SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1999
$100,000,000
Dreyfus [Logo] Dreyfus Municipal Income, Inc.
2,000 Shares Series A
2,000 Shares Series B
AUCTION PREFERRED STOCK
LIQUIDATION PREFERENCE $25,000 PER SHARE
-------------------------
Dreyfus Municipal Income, Inc. (the "Fund") is a non-diversified,
closed-end management investment company. Its investment objective is to
maximize current income exempt from federal income tax to the extent consistent
with the preservation of capital. The Fund ordinarily invests all of its assets
in municipal obligations considered by its investment adviser to be investment
grade at the time of purchase. See the "Investment Objective and Policies"
section beginning on page 13 of this Prospectus for a discussion of the
investment risks you should consider in making an investment decision.
The Dreyfus Corporation ("Dreyfus") is the Fund's investment adviser.
<TABLE>
<CAPTION>
Per share Sales load (2) Proceeds to Fund(1)
<S> <C> <C> <C>
Public Offering Price.................... $ 25,000 $ $
Total.................................... $100,000,000 $ $
- ------------
(1) Plus accumulated dividends, if any, from the Date of Original Issue.
(2) The Fund and Dreyfus have agreed to indemnify the underwriter against
certain liabilities under the Securities Act of 1933. See "Underwriting."
</TABLE>
The Applicable Rate for the Initial Dividend Period will be ___% per
annum for Series A Preferred Stock and ___% per annum for Series B Preferred
Stock. The Applicable Rate on the Preferred Stock for each Subsequent Dividend
Period generally will be determined pursuant to periodic Auctions conducted in
accordance with the procedures described herein. Unless the Fund gives notice of
a Special Dividend Period, each Subsequent Dividend Period for each series of
Preferred Stock will be a 28-Day Dividend Period.
Dividends on the Preferred Stock will be cumulative from the Date of
Original Issue and payable commencing on ___________, 1999 for Series A
Preferred Stock and on ____________, 1999 for Series B Preferred Stock and,
generally, on each succeeding fourth Wednesday for Series A Preferred Stock and
each succeeding fourth Friday for Series B Preferred Stock.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus sets forth concisely information about the Fund that
you should know before investing. You should retain it for future reference. A
statement of additional information ("SAI") dated September __, 1999, containing
additional information about the Fund, is on file with the SEC and is
incorporated by reference into this Prospectus. The table of contents of the SAI
appears on page 46 of this Prospectus. You may obtain a copy of the SAI without
charge by calling the Fund at 1-800-334-6899, or writing to the Fund at 200 Park
Avenue, New York, New York 10166.
-------------------------
PAINEWEBBER INCORPORATED
-------------------------
The date of this Prospectus is September __, 1999.
-------------------------
<PAGE>
The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
<PAGE>
(CONTINUED FROM THE PREVIOUS PAGE)
The Broker-Dealers may maintain a secondary trading market in the
Preferred Stock outside of the Auctions; however, they have no obligation to do
so, and there can be no assurance that a secondary market for the Preferred
Stock will develop or, if it does develop, that it will provide holders with a
liquid trading market. The Preferred Stock will not be listed for trading on any
exchange or any other market. An increase in the level of interest rates,
particularly during any Long Term Dividend Period, likely will have an adverse
effect on the secondary market price of the shares of Preferred Stock.
Each prospective purchaser should review carefully the detailed
information regarding the Auction Procedures which appears in this Prospectus
and the SAI.
Certain capitalized terms used in this Prospectus are defined in the
"Glossary" that appears at the end of this Prospectus.
The Underwriter is offering the shares of Preferred Stock subject to
certain conditions. It is expected that one certificate for each series of
Preferred Stock will be delivered to the nominee of The Depository Trust Company
on or about September __, 1999.
_______________
THE SHARES OF PREFERRED STOCK ARE NOT BANK DEPOSITS. AN INVESTMENT IN
SHARES OF PREFERRED STOCK IS NOT GUARANTEED, ENDORSED OR INSURED BY ANY BANK,
FINANCIAL INSTITUTION OR GOVERNMENT ENTITY, SUCH AS THE FEDERAL DEPOSIT
INSURANCE CORPORATION.
TABLE OF CONTENTS
PAGE
Prospectus Summary............................................................1
Financial Highlights.........................................................10
The Fund.....................................................................11
Use of Proceeds..............................................................11
Capitalization...............................................................12
Portfolio Composition........................................................12
Investment Objective and Policies............................................13
Description of Preferred Stock...............................................19
Management of the Fund.......................................................37
Taxes........................................................................38
Description of Capital Structure.............................................41
Certain Provisions of the Charter............................................43
Underwriting.................................................................44
Shareholder Servicing Agent, Custodian and Transfer Agent....................44
Legal Opinions...............................................................45
Independent Auditors.........................................................45
Additional Information.......................................................45
Special Note Regarding Forward-Looking Statements............................45
Table of Contents of the SAI.................................................46
Glossary.....................................................................47
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER
THE FUND NOR THE UNDERWRITER HAS AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH
DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT
INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE UNDERWRITER IS
MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS
PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER ONLY.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE
DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND IN THE SAI.
CERTAIN OF THE CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED IN THE
GLOSSARY THAT APPEARS AT THE END OF THIS PROSPECTUS.
THE FUND........................ The Fund is a non-diversified, closed-end
management investment company. The Fund was
organized under Maryland law on September 2,
1988, and has registered under the Investment
Company Act of 1940, as amended (the
"Investment Company Act"). The Fund's
principal office is located at 200 Park
Avenue, New York, New York 10166, and its
telephone number is 1-800-334-6899.
INVESTMENT ADVISER.............. Dreyfus is the Fund's investment adviser.
INVESTMENT OBJECTIVE AND
POLICIES...................... The Fund's investment objective is to
maximize current income exempt from federal
income tax to the extent consistent with the
preservation of capital. The Fund ordinarily
invests all of its net assets in municipal
obligations that provide income exempt from
federal income tax. No assurance can be given
that the Fund's investment objective will be
achieved. The Fund ordinarily will invest all
of its net assets in municipal obligations
considered investment grade (at least
Baa/BBB) by Moody's, S&P or Fitch or the
unrated equivalent as determined by Dreyfus
at the time of purchase.
THE OFFERING.................... The Fund is offering an aggregate of:
2,000 shares of Series A Preferred Stock
2,000 shares of Series B Preferred
Stock,
each at a purchase price of $25,000 per share
plus accumulated dividends, if any, from the
Date of Original Issue.
The shares of Preferred Stock are being
offered by PaineWebber Incorporated. See
"Underwriting."
PRINCIPAL INVESTMENT RISKS...... Before investing in shares of the Preferred
Stock, you should consider carefully the
following risks of such an investment:
o if an Auction fails, you may not be able
to sell some or all of your shares;
o because of the nature of the market for
shares of Preferred Stock, you may
receive less than the price you paid for
your shares if you sell them outside of
the Auction, especially when market
interest rates are rising;
o the Rating Agency could downgrade the
shares of Preferred Stock, which could
adversely affect liquidity;
o the Fund may be forced to redeem your
shares to meet regulatory or Rating
Agency requirements or may voluntarily
redeem your shares in certain
circumstances;
o the Fund may not earn sufficient income
from its investments to pay dividends;
o if long term interest rates rise, the
value of the Fund's investment portfolio
will decline, reducing the asset
coverage for the shares of Preferred
Stock; and
o if an issuer of a municipal obligation
in which the Fund invests defaults,
there may be a negative impact on the
income and net asset value of the Fund's
portfolio.
For a description of additional risks of
investing in the Fund, see "Investment
Objective and Policies--Additional Risk
Considerations," and "--Risks of Investing in
the Preferred Stock."
DIVIDENDS ON
PREFERRED STOCK .............. The shares of Preferred Stock will entitle
their holders to receive cash dividends at
the Applicable Rate. The Applicable Rate for
each Dividend Period after the Initial
Dividend Period will be determined by an
Auction conducted on the Business Day next
preceding the start of the Dividend Period.
Typically, each Dividend Period for each
series of Preferred Stock after the Initial
Dividend Period will be 28 days. Dividends
ordinarily will be payable on each succeeding
fourth Wednesday for Series A Preferred
Stock and on each succeeding fourth Friday
for Series B Preferred Stock, subject to
certain exceptions. The Fund, however, may
change the Dividend Period, subject to giving
notice to holders of the Preferred Stock.
Beneficial Owners and Potential Beneficial
Owners of shares of Preferred Stock may
participate in Auctions through their
Broker-Dealers. Except for certain Special
Dividend Periods, Beneficial Owners desiring
to continue to hold all of their shares of
Preferred Stock regardless of the Applicable
Rate resulting from Auctions need not
participate. For an explanation of Auctions
and the method of determining the Applicable
Rate, see "Description of Preferred
Stock--The Auction."
Dividends for the shares of Preferred Stock
will be paid through the Securities
Depository on each Dividend Payment Date. The
Securities Depository typically will
distribute dividends in same-day funds to
Agent Members, who are expected to distribute
such dividends to the person for whom they
are acting as agent in accordance with the
instructions of such person. See "Description
of Preferred Stock--Dividends."
A Special Dividend Period can be declared
only if certain conditions are met. See
"Description of Preferred Stock-- Dividends."
If Sufficient Clearing Bids do not exist at
the Auction for the shares of Preferred
Stock, the Dividend Period commencing on the
Business Day succeeding that Auction will be
a 28-Day Dividend Period, and the holders of
the shares of Preferred Stock outstanding
before that Auction will be required to
continue to hold such shares for that
Dividend Period. In addition, the Fund may
not give a Notice of Special Dividend Period,
or if the Fund has given a Notice of Special
Dividend Period for the Preferred Stock, the
Fund will be required to give a Notice of
Revocation, if:
o either the Investment Company Act
Preferred Stock Asset Coverage is not
satisfied or the Fund fails to maintain
S&P Eligible Assets with an aggregate
Discounted Value at least equal to the
Preferred Stock Basic Maintenance
Amount, in each case on each of the two
Valuation Dates immediately preceding
the Business Day prior to the related
Auction Date for the shares of Preferred
Stock,
o sufficient funds for the payment of
dividends payable on the immediately
succeeding Dividend Payment Date have
not been irrevocably deposited with the
Auction Agent by the close of business
on the third Business Day preceding the
related Auction Date, or
o the Broker-Dealers have not given the
Fund notice that it is advisable to hold
an Auction in respect of a Special
Dividend Period.
In any of these events, the next succeeding
Dividend Period will be a 28-Day Dividend
Period.
ADVANCE NOTICE OF ALLOCA-
TION OF TAXABLE INCOME;
INCLUSION OF TAXABLE
INCOME IN DIVIDENDS........... Dividends paid from tax-exempt income earned
on municipal obligations will be exempt from
federal income tax, although some or all of
those dividends may be a tax preference item
for purposes of the federal alternative
minimum tax.
The Fund is required to allocate net capital
gains and any other income subject to federal
income tax proportionately among the Fund's
shares of common stock and shares of
Preferred Stock. The Fund will seek to notify
the Auction Agent of the amount of the
taxable income to be included in any dividend
on the shares of Preferred Stock before the
Auction establishing the Applicable Rate for
such dividend. The Auction Agent will notify
each Broker-Dealer whenever it receives any
such notice from the Fund, and each Broker-
Dealer will notify its Beneficial Owners and
Potential Beneficial Owners, as provided in
its Broker-Dealer Agreement.
The Fund also may include such taxable income
in a dividend on the shares of Preferred
Stock without giving advance notice thereof
if it increases the dividend by an amount
sufficient to offset substantially the tax
effect thereof. The amount of taxable income
allocable to the shares of Preferred Stock
will depend upon the amount of taxable income
realized by the Fund and other factors but
generally is not expected to be significant.
See "Taxes" and "Description of Preferred
Stock--The Auction--Auction Date; Advance
Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends."
