allocated to the shareholder for the purchase of shares
on its behalf.
Part or all of the interest on indebtedness, if any,
incurred or continued by a shareholder to purchase or carry
shares of the Fund paying exempt-interest dividends is not
deductible. Under rules used by the Internal Revenue Service (the
"Service") to determine when borrowed funds are considered used
for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with
borrowed funds even though such funds are not directly traceable
to the purchase of shares.
The Fund may invest in tax-exempt municipal securities
subject to the alternative minimum tax ("AMT"). Under current
federal income tax law, (i) interest on tax-exempt municipal
securities issued after August 7, 1986 which are "specified
private activity bonds" and the proportionate share of any
exempt-interest dividend paid by a regulated investment company
which receives interest from such specified private activity
bonds will be treated as an item of tax preference for purposes
of the AMT imposed on individuals and corporations although for
regular federal income tax purposes such interest will remain
fully tax-exempt, and (ii) interest on all tax-exempt obligations
and all exempt-interest dividends will be included in "adjusted
current earnings" of corporations for AMT purposes.
In general, exempt-interest dividends, if any,
attributable to interest received on certain private activity
obligations and certain industrial development bonds will not be
tax-exempt to any shareholders who are "substantial users,"
within the meaning of Section 147(a) of the Code, of the
facilities financed by such obligations or bonds or who are
"related persons" of such substantial users.
The Fund will inform investors within 60 days of the
Fund's taxable year-end of the percentage of its income
50
distributions designated as tax-exempt. The percentage is
applied uniformly to all distributions made during the year. The
percentage of income designated as tax-exempt for any particular
distribution may be substantially different from the percentage
of the Fund's income that was tax-exempt during the period
covered by the distribution.
The Fund will allocate distributions to shareholders
that are treated as tax-exempt interest and as long-term capital
gain and ordinary income, if any, among the Common Shares and
Preferred Shares in proportion to total dividends paid to each
class for the year.
Hedging Transactions. If the Fund engages in hedging
transactions, including hedging transactions in options, futures
contracts, and straddles, or other similar transactions, it will
be subject to special tax rules (including constructive sale,
mark-to-market, straddle, wash sale, and short sale rules), the
effect of which may be to accelerate income to the Fund, defer
losses to the Fund, cause adjustments in the holding periods of
the Fund's securities, affect whether gains and losses realized
by the Fund are ordinary or capital, convert long-term capital
gains into short-term capital gains or convert short-term capital
losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of
distributions to shareholders. Income earned as a result of the
Fund's hedging activities will not be eligible to be treated as
exempt-interest dividends when distributed to shareholders. The
Fund will endeavor to make any available elections and entries in
its books and records pertaining to such transactions in a manner
believed to be in the best interests of the Fund and its
shareholders.
Return of Capital Distributions. If the Fund makes a
distribution to you in excess of its current and accumulated
earnings and profits in any taxable year, the excess distribution
will be treated as a return of capital to the extent of your tax
basis in your shares, and thereafter as capital gain. A return
of capital is not taxable, but it reduces your tax basis in your
shares, thus reducing any loss or increasing any gain on a
subsequent taxable disposition by you of your shares.
Dividends and distributions on the Fund's shares are
generally subject to federal income tax as described herein ,
even though such dividends and distributions may economically
represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares
purchased at a time when the Fund's net asset value reflects
gains that are either unrealized, or realized but not
distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects
51
unrealized losses. Distributions are taxable to a shareholder
even if they are paid from income or gains earned by the Fund
prior to the shareholder's investment (and thus included in the
price paid by the shareholder).
Securities Issued or Purchased at a Discount. The
Fund's investment in securities issued at a more than de minimis
discount and certain other obligations will (and investments in
securities purchased at a discount may) require the Fund to
accrue and distribute income not yet received. In order to
generate sufficient cash to make the requisite distributions, the
Fund may be required to sell securities in its portfolio that it
otherwise would have continued to hold.
Sale or Redemption of Shares. The sale, exchange or
redemption of Fund shares will give rise to gain or loss in an
amount equal to the difference between the proceeds of the sale,
exchange or redemption and the shareholder's adjusted tax basis
in the shares. Any gain or loss realized upon a taxable
disposition of shares held as a capital asset will be treated as
long-term capital gain or loss if the shares have been held for
more than 12 months. Otherwise, the gain or loss on the taxable
disposition of Fund shares held as a capital asset will be
treated as short-term capital gain or loss. However, if a
shareholder sells shares at a loss within six months of purchase,
any loss will be disallowed for federal income tax purposes to
the extent of any exempt-interest dividends received on such
shares. In addition, any loss realized upon a taxable
disposition of shares held for six months or less but not
disallowed as provided in the preceding sentence will be treated
as long-term, rather than short-term, to the extent of any long-
term capital gain distributions received by the shareholder with
respect to the shares. All or a portion of any loss realized
upon a taxable disposition of Fund shares will be disallowed if
other substantially identical shares of the Fund are purchased
within 30 days before or after the disposition. In such a case,
the basis of the newly purchased shares will be adjusted to
reflect the disallowed loss.
If the Fund redeems some but not all of the Preferred
Shares held by a Preferred Shareholder and such shareholder is
treated as having received a taxable dividend upon such
redemption, there is a remote risk that non-redeeming Preferred
Shareholders will be treated as having received taxable
distributions from the Fund.
Backup Withholding. The Fund generally is required to
withhold and remit to the U.S. Treasury a percentage of the
taxable dividends and other distributions paid to any non-
corporate shareholder who fails to properly furnish the Fund with
a correct taxpayer identification number (TIN), who has under-
52
reported dividend or interest income, or who fails to certify to
the Fund that he or she is not subject to such withholding.
Backup withholding is not an additional tax; any amounts withheld
may be credited against the shareholder's U.S. federal income tax
liability.
General. The federal income tax discussion set forth
above is for general information only. Prospective investors
should consult their tax advisers regarding the specific federal
tax consequences of purchasing, holding, and disposing of shares
of the Fund, as well as the effects of state, local and foreign
tax law and any proposed tax law changes.
EXPERTS
The Statement of Assets and Liabilities of the Fund as
of January 23, 2002, incorporated by reference into this SAI, has
been so included in reliance on the report of Ernst & Young LLP,
independent auditors, given on their authority as experts in
auditing and accounting. The principal business address of Ernst
& Young LLP is 787 Seventh Avenue, New York, New York 10019.
REGISTRATION STATEMENT
A Registration Statement on Form N-2, relating to the
shares of the Fund offered hereby, has been filed by the Fund
with the SEC, Washington, D.C. The Fund's Prospectus and this
SAI 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 or to be offered hereby, reference is made to
the Fund's Registration Statement. Statements contained in the
Fund's Prospectus and this SAI 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. Copies of the Registration Statement may be inspected
without charge at the SEC's principal office in Washington, D.C.,
and copies of all or any part thereof may be obtained from the
SEC upon the payment of certain fees prescribed by the SEC.
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities of the Fund
dated January 23, 2002, and the report of Ernst & Young LLP
thereon dated January 24, 2002, as included in the Fund's
Statement of Additional Information dated January 28, 2002
relating to the Common Shares, is hereby incorporated by
reference into this SAI.
53
ALLIANCE NATIONAL MUNICIPAL INCOME FUND
PORTFOLIO OF INVESTMENTS
March 8, 2002 (unaudited)
Standard
& Poor's Principal
Rating Amount Value
(000)
-----------------------------------------------------------------------------
MUNICIPAL BONDS-112.5%
Long Term Municipal Bonds-84.9%
Alabama-4.3%
Jefferson Cnty AL Swr Rev
Cap Impt Wts Ser A
5.375%, 2/01/36 AAA $12,405 $12,337,145
-----------------------------------------------------------------------------
Arizona-0.6%
Mohave Cnty AZ Indl Dev Auth
Citizens Utils Co Projs Ser B
5.80%, 11/15/28 A 2,000 1,721,480
-----------------------------------------------------------------------------
District of Columbia-3.7%
District Columbia TOB Fin Corp
Asset Bkd Bds
6.50%, 5/15/33 A 7,220 7,725,617
District Columbia TOB Settle
Asset Bkd Bds
6.75%, 5/15/40 A 2,750 2,909,335
10,634,952
-----------------------------------------------------------------------------
Florida-14.0%
Fiddlers Creek Cmnty Dev Dist
Ser A
6.875%, 5/01/33 NR 10,120 10,003,620
Fiddlers Creek Cmnty Dev Dist
Ser B
6.625%, 5/01/33 NR 5,330 5,267,106
Florida Hsg Fin Agy
Hsg Brittany Rosemont Ser G1
6.25%, 7/01/35 AAA 810 840,148
Florida Hsg Fin Agy
Hsg Landings Boot Ranch Ser K
6.10%, 11/01/35 AAA 1,370 1,414,347
Florida Hsg Fin Corp Rev
Hsg Westminster Apts Ser E 1
5.40%, 4/01/42 AAA 3,000 2,942,040
Florida Hsg Fin Corp Rev
Hsg Westlake Apts Ser D 1
54
5.40%, 3/01/42 AAA 8,780 8,555,320
FSU Finl Assistance Inc FL Edl
FSU Fins Assist
5.00%, 10/01/31 AAA 5,000 4,685,200
Hamal FL Cmnty Dev Dist
6.75%, 5/01/31 NR 2,500 2,483,950
Miromar Lakes Cmnty Dev Dist
Ser B
7.25%, 5/01/12 NR 2,000 2,099,260
Pinellas Cnty Fl Hsg Fin Auth
AMT Multi Cnty Prog A
5.40%, 3/01/32(a) Aaa 1,680 1,653,002
39,943,993
-----------------------------------------------------------------------------
Iowa-3.4%
Iowa Fin Auth Sngl Fam Rev
AMT Mtg Bkd Secs Prog Ser A
5.40%, 7/01/32 AAA 2,200 2,161,170
Tobacco Settlement Auth IA
Asset Bkd Ser B
5.60%,6/01/35 A 8,250 7,480,935
9,642,105
-----------------------------------------------------------------------------
Louisiana-2.1%
Louisiana Hsg Fin Agy Mtg Rev
Single Family Home Ownership C
4.00%, 6/01/33(a) Aaa 4,115 4,072,245
Tobacco Settlement Fing Corp
Asset Bkd Ser B
5.875%, 5/15/39 A 2,000 1,911,360
5,983,605
-----------------------------------------------------------------------------
Massachusetts-1.4%
Massachusetts St Health & Edl
Cape Cod Healthcare Ser C
5.25%, 11/15/31 AA 2,100 2,017,533
Massachusetts St Health & Edl
Berkshire Hlth Sys Ser E
5.70%, 10/01/25 AA 2,000 2,018,460
4,035,993
-----------------------------------------------------------------------------
Michigan-2.3%
Detroit MI Loc Dev Fin Auth
Sub Tax Increment Ser A
5.50%, 5/01/21 BB- 1,820 1,558,284
Saginaw MI Hosp Fin Auth Rev
Covenant Med Ctr Ser F
6.50%, 7/01/30 A 4,710 4,899,295
----------------------------------------------------------------------------
Missouri-1.5%
Missouri St Hsg Dev Commn Sgl
55
AMT Homeownership Ln Prog A 1
4.00%, 9/01/32 AAA 4,200 4,173,414
-----------------------------------------------------------------------------
Nevada-4.0%
Clark Cnty NV Arpt Rev
Sub Lien Ser B
5.25%, 7/01/34 AAA 11,920 11,540,944
-----------------------------------------------------------------------------
New Hampshire-1.7%
New Hamsphire Health & Ed Facs
Healthcare Sys Covenant Hlth
6.125%, 7/01/31 A- 5,000 4,863,600
-----------------------------------------------------------------------------
Ohio-7.8%
Cleveland Cuyahoga Cnty OH
Spl Assmt Tax Increment
7.35%, 12/01/31 NR 7,800 7,859,592
Ohio Hsg Fin Agy Mtg Rev
AMT Residential Ser D
6.05%, 3/01/31(a) Aaa 14,000 14,359,380
22,218,972
-----------------------------------------------------------------------------
Pennsylvania-1.5%
Philadelphia PA Hosps & Higher
Facs Auth Hosp Rev Templ Univ
6.625%, 11/15/23 BBB 3,250 3,261,635
Southeastern PA Transn Auth PA
Ser A
4.75%, 3/01/29 AAA 1,000 912,180
-----------------------------------------------------------------------------
Puerto Rico-2.6%
Puerto Rico Pub Fin Corp
Commwlth Approp Ser A
5.00%, 8/01/31 AAA 7,875 7,638,671
-----------------------------------------------------------------------------
South Carolina-1.4%
Tobacco Settlement Rev Mgmt Au
Ser B
6.375%, 5/15/28 A 3,850 3,937,741
-----------------------------------------------------------------------------
Texas-19.1%
Bexar Cnty TX Hsg Fin Corp MF
Doral Club & Sutton Hse Apt A
5.55%, 10/01/36(a) Aaa 15,000 15,017,250
Dallas Fort Worth TX Intl
Ref & Impt Jt Ser A
5.50%, 11/01/35 AAA 10,000 9,833,700
Houston TX Wtr & Swr Sys Rev
Ref Jr Lien Ser A
5.125%, 12/01/31 AAA 15,000 14,434,500
San Antonio TX Arpt Sys Rev Impt
56
5.25%, 7/01/27 AAA 6,250 5,988,000
Texas St
AMT Ser A
5.50%, 8/01/41 AA 9,470 9,364,031
54,637,481
-----------------------------------------------------------------------------
Virginia-2.9%
Fauquier Cnty VA Indl Dev Auth
5.25%, 10/01/31 AA 8,500 8,203,095
-----------------------------------------------------------------------------
Washington-3.3%
Twenty Fifth Ave Pptys WA
5.25%, 6/01/33 AAA 9,750 9,558,510
-----------------------------------------------------------------------------
Wisconsin-7.3%
Wisconsin Hsg & Economic Dev
Ser A
5.50%, 9/01/32 AA 10,000 9,854,400
Wisconsin St Health & Edl Facs
Ministry Health Care Ser A
5.25%, 2/15/32 AAA 11,500 11,112,565
20,966,965
Total Long Term Municipal Bonds
(Cost $245,223,557) 242,670,060
-----------------------------------------------------------------------------
Short Term Municipal Notes-(b)27.6%
Alaska-0.2%
Valdez AK Marine Term Rev
Ref Exxon Pipeline Co Pj A
1.20%, 12/01/33 A-1+ 500 500,000
-----------------------------------------------------------------------------
Alabama-1.7%
Stevenson AL Indl Dev Brd
Ref Mead Corp Proj Ser A
1.40%, 10/01/35 A-1+ 4,900 4,900,000
-----------------------------------------------------------------------------
Arizona-1.3%
Maricopa Cnty AZ Pollutn Ctl
Adj Rfe Ariz Pub Svc Co Ser C
1.30%, 5/01/29 A-1+ 3,600 3,600,000
-----------------------------------------------------------------------------
Colorado-2.5%
Denver CO Health & Hosp Auth
Adj Ser B
1.30%, 12/01/31 A-1 7,000 7,000,000
-----------------------------------------------------------------------------
Florida-2.5%
Martin Cnty FL Pollutn Ctl Rev
Ref FL Pwr & Light Co Pj
1.35%, 7/15/22 A-1 7,100 7,100,000
57
-----------------------------------------------------------------------------
Georgia-1.3%
Putnam Cnty GA Dev Auth Poll
Daily GA Pwr Co Plt Branch Pj
1.30%, 3/01/24 A-1 3,625 3,625,000
-----------------------------------------------------------------------------
Idaho-1.9%
Idaho Hsg & Fin Assn Hsg Rev
Var Balmoral Apts Pj
1.45%, 5/01/32 A-1 3,200 3,200,000
Idaho Hsg & Fin Ssn Hsg Rev
Balmoral Apts II Dev
1.45%, 4/01/33/(a) Aa3 2,100 2,100,000
-----------------------------------------------------------------------------
Indiana-1.1%
Indiana Hlth Fac Fing Auth Rev
Fayette Mem Hosp Assn A
1.30%, 10/01/32 A-1+ 3,245 3,245,000
-----------------------------------------------------------------------------
Iowa-2.0%
Iowa Fin Auth Rev
Adj Burlington Med Ctr
1.30%, 6/01/27 A-1 3,750 3,750,000
Iowa Higher Ed Ln Auth Rev
Private College Fac
1.25%, 11/01/32 A-1+ 2,000 2,000,000
5,750,000
-----------------------------------------------------------------------------
Louisiana-1.8%
Louisiana St Offshore Term
Aces Loop IST Conv 2/1/94
1.25%, 9/01/06 A-1+ 5,250 5,250,000
-----------------------------------------------------------------------------
Michigan-3.4%
Eastern MI Univ Revs
Ref Gen
1.30%, 6/01/27 A-1+ 3,700 3,700,000
Michigan St Strategic Ltd Oblg
Var Dow Chemical Co Proj
1.45%, 12/01/14(a) P-1 6,100 6,100,000
-----------------------------------------------------------------------------
Ohio-0.9%
Ohio St Air Quality Dev Auth Rev
1.40%, 9/01/18 AA 2,600 2,600,000
-----------------------------------------------------------------------------
Pennsylvania-2.3%
Pennsylvania Hsg Fin Agy
Single Fam Mtg Mun Tr Rcpts
1.30%, 4/01/33 NR 6,500 6,500,000
-----------------------------------------------------------------------------
Washington-3.6%
58
Washington St Hsg Fin Commn
Var Mill Pointe Apts
1.45%, 1/01/30 A-1 5,725 5,725,000
Washington St Nonprofit Hsg
Nonprofit Hsg Rev
1.30%, 1/01/21 A-1 3,400 3,400,000
Washington St Nonprofit Hsg
Rockwood Retirement Prog A
1.30%, 1/01/30(a) VMIG-1 1,300 1,300,000
10,425,000
-----------------------------------------------------------------------------
Wisconsin-1.1%
Wisconsin St Health & Edl Facs
Adj Gundersen Lutheran Ser A
1.30%, 12/01/15 A-1+ 2,000 2,000,000
Wisconsin St Health & Edl Facs
Gundersen Lutheran Ser B
1.30%, 12/01/29 A-1+ 1,170 1,170,000
3,170,000
Total Short Term Municipal Notes
(Cost $78,765,000) 78,765,000
-----------------------------------------------------------------------------
Total Investments-112.5%
(Cost $323,988,557) 321,435,060
Other assets less liabilities -
(12.5)% (35,748,179)
Net Assets-100% $285,686,881
-----------------------------------------------------------------------------
(a) Moody's or Fitch Rating.
(b) Variable Rate Demand Notes (VRDN) are instruments whose
interest rates change on a specific date (such as coupon
date or interest payment date) or whose interest rates vary
with changes in a designated base rate (such as the prime
interest rate). This instrument is payable on demand and is
secured by letters of credit or other credit support
agreements from major banks.
See notes to financial statements.
59
STATEMENT OF ASSETS & LIABILITIES
March 8, 2002 (unaudited)
Assets
Investments in securities, at value
(cost $323,988,557) $321,435,060
Interest receivable 2,325,976
Receivable for investment securities sold 1,800,705
Total assets 325,561,741
-----------------------------------------------------------------
Liabilities
Due to custodian 150,477
Payable for investment securities purchased 39,391,730
Payable for fund offering costs 283,329
Advisory fee payable 31,597
Accrued expenses and other liabilities 17,727
Total liabilities 39,874,860
Net Assets $285,686,881
-----------------------------------------------------------------
Composition of Net Assets
Common stock, at par $20,107
Additional paid-in capital 287,404,698
Undistributed net investment income 815,573
Net unrealized depreciation of investments (2,553,497)
$285,686,881
Net Assets $285,686,881
-----------------------------------------------------------------
Shares of common stock outstanding 20,106,667
Net asset value per share $14.21
-----------------------------------------------------------------
See notes to financial statements.
60
STATEMENT OF OPERATIONS
January 29, 2002(a) to March 8, 2002 (unaudited)
Investment Income
Interest $986,983
--------
Expenses
Advisory fee $197,062
Custodian 16,318
Audit and legal 12,751
Printing 8,241
Transfer agency 5,617
Directors' fees 3,157
Miscellaneous 1,640
-------
Total expenses 244,786
Less: expenses waived by the Adviser
(see Note B) (73,376)
--------
Net expenses 171,410
-------
Net investment income 815,573
Unrealized Loss on Investments
Net change in unrealized appreciation/depreciation
of investments (2,553,497)
-----------
Net Decrease in Net Assets from
Operations $(1,737,924)
(a) Commencement of operations.
See notes to financial statements.
61
STATEMENT OF CHANGES IN NET ASSETS
January 29, 2002(a)
to March 8, 2002
(unaudited)
------------------
Increase (Decrease) in Net Assets
from Operations
Net investment income $815,573
Net change in unrealized appreciation/
depreciation of investments (2,553,497)
-----------------------------------------------------------------
Net decrease in net assets from operations (1,737,924)
Common Stock Transactions
Net increase 287,324,800
-----------------------------------------------------------------
Total increase 285,586,876
Net Assets
Beginning of period 100,005
End of period (including undistributed net
investment income of $815,573) $285,686,881
-----------------------------------------------------------------
(a) Commencement of operations.
See notes to financial statements.
62
NOTES TO FINANCIAL STATEMENTS
March 8, 2002 (unaudited)
NOTE A
Significant Accounting Policies
Alliance National Municipal Income Fund, Inc. (the "Fund"), was
incorporated in the state of Maryland on November 9, 2001 and is
registered under the Investment Company Act of 1940 as a non-
diversified, closed-end management investment company. Prior to
commencement of operations on January 29, 2002, the Fund had no
operations other than the sale to Alliance Capital Management
L.P. of 6,667 shares for the amount of $100,005 on January 23,
2002. The financial statements have been prepared in conformity
with accounting principles generally accepted in the United
States, which require management to make certain estimates and
assumptions that affect the reporting amounts of assets and
liabilities in the financial statements and amounts of income and
expenses during the reporting period. Actual results could differ
from those estimates. The following is a summary of significant
accounting policies followed by the Fund.
1. Security Valuation
Portfolio securities traded on a national securities exchange are
generally valued at the last reported sale price or if there was
no sale on such a day, the last bid price quoted on such day. If
no bid prices are quoted, then the security is valued at the mean
of the bid and asked prices as obtained on that day from one or
more dealers regularly making a market in that security.
Securities traded on the over-the-counter market are valued at
the mean of the closing bid and ask prices provided by two or
more dealers regularly making a market in such securities. U.S.
government securities and other debt securities which mature in
60 days or less are valued at amortized cost unless this method
does not represent fair value. Securities for which market
quotations are not readily available are valued at fair value as
determined in good faith by, or in accordance with procedures
approved by, the Board of Directors. Fixed income securities may
be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of
such securities.
2. Taxes
It is the Fund's policy to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its investment company taxable income and net
realized gains, if any, to shareholders. Therefore, no provisions
for federal income or excise taxes are required.
63
3. Organization Expenses and Offering Costs
The Fund has incurred $603,200, an amount equal to $.03 per share
of common shares issued, for offering costs of which were charged
to paid-in capital. As of March 8, 2002, the Fund has paid an
amount equal to $319,871 of these expenses and an amount equal to
$283,329 remains outstanding. Alliance Capital Management L.P.,
the Fund's investment adviser, has agreed to pay any additional
organization expenses and offering costs that exceed the $.03 per
share amount.
4. Investment Income and Investment Transactions
Interest income is accrued daily. Investment transactions are
accounted for on the date the securities are purchased or sold.
Investment gains and losses are determined on the identified cost
basis. The Fund amortizes premiums and accretes original issue
discounts and market discounts as adjustments to interest income.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the
ex-dividend date. Income and capital gains distributions are
determined in accordance with federal tax regulations and may
differ from those determined in accordance with accounting
principles generally accepted in the United States. To the
extent these differences are permanent, such amounts are
reclassified within the capital accounts based on their federal
tax basis treatment; temporary differences do not require such
reclassification.
NOTE B
Advisory Fee
Under the terms of an investment advisory agreement, the Fund
pays Alliance Capital Management L.P. (the "Adviser") an advisory
fee payable monthly, in a maximum amount equal to .65% of the
Fund's average daily net assets. The Adviser has agreed to waive
a portion of its fees or reimburse the Fund for expenses in the
amount of .25% of average daily net assets for the first 5 full
years of the Fund's operations, .20% of average daily net assets
in year 6, .15% in year 7, .10% in year 8, and .05% in year 9.
For the period ended March 8, 2002, the amount of such fee waived
was $73,376.
NOTE C
Investment Transactions
Purchases and sales of investment securities (excluding short
term investments and U.S. government securities) aggregated
$288,937,529 and $8,610,809, respectively, for the period ended
March 8, 2002. There were no purchases or sales of U.S.
government and government agency obligations for the period ended
March 8, 2002.
64
At March 8, 2002, the cost of investments for federal income tax
purposes was $323,988,557. Accordingly, gross unrealized
appreciation of investments was $23,530 and gross unrealized
depreciation of investments was $2,577,027 resulting in net
unrealized depreciation of $2,553,497.
NOTE D
Common Stock
There are 2,000,000,000 shares of $.001 par value common stock
authorized. Of the 20,106,667 shares outstanding at March 8,
2002, the Adviser owned 6,667 shares. In addition to the shares
issued to the Adviser, an initial public offering of the Fund's
shares resulted in the issuance of 18,900,000 shares. Also, the
Fund issued an additional 1,200,000 shares in connection with the
exercise by the underwriters of the over-allotments option.
NOTE E
Subsequent Events
The Fund expects to issue preferred shares on or about March 27,
2002. Also, the Fund has issued an additional 365,000 common
shares on March 15, 2002. The additional offering costs with
respect to these common shares and preferred shares are estimated
to be $10,950 and $283,710, respectively.
65
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Common Stock
Outstanding Throughout The Period
January 29, 2002(a)
to March 8, 2002
(unaudited)
-----------------
Net asset value, beginning of period $14.33
-----------------------------------------------------------------
Income From Investment Operations
Net investment income(b)(c) 0.04
Net realized and unrealized loss on investment
transactions (0.13)
Net decrease in net asset value from operations (0.09)
Offering cost (0.03)
-----------------------------------------------------------------
Net asset value, end of period $14.21
Market value, end of period $15.00
-----------------------------------------------------------------
Total Investment Return
Total investment return based on:(d)
Market value 0.00%
Net asset value (0.84)%
Ratios/Supplemental Data:
Net assets, end of period (000's omitted) $285,687
Ratio to average net assets of:
Expenses, net of fee waivers(e) 0.58%
Expenses, before fee waivers(e) 0.83%
Net investment income, net of fee waivers(e) 2.78%
Net investment income, before fee waivers(e) 2.53%
Portfolio turnover rate 3%
(a) Commencement of operations.
(b) Based on average shares outstanding.
(c) Net of fees waived by the Adviser.
(d) Total investment return is calculated assuming a purchase of
common stock on the opening of the first day and a sale on
the closing of the last day of the period reported.
Dividends and distributions, if any, are assumed for
purposes of this calculation, to be reinvested at prices
obtained under the Fund's dividend reinvestment plan.
Generally, total investment return based on net asset value
will be higher than total investment return based on market
value in periods where there is an increase in the discount
or a decrease in the premium of the market value to net
asset value from the beginning to the end of such periods.
Conversely, total investment return based on net asset value
will be lower than total investment return based on market
value in periods where there is a decrease in the discount
66
or an increase in the premium of the market value to the net
asset value from the beginning to the end of the period.
Total investment return calculated for a period of less than
one year is not annualized.
(e) Annualized.