ADDITIONAL DIVIDENDS ........... If the Fund retroactively allocates any net
capital gains or other taxable income to the
shares of Preferred Stock without advance
notice, the Fund will make payments to
holders of the shares of Preferred Stock to
which such allocation was made to offset
substantially the tax effect thereof. This
retroactive allocation may happen if (i) all
or a portion of the outstanding shares of
Preferred Stock are redeemed, (ii) the Fund
liquidates, (iii) a debt obligation believed
to be a municipal obligation unexpectedly
turns out to be an obligation subject to
federal income tax or (iv) any other reason
determined in good faith by the Fund. See
"Description of Preferred
Stock--Dividends--Additional Dividends" and
"Taxes."
DETERMINATION OF MAXIMUM
APPLICABLE RATES.............. Except during a Non-Payment Period, the
Applicable Rate for any Dividend Period for
the Preferred Stock will not be more than the
Maximum Applicable Rate. The Maximum
Applicable Rate for each series of Preferred
Stock will depend on the credit rating
assigned to such shares and on the duration
of the Dividend Period. The Maximum
Applicable Rate will be the Applicable
Percentage of the Reference Rate.
The Reference Rate is:
o with respect to any 28-Day Dividend
Period or any Short Term Dividend Period
having 28 or fewer days, the higher of
the applicable "AA" Composite Commercial
Paper Rate and the Taxable Equivalent of
the Short Term Municipal Obligation
Rate,
o with respect to any Short Term Dividend
Period having more than 28 but fewer
than 183 days, the applicable "AA"
Composite Commercial Paper Rate,
o with respect to any Short Term Dividend
Period having 183 or more but fewer than
364 days, the applicable U.S. Treasury
Bill Rate, and
o with respect to any Long Term Dividend
Period, the applicable U.S. Treasury
Note Rate.
The Applicable Percentage will be determined based
on:
o the credit rating assigned on such date
to the shares of Preferred Stock by S&P
(or, if S&P does not make such rating
available, the equivalent of such rating
by a Substitute Rating Agency), and
o whether the Fund has provided
notification to the Auction Agent,
before the Auction establishes the
Applicable Rate for any dividend, that
net capital gains or other taxable
income will be included in such dividend
on the shares of Preferred Stock as
follows:
APPLICABLE APPLICABLE
Percentage of Percentage of
S&P Credit Reference Rate- Reference Rate-
Ratings No Notification Notification
AA- or higher... 110% 150%
A- to A+........ 125 160
BBB- to BBB+.... 150 250
Below BBB-...... 200 275
There is no minimum Applicable Rate in
respect of any Dividend Period.
The Applicable Rate for any Dividend Period
commencing during any Non-Payment Period, and
the rate used to calculate the late charge
described under "Description of Preferred
Stock--Dividends--Non-Payment Period; Late
Charge," initially will be 200% of the
Reference Rate (or 275% of such rate if the
Fund has provided notification to the Auction
Agent before the Auction establishing the
Applicable Rate for any dividend that net
capital gains or other taxable income will be
included in such dividend on shares of
Preferred Stock).
AUCTION PROCEDURES ............. Separate Auctions will be conducted for each
series of Preferred Stock. Unless otherwise
permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners of shares of
Preferred Stock may participate in Auctions
only through their Broker-Dealers.
Broker-Dealers will submit the Orders of
their respective customers who are Beneficial
Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves 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. On or before each Auction
Date (the Business Day next preceding the
first day of each Dividend Period), each
Beneficial Owner may submit Orders to its
Broker-Dealer as follows:
o Hold Order--indicating its desire to
hold the shares of Preferred Stock
without regard to the Applicable Rate
for the next Dividend Period for such
shares.
o Bid--indicating its desire to hold the
shares of Preferred Stock, provided the
Applicable Rate for the next Dividend
Period for such shares is not less than
the rate per annum specified in such
Bid.
o Sell Order--indicating its desire to
sell the shares of Preferred Stock
without regard to the Applicable Rate
for the next Dividend Period for such
shares.
A Beneficial Owner may submit different types
of Orders to its Broker-Dealer with respect
to the shares of Preferred Stock then held by
such Beneficial Owner, provided that the
total number of shares of Preferred Stock
covered by such Orders does not exceed the
number of shares of Preferred Stock held by
the Beneficial Owner. If, however, a
Beneficial Owner offers through its
Broker-Dealer to purchase additional shares
of Preferred Stock in the Auction, such
Beneficial Owner, for purposes of such offer
to purchase additional shares, will be
treated as a Potential Beneficial Owner as
described below. Bids by Beneficial Owners
through their Broker-Dealers with rates per
annum higher than the Maximum Applicable Rate
will be treated as Sell Orders.
If an Order is not submitted on behalf of a
Beneficial Owner for any reason, including
the failure of a Broker-Dealer to submit such
Beneficial Owner's Order to the Auction
Agent, then a Hold Order (in the case of an
Auction relating to a Dividend Period of 91
days or less) and a Sell Order (in the case
of an Auction relating to a Special Dividend
Period of longer than 91 days) will be deemed
to have been submitted on behalf of such
Beneficial Owner.
Potential Beneficial Owners of shares of
Preferred Stock may submit Bids through their
Broker-Dealers offering to purchase shares of
Preferred Stock, provided the Applicable Rate
for the next Dividend Period for such shares
is not less than the rate per annum specified
in such Bid. A Bid by a Potential Beneficial
Owner with a rate per annum higher than the
Maximum Applicable Rate will not be
considered.
Neither the Fund nor the Auction Agent will
be responsible for a Broker-Dealer's failure
to comply with any of the Auction Procedures.
A Broker-Dealer also may hold shares of
Preferred Stock for its own account as a
Beneficial Owner and, thus, may participate
in an Auction on behalf of both itself and
its customers. A Broker-Dealer acting for
itself will be subject to the same procedures
as when it acts on behalf of a Beneficial
Owner or a Potential Beneficial Owner.
If Sufficient Clearing Bids exist in an
Auction for a series of Preferred Stock, the
Applicable Rate will be the lowest rate per
annum specified in the Submitted Bids which,
taking into account such rate per annum and
all lower rates per annum bid by Existing
Holders and Potential Holders, would result
in Existing Holders and Potential Holders
owning all of the shares of Preferred Stock
available for purchase in the Auction.
If Sufficient Clearing Bids do not exist, the
Dividend Period next following the Auction
automatically will be a 28-Day Dividend
Period and the Applicable Rate will be the
Maximum Applicable Rate. In such event,
Existing Holders that have submitted Sell
Orders will not be able to sell in the
Auction all, and may not be able to sell any,
shares of Preferred Stock subject to such
Sell Orders.
If all Existing Holders submit (or are deemed
to have submitted) Hold Orders in an Auction,
the Dividend Period next following the
Auction automatically will be the same length
as the immediately preceding Dividend Period,
and the Applicable Rate will be 40% of the
Reference Rate (as defined under
"Determination of Maximum Applicable Rates"
above) in effect on the date of the Auction
(or 60% of such rate if the Fund has provided
notification to the Auction Agent, before the
Auction establishes the Applicable Rate for
any dividend, that net capital gains or other
taxable income will be included in such
dividend on shares of Preferred Stock).
The Auction Procedures include a pro rata
allocation of shares for purchase and sale,
which may result in an Existing Holder
selling or holding, or a Potential Holder
purchasing, a number of shares of Preferred
Stock that is less than the number of shares
of Preferred Stock specified in its Order. If
the allocation has this result, a
Broker-Dealer will be required to make
appropriate pro rata allocations among its
customers and itself.
A Sell Order by an Existing Holder will
constitute an irrevocable offer to sell the
shares of Preferred Stock subject to it, and
a Bid placed by an Existing Holder also will
constitute an irrevocable offer to sell the
shares of Preferred Stock subject to it if
the rate per annum specified in the Bid is
higher than the Applicable Rate determined in
the Auction, in each case at a price per
share equal to $25,000.
A Bid placed by a Potential Holder will
constitute an irrevocable offer to purchase
the shares of Preferred Stock subject thereto
if the rate per annum specified in such Bid
is less than or equal to the Applicable Rate
determined in the Auction. 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 same-day funds
to the Securities Depository against delivery
by book-entry to their 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 in
same-day funds. See "Description of Preferred
Stock--The Auction."
ASSET MAINTENANCE............... Under its Charter, the Fund must maintain (i)
S&P Eligible Assets having in the aggregate a
Discounted Value at least equal to the
Preferred Stock Basic Maintenance Amount and
(ii) Investment Company Act Preferred Stock
Asset Coverage of at least 200%. See
"Description of Preferred Stock--Asset
Maintenance."
The Fund estimates that, based on the
composition of its portfolio at August 31,
1999, Investment Company Act Preferred Stock
Asset Coverage with respect to shares of
Preferred Stock would be approximately
283% immediately after the issuance of the
shares of Preferred Stock offered hereby in
an amount representing approximately 35%
of the Fund's capital (including the capital
attributable to the shares of Preferred
Stock).
The Discount Factors and guidelines for
calculating the Discounted Value of the
Fund's portfolio for purposes of determining
whether the Preferred Stock Basic Maintenance
Amount has been satisfied have been
established by S&P in connection with the
Fund's receipt of ratings on the shares of
Preferred Stock on their Date of Original
Issue of "AAA" from S&P.
MANDATORY REDEMPTION ........... If the Preferred Stock Basic Maintenance
Amount or the Investment Company Act
Preferred Stock Asset Coverage is not
maintained or restored as required, the
shares of Preferred Stock will be subject to
mandatory redemption, out of funds legally
available, at the Mandatory Redemption Price
of $25,000 per share, plus an amount equal to
accumulated but unpaid dividends to the date
fixed for redemption. In addition, holders of
shares of Preferred Stock may be entitled to
receive Additional Dividends in the event of
redemption of such shares of Preferred Stock.
See "Description of Preferred
Stock--Dividends--Additional Dividends." Any
such redemption will be limited to the
minimum number of shares of Preferred Stock
necessary to restore the Preferred Stock
Basic Maintenance Amount or the Investment
Company Act Preferred Stock Asset Coverage,
as the case may be. The Fund's ability to
complete a mandatory redemption may be
restricted by the provisions of the
Investment Company Act. See "Description of
Preferred Stock--Redemption--Mandatory
Redemption."
OPTIONAL REDEMPTION............. The shares of Preferred Stock are redeemable
at the option of the Fund on any Dividend
Payment Date (except during the Initial
Dividend Period or a Non-Call Period) at the
Optional Redemption Price of $25,000 per
share, plus an amount equal to accumulated
but unpaid dividends to the date fixed for
redemption plus the premium, if any,
resulting from the designation of a Premium
Call Period. See "Description of Preferred
Stock--Redemption--Optional Redemption."
Holders of shares of Preferred Stock also may
be entitled to receive Additional Dividends
if their shares of Preferred Stock are
redeemed. See "Description of Preferred
Stock--Dividends--Additional Dividends."
LIQUIDATION PREFERENCE .......... The liquidation preference of the shares of
Preferred Stock will be $25,000 per share,
plus an amount equal to accumulated but
unpaid dividends. See "Description of
Preferred Stock--Liquidation Rights." Holders
of shares of Preferred Stock also may be
entitled to receive Additional Dividends if
the Fund is liquidated. See "Description of
Preferred Stock--Dividends--Additional
Dividends."
RATING........................... Shares of Preferred Stock will be issued only
if S&P gives them a credit quality rating of
"AAA." The Fund may seek at some future time
to have the shares of Preferred Stock rated
by an additional Rating Agency. See
"Investment Objective and Policies--Rating
Agency Guidelines."
VOTING RIGHTS.................... Holders of any shares of Preferred Stock,
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 at any
time when two years' dividends on any shares
of Preferred Stock are unpaid. The holders of
any shares of Preferred Stock will vote as a
separate class on certain other matters as
required under the Fund's Charter and the
Investment Company Act. See "Description of
Preferred Stock--Voting Rights,"
"Description of Capital Structure" and
"Certain Provisions of the Charter."
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain specified information for a share
of common stock of the Fund outstanding throughout each period. The financial
highlights for each of the ten years in the period ended September 30, 1998 have
been audited by Ernst & Young LLP, the Fund's independent auditors, whose report
covering each of the five years in the period ended September 30, 1998, is
included in the Fund's September 30, 1998 Annual Report and is incorporated by
reference in the SAI. The financial highlights should be read in conjunction
with the financial statements and notes thereto included in the Fund's September
30, 1998 Annual Report and Semi-Annual Report for the six months ended March 31,
1999, which are available without charge from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
Six-Month
Period Ended
March 31, 1999
(Unaudited) 1998 1997 1996 1995 1994
--------------- ---- ---- ---- ---- ----
PER SHARE DATA:
Net asset value,
<S> <C> <C> <C> <C> <C> <C>
beginning of period....... $9.71 $ 9.55 $ 9.60 $ 9.74 $ 9.41 $ 10.45
----- -------- -------- -------- -------- ---------
INVESTMENT OPERATIONS:
Investment income--net...... .27 .55 .61 .64 .65 .67
Net realized and
unrealized gain (loss)
on investments............ (.17) .21 (.02) (.16) .35 (.93)
----- -------- -------- -------- -------- ---------
TOTAL FROM INVESTMENT
OPERATIONS................ .10 .76 .59 .48 1.00 (.26)
----- -------- -------- -------- -------- ---------
DISTRIBUTIONS:
Dividends from
investment income--net.... (.28) (.60) (.64) (.62) (.67) (.70)
Dividends from
net realized gain on
investments............... -- -- -- -- -- (.08)
----- -------- -------- -------- -------- ---------
TOTAL DISTRIBUTIONS......... (.28) (.60) (.64) (.62) (.67) (.78)
----- -------- -------- -------- -------- ---------
Net asset value, end of
period.................... $9.53 $ 9.71 $ 9.55 $ 9.60 $ 9.74 $ 9.41
===== ======== ======== ======== ======== ========
Market value, end of
period.................... $8 15/16 $ 9 11/16 $ 10 3/8 $ 9 9/16 $ 9 3/8 $ 8 7/8
===== ======== ======== ======== ======== ========
TOTAL RETURN* (9.91%)(3) (.69%) 15.90% 8.83% 13.48% (10.77%)
RATIOS/
SUPPLEMENTAL DATA:
Ratio of expenses to
average net assets........ .82%(3) .82% .82% .83% .85% .84%
Ratio of net investment
income to average net
assets.................... 5.66%(3) 5.75% 6.36% 6.61% 6.86% 6.76%
Portfolio turnover rate..... 17.92%(4) 8.84% 10.67% 8.56% 36.09% 14.41%
Net assets, end of
period (000's Omitted).... $194,224 $197,505 $193,578 $193,165 $195,517 $188,730
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------
1993 1992 1991 1990 1989(1)
---- ---- ---- ---- ----
PER SHARE DATA:
Net asset value,
<S> <C> <C> <C> <C> <C>
beginning of period..... $ 10.06 $ 9.83 $ 9.34 $ 9.52 $ 9.26(2)
--------- -------- -------- -------- --------
INVESTMENT OPERATIONS
Investment income--net.... .71 .71 .72 .73 .64
Net realized and
unrealized gain (loss)
on investments.......... .44 .30 .49 (.19) .14
--------- -------- -------- -------- --------
TOTAL FROM INVESTMENT
OPERATIONS.............. 1.15 1.01 1.21 .54 .78
--------- -------- -------- -------- --------
DISTRIBUTIONS:
Dividends from
investment income--net.. (.70) (.70) (.68) (.70) (.52)
Dividends from
net realized gain on
investments............. (.06) (.08) (.04) (.02) --
--------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS....... (.76) (.78) (.72) (.72) (.52)
--------- -------- -------- -------- --------
Net asset value, end of
period.................. $ 10.45 $ 10.06 $ 9.83 $ 9.34 $ 9.52
======== ======== ======== ======== ========
Market value, end of
period.................. 10 3/4 $ 10 1/2 $ 10 $ 9 1/4 $ 10
======== ======== ======== ======== ========
TOTAL RETURN* 10.30% 13.61% 16.61% (.21%) 5.88%(3)
RATIOS/
SUPPLEMENTAL DATA:
Ratio of expenses to
average net assets...... .83% .86% .88% .85% .88%(3)
Ratio of net investment
income to average net
assets.................. 7.01% 7.20% 7.61% 7.73% 7.37%(3)
Portfolio turnover rate... 11.94% 22.75% 36.40% 27.11% 95.24%(4)
Net assets, end of
period (000's omitted).. $206,999 $195,991 $188,441 $176,356 $176,757
- ---------------------------------
* Total return is calculated based on market value.
(1) From October 24, 1988 (commencement of operations) to September 30, 1989.
(2) Net of offering costs charged to paid-in capital.
(3) Annualized.
(4) Not annualized.
</TABLE>
<PAGE>
THE FUND
The Fund is a non-diversified, closed-end management investment
company that commenced operations in 1988. The Fund's investment objective is to
maximize current income exempt from federal income tax to the extent consistent
with the preservation of capital. The Fund ordinarily invests all of its assets
in municipal obligations considered by Dreyfus to be investment grade at the
time of purchase.
The Fund was organized as a Maryland corporation on September 2, 1988
and has registered with the SEC under the Investment Company Act. In October
1988, the Fund issued 16,000,000 shares of common stock pursuant to the initial
public offering thereof and commenced operations. The net proceeds of such
offering were $148,800,000. The Fund's common stock is traded on the American
Stock Exchange ("AMEX") under the symbol "DMF." The Fund's principal office is
located at 200 Park Avenue, New York, New York 10166. Dreyfus is registered with
the SEC under the Investment Advisers Act of 1940, as amended.
USE OF PROCEEDS
The estimated net proceeds of this offering will be $98,800,000 after
the payment of offering expenses (not expected to exceed $200,000) and the sales
load. See "Underwriting."
Dreyfus anticipates that the Fund will take up to sixty days from its
receipt of the net proceeds of the offer to invest or otherwise employ such
proceeds in accordance with the Fund's investment objective and policies under
current market conditions. Pending such investment, the proceeds of the offer
will be held in high-quality, short term, tax-exempt money market instruments or
shares of investment companies which invest in such securities. Consequently,
the proceeds may not be invested for up to sixty days in securities consistent
with the Fund's goal of maximizing current income.
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of August 31, 1999 as adjusted to give effect to the issuance of the
shares of Preferred Stock offered hereby.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
Shareholders' equity:
Preferred Stock, par value $0.001 per share (no shares issued; 4,000
shares of Preferred Stock, as adjusted, at $25,000 per share
<S> <C> <C>
liquidation preference)................................................... $100,000,000
Common Stock, par value, $0.001 per share (20,382,927 shares issued
and outstanding).......................................................... $ 20,383 $ 20,383
Capital in excess of par value attributable to common stock.................... 189,890,840 188,690,840
Accumulated distributions in excess of investment income - net................ (120,396) (120,396)
Accumulated realized gain (loss) - net......................................... (2,800,733) (2,800,733)
Unrealized depreciation on investments - net................................... (2,549,257) (2,549,267)
-------------- -------------
Net assets..................................................................... $ 184,440,827 $283,240,827
============== =============
</TABLE>
PORTFOLIO COMPOSITION
As of August 31, 1999, approximately 98% of the market value of the
Fund's portfolio was invested in long term municipal obligations and the
remainder was invested in short term municipal obligations. The following table
sets forth certain information with respect to the composition of the Fund's
investment portfolio as of August 31, 1999.
<TABLE>
<CAPTION>
Number of Value
S&P* MOODY'S* FITCH* Issues (IN THOUSANDS) PERCENT
---- -------- ------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
AAA Aaa AAA 7 29,955 16.5%
AA Aa AA 4 7,017 3.9
A A A 7 23,716 13.1
BBB Baa BBB 21 71,635 39.5
NR+ NR+ NR+ 13 45,283 25.0
Cash 2 3,700 2.0
-----
Total 54 $181,306 100.0%
====== ======== ======
----------
* Ratings: Using the highest of S&P's, Moody's or Fitch's ratings on the
Fund's municipal obligations. See "Appendix A" of the SAI. S&P's and
Fitch's rating categories may be modified further by a plus (+) or minus
(-) in AA, A and BBB ratings. Moody's rating categories may be modified
further by a 1, 2 or 3 in Aa, A and Baa ratings.
+ Securities that are not rated by S&P, Moody's or Fitch. These municipal
obligations may be rated by nationally recognized statistical rating
organizations other than S&P, Moody's or Fitch, or may not be rated by any
such organization.
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to maximize current income exempt from
federal income tax to the extent consistent with the preservation of capital.
The Fund's investment objective may not be changed without the affirmative vote
of the holders of a majority (as defined in the Investment Company Act) of the
Fund's outstanding voting securities. No assurance can be given that the Fund
will achieve it's investment objective.
MANAGEMENT POLICIES
Under normal market conditions, the Fund will invest, as a fundamental
policy, at least 80% of its net assets in municipal obligations. The Fund
ordinarily invests all of its net assets in municipal obligations.
Municipal obligations are debt obligations issued by states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate agencies
or authorities, that provide income exempt from federal income tax. Municipal
obligations are classified as general obligation bonds, revenue bonds and notes.
General obligation bonds are secured by the issuer's pledge of its faith, credit
and taxing power for the payment of principal and interest. Revenue bonds are
payable from the revenue 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, but not from the general taxing power. Notes are short
term instruments which are obligations of the issuing municipalities or agencies
and are sold in anticipation of a bond sale, collection of taxes or receipt of
other revenues. The Fund may purchase floating and variable rate obligations,
municipal derivatives, such as custodial receipt programs created by financial
intermediaries, tender option bonds, and participations in municipal
obligations.
Under normal market conditions, the Fund ordinarily invests all of its net
assets in municipal obligations considered at the time of purchase investment
grade by Moody's, S&P or Fitch or the unrated equivalent as determined by
Dreyfus in the case of bonds, and in the two highest rating categories of
Moody's, S&P or Fitch or the unrated equivalent as determined by Dreyfus in the
case of short term obligations having or deemed to have maturities of less than
one year. When the Fund invests in unrated municipal obligations, it may be more
dependent on the research capabilities of Dreyfus than when it invests in rated
municipal obligations. The foregoing 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 Moody's, S&P or Fitch downgrades its assessment of the
credit characteristics of a particular issue. Investment grade bonds are those
rated in the four highest rating categories of Moody's, S&P or Fitch. See
"Additional Risk Considerations" below. The Fund also may invest in taxable
investments to the extent and of the quality described below.
The Fund emphasizes investments in municipal obligations with long term
maturities, but the degree of such emphasis depends upon market conditions
existing at the time of investment. Under normal market conditions, long term
municipal obligations generally provide a higher yield than short-term municipal
obligations. The Fund, however, may invest in short-term municipal obligations
when their yields are greater than yields available on long term municipal
obligations, for temporary defensive purposes and after the closing of this
offering as the Fund selects longer term municipal obligations to purchase for
its portfolio.
From time to time, the Fund may invest more than 25% of the value of its
total assets in industrial development bonds which, although issued by
industrial development authorities, may be backed only by the assets and
revenues of the non-governmental users. Interest on certain municipal
obligations (including certain industrial development bonds) which are specific
private activity bonds, while exempt from federal income tax, is a preference
item for the purpose of the federal alternative minimum tax ("AMT"). Where a
regulated investment company receives such interest, a proportionate share of
any exempt-interest dividend paid by the investment company will be treated as a
preference item to the shareholder. The Fund may invest without limitation in
such municipal obligations if Dreyfus determines that their purchase is
consistent with the Fund's investment objective.