67
APPENDIX A: ARTICLES SUPPLEMENTARY
ALLIANCE NATIONAL MUNICIPAL INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
Auction Preferred Shares Series M
Auction Preferred Shares Series T
Auction Preferred Shares Series W
Auction Preferred Shares Series TH
ALLIANCE NATIONAL MUNICIPAL INCOME FUND, INC., a
Maryland corporation (the "Corporation"), hereby certifies to the
State Department of Assessments and Taxation of Maryland that:
FIRST: Under a power contained in Article SEVENTH of
its charter (the "Charter"), the Board of Directors of the
Corporation, and a duly authorized committee thereof, by duly
adopted resolutions, classified (a) 1950 shares of common stock,
par value $.001 per share ("Common Stock"), of the Corporation as
a series of preferred stock, par value $.001 per share
("Preferred Stock"), liquidation preference $25,000 per share
plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared) thereon, designated as Auction
Preferred Shares, Series M ("Preferred Shares Series M"), (b)
1950 shares of Common Stock as a series of Preferred Stock,
liquidation preference $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or
declared) thereon, designated Auction Preferred Shares, Series T
("Preferred Shares Series T"), (c) 1950 shares of Common Stock as
a series of Preferred Stock, liquidation preference $25,000 per
share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) thereon, designated as
Auction Preferred Shares, Series W ("Preferred Shares Series W"),
and (d) 1950 shares of Common Stock as a series of Preferred
Stock, liquidation preference $25,000 per share plus an amount
equal to accumulated but unpaid dividends (whether or not earned
or declared) thereon, designated Auction Preferred Shares, Series
TH ("Preferred Shares Series TH" and together with the Preferred
Shares Series M, Preferred Shares Series T, and Preferred Shares
Series W collectively referred to as the "Preferred Shares"),
each such series of Preferred Shares having the following
preferences, rights, voting powers, restrictions, limitations as
to dividends and other distributions, qualifications, terms and
conditions of redemption, which, upon any restatement of the
Charter, shall become part of Article FIFTH of the Charter, with
any necessary or appropriate renumbering or relettering of the
sections or subsections hereof.
A-1
DESIGNATION
PREFERRED SHARES SERIES M: A series of 1950 shares of
preferred stock, par value $.001 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon,
is hereby designated Auction Preferred Shares, Series M
(hereinafter, "Preferred Shares Series M"). Each Preferred Share
Series M shall be issued on March 27, 2002; have an Applicable
Rate for its Initial Rate Period (which period shall continue to
and include April 8, 2002) equal to [____]% per annum; have an
initial Dividend Payment Date of April 9, 2002; and have such
other preferences, rights, voting powers, restrictions,
limitations as to dividends and other distributions,
qualifications, and terms and conditions of redemption, in
addition to those required by applicable law or set forth in the
Corporation's Charter applicable to preferred stock of the
Corporation, as are set forth in Part I and Part II of these
Articles Supplementary. The Preferred Shares Series M shall
constitute a separate series of preferred stock of the
Corporation.
PREFERRED SHARES SERIES T: A series of 1950 shares of
preferred stock, par value $.001 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon,
is hereby designated Auction Preferred Shares, Series T
("Preferred Shares Series T"). Each Preferred Share Series T
shall be issued on March 27, 2002; have an Applicable Rate for
its Initial Rate Period (which period shall continue to and
include April 9, 2002) equal to [____]% per annum; have an
initial Dividend Payment Date of April 10, 2002; and have such
other preferences, rights, voting powers, restrictions,
limitations as to dividends and other distributions,
qualifications, and terms and conditions of redemption, in
addition to those required by applicable law or set forth in the
Corporation's Charter applicable to preferred stock of the
Corporation, as are set forth in Part I and Part II of these
Articles Supplementary. The Preferred Shares Series T shall
constitute a separate series of preferred stock of the
Corporation.
PREFERRED SHARES SERIES W: A series of 1950 shares of
preferred stock, par value $.001 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon,
is hereby designated Auction Preferred Shares, Series W
("Preferred Shares Series W"). Each Preferred Share Series W
shall be issued on March 27, 2002; have an Applicable Rate for
its Initial Rate Period (which period shall continue to and
include April 3, 2002) equal to [____]% per annum; have an
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initial Dividend Payment Date of April 4, 2002; and have such
other preferences, rights, voting powers, restrictions,
limitations as to dividends and other distributions,
qualifications, and terms and conditions of redemption, in
addition to those required by applicable law or set forth in the
Corporation's Charter applicable to preferred stock of the
Corporation, as are set forth in Part I and Part II of these
Articles Supplementary. The Preferred Shares Series W shall
constitute a separate series of preferred stock of the
Corporation.
PREFERRED SHARES SERIES TH: A series of 1950 shares of
preferred stock, par value $.001 per share, liquidation
preference $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) thereon,
is hereby designated Auction Preferred Shares, Series TH
("Preferred Shares Series TH", and together with the Preferred
Shares Series M, Preferred Shares Series T, and Preferred Shares
Series W collectively referred to as the "Preferred Shares").
Each Preferred Share Series TH shall be issued on March 27, 2002;
have an Applicable Rate for its Initial Rate Period (which period
shall continue to and include April 4, 2002) equal to [____]% per
annum; have an initial Dividend Payment Date of April 5, 2002;
and have such other preferences, rights, voting powers,
restrictions, limitations as to dividends and other
distributions, qualifications, and terms and conditions of
redemption, in addition to those required by applicable law or
set forth in the Corporation's Charter applicable to preferred
stock of the Corporation, as are set forth in Part I and Part II
of these Articles Supplementary. The Preferred Shares Series TH
shall constitute a separate series of preferred stock of the
Corporation.
No holder of any series of Preferred Shares shall have, solely by
reason of being a holder of any series of Preferred Shares, any
right to acquire, purchase or subscribe for any Common Stock or
other securities of the Corporation that it may hereafter issue
or sell (whether out of the number of shares authorized by the
Charter, or out of any shares acquired by the Corporation after
the issuance thereof, or otherwise).
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DEFINITIONS
As used in Parts I and II of these Articles Supplementary (the
"Articles"), the following terms shall have the following
meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the
context otherwise requires:
AA COMPOSITE COMMERCIAL PAPER RATE, on any date for any Rate
Period of any series of Preferred Shares, shall mean (a) (i) in
the case of any Minimum Rate Period or any Special Rate Period of
fewer than 49 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, that if such Rate Period is a
Minimum Rate Period and the AA Composite Commercial Paper Rate is
being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are
subject to Submitted Hold Orders, then the interest equivalent of
the seven-day rate, and (ii) in the case of any Special Rate
Period of (A) 49 or more but fewer than 70 Rate Period Days, the
interest equivalent of the 60-day rate; (B) 70 or more but fewer
than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (C) 85 or more but
fewer than 99 Rate Period Days, the interest equivalent of the
90-day rate; (D) 99 or more but fewer than 120 Rate Period Days,
the arithmetic average of the interest equivalent of the 90-day
and 120-day rates; (E) 120 or more but fewer than 141 Rate Period
Days, the interest equivalent of the 120-day rate; (F) 141 or
more but fewer than 162 Rate Period Days, the arithmetic average
of the 120-day and 180-day rates; and (G) 162 or more but fewer
than 183 Rate Period Days, the interest equivalent of the 180-day
rate, in each case on commercial paper placed on behalf issuers
whose corporate bonds are rated AA by S&P or the equivalent of
such rating by S&P or another rating agency, as made available on
a discount basis or otherwise by the Federal Reserve Bank of New
York for the Business Day next preceding such date; or (B) in the
event that the Federal Reserve Bank of New York does not make
available any such rate, then the arithmetic average of such
rates, as quoted on a discount basis or otherwise, by the
Commercial Paper Dealers to the Auction Agent for the close of
business on the Business Day next preceding such date. If any
Commercial Paper Dealer does not quote a rate required to
determine the AA Composite Commercial Paper Rate, the AA
Composite Commercial Paper Rate shall be determined on the basis
of the quotation or quotations furnished by the remaining
Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper
Dealers selected by the Corporation to provide such rate or rates
not being supplied by any Commercial Paper Dealer or Commercial
Paper Dealers, as the case may be, or, if the Corporation does
not select any such Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers, by the remaining Commercial
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Paper Dealer or Commercial Paper Dealers. For purposes of this
definition, the "interest equivalent" of a rate stated on a
discount basis (a "discount rate") for commercial paper of a
given days' maturity shall be equal to the quotient (rounded
upwards to the next higher one-thousandth (.001) of 1%) of (1)
the discount rate divided by (2) the difference between (I) 1.00
and (II) a fraction, the numerator of which shall be the product
of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be
360.
ACCOUNTANT'S CONFIRMATION shall have the meaning specified in
paragraph (c) of Section 7 of Part I of these Articles.
AFFILIATE shall mean any Person known to the Auction Agent to
be controlled by, in control of or under common control with the
Corporation; provided, however, that no Broker-Dealer controlled
by, in control of or under common control with the Corporation
shall be deemed to be an Affiliate nor shall any corporation or
any Person controlled by, in control of or under common control
with such corporation, one of the directors or executive officers
of which is a director of the Corporation, be deemed to be an
Affiliate solely because such director or executive officer is
also a director of the Corporation.
AGENT MEMBER shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
ALL HOLD ORDER RATE shall have the same meaning specified in
Section 6 of Appendix A of these Articles.
ANTICIPATION NOTES shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RANs), Tax and Revenue Anticipation
Notes (TRANs), Grant Anticipation Notes (GANs) that are rated by
S&P and Bond Anticipation Notes (BANs) that are rated by S&P.
APPLICABLE RATE shall have the meaning specified in
subparagraph (e)(i) of Section 2 of Part I of these Articles.
AUCTION shall mean each periodic implementation of the
Auction Procedures.
AUCTION AGENCY AGREEMENT shall mean the agreement between the
Corporation and the Auction Agent, which provides, among other
things, that the Auction Agent will follow the Auction Procedures
for purposes of determining the Applicable Rate for any series of
Preferred Shares so long as the Applicable Rate for shares of
such series is to be based on the results of an Auction.
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AUCTION AGENT shall mean the entity appointed as such by a
resolution of the Board of Directors in accordance with Section 6
of Part II of these Articles.
AUCTION DATE, with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
AUCTION PROCEDURES shall mean the procedures for conducting
Auctions set forth in Part II of these Articles.
AVAILABLE PREFERRED SHARES shall have the meaning specified
in paragraph (a) of Section 3 of Part II of these Articles.
BENCHMARK RATE shall have the meaning specified in Section 6
of Appendix A hereto.
BENEFICIAL OWNER, with respect to any series of Preferred
Shares, means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction
Agent) as a holder of shares of such series.
BID and BIDS shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of these Articles.
BIDDER and BIDDERS shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these
Articles; provided, however, that neither the Corporation nor any
Affiliate thereof shall be permitted to be a Bidder in an
Auction, except that any Broker-Dealer that is controlled by, in
control of or under common control with the Corporation may be a
Bidder in an Auction, but only if the Orders placed by such
Broker-Dealer are not for its own account.
BOARD OF DIRECTORS shall mean the Board of Directors of the
Corporation or any duly authorized committee thereof.
BROKER-DEALER shall mean any broker-dealer, commercial bank
or other entity permitted by law to perform the functions
required of a Broker-Dealer in Part II of these Articles, that is
a member of, or a participant in, the Securities Depository or is
an affiliate of such member or participant, has been selected by
the Corporation and has entered into a Broker-Dealer Agreement
that remains effective.
BROKER-DEALER AGREEMENT shall mean an agreement among the
Corporation, the Auction Agent and a Broker-Dealer pursuant to
which such Broker-Dealer agrees to follow the procedures
specified in Part II of these Articles.
BUSINESS DAY shall mean a day on which the New York Stock
Exchange is open for trading and which is neither a Saturday,
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Sunday nor any other day on which banks in The City of New York,
New York, are authorized by law to close.
CHARTER shall have the meaning specified on the first page of
these Articles.
CODE means the Internal Revenue Code of 1986, as amended.
COMMERCIAL PAPER DEALERS shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated and any other commercial paper dealer
selected by the Corporation as to which Moody's, S&P or any
substitute rating agency then rating the Preferred Shares shall
not have objected or, in lieu of any thereof, their respective
affiliates or successors, if such entity is a commercial paper
dealer.
COMMON STOCK shall mean the common stock, par value $.001 per
share, of the Corporation.
CORPORATION shall mean the entity named on the first page of
these Articles, which is the issuer of the Preferred Shares.
CURE DATE shall mean the Preferred Shares Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be.
DATE OF ORIGINAL ISSUE, with respect to any series of
Preferred Shares, shall mean the date on which the Corporation
initially issued such shares.
DEPOSIT SECURITIES shall mean cash and Municipal Obligations
rated at least rated P-1, MIG-1 or VMIG-1 by Moody's or A-1+ or
SP-1+ by S&P.
DISCOUNTED VALUE, as of any Valuation Date, shall mean, (a)
with respect to an S&P Eligible Asset, the quotient of the Market
Value thereof divided by the applicable S&P Discount Factor and
(b)(i) with respect to a Moody's Eligible Asset that is not
currently callable as of such Valuation Date at the option of the
issuer thereof, the quotient of the Market Value thereof divided
by the applicable Moody's Discount Factor, or (ii) with respect
to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient
of (A) the lesser of the Market Value or call price thereof,
including any call premium, divided by (B) the applicable Moody's
Discount Factor.
DIVIDEND PAYMENT DATE, with respect to any series of
Preferred Shares, shall mean any date on which dividends are
payable on shares of such series pursuant to the provisions of
paragraph (d) of Section 2 of Part I of these Articles.
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DIVIDEND PERIOD, with respect to any series of Preferred
Shares, shall mean the period from and including the Date of
Original Issue of shares of such series to but excluding the
initial Dividend Payment Date for shares of such series and any
period thereafter from and including one Dividend Payment Date
for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series.
EXISTING HOLDER, with respect to any series of Preferred
Shares, shall mean a Broker-Dealer (or any such other Person as
may be permitted by the Corporation) that is listed on the
records of the Auction Agent as a holder of shares of such
series.
FAILURE TO DEPOSIT, with respect to any series of Preferred
Shares, shall mean a failure by the Corporation to pay to the
Auction Agent, not later than 12:00 Noon, New York City time, (a)
on the Business Day next preceding any Dividend Payment Date for
shares of such series, in funds available on such Dividend
Payment Date in The City of New York, New York, the full amount
of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (b) on
the Business Day next preceding any redemption date in funds
available on such redemption date for shares of such series in
The City of New York, New York, the Redemption Price to be paid
on such redemption date for any share of such series after notice
of redemption is mailed pursuant to paragraph (c) of Section 11
of Part I of these Articles; provided, however, that the
foregoing clause (b) shall not apply to the Corporation's failure
to pay the Redemption Price in respect of the Preferred Shares
when the related Notice of Redemption provides that redemption of
such shares is subject to one or more conditions precedent and
any such condition precedent shall not have been satisfied at the
time or times and in the manner specified in such Notice of
Redemption.
FEDERAL TAX RATE INCREASE shall have the meaning specified in
the definition of Moody's Volatility Factor.
GROSS-UP PAYMENT shall have the meaning specified in
Section 1 of Appendix A hereto.
HOLDER, with respect to any series of Preferred Shares, shall
mean the registered holder of such shares as the same appears on
the record books of the Corporation.
HOLD ORDER and HOLD ORDERS shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these
Articles.
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INDEPENDENT ACCOUNTANT shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the
Corporation an independent public accountant or firm of
independent public accountants under the Securities Act of 1933,
as amended.
INITIAL RATE PERIOD, with respect to any series of Preferred
Shares, shall have the meaning specified with respect to shares
of such series in "Designation" above.
INTEREST EQUIVALENT means a yield on a 360-day basis of a
discount basis security which is equal to the yield on an
equivalent interest-bearing security.
ISSUE TYPE CATEGORY shall have the meaning specified in
Section 1 of Appendix A hereto.
KENNY INDEX shall have the meaning specified in the
definition of Taxable Equivalent of the Short-Term Municipal Bond
Rate.
LATE CHARGE shall have the meaning specified in subparagraph
(e)(i)(B) and (D) of Section 2 of Part I of these Articles.
LIQUIDATION PREFERENCE, with respect to a given number of
Preferred Shares, means $25,000 times that number.
MARKET VALUE of any asset of the Corporation shall mean the
market value thereof determined by the pricing service designated
from time to time by the Corporation's investment adviser (the
"Pricing Service"). Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value
portfolio securities at the mean between the quoted bid and asked
price or the yield equivalent when quotations are readily
available. Securities for which quotations are not readily
available are valued at fair value as determined by the Pricing
Service using methods which include consideration of: yields or
prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from
dealers; and general market conditions. The Pricing Service may
employ electronic data processing techniques or a matrix system,
or both, to determine valuations. If the Pricing Service fails
to provide the Market Value of any Municipal Obligation, such
Municipal Obligation shall be valued at the lower of two bid
quotations (one of which shall be in writing) obtained by the
Corporation from two dealers who are members of the National
Association of Securities Dealers, Inc. and are making a market
in such Municipal Obligations. Futures contracts and options are
valued at closing prices for such instruments established by the
exchange or board of trade on which they are traded, or, if
market quotations are not readily available, are valued at fair
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value as determined by the Pricing Service or if the Pricing
Service is not able to value such instruments, they shall be
valued at fair value on a consistent basis using methods
determined in good faith by the Board of Directors.
MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY, as of any
Valuation Date, shall mean the aggregate amount of Gross-up
Payments that would be due if the Corporation were to make
Taxable Allocations, with respect to any taxable year, estimated
based upon dividends paid and the amount of undistributed
realized net capital gains and other taxable income earned by the
Corporation, as of the end of the calendar month immediately
preceding such Valuation Date, and assuming such Gross-up
Payments are fully taxable.
MAXIMUM RATE, for any series of Preferred Shares on any
Auction Date for shares of such series, shall mean:
(a) in the case of any Auction Date which is not the
Auction Date immediately prior to the first day of any proposed
Special Rate Period designated by the Corporation pursuant to
Section 4 of Part I of these Articles, the product of: (i) the
Reference Rate on such Auction Date for the next Rate Period of
shares of such series and (ii) the Rate Multiple on such Auction
Date, unless shares of such series have or had a Special Rate
Period (other than a Special Rate Period of 28 Rate Period Days
or fewer) and an Auction at which Sufficient Clearing Bids
existed has not yet occurred for a Minimum Rate Period of shares
of such series after such Special Rate Period, in which case the
higher of:
(A) the dividend rate on shares of such series for
the then-ending Rate Period; or
(B) the product of (1) the higher of (I) the
Reference Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares
of such series, if such then-ending Rate Period was 364
Rate Period Days or fewer, or the Treasury Note Rate on
such Auction Date for a Rate Period equal in length to
the then-ending Rate Period of shares of such series, if
such then-ending Rate Period was more than 364 Rate
Period Days, and (II) the Reference Rate on such Auction
Date for a Rate Period equal in length to such Special
Rate Period of shares of such series, if such Special
Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate
Period equal in length to such Special Rate Period, if
such Special Rate Period was more than 364 Rate Period
Days and (2) the Rate Multiple on such Auction Date; or
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(b) in the case of any Auction Date which is the Auction
Date immediately prior to the first day of any proposed Special
Rate Period designated by the Corporation pursuant to Section 4
of Part I of these Articles, the product of (A) the highest of:
(A) the Reference Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was 364 Rate Period Days
or fewer, or the Treasury Note Rate on such Auction Date for a
Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was more
than 364 Rate Period Days, (B) the Reference Rate on such Auction
Date for the Special Rate Period for which the Auction is being
held if such Special Rate Period is 364 Rate Period Days or fewer
or the Treasury Note Rate on such Auction Date for the Special
Rate Period for which the Auction is being held if such Special
Rate Period is more than 364 Rate Period Days, and (C) the
Reference Rate on such Auction Date for Minimum Rate Periods and
(ii) the Rate Multiple on such Auction Date.
MINIMUM RATE PERIOD shall mean any Rate Period consisting of
7 Rate Period Days.
MOODY'S shall mean Moody's Investors Service, Inc., a
Delaware corporation, and its successors.
MOODY'S DISCOUNT FACTOR shall have the meaning specified in
Section 1 of Appendix A hereto.
MOODY'S ELIGIBLE ASSET shall have the meaning specified in
Section 1 of Appendix A hereto.
MOODY'S EXPOSURE PERIOD shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.
MOODY'S VOLATILITY FACTOR shall mean, as of any Valuation
Date, (a) in the case of any Minimum Rate Period, any Special
Rate Period of 28 Rate Period Days or fewer, or any Special Rate
Period of 57 Rate Period Days or more, a multiplicative factor
equal to 275%, except as otherwise provided in the last sentence
of this definition; (b) in the case of any Special Rate Period of
more than 28 but fewer than 36 Rate Period Days, a multiplicative
factor equal to 203%; (c) in the case of any Special Rate Period
of more than 35 but fewer than 43 Rate Period Days, a
multiplicative factor equal to 217%; (d) in the case of any
Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (e) in the case
of any Special Rate Period of more than 49 but fewer than 57 Rate
Period Days, a multiplicative factor equal to 235%. If, as a
result of the enactment of changes to the Code, the greater of
the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal
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corporate income tax rate applicable to ordinary income will
increase, such increase being rounded up to the next five
percentage points (the "Federal Tax Rate Increase"), until the
effective date of such increase, the Moody's Volatility Factor in
the case of any Rate Period described in (a) above in this
definition instead shall be determined by reference to the
following table:
FEDERAL TAX RATE INCREASE VOLATILITY FACTOR
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
MUNICIPAL OBLIGATIONS shall mean any and all instruments that
pay interest or make other distributions that are exempt from
regular federal income tax and in which the Corporation may
invest consistent with the investment policies and contained in
its registration statement on Form N-2 as the same may be amended
from time to time.
1940 ACT shall mean the Investment Company Act of 1940, as
amended.
1940 ACT CURE DATE, with respect to the failure by the
Corporation to maintain the 1940 Act Preferred Shares Asset
Coverage (as required by Section 6 of Part I of these Articles)
as of the last Business Day of each month, shall mean the last
Business Day of the following month.
1940 ACT PREFERRED SHARES ASSET COVERAGE shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at
least 200% with respect to all outstanding senior securities of
the Corporation that are shares of stock, including all
outstanding Preferred Shares (or such other asset coverage as may
in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities that are shares or
stock of a closed-end investment company as a condition of
declaring dividends on its common shares or stock).
NOTICE OF REDEMPTION shall mean any notice with respect to
the redemption of Preferred Shares pursuant to paragraph (c) of
Section 11 of Part I of these Articles.
NOTICE OF SPECIAL RATE PERIOD shall mean any notice with
respect to a Special Rate Period of any series of Preferred
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Shares pursuant to subparagraph (d)(i) of Section 4 of Part I of
these Articles.
ORDER and ORDERS shall have the respective meanings specified
in paragraph (a) of Section 1 of Part II of these Articles.
OTHER ISSUES, if defined in Section 1 of Appendix A hereto,
shall have the meaning specified in that section.
OUTSTANDING shall mean, as of any Auction Date with respect
to any series of Preferred Shares, the number of shares of such
series theretofore issued by the Corporation except, without
duplication, (i) any shares of such series theretofore cancelled
or delivered to the Auction Agent for cancellation or redeemed by
the Corporation, (ii) any shares of such series as to which the
Corporation or any Affiliate thereof shall be an Existing Holder
and (iii) any shares of such series represented by any
certificate in lieu of which a new certificate has been executed
and delivered by the Corporation.
PERSON shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint
venture or other entity or a government or any agency or
political subdivision thereof.
POTENTIAL BENEFICIAL OWNER, with respect to any series of
Preferred Shares, shall mean a customer of a Broker-Dealer that
is not a Beneficial Owner of shares of such series but that
wishes to purchase shares of such series, or that is a Beneficial
Owner of shares of such series that wishes to purchase additional
shares of such series.
POTENTIAL HOLDER, with respect to any series of Preferred
Shares, shall mean a Broker-Dealer (or any such other person as
may be permitted by the Corporation) that is not an Existing
Holder of shares of such series or that is an Existing Holder of
shares of such series that wishes to become the Existing Holder
of additional shares of such series.
PREFERRED SHARES shall have the meaning set forth in the
"Designation" section of these Articles.
PREFERRED SHARES BASIC MAINTENANCE AMOUNT, as of any
Valuation Date, shall mean the dollar amount equal to the sum of:
(a)(i) the product of the number of Preferred Shares outstanding
on such date multiplied by $25,000 (plus the product of the
number of shares of any other series of Preferred Stock
outstanding on such date multiplied by the liquidation preference
of such shares), plus any redemption premium applicable to the
Preferred Shares (or other Preferred Stock) then subject to
redemption; (ii) the aggregate amount of dividends that will have
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accumulated at the respective Applicable Rates (whether or not
earned or declared) to (but not including) the first respective
Dividend Payment Dates for the Preferred Shares outstanding that
follow such Valuation Date (plus the aggregate amount of
dividends, whether or not earned or declared, that will have
accumulated in respect of other outstanding Preferred Stock to,
but not including, the first respective dividend payment dates
for such other shares that follow such Valuation Date); (iii) the
aggregate amount of dividends that would accumulate on shares of
each series of Preferred Shares outstanding from such first
respective Dividend Payment Date therefor through the 56th day
after such Valuation Date, at the Maximum Rate (calculated as if
such Valuation Date were the Auction Date for the Rate Period
commencing on such Dividend Payment Date) for a Minimum Rate
Period of shares of such series to commence on such Dividend
Payment Date, assuming, solely for purposes of the foregoing,
that, if on such Valuation Date, the Corporation shall have
delivered a Notice of Special Rate Period to the Auction Agent
pursuant to Section 4(d)(i) of this Part I with respect to shares
of such series, such Maximum Rate shall be the higher of (A) the
Maximum Rate for the Special Rate Period of shares of such series
to commence on such Dividend Payment Date and (B) the Maximum
Rate for a Minimum Rate Period of shares of such series to
commence on such Dividend Payment Date, multiplied by the
Volatility Factor applicable to a Minimum Rate Period, or, in the
event the Corporation shall have delivered a Notice of Special
Rate Period to the Auction Agent pursuant to Section 4(d)(i) of
this Part I with respect to shares of such series designating a
Special Rate Period consisting of 56 Rate Period Days or more,
the Volatility Factor applicable to a Special Rate Period of that
length (plus the aggregate amount of dividends that would
accumulate at the maximum dividend rate or rates on any other
Preferred Stock outstanding from such respective dividend payment
dates through the 56th day after such Valuation Date, as
established by or pursuant to the respective statements
establishing and fixing the rights and preferences of such other
Preferred Stock) (except that (1) if such Valuation Date occurs
at a time when a Failure to Deposit (or, in the case of Preferred
Stock other than Preferred Shares, a failure similar to a Failure
to Deposit) has occurred that has not been cured, the dividend
for purposes of calculation would accumulate at the current
dividend rate then applicable to the shares in respect of which
such failure has occurred and (2) for those days during the
period described in this subparagraph (iii) in respect of which
the Applicable Rate in effect immediately prior to such Dividend
Payment Date will remain in effect (or, in the case of Preferred
Stock other than Preferred Shares, in respect of which the
dividend rate or rates in effect immediately prior to such
respective dividend payment dates will remain in effect), the
dividend for purposes of calculation would accumulate at such
Applicable Rate (or other rate or rates, as the case may be) in
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respect of those days); (iv) the amount of anticipated expenses
of the Corporation for the 90 days subsequent to such Valuation
Date; (v) the amount of the Corporation's Maximum Potential
Gross-up Payment Liability in respect of the Preferred Shares
(and similar amounts payable in respect of other Preferred Stock
pursuant to provisions similar to those contained in Section 3 of
Part I of these Articles) as of such Valuation Date; (vi) the
amount of any indebtedness or obligations of the Corporation
senior in right of payment to the Preferred Shares and (vii) any
current liabilities as of such Valuation Date to the extent not
reflected in any of (a)(i) through (a)(v) (including, without
limitation, any payables for Municipal Obligations purchased as
of such Valuation Date and any liabilities incurred for the
purpose of clearing securities transactions) less (b) the value
(i.e., for purposes of current Moody's guidelines, the face value
of cash, short-term Municipal Obligations rated MIG-1, VMIG-1 or
P-1, and short-term securities that are the direct obligation of
the U.S. government, provided in each case that such securities
mature on or prior to the date upon which any of (a)(i) through
(a)(vii) become payable, otherwise the Moody's Discounted Value
and, for the purposes of the current S&P guidelines, the face
value of cash, short-term Municipal Obligations rated SP-1 or A-1
or Municipal Obligations rated A, provided in each case that such
securities mature on or prior to the date upon which any of
(a)(i) through (a)(vii) become payable, otherwise the S&P
Discounted Value) of any of the Corporation's assets irrevocably
deposited by the Corporation for the payment of any of (a)(i)
through (a)(vii).
PREFERRED SHARES BASIC MAINTENANCE CURE DATE, with respect to
the failure by the Corporation to satisfy the Preferred Shares
Basic Maintenance Amount (as required by paragraph (a) of Section
7 of Part I of these Articles) as of a given Valuation Date,
shall mean the seventh Business Day following such Valuation
Date.
PREFERRED SHARES BASIC MAINTENANCE REPORT shall mean a report
signed by the President, Treasurer or any Senior Vice President
or Vice President of the Corporation which sets forth, as of the
related Valuation Date, the assets of the Corporation, the Market
Value and the Discounted Value thereof (seriatim and in
aggregate), and the Preferred Shares Basic Maintenance Amount.
PREFERRED STOCK shall mean the preferred stock of the
Corporation, and includes the Preferred Shares.
QUARTERLY VALUATION DATE shall mean the last Business Day of
the last month of each fiscal quarter of the Corporation in each
fiscal year of the Corporation, commencing January 31, 2002.
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RATE MULTIPLE shall have the meaning specified in Section 1
of Appendix A hereto.
RATE PERIOD, with respect to any series of Preferred Shares,
shall mean the Initial Rate Period, and any Transitional Rate
Period, of shares of such series and any Subsequent Rate Period,
including any Special Rate Period, of shares of such series.
RATE PERIOD DAYS, for any Rate Period or Dividend Period,
means the number of days that would constitute such Rate Period
or Dividend Period but for the application of paragraph (d) of
Section 2 of Part I of these Articles or paragraph (b) of Section
4 of Part I of these Articles.
RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD shall mean (a) for
purposes of calculation of Moody's Eligible Assets as of any
Valuation Date, no more than the aggregate of the following: (i)
the book value of receivables for Municipal Obligations sold as
of or prior to such Valuation Date if such receivables are due
within five business days of such Valuation Date, and if the
trades that generated such receivables are (A) settled through
clearing house firms with respect to which the Corporation has
received prior written authorization from Moody's or (B) with
counterparties having a Moody's long-term debt rating of at least
Baa3; and (ii) the Moody's Discounted Value of Municipal
Obligations sold as of or prior to such Valuation Date which
generated receivables, if such receivables are due within five
business days of such Valuation Date but do not comply with
either of the conditions specified in (i) above, and (b) for
purposes of calculation of S&P Eligible Assets as of any
Valuation Date, the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation
Date.
REDEMPTION DATE shall mean the date determined in accordance
with Section 11 of Part I of these Articles.
REDEMPTION PRICE shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of
these Articles.
REFERENCE RATE shall mean (a) the higher of the Taxable
Equivalent of the Short-Term Municipal Bond Rate and the AA
Composite Commercial Paper Rate in the case of Minimum Rate
Periods and Special Rate Periods of 28 Rate Period Days or fewer,
(b) the AA Composite Commercial Paper Rate in the case of Special
Rate Periods of more than 28 Rate Period Days but fewer than 183
Rate Period Days; and (c) the Treasury Bill Rate in the case of
Special Rate Periods of more than 182 Rate Period Days but fewer
than 365 Rate Period Days.
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REGISTRATION STATEMENT shall mean the Registration Statement
filed on Form N-2 with the Securities and Exchange Commission
with respect to the Preferred Shares.
S&P shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
S&P DISCOUNT FACTOR shall have the meaning specified in
Section 1 of Appendix A hereto.
S&P ELIGIBLE ASSET shall have the meaning specified in
Section 1 of Appendix A hereto.
S&P EXPOSURE PERIOD shall mean the maximum period of time
following a Valuation Date that the Corporation has under these
Articles to cure any failure to maintain, as of such Valuation
Date, the Discounted Value for its portfolio at least equal to
the Preferred Shares Basic Maintenance Amount (as described in
paragraph (a) of Section 7 of Part I of these Articles).
S&P VOLATILITY FACTOR shall mean, as of any Valuation Date, a
multiplicative factor equal to (a) 305% in the case of any
Minimum Rate Period or any Special Rate Period of 28 Rate Period
Days or fewer, (b) 268% in the case of any Special Rate Period of
more than 28 Rate Period Days but fewer than 183 Rate Period
Days; and (c) 204% in the case of any Special Rate Period of more
than 182 Rate Period Days.
SECURITIES DEPOSITORY shall mean The Depository Trust Company
and its successors and assigns or any other securities depository
selected by the Corporation that agrees to follow the procedures
required to be followed by such securities depository in
connection with the Preferred Shares.
SELL ORDER and SELL ORDERS shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of these
Articles.
SPECIAL RATE PERIOD, with respect to any series of Preferred
Shares, shall have the meaning specified in paragraph (a) of
Section 4 of Part I of these Articles.
SPECIAL REDEMPTION PROVISIONS shall have the meaning
specified in subparagraph (a)(i) of Section 11 of Part I of these
Articles.
SUBMISSION DEADLINE shall mean 1:30 P.M., New York City time,
on any Auction Date or such other time on any Auction Date by
which Broker-Dealers are required to submit Orders to the Auction
Agent as specified by the Auction Agent from time to time.
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SUBMITTED BID and SUBMITTED BIDS shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of
these Articles.
SUBMITTED HOLD ORDER and SUBMITTED HOLD ORDERS shall have the
respective meanings specified in paragraph (a) of Section 3 of
Part II of these Articles.
SUBMITTED ORDER and SUBMITTED ORDERS shall have the
respective meanings specified in paragraph (a) of Section 3 of
Part II of these Articles.
SUBMITTED SELL ORDER and SUBMITTED SELL ORDERS shall have the
respective meanings specified in paragraph (a) of Section 3 of
Part II of these Articles.
SUBSEQUENT RATE PERIOD, with respect to any series of
Preferred Shares, shall mean the period from and including the
first day following the Initial Rate Period of shares of such
series to but excluding the next Dividend Payment Date for shares
of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such
series; provided, however, that if any Subsequent Rate Period is
also a Special Rate Period, such term shall mean the period
commencing on the first day of such Special Rate Period and
ending on the last day of the last Dividend Period thereof.
SUBSTITUTE COMMERCIAL PAPER DEALER shall mean any commercial
paper dealer selected by the Corporation as to which Moody's, S&P
or any substitute rating agency then rating the Preferred Shares
shall not have objected; provided, however, that none of such
entities shall be a Commercial Paper Dealer.
SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER shall mean any
U.S. Government securities dealer selected by the Corporation as
to which Moody's, S&P or any substitute rating agency then rating
the Preferred Shares shall not have objected; provided, however,
that none of such entities shall be a U.S. Government Securities
Dealer.
SUFFICIENT CLEARING BIDS shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles.
TAXABLE ALLOCATION shall have the meaning specified in
Section 3 of Part I of these Articles.
TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND
RATE, on any date for any Minimum Rate Period or Special Rate
Period of 28 Rate Period Days or fewer, shall mean 90% of the
quotient of (a) the per annum rate expressed on an interest
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equivalent basis equal to the Kenny S&P 30 day High Grade Index
or any successor index (the "Kenny Index") (provided, however,
that any such successor index must be approved by Moody's (if
Moody's is then rating the Preferred Shares) and S&P (if S&P is
then rating the Preferred Shares)), made available for the
Business Day immediately preceding such date but in any event not
later than 8:30 A.M., New York City time, on such date by Kenny
S&P Evaluation Services or any successor thereto, based upon 30-
day yield evaluations at par of short-term bonds the interest on
which is excludable for regular Federal income tax purposes under
the Code of "high grade" component issuers selected by Kenny S&P
Evaluation Services or any such successor from time to time in
its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds, but shall
exclude any bonds the interest on which constitutes an item of
tax preference under Section 57 (a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax",
divided by (b) 1.00 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a
decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City
time, on such date by Kenny S&P Evaluation Services or any
successor, the Taxable Equivalent of the Short-Term Municipal
Bond Rate shall mean the quotient of (i) the per annum rate
expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business
Day, divided by (ii) 1.00 minus the maximum marginal regular
Federal individual income tax rate applicable to ordinary income
or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.
TAXABLE INCOME shall have the meaning specified in Section 6
of Appendix A hereto.
TREASURY BILL shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of 364 days
or less.
TREASURY BILL RATE, on any date for any Rate Period, shall
mean (a) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently
auctioned Treasury Bill with a remaining maturity closest to the
length of the Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date or, if
the length of the Rate Period exceeds the remaining maturity of
any recently auctioned Treasury Bill, the weighted average rate
of the most recently auctioned Treasury Bill and Treasury Note
with maturities closest to the length of the rate period; or (b)
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in the event that any such rate is not published in The Wall
Street Journal, then the bond equivalent yield, calculated in
accordance with prevailing industry convention, as calculated by
reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury Bill with a remaining
maturity closest to the length of such Rate Period, or, if the
length of the Rate Period exceeds the remaining maturity of any
recently auctioned Treasury bill, the weighted average rate of
the most recently auctioned Treasury Bill and Treasury Note with
maturities closest to the length of the rate period as determined
by bid price quotations as of the close of business on the
Business Day immediately preceding such date obtained from the
U.S. Government Securities Dealers to the Auction Agent.
TREASURY NOTE shall mean a direct obligation of the U.S.
Government having a maturity at the time of issuance of five
years or less but more than 364 days.
TREASURY NOTE RATE, on any date for any Rate Period, shall
mean (a) the yield on the most recently auctioned Treasury Note
with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the
Business Day next preceding such date; or (b) in the event that
any such rate is not published in The Wall Street Journal, then
the yield as calculated by reference to the arithmetic average of
the bid price quotations of the most recently auctioned Treasury
Note with a remaining maturity closest to the length of such Rate
Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the
Auction Agent. If any U.S. Government Securities Dealer does not
quote a rate required to determine the Treasury Bill Rate or the
Treasury Note Rate, the Treasury Bill Rate or the Treasury Note
Rate shall be determined on the basis of the quotation or
quotations furnished by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers and any Substitute
U.S. Government Securities Dealers selected by the Corporation to
provide such rate or rates not being supplied by any U.S.
Government Securities Dealer or U.S. Government Securities
Dealers, as the case may be, or, if the Corporation does not
select any such Substitute U.S. Government Securities Dealer or
Substitute U.S. Government Securities Dealers, by the remaining
U.S. Government Securities Dealer or U.S. Government Securities
Dealers.
U.S. GOVERNMENT SECURITIES DEALER shall mean Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon
Brothers Inc. Morgan Guaranty Trust Company of New York and any
other U.S. Government Securities dealer selected by the
Corporation as to which Moody's shall not have objected or their
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respective affiliates or successors, if such entity is a U.S.
Government securities dealer.
VALUATION DATE shall mean, for purposes of determining
whether the Corporation is maintaining the Preferred Shares Basic
Maintenance Amount, each Business Day.
VOLATILITY FACTOR shall mean, as of any Valuation Date, the
greater of the Moody's Volatility Factor and the S&P Volatility
Factor.
VOTING PERIOD shall have the meaning specified in paragraph
(b) of Section 5 of Part I of these Articles.
WINNING BID RATE shall have the meaning specified in
paragraph (a) of Section 3 of Part II of these Articles.
Any additional definitions specifically set forth in Section 1 of
Appendix A hereto shall be incorporated herein and made part
hereof by reference thereto.
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PART I
1. NUMBER OF AUTHORIZED SHARES. The number of authorized shares
constituting a series of Preferred Shares shall be as set forth
with respect to such series in "Designation" above.
2. DIVIDENDS.
(a) RANKING. The shares of each series of Preferred Shares
shall rank on a parity with each other, with shares of any other
series of Preferred Shares and with shares of any other series of
Preferred Stock as to the payment of dividends by the
Corporation.
(b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of any
series of Preferred Shares shall be entitled to receive, when, as
and if authorized by the Board of Directors and declared by the
Corporation, out of funds legally available therefor in
accordance with the Charter and applicable law, cumulative cash
dividends at the Applicable Rate for shares of such series, and
no more (except to the extent set forth in Section 3 of this Part
I), payable on the Dividend Payment Dates with respect to shares
of such series. Holders of shares of any series of Preferred
Shares shall not be entitled to any dividend, whether payable in
cash, property or shares, in excess of full cumulative dividends,
as herein provided, on Preferred Shares. No interest, or sum of
money in lieu of interest, shall be payable in respect of any
dividend payment or payments on Preferred Shares which may be in
arrears, and, except to the extent set forth in subparagraph
(e)(i) of this Section 2, no additional sum of money shall be
payable in respect of any such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE.
Dividends on shares of any series of Preferred Shares shall
accumulate at the Applicable Rate for shares of such series from
the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. The
Dividend Payment Dates with respect to any series of Preferred
Shares shall be as set forth with respect to shares of such
series in Section 8 of Appendix A; provided, however, that:
(i) (A) in the case of the Preferred Shares Series M, if
the Tuesday on which dividends would otherwise be payable on
shares of such series is not a Business Day, then such dividends
shall be payable on such shares on the first Business Day that
falls after that day, (B) in the case of the Preferred Shares
Series T, if the Wednesday on which dividends would otherwise be
payable on shares of such series is not a Business Day, then such
dividends shall be payable on such shares on the first Business
Day that falls after that day, (C) in the case of the Preferred
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Shares Series W, if the Thursday on which dividends would other
wise be payable on such shares is not a Business Day, then such
dividends shall be payable on such shares on the first Business
Day that falls after that day; and (D) in the case of the
Preferred Shares Series TH, if the Friday on which dividends
would otherwise be payable on such shares is not a Business Day,
then such dividends shall be payable on such shares on the first
Business Day that falls after that day; and
(ii) notwithstanding "Designation" above, the
Corporation in its discretion may establish the Dividend Payment
Dates in respect of any Special Rate Period of any series of
Preferred Shares consisting of more than 28 Rate Period Days;
provided, however, that such dates shall be set forth in the
Notice of Special Rate Period relating to such Special Rate
Period, as delivered to the Auction Agent, which Notice of
Special Rate Period shall be filed with the Secretary of the
Corporation; and further provided that (A) any such Dividend
Payment Date shall be a Business Day and (B) the last Dividend
Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such
last day is determined in accordance with paragraph (b) of
Section 4 of this Part I.
(e) APPLICABLE RATES AND CALCULATION OF DIVIDENDS.
(i) APPLICABLE RATES. The Applicable Rate on shares of
any series of Preferred Shares during the period from and after
the Date of Original Issue of shares of such series to and
including the last day of the Initial Rate Period of shares of
such series shall be equal to the rate per annum set forth with
respect to shares of such series under Designation above. For
each Subsequent Rate Period of shares of such series thereafter,
the Applicable Rate on shares of such series shall be equal to
the rate per annum that results from an Auction for shares of
such series on the Auction Date next preceding such Subsequent
Rate Period; provided, however, that if:
(A) an Auction for any such Subsequent Rate Period
is not held for any reason other than as described below, the
Applicable Rate on shares of such series for such Subsequent Rate
Period will be the Maximum Rate for shares of such series on the
Auction Date therefor;
(B) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period thereof
(other than any Special Rate Period consisting of more than 364
Rate Period Days or any Rate Period succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which
a Failure to Deposit occurred that has not been cured), but,
prior to 12:00 Noon, New York City time, on the third Business
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Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall have been cured in
accordance with paragraph (f) of this Section 2 and the
Corporation shall have paid to the Auction Agent a Late Charge
equal to the sum of (1) if such Failure to Deposit consisted of
the failure timely to pay to the Auction Agent the full amount of
dividends with respect to any Dividend Period of the shares of
such series, an amount computed by multiplying (I) 200% of the
Reference Rate for the Rate Period during which such Failure to
Deposit occurs on the Dividend Payment Date for such Dividend
Period by (II) a fraction, the numerator of which shall be the
number of days for which such Failure to Deposit has not been
cured in accordance with paragraph (f) of this Section 2
(including the day such Failure to Deposit occurs and excluding
the day such Failure to Deposit is cured) and the denominator of
which shall be 360, and applying the rate obtained against the
aggregate Liquidation Preference of the outstanding shares of
such series and (2) if such Failure to Deposit consisted of the
failure timely to pay to the Auction Agent the Redemption Price
of the shares, if any, of such series for which Notice of
Redemption has been mailed by the Corporation pursuant to
paragraph (c) of Section 11 of this Part I, an amount computed by
multiplying (I) 200% of the Reference Rate for the Rate Period
during which such Failure to Deposit occurs on the redemption
date by (II) a fraction, the numerator of which shall be the
number of days for which such Failure to Deposit is not cured in
accordance with paragraph (f) of this Section 2 (including the
day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which shall
be 360, and applying the rate obtained against the aggregate
Liquidation Preference of the outstanding shares of such series
to be redeemed, no Auction will be held in respect of shares of
such series for the Subsequent Rate Period thereof and the
Applicable Rate for shares of such series for such Subsequent
Rate Period will be the Maximum Rate for shares of such series on
the Auction Date for such Subsequent Rate Period;
(C) any Failure to Deposit shall have occurred with
respect to shares of such series during any Rate Period thereof
(other than any Special Rate Period consisting of more than 364
Rate Period Days or any Rate Period succeeding any Special Rate
Period consisting of more than 364 Rate Period Days during which
a Failure to Deposit occurred that has not been cured), and,
prior to 12:00 Noon, New York City time, on the third Business
Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall not have been cured in
accordance with paragraph (f) of this Section 2 or the
Corporation shall not have paid the applicable Late Charge to the
Auction Agent, no Auction will be held in respect of shares of
such series for the first Subsequent Rate Period thereof
thereafter (or for any Rate Period thereof thereafter to and
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including the Rate Period during which (1) such Failure to
Deposit is cured in accordance with paragraph (f) of this Section
2 and (2) the Corporation pays the applicable Late Charge to the
Auction Agent (the condition set forth in this clause (2) to
apply only in the event Moody's is rating such shares at the time
the Corporation cures such Failure to Deposit), in each case no
later than 12:00 Noon, New York City time, on the fourth Business
Day prior to the end of such Rate Period), and the Applicable
Rate for shares of such series for each such Subsequent Rate
Period shall be a rate per annum equal to the Maximum Rate for
shares of such series on the Auction Date for such Subsequent
Rate Period (but with the prevailing rating for shares of such
series, for purposes of determining such Maximum Rate, being
deemed to be "Below 'ba3'/BB2"); or
(D) any Failure to Deposit shall have occurred with
respect to shares of such series during a Special Rate Period
thereof consisting of more than 364 Rate Period Days, or during
any Rate Period thereof succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a
Failure to Deposit occurred that has not been cured, and, prior
to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such
Rate Period, such Failure to Deposit shall not have been cured in
accordance with paragraph (f) of this Section 2 or, in the event
Moody's is then rating such shares, the Corporation shall not
have paid the applicable Late Charge to the Auction Agent (such
Late Charge, for purposes of this subparagraph (D), to be
calculated by using, as the Reference Rate, the Reference Rate
applicable to a Rate Period (1) consisting of more than 182 Rate
Period Days but fewer than 365 Rate Period Days and (2)
commencing on the date on which the Rate Period during which
Failure to Deposit occurs commenced), no Auction will be held in
respect of shares of such series for such Subsequent Rate Period
(or for any Rate Period thereof thereafter to and including the
Rate Period during which (I) such Failure to Deposit is cured in
accordance with paragraph (f) of this Section 2 and (II) the
Corporation pays the applicable Late Charge to the Auction Agent
(the condition set forth in this clause (II) to apply only in the
event Moody's is rating such shares at the time the Corporation
cures such Failure to Deposit), in each case no later than 12:00
Noon, New York City time, on the fourth Business Day prior to the
end of such Rate Period), and the Applicable Rate for shares of
such series for each such Subsequent Rate Period shall be a rate
per annum equal to the Maximum Rate for shares of such series on
the Auction Date for such Subsequent Rate Period (but with the
prevailing rating for shares of such series, for purposes of
determining such Maximum Rate, being deemed to be "Below
'ba3'/BB2") (the rate per annum at which dividends are payable on
the Preferred Shares for any Rate Period thereof being herein
referred to as the Applicable Rate for shares of such series).
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(ii) CALCULATION OF DIVIDENDS. The amount of dividends
per share payable on any series of Preferred Shares on any date
on which dividends shall be payable on shares of such series
shall be computed by multiplying the Applicable Rate for shares
of such series in effect for such Dividend Period or Dividend
Periods or part thereof for which dividends have not been paid by
a fraction, the numerator of which shall be the number of days in
such Dividend Period or Dividend Periods or part thereof and the
denominator of which shall be 365 if such Dividend Period
consists of 7 Rate Period Days and 360 for all other Dividend
Periods, and applying the rate obtained against $25,000.
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with
respect to any series of Preferred Shares shall have been cured
(if such Failure to Deposit is not solely due to the willful
failure of the Corporation to make the required payment to the
Auction Agent) with respect to any Rate Period of shares of such
series if, within the respective time periods described in
subparagraph (e)(i) of this Section 2, the Corporation shall have
paid to the Auction Agent (i) all accumulated and unpaid
dividends on shares of such series and (ii) without duplication,
the Redemption Price for shares, if any, of such series for which
Notice of Redemption has been mailed by the Corporation pursuant
to paragraph (c) of Section 11 of Part I of these Articles;
provided, however, that the foregoing clause (ii) shall not apply
to the Corporation's failure to pay the Redemption Price in
respect of Preferred Shares when the related Redemption Notice
provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not
have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(g) DIVIDEND PAYMENTS BY CORPORATION TO AUCTION AGENT. The
Corporation shall pay to the Auction Agent, not later than 12:00
Noon, New York City time, on the Business Day next preceding each
Dividend Payment Date for any series of Preferred Shares, an
aggregate amount of funds available on the next Business Day in
The City of New York, New York, equal to the dividends to be paid
to all Holders of shares of such series on such Dividend Payment
Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY
CORPORATION. All moneys paid to the Auction Agent for the
payment of dividends (or for the payment of any Late Charge)
shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the
Holders. Any moneys paid to the Auction Agent in accordance with
the foregoing but not applied by the Auction Agent to the payment
of dividends (and any such Late Charge) will, upon request to the
extent permitted by law, be repaid to the Corporation at the end
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of 90 days from the date on which such moneys were so to have
been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on Preferred
Shares shall be paid on the Dividend Payment Date therefor to the
Holders on the Business Day next preceding such Dividend Payment
Date.
(j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT
UNPAID DIVIDENDS. Any dividend payment made on Preferred Shares
shall first be credited against the earliest accumulated but
unpaid dividends due with respect to such shares. Dividends in
arrears for any past Dividend Period may be declared and paid at
any time, without reference to any regular Dividend Payment Date,
to the Holders on such date, not exceeding 15 days preceding the
payment date thereof, as may be fixed by the Board of Directors.
(k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS.
Dividends on Preferred Shares shall be designated as exempt-
interest dividends up to the amount of tax-exempt income of the
Corporation, to the extent permitted by, and for purposes of,
Section 852 of the Code.
3. GROSS-UP PAYMENTS. Holders shall be entitled to receive, when,
as and if declared by the Board of Directors, out of funds
legally available therefor, dividends in an amount equal to the
aggregate Gross-up Payments as follows:
(a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE
PERIOD DAYS OR FEWER. If, in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, the
Corporation allocates any net capital gains or other income
taxable for Federal income tax purposes to a dividend paid on
Preferred Shares without having given advance notice thereof to
the Auction Agent as provided in Section 5 of Part II of the
Articles (a "Taxable Allocation") solely by reason of the fact
that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding Preferred
Shares or the liquidation of the Corporation, the Corporation
shall, prior to the end of the calendar year in which such
dividend was paid, provide notice thereof to the Auction Agent
and direct the Corporation's dividend disbursing agent to send
such notice with a Gross-up Payment to each Holder of such shares
that was entitled to such dividend payment during such calendar
year at such Holder's address.
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS.
If, in the case of any Special Rate Period of more than 28 Rate
Period Days, the Corporation makes a Taxable Allocation to a
dividend paid on Preferred Shares, the Corporation shall, prior
to the end of the calendar year in which such dividend was paid,
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provide notice thereof to the Auction Agent and direct the
Corporation's dividend disbursing agent to send such notice with
a Gross-up Payment to each Holder that was entitled to such
dividend payment during such calendar year.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The
Corporation shall not be required to make Gross-up Payments with
respect to any net capital gains or other taxable income
determined by the Internal Revenue Service to be allocable in a
manner different from that allocated by the Corporation.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The
Corporation, at its option, may designate any succeeding
Subsequent Rate Period of any series of Preferred Shares as a
Special Rate Period consisting of a specified number of Rate
Period Days evenly divisible by seven and not more than 1,820,
provided, however, that such Special Rate Period may consist of a
number of Rate Period days not evenly divisible by seven if all
series of Preferred Shares are to be redeemed at the end of the
Special Rate Period, subject to adjustment as provided in
paragraph (b) of this Section 4. A designation of a Special Rate
Period shall be effective only if (i) notice thereof shall have
been given in accordance with paragraph (c) and subparagraph
(d)(i) of this Section 4, (ii) an Auction for shares of such
series shall have been held on the Auction Date immediately
preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids for shares of such series shall have
existed in such Auction, and (iii) if any Notice of Redemption
shall have been mailed by the Corporation pursuant to paragraph
(c) of Section 11 of this Part I with respect to any shares of
such series, the Redemption Price with respect to such shares
shall have been deposited with the Auction Agent. In the event
the Corporation wishes to designate any succeeding Subsequent
Rate Period for any series of Preferred Shares as a Special Rate
Period consisting of more than 28 Rate Period Days, the
Corporation shall notify S&P (if S&P is then rating such series)
and Moody's (if Moody's is then rating such series) in advance of
the commencement of such Subsequent Rate Period that the
Corporation wishes to designate such Subsequent Rate Period as a
Special Rate Period and shall provide S&P (if S&P is then rating
such series) and Moody's (if Moody's is then rating such series)
with such documents as either may request.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event
the Corporation wishes to designate a Subsequent Rate Period as a
Special Rate Period, but the day following what would otherwise
be the last day of such Special Rate Period is not (i) a Tuesday
that is a Business Day in the case of the Preferred Shares Series
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M, or (ii) a Wednesday that is a Business Day in the case of the
Preferred Shares Series T, (iii) a Thursday that is a Business
Day in the case of Preferred Shares Series W, or (iv) a Friday
that is not a Business Day in the case of Preferred Shares Series
TH, then the Corporation shall designate such Subsequent Rate
Period as a Special Rate Period consisting of the period
commencing on the first day following the end of the immediately
preceding Rate Period and ending (A) on the first Monday that is
followed by a Tuesday that is a Business Day preceding what would
otherwise be such last day, in the case of Preferred Shares
Series M, (B) on the first Tuesday that is followed by a
Wednesday that is a Business Day preceding what would otherwise
be such last day, in the case of Preferred Shares Series T, (C)
on the first Wednesday that is followed by a Thursday that is a
Business Day preceding what would otherwise be such last day, in
the case of Preferred Shares Series W, and (D) on the first
Thursday that is followed by a Friday that is a Business Day
preceding what would otherwise be such last day, in the case of
Preferred Shares Series TH.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the
Corporation proposes to designate any succeeding Subsequent Rate
Period of any series of Preferred Shares as a Special Rate Period
pursuant to paragraph (a) of this Section 4, not less than 20 nor
more than 30 days prior to the date the Corporation proposes to
designate as the first day of such Special Rate Period (which
shall be such day that would otherwise be the first day of a
Minimum Rate Period), notice shall be (i) published or caused to
be published by the Corporation in a newspaper of general
circulation to the financial community in The City of New York,
New York, which carries financial news, and (ii) mailed by the
Corporation by first-class mail, postage prepaid, to the Holders
of shares of such series. Each such notice shall state (A) that
the Corporation may exercise its option to designate a succeeding
Subsequent Rate Period of shares of such series as a Special Rate
Period, specifying the first day thereof and (B) that the
Corporation will, by 11:00 A.M., New York City time, on the
second Business Day next preceding such date notify the Auction
Agent of either (1) its determination, subject to certain
conditions, to exercise such option, in which case the
Corporation shall specify the Special Rate Period designated, or
(2) its determination not to exercise such option.