From time to time, (a) on a temporary basis other than for temporary
defensive purposes (but not to exceed 20% of the Fund's net assets) or (b) for
temporary defensive purposes without limitation, the Fund may invest in taxable
short term investments ("Taxable Investments") consisting of: notes of issuers
having, at the time of purchase, a quality rating within the two highest grades
of Moody's, S&P or Fitch; obligations of the U.S. Government, its agencies or
instrumentalities; commercial paper rated at least P-2 by Moody's or at least
A-2 by S&P or Fitch; certificates of deposit of U.S. domestic banks, including
foreign branches of domestic banks, with assets of $1 billion or more;
bankers' acceptances; time deposits; and repurchase agreements in respect of any
of the foregoing. See the SAI for a description of these securities. Dividends
paid by the Fund that are attributable to interest earned from Taxable
Investments will be taxable to investors. See "Taxes." Under normal market
conditions, the Fund anticipates that not more than 5% of its total assets will
be invested in any of the foregoing categories of Taxable Investments.
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below. Use of certain of these techniques may give rise to taxable income. These
instruments and certain related risks are described more specifically under
"Additional Information About Certain Portfolio Securities and Investment
Techniques" in the SAI. The Fund's ability to use some of these techniques, such
as investing in futures, engaging in options transactions and lending portfolio
securities is limited as a condition to S&P's rating the shares of Preferred
Stock "AAA." See "Rating Agency Guidelines" below.
WHEN-ISSUED SECURITIES. New issues of municipal obligations usually are
offered on a when-issued basis, which means that delivery and payment for such
municipal obligations normally take place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that will
be received on the municipal obligations are fixed at the time the buyer enters
into the commitment. The Fund will make commitments to purchase such municipal
obligations only with the intention of actually acquiring the securities, but
the Fund may sell these securities before the settlement date if it is deemed
advisable, although any gain realized on such sale would be taxable. The Fund
will not accrue income with respect to a when-issued security before its stated
delivery date. No additional when-issued commitments will be made if more than
20% of the Fund's net assets would be so committed.
STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by
commitment the Fund obligates a broker, dealer or bank to repurchase at the
Fund's option specified securities at a specified price. In this respect,
stand-by commitments are comparable to put options. The exercise of a stand-by
commitment, therefore, is subject to the ability of the seller to make payment
on demand. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes. The Fund anticipates that stand-by commitments will be
available from brokers, dealers and banks without the payment of any direct or
indirect consideration. The Fund may pay for stand-by commitments if such action
is deemed necessary, thus increasing to a degree the cost of the underlying
municipal obligation and similarly decreasing such security's yield to
investors.
DERIVATIVES. The Fund may invest in, or enter into, certain types of
derivatives, such as futures and options, for a variety of reasons, including to
increase current income, reduce fluctuations in net asset value and protect
against a decline in the value of municipal obligations held by the Fund or an
increase in the price of municipal obligations the Fund proposes to purchase in
the future. Distributions by the Fund of any gains realized on the Fund's
futures and options transactions will be taxable. The rating agency guidelines
for the Preferred Stock limit the use of these derivatives.
Derivatives may entail investment exposures that are greater than their
cost would suggest, meaning that a small investment in derivatives could have a
large potential impact on the Fund's performance.
If the Fund invests in derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Fund's return or result
in a loss. The Fund also could experience losses if its derivatives were poorly
correlated with its other investments, or if the Fund were unable to liquidate
its position because of an illiquid secondary market. The market for many
derivatives is, or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices for
derivatives.
The Fund may acquire call options on specific municipal obligations.
The Fund generally would purchase these call options to protect the Fund from
the issuer of the related municipal obligation redeeming, or other holder of the
call option from calling away, the municipal obligation before maturity. The
sale by the Fund of a call option it owns on a specific municipal obligation
could result in the receipt of taxable income by the Fund. Certain securities
purchased by the Fund, such as those with interest rates that fluctuate directly
or indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
Although the Fund will not be a commodity pool, certain derivatives subject
the Fund to the rules of the Commodity Futures Trading Commission which limit
the extent to which the Fund can invest in such derivatives. The Fund may invest
in futures contracts and options with respect thereto for hedging purposes
without limit. However, the Fund may not invest in such contracts and options
for other purposes if the sum of the amount of initial margin deposits and
premiums paid for unexpired options with respect to such contracts, other than
for bona fide hedging purposes, exceeds 5% of the liquidation value of the
Fund's assets, after taking into account unrealized profits and unrealized
losses on such contracts and options, but in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation.
The Fund may purchase call and put options and may write (i.e., sell)
covered call and put option contracts. When required by the SEC, the Fund will
segregate permissible liquid assets to cover its obligations relating to its
purchase of derivatives. To maintain this required cover, the Fund may have to
sell portfolio securities at disadvantageous prices or times because it may not
be possible to liquidate a derivative position at a reasonable price.
The Fund may invest in residual interest municipal obligations whose
interest rates bear an inverse relationship to the interest rate on another
security or the value of an index ("inverse floaters"). An investment in inverse
floaters may involve greater risk than an investment in a fixed-rate bond.
Because changes in the interest rate on the other security or index inversely
affect the residual interest paid on the inverse floater, the value of an
inverse floater is generally more volatile than that of a fixed-rate bond.
Inverse floaters have interest rate adjustment formulas which generally reduce
or, in the extreme, eliminate the interest paid to the Fund when short term
interest rates rise, and increase the interest paid to the Fund when short term
interest rates fall. Inverse floaters have varying degrees of liquidity, and the
market for these securities is relatively volatile. These securities tend to
underperform the market for fixed-rate bonds in a rising interest rate
environment, but tend to outperform the market for fixed-rate bonds when
interest rates decline. Shifts in long term interest rates may, however, alter
this tendency. Although volatile, inverse floaters typically offer the potential
for yields exceeding the yields available on fixed-rate bonds with comparable
credit quality, coupon, call provisions and maturity. These securities usually
permit the investor to convert the floating-rate to a fixed-rate (normally
adjusted downward), and this optional conversion feature may provide a partial
hedge against rising rates if exercised at an opportune time.
ADDITIONAL RISK CONSIDERATIONS
THE FUND'S INVESTMENTS ARE SUBJECT TO INTEREST RATE, MARKET, INCOME, CALL
AND CREDIT RISK. The prices of municipal obligations tend to fall as interest
rates rise. Securities that have longer maturities tend to fluctuate more in
price in response to changes in market interest rates. This risk is usually
greater among municipal obligations with longer maturities or durations and when
residual interest municipal obligations are held by the Fund. This means that
the Fund, which invests in such longer term securities, is subject to greater
market risk (other things being equal) than a fund investing solely in
shorter term securities.
The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short and long term. If interest
rates fall, the Fund's income available over time to make dividend payments with
respect to the Preferred Stock could drop as well if the Fund purchases
securities with lower interest coupons.
The Fund may invest in inverse floaters. Compared to similar fixed-rate
municipal obligations, the value of these bonds will fluctuate to a greater
extent in response to changes in prevailing long term interest rates. Moreover,
the income earned on inverse floaters will fluctuate in response to changes in
prevailing short term interest rates. Thus, when such bonds are held by the
Fund, an increase in short or long term market interest rates will adversely
affect the income received from such bonds.
If interest rates fall, it is possible that issuers of callable bonds with
high interest coupons will "call" (or prepay) their bonds before their maturity
date. If a call were exercised by the issuer during a period of declining
interest rates, the Fund would likely replace such called security with a lower
yielding security. Municipal obligations are subject to the risk of non-payment
of scheduled interest and/or principal. Such non-payment would result in a
reduction of income to the Fund, a reduction in the value of the security
experiencing non-payment and a potential decrease in the net asset value of the
Fund.
The Fund is permitted to invest in securities rated Baa by Moody's or BBB
by S&P or Fitch. Bonds which are rated Baa by Moody's are considered medium
grade obligations; they are neither highly protected nor poorly secured, and are
considered by Moody's to have speculative characteristics. Bonds which are rated
BBB by S&P are regarded as having adequate capacity to pay interest and repay
principal, and while such bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for bonds in this
category than in higher rated categories. Bonds rated BBB by Fitch are
considered to be of satisfactory credit quality and the obligor's ability to pay
interest and repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to have an
adverse impact on these bonds, and therefore, impair timely payment of interest
or principal. See "Appendix A" in the SAI for a general description of Moody's,
S&P and Fitch ratings of municipal obligations. Although ratings may be useful
in evaluating the safety of interest and principal payments, they do not
evaluate the market value risk of these bonds. It also is possible that a rating
agency might not timely change the rating on a particular issue to reflect
subsequent events. Once the rating of a bond in the Fund's portfolio has been
changed, the Fund will consider all circumstances deemed relevant in determining
whether to continue to hold the bond.
THE FUND IS A "NON-DIVERSIFIED" INVESTMENT COMPANY. As a "non-diversified"
investment company, the Fund may invest, subject to certain federal tax
requirements, a relatively high percentage of its assets in the securities of a
limited number of issuers. Therefore, its performance may be more vulnerable to
changes in the market value of a single issuer or group of issuers. See "Taxes."
YEAR 2000 ISSUES. The Fund could be adversely affected if the computer
systems used by Dreyfus and the Fund's other service providers do not properly
process and calculate date-related information from and after January 1, 2000.
Dreyfus is working to avoid year 2000-related problems in its systems and to
obtain assurances from other service providers that they are taking similar
steps. In addition, issuers of securities in which the Fund invests may be
adversely affected by year 2000-related problems. This could have an impact on
the value of the Fund's investments.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate will not be a limiting factor when the
Fund deems it desirable to purchase or sell securities. A 100% annual turnover
rate would occur, for example, if all the securities in the portfolio were
replaced in a period of one year. A higher turnover rate necessarily involves
greater expenses to the Fund. The Fund will engage in portfolio trading if it
believes that a transaction will help in achieving its investment objective.
RATING AGENCY GUIDELINES
The Fund intends that, so long as shares of Preferred Stock are
outstanding, the composition of its portfolio will reflect guidelines
established by S&P in connection with the Fund's receipt of a rating for such
shares on or prior to their Date of Original Issue of at least "AAA" from S&P.
S&P issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines have been developed by S&P
in connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stock, generally on a case-by-case
basis through discussions with the issuers of these securities. The guidelines
are designed to ensure that assets underlying outstanding debt or preferred
stock will be varied sufficiently and will be of sufficient quality and amount
to justify investment grade ratings. The guidelines do not have the force of law
but have been adopted by the Fund to satisfy current requirements necessary for
S&P to issue the above-described rating for the shares of Preferred Stock, which
rating generally is relied upon by institutional investors in purchasing such
securities. The guidelines provide a set of tests for portfolio composition and
asset coverage that supplement (and in some cases are more restrictive than) the
applicable requirements under the Investment Company Act. See "Description of
Preferred Stock--Asset Maintenance."
The Fund intends to maintain a Discounted Value for its portfolio at least
equal to the Preferred Stock Basic Maintenance Amount. S&P has established
guidelines for determining Discounted Value. To the extent any particular
portfolio holding does not satisfy these guidelines, all or a portion of such
holding's value will not be included in the calculation of Discounted Value of
the Fund's portfolio assets. The S&P guidelines may impose limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required aggregate Discounted Value, the
Fund will seek to alter the composition of its portfolio to retain a Discounted
Value at least equal to the Preferred Stock Basic Maintenance Amount on or
before the Preferred Stock Basic Maintenance Cure Date, thereby incurring
additional transaction costs and possible losses and/or gains on dispositions of
portfolio securities. If any such failure is not cured in a timely manner, the
shares of Preferred Stock will be subject to mandatory redemption. The Preferred
Stock Basic Maintenance Amount includes the sum of (i) the aggregate liquidation
value of the shares of Preferred Stock then outstanding and (ii) certain accrued
and projected payment obligations of the Fund. See "Description of Preferred
Stock--Asset Maintenance" and "Description of Preferred Stock--Redemption."