(d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M.,
New York City time, on the second Business Day next preceding the
first day of any proposed Special Rate Period of any series of
Preferred Shares as to which notice has been given as set forth
in paragraph (c) of this Section 4, the Corporation shall deliver
to the Auction Agent either:
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(i) a notice ("Notice of Special Rate Period") stating
(A) that the Corporation has determined to designate the next
succeeding Rate Period of shares of such series as a Special Rate
Period, specifying the same and the first day thereof, (B) the
Auction Date immediately prior to the first day of such Special
Rate Period, (C) that such Special Rate Period shall not commence
if (1) an Auction for shares of such series shall not be held on
such Auction Date for any reason or (2) an Auction for shares of
such series shall be held on such Auction Date but Sufficient
Clearing Bids for shares of such series shall not exist in such
Auction, (D) the scheduled Dividend Payment Dates for shares of
such series during such Special Rate Period and (E) the Special
Redemption Provisions, if any, applicable to shares of such
series in respect of such Special Rate Period, such notice to be
accompanied by a Preferred Shares Basic Maintenance Report
showing that, as of the third Business Day next preceding such
proposed Special Rate Period, Moody's Eligible Assets (if Moody's
is then rating such series) and S&P Eligible Assets (if S&P is
then rating such series) each have an aggregate Discounted Value
at least equal to the Preferred Shares Basic Maintenance Amount
as of such Business Day (assuming for purposes of the foregoing
calculation that (I) the Maximum Rate is the Maximum Rate on such
Business Day as if such Business Day were the Auction Date for
the proposed Special Rate Period, and (II) the Moody's Discount
Factors applicable to Moody's Eligible Assets are determined by
reference to the first Exposure Period longer than the Exposure
Period then applicable to the Corporation, as described in the
definition of Moody's Discount Factor herein); or
(ii) a notice stating that the Corporation has
determined not to exercise its option to designate a Special Rate
Period of shares of such series and that the next succeeding Rate
Period of shares of such series shall be a Minimum Rate Period.
(e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the
Corporation fails to deliver either of the notices described in
subparagraphs (d)(i) or (d)(ii) of this Section 4 (and, in the
case of the notice described in subparagraph (d)(i) of this
Section 4, a Preferred Shares Basic Maintenance Report to the
effect set forth in such subparagraph (if either Moody's or S&P
is then rating the series in question)) with respect to any
designation of any proposed Special Rate Period to the Auction
Agent by 11:00 A.M., New York City time, on the second Business
Day next preceding the first day of such proposed Special Rate
Period, the Corporation shall be deemed to have delivered a
notice to the Auction Agent with respect to such Special Rate
Period to the effect set forth in subparagraph (d)(ii) of this
Section 4. In the event the Corporation delivers to the Auction
Agent a notice described in subparagraph (d)(i) of this Section
4, it shall file a copy of such notice with the Secretary of the
Corporation, and the contents of such notice shall be binding on
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the Corporation. In the event the Corporation delivers to the
Auction Agent a notice described in subparagraph (d)(ii) of this
Section 4, the Corporation will provide Moody's (if Moody's is
then rating the series in question) and S&P (if S&P is then
rating the series in question) a copy of such notice.
5. VOTING RIGHTS.
(a) ONE VOTE PER PREFERRED SHARE. Except as otherwise
provided in the Charter or as otherwise required by law, (i) each
Holder shall be entitled to one vote for each Preferred Share
held by such Holder on each matter submitted to a vote of
stockholders of the Corporation, and (ii) the Holders and holders
of outstanding Preferred Stock and of Common Stock shall vote
together as a single class; provided, however, that the Holders
and holders of outstanding Preferred Stock shall be entitled, as
a class, to the exclusion of the holders of all other securities
and classes of shares of Common Stock of the Corporation, to
elect two Directors of the Corporation, each share of Preferred
Stock, including each Preferred Share, entitling the holder
thereof to one vote. Subject to paragraph (b) of this Section 5,
the holders of outstanding Common Stock and Preferred Stock,
including the Holders, voting together as a single class, shall
elect the balance of the Directors.
(b) VOTING FOR ADDITIONAL DIRECTORS.
(i) VOTING PERIOD. During any period in which any one or
more of the conditions described in subparagraphs (A) or (B) of
this subparagraph (b)(i) shall exist (such period being referred
to herein as a "Voting Period"), the number of Directors
constituting the Board of Directors shall be automatically
increased by the smallest number that, when added to the two
Directors elected exclusively by the Holders and holders of
Preferred Stock, would constitute a majority of the Board of
Directors as so increased by such, smallest number; and the
Holders and holders of Preferred Stock, shall be entitled,
voting as a class on a one-vote-per-share basis (to the exclusion
of the holders of all other securities, including all other
classes or series of stock, of the Corporation), to elect such
smallest number of additional Directors, together with the two
Directors that such holders are in any event entitled to elect. A
Voting Period shall commence:
(A) if at the close of business on any Dividend
Payment Date accumulated dividends (whether or not earned or
declared) on any outstanding share of Preferred Stock, including
Preferred Shares, equal to at least two full years' dividends
shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent
for the payment of such accumulated dividends; or
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(B) if at any time Holders and holders of Preferred
Stock are entitled under the 1940 Act to elect a majority of the
Directors of the Corporation.
Upon the termination of a Voting Period, the voting
rights described in this subparagraph (b)(i) shall cease, subject
always, however, to the revesting of such voting rights in the
Holders and holders of Preferred Stock upon the further
occurrence of any of the events described in this subparagraph
(b)(i).
(ii) NOTICE OF SPECIAL MEETING. As soon as practicable
after the accrual of any right of the Holders and holders of
Preferred Stock to elect additional Directors as described in
subparagraph (b)(i) of this Section 5, the Corporation shall
notify the Auction Agent and the Auction Agent shall call a
special meeting of such holders, by mailing a notice of such
special meeting to such holders, such meeting to be held not less
than 10 nor more than 20 days after the date of mailing of such
notice. If the Corporation fails to send such notice to the
Auction Agent or if the Auction Agent does not call such a
special meeting, it may be called by any such holder on like
notice. The record date for determining the holders entitled to
notice of and to vote at such special meeting shall be the close
of business on the fifth Business Day preceding the day on which
such notice is mailed. At any such special meeting and at each
meeting of Holders and holders of Preferred Stock held during a
Voting Period at which Directors are to be elected, such holders,
voting together as a class (to the exclusion of the holders of
all other securities, including all other classes or series of
stock, of the Corporation), shall be entitled to elect the number
of Directors prescribed in subparagraph (b)(i) of this Section 5
on a one-vote-per-share basis.
(iii) TERMS OF OFFICE OF EXISTING DIRECTORS. The terms
of office of all persons who are Directors of the Corporation at
the time of a special meeting of Holders and holders of other
Preferred Stock to elect Directors shall continue,
notwithstanding the election at such meeting by the Holders and
such other holders of the number of Directors that they are
entitled to elect, and the persons so elected by the Holders and
such other holders, together with the two incumbent Directors
elected by the Holders and such other holders of Preferred Stock
and the remaining incumbent Directors elected by the holders of
the Common Stock, shall constitute the duly elected Directors of
the Corporation.
(iv) TERMS OF OFFICE OF CERTAIN DIRECTORS TO TERMINATE
UPON TERMINATION OF VOTING PERIOD. Simultaneously with the
termination of a Voting Period, the terms of office of the
additional Directors elected by the Holders and holders of other
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Preferred Stock pursuant to subparagraph (b)(i) of this Section 5
shall terminate, the number of Directors constituting the Board
of Directors shall decrease accordingly, the remaining Directors
shall constitute the Directors of the Corporation and the voting
rights of the Holders and such other holders to elect additional
Directors pursuant to subparagraph (b)(i) of this Section 5 shall
cease, subject to the provisions of the last sentence of
subparagraph (b)(i) of this Section 5.
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER
MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any
Preferred Shares are outstanding, the Corporation shall not,
without the affirmative vote or consent of the Holders of a
majority of the outstanding Preferred Shares, determined with
reference to a "majority of outstanding voting securities" as
that term is defined in Section 2(a)(42) of the 1940 Act, voting
separately as one class: (A) authorize, create or issue any class
or series of stock ranking prior to or on a parity with the
Preferred Shares with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Corporation, or authorize, create or
issue additional shares of any series of Preferred Shares (except
that, notwithstanding the foregoing, but subject to the
provisions of paragraph (c) of Section 10 of this Part I, the
Board of Directors, without the vote or consent of the Holders,
may from time to time authorize and create, and the Corporation
may from time to time issue, shares of any classes or series of
Preferred Stock (including Preferred Shares) ranking on a parity
with the Preferred Shares with respect to the payment of
dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Corporation;
provided, however, that if Moody's or S&P is not then rating the
Preferred Shares, the aggregate liquidation preference of all
Preferred Shares of the Corporation outstanding after any such
issuance, exclusive of accumulated and unpaid dividends, may not
exceed the amount set forth in Section 5 of Appendix A hereto),
(B) amend, alter or repeal the provisions of the Charter, or
these Articles, whether by merger, consolidation or otherwise, so
as to affect any preference, right or power of such Preferred
Shares or the Holders thereof; provided, however, that (1) none
of the actions permitted by the exception to (A) above will be
deemed to affect such preferences, rights or powers, (2) a
division of Preferred Shares will be deemed to affect such
preferences, rights or powers only if the terms of such division
adversely affect the Holders and (3) the authorization, creation
and issuance of classes or series of shares ranking junior to the
Preferred Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Corporation, will be deemed to affect
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such preferences, rights or powers only if Moody's or S&P is then
rating the Preferred Shares and such issuance would, at the time
thereof, cause the Corporation not to satisfy the 1940 Act
Preferred Shares Asset Coverage or the Preferred Shares Basic
Maintenance Amount, or (c) file a voluntary application for
relief under Federal bankruptcy law or any similar application
under state law for so long as the Corporation is solvent and
does not foresee becoming insolvent.
(ii) 1940 ACT MATTERS. Unless a higher percentage is
provided for in the Charter, (A) the affirmative vote of the
Holders of 75% of the outstanding Preferred Shares, voting as a
separate class, shall be required to approve any conversion of
the Corporation from a closed-end to an open-end investment
company and (B) the affirmative vote of the Holders of a majority
of the outstanding Preferred Shares, voting separately as a
class, shall be required to approve any plan of reorganization
(as such term is used in the 1940 Act) adversely affecting such
shares. The affirmative vote of the Holders of a majority of the
outstanding Preferred Shares, voting separately as a class, shall
be required to approve any action not described in the first
sentence of this Section 5(c)(ii) requiring a vote of security
holders of the Corporation under Section 13(a) of the 1940 Act.
For purposes of the foregoing, majority of the outstanding
Preferred Shares is determined with reference to a "majority of
outstanding voting securities" as that term is defined in Section
2(a)(42) of the 1940 Act. In the event a vote of Holders of
Preferred Shares is required pursuant to the provisions of
Section 13(a) of the 1940 Act, the Corporation shall, not later
than ten Business Days prior to the date on which such vote is to
be taken, notify Moody's (if Moody's is then rating the Preferred
Shares) and S&P (if S&P is then rating the Preferred Shares) that
such vote is to be taken and the nature of the action with
respect to which such vote is to be taken. The Corporation
shall, not later than ten Business Days after the date on which
such vote is taken, notify Moody's (if Moody's is then rating the
Preferred Shares) of the results of such vote.
(iii) OTHER MATTERS. (A) Notwithstanding any other
provision of the Charter, and subject to the exceptions provided
in paragraph (d) of this Section 5(c)(iii), the types of
transactions described in paragraph (c) of this Section 5(c)(iii)
shall require the affirmative vote of seventy-five percent (75%)
of the outstanding Preferred Shares, voting together with the
Common Stock when a Principal Shareholder (as defined in
paragraph (b) of this Section 5(c)(iii) is a party to the
transaction. Such affirmative vote shall be in addition to the
vote of the holders of the stock of the Corporation otherwise
required by law or any agreement between the Corporation and any
national securities exchange.
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(B) The term "Principal Shareholder" shall mean any
corporation, person or other entity which is the beneficial
owner, directly or indirectly, of more than five percent (5%) of
the outstanding shares of stock of the Corporation 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 5(c)(iii), in addition to the shares of stock
which a corporation, person or other entity beneficially owns
directly, (1) any corporation, person or other entity shall be
deemed to be the beneficial owner of any shares of stock of the
Corporation (I) which it has the right to acquire pursuant to any
agreement or upon exercise of conversion rights or warrants, or
otherwise (but excluding stock options granted by the
Corporation) 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 stock of
the Corporation, 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, as
amended, as in effect from time to time, and (2) the outstanding
shares of any class of stock of the Corporation 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 5(c)(iii) shall apply to the following
transactions:
(1) The merger, consolidation or statutory share
exchange of the Corporation with or into any Principal
Shareholder.
(2) The issuance of any securities of the Corporation
to any Principal Shareholder for cash except upon
(I) reinvestment of dividends pursuant to a dividend reinvestment
plan of the Corporation or (II) issuance of any securities of the
Corporation upon the exercise of any stock subscription rights
distributed by the Corporation or (III) a public offering by the
Corporation registered under the Securities Act of 1933, as
amended.
(3) The sale, lease or exchange of all or any
substantial part of the assets of the Corporation 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).
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(4) The sale, lease or exchange to the Corporation or
any subsidiary thereof, in exchange for securities of the
Corporation, 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 5(c)(iii) shall not be
applicable to (1) any of the transactions described in Paragraph
(C) of this Section if the Continuing Directors of the
Corporation (as defined below) shall by resolution have approved
a memorandum of understanding with such Principal Shareholder
with respect to and substantially consistent with such
transaction, or (2) any such transaction with any corporation of
which a majority of the outstanding shares of all classes of
stock normally entitled to vote in elections of directors is
owned of record or beneficially by the Corporation and its
subsidiaries. A "Continuing Director" is a Director who (I) was
a Director on the date of the closing of the initial public
offering of the Corporation's Common Stock or (II) subsequently
became a Director and whose election, or nomination for election
by the Corporation's stockholders, was approved by a vote of a
majority of the Continuing Directors then on the Board of
Directors.
(E) The Board of Directors shall have the power and duty to
determine for the purposes of this Section 5(c)(iii) on the basis
of information known to the Corporation, whether (1) a
corporation, person or entity beneficially owns more than five
percent (5%) of the outstanding shares of any class of stock of
the Corporation, (2) a corporation, person or entity is an
"affiliate" or "associate" (as defined above) of another, (3) the
assets being acquired or leased to or by the Corporation, or any
subsidiary thereof, constitute a substantial part of the assets
of the Corporation and have an aggregate fair market value of
less than $1,000,000, and (4) 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.
(F) The liquidation or dissolution of the Corporation and
any amendments to the Charter to terminate the Corporation's
existence shall require the affirmative vote of seventy-five
percent (75%) of the outstanding Preferred Shares voting together
with the Common Stock, provided, however, that if a majority of
the Continuing Directors shall have approved the liquidation or
dissolution of the Corporation, such action shall require the
affirmative vote of a majority of the votes entitled to be cast.
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(d) CERTAIN DEFINITIONS DEPENDENT UPON FACTS ASCERTAINABLE
OUTSIDE THE CHARTER. The rights of any Preferred Shares or the
Holders thereof, including the interpretation or applicability of
any or all of the definitions of the terms listed below that were
adopted pursuant to ratings agency guidelines, may from time to
time be modified by the Board of Directors in its sole discretion
based on a determination by the Board of Directors that such
action is necessary or appropriate with respect to the Preferred
Shares; provided, however, that the Board of Directors receives
written confirmation from Moody's (such confirmation being
required to be obtained only in the event Moody's is rating the
Preferred Shares and in no event being required to be obtained in
the case of the definitions of (1) Deposit Securities, Discounted
Value, Receivables for Municipal Obligations Sold, Issue Type
Category and Other Issues as such terms apply to S&P Eligible
Assets and (2) S&P Discount Factor, S&P Eligible Asset, S&P
Exposure Period and S&P Volatility Factor) and S&P (such
confirmation being required to be obtained only in the event S&P
is rating the Preferred Shares and in no event being required to
be obtained in the case of the definitions of (I) Discounted
Value, Receivables for Municipal Obligations Sold, Issue Type
Category and Other Issues as such terms apply to Moody's Eligible
Assets, and (II) Moody's Discount Factor, Moody's Eligible Asset,
Moody's Exposure Period and Moody's Volatility Factor) that any
such modification would not impair the ratings then assigned by
Moody's or S&P, as the case may be, to Preferred Shares:
Deposit Securities Moody's Volatility Factor
Discounted Value 1940 Act Cure Date
Escrowed Bonds 1940 Act Preferred Shares
Asset Coverage
Issue Type Category Other Issues
Market Value Quarterly Valuation Date
Maximum Potential Gross-up
Payment Liability Receivables for Municipal
Obligations Sold
Preferred Shares Basic
Maintenance Amount S&P Discount Factor
Preferred Shares Basic
Maintenance Cure Date S&P Eligible Asset
Preferred Shares Basic
Maintenance Report S&P Exposure Period
Moody's Discount Factor S&P Volatility Factor
Moody's Eligible Asset Valuation Date
Moody's Exposure Period Volatility Factor
(e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS.
Unless otherwise required by law, the Holders shall not have any
relative rights or preferences or other special rights other than
those specifically set forth herein.
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(f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders
shall have no preemptive rights or rights to cumulative voting.
(g) VOTING FOR DIRECTORS SOLE REMEDY FOR CORPORATION'S
FAILURE TO PAY DIVIDENDS. In the event that the Corporation fails
to pay any dividends on the Preferred Shares, the exclusive
remedy of the Holders shall be the right to vote for Directors
pursuant to the provisions of this Section 5.
(h) HOLDERS ENTITLED TO VOTE. For purposes of determining any
rights of the Holders to vote on any matter, whether such right
is created by these Articles, by the other provisions of the
Charter, by statute or otherwise, no Holder shall be entitled to
vote any Preferred Shares and no Preferred Shares shall be deemed
to be outstanding for the purpose of voting or determining the
number of shares required to constitute a quorum if, prior to or
concurrently with the time of determination of shares entitled to
vote or shares deemed outstanding for quorum purposes, as the
case may be, the requisite Notice of Redemption with respect to
such shares shall have been mailed as provided in paragraph (c)
of Section 11 of this Part I and the Redemption Price for the
redemption of such shares shall have been deposited in trust with
the Auction Agent for that purpose. None of the Preferred Shares
held by the Corporation or any affiliate of the Corporation
(except for shares held by a Broker-Dealer that is an affiliate
of the Corporation for the account of its customers) shall have
any voting rights or be deemed to be outstanding for voting or
other purposes.
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE. The Corporation
shall maintain, as of the last Business Day of each month in
which any Preferred Share is outstanding, the 1940 Act Preferred
Shares Asset Coverage.
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as Preferred Shares are outstanding, the
Corporation shall maintain, on each Valuation Date, and shall
verify to its satisfaction that it is maintaining on such
Valuation Date, (i) S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount (if S&P is then rating the Preferred
Shares) and (ii) Moody's Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount (if Moody's is then rating the Preferred
Shares).
(b) On or before 5:00 P.M., New York City time, on the third
Business Day after a Valuation Date on which the Corporation
fails to satisfy the Preferred Shares Basic Maintenance Amount,
and on the third Business Day after the Preferred Shares Basic
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Maintenance Cure Date with respect to such Valuation Date, the
Corporation shall complete and deliver to S&P (if S&P is then
rating the Preferred Shares), Moody's (if Moody's is then rating
the Preferred Shares) and the Auction Agent (if either S&P or
Moody's is then rating the Preferred Shares) a Preferred Shares
Basic Maintenance Report as of the date of such failure or such
Preferred Shares Basic Maintenance Cure Date, as the case may be,
which will be deemed to have been delivered to the Auction Agent
if the Auction Agent receives a copy or telecopy, telex or other
electronic transcription thereof and on the same day the
Corporation mails to the Auction Agent for delivery on the next
Business Day the full Preferred Shares Basic Maintenance Report.
The Corporation shall also deliver a Preferred Shares Basic
Maintenance Report to (i) the Auction Agent (if either Moody's or
S&P is then rating the Preferred Shares) as of (A) the fifteenth
day of each month (or, if such day is not a Business Day, the
next succeeding Business Day) and (B) the last Business Day of
each month, (ii) Moody's (if Moody's is then rating the Preferred
Shares) and S&P (if S&P is then rating the Preferred Shares) as
of any Quarterly Valuation Date, in each case on or before the
third Business Day after such day, and (iii) S&P, if and when
requested for any Valuation Date, on or before the third Business
Day after such request. A failure by the Corporation to deliver
a Preferred Shares Basic Maintenance Report pursuant to the
preceding sentence shall be deemed to be delivery of a Preferred
Shares Basic Maintenance Report indicating the Discounted Value
for all assets of the Corporation is less than the Preferred
Shares Basic Maintenance Amount, as of the relevant Valuation
Date.
(c) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with
paragraph (b) of this Section 7 relating to a Quarterly Valuation
Date, the Corporation shall cause the Independent Accountant to
confirm in writing to S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares)
and the Auction Agent (if either S&P or Moody's is then rating
the Preferred Shares) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Preferred
Shares Basic Maintenance Report, randomly selected by the
Independent Accountant, that was delivered by the Corporation
during the quarter ending on such Quarterly Valuation Date), (ii)
that, in such Report (and in such randomly selected Report), the
Corporation determined in accordance with these Articles whether
the Corporation had, at such Quarterly Valuation Date (and at the
Valuation Date addressed in such randomly-selected Report), S&P
Eligible Assets (if S&P is then rating the Preferred Shares) of
an aggregate Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount and Moody's Eligible Assets (if
Moody's is then rating the Preferred Shares) of an aggregate
Discounted Value at least equal to the Preferred Shares Basic
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Maintenance Amount, (iii) that, in such Report (and in such
randomly selected Report), the Corporation determined whether the
Corporation had, at such Quarterly Valuation Date (and at the
Valuation Date addressed in such randomly selected Report) in
accordance with these Articles, S&P Eligible Assets of an
aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount and Moody's Eligible Assets of an
aggregate Discounted Value at least equal to the Preferred Shares
Basic Maintenance Amount, (iv) with respect to the S&P ratings on
Municipal Obligations, the issuer name, issue size and coupon
rate listed in such Report, that the Independent Accountant has
requested that S&P verify such information and the Independent
Accountant shall provide a listing in its letter of any
differences, (v) with respect to the Moody's ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed
in such Report, that such information has been verified by
Moody's (in the event such information is not verified by
Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any
differences), (vi) with respect to the bid or mean price (or such
alternative permissible factor used in calculating the Market
Value) provided by the custodian of the Corporation's assets to
the Corporation for purposes of valuing securities in the
Corporation's portfolio, the Independent Accountant has traced
the price used in such Report to the bid or mean price listed in
such Report as provided to the Corporation and verified that such
information agrees (in the event such information does not agree,
the Independent Accountant will provide a listing in its letter
of such differences) and (vii) with respect to such confirmation
to Moody's and S&P, that the Corporation has satisfied the
requirements of Section 13 of these Articles (such confirmation
is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with
paragraph (b) of this Section 7 relating to any Valuation Date on
which the Corporation failed to satisfy the Preferred Shares
Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to
satisfy the Preferred Shares Basic Maintenance Amount, the
Corporation shall cause the Independent Accountant to provide to
S&P (if S&P is then rating the Preferred Shares), Moody's (if
Moody's is then rating the Preferred Shares) and the Auction
Agent (if either S&P or Moody's is then rating the Preferred
Shares) an Accountant's Confirmation as to such Preferred Shares
Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to
paragraph (c) or (d) of this Section 7 shows that an error was
made in the Preferred Shares Basic Maintenance Report for a
particular Valuation Date for which such Accountant's
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Confirmation was required to be delivered, or shows that a lower
aggregate Discounted Value for the aggregate of all S&P Eligible
Assets (if S&P is then rating the Preferred Shares) or Moody's
Eligible Assets (if Moody's is then rating the Preferred Shares),
as the case may be, of the Corporation was determined by the
Independent Accountant, the calculation or determination made by
such Independent Accountant shall be final and conclusive and
shall be binding on the Corporation, and the Corporation shall
accordingly amend and deliver the Preferred Shares Basic
Maintenance Report to S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares)
and the Auction Agent (if either S&P or Moody's is then rating
the Preferred Shares) promptly following receipt by the
Corporation of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first
Business Day after the Date of Original Issue of Preferred
Shares, the Corporation shall complete and deliver to S&P (if S&P
is then rating the Preferred Shares) and Moody's (if Moody's is
then rating the Preferred Shares) a Preferred Shares Basic
Maintenance Report as of the close of business on such Date of
Original Issue. Within five Business Days of such Date of
Original Issue, the Corporation shall cause the Independent
Accountant to confirm in writing to S&P (if S&P is then rating
the Preferred Shares) (i) the mathematical accuracy of the
calculations reflected in such Report and (ii) that the
Discounted Value of S&P Eligible Assets reflected thereon equals
or exceeds the Preferred Shares Basic Maintenance Amount
reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third
Business Day after either (i) the Corporation shall have redeemed
Common Stock or (ii) the ratio of the Discounted Value of S&P
Eligible Assets or the Discounted Value of Moody's Eligible
Assets to the Preferred Shares Basic Maintenance Amount is less
than or equal to 105% or (iii) whenever requested by Moody's and
S&P, the Corporation shall complete and deliver to S&P (if S&P is
then rating the Preferred Shares) or Moody's (if Moody's is then
rating the Preferred Shares), as the case may be, a Preferred
Shares Basic Maintenance Report as of the date of either such
event.
8. [RESERVED].
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON PREFERRED STOCK OTHER THAN PREFERRED SHARES.
Except as set forth in the next sentence and in paragraph (c) of
this Section 9, no dividends shall be declared or paid or set
apart for payment on the shares of any class or series of shares
of Preferred Stock ranking, as to the payment of dividends, on a
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parity with the Preferred Shares for any period unless full
cumulative dividends have been or contemporaneously are declared
and paid on each series of Preferred Shares through its most
recent Dividend Payment Date. When dividends are not paid in full
upon the each series of Preferred Shares through its most recent
Dividend Payment Date or upon the shares of any other class or
series of shares of Preferred Stock ranking on a parity as to the
payment of dividends with the Preferred Shares through their most
recent respective dividend payment dates, all dividends declared
upon the Preferred Shares and any other such class or series of
shares of Preferred Stock ranking on a parity as to the payment
of dividends with the Preferred Shares shall be declared pro rata
so that the amount of dividends declared per share on the
Preferred Shares and such other class or series of shares of
Preferred Stock shall in all cases bear to each other the same
ratio that accumulated dividends per share on the Preferred
Shares and such other class or series of shares of Preferred
Stock bear to each other (for purposes of this sentence, the
amount of dividends declared per one Preferred Share shall be
based on the Applicable Rate for such share for the Dividend
Periods during which dividends were not paid in full).
(b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON
STOCK UNDER THE 1940 ACT. The Board of Directors shall not
authorize any dividend (except a dividend payable in Common
Stock), or authorize any other distribution, upon the Common
Stock, or purchase Common Stock, unless in every such case the
Preferred Shares have, at the time of any such declaration or
purchase, an asset coverage (as defined in and determined
pursuant to the 1940 Act) of at least 200% (or such other asset
coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition
of declaring dividends on its common shares or stock) after
deducting the amount of such dividend, distribution or purchase
price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
For so long as any of the Preferred Shares is outstanding, and
except as set forth in paragraph (a) of this Section 9 and
paragraph (c) of Section 12 of this Part I, (i) the Corporation
shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or
purchase, Common Stock or other shares, if any, ranking junior to
the Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding
up) in respect of the Common Stock or any other shares of the
Corporation ranking junior to or on a parity with the Preferred
Shares as to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up, or call for
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redemption, redeem, purchase or otherwise acquire for
consideration any Common Stock or any other such junior shares
(except by conversion into or exchange for shares of the
Corporation ranking junior to the Preferred Shares as to the
payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), or any such parity
shares (except by conversion into or exchange for shares of the
Corporation ranking junior to or on a parity with Preferred
Shares as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless (A)
full cumulative dividends on shares of each series of Preferred
Shares through its most recently ended Dividend Period shall have
been paid or shall have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent and (B) the
Corporation has redeemed the full number of shares of each series
of Preferred Shares required to be redeemed by any provision for
mandatory redemption pertaining thereto, and (ii) the Corporation
shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in
shares of, or in options, warrants or rights to subscribe for or
purchase, Common Stock or other shares, if any, ranking junior to
the Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding
up) in respect of Common Stock or any other shares of the
Corporation ranking junior to the Preferred Shares as to the
payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption,
redeem, purchase or otherwise acquire for consideration any
Common Stock or any other such junior shares (except by
conversion into or exchange for shares of the Corporation ranking
junior to the Preferred Shares as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or
winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the Preferred Shares) and S&P Eligible Assets (if S&P is
then rating the Preferred Shares) would each at least equal the
Preferred Shares Basic Maintenance Amount.
10. RATING AGENCY RESTRICTIONS. For so long as any Preferred
Shares are outstanding and Moody's or S&P, or both, are rating
such shares, the Corporation will not, unless it has received
written confirmation from Moody's or S&P, or both, as
appropriate, that any such action would not impair the ratings
then assigned by such rating agency to such shares, engage in any
one or more of the following transactions:
(a) buy or sell futures or write put or call options except
as provided in Section 7 of Appendix A hereto;
(b) borrow money, except that the Corporation may, without
obtaining the written confirmation described above, borrow money
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for the purpose of clearing securities transactions if (i) the
Preferred Shares Basic Maintenance Amount would continue to be
satisfied after giving effect to such borrowing and (ii) such
borrowing (A) is privately arranged with a bank or other person
and is evidenced by a promissory note or other evidence of
indebtedness that is not intended to be publicly distributed or
(B) is for "temporary purposes", is evidenced by a promissory
note or other evidence of indebtedness and is in an amount not
exceeding 5 per centrum of the value of the total assets of the
Corporation at the time of the borrowing; for purposes of the
foregoing, "temporary purpose" means that the borrowing is to be
repaid within sixty days and is not to be extended or renewed;
(c) issue additional shares of any series of Preferred Shares
or any class or series of shares ranking prior to or on a parity
with the Preferred Shares with respect to the payment of
dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Corporation, or reissue any
Preferred Shares previously purchased or redeemed by the
Corporation;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the Pricing Service or
(h) enter into reverse repurchase agreements.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of any series of Preferred Shares may
be redeemed, at the option of the Corporation, as a whole or from
time to time in part, on the second Business Day preceding any
Dividend Payment Date for shares of such series, out of funds
legally available therefor, at a redemption price per share equal
to the sum of $25,000 plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to
(but not including) the Redemption Date fixed for redemption;
provided, however, that (A) shares of any series of Preferred
Shares may not be redeemed in part if after such partial
redemption fewer than [250] shares of such series remain
outstanding; (B) shares of any series of Preferred Shares are
redeemable by the Corporation during the Initial Rate Period
thereof only on a Redemption Date that is the second Business Day
next preceding the last Dividend Payment Date for such Initial
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Rate Period; and (C) subject to subparagraph (ii) of this
paragraph (a), the Notice of Special Rate Period relating to a
Special Rate Period of any series of Preferred Shares, as
delivered to the Auction Agent and filed with the Secretary of
the Corporation, may provide Special Redemption Provisions that
shares of such series shall not be redeemable during the whole or
any part of such Special Rate Period (except as provided in
subparagraph (iv) of this paragraph (a)) or shall be redeemable
during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be
specified therein.
(ii) A Notice of Special Rate Period relating to any
series of Preferred Shares for a Special Rate Period thereof may
contain Special Redemption Provisions only if the Corporation's
Board of Directors, after consultation with the Broker-Dealer or
Broker-Dealers for such Special Rate Period of shares of such
series, determines that such Special Redemption Provisions are in
the best interest of the Corporation.
(iii) If fewer than all of the outstanding shares of any
series of Preferred Shares are to be redeemed pursuant to
subparagraph (i) of this paragraph (a), the number of shares of
such series to be redeemed shall be determined by the Board of
Directors, and such shares shall be redeemed pro rata from the
Holders of shares of such series in proportion to the number of
shares of such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of
this paragraph (a), shares of any series of Preferred Shares may
be redeemed, at the option of the Corporation, as a whole but not
in part, out of funds legally available therefor, on a Redemption
Date that is the first day following any Dividend Period thereof
included in a Rate Period consisting of more than 364 Rate Period
Days if, on the date of determination of the Applicable Rate for
shares of such series for such Rate Period, such Applicable Rate
equaled or exceeded on such date of determination the Treasury
Note Rate for such Rate Period, at a redemption price per share
equal to the sum of $25,000 plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared)
to (but not including) the date fixed for redemption.
(v) The Corporation may not on any date mail a Notice of
Redemption pursuant to paragraph (c) of this Section 11 in
respect of a redemption contemplated to be effected pursuant to
this paragraph (a) unless on such date (A) the Corporation has
available Deposit Securities with maturity or tender dates not
later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable
premium) due to Holders by reason of the redemption of such
shares on such Redemption Date and (B) the Discounted Value of
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Moody's Eligible Assets (if Moody's is then rating the Preferred
Shares) and the Discounted Value of S&P Eligible Assets (if S&P
is then rating the Preferred Shares) each at least equal the
Preferred Shares Basic Maintenance Amount, and would at least
equal the Preferred Shares Basic Maintenance Amount immediately
subsequent to such redemption if such redemption were to occur on
such date. For purposes of determining in clause (Bb) of the
preceding sentence whether the Discounted Value of Moody's
Eligible Assets at least equals the Preferred Shares Basic
Maintenance Amount, the Moody's Discount Factors applicable to
Moody's Eligible Assets shall be determined by reference to the
first Exposure Period longer than the Exposure Period then
applicable to the Corporation, as described in the definition of
Moody's Discount Factor herein.
(b) MANDATORY REDEMPTION. The Corporation shall redeem, at a
redemption price equal to $25,000 per share plus accumulated but
unpaid dividends thereon (whether or not earned or declared) to
(but not including) the Redemption Date that is the date fixed by
the Board of Directors for redemption, certain of the Preferred
Shares, if the Corporation fails to have either Moody's Eligible
Assets with a Discounted Value or S&P Eligible Assets with a
Discounted Value greater than or equal to the Preferred Shares
Basic Maintenance Amount or fails to maintain the 1940 Act
Preferred Shares Asset Coverage, in accordance with the
requirements of the rating agency or agencies then rating the
Preferred Shares, and such failure is not cured on or before the
Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure
Date, as the case may be. The number of Preferred Shares to be
redeemed shall be equal to the lesser of (i) the minimum number
of Preferred Shares, together with all other preferred shares
subject to redemption or retirement, the redemption of which, if
deemed to have occurred immediately prior to the opening of
business on the Cure Date, would have resulted in the
Corporation's having both Moody's Eligible Assets with a
Discounted Value and S&P Eligible Assets with a Discounted Value
greater than or equal to the Preferred Shares Basic Maintenance
Amount or maintaining the 1940 Act Preferred Shares Asset
Coverage, as the case may be, on such Cure Date (provided,
however, that if there is no such minimum number of Preferred
Shares and other Preferred Stock the redemption or retirement of
which would have had such result, all Preferred Shares and
Preferred Stock then outstanding shall be redeemed), and (ii) the
maximum number of Preferred Shares, together with all other
Preferred Stock subject to redemption or retirement, that can be
redeemed out of funds expected to be legally available therefor
in accordance with the Charter and applicable law. In determining
the Preferred Shares required to be redeemed in accordance with
the foregoing, the Corporation shall allocate the number required
to be redeemed to satisfy the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage, as the
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case may be, pro rata among each series of Preferred Shares and
other Preferred Stock subject to redemption or retirement. The
Corporation shall effect such redemption on the Redemption Date,
which date shall not be earlier than 20 days nor later than 40
days after such Cure Date, except that if the Corporation does
not have funds legally available for the redemption of all of the
required number of Preferred Shares and other Preferred Stock
which are subject to redemption or retirement or the Corporation
otherwise is unable to effect such redemption on or prior to 40
days after such Cure Date, the Corporation shall redeem those
Preferred Shares and other Preferred Stock which it was unable to
redeem on the earliest practicable date on which it is able to
effect such redemption. If fewer than all of the outstanding
shares of a series of Preferred Shares are to be redeemed
pursuant to this paragraph (b), the number of shares of such
series to be redeemed shall be redeemed pro rata from the Holders
of shares of such series in proportion to the number of shares of
such series held by such Holders.
(c) NOTICE OF REDEMPTION. If the Corporation shall determine
or be required to redeem shares of a series of Preferred Shares
pursuant to paragraph (a) or (b) of this Section 11, it shall
mail a Notice of Redemption with respect to such redemption by
first class mail, postage prepaid, to each Holder of the shares
of such series to be redeemed, at such Holder's address as the
same appears on the record books of the Corporation on the record
date established by the Board of Directors. Such Notice of
Redemption shall be so mailed not less than 20 nor more than 45
days prior to the date fixed for redemption. Each such Notice of
Redemption shall state: (i) the Redemption Date; (ii) the number
of Preferred Shares to be redeemed and the series thereof; (iii)
the CUSIP number for shares of such series; (iv) the Redemption
Price; (v) the place or places where the certificate(s) for such
shares (properly endorsed or assigned for transfer, if the Board
of Directors shall so require and the Notice of Redemption shall
so state) are to be surrendered for payment of the Redemption
Price; (vi) that dividends on the shares to be redeemed will
cease to accumulate on such redemption date; and (vii) the
provisions of this Section 11 under which such redemption is
made. If fewer than all shares of a series of Preferred Shares
held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of shares of
such series to be redeemed from such Holder. The Corporation may
provide in any Notice of Redemption relating to a redemption
contemplated to be effected pursuant to paragraph (a) of this
Section 11 that such redemption is subject to one or more
conditions precedent and that the Corporation shall not be
required to effect such redemption unless each such condition
shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
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(d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES.
Notwithstanding the provisions of paragraphs (a) or (b) of this
Section 11, if any dividends on shares of any series of Preferred
Shares (whether or not earned or declared) are in arrears, no
shares of such series shall be redeemed unless all outstanding
shares of such series are simultaneously redeemed, and the
Corporation shall not purchase or otherwise acquire any shares of
such series of Preferred Shares; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all
outstanding shares of such series pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made
on the same terms to, and accepted by, Holders of all outstanding
shares of such series.
(e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent
that any redemption for which Notice of Redemption has been
mailed is not made by reason of the absence of legally available
funds therefor in accordance with the Charter and applicable law,
such redemption shall be made as soon as practicable to the
extent such funds become available. Failure to redeem the
Preferred Shares shall be deemed to exist at any time after the
date specified for redemption in a Notice of Redemption when the
Corporation shall have failed, for any reason whatsoever, to
deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has
been mailed; provided, however, that the foregoing shall not
apply in the case of the Corporation's failure to deposit in
trust with the Auction Agent the Redemption Price with respect to
any shares where (i) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or
more conditions precedent and (ii) any such condition precedent
shall not have been satisfied at the time or times and in the
manner specified in such Notice of Redemption. Notwithstanding
the fact that the Corporation may not have redeemed the Preferred
Shares for which a Notice of Redemption has been mailed,
dividends may be declared and paid on the Preferred Shares and
shall include those Preferred Shares for which a Notice of
Redemption has been mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY
CORPORATION. All moneys paid to the Auction Agent for payment of
the Redemption Price of Preferred Shares called for redemption
shall be held in trust by the Auction Agent for the benefit of
Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE
NO LONGER OUTSTANDING. Provided a Notice of Redemption has been
mailed pursuant to paragraph (c) of this Section 11, upon the
deposit with the Auction Agent (on the Business Day next
preceding the Redemption Date, in funds available on the next
Business Day in The City of New York, New York) of funds
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sufficient to redeem the Preferred Shares that are the subject of
such notice, dividends on such shares shall cease to accumulate
and such shares shall no longer be deemed to be outstanding for
any purpose, and all rights of the Holders of the shares so
called for redemption shall cease and terminate, except the right
of such Holders to receive the Redemption Price, but without any
interest or other additional amount, except as provided in
subparagraph (e)(i) of Section 2 of this Part I and in Section 3
of this Part I. Upon surrender in accordance with the Notice of
Redemption of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of
Directors shall so require and the Notice of Redemption shall so
state), the Redemption Price shall be paid by the Auction Agent
to the Holders of Preferred Shares subject to redemption. In the
case that fewer than all of the shares represented by any such
certificate are redeemed, a new certificate shall be issued,
representing the unredeemed shares, without cost to the Holder
thereof. The Corporation shall be entitled to receive from the
Auction Agent, promptly after the Redemption Date fixed for
redemption, any cash deposited with the Auction Agent in excess
of (i) the aggregate Redemption Price of the Preferred Shares
called for redemption on the Redemption Date and (ii) all other
amounts to which Holders of Preferred Shares called for
redemption may be entitled. Any funds so deposited that are
unclaimed at the end of 90 days from such redemption date shall,
upon request and to the extent permitted by law, be repaid to the
Corporation, after which time the Holders of Preferred Shares so
called for redemption may look only to the Corporation for
payment of the Redemption Price and all other amounts to which
they may be entitled.
(h) COMPLIANCE WITH APPLICABLE LAW. In effecting any
redemption pursuant to this Section 11, the Corporation shall use
its best efforts to comply with all applicable conditions
precedent to effecting such redemption under the 1940 Act and any
applicable Maryland law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Maryland law.
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED. In the case
of any redemption pursuant to this Section 11, only whole
Preferred Shares shall be redeemed, and in the event that any
provision of the Charter would require redemption of a fractional
share, the Auction Agent shall be authorized to round up so that
only whole shares are redeemed.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of any series of Preferred Shares
shall rank on a parity with each other, with shares of any other
series of Preferred Shares and with shares of any other series of
Preferred Stock as to the distribution of assets upon
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dissolution, liquidation or winding up of the affairs of the
Corporation.
(b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution,
liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, the Holders then outstanding
shall be entitled to receive and to be paid out of the assets of
the Corporation available for distribution to its stockholders,
before any payment or distribution shall be made on the Common
Stock or on any other class of stock of the Corporation ranking
junior to the Preferred Shares upon dissolution, liquidation or
winding up, an amount equal to the Liquidation Preference with
respect to such shares plus an amount equal to all dividends
thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in
same day funds, together with any payments required to be made
pursuant to Section 3 of this Part I in connection with the
liquidation of the Corporation. After the payment to the Holders
of the full preferential amounts provided for in this paragraph
(b), the Holders shall have no right or claim to any of the
remaining assets of the Corporation.
(c) PRO RATA DISTRIBUTIONS. In the event the assets of the
Corporation available for distribution to the Holders upon any
dissolution, liquidation, or winding up of the affairs of the
Corporation, whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such Holders are
entitled pursuant to paragraph (b) of this Section 12, no such
distribution shall be made on account of any shares of any other
class or series of Preferred Stock ranking on a parity with the
Preferred Shares with respect to the distribution of assets upon
such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the Preferred
Shares, ratably, in proportion to the full distributable amounts
for which holders of all such parity shares are respectively
entitled upon such dissolution, liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the
holders of shares of any series or class or classes of shares
ranking on a parity with the Preferred Shares with respect to the
distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Corporation, after payment shall have
been made in full to the Holders as provided in paragraph (b) of
this Section 12, but not prior thereto, any other series or class
or classes of shares ranking junior to the Preferred Shares with
respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Corporation
shall, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the Holders of the
Preferred Shares shall not be entitled to share therein.
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(e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the
sale of all or substantially all the property or business of the
Corporation, nor the merger or consolidation of the Corporation
into or with any Maryland corporation nor the merger or
consolidation of any Maryland corporation into or with the
Corporation shall be a dissolution, liquidation or winding up,
whether voluntary or involuntary, for the purposes of this
Section 12.
(f) LIQUIDATION DISTRIBUTION UPON DISSOLUTION NOT ADDED TO
CORPORATION'S TOTAL LIABILITIES. In determining whether a
distribution (other than upon voluntary or involuntary
liquidation), by dividend, redemption or other acquisition of
shares of stock of the Corporation or otherwise, is permitted
under the Maryland General Corporation Law, amounts that would be
needed, if the Corporation were to be dissolved at the time of
the distribution, to satisfy the preferential rights upon
dissolution of Holders of the Preferred Shares will not be added
to the Corporation's total liabilities.
13. MISCELLANEOUS.
(a) APPENDIX A INCORPORATED BY REFERENCE. Appendix A hereto
is incorporated in and made a part of these Articles by reference
thereto.
(b) NO FRACTIONAL SHARES. No fractional Preferred Shares
shall be issued.
(c) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE CORPORATION. Shares of any series of
Preferred Shares which are redeemed, exchanged or otherwise
acquired by the Corporation shall return to the status of
authorized and unissued shares of Common Stock.
(d) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by
applicable law, the Board of Directors may interpret or adjust
the provisions of these Articles to resolve any inconsistency or
ambiguity or to remedy any formal defect, and may amend these
Articles with respect to any series of Preferred Shares prior to
the issuance of shares of such series.
(e) HEADINGS NOT DETERMINATIVE. The headings contained in
these Articles are for convenience of reference only and shall
not affect the meaning or interpretation of these Articles.
(f) NOTICES. All notices or communications, unless otherwise
specified in the Bylaws of the Corporation or these Articles,
shall be sufficiently given if in writing and delivered in person
or mailed by first-class mail, postage prepaid.
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PART II
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares:
(i) each Beneficial Owner of shares of such series may
submit to its Broker-Dealer by telephone or otherwise information
as to:
(A) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner which such Beneficial
Owner desires to continue to hold without regard to the
Applicable Rate for shares of such series for the next succeeding
Rate Period of such shares;
(B) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner which such Beneficial
Owner offers to sell if the Applicable Rate for shares of such
series for the next succeeding Rate Period of shares of such
series shall be less than the rate per annum specified by such
Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner which such Beneficial
Owner offers to sell without regard to the Applicable Rate for
shares of such series for the next succeeding Rate Period of
shares of such series;
and
(ii) one or more Broker-Dealers, using lists of
Potential Beneficial Owners, shall in good faith for the purpose
of conducting a competitive Auction in a commercially reasonable
manner, contact Potential Beneficial Owners (by telephone or
otherwise), including Persons that are not Beneficial Owners, on
such lists to determine the number of shares, if any, of such
series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such series for the
next succeeding Rate Period of shares of such series shall not be
less than the rate per annum specified by such Potential
Beneficial Owner.
For the purposes hereof, the communication by a Beneficial
Owner or Potential Beneficial Owner to a Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, of information referred to in
clause (i)(A), (i)(B), (i)(C) or (ii) of this paragraph (a) is
hereinafter referred to as an "Order" and collectively as
"Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-
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Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order
containing the information referred to in clause (i)(A) of this
paragraph (a) is hereinafter referred to as a "Hold Order" and
collectively as "Hold Orders"; an Order containing the
information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a "Bid" and
collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter
referred to as a "Sell Order" and collectively as "Sell Orders".
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of
shares of a series of Preferred Shares subject to an Auction on
any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be less than the
rate specified therein;
(B) such number or a lesser number of Outstanding
shares of such series to be determined as set forth in clause
(iv) of paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on such
Auction Date shall be equal to the rate specified therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall be
higher than the Maximum Rate for shares of such series, or such
number or a lesser number of Outstanding shares of such series to
be determined as set forth in clause (iii) of paragraph (b) of
Section 4 of this Part II if the rate specified therein shall be
higher than the Maximum Rate for shares of such series and
Sufficient Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing
Holder of shares of a series of Preferred Shares subject to an
Auction on any Auction Date shall constitute an irrevocable offer
to sell:
(A) the number of Outstanding shares of such series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in clause (iii) of paragraph
(b) of Section 4 of this Part II if Sufficient Clearing Bids for
shares of such series do not exist;
provided, however, that a Broker-Dealer that is an
Existing Holder with respect to shares of a series of Preferred
Shares shall not be liable to any Person for failing to sell such
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shares pursuant to a Sell Order described in the proviso to
paragraph (c) of Section 2 of this Part II if (1) such shares
were transferred by the Beneficial Owner thereof without
compliance by such Beneficial Owner or its transferee Broker-
Dealer (or other transferee person, if permitted by the
Corporation) with the provisions of Section 7 of this Part II or
(2) such Broker-Dealer has informed the Auction Agent pursuant to
the terms of its Broker-Dealer Agreement that, according to such
Broker-Dealer's records, such Broker-Dealer believes it is not
the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a
Potential Holder of shares of a series of Preferred Shares
subject to an Auction on any Auction Date shall constitute an
irrevocable offer to purchase:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares of such
series determined on such Auction Date shall be higher than the
rate specified therein; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in clause (v) of paragraph (a)
of Section 4 of this Part II if the Applicable Rate for shares of
such series determined on such Auction Date shall be equal to the
rate specified therein.
(c) No Order for any number of Preferred Shares other than
whole shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction
Agent prior to the Submission Deadline on each Auction Date all
Orders for shares of a series of Preferred Shares subject to an
Auction on such Auction Date obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the
Corporation) as an Existing Holder in respect of shares subject
to Orders submitted or deemed submitted to it by Beneficial
Owners and as a Potential Holder in respect of shares subject to
Orders submitted to it by Potential Beneficial Owners, and shall
specify with respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which
shall be the Broker-Dealer unless otherwise permitted by the
Corporation);
(ii) the aggregate number of shares of such series that
are the subject of such Order;
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(iii) to the extent that such Bidder is an Existing
Holder of shares of such series:
(A) the number of shares, if any, of such series
subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series
subject to any Bid of such Existing Holder and the rate specified
in such Bid; and
(C) the number of shares, if any, of such series
subject to any Sell Order of such Existing Holder; and
(iv) to the extent such Bidder is a Potential Holder of
shares of such series, the rate and number of shares of such
series specified in such Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent
shall round such rate up to the next highest one thousandth
(.001) of 1%.
(c) If an Order or Orders covering all of the Outstanding
shares of a series of Preferred Shares held by any Existing
Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to
have been submitted by or on behalf of such Existing Holder
covering the number of Outstanding shares of such series held by
such Existing Holder and not subject to Orders submitted to the
Auction Agent; provided, however, that if an Order or Orders
covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to
the Submission Deadline for an Auction relating to a Special Rate
Period consisting of more than 28 Rate Period Days, the Auction
Agent shall deem a Sell Order to have been submitted by or on
behalf of such Existing Holder covering the number of outstanding
shares of such series held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted
to the Auction Agent covering in the aggregate more than the
number of Outstanding shares of a series of Preferred Shares
subject to an Auction held by such Existing Holder, such Orders
shall be considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be
considered valid, but only up to and including in the aggregate
the number of Outstanding shares of such series held by such
Existing Holder, and if the number of shares of such series
subject to such Hold Orders exceeds the number of Outstanding
shares of such series held by such Existing Holder, the number of
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shares subject to each such Hold Order shall be reduced pro rata
to cover the number of Outstanding shares of such series held by
such Existing Holder;
(ii) (A) any Bid for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the number of shares of such series subject to any Hold
Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid
of an Existing Holder for shares of such series is submitted to
the Auction Agent with the same rate and the number of
Outstanding shares of such series subject to such Bids is greater
than such excess, such Bids shall be considered valid up to and
including the amount of such excess, and the number of shares of
such series subject to each Bid with the same rate shall be
reduced pro rata to cover the number of shares of such series
equal to such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid of an Existing Holder for shares of such series is
submitted to the Auction Agent with different rates, such Bids
shall be considered valid in the ascending order of their
respective rates up to and including the amount of such excess;
and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of Bids
considered not valid in whole or in part under this clause (ii)
shall be treated as the subject of a Bid for shares of such
series by or on behalf of a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for shares of such series shall be
considered valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the sum of shares of such series subject to valid Hold
Orders referred to in clause (i) above and valid Bids referred to
in clause (ii) above.
(e) If more than one Bid for one or more shares of a series
of Preferred Shares is submitted to the Auction Agent by or on
behalf of any Potential Holder, each such Bid submitted shall be
a separate Bid with the rate and number of shares therein
specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to
the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
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3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE
AND APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction
Date for shares of a series of Preferred Shares, the Auction
Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers in respect of shares of
such series (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell
Order," as the case may be, or as a "Submitted Order" and
collectively as "Submitted Hold Orders," "Submitted Bids" or
"Submitted Sell Orders," as the case may be, or as "Submitted
Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of
such series over the number of Outstanding shares of such series
subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such series
whether:
(A) the number of Outstanding shares of such series
subject to Submitted Bids of Potential Holders specifying one or
more rates equal to or lower than the Maximum Rate for shares of
such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series
subject to Submitted Bids of Existing Holders specifying one or
more rates higher than the Maximum Rate for shares of such
series; and
(C) the number of Outstanding shares of such series
subject to Submitted Sell Orders (in the event such excess or
such equality exists (other than because the number of shares of
such series in subclauses (B) and (C) above is zero because all
of the Outstanding shares of such series are subject to Submitted
Hold Orders), such Submitted Bids in subclause (A) above being
hereinafter referred to collectively as "Sufficient Clearing
Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such
series exist, the lowest rate specified in such Submitted Bids
(the Winning Bid Rate for shares of such series) which if:
(A)(1) each such Submitted Bid of Existing Holders
specifying such lowest rate and (2) all other such Submitted Bids
of Existing Holders specifying lower rates were rejected, thus
A-57
entitling such Existing Holders to continue to hold the shares of
such series that are subject to such Submitted Bids; and
(B)(1) each such Submitted Bid of Potential Holders
specifying such lowest rate and (2) all other such Submitted Bids
of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in
subclause (A) above continuing to hold an aggregate number of
Outstanding shares of such series which, when added to the number
of Outstanding shares of such series to be purchased by such
Potential Holders described in subclause (B) above, would equal
not less than the Available Preferred Shares of such series.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 3, the
Auction Agent shall advise the Corporation of the Maximum Rate
for shares of the series of Preferred Shares for which an Auction
is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of such series for
the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such
series exist, that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be equal
to the Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such
series do not exist (other than because all of the Outstanding
shares of such series are subject to Submitted Hold Orders), that
the Applicable Rate for all shares of such series for the next
succeeding Rate Period thereof shall be equal to the Maximum Rate
for shares of such series; or
(iii) if all of the Outstanding shares of such series
are subject to Submitted Hold Orders, that the Applicable Rate
for all shares of such series for the next succeeding Rate Period
thereof shall be as set forth in Section 6 of Appendix A hereto.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL
ORDERS AND ALLOCATION OF SHARES. Existing Holders shall continue
to hold the Preferred Shares that are subject to Submitted Hold
Orders, and, based on the determinations made pursuant to
paragraph (a) of Section 3 of this Part II, the Submitted Bids
and Submitted Sell Orders shall be accepted or rejected by the
Auction Agent and the Auction Agent shall take such other action
as set forth below:
(a) If Sufficient Clearing Bids for shares of a series of
Preferred Shares have been made, all Submitted Sell Orders with
respect to shares of such series shall be accepted and, subject
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to the provisions of paragraphs (d) and (e) of this Section 4,
Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of
such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is higher than the Winning Bid
Rate for shares of such series shall be accepted, thus requiring
each such Existing Holder to sell the Preferred Shares subject to
such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is lower than the Winning Bid
Rate for shares of such series shall be rejected, thus entitling
each such Existing Holder to continue to hold the Preferred
Shares subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is lower than the Winning
Bid Rate for shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the Winning Bid
Rate for shares of such series shall be rejected, thus entitling
such Existing Holder to continue to hold the Preferred Shares
subject to such Submitted Bid, unless the number of Outstanding
Preferred Shares subject to all such Submitted Bids shall be
greater than the number of Preferred Shares (remaining shares) in
the excess of the Available Preferred Shares of such series over
the number of Preferred Shares subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in
which event such Submitted Bid of such Existing Holder shall be
rejected in part, and such Existing Holder shall be entitled to
continue to hold Preferred Shares subject to such Submitted Bid,
but only in an amount equal to the number of Preferred Shares of
such series obtained by multiplying the number of remaining
shares by a fraction, the numerator of which shall be the number
of Outstanding Preferred Shares held by such Existing Holder
subject to such Submitted Bid and the denominator of which shall
be the aggregate number of Outstanding Preferred Shares subject
to such Submitted Bids made by all such Existing Holders that
specified a rate equal to the Winning Bid Rate for shares of such
series; and
(v) each Potential Holder's Submitted Bid for shares of
such series specifying a rate that is equal to the Winning Bid
Rate for shares of such series shall be accepted but only in an
amount equal to the number of shares of such series obtained by
multiplying the number of shares in the excess of the Available
Preferred Shares of such series over the number of Preferred
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Shares subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph (a) by a fraction, the numerator
of which shall be the number of Outstanding Preferred Shares
subject to such Submitted Bid and the denominator of which shall
be the aggregate number of Outstanding Preferred Shares subject
to such Submitted Bids made by all such Potential Holders that
specified a rate equal to the Winning Bid Rate for shares of such
series.