The Fund may, but is not required to, adopt any modifications to these
guidelines established hereafter by S&P. Failure to adopt any such
modifications, however, may result in a change in the rating described above or
a withdrawal of the rating altogether. In addition, any rating agency providing
a rating for the shares of Preferred Stock, at any time, may change or withdraw
any such rating. As set forth in the Charter, the Fund's Board of Directors,
without shareholder approval, may modify certain definitions or restrictions
that have been adopted by the Fund pursuant to the rating agency guidelines,
provided the Fund's Board of Directors has obtained written confirmation from
S&P that any such change would not impair the ratings then assigned by S&P to
the shares of Preferred Stock.
As described by S&P, a preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock obligations. The
rating on the shares of Preferred Stock is not a recommendation to purchase,
hold or sell shares of Preferred Stock, inasmuch as the rating does not comment
as to market price or suitability for a particular investor, nor do the rating
agency guidelines address the likelihood that a holder of shares of Preferred
Stock will be able to sell such shares in an Auction or otherwise. The rating is
based on current information furnished to S&P by the Fund and Dreyfus and
information obtained from other sources. The rating may be changed, suspended or
withdrawn as a result of changes in, or the unavailability of, such information.
The Fund's shares of common stock have not been rated by a Rating Agency.
For a more detailed description of S&P guidelines, see "Rating Agency
Guidelines" in the SAI.
RISKS OF INVESTING IN THE PREFERRED STOCK
There are a number of specific factors investors in the shares of Preferred
Stock should consider:
o The credit rating of the shares of Preferred Stock could be reduced
while an investor holds the shares of Preferred Stock, which could
affect liquidity.
o Neither the Broker-Dealers nor the Fund are obligated to purchase the
shares of Preferred Stock in an Auction or otherwise nor is the Fund
required to redeem the shares of Preferred Stock in the event of a
failed Auction.
o If in an Auction Sufficient Clearing Bids do not exist, the Applicable
Rate will be the Maximum Applicable Rate, and in such event,
Beneficial Owners that have submitted Sell Orders will not be able to
sell in the Auction all, and may not be able to sell any, of the
shares of Preferred Stock subject to such Sell Orders. Thus, under
certain circumstances, Beneficial Owners may not have liquidity of
investment.
o If long term interest rates rise, the value of the Fund's investment
portfolio will decline, reducing the asset coverage for the Preferred
Stock.
The Broker-Dealers may maintain a secondary trading market in the shares of
Preferred Stock outside of Auctions; however, they have no obligation to do so
and there can be no assurance that a secondary market for the shares of
Preferred Stock will develop or, if it does develop, that it will provide
holders with a liquid trading market (i.e., trading will depend on the presence
of willing buyers and sellers and the trading price is subject to variables to
be determined at the time of the trade by the Broker-Dealers). The shares of
Preferred Stock will not be registered on any stock exchange or on any automated
quotation system. If you try to sell your shares of Preferred Stock between
Auctions, you may not be able to sell any or all of your shares, or you may not
be able to sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. An increase in the level of interest rates, particularly during any
Long Term Dividend Period, likely will have an adverse effect on the secondary
market price of the shares of Preferred Stock.
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board of Directors. See "Certain Provisions
of the Charter."
DESCRIPTION OF PREFERRED STOCK
Each series of Preferred Stock will be preferred stock that entitles its
holders to receive dividends when, as and if declared by the Fund's Board of
Directors, out of funds legally available therefor, at a rate per annum that may
vary for the successive Dividend Periods for each such series. After the Initial
Dividend Period, each Subsequent Dividend Period for each series of Preferred
Stock generally will be a 28-Day Dividend Period; provided, however, that before
any Auction, the Fund may elect, subject to certain limitations described
herein, upon giving notice to holders thereof, a Special Dividend Period. In
addition, the Fund may change the dividend period for one or both series,
subject to giving notice to holders of the Preferred Stock. The Applicable Rate
for a particular Dividend Period for a series of Preferred Stock will be
determined by an Auction conducted on the Business Day before the start of such
Dividend Period. Beneficial Owners and Potential Beneficial Owners of shares of
Preferred Stock may participate in Auctions therefor. Except in the case of a
Special Dividend Period of longer than 91 days, Beneficial Owners desiring to
continue to hold all of their shares of Preferred Stock regardless of the
Applicable Rate resulting from Auctions need not participate. For an explanation
of Auctions and the method of determining the Applicable Rate, see "Description
of Preferred Stock--The Auction."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of Preferred Stock of each series will be
represented by one or more certificates registered in the name of the nominee of
the Securities Depository (initially expected to be Cede & Co. ("Cede")), and no
person acquiring shares of Preferred Stock will be entitled to receive a
certificate representing such shares. See "Appendix D" to the SAI. As a result,
the nominee of the Securities Depository is expected to be the sole holder of
record of each series of Preferred Stock. Accordingly, each purchaser of shares
of Preferred Stock must rely on (i) the procedures of the Securities Depository
and, if such purchaser is not a member of the Securities Depository, such
purchaser's Agent Member, to receive dividends, distributions and notices and to
exercise voting rights (if and when applicable) and (ii) the records of the
Securities Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to evidence its beneficial ownership
of the shares of Preferred Stock.
When issued and sold, the shares of Preferred Stock of each series 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) and will be
fully paid and non-assessable. See "Description of Preferred Stock--Liquidation
Rights." The shares of Preferred Stock will not be convertible into the Fund's
shares of common stock or other shares of the Fund, and the holders thereof will
have no preemptive rights. The shares of Preferred Stock will not be subject to
any sinking fund but will be subject to redemption at the option of the Fund at
the Optional Redemption Price on any Dividend Payment Date for such series
(except during the Initial Dividend Period and during a Non-Call Period) and, in
certain circumstances, will be subject to mandatory redemption by the Fund at
the Mandatory Redemption Price. See "Description of Preferred
Stock--Redemption."
In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, Bankers Trust Company will be the transfer agent,
registrar, dividend disbursing agent and redemption agent for each series of
Preferred Stock. The Auction Agent, however, will serve merely as the agent of
the Fund, acting in accordance with the Fund's instructions, and will not be
responsible for any evaluation or verification of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent permitted
by applicable law) to purchase or otherwise acquire any shares of Preferred
Stock so long as the Fund is current in the payment of dividends on shares of
Preferred Stock and on any other shares of the Fund ranking on a parity with the
shares of Preferred Stock with respect to the payment of dividends or upon
liquidation.
The foregoing is a brief description of the terms of the shares of
Preferred Stock. This description does not purport to be complete and is subject
to and qualified in its entirety by reference to the Charter, including the
provisions thereof establishing the shares of Preferred Stock. The Charter has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part.
THE AUCTION
GENERAL. Holders of the shares of Preferred Stock of each series will be
entitled to receive cumulative cash dividends on their shares when, as and if
declared by the Fund's Board of Directors, out of the funds legally available
therefor. Dividends will be paid on the Initial Dividend Payment Date with
respect to the Initial Dividend Period for each series and, thereafter, on each
Dividend Payment Date with respect to a Subsequent Dividend Period for each
series at the rate per annum equal to the Applicable Rate for each such Dividend
Period.
The provisions of the Charter establishing the terms of the shares of
Preferred Stock offered hereby provide that the Applicable Rate for each
Dividend Period after the Initial Dividend Period for each series will be equal
to the rate per annum that the Auction Agent advises has resulted on the
Business Day preceding the first day of such Dividend Period as a result of the
Auction Procedures. The Auction Procedures are attached as "Appendix D" to the
SAI. If, however, the Fund should fail to pay or duly provide for the full
amount of any dividend on or the redemption price of the shares of Preferred
Stock called for redemption, the Applicable Rate for the shares of Preferred
Stock will be determined as set forth under "Description of Preferred
Stock--Dividends--Determination of Dividend Rate."
AUCTION AGENT AGREEMENT. The Fund will enter into the Auction Agent
Agreement, which provides, among other things, that the Auction Agent will
follow the Auction Procedures for the purpose of determining the Applicable Rate
for each series of Preferred Stock. The Fund will pay the Auction Agent
compensation for its services under the Auction Agent Agreement.
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the Auction
Agent Agreement, and will not be liable for any error of judgment made in good
faith unless the Auction Agent shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agent Agreement, the Fund is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection with
the performance of its duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon notice to
the Fund, which termination may be no earlier than 60 days following delivery of
such notice. If the Auction Agent resigns, 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 Agent Agreement. The Fund may
terminate the Auction Agent Agreement, provided that prior to such termination
the Fund shall have entered into such an agreement with respect thereto with a
successor Auction Agent.
BROKER-DEALER AGREEMENTS. The Auctions require the participation of one or
more broker-dealers. The Auction Agent will enter into Broker-Dealer Agreements
with PaineWebber Incorporated and other Broker-Dealers selected by the Fund,
which provide for the participation of such Broker-Dealers in Auctions. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a Broker-
Dealer on five days' notice to the other party, provided that the Broker-Dealer
Agreement with PaineWebber Incorporated may not be terminated without the prior
written consent of the Fund, which consent may not be unreasonably withheld.
SECURITIES DEPOSITORY. The Depository Trust Company initially will act as
the Securities Depository for the Agent Members with respect to the shares of
Preferred Stock. One or more registered certificates for all of the shares of
each series of Preferred Stock initially will be registered in the name of Cede,
as nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions restricting
transfers of the shares of Preferred Stock of the series to which it relates
contained in the Charter. Cede initially will be the holder of record of all
shares of Preferred Stock, and Beneficial Owners will not be entitled to receive
certificates representing their ownership interest in such shares. See "Appendix
D" to the SAI. The Securities Depository will maintain lists of its participants
and will maintain the positions (ownership interests) of the shares of Preferred
Stock held by each Agent Member, whether as the Beneficial Owner thereof for its
own account or as nominee for the Beneficial Owner thereof. Payments made by the
Fund to holders of shares of Preferred Stock will be duly made by making
payments to the nominee of the Securities Depository.
AUCTION PROCEDURES. The following is a brief summary of the procedures to
be used in conducting Auctions. This summary is qualified by reference to the
Auction Procedures set forth in "Appendix D" to the SAI. The Settlement
Procedures to be used with respect to Auctions are set forth in "Appendix C" to
the SAI.
AUCTION DATE; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF
TAXABLE INCOME IN DIVIDENDS. An Auction to determine the Applicable Rate for the
shares of Preferred Stock offered hereby for each Dividend Period for such
shares (other than the Initial Dividend Period therefor) will be held on the
Auction Date. The initial Auction Date will be _____________, 1999 for Series A
Preferred Stock and _________________, 1999 for Series B Preferred Stock.
Auctions for the shares of Preferred Stock for Dividend Periods after the
Initial Dividend Period ordinarily will be held every fourth Tuesday after
the preceding Dividend Payment Date for Series A Preferred Stock and every such
fourth Thursday for Series B Preferred Stock; and each subsequent Dividend
Period ordinarily will begin on the following Wednesday for Series A Preferred
Stock and on the following Friday for Series B Preferred Stock. The Auction
Date and the first day of the related Dividend Period for a series of Preferred
Stock (both of which must be Business Days) need not be consecutive calendar
days. See "Description of Preferred Stock--Dividends" for information concerning
the circumstances under which a Dividend Payment Date may fall on a date other
than the days specified above, which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net capital
gain or other income subject to federal income tax in any dividend on the shares
of Preferred Stock, the Fund will notify the Auction Agent of the amount to be
so included at least five Business Days prior to 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, in turn it will notify each
Broker-Dealer, who, on or prior to such Auction Date, in accordance with its
Broker-Dealer Agreement, will notify its customers who are Beneficial Owners and
Potential Beneficial Owners believed to be interested in submitting an Order in
the Auction to be held on such Auction Date. The Fund also may include such
income in a dividend on the shares of Preferred Stock without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend; provided that the Fund will notify the
Auction Agent of the additional amounts to be included in such dividend at least
five Business Days prior to the applicable Dividend Payment Date. See
"Description of Preferred Stock--Dividends--Additional Dividends."
ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS, EXISTING HOLDERS
AND POTENTIAL HOLDERS. On or prior to each Auction Date for a series of
Preferred Stock:
(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:
(i) Hold Order--indicating the number of outstanding shares of
Preferred Stock, if any, that such Beneficial Owner desires to continue to
hold without regard to the Applicable Rate for the next Dividend Period for
such shares;
(ii) Bid--indicating the number of outstanding shares of Preferred
Stock, if any, that such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next Dividend Period for such
shares is not less than the rate per annum then specified by such
Beneficial Owner; and/or
(iii) Sell Order--indicating the number of outstanding shares of
Preferred Stock, if any, that such Beneficial Owner offers to sell without
regard to the Applicable Rate for the next Dividend Period for such shares;
and
(b) Broker-Dealers will contact customers who are Potential Beneficial
Owners of shares of Preferred Stock to determine whether such Potential
Beneficial Owners desire to submit Bids indicating the number of shares of
Preferred Stock which they offer to purchase provided that the Applicable Rate
for the next Dividend Period for such shares is not less than the rates per
annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A Beneficial
Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." 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, before the Submission Deadline on any
Auction Date will be irrevocable.
In an Auction, a Beneficial Owner may submit different types of Orders with
respect to shares of Preferred Stock then held by such Beneficial Owner, as well
as Bids for additional shares of Preferred Stock. For information concerning the
priority given to different types of Orders placed by Beneficial Owners, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for a series of Preferred Stock will be the
Applicable Percentage of the Reference Rate. The Auction Agent will round each
applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one
percent per annum, with any such number ending in five ten-thousandths of one
percent being rounded upwards to the nearest one-thousandth (0.001) of one
percent. The Auction Agent will not round the applicable Reference Rate as part
of its calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for a series of Preferred Stock will depend on
the credit rating or ratings assigned to the shares of such series. The
Applicable Percentage will be determined based on (i) the credit rating assigned
on such date to such shares by S&P (or if S&P shall not make such rating
available, the equivalent of such rating by a Substitute Rating Agency), and
(ii) whether the Fund has provided notification to the Auction Agent before the
Auction establishing the Applicable Rate for any dividend that net capital gains
or other taxable income will be included in such dividend on the shares of
Preferred Stock as follows:
<TABLE>
<CAPTION>
Applicable Applicable
Percentage of Percentage of
Reference Reference
Rate - Rate -
S&P CREDIT RATINGS NO NOTIFICATION NOTIFICATION
<S> <C> <C>
AA- or higher........................................... 110% 150%
A- to A+................................................ 125 160
BBB- to BBB+............................................ 150 250
Below BBB-.............................................. 200 275
</TABLE>
There is no minimum Applicable Rate in respect of any Dividend Period. The
Fund will take all reasonable action necessary to enable S&P to provide a rating
for each series of Preferred Stock. If S&P does not make such a rating
available, the underwriter or their affiliates and successors, after
consultation with the Fund, will select a Substitute Rating Agency.
Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares"
below.
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. A Broker-Dealer also may
hold shares of Preferred Stock in its own account as a Beneficial Owner. A
Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial Owner
or a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its customers.
Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of a
Beneficial Owner or a Potential Beneficial Owner will be treated in the same
manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit
to the Auction Agent an Order in respect of any shares of Preferred Stock held
by it or its customers who are Beneficial Owners will be treated in the same
manner as a Beneficial Owner's failure to submit to its Broker-Dealer an Order
in respect of shares of Preferred Stock held by it, as described in the next
paragraph. If as a Broker-Dealer participates in an Auction as an Existing
Holder or a Potential Holder only to represent the interests of a Beneficial
Owner or Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the priority
given to different types of Orders placed by Existing Holders, see "Submission
of Orders by Broker-Dealers to Auction Agent" below. Each purchase or sale in an
Auction will be settled on the Business Day next succeeding the Auction Date at
a price per share equal to $25,000. See "Notification of Results; Settlement"
below.
If one or more Orders covering in the aggregate all of the outstanding
shares of Preferred Stock held by a Beneficial Owner are not submitted to the
Auction Agent prior to the Submission Deadline, either because a Broker-Dealer
failed to contact such Beneficial Owner or otherwise, the Auction Agent will
deem a Hold Order (in the case of an Auction relating to a Dividend Period of 91
days or less) and a Sell Order (in the case of an Auction relating to a Special
Dividend Period of longer than 91 days) to have been submitted on behalf of such
Beneficial Owner covering the number of outstanding shares of Preferred Stock
held by such Beneficial Owner and not subject to Orders submitted to the Auction
Agent. If all of the outstanding shares of Preferred Stock are subject to
Submitted Hold Orders, the Dividend Period next succeeding the Auction
automatically will be the same length as the immediately preceding Dividend
Period, and the Applicable Rate for the next Dividend Period for all the shares
of Preferred Stock will be 40% of the Reference Rate on the date of the
applicable Auction (or 60% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in such
dividend on the shares of Preferred Stock).
For the purposes of an Auction, the shares of Preferred Stock for which the
Fund has given notice of redemption and deposited moneys therefor with the
Auction Agent in trust or segregated in an account at the Fund's custodian bank
for the benefit of the Auction Agent, as set forth under "Description of
Preferred Stock--Redemption," will not be considered as outstanding and will not
be included in such Auction. Pursuant to its Charter, the Fund is prohibited
from reissuing and its affiliates (other than the Underwriter) are prohibited
from transferring (other than to the Fund) any shares of Preferred Stock they
may acquire. Neither the Fund nor any affiliate of the Fund (other than the
Underwriter) may submit an Order in any Auction, except that an affiliate of the
Fund that is a Broker-Dealer may submit an Order.
SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT. Before 1:00 p.m.,
New York City time, on each Auction Date, or such other time on the Auction Date
as may be specified by the Auction Agent (the "Submission Deadline"), each
Broker-Dealer will submit to the Auction Agent in writing all Orders obtained by
it for the Auction for a series of Preferred Stock to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Fund) as the
Existing Holder or Potential Holder in respect of the shares of Preferred Stock
subject to such Orders. 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, before the Submission Deadline on any Auction Date, will be irrevocable.
If the rate per annum specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (0.001) of one percent. If one or
more Orders of an Existing Holder are submitted to the Auction Agent and such
Orders cover in the aggregate more than the number of outstanding shares of
Preferred Stock held by such Existing Holder, such Orders will be considered
valid in the following order of priority:
(i) any Hold Order will be considered valid up to and including the
number of outstanding shares of Preferred Stock held by such Existing
Holder; provided, that if more than one Hold Order is submitted by such
Existing Holder and the number of shares of Preferred Stock subject to such
Hold Orders exceeds the number of outstanding shares of Preferred Stock
held by such Existing Holder, the number of shares of Preferred Stock
subject to each of such Hold Orders will be reduced pro rata so that such
Hold Orders, in the aggregate, will cover exactly the number of outstanding
shares of Preferred Stock held by such Existing Holder;
(ii) any Bids will be considered valid, in the ascending order of
their respective rates per annum if more than one Bid is submitted by such
Existing Holder, up to and including the excess of the number of
outstanding shares of Preferred Stock held by such Existing Holder over the
number of outstanding shares of Preferred Stock subject to any Hold Order
referred to in clause (i) above (and if more than one Bid submitted by such
Existing Holder specifies the same rate per annum and together they cover
more than the remaining number of shares that can be the subject of valid
Bids after application of clause (i) above and of the foregoing portion of
this clause (ii) to any Bid or Bids specifying a lower rate or rates per
annum, the number of shares subject to each of such Bids will be reduced
pro rata so that such Bids, in the aggregate, cover exactly such remaining
number of outstanding shares); and the number of outstanding shares, if
any, subject to Bids not valid under this clause (ii) will be treated as
the subject of a Bid by a Potential Holder; and
(iii) any Sell Order will be considered valid up to and including the
excess of the number of outstanding shares of Preferred Stock held by such
Existing Holder over the sum of the number of shares of Preferred Stock
subject to Hold Orders referred to in clause (i) above and the number of
shares of Preferred Stock subject to valid Bids by such Existing Holder
referred to in clause (ii) above; provided, that if more than one Sell
Order is submitted by any Existing Holder and the number of shares of
Preferred Stock subject to such Sell Orders is greater than such excess,
the number of shares of Preferred Stock subject to each of such Sell Orders
will be reduced pro rata so that such Sell Orders, in the aggregate, will
cover exactly the number of shares of Preferred Stock equal to such excess.
If more than one Bid of any Potential Holder is submitted in any Auction,
each Bid submitted in such Auction will be considered a separate Bid with the
rate per annum and number of shares of Preferred Stock therein specified.
DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE
RATE. Not earlier than the Submission Deadline for each Auction, the Auction
Agent will assemble all Orders submitted or deemed submitted to it by the
Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as submitted or
deemed submitted by a Broker-Dealer hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding shares of Preferred Stock over the number of outstanding
shares of Preferred Stock subject to Submitted Hold Orders (such excess being
referred to as the "Available Shares of Preferred Stock") and whether Sufficient
Clearing Bids have been made in such Auction. Sufficient Clearing Bids will have
been made if the number of outstanding shares of Preferred Stock that are the
subject of Submitted Bids of Potential Holders with rates per annum not higher
than the Maximum Applicable Rate equals or exceeds the number of outstanding
shares that are the subject of Submitted Sell Orders (including the number of
shares subject to Bids of Existing Holders specifying rates per annum higher
than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made,
the Auction Agent will determine the lowest rate per annum specified in the
Submitted Bids (the "Winning Bid Rate") which would result in the number of
shares subject to Submitted Bids specifying such rate per annum or a lower rate
per annum being at least equal to the Available Shares of Preferred Stock. If
Sufficient Clearing Bids have been made, the Winning Bid Rate will be the
Applicable Rate for the next Dividend Period for the shares of Preferred Stock
then outstanding. If Sufficient Clearing Bids have not been made (other than
because all outstanding shares of Preferred Stock are the subject of Submitted
Hold Orders), the Dividend Period next following the Auction automatically will
be a 28-Day Dividend Period, and the Applicable Rate for such Dividend Period
will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners that have
Submitted Sell Orders will not be able to sell in the Auction all, and may not
be able to sell any, the shares of Preferred Stock subject to such Submitted
Sell Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares" below. Thus, under some circumstances,
Beneficial Owners may not have liquidity of investment.
ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES. Based on the determinations described under "Determination
of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate" above and
subject to the discretion of the Auction Agent to round as described below,
Submitted Bids and Submitted Sell Orders will be accepted or rejected in the
order of priority set forth in the Auction Procedures with the result that
Existing Holders and Potential Holders of a series of Preferred Stock will sell,
continue to hold and/or purchase shares of Preferred Stock as set forth below.