(b) If Sufficient Clearing Bids for shares of a series of
Preferred Shares have not been made (other than because all of
the Outstanding shares of such series are subject to Submitted
Hold Orders), subject to the provisions of paragraph (d) of this
Section 4, Submitted Orders for shares of such series shall be
accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such
series specifying any rate that is equal to or lower than the
Maximum Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the Preferred
Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of
such series specifying any rate that is equal to or lower than
the Maximum Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of
such series specifying any rate that is higher than the Maximum
Rate for shares of such series and the Submitted Sell Orders for
shares of such series of each Existing Holder shall be accepted,
thus entitling each Existing Holder that submitted or on whose
behalf was submitted any such Submitted Bid or Submitted Sell
Order to sell the shares of such series subject to such Submitted
Bid or Submitted Sell Order, but in both cases only in an amount
equal to the number of shares of such series obtained by
multiplying the number of shares of such series subject to
Submitted Bids described in clause (ii) of this paragraph (b) by
a fraction, the numerator of which shall be the number of
Outstanding shares of such series held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of Outstanding
shares of such series subject to all such Submitted Bids and
Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Preferred
Shares are subject to Submitted Hold Orders, all Submitted Bids
for shares of such series shall be rejected.
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(d) If, as a result of the procedures described in clause
(iv) or (v) of paragraph (a) or clause (iii) of paragraph (b) of
this Section 4, any Existing Holder would be entitled or required
to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of a series of Preferred Shares
on any Auction Date, the Auction Agent shall, in such manner as
it shall determine in its sole discretion, round up or down the
number of shares of such series of Preferred Shares to be
purchased or sold by any Existing Holder or Potential Holder on
such Auction Date as a result of such procedures so that the
number of shares so purchased or sold by each Existing Holder or
Potential Holder on such Auction Date shall be whole Preferred
Shares.
(e) If, as a result of the procedures described in clause (v)
of paragraph (a) of this Section 4, any Potential Holder would be
entitled or required to purchase less than a whole share of a
series of Preferred Shares on any Auction Date, the Auction Agent
shall, in such manner as it shall determine in its sole
discretion, allocate shares of such series of Preferred Shares
for purchase among Potential Holders so that only whole shares of
such series are purchased on such Auction Date as a result of
such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing shares of
such series of Preferred Shares on such Auction Date.
(f) Based on the results of each Auction for shares of a
series of Preferred Shares, the Auction Agent shall determine the
aggregate number of shares of such series to be purchased and the
aggregate number of shares of such series to be sold by Potential
Holders and Existing Holders and, with respect to each Potential
Holder and Existing Holder, to the extent that such aggregate
number of shares to be purchased and such aggregate number of
shares to be sold differ, determine to which other Potential
Holder(s) or Existing Holder(s) they shall deliver, or from which
other Potential Holder(s) or Existing Holder(s) they shall
receive, as the case may be, shares of such series.
Notwithstanding any provision of the Auction Procedures or the
Settlement Procedures to the contrary, in the event an Existing
Holder or Beneficial Owner of shares of a series of Preferred
Shares with respect to whom a Broker-Dealer submitted a Bid to
the Auction Agent for such shares that was accepted in whole or
in part, or submitted or is deemed to have submitted a Sell Order
for such shares that was accepted in whole or in part, fails to
instruct its Agent Member to deliver such shares against payment
therefor, partial deliveries of shares of Preferred Shares that
have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such series that
have been accepted in whole or in part shall constitute good
delivery to such Potential Holders and Potential Beneficial
Owners.
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(g) Neither the Corporation nor the Auction Agent nor any
affiliate of either shall have any responsibility or liability
with respect to the failure of an Existing Holder, a Potential
Holder, a Beneficial Owner, a Potential Beneficial Owner or its
respective Agent Member to deliver shares of any series of
Preferred Shares or to pay for shares of any series of Preferred
Shares sold or purchased pursuant to the Auction Procedures or
otherwise.
5. NOTIFICATION OF ALLOCATIONS. Whenever the Corporation intends
to include any net capital gains or other income taxable for
Federal income tax purposes in any dividend on Preferred Shares,
the Corporation shall, in the case of a Minimum Rate Period or a
Special Rate Period of 28 Rate Period Days or fewer, and may, in
the case of any other Special Rate Period, notify the Auction
Agent of the amount to be so included not later than the Dividend
Payment Date next preceding the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever
the Auction Agent receives such notice from the Corporation, it
will be required in turn to notify each Broker-Dealer, who, on or
prior to such Auction Date, in accordance with its Broker-Dealer
Agreement, will be required to notify its Beneficial Owners and
Potential Beneficial Owners of Preferred Shares believed by it to
be interested in submitting an Order in the Auction to be held on
such Auction Date.
6. AUCTION AGENT. For so long as any Preferred Shares are
outstanding, the Auction Agent, duly appointed by the Corporation
to so, shall be in each case a commercial bank, trust company or
other financial institution independent of the Corporation and
its Affiliates (which however, may engage or have engaged in
business transactions with the Corporation or its Affiliates) and
at no time shall the Corporation or any of its Affiliates act as
the Auction Agent in connection with the Auction Procedures. If
the Auction Agent resigns or for any reason its appointment is
terminated during any period that any Preferred Shares are
outstanding, the Board of Directors shall use its best efforts
promptly thereafter to appoint another qualified commercial bank,
trust company or financial institution to act as the Auction
Agent. The Auction Agent's registry of Existing Holders of shares
of a series of Preferred Shares shall be conclusive and binding
on the Broker-Dealers. A Broker-Dealer may inquire of the Auction
Agent between 3:00 p.m. on the Business Day preceding an Auction
for Preferred Shares of a series and 9:30 a.m. on the Auction
Date for such Auction to ascertain the number of shares of such
series in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer
believes it is the Existing Holder of fewer shares of such series
than specified by the Auction Agent in response to such Broker-
Dealer's inquiry, such Broker-Dealer may so inform the Auction
Agent of that belief. Such Broker-Dealer shall not, in its
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capacity as Existing Holder of shares of such series, submit
Orders in such Auction in respect of shares of such series
covering in the aggregate more than the number of shares of such
series specified by the Auction Agent in response to such Broker-
Dealer's inquiry.
7. TRANSFER OF SHARES OF ANY SERIES OF PREFERRED SHARES. Unless
otherwise permitted by the Corporation, a Beneficial Owner or an
Existing Holder may sell, transfer or otherwise dispose of shares
of any series of Preferred Shares only in whole shares and only
pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a
Broker-Dealer, provided, however, that (a) a sale, transfer or
other disposition of Preferred Shares from a customer of a
Broker-Dealer who is listed on the records of that Broker-Dealer
as the holder of such shares to that Broker-Dealer or another
customer of that Broker-Dealer shall not be deemed to be a sale,
transfer or other disposition for purposes of this Section 7 if
such Broker-Dealer remains the Existing Holder of the shares so
sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers
other than pursuant to Auctions, the Broker-Dealer (or other
Person, if permitted by the Corporation) to whom such transfer is
made shall advise the Auction Agent of such transfer.
8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting
Period, (a) all of the shares of a series of Preferred Shares
outstanding from time to time shall be represented by one global
certificate registered in the name of the Securities Depository
or its nominee and (b) no registration of transfer of shares of a
series of Preferred Shares shall be made on the books of the
Corporation to any Person other than the Securities Depository or
its nominee.
9. FORCE MAJEURE
(a) Notwithstanding anything else set forth herein, if an
Auction Date is not a Business Day because the New York Stock
Exchange is closed for business due to an act of God, natural
disaster, act of war, civil or military disturbance, act of
terrorism, sabotage, riots or a loss or malfunction of utilities
or communications services of the Auction Agent is no able to
conduct an Auction in accordance with the Auction Procedures for
any such reason, then the Auction Rate for the next Dividend
Period shall be the Auction Rate determined on the previous
Auction Date.
(b) Notwithstanding anything else set forth herein, if a
Dividend Payment Date is not a Business Day because the New York
Stock Exchange is closed for business due to an act of God,
natural disaster, act of war, civil or military disturbance, act
A-63
of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications service or the dividend payable on
such date can not be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend
Period shall be the next Business Day o which the Trust and its
paying agent, if any, are able to cause the dividend to be paid
using their reasonable best efforts;
(ii) the affected Dividend Period shall end on the day
it would have ended had such event not occurred and the Dividend
Payment Date had remained the scheduled date; and
(iii) the next Dividend Period will begin and end on the
dates on which it would have begun and ended had such event not
occurred and the Dividend Payment Date remained the scheduled
date.
SECOND: The Preferred Shares have been classified and
designated by the Board of Directors under the authority
contained in the Charter.
THIRD: These Articles Supplementary have been approved
by the Board of Directors in the manner and by the vote required
by law.
FOURTH: The undersigned President of the Corporation
acknowledges these Articles Supplementary to the corporate act of
the Corporation and, as to all matters or facts required to be
verified under oath, the undersigned President acknowledges that,
to the best of his knowledge, information and belief, these
matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Corporation has caused these
Articles Supplementary to be executed under seal in its name and
on its behalf by its President and attested by its Secretary on
this ____ day of __________, 2002.
ATTEST: ALLIANCE NATIONAL MUNICIPAL
INCOME FUND, INC.
_______________________ _______________________(seal)
Edmund P. Bergan, Jr. John D. Carifa
Secretary President
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APPENDIX A
ALLIANCE NATIONAL MUNICIPAL INCOME FUND, INC.
SECTION 1. CERTAIN DEFINITIONS. For purposes of these Articles,
the following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in
the plural and vice versa), unless the context otherwise
requires:
(a) ESCROWED BONDS shall mean Municipal Obligations that (i)
have been determined to be legally defeased in accordance with
S&P's legal defeasance criteria, (ii) have been determined to be
economically defeased in accordance with S&P's economic
defeasance criteria and assigned a rating of AAA by S&P, (iii)
are not rated by S&P but have been determined to be legally
defeased by Moody's or (iv) have been determined to be
economically defeased by Moody's and assigned a rating no lower
than the rating that is Moody's equivalent of S&P's AAA rating.
In the event that a defeased obligation which is an S&P Eligible
Asset does not meet the criteria of an Escrowed Bond, such
Municipal Obligation will be deemed to remain in the Issue Type
Category into which it fell prior to such defeasance.
(b) GROSS-UP PAYMENT means payment to a Holder of an amount
which, when taken together with the aggregate amount of Taxable
Allocations made to such Holder to which such Gross-up Payment
relates, would cause such Holder's dividends in dollars (after
Federal income tax consequences) from the aggregate of such
Taxable Allocations and the related Gross-up Payment to be equal
to the dollar amount of the dividends which would have been
received by such Holder if the amount of such aggregate Taxable
Allocations would have been excludable from the gross income of
such Holder. Such Gross-up Payment shall be calculated (i)
without consideration being given to the time value of money;
(ii) assuming that no Holder of Preferred Shares is subject to
the Federal alternative minimum tax with respect to dividends
received from the Corporation; and (iii) assuming that each
Taxable Allocation and each Gross-up Payment (except to the
extent such Gross-up Payment is designated as an exempt-interest
dividend under Section 852(b)(5) of the Code or successor
provisions) would be taxable in the hands of each Holder of
Preferred Shares at the maximum marginal combined regular Federal
personal income tax rate applicable to ordinary income (taking
into account the Federal income tax deductibility of state and
local taxes paid or incurred) or net capital gains, as
applicable, or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income or net capital
gains, as applicable, whichever is greater, in effect at the time
such Gross-up Payment is made.
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(c) ISSUE TYPE CATEGORY shall mean, with respect to a
Municipal Obligation acquired by the Corporation, (i) for
purposes of Issue Type Concentration in calculating Moody's
Eligible Assets as of any Valuation Date, one of the following
categories into which such Municipal Obligation falls based upon
a good faith determination by the Corporation: health care issues
(including issues related to teaching and non-teaching hospitals,
public or private); housing issues (including issues related to
single- and multi-family housing projects); educational
facilities issues (including issues related to public and private
schools); student loan issues; resource recovery issues;
transportation issues (including issues related to mass transit,
airports and highways); industrial development bond issues
(including issues related to pollution control facilities);
utility issues (including issues related to the provision of gas,
water, sewers and electricity); general obligation issues; lease
obligations (including certificates of participation); escrowed
bonds; and other issues (Other Issues) not falling within one of
the aforementioned categories (includes special obligations to
crossover, excise and sales tax revenue; recreation revenue,
special assessment and telephone revenue bonds); and (ii) for
purposes of calculating S&P Eligible Assets as of any Valuation
Date, one of the following categories into which such Municipal
Obligation falls based upon a good faith determination by the
Corporation: health care issues (including issues related to
teaching and non-teaching hospitals, public or private); housing
issues (including issues related to single- and multi-family
housing projects); educational facilities issues (including
issues related to public and private schools); student loan
issues; transportation issues (including issues related to mass
transit, airports and highways); industrial development bond
issues (including issues related to pollution control
facilities); public power utilities issues (including issues
related to the provision of electricity, either singly or in
combination with the provision of other utilities, and issues
related only to the provision of gas); water and sewer utilities
issues (including issues related to the provision of water and
sewers as well as combination utilities not falling within the
public power utilities category); special utilities issues
(including issues related to resource recovery, solid waste and
irrigation as well as other utility issues not falling within the
public power and water and sewer utilities categories); general
obligation issues; lease obligations (including certificates of
participation); Escrowed Bonds; and other issues (Other Issues)
not falling within one of the aforementioned categories.
Municipal Obligations in the utility issue category will be
classified within one of the three following sub-categories: (A)
electric, gas and combination issues (if the combination issue
includes an electric issue); (B) water and sewer utilities and
combination issues (if the combination issue does not include an
electric issue); and (C) irrigation, resource recovery, solid
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waste and other utilities, provided that Municipal Obligations
included in this sub-category (C) must be rated by S&P in order
to be included in S&P Eligible Assets. Municipal Obligations in
the transportation issue category will be classified within one
of the two following sub-categories: (1) streets and highways,
toll roads, bridges and tunnels, airports and multi-purpose port
authorities (multiple revenue streams generated by toll roads,
airports, real estate, bridges); and (2) mass transit, parking
seaports and others.
(d) MOODY'S DISCOUNT FACTOR shall mean, for purposes of
determining the Discounted Value of any Moody's Eligible Asset,
the percentage determined by reference to the rating on such
asset and the shortest Exposure Period set forth opposite such
rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
Rating Category
Exposure
Period Aaa* Aa* A* Baa* Other** (V)MIG-1*** SP-1+**** Unrated*****
-------- --- -- - ---- ---- -------- ----- -------
7 weeks....... 151% 159% 168% 202% 229% 136% 148% 225%
8 weeks or
less but
greater than
seven weeks... 154% 164% 173% 205% 235% 137% 149% 231%
9 weeks or
less but
greater than
eight weeks... 158% 169% 179% 209% 242% 138% 150% 240%
____________________
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a demand
feature at par exercisable in 30 days and which do not have a long-term rating.
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P, which do not mature
or have a demand feature at par exercisable in 30 days and which do not have a long-term
rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB by S&P or not
rated by Moody's or S&P.
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Notwithstanding the foregoing, (i) the Moody's Discount Factor
for short-term Municipal Obligations will be 115%, so long as
such Municipal Obligations are rated at least MIG-1, VMIG-1 or P-
1 by Moody's and mature or have a demand feature at par
exercisable in 30 days or less or 125% as long as such Municipal
Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or
less and (ii) no Moody's Discount Factor will be applied to cash
or to Receivables for Municipal Obligations Sold.
(e) MOODY'S ELIGIBLE ASSET shall mean cash, Receivables for
Municipal Obligations Sold or a Municipal Obligation that (i)
pays interest in cash, (ii) is publicly rated Baa or higher by
Moody's or, if not rated by Moody's but rated by S&P, is rated at
least BBB by S&P provided, however, that for purposes of
determining the Moody's Discount Factor applicable to any such
S&P-rated Municipal Obligation, such Municipal Obligation
(including any short-term Municipal Obligation) shall be deemed
to have a Moody's rating that is one full rating category lower
than its S&P Rating (iii) does not have its Moody's rating, as
applicable, suspended by Moody's, and (iii) is part of an issue
of Municipal Obligations of at least $10,000,000. Municipal
Obligations issued by any one issuer and rated BBB by S&P may
comprise no more than 4% of total Moody's Eligible Assets; such
BBB-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated Baa by
Moody's or A by S&P, may comprise no more than 6% of total
Moody's Eligible Assets; such BBB, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations
issued by the same issuer and rated A by Moody's or AA by S&P,
may comprise no more than 10% of total Moody's Eligible Assets;
and such BBB, Baa, A and AA-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer
and rated Aa by Moody's or AAA by S&P, may comprise no more than
20% of total Moody's Eligible Assets. For purposes of the
foregoing sentence, any Municipal Obligation backed by the
guaranty, letter of credit or insurance issued by a third party
shall be deemed to be issued by such third party if the issuance
of such third party credit is the sole determinant of the rating
on such Municipal Obligation. Municipal Obligations issued by
issuers located within a single state or territory and rated BBB
by S&P may comprise no more than 12% of total Moody's Eligible
Assets; such BBB-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by issuers located within a
single state or territory and rated Baa by Moody's or A by S&P,
may comprise no more than 20% of total Moody's Eligible Assets;
such BBB, Baa and A-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by issuers located within
the same state or territory and rated A by Moody's or AA by S&P,
may comprise no more than 40% of total Moody's Eligible Assets;
A-4
and such BBB, Baa, A and AA-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located
within the same state or territory and rated Aa by Moody's or AAA
by S&P, may comprise no more than 60% of total Moody's Eligible
Assets. For purposes of this definition, a Municipal Obligation
shall be deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+
by S&P. When the Corporation sells a Municipal Obligation and
agrees to repurchase such Municipal Obligation at a future date,
such Municipal Obligation shall be valued at its Discounted Value
for purposes of determining Moody's Eligible Assets, and the
amount of the repurchase price of such Municipal Obligation shall
be included as a liability for purposes of calculating the
Preferred Shares Basic Maintenance Amount. When the Corporation
purchases a Moody's Eligible Asset and agrees to sell it at a
future date, such Eligible Asset shall be valued at the amount of
cash to be received by the Corporation upon such future date,
provided that the counterparty to the transaction has a long-term
debt rating of at least A2 from Moody's and the transaction has a
term of no more than 30 days, otherwise such Eligible Asset shall
be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be
considered a Moody's Eligible Asset to the extent it is (i)
subject to any material lien, mortgage, pledge, security interest
or security agreement of any kind (collectively, "Liens"), except
for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the
Corporation will not affect the status of such asset as a Moody's
Eligible Asset, (b) Liens for taxes that are not then due and
payable or that can be paid thereafter without penalty, (c) Liens
to secure payment for services rendered or cash advanced to the
Corporation by Alliance Capital Management L.P., State Street
Bank & Trust Company or the Auction Agent and (d) Liens by virtue
of any repurchase agreement; or (ii) deposited irrevocably for
the payment of any liabilities for purposes of determining the
Preferred Shares Basic Maintenance Amount.
For the purposes of determining Moody's Eligible Assets, the
following diversification guidelines apply:
A-5
MINIMUM MAXIMUM MAX STATE OR
ISSUER MAXIMUM MAXIMUM TYPE COUNTY TERRITORY
SIZE UNDERLYING CONCENTRATION CONCENTRATION CONCENTRATION
RATING ($mln) OLIGOR(%)(1) (%)(3)(4) (%)(1)(5) (%)(1)(5)
Aaa 10 100 100 100 100
Aa 10 20 60 60 60
A 10 10 40 40 40
Baa 10 6 20 20 20
Other(2) 10 4 12 12 12
(1) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category.
(2) State municipal bonds and Municipal Obligations not rated by Moody's but
rated BBB or BBB+ by S&P.
(3) Does not apply to general obligations bonds.
(4) In no event shall:
(a) more than 10% of Moody's Eligible Assets consist of student loan
issues
(5) Applicable to general obligation bonds only.
(6) Does not apply to state Municipal Bonds. Territorial bonds (other than
those issued by Puerto Rico and counted collectively) are each limited to
10% of Moody's Eligible Assets. For diversification purposes, Puerto Rico
will be treated as a state.
(f) OTHER ISSUES shall have the respective meanings
specified in the definition of Issue Type Category.
(g) RATE MULTIPLE, for shares of a series of Preferred
Shares on any Auction Date for shares of such series, shall mean
the percentage, determined as set forth below, based on the
prevailing rating of shares of such series in effect at the close
of business on the Business Day next preceding such Auction Date:
PREVAILING RATING PERCENTAGE
aa3/AA-- or higher........ 110%
a3/A--.................... 125%
baa3/BBB--................ 150%
ba3/BB--.................. 200%
Below ba3/BB--............ 250%
provided, however, that in the event the Corporation has notified
the Auction Agent of its intent to allocate income taxable for
Federal income tax purposes to shares of such series prior to the
Auction establishing the Applicable Rate for shares of such
series, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal combined
regular Federal personal income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income
tax rate applicable to ordinary income, whichever is greater.
A-6
For purposes of this definition, the prevailing rating of
shares of a series of Preferred Shares shall be (i) aa3/AA-- or
higher if such shares have a rating of aa3 or better by Moody's
and AA-- or better by S&P or the equivalent of such ratings by
such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (ii) if not aa3/AA-- or
higher, then a3/A-- if such shares have a rating of a3 or better
by Moody's and A-- or better by S&P or the equivalent of such
ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (iii) if
not aa3/AA-- or higher or a3/A--, then baa3/BBB-- if such shares
have a rating of baa3 or better by Moody's and BBB-- or better by
S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected
as provided below, (iv) if not aa3/AA-- or higher, a3/A-- or
baa3/BBB--, then ba3/BB-- if such shares have a rating of ba3 or
better by Moody's and BB-- or better by S&P or the equivalent of
such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, and (v) if
not aa3/AA-- or higher, a3/A--, baa3/BBB--, or ba3/BB--, then
Below ba3/BB--; provided, however, that if such shares are rated
by only one rating agency, the prevailing rating will be
determined without reference to the rating of any other rating
agency. The Corporation shall take all reasonable action
necessary to enable either S&P or Moody's to provide a rating for
Preferred Shares. If neither S&P nor Moody's shall make such a
rating available, the party set forth in Section 3 of Appendix A
or its successor shall select at least one nationally recognized
statistical rating organization (as that term is used in the
rules and regulations of the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended from time
to time) to act as a substitute rating agency in respect of
shares of the series of Preferred Shares set forth opposite such
party's name in Section 3 of Appendix A and the Corporation shall
take all reasonable action to enable such rating agency to
provide a rating for such shares.
(h) S&P DISCOUNT FACTOR shall mean, for purposes of
determining the Discounted Value of any S&P Eligible Asset, the
percentage determined by reference to the rating on such asset
and the shortest Exposure Period set forth opposite such rating
that is the same length as or is longer than the S&P Exposure
Period, in accordance with the table set forth below:
A-7
RATING CATEGORY
Exposure Period AAA* AA* A* BBB* HIGH YIELD
45 Business Days 190% 195% 210% 250% 220%
25 Business Days 170 175 190 230 220
10 Business Days 155 160 175 215 220
7 Business Days 150 155 170 210 220
3 Business Days 130 135 150 190 220
________
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such
Municipal Obligations are rated A-1+ or SP-1+ by S&P and mature
or have a demand feature exercisable within 30 days or less, or
120% so long as such Municipal Obligations are rated A-1 or SP-1
by S&P and mature or have a demand feature exercisable in 30 days
or less or 125% if such Municipal Obligations are not rated by
S&P but are rated equivalent to A-1+ or SP-1+ by another
nationally recognized statistical rating organization, on a case
by case basis; provided, however, that any such non-S&P rated
short-term Municipal Obligations which have demand features
exercisable within 30 days or less must be backed by a letter of
credit, liquidity facility or guarantee from a bank or other
financial institution with a short-term rating of at least A-1+
from S&P; and further provided that such non-S&P rated short-term
Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets;
provided, however, that Municipal Obligations not rated by S&P
but rated equivalent to BBB or lower by another nationally
recognized statistical rating organization, rated BB+ or lower by
S&P or non-rated (such Municipal Obligations are hereinafter
referred to as "High Yield Securities") may comprise no more than
20% of the short-term Municipal Obligations that qualify as S&P
Eligible Assets; (ii) the S&P Discount Factor for Receivables for
Municipal Obligations Sold that are due in more than five
Business Days from such Valuation Date will be the S&P Discount
Factor applicable to the Municipal Obligations sold; (iii) no S&P
Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold if such receivables are due within
five Business Days of such Valuation Date; and (iv) except as set
forth in clause (i) above, in the case of any Municipal
Obligation that is not rated by S&P but qualifies as an S&P
Eligible Asset pursuant to clause (iii) of that definition, such
Municipal Obligation will be deemed to have an S&P rating one
full rating category lower than the S&P rating category that is
the equivalent of the rating category in which such Municipal
Obligation is placed by a nationally recognized statistical
rating organization. Receivables for Municipal Obligations Sold,
for purposes of calculating S&P Eligible Assets as of any
A-8
Valuation Date, means the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date. The
Corporation may adopt S&P Discount Factors for Municipal
Obligations other than Municipal Obligations provided that S&P
advises the Corporation in writing that such action will not
adversely affect its then current rating on the Preferred Shares.
For purposes of the foregoing, Anticipation Notes rated SP-1+ or,
if not rated by S&P, equivalent to A-1+ or SP-1+ by another
nationally recognized statistical rating organization, on a case
by case basis, which do not mature or have a demand feature at
par exercisable in 30 days and which do not have a long-term
rating, shall be considered to be short-term Municipal
Obligations.
(i) S&P ELIGIBLE ASSET shall mean cash (excluding any cash
irrevocably deposited by the Corporation for the payment of any
liabilities within the meaning of Preferred Shares Basic
Maintenance Amount), Receivables for Municipal Obligations Sold
or a Municipal Obligation owned by the Corporation that (A) is
interest bearing and pays interest at least semi-annually; (B) is
payable with respect to principal and interest in U.S. Dollars;
(C) is publicly rated BBB or higher by S&P or, if not rated by
S&P but rated equivalent or higher to an A by another nationally
recognized statistical rating organization, on a case by case
basis; (D) is not subject to a covered call or put option written
by the Corporation; (E) is not part of a private placement of
Municipal Obligations; and (vi) is part of an issue of Municipal
Obligations with an original issue size of at least $10 million
or if of an issue with an original issue size below $10 million
(but in no event below $5 million) is issued by an issuer with a
total of at least $50 million of securities outstanding.