Existing Holders that submit or are deemed to have submitted Hold Orders will
continue to hold the shares of Preferred Stock subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Winning Bid Rate or a Submitted Sell Order will
sell the outstanding shares of Preferred Stock subject to such Submitted
Bid or Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid specifying a rate
per annum lower than the Winning Bid Rate will continue to hold the
outstanding shares of Preferred Stock subject to such Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid specifying a
rate per annum lower than the Winning Bid Rate will purchase the number of
shares of Preferred Stock subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to the Winning Bid Rate will continue to hold the
outstanding shares of Preferred Stock subject to such Submitted Bids,
unless the number of outstanding shares of Preferred Stock subject to all
such Submitted Bids of Existing Holders is greater than the excess of the
Available Shares of Preferred Stock over the number of shares of Preferred
Stock accounted for in clauses (b) and (c) above, in which event each
Existing Holder with such a Submitted Bid will sell a number of outstanding
shares of Preferred Stock determined on a pro rata basis based on the
number of outstanding shares of Preferred Stock subject to all such
Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to the Winning Bid Rate will purchase any Available
Shares of Preferred Stock not accounted for in clause (b), (c) or (d) above
on a pro rata basis based on the shares of Preferred Stock subject to all
such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because all
outstanding shares of Preferred Stock are the subject of Submitted Hold Orders):
(a) each Existing Holder that placed a Submitted Bid specifying a rate
per annum equal to or lower than the Maximum Applicable Rate will continue
to hold the outstanding shares of Preferred Stock subject to such Submitted
Bid;
(b) each Potential Holder that placed a Submitted Bid specifying a
rate per annum equal to or lower than the Maximum Applicable Rate will
purchase the number of shares of Preferred Stock subject to such Submitted
Bid; and
(c) each Existing Holder that placed a Submitted Bid specifying a rate
per annum higher than the Maximum Applicable Rate or a Submitted Sell Order
will sell a number of outstanding shares of Preferred Stock determined on a
pro rata basis based on the outstanding shares of Preferred Stock subject
to all such Submitted Bids and Submitted Sell Orders. If as a result of the
Auction Procedures described above any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of shares of Preferred Stock, the Auction Agent, in
such manner as, in its sole discretion, it shall determine, will round up
or down the number of shares of Preferred Stock being sold or purchased on
such Auction Date so that each share sold or purchased by each Existing
Holder or Potential Holder will be a whole share of Preferred Stock. If
any Potential Holder would be entitled or required to purchase less than a
whole share of Preferred Stock, the Auction Agent, in such manner as, in
its sole discretion, it shall determine, will allocate shares of Preferred
Stock for purchase among Potential Holders so that only whole shares of
Preferred Stock are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing
any shares of Preferred Stock.
NOTIFICATION OF RESULTS; SETTLEMENT. The Auction Agent will advise each
Broker-Dealer who submitted a Bid or Sell Order in an Auction whether such Bid
or Sell Order was accepted or rejected in whole or in part and of the Applicable
Rate for the next Dividend Period for the related shares of Preferred Stock by
telephone at approximately 3:00 p.m., New York City time, on the Auction Date
for such Auction. Each such Broker-Dealer that submitted an Order for the
account of a customer then will advise such customer whether such Bid or Sell
Order was accepted or rejected, will confirm purchases and sales with each
customer purchasing or selling shares of Preferred Stock as a result of the
Auction and will advise each customer purchasing or selling shares of Preferred
Stock to give instructions to its Agent Member of the Securities Depository to
pay the purchase price against delivery of such shares or to deliver such shares
against payment therefor as appropriate. If a customer selling shares of
Preferred Stock as a result of an Auction fails to instruct its Agent Member to
deliver such shares, the Broker- Dealer that submitted such customer's Bid or
Sell Order will instruct such Agent Member to deliver such shares against
payment therefor. Each Broker-Dealer that submitted a Hold Order in an Auction
on behalf of a customer also will advise such customer of the Applicable Rate
for the next Dividend Period for the shares of Preferred Stock. The Auction
Agent will record each transfer of shares of Preferred Stock on the record book
of Existing Holders to be maintained by the Auction Agent.
In accordance with the Securities Depository's normal procedures, on the
day after each Auction Date, the transactions described above will be executed
through the Securities Depository, and the accounts of the respective Agent
Members at the Securities Depository will be debited and credited as necessary
to effect the purchases and sales of shares of Preferred Stock as determined in
such Auction. Purchasers will make payment through their Agent Members in
same-day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment in same-day funds. If the
procedures of the Securities Depository applicable to shares of Preferred Stock
shall be changed to provide for payment in next-day funds, then purchasers may
be required to make payment in next-day funds. If the certificates for the
shares of Preferred Stock are not held by the Securities Depository or its
nominee, payment will be made in same-day funds to the Auction Agent against
delivery of such certificates.
If any Existing Holder selling shares of Preferred Stock in an Auction
fails to deliver such shares, the Broker-Dealer of any person that was to have
purchased shares of Preferred Stock in such Auction may deliver to such person a
number of whole shares of Preferred Stock that is less than the number of shares
that otherwise was to be purchased by such person. In such event, the number of
shares of Preferred Stock to be so delivered will be determined by such
Broker-Dealer. Delivery of such lesser number of shares will constitute good
delivery. Each Broker-Dealer Agreement also will provide that neither the Fund
nor the Auction Agent will have responsibility or liability with respect to the
failure of a Potential Beneficial Owner, Beneficial Owner or their respective
Agent Members to deliver shares of Preferred Stock or to pay for shares of
Preferred Stock purchased or sold pursuant to an Auction or otherwise.
BROKER-DEALERS
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price of
shares of Preferred Stock placed by such Broker-Dealer at such Auction. The
service charge (i) for any 28-Day Dividend Period will be payable at the annual
rate of 0.25% of the purchase price of the shares of Preferred Stock placed by
such Broker-Dealer in any such Auction and (ii) for any Special Dividend Period
will be determined by mutual consent of the Fund and any such Broker-Dealer or
Broker-Dealers and will be based upon a selling concession that would be
applicable to an underwriting of fixed or variable rate preferred stock with a
similar final maturity or variable rate dividend period, respectively, at the
commencement of the Dividend Period with respect to such Auction. For the
purposes of the preceding sentence, the shares of Preferred Stock will be placed
by a Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to
have been made by Beneficial Owners that were acquired by such Beneficial Owners
through such Broker-Dealer or (ii) the subject of the following Orders submitted
by such Broker-Dealer: (A) a Submitted Bid of a Beneficial Owner that resulted
in such Beneficial Owner continuing to hold such shares as a result of the
Auction, (B) a Submitted Bid of a Potential Beneficial Owner that resulted in
such Potential Beneficial Owner purchasing such shares as a result of the
Auction or (C) a Submitted Hold Order.
The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders
in Auctions for its own account, unless the Fund notifies all Broker-Dealers
that they no longer may do so; provided that Broker-Dealers may continue to
submit Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its
own account in any Auction of shares of Preferred Stock, it may have knowledge
of Orders placed through it in that Auction and therefore have an advantage over
other Bidders, but such Broker-Dealer would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction.
The Broker-Dealers may maintain a secondary trading market in the shares of
Preferred Stock outside of Auctions; however, they have no obligation to do so
and there can be no assurance that a secondary market for the shares of
Preferred Stock will develop or, if it does develop, that it will provide
holders with a liquid trading market (i.e., trading will depend on the presence
of willing buyers and sellers and the trading price is subject to variables to
be determined at the time of the trade by the Broker-Dealers). The shares of
Preferred Stock will not be registered on any stock exchange or on any automated
quotation system. An increase in the level of interest rates, particularly
during any Long Term Dividend Period for a series of Preferred Stock, likely
will have an adverse effect on the secondary market price of such shares of
Preferred Stock, and a selling shareholder may sell shares of Preferred Stock
between Auctions at a price per share of less than $25,000.
DIVIDENDS
GENERAL. The holders of shares of Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Fund's Board of Directors,
out of funds legally available therefor, cumulative cash dividends on their
shares, at the Applicable Rate determined as set forth below under
"Determination of Dividend Rate," payable on the dates set forth below.
Dividends on the shares of Preferred Stock so declared and payable will be paid
(i) in preference to and in priority over any dividends so declared and payable
on the Fund's shares of common stock, and (ii) to the extent permitted under the
Internal Revenue Code and to the extent available, out of net tax-exempt income
earned on the Fund's investments. Dividends on the shares of Preferred Stock, to
the extent that they are derived from municipal obligations, generally will be
exempt from federal income tax, though some or all of those dividends may be a
tax preference item for purposes of AMT. See "Taxes."
Dividends on each series of Preferred Stock will accumulate from the Date
of Original Issue and will be payable on the dates described below. Dividends on
a series of shares of Preferred Stock with respect to the Initial Dividend
Period will be payable on the Initial Dividend Payment Date for that series.
Following the Initial Dividend Payment Date, dividends on each series of
Preferred Stock will be payable, at the option of the Fund, either (i) with
respect to any 28-Day Dividend Period and any Short Term Dividend Period of 35
or fewer days, on the day next succeeding the last day thereof or (ii) with
respect to any Short Term Dividend Period of more than 35 days and with respect
to any Long Term Dividend Period, monthly on the first Business Day of each
calendar month during such Short Term Dividend Period or Long Term Dividend
Period and on the day next succeeding the last day thereof (each such date
referred to in clause (i) or (ii) being referred to herein as a "Normal Dividend
Payment Date"), except that if such Normal Dividend Payment Date is not a
Business Day, the Dividend Payment Date will be the first Business Day next
succeeding such Normal Dividend Payment Date. Although any particular Dividend
Payment Date may not occur on the originally scheduled date because of the
exceptions discussed above, the next succeeding Dividend Payment Date, subject
to such exceptions, will occur on the next following originally scheduled date.
If for any reason a Dividend Payment Date cannot be fixed as described above,
then the Fund's Board of Directors will fix the Dividend Payment Date. The
Fund's Board of Directors before authorizing a dividend may change a Dividend
Payment Date if such change does not adversely affect the contract rights of the
holders of shares of Preferred Stock set forth in the Charter.
Before each Dividend Payment Date, the Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The Fund
does not intend to establish any reserves for the payment of dividends.
Each dividend will be paid to the record holder of the shares of Preferred
Stock, which holder is expected to be the nominee of the Securities Depository.
See "Description of Preferred Stock--The Auction--Securities Depository." The
Securities Depository will credit the accounts of the Agent Members of the
Existing Holders in accordance with the Securities Depository's normal
procedures which provide for payment in same-day funds. The Agent Member of an
Existing Holder will be responsible for holding or disbursing such payments on
the applicable Dividend Payment Date to such Existing Holder in accordance with
the instructions of such Existing Holder. 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 nominee of the Securities Depository. Any
dividend payment made on the shares of Preferred Stock first will be credited
against the earliest declared but unpaid dividends accumulated with respect to
such shares.
Holders of the shares of Preferred Stock will not be entitled to any
dividends, whether payable in cash, property or stock, in excess of full
cumulative dividends except as described under "Additional Dividends" and
"Non-Payment Period; Late Charge" below. No interest will be payable in respect
of any dividend payment or payments on the shares of Preferred Stock which may
be in arrears.
The amount of cash dividends per share of Preferred Stock of each series
payable (if declared) on the Initial Dividend Payment Date, each 28-Day Dividend
Period and each Dividend Payment Date of each Short Term Dividend Period will be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and for which dividends
are payable on such Dividend Payment Date and the denominator of which will be
365, multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of Preferred Stock payable (if declared) on any
Dividend Payment Date will be computed by multiplying the Applicable Rate for
such Dividend Period by a fraction, the numerator of which will be such number
of days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by $25,000,
and rounding the amount so obtained to the nearest cent.
NOTIFICATION OF DIVIDEND PERIOD. With respect to each Dividend Period that
is a Special Dividend Period, the Fund, at its sole option and to the extent
permitted by law, by a Request for Special Dividend Period to the Auction Agent
and to each Broker-Dealer, may request that the next succeeding Dividend Period
for a series of Preferred Stock will be a number of days (other than 28),
evenly divisible by seven, and not fewer than seven nor more than 364 in the
case of a Short Term Dividend Period or one whole year or more but not greater
than five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Fund may not give a Request for Special Dividend
Period (and any such request will be null and void) unless, for any Auction
occurring after the initial Auction, Sufficient Clearing Bids were made in the
last occurring Auction and unless full cumulative dividends, any amounts due
with respect to redemptions, and any Additional Dividends payable before such
date have been paid in full. Such Request for Special Dividend Period, in the
case of a Short Term Dividend Period, will be given on or before the second
Business Day but not more than seven Business Days before an Auction Date for
the shares of Preferred Stock of that series and, in the case of a Long Term
Dividend Period, will be given on or before the second Business Day but not more
than 28 days before an Auction Date for the shares of Preferred Stock of that
series. Upon receiving such Request for Special Dividend Period, the
Broker-Dealers jointly will determine whether, given the factors set forth
below, it is advisable that the Fund issue a Notice of Special Dividend Period
as contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the shares of Preferred Stock of that series during such
Special Dividend Period and the Specific Redemption Provisions and will give the
Fund and the Auction Agent written notice (a "Response") of such determination
by no later than the second Business Day prior to such Auction Date. In making
such determination, the Broker-Dealers will consider (i) existing short term and
long term market rates and indices of such short term and long term rates, (ii)
existing market supply and demand for short term and long term securities, (iii)
existing yield curves for short term and long term securities comparable to the
shares of Preferred Stock, (iv) industry and financial conditions which may
affect the shares of Preferred Stock of that series, (v) the investment
objective of the Fund and (vi) the Dividend Periods and dividend rates at which
current and potential beneficial holders of the shares of Preferred Stock would
remain or become beneficial holders.
If the Broker-Dealers do not give the Fund and the Auction Agent a Response
by such second Business Day or if the Response states that given the factors set
forth above it is not advisable that the Fund give a Notice of Special Dividend
Period for the shares of Preferred Stock of that series, the Fund may not give a
Notice of Special Dividend Period in respect of such Request for Special
Dividend Period. In the event the Response indicates that it is advisable that
the Fund give a Notice of Special Dividend Period for the shares of Preferred
Stock of that series, the Fund, by no later than the second Business Day before
such Auction Date, may give a notice (a "Notice of Special Dividend Period") to
the Auction Agent, the Securities Depository and each Broker-Dealer, which
notice will specify (i) the duration of the Special Dividend Period, (ii) the
Optional Redemption Price, if any, as specified in the related Response and
(iii) the Specific Redemption Provisions, if any, as specified in the related
Response. The Fund has agreed to provide a copy of such Notice of Special
Dividend Period to S&P. The Fund will not give a Notice of Special Dividend
Period, and, if such Notice of Special Dividend Period was given already, will
give telephonic and written notice of its revocation (a "Notice of Revocation")
to the Auction Agent, each Broker-Dealer, and the Securities Depository on or
before the Business Day prior to the relevant Auction Date if (x) either the
Investment Company Act Preferred Stock Asset Coverage is not satisfied or the
Fund fails to maintain S&P Eligible Assets with an aggregate Discounted Value at
least equal to the Preferred Stock Basic Maintenance Amount, on each of the two
Valuation Dates immediately preceding the Business Day prior to the relevant
Auction Date on an actual basis and on a pro forma basis giving effect to the
proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate the Broker-Dealers
advise the Fund is an approximately equal rate for securities similar to the
shares of Preferred Stock with an equal dividend period), (y) sufficient funds
for the payment of dividends payable on the immediately succeeding Dividend
Payment Date have not been irrevocably deposited with the Auction Agent by the
close of business on the third Business Day preceding the related Auction Date
or (z) the Broker-Dealers jointly advise the Fund that, after consideration of
the factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. The Fund also has agreed to provide a copy of such Notice
of Revocation to S&P. If the Fund is prohibited from giving a Notice of Special
Dividend Period as a result of the factors enumerated in clause (x), (y) or (z)
above or if the Fund gives a Notice of Revocation with respect to a Notice of
Special Dividend Period, the next succeeding Dividend Period for that series
will be a 28-Day Dividend Period. In addition, in the event Sufficient Clearing
Bids are not made in any Auction or an Auction is not held for any reason, the
next succeeding Dividend Period will be a 28-Day Dividend Period, and the Fund
may not again give a Notice of Special Dividend Period (and any such attempted
notice will be null and void) until Sufficient Clearing Bids have been made in
an Auction with respect to a 28-Day Dividend Period.
DETERMINATION OF DIVIDEND RATE. The dividend rate on a series of Preferred
Stock during the period from and including the Date of Original Issue for the
shares of Preferred Stock to but excluding the Initial Dividend Payment Date for
that series of Preferred Stock (the "Initial Dividend Period") will be the rate
per annum set forth on the cover page of this Prospectus. Commencing on the
Initial Dividend Payment Date for a series of Preferred Stock, the Applicable
Rate on that series of Preferred Stock for each Subsequent Dividend Period,
which Subsequent Dividend Period will be a period commencing on and including a
Dividend Payment Date and ending on and including the calendar day before the
next Dividend Payment Date (or last Dividend Payment Date in a Dividend Period
if there is more than one Dividend Payment Date), will be equal to the rate per
annum that results from the Auction with respect to such Subsequent Dividend
Period. The Initial Dividend Period and Subsequent Dividend Period for each
series of Preferred Stock is referred to herein as a "Dividend Period." Cash
dividends will be calculated as set forth above under "Dividends--General."
NON-PAYMENT PERIOD; LATE CHARGE. A Non-Payment Period for a series of
Preferred Stock will commence if the Fund fails to (i) declare, before the close
of business on the second Business Day preceding any Dividend Payment Date, for
payment on or (to the extent permitted as described below) within three Business
Days after such Dividend Payment Date to the persons who held such shares as of
12:00 noon, New York City time, on the Business Day preceding such Dividend
Payment Date, the full amount of any dividend on the shares of Preferred Stock
payable on such Dividend Payment Date or (ii) deposit, irrevocably in trust, in
same-day funds, with the Auction Agent by 12:00 noon, New York City time, (A) on
such Dividend Payment Date the full amount of any cash dividend on such shares
(if declared) payable on such Dividend Payment Date or (B) on any redemption
date for the shares of Preferred Stock called for redemption, the Mandatory
Redemption Price per share of such shares of Preferred Stock or, in the case of
an optional redemption, the Optional Redemption Price per share. Such
Non-Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid cash dividends and unpaid redemption prices shall have been so
deposited or otherwise shall have been made available to the applicable holders
in same-day funds, provided that a Non-Payment Period for the Preferred Stock
will not end unless the Fund shall have given at least five days' but no more
than 30 days' written notice of such deposit or availability to the Auction
Agent, the Securities Depository and all holders of the Preferred Stock of such
series. Notwithstanding the foregoing, the failure by the Fund to deposit funds
as provided for by clauses (ii) (A) or (ii) (B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in each
case to the extent contemplated below, shall not constitute a "Non-Payment
Period." The Applicable Rate for each Dividend Period for the shares of
Preferred Stock of any series, commencing during a Non-Payment Period, will be
equal to the Non-Payment Period Rate; and each Dividend Period commencing after
the first day of, and during, a Non-Payment Period will be a 28-Day Dividend
Period. Any dividend on the Preferred Stock due on any Dividend Payment Date for
such shares (if, prior to the close of business on the second Business Day
preceding such Dividend Payment Date, the Fund has declared such dividend
payable on such Dividend Payment Date to the persons who held such shares as of
12:00 noon, New York City time, on the Business Day preceding such Dividend
Payment Date) or redemption price with respect to such shares not paid to such
persons when due may be paid to such persons in the same form of funds by 12:00
noon, New York City time, on any of the first three Business Days after such
Dividend Payment Date or due date, as the case may be, provided that such amount
is accompanied by a late charge calculated for such period of non-payment at the
Non-Payment Period Rate applied to the amount of such non-payment based on the
actual number of days comprising such period divided by 365. In the case of a
willful failure of the Fund to pay a dividend on a Dividend Payment Date or to
redeem any shares of Preferred Stock on the date set for such redemption, the
preceding sentence shall not apply and the Applicable Rate for the Dividend
Period commencing during the Non-Payment Period resulting from such failure
shall be the Non-Payment Period Rate. For the purposes of the foregoing, payment
to a person in same-day funds on any Business Day at any time will be considered
equivalent to payment to that person in New York Clearing House (next-day) funds
at the same time on the preceding Business Day, and any payment made after 12:00
noon, New York City time, on any Business Day shall be considered to have been
made instead in the same form of funds and to the same person before 12:00 noon,
New York City time, on the next Business Day. The Non-Payment Period Rate
initially will be 200% of the applicable Reference Rate (or 275% of such rate if
the Fund has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on the shares of
Preferred Stock), provided that the Board of Directors of the Fund shall have
the authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Directors of the Fund determines and S&P
(or any Substitute Rating Agency in lieu of S&P in the event such party shall
not rate the Preferred Stock) advises the Fund in writing that such adjustment,
modification, alteration or change will not adversely affect its then-current
rating on the shares of Preferred Stock.
RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the Investment Company
Act, the Fund may not declare dividends or make other distributions on the
Fund's shares of common stock or purchase any such shares if, at the time of the
declaration, distribution or purchase, as applicable (and after giving effect
thereto), asset coverage (as defined in the Investment Company Act) with respect
to the outstanding shares of Preferred Stock would be less than 200% (or such
other percentage as in the future may be required by law). Under the Internal
Revenue Code, the Fund must, among other things, distribute each year at least
90% of the sum of its net tax-exempt income and investment company taxable
income in order to maintain its qualification for tax treatment as a regulated
investment company. The foregoing limitations on dividends, other distributions
and purchases in certain circumstances may impair the Fund's ability to maintain
such qualification. See "Taxes." Upon any failure to pay dividends on the shares
of Preferred Stock for two years or more, the holders of the shares of Preferred
Stock will acquire certain additional voting rights. See "Voting Rights" below.
For so long as any shares of Preferred Stock are outstanding, the Fund will
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or options, warrants
or rights to subscribe for or purchase, shares of its common stock or other
stock, if any, ranking junior to the shares of Preferred Stock as to dividends
or upon liquidation) in respect of its shares of common stock or any other stock
of the Fund ranking junior to or on a parity with the shares of Preferred Stock
as to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of common stock or shares of any
other such junior stock (except by conversion into or exchange for stock of the
Fund ranking junior to shares of Preferred Stock as to dividends and upon
liquidation) or any such parity stock (except by conversion into or exchange for
stock of the Fund ranking junior to or on a parity with shares of Preferred
Stock as to dividends and upon liquidation), unless (A) immediately after such
transaction, the Fund would have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Stock Basic Maintenance
Amount, and the Investment Company Act Preferred Stock Asset Coverage (see
"Asset Maintenance" and "Redemption" below) would be satisfied, (B) full
cumulative dividends on the shares of Preferred Stock due on or before the date
of the transaction have been declared and paid or have been declared and
sufficient funds for the payment thereof deposited with the Auction Agent, (C)
any Additional Dividend required to be paid on or before the date of such
declaration or payment has been paid and (D) the Fund has redeemed the full
number of shares of Preferred Stock required to be redeemed by any provision for
mandatory redemption contained in the Charter.
ADDITIONAL DIVIDENDS. If the Fund retroactively allocates any net capital
gains or other taxable income to the shares of Preferred Stock without having
given advance notice thereof to the Auction Agent as described above under "The
Auction--Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion
of Taxable Income in Dividends," the Fund, within 90 days (and generally within
60 days) after the end of the Fund's fiscal year for which a Retroactive Taxable
Allocation is made, will provide notice thereof to the Auction Agent and to each
holder of shares of Preferred Stock (initially Cede as nominee of the Securities
Depository) during such fiscal year at such holder's address as the same appears
or last appeared on the stock books of the Fund. Such a retroactive allocation
may happen when such allocation is made as a result of (i) the redemption of all
or a portion of the outstanding shares of Preferred Stock, (ii) the liquidation
of the Fund (the amount of such allocation referred to herein as a "Retroactive
Taxable Allocation"), (iii) a debt obligation believed to be a municipal
obligation unexpectedly turns out to be an obligation subject to federal income
tax or (iv) any other reason determined in good faith by the Fund. The Fund,
within 30 days after such notice is given to the Auction Agent, will pay to the
Auction Agent (who then will distribute to such holders of the shares of
Preferred Stock), out of funds legally available therefor, an amount equal to
the aggregate Additional Dividend with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question. See
"Taxes."
An "Additional Dividend" means a payment to a present or former holder of
the shares of Preferred Stock of an amount that would cause (i) the dollar
amount of such holder's dividends received on the shares of Preferred Stock with
respect to the fiscal year in question (including the Additional Dividend) less
the federal income tax and applicable state tax attributable to the aggregate of
(x) the Retroactive Taxable Allocations made to such holder with respect to the
fiscal year in question and (y) the Additional Dividend (to the extent taxable)
to equal (ii) the dollar