Solely for purposes of this definition, the term Municipal
Obligation means any obligation the interest on which is exempt
from regular Federal income taxation and which is issued by any
of the fifty United States, the District of Columbia or any of
the territories of the United States, their subdivisions,
counties, cities, towns, villages, school districts and agencies
(including authorities and special districts created by the
states), and federally sponsored agencies such as local housing
authorities. Notwithstanding the foregoing limitations:
(A) Municipal Obligations (excluding Escrowed Bonds and
High Yield Securities) of any one issuer or guarantor (excluding
bond insurers) shall be considered S&P Eligible Assets only to
the extent the Market Value of such Municipal Obligations
(including short-term Municipal Obligations) does not exceed 10%
of the aggregate Market Value of S&P Eligible Assets, provided
that 2% is added to the applicable S&P Discount Factor for every
1% by which the Market Value of such Municipal Obligations
exceeds 5% of the aggregate Market Value of S&P Eligible Assets.
High Yield Securities of any one issuer shall be considered S&P
A-9
Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 5% of the aggregate Market
Value of S&P Eligible Assets;
(B) Municipal Obligations (excluding Escrowed Bonds) of
any one Issue Type Category shall be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 25% of the aggregate Market Value of
S&P Eligible Assets; provided, however, that Municipal
Obligations falling within the utility Issue Type Category will
be broken down into three sub-categories and such Municipal
Obligations will be considered S&P Eligible Assets to the extent
the Market Value of such Municipal Obligations in each sub-
category does not exceed 25% of the aggregate Market Value of S&P
Eligible Assets per each sub-category provided that the total
utility Issue Type Category does not exceed 60% of the Aggregate
Market Value of S&P Eligible Assets; provided, however, that
Municipal Obligations falling within the transportation Issue
Type Category will be broken down into two sub-categories and
such Municipal Obligations will be considered S&P Eligible Assets
to the extent the Market Value of such Municipal Obligations in
both sub-categories combined does not exceed 40% of the aggregate
Market Value of S&P Eligible Assets (exposure to transportation
sub-category (i) described in the definition of Issue Type
Category is limited to 25% of the aggregate Market Value of S&P
Eligible Assets, provided, however, exposure to transportation
sub-category (ii) can exceed the 25% limit to the extent that
exposure to transportation sub-category (i) is reduced, for a
total exposure up to and not exceeding 40% of the aggregate
Market Value of S&P Eligible Assets for the transportation Issue
Type Category); and provided, however, that the general
obligation issues will be considered S&P Eligible Assets only to
the extent the Market Value of such general obligation issues
does not exceed 50% of the aggregate Market Value of S&P Eligible
Assets;
(C) Municipal Obligations not rated by S&P shall be
considered S&P Eligible Assets only to the extent the Market
Value of such Municipal Obligations does not exceed 50% of the
aggregate Market Value of S&P Eligible Assets; provided, however,
that High Yield Securities shall be considered S&P Eligible
Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 20% of the aggregate Market Value of
S&P Eligible Assets; and
(D) Out of State Bonds shall be considered S&P Eligible
Assets only to the extent that the Market Value of such Municipal
Obligations does not exceed 20% of the aggregate Market Value of
S&P Eligible Assets.
SECTION 2. RESERVED.
A-10
SECTION 3. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF RATE
MULTIPLE IN THESE ARTICLES.
PARTY SERIES OF PREFERRED SHARES
Salomon Smith Barney Inc. Preferred Shares Series M
Salomon Smith Barney Inc. Preferred Shares Series T
Salomon Smith Barney Inc. Preferred Shares Series W
Salomon Smith Barney Inc. Preferred Shares Series Th
SECTION 4. RESERVED.
SECTION 5. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (c)(i) OF SECTION
5 OF PART I OF THESE ARTICLES. $195,000,000.
SECTION 6. ALL HOLD ORDER RATE FOR PURPOSES OF SUBPARAGRAPH
(b)(iii) OF SECTION 3 OF PART II OF THESE ARTICLES. For purposes
of subparagraph (b)(iii) of Section 3 of Part II of these
Articles, the All Holder Order Rate for shares of such series for
the next succeeding Rate Period of shares of such series shall be
equal to the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of
(a)(i) the AA Composite Commercial Paper Rate on such Auction
Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (ii) the Treasury Bill Rate on such
Auction Date for such Rate Period, if such Rate Period consists
of more than 182 but fewer than 365 Rate Period Days; or (iii)
the Treasury Note Rate on such Auction Date for such Rate Period,
if such Rate Period is more than 364 Rate Period Days (the rate
described in the foregoing clause (a)(i), (ii) or (iii), as
applicable, being referred to herein as the Benchmark Rate) and
(b) 1 minus the maximum marginal regular Federal personal income
tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary
income, whichever is greater; provided, however, that if the
Corporation has notified the Auction Agent of its intent to
allocate to shares of such series in such Rate Period any net
capital gains or other income taxable for Federal income tax
purposes (hereinafter "Taxable Income"), the All Hold Order Rate
for shares of such series for such Rate Period will be (A) if the
Taxable Yield Rate (as defined below) is greater than the
Benchmark Rate, then the Benchmark Rate, or (B) if the Taxable
Yield Rate is less than or equal to the Benchmark Rate, then the
rate equal to the sum of (1) the lesser of the Kenny Index (if
such Rate Period consists of fewer than 183 Rate Period Days) or
the product of the Benchmark Rate multiplied by the factor set
forth in the preceding clause (ii) and (2) the product of the
maximum marginal regular Federal personal income tax rate
applicable to ordinary income or the maximum marginal regular
Federal corporate income tax applicable to ordinary income,
whichever is greater, multiplied by the Taxable Yield Rate. For
A-11
purposes of the foregoing, Taxable Yield Rate means the rate
determined by (I) dividing the amount of Taxable Income available
for distribution per such share of Preferred Shares by the number
of days in the Dividend Period in respect of which such Taxable
Income is contemplated to be distributed, (II) multiplying the
amount determined in (I) above by 365 (in the case of a Dividend
Period of 7 Rate Period Days) or 360 (in the case of any other
Dividend Period), and (III) dividing the amount determined in (b)
above by $25,000.
SECTION 7. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS.
(a) For so long as Preferred Shares are rated by S&P, the
Corporation will not purchase or sell futures contracts, write,
purchase or sell options on futures contracts or write put
options (except covered put options) or call options (except
covered call options) on portfolio securities unless it receives
written confirmation from S&P that engaging in such transactions
will not impair the ratings then assigned to the Preferred Shares
by S&P, except that the Corporation may purchase or sell futures
contracts based on the Bond Buyer Municipal Bond Index (the
"Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call
options on such contracts (collectively, "S&P Hedging
Transactions"), subject to the following limitations:
(i) the Corporation will not engage in any S&P Hedging
Transaction based on the Municipal Index (other than transactions
which terminate a futures contract or option held by the
Corporation by the Corporation's taking an opposite position
thereto ("Closing Transactions")), which would cause the
Corporation at the time of such transaction to own or have sold
the least of (A) more than 1,000 outstanding futures contracts
based on the Municipal Index, (B) outstanding futures contracts
based on the Municipal Index exceeding in number 25% of the
quotient of the Market Value of the Corporation's total assets
divided by $1,000 or (C) outstanding futures contracts based on
the Municipal Index exceeding in number 10% of the average number
of daily traded futures contracts based on the Municipal Index in
the 30 days preceding the time of effecting such transaction as
reported by The Wall Street Journal;
(ii) the Corporation will not engage in any S&P Hedging
Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Corporation at the time of
such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds exceeding
in number 50% of the quotient of the Market Value of the
Corporation's total assets divided by $100,000 ($200,000 in the
case of the two-year United States Treasury Note) or (B)
outstanding futures contracts based on Treasury Bonds exceeding
A-12
in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the 30 days preceding the
time of effecting such transaction as reported by The Wall Street
Journal.
(iii) the Corporation will engage in Closing
Transactions to close out any outstanding futures contract which
the Corporation owns or has sold or any outstanding option
thereon owned by the Corporation in the event (A) the Corporation
does not have S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic
Maintenance Amount on two consecutive Valuation Dates and (B) the
Corporation is required to pay Variation Margin on the second
such Valuation Date;
(iv) the Corporation will engage in a Closing
Transaction to close out any outstanding futures contract or
option thereon in the month prior to the delivery month under the
terms of such futures contract or option thereon unless the
Corporation holds the securities deliverable under such terms;
and
(v) when the Corporation writes a futures contract or
option thereon, it will either maintain an amount of cash, cash
equivalents or high grade (rated A or better by S&P), fixed-
income securities in a segregated account with the Corporation's
custodian, so that the amount so segregated plus the amount of
Initial Margin and Variation Margin held in the account of or on
behalf of the Corporation's broker with respect to such futures
contract or option equals the Market Value of the futures
contract or option, or, in the event the Corporation writes a
futures contract or option thereon which requires delivery of an
underlying security, it shall hold such underlying security in
its portfolio.
For purposes of determining whether the Corporation has S&P
Eligible Assets with a Discounted Value that equals or exceeds
the Preferred Shares Basic Maintenance Amount, the Discounted
Value of cash or securities held for the payment of Initial
Margin or Variation Margin shall be zero and the aggregate
Discounted Value of S&P Eligible Assets shall be reduced by an
amount equal to (A) 30% of the aggregate settlement value, as
marked to market, of any outstanding futures contracts based on
the Municipal Index which are owned by the Corporation plus (B)
25% of the aggregate settlement value, as marked to market, of
any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Corporation.
(b) For so long as Preferred Shares are rated by Moody's, the
Corporation will not buy or sell futures contracts, write,
purchase or sell call options on futures contracts or purchase
A-13
put options on futures contracts or write call options (except
covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such
transactions would not impair the ratings then assigned to the
Preferred Shares by Moody's, except that the Corporation may
purchase or sell exchange-traded futures contracts based on the
Municipal Index or Treasury Bonds and purchase, write or sell
exchange-traded put options on such futures contracts and
purchase, write or sell exchange-traded call options on such
futures contracts (collectively, "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Corporation will not engage in any Moody's
Hedging Transaction based on the Municipal Index (other than
Closing Transactions), which would cause the Corporation at the
time of such transaction to own or have sold (A) outstanding
futures contracts based on the Municipal Index exceeding in
number 10% of the average number of daily traded futures
contracts based on the Municipal Index in the 30 days preceding
the time of effecting such transaction as reported by The Wall
Street Journal or (B) outstanding futures contracts based on the
Municipal Index having a Market Value exceeding 50% of the Market
Value of all Municipal Bonds constituting Moody's Eligible Assets
owned by the Corporation (other than Moody's Eligible Assets
already subject to a Moody's Hedging Transaction);
(ii) the Corporation will not engage in any Moody's
Hedging Transaction based on Treasury Bonds (other than Closing
Transactions) which would cause the Corporation at the time of
such transaction to own or have sold (A) outstanding futures
contracts based on Treasury Bonds having an aggregate Market
Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Corporation and rated Aa by Moody's
(or, if not rated by Moody's but rated by S&P, rated AAA by S&P)
or (B) outstanding futures contracts based on Treasury Bonds
having an aggregate Market Value exceeding 40% of the aggregate
Market Value of all Municipal Bonds constituting Moody's Eligible
Assets owned by the Corporation (other than Moody's Eligible
Assets already subject to a Moody's Hedging Transaction) and
rated Baa or A by Moody's (or, if not rated by Moody's but rated
by S&P, rated A or AA by S&P) (for purposes of the foregoing
clauses (i) and (ii), the Corporation shall be deemed to own the
number of futures contracts that underlie any outstanding options
written by the Corporation);
(iii) the Corporation will engage in Closing
Transactions to close out any outstanding futures contract based
on the Municipal Index if the amount of open interest in the
Municipal Index as reported by The Wall Street Journal is less
than 5,000;
A-14
(iv) the Corporation will engage in a Closing
Transaction to close out any outstanding futures contract by no
later than the fifth Business Day of the month in which such
contract expires and will engage in a Closing Transaction to
close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such
option expires;
(v) the Corporation will engage in Moody's Hedging
Transactions only with respect to futures contracts or options
thereon having the next settlement date or the settlement date
immediately thereafter;
(vi) the Corporation will not engage in options and
futures transactions for leveraging or speculative purposes and
will not write any call options or sell any futures contracts for
the purpose of hedging the anticipated purchase of an asset prior
to completion of such purchase; and
(vii) the Corporation will not enter into an option or
futures transaction unless, after giving effect thereto, the
Corporation would continue to have Moody's Eligible Assets with
an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Corporation has
Moody's Eligible Assets with an aggregate Discounted Value that
equals or exceeds the Preferred Shares Basic Maintenance Amount,
the Discounted Value of Moody's Eligible Assets which the
Corporation is obligated to deliver or receive pursuant to an
outstanding futures contract or option shall be as follows: (A)
assets subject to call options written by the Corporation which
are either exchange-traded and readily reversible or which expire
within 49 days after the date as of which such valuation is made
shall be valued at the lesser of (1) Discounted Value and (2) the
exercise price of the call option written by the Corporation; (B)
assets subject to call options written by the Corporation not
meeting the requirements of clause (A) of this sentence shall
have no value; (C) assets subject to put options written by the
Corporation shall be valued at the lesser of (1) the exercise
price and (2) the Discounted Value of the subject security; (D)
futures contracts shall be valued at the lesser of (1) settlement
price and (2) the Discounted Value of the subject security,
provided that, if a contract matures within 49 days after the
date as of which such valuation is made, where the Corporation is
the seller the contract may be valued at the settlement price and
where the Corporation is the buyer the contract may be valued at
the Discounted Value of the subject securities; and (E) where
delivery may be made to the Corporation with any security of a
class of securities, the Corporation shall assume that it will
take delivery of the security with the lowest Discounted Value.
A-15
For purposes of determining whether the Corporation has
Moody's Eligible Assets with an aggregate Discounted Value that
equals or exceeds the Preferred Shares Basic Maintenance Amount,
the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the
Corporation: (I) 10% of the exercise price of a written call
option; (II) the exercise price of any written put option; (III)
where the Corporation is the seller under a futures contract, 10%
of the settlement price of the futures contract; (IV) where the
Corporation is the purchaser under a futures contract, the
settlement price of assets purchased under such futures contract;
(V) the settlement price of the underlying futures contract if
the Corporation writes put options on a futures contract; and
(VI) 105% of the Market Value of the underlying futures contracts
if the Corporation writes call options on a futures contract and
does not own the underlying contract.
(c) For so long as Preferred Shares are rated by Moody's, the
Corporation will not enter into any contract to purchase
securities for a fixed price at a future date beyond customary
settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted under Section
7(b) of this Appendix A), except that the Corporation may enter
into such contracts to purchase newly-issued securities on the
date such securities are issued (Forward Commitments), subject to
the following limitation:
(i) the Corporation will maintain in a segregated
account with its custodian cash, cash equivalents or short-term,
fixed-income securities rated P-1, MTG-1 or VMIG-1 by Moody's and
maturing prior to the date of the Forward Commitment with a
Market Value that equals or exceeds the amount of the
Corporation's obligations under any Forward Commitments to which
it is from time to time a party or long-term fixed income
securities with a Discounted Value that equals or exceeds the
amount of the Corporation's obligations under any Forward
Commitment to which it is from time to time a party; and
(ii) the Corporation will not enter into a Forward
Commitment unless, after giving effect thereto, the Corporation
would continue to have Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount.
For purposes of determining whether the Corporation has
Moody's Eligible Assets with an aggregate Discounted Value that
equals or exceeds the Preferred Shares Basic Maintenance Amount,
the Discounted Value of all Forward Commitments to which the
Corporation is a party and of all securities deliverable to the
Corporation pursuant to such Forward Commitments shall be zero.
A-16
SECTION 8. DIVIDEND PAYMENT DATES. Except as otherwise provided
in paragraph (d) of Section 2 of Part I of these Articles,
dividends shall be payable on shares of:
Preferred Shares Series M, for the Initial Rate Period on
April 9, 2002, and on each Tuesday thereafter.
Preferred Shares Series T, for the Initial Rate Period on
April 10, 2002, and on each Wednesday thereafter.
Preferred Shares Series W, for the Initial Rate Period on
April 4, 2002, and on each Thursday thereafter.
Preferred Shares Series TH, for the Initial Rate Period on
April 5, 2002, and on each Friday thereafter.
A-17
TABLE OF CONTENTS
DEFINITIONS......................................... 5
PART I
1. NUMBER OF AUTHORIZED SHARES...................... 25
2. DIVIDENDS........................................ 25
3. GROSS-UP PAYMENTS................................ 31
4. DESIGNATION OF SPECIAL RATE PERIODS.............. 32
5. VOTING RIGHTS.................................... 35
6. 1940 ACT PREFERRED SHARES ASSET COVERAGE......... 43
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT........ 43
8. [RESERVED]....................................... 47
9. RESTRICTIONS ON DIVIDENDS
AND OTHER DISTRIBUTIONS........................ 47
10. RATING AGENCY RESTRICTIONS...................... 49
11. REDEMPTION...................................... 50
12. LIQUIDATION RIGHTS.............................. 56
13. MISCELLANEOUS................................... 57
PART II
1. ORDERS........................................... 59
2. SUBMISSION OF ORDERS BY BROKER-DEALERS
TO AUCTION AGENT............................... 61
3. DETERMINATION OF SUFFICIENT CLEARING BIDS,
WINNING BID RATE AND APPLICABLE RATE........... 64
4. ACCEPTANCE AND REJECTION OF SUBMITTED
BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES........................... 66
5. NOTIFICATION OF ALLOCATIONS...................... 70
6. AUCTION AGENT.................................... 70
7. TRANSFER OF SHARES OF ANY SERIES OF
PREFERRED SHARES................................. 71
8. GLOBAL CERTIFICATE............................... 71
9. FORCE MAJEURE.................................... 72
APPENDIX A ALLIANCE NATIONAL MUNICIPAL
INCOME FUND, INC....................... A-1
A-18
APPENDIX B: BOND RATINGS
Standard & Poor's Bond Ratings
A Standard & Poor's municipal bond rating is a current
assessment of the creditworthiness of an obligor with respect to
a specific obligation. Debt rated "AAA" has the highest rating
assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong. Debt rated "AA" has a very
strong capacity to pay interest and to repay principal and
differs from the highest rated issues only in small degree. 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
a debt of a higher rated category. 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 to repay principal for debt in this category than for higher
rated categories.
Debt rated "BB," "B," "CCC" or "CC" is regarded, on
balance, as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation
and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to
adverse conditions. The rating "C" is reserved for income bonds
on which no interest is being paid. Debt rated "D" is in default
and payments of interest and/or repayment of principal are in
arrears.
The ratings from "AAA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within
the major rating categories.
Moody's Bond Ratings
Excerpts from Moody's description of its municipal bond
ratings: Aaa - judged to be the best quality, carry the smallest
degree of investment risk; Aa - judged to be of high quality by
all standards; A - possess many favorable investment attributes
and are to be considered as higher upper grade obligations; Baa -
considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured and have speculative
characteristics as well; Ba, B, Caa, Ca, C - protection of
interest and principal payments is questionable; Ba indicates
some speculative elements while Ca represents a high degree of
speculation and C represents the lowest rated class of bonds;
B-1
Caa, Ca and C bonds may be in default. Moody's applies numerical
modifiers 1, 2 and 3 in each generic rating classification from
Aa to B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks at the
lower end of its generic rating category.
Short-Term Municipal Loans
Moody's highest rating for short-term municipal loans is
MIG-1/VMIG-1. Moody's states that short-term municipal
securities rated MIG-1/VMIG-1 are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the
market for refinancing, or both. Loans bearing the MIG-2/VMIG-2
designation are of high quality, with margins of protection ample
although not so large as in the MIG-l/VMIG-1 group.
S&P's highest rating for short-term municipal loans is
SP-1. S&P states that short-term municipal securities bearing
the SP-1 designation have very strong or strong capacity to pay
principal and interest. Those issues rated SP-1 which are
determined to possess overwhelming safety characteristics will be
given a plus (+) designation. Issues rated SP-2 have
satisfactory capacity to pay principal and interest.
Other Municipal Securities
"Prime-1" is the highest rating assigned by Moody's for
other short-term municipal securities and commercial paper, and
A-1+" and "A-1" are the two highest ratings for commercial paper
assigned by S&P (S&P does not rate short-term tax-free
obligations). Moody's uses the numbers 1, 2 and 3 to denote
relative strength within its highest classification of "Prime,"
while S&P uses the number 1+, 1, 2 and 3 to denote relative
strength within its highest classification of "A." Issuers rated
"Prime" by Moody's have the following characteristics: their
short-term debt obligations carry the smallest degree of
investment risk, margins of support for current indebtedness are
large or stable with cash flow and asset protection well assured,
current liquidity provides ample coverage of near-term
liabilities and unused alternative financing arrangements are
generally available. While protective elements may change over
the intermediate or longer-term, such changes are most unlikely
to impair the fundamentally strong position of short-term
obligations. Commercial paper issuers rated "A" by S&P have the
following characteristics: liquidity ratios are better than
industry average, long-term debt rating is A or better, the
issuer has access to at least two additional channels of
borrowing, and basic earnings and cash flow are in an upward
B-2
trend. Typically, the issuer is a strong company in a well-
established industry and has superior management.
Fitch, Inc. International Long-Term Credit Ratings
Investment Grade
AAA - Highest credit quality. 'AAA' ratings denote the
lowest expectation of credit risk. They are assigned only in case
of exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA - Very high credit quality. 'AA' ratings denote a
very low expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
A - High credit quality. 'A' ratings denote a low
expectation of credit risk. The capacity for timely payment of
financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or
in economic conditions than is the case for higher ratings.
BBB - Good credit quality. 'BBB' ratings indicate that
there is currently a low expectation of credit risk. The capacity
for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
Speculative Grade
BB - Speculative. 'BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the result
of adverse economic change over time; however, business or
financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not
investment grade.
B - Highly speculative. 'B' ratings indicate that
significant credit risk is present, but a limited margin of
safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC, CC, C - High default risk. Default is a real
possibility. Capacity for meeting financial commitments is solely
reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind
appears probable. 'C' ratings signal imminent default.
B-3
DDD, DD, D - Default. The ratings of obligations in this
category are based on their prospects for achieving partial or
full recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and cannot
be estimated with any precision, the following serve as general
guidelines. 'DDD' obligations have the highest potential for
recovery, around 90% - 100% of outstanding amounts and accrued
interest. 'DD' indicates potential recoveries in the range of
50% - 90% and 'D' the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some
or all of their obligations. Entities rated 'DDD' have the
highest prospect for resumption of performance or continued
operation with or without a formal reorganization process.
Entities rated 'DD' and 'D' are generally undergoing a formal
reorganization or liquidation process; those rated 'DD' are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated 'D' have a poor prospect of
repaying all obligations.
Fitch, Inc. International Short-Term Credit Ratings
F1 - Highest credit quality. Indicates the strongest
capacity for timely payment of financial commitments; may have an
added "+" to denote any exceptionally strong credit feature.
F2 - Good credit quality. A satisfactory capacity for
timely payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 - Fair credit quality. The capacity for timely
payment of financial commitments is adequate; however, near-term
adverse changes could result in a reduction to non-investment
grade.
B - Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term adverse
changes in financial and economic conditions.
C - High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely reliant upon
a sustained, favorable business and economic environment.
D - Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to
the 'A' Long-term rating category, to categories below 'CCC', or
to Short-term ratings other than 'F1'.
B-4
'NR' indicates that Fitch does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or
when an obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify
investors that there is a reasonable probability of a rating
change and the likely direction of such change. These are
designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings
may be raised, lowered or maintained. Rating Watch is typically
resolved over a relatively short period.
A Rating Outlook indicates the direction a rating is likely to
move over a one to two-year period. Outlooks may be positive,
stable or negative. A positive or negative Rating Outlook does
not imply a rating change is inevitable. Similarly, companies
whose outlooks are 'stable' could be upgraded or downgraded
before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch may be unable to
identify the fundamental trend. In these cases, the Rating
Outlook may be described as evolving.
Further Rating Distinctions
While ratings provide an assessment of the obligor's
capacity to pay debt service, it should be noted that the
definition of obligor expands as layers of security are added. If
municipal securities are guaranteed by third parties then the
"underlying" issuers as well as the "primary" issuer will be
evaluated during the rating process. In some cases, depending on
the scope of the guaranty, such as bond insurance, bank letters
of credit or collateral, the credit enhancement will provide the
sole basis for the rating given.
Minimum Rating(s) Requirements
For minimum rating(s) requirements for the Fund's
securities, please refer to "The Fund's Investments - Investment
Objectives and Policies" in the Prospectus.
B-5
APPENDIX C: FUTURES CONTRACTS AND RELATED OPTIONS
Futures Contracts
The Fund may enter into contracts for the purchase or
sale for future delivery of municipal securities or U.S.
Government Securities, or contracts based on financial indices
including any index of municipal securities or U.S. Government
Securities. U.S. futures contracts have been designed by
exchanges which have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC"), and must be
executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures
contracts trade on a number of exchange markets, and, through
their clearing corporations, the exchanges guarantee performance
of the contracts as between the clearing members of the exchange.
At the same time a futures contract is purchased or
sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial
deposit would be approximately 1/2% to 5% of a contract's face
value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the
Fund would provide or receive cash that reflects any decline or
increase in the contract's value.
At the time of delivery of securities pursuant to such a
contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
rate from that specified in the contract. In some (but not many)
cases, securities called for by a futures contract may not have
been issued when the contract was written.
Although futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the
contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for
delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation
to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the
contracts are traded, the Fund will incur brokerage fees when it
purchases or sells futures contracts.
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Interest Rate Futures
The purpose of the acquisition or sale of a futures
contract, in the case of the Fund, which holds or intends to
acquire fixed-income securities, is to attempt to protect the
Fund from fluctuations in interest rates without actually buying
or selling fixed-income securities. For example, if interest
rates were expected to increase, the Fund might enter into
futures contracts for the sale of debt securities. Such a sale
would have much the same effect as selling an equivalent value of
the debt securities owned by the Fund. If interest rates did
increase, the value of the debt securities in the Fund would
decline, but the value of the futures contracts to the Fund would
increase at approximately the same rate, thereby keeping the net
asset value of the Fund from declining as much as it otherwise
would have. The Fund could accomplish similar results by selling
debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of
futures contracts as an investment technique allows the Fund to
maintain a defensive position without having to sell its
portfolio securities.
Similarly, when it is expected that interest rates may
decline, futures contracts may be purchased to attempt to hedge
against anticipated purchases of debt securities at higher
prices. Since the fluctuations in the value of futures contracts
should be similar to those of debt securities, a Fund could take
advantage of the anticipated rise in the value of debt securities
without actually buying them until the market had stabilized. At
that time, the futures contracts could be liquidated and the Fund
could then buy debt securities on the cash market. To the extent
the Fund enters into futures contracts for this purpose, the
assets in the segregated account maintained to cover the Fund's
obligations with respect to such futures contracts will consist
of cash, cash equivalents or high-quality liquid debt securities
from its portfolio in an amount equal to the difference between
the fluctuating market value of such futures contracts and the
aggregate value of the initial and variation margin payments made
by the Fund with respect to such futures contracts.
The ordinary spreads between prices in the cash and
futures markets, due to differences in the nature of those
markets, are subject to distortions. First, all participants in
the futures market are subject to initial deposit and variation
margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the
liquidity of the futures market depends on participants entering
into offsetting transactions rather than making or taking
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delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus
producing distortion. Third, from the point of view of
speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct
forecast of general interest rate trends by the Adviser may still
not result in a successful transaction.
In addition, futures contracts entail risks. Although
the Fund believes that use of such contracts will benefit the
Fund, if the Adviser's investment judgment about the general
direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any
such contract. For example, if the Fund has hedged against the
possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its
portfolio and interest rates decrease instead, the Fund will lose
part or all of the benefit of the increased value of its debt
securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to
sell debt securities from its portfolio to meet daily variation
margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising
market. The Fund may have to sell securities at a time when it
may be disadvantageous to do so.
Options on Futures Contracts
The Fund intends to purchase and write options on
futures contracts for hedging purposes. The Funds are not
commodity pools and all transactions in futures contracts and
options on futures contracts engaged in by the Funds must
constitute bona fide hedging or other permissible transactions in
accordance with the rules and regulations promulgated by the
CFTC. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an
individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which
it is based or the price of the underlying debt securities, it
may or may not be less risky than ownership of the futures
contract or underlying debt securities. As with the purchase of
futures contracts, when the Fund is not fully invested it may
purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the
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security which is deliverable upon exercise of the futures
contract or securities comprising an index. If the futures price
at expiration of the option is below the exercise price, the Fund
that has written a call will retain the full amount of the option
premium which provides a partial hedge against any decline that
may have occurred in its portfolio holdings. The writing of a
put option on a futures contract constitutes a partial hedge
against increasing prices of the security which is deliverable
upon the exercise of futures contract or securities comprising an
index. If the futures price at the expiration of the option is
higher than the exercise price, the Fund that has written a put
will retain the full amount of the option premium which provides
a partial hedge against any increase in the price of securities
which it intends to purchase. If a put or call option the Fund
has written is exercised, the Fund will incur a loss which will
be reduced by the amount of the premium it receives. Depending
on the degree of correlation between changes in the value of its
portfolio securities and changes in the value of its futures
positions, the Fund's losses from existing options on futures may
to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is
similar in some respects to the purchase of protective put
options on portfolio securities. For example, the Fund may
purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates.
The amount of risk the Fund assumes when it purchases an
option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract
will not be fully reflected in the value of the option purchased.
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PART C
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
1. FINANCIAL STATEMENTS
The audited Statement of Assets and Liabilities of the
Registrant as of January 23, 2002, are incorporated by
reference into the Statement of Additional Information
filed with this Registration Statement. The unaudited
financial statements of the Registrant as of March 8, 2002
are included in the Statement of Additional Information.
2. EXHIBITS.
(a)(1) Amended Articles of Incorporation - Incorporated by
reference to Exhibit (a) to Pre-Effective Amendment No. 1
of the Registrant's Registration Statement on Form N-2
for the issuance of Common Shares. (File Nos. 333-73130
and 811-10573) filed with the Securities and Exchange
Commission on December 21, 2001.
(2) Certificate of Correction - Incorporated by reference to
Exhibit (a)2 to Pre-Effective Amendment No. 2 of the
Registrant's Registration Statement on Form N-2 for the
issuance of Common Shares (File Nos. 333-73130 and 811-
10573) filed with the Securities and Exchange Commission
on January 25, 2002.
(b) Bylaws - Incorporated by reference to Exhibit (b) to Pre-
Effective Amendment No. 2 of the Registrant's
Registration Statement on Form N-2 for the issuance of
Common Shares (File Nos. 333-73130 and 811-10573) filed
with the Securities and Exchange Commission on
January 25, 2002.
(c) Not applicable.
(d) Not applicable.
(e) Not Applicable.
(f) Not applicable
(g) Form of Investment Advisory Agreement - Incorporated by
reference to Exhibit (g) to Pre-Effective Amendment No. 2
of the Registrant's Registration Statement on Form N-2
for the issuance of Common Shares (File Nos. 333-73130
and 811-10573) filed with the Securities and Exchange
Commission on January 25, 2002.
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(h) Form of Underwriting Agreement - Filed herewith.
(i) Not applicable
(j) Custodian Agreement - Incorporated by reference to
Exhibit (j) to Pre-Effective Amendment No. 2 of the
Registrant's Registration Statement on Form N-2 for the
issuance of Common Shares (File Nos. 333-73130 and 811-
10573), filed, with the Securities and Exchange
Commission on January 25, 2002.
(k)(1) Form of Transfer Agency Agreement - Incorporated by
reference to Exhibit (k)(1) to Pre-Effective Amendment
No. 2 of the Registrant's Registration Statement on Form
N-2 for the issuance of Common Shares (File Nos. 333-
73130 and 811-10573), filed with the Securities and
Exchange Commission on January 25, 2002.
(2) Form of Shareholder Inquiry Agency Agreement -
Incorporated by reference to Exhibit (k)(2) to Pre-
Effective Amendment No. 2 of the Registrant's
Registration Statement on Form N-2 for the issuance of
Common Shares (File Nos. 333-73130 and 811-10573), filed
with the Securities and Exchange Commission on
January 25, 2002.
(3) Form of Auction Agency Agreement between the Registrant
and The Bank of New York - Filed herewith.
(4) Form of Broker-Dealer Agreement as to the Registrant's
Preferred Shares - Filed herewith.
(5) Form of DTC Representations Letter as to the Registrant's
Preferred Shares - Filed herewith.
(l)(1) Opinion and Consent of Seward & Kissel LLP - Filed
herewith.
(2) Opinion and Consent of Ballard Spahr Andrews & Ingersoll,
LLP - Filed herewith.
(m) Not applicable
(n) Consent of Independent Auditors - Incorporated by
reference to Exhibit (n) to Pre-Effective Amendment No. 2
of the Registrant's Registration Statement on Form N-2
(File Nos. 333-82894 and 811-10573) filed with the
Securities and Exchange Commission on March 21, 2002.
(o) Not applicable
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(p) Investment Representation Letter - Incorporated by
reference to Exhibit (p) to Pre-Effective Amendment No. 2
of the Registrant's Registration Statement on Form N-2
for the issuance of Common Shares (File Nos. 333-73130
and 811-10573) filed with the Securities and Exchange
Commission on January 25, 2002.
(q) Not applicable
(r)(1) Code of Ethics for the Fund - Incorporated by reference
to Exhibit (p)(1) to Post-Effective Amendment No. 74 of
the Registration Statement on Form N-1A of Alliance Bond
Fund, Inc. (File Nos. 2-48227 and 811-2383), filed with
the Securities and Exchange Commission on October 6,
2000, which is substantially identical in all material
respects except as to the party which is the Registrant.
(2) Code of Ethics for the Alliance Capital Management L.P. -
Incorporated by reference to Exhibit (p)(2) to Post-
Effective Amendment No. 31 of the Registration Statement
on Form N-1A of Alliance Variable Products Series Fund,
Inc. (File Nos. 33-18647 and 811-5398), filed with the
Securities and Exchange Commission on April 27, 2001.
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Other Exhibits:
Powers of Attorney for: Ruth Block, John D. Carifa,
David H. Dievler, John H. Dobkin, William H. Foulk, Jr.,
Dr. James Hester, Clifford L. Michel, and Donald J.
Robinson - Incorporated by reference to Other Exhibits to
Pre-Effective Amendment No. 1 of the Registrant's
Registration Statement on Form N-2 for Common Shares
(File Nos. 333-73130 and 811-10573) filed with the
Securities and Exchange Commission on December 21, 2001.
ITEM 25. MARKETING ARRANGEMENTS
See Underwriting Agreement filed as Exhibit (h).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC Registration fees $17,940
National Association of Securities Dealers, Inc. fees $0
Printing (other than stock certificates) and related
delivery expenses $19,000
Engraving and printing stock certificates $0
Legal fees and expenses $60.00
Rating Agency Fees $157,000
Fees and expenses of qualification under
state securities laws (excluding fees of counsel) $0
Auditing fees and expenses $17,000
Miscellaneous $12,770
Total $283,710
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE
REGISTRANT
Not applicable
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (as of March 14,
2002)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Preferred Shares ($0.001 par value per share) 0
ITEM 29. INDEMNIFICATION
It is the Registrant's policy to indemnify its directors
and officers, employees and other agents to the maximum extent
permitted by Section 2-418 of the General Corporation Law of the
State of Maryland and as set forth in Article EIGHTH of
Registrant's Amended Articles of Incorporation filed as Exhibit
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(a), Article IX of the Registrant's Bylaws filed as Exhibit (b)
and Section 8 of the Underwriting Agreement filed as Exhibit
(h)(1). The Adviser's liability for any loss suffered by the
Registrant or its stockholders is set forth in Section 4 of the
Investment Advisory Agreement filed as Exhibit (g) to this
Registration Statement.
SECTION 2-418 OF THE MARYLAND GENERAL CORPORATION LAW
READS AS FOLLOWS:
2-418 INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS.--(a) In this section the
following words have the meaning indicated.
(1) "Director" means any person who is or was
a director of a corporation and any person who,
while a director of a corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or
foreign predecessor entity of a corporation in a
merger, consolidation, or other transaction in
which the predecessor's existence ceased upon
consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director, the
office of director in the corporation; and
(ii) When used with respect to a person other than
a director as contemplated in subsection (j), the
elective or appointive office in the corporation
held by the officer, or the employment or agency
relationship undertaken by the employee or agent in
behalf of the corporation.
(iii) "Official capacity" does not include service
for any other foreign or domestic corporation or
any partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is, or
is threatened to be made a named defendant or
respondent in a proceeding.
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(6) "Proceeding" means any threatened,
pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or
investigative.
(b)(1) A corporation may indemnify any
director made a party to any proceeding by reason
of service in that capacity unless it is
established that:
(i) The act or omission of the director was
material to the matter giving rise to the
proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate
dishonesty; or
(ii) The director actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the
director had reasonable cause to believe that the act or
omission was unlawful.
(2) (i) Indemnification may be against judgments,
penalties, fines, settlements, and reasonable expenses
actually incurred by the director in connection with the
proceeding.
(ii) However, if the proceeding was one by or in
the right of the corporation, indemnification may not be
made in respect of any proceeding in which the director
shall have been adjudged to be liable to the
corporation.
(3) (i) The termination of any proceeding by
judgment, order or settlement does not create a
presumption that the director did not meet the requisite
standard of conduct set forth in this subsection.
(ii) The termination of any proceeding by
conviction, or a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior
to judgment, creates a rebuttable presumption that the
director did not meet that standard of conduct.
(4) A corporation may not indemnify a director or
advance expenses under this section for a proceeding
C-6
brought by that director against the corporation,
except:
(i) For a proceeding brought to enforce
indemnification under this section; or
(ii) If the charter or bylaws of the corporation, a
resolution of the board of directors of the corporation,
or an agreement approved by the board of directors of
the corporation to which the corporation is a party
expressly provide otherwise.
(c) A director may not be indemnified under
subsection (b) of this section in respect of any
proceeding charging improper personal benefit to the
director, whether or not involving action in the
director's official capacity, in which the director was
adjudged to be liable on the basis that personal benefit
was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits
or otherwise, in the defense of any proceeding referred
to in subsection (b) of this section shall be
indemnified against reasonable expenses incurred by the
director in connection with the proceeding.
(2) A court of appropriate jurisdiction upon
application of a director and such notice as the court
shall require, may order indemnification in the
following circumstances:
(i) If it determines a director is entitled to
reimbursement under paragraph (1) of this subsection,
the court shall order indemnification, in which case the
director shall be entitled to recover the expenses of
securing such reimbursement; or
(ii) If it determines that the director is fairly and
reasonably entitled to indemnification in view of all
the relevant circumstances, whether or not the director
has met the standards of conduct set forth in subsection
(b) of this section or has been adjudged liable under
the circumstances described in subsection (c) of this
section, the court may order such indemnification as the
court shall deem proper. However, indemnification with
respect to any proceeding by or in the right of the
corporation or in which liability shall have been
adjudged in the circumstances described in subsection
(c) shall be limited to expenses.
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(3) A court of appropriate jurisdiction may be the
same court in which the proceeding involving the
director's liability took place.
(e)(1) Indemnification under subsection (b) of
this section may not be made by the corporation unless
authorized for a specific proceeding after a
determination has been made that indemnification of the
director is permissible in the circumstances because the
director has met the standard of conduct set forth in
subsection (b) of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a
quorum consisting of directors not, at the time, parties
to the proceeding, or, if such a quorum cannot be
obtained, then by a majority vote of a committee of the
board consisting solely of two or more directors not, at
the time, parties to such proceeding and who were duly
designated to act in the matter by a majority vote of
the full board in which the designated directors who are
parties may participate;
(ii) By special legal counsel selected by the board or a
committee of the board by vote as set forth in
subparagraph (i) of this paragraph, or, if the requisite
quorum of the full board cannot be obtained therefor and
the committee cannot be established, by a majority vote
of the full board in which directors who are parties may
participate; or
(iii) By the stockholders.
(3) Authorization of indemnification and
determination as to reasonableness of expenses shall be
made in the same manner as the determination that
indemnification is permissible. However, if the
determination that indemnification is permissible is
made by special legal counsel, authorization of
indemnification and determination as to reasonableness
of expenses shall be made in the manner specified in
subparagraph (ii) of paragraph (2) of this subsection
for selection of such counsel.
(4) Shares held by directors who are parties to
the proceeding may not be voted on the subject matter
under this subsection.
(f)(1) Reasonable expenses incurred by a director
who is a party to a proceeding may be paid or reimbursed
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by the corporation in advance of the final disposition
of the proceeding, upon receipt by the corporation of:
(i) A written affirmation by the director of the
director's good faith belief that the standard of
conduct necessary for indemnification by the corporation
as authorized in this section has been met; and
(ii) A written undertaking by or on behalf of the
director to repay the amount if it shall ultimately be
determined that the standard of conduct has not been
met.
(2) The undertaking required by subparagraph (ii)
of paragraph (1) of this subsection shall be an
unlimited general obligation of the director but need
not be secured and may be accepted without reference to
financial ability to make the repayment.
(3) Payments under this subsection shall be made
as provided by the charter, bylaws, or contract or as
specified in subsection (e) of this section.
(g) The indemnification and advancement of
expenses provided or authorized by this section may not
be deemed exclusive of any other rights, by
indemnification or otherwise, to which a director may be
entitled under the charter, the bylaws, a resolution of
stockholders or directors, an agreement or otherwise,
both as to action in an official capacity and as to
action in another capacity while holding such office.
(h) This section does not limit the corporation's
power to pay or reimburse expenses incurred by a
director in connection with an appearance as a witness
in a proceeding at a time when the director has not been
made a named defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have
requested a director to serve an employee benefit plan
where the performance of the director's duties to the
corporation also imposes duties on, or otherwise
involves services by, the director to the plan or
participants or beneficiaries of the plan:
(2) Excise taxes assessed on a director with
respect to an employee benefit plan pursuant to
applicable law shall be deemed fines; and
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(3) Action taken or omitted by the director with
respect to an employee benefit plan in the performance
of the director's duties for a purpose reasonably
believed by the director to be in the interest of the
participants and beneficiaries of the plan shall be
deemed to be for a purpose which is not opposed to the
best interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be
indemnified as and to the extent provided in subsection
(d) of this section for a director and shall be
entitled, to the same extent as a director, to seek
indemnification pursuant to the provisions of subsection
(d);
(2) A corporation may indemnify and advance
expenses to an officer, employee, or agent of the
corporation to the same extent that it may indemnify
directors under this section; and
(3) A corporation, in addition, may indemnify and
advance expenses to an officer, employee, or agent who
is not a director to such further extent, consistent
with law, as may be provided by its charter, bylaws,
general or specific action of its board of directors or
contract.
(k)(1) A corporation may purchase and maintain
insurance on behalf of any person who is or was a
director, officer, employee, or agent of the
corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving
at the request, of the corporation as a director,
officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint
venture, trust, other enterprise, or employee benefit
plan against any liability asserted against and incurred
by such person in any such capacity or arising out of
such person's position, whether or not the corporation
would have the power to indemnify against liability
under the provisions of this section.
(2) A corporation may provide similar protection,
including a trust fund, letter of credit, or surety
bond, not inconsistent with this section.
(3) The insurance or similar protection may be
provided by a subsidiary or an affiliate of the
corporation.
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(1) Any indemnification of, or advance of expenses
to, a director in accordance with this section, if
arising out of a proceeding by or in the right of the
corporation, shall be reported in writing to the
stockholders with the notice of the next stockholders'
meeting or prior to the meeting."
ARTICLE EIGHTH OF THE REGISTRANT'S ARTICLES OF INCORPORATION
READS AS FOLLOWS:
(1) To the full extent that limitations on the
liability of directors and officers are permitted by the
Maryland General Corporation Law, no director or officer
of the Corporation shall have any liability to the
Corporation or its stockholders for money damages. This
limitation on liability applies to events occurring at
the time a person serves as a director or officer of the
Corporation whether or not such person is a director or
officer at the time of any proceeding in which liability
is asserted.
(2) The Corporation shall indemnify and advance
expenses to its currently acting and its former
directors to the fullest extent that indemnification of
directors is permitted by the Maryland General
Corporation Law. The Corporation shall indemnify and
advance expenses to its officers to the same extent as
its directors and to such further extent as is
consistent with law. The Board of Directors may by
Bylaw, resolution or agreement make further provisions
for indemnification of directors, officers, employees
and agents to the fullest extent permitted by the
Maryland General Corporation Law.
(3) No provision of this Article EIGHTH shall be
effective to protect or purport to protect any director
or officer of the Corporation against any liability to
the Corporation or its stockholders to which he would
otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the
duties involved in the conduct to his office.
(4) References to the Maryland General Corporation
Law in this Article EIGHTH are to that law as from time
to time amended. No amendment to the Charter of the
Corporation shall affect any right of any person under
this Article EIGHTH based on any event, omission or
proceeding prior to the amendment.
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ARTICLE IX OF THE REGISTRANT'S BY-LAWS READS AS FOLLOWS:
Section 1. Indemnification of Directors and Officers
and Other Persons. The Corporation shall indemnify its directors
to the fullest extent that indemnification of directors is
permitted by the MGCL. The Corporation shall indemnify its
current and former officers to the same extent as its directors
and to such further extent as is consistent with law. The
Corporation shall indemnify its current and former directors and
officers and those persons who, at the request of the
Corporation, serve or have served as a director, officer,
partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, other enterprise
or employee benefit plan against all expenses, liabilities and
losses (including attorneys' fees, judgments, fines and amounts
paid in settlement) reasonably incurred or suffered by them in
connection with being such a director, officer or other person
serving as described above. The indemnification and other rights
provided by this Article shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and administrators of such a person.
This Article shall not protect any such person against any
liability to the Corporation or to its security holders to which
such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his or her office
("disabling conduct").
Section 2. Advances. Any current or former director
or officer of the Corporation shall be entitled to advances from
the Corporation for payment of the reasonable expenses incurred
by such current or former director or officer in connection with
the matter as to which he or she may be entitled to
indemnification in the manner and, subject to the conditions
described below, to the fullest extent permissible under the
MGCL. The person seeking indemnification shall provide to the
Corporation a written affirmation of his or her good faith belief
that the standard of conduct necessary for indemnification by the
Corporation has been met and a written undertaking by the person
seeking indemnification or on behalf of such person to repay any
such advance if it should ultimately be determined that the
standard of conduct has not been met. In addition, at least one
of the following additional conditions shall be met: (a) the
person seeking indemnification shall provide a security in form
and amount acceptable to the Corporation for his undertaking; (b)
the Corporation is insured against losses arising by reason of
the advance; or (c) a majority of a quorum of directors of the
Corporation who are neither "interested persons" as defined in
Section 2(a)(19) of the Investment Company Act of 1940, as
amended, nor parties to the proceeding ("disinterested non-party
directors"), or independent legal counsel, in a written opinion,
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shall have determined, based on a review of facts readily
available to the Corporation at the time the advance is proposed
to be made, that there is reason to believe that the person
seeking indemnification will ultimately be found to be entitled
to indemnification.
Section 3. Procedure. At the request of any person
claiming indemnification under this Article, the Board of
Directors shall determine, or cause to be determined, in a manner
consistent with the MGCL, whether the standards required by this
Article have been met. Indemnification shall be made only
following: (a) a final decision on the merits by a court or
other body before whom the proceeding was brought that the person
to be indemnified was not liable by reason of disabling conduct
or (b) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the person
to be indemnified was not liable by reason of disabling conduct
by (i) the vote of a majority of a quorum of disinterested non-
party directors or (ii) an independent legal counsel in a written
opinion.
Section 4. Indemnification of Employees and Agents.
Employees and agents who are not officers or directors of the
Corporation may be indemnified, and reasonable expenses may be
advanced to such employees or agents, as may be provided by
action of the Board of Directors or by contract, subject to any
limitations imposed by the Investment Company Act of 1940.
Section 5. Other Rights. The Board of Directors may
make further provision consistent with law for indemnification
and advance of expenses to directors, officers, employees and
agents by resolution, agreement or otherwise. The
indemnification provided by this Article shall not be deemed
exclusive of any other right, with respect to indemnification or
otherwise, to which those seeking indemnification may be entitled
under any insurance or other agreement or resolution of
stockholders or disinterested directors or otherwise. The rights
provided to any person by this Article shall be enforceable
against the Corporation by such person, who shall be presumed to
have relied upon it in serving or continuing to serve as a
director, officer, employee, or agent as provided above.
Section 6. Amendments. References in this Article
are to the MGCL and to the Investment Company Act of 1940 as from
time to time amended. No amendment of these Bylaws shall affect
any right of any person under this Article based on any event,
omission or proceeding prior to the amendment.
The Underwriting Agreement between the Registrant, Alliance
Capital Management L.P. (the "Manager") and Salomon Smith Barney
Inc. (the "Underwriter") provides that the Registrant and the
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Manager will, jointly and severally, agree to indemnify and hold
harmless the Underwriter and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the
Securities Act of 1933 or Section 20 of the Securities Exchange
Act of 1934, from and against any and all losses, claims,
damages, liabilities and expenses, joint or several (including
reasonable costs of investigation) arising out of or based upon
any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, the Prospectus, any
Prepricing Prospectus, any sales material (or any amendment or
supplement to any of the foregoing) or arising out of or based
upon any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein (in the case of a prospectus, in light of the
circumstances under which they were made) not misleading, except
insofar as such losses, claims, damages, liabilities or expenses
arise out of or are based upon any untrue statement or omission
or alleged untrue statement or omission which has been made
therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Underwriter furnished in
writing to the Fund by or on behalf of the Underwriter expressly
for use in connection therewith; provided, however, that the
foregoing indemnity with respect to the Registration Statement,
the Prospectus or any Prepricing Prospectuses (or any amendment
or supplement to any of the foregoing) shall not inure to the
benefit of any Underwriter from whom the person asserting any
loss, claim, damage, liability or expense purchased Shares, if it
is shown that a copy of the Prospectus, as then amended or
supplemented, which would have cured any defect giving rise to
such loss, claim, damage, liability or expense was not sent or
delivered to such person by or on behalf of such Underwriter, if
required by law to be so delivered, at or prior to the
confirmation of the sale of such Shares to such person and such
Prospectus, amendments and supplements had been provided by the
Registrant to the Underwriter in the requisite quantity and on a
timely basis to permit proper delivery. The foregoing indemnity
agreement shall be in addition to any liability which the
Registrant or the Manager may otherwise have.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that,
in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, 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 a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
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connection with the securities 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 of whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
In accordance with Release No. IC-11330 (September 2, 1980),
the Registrant will indemnify its directors, officers, investment
manager and principal underwriters only if (1) a final decision
on the merits was issued by the court or other body before whom
the proceeding was brought that the person to be indemnified (the
"indemnitee") was not liable by reason or willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office ("disabling conduct") or
(2) a reasonable determination is made, based upon a review of
the facts, that the indemnitee was not liable by reason of
disabling conduct, by (a) the vote of a majority of a quorum of
the directors who are neither "interested persons" of the
Registrant as defined in section 2(a)(19) of the Investment
Company Act of 1940 nor parties to the proceeding
("disinterested, non-party directors"), or (b) an independent
legal counsel in a written opinion. The Registrant will advance
attorneys fees or other expenses incurred by its directors,
officers, investment adviser or principal underwriters in
defending a proceeding, upon the undertaking by or on behalf of
the indemnitee to repay the advance unless it is ultimately
determined that he is entitled to indemnification and, as a
condition to the advance, (1) the indemnitee shall provide a
security for his undertaking, (2) the Registrant shall be insured
against losses arising by reason of any lawful advances, or (3) a
majority of a quorum of disinterested, non-party directors of the
Registrant, or an independent legal counsel in a written opinion,
shall determine, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
The Registrant participates in a joint trustees/directors and
officers liability insurance policy issued by the ICI Mutual
Insurance Company. Coverage under this policy has been extended
to directors, trustees and officers of the investment companies
managed by Alliance Capital Management L.P. Under this policy,
outside trustees and directors are covered up to the limits
specified for any claim against them for acts committed in their
capacities as trustee or director. A pro rata share of the
premium for this coverage is charged to each investment company
and to the Adviser.
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ITEM 30. BUSINESS AND OTHER CONNECTIONS OF ALLIANCE
The descriptions of Alliance Capital Management L.P. under
the caption "Management of the Fund-Investment Adviser" in the
Prospectus and in the Statement of Additional Information are
incorporated by reference herein.
The information as to the directors and executive officers of
Alliance Capital Management Corporation, the general partner of
Alliance, set forth in Alliance Capital Management L.P.'s Form
ADV filed with the Securities and Exchange Commission on April
21, 1988 (File No. 801-32361) and as amended through the date
hereof is incorporated by reference herein.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940
and the Rules thereunder are maintained as follows: journals,
ledgers, securities records and other original records are
maintained principally at the offices of Alliance Capital
Management L.P., 500 Plaza Drive, Secaucus, New Jersey 07094, at
the offices of State Street Bank and Trust Company, the
Registrant's Custodian, LaFayette Corporate Center, 2 Avenue
Lafayette, Boston, Massachusetts 02111, and at the offices of
EquiServe Trust Company, the Registrant's Transfer Agent,
Dividend-Disbursing Agent and Registrar, 150 Royall Street,
Canton, Massachusetts 02021. All other records so required to be
maintained are maintained at the offices of Alliance Capital
Management L.P., 1345 Avenue of the Americas, New York, New York
10105.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
1. Registrant undertakes to suspend offering of the shares
covered hereby until it amends its Prospectus contained
herein if subsequent to the effective date of this
Registration Statement, its net asset value per share
declines more than 10 percent from its net asset value per
share as of the effective date of this Registration
Statement or the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
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4. Not applicable.
5. 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 a
registration statement in reliance upon Rule 430A
and contained in the form of prospectus filed by the
Registrant under Rule 497(h) under the Securities
Act of 1933 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 the securities at that time shall be
deemed to be the initial bona fide offering thereof.
6. 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,
any Statement of Additional Information.
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SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant has duly caused this Pre-Effective
Amendment No. 3 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
and State of New York, on the 22nd day of March, 2002.
Alliance National Municipal Income Fund, Inc.
By /s/ John D. Carifa
------------------------------
John D. Carifa
Chairman and President
Pursuant to the requirements of the Securities Act of
1933, as amended, this Registration Statement has been signed
below by the following persons in the capacities and on the date
indicated.
Signature Title Date
--------- ----- ----
(1) Principal Executive Officer Chairman and March 22, 2002
President
/s/ John D. Carifa
--------------------------
John D. Carifa
(2) Principal Financial and Treasurer and March 22, 2002
Accounting Officer: Chief Financial
Officer
/s/ Mark D. Gersten
--------------------------
Mark D. Gersten
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(3) All of the Directors: March 22, 2002
Ruth Block
John D. Carifa
David H. Dievler
John H. Dobkin
William H. Foulk, Jr.
Dr. James Hester
Clifford L. Michel
Donald J. Robinson
By: /s/ Edmund P. Bergan, Jr.
--------------------------
Edmund P. Bergan, Jr.
(Attorney-in-Fact)
C-19
00250209.AW2
Exhibit Index
Item No.
Form of Underwriting Agreement 24(2)(h)
Form of Auction Agency Agreement between
the Registrant and The Bank of New York 24(2)(k)(3)
Form of Broker-Dealer Agreement as to the
Registrant's Preferred Shares 24(2)(k)(4)
Form of DTC Representations Letter as
to the Registrant's Preferred Shares 24(2)(k)(5)
Opinion and Consent of Seward & Kissel LLP 24(2)(l)(1)
Opinion and Consent of Ballard Spahr Andrews
& Ingersoll, LLP 24(2)(l)(2)
00250209.AW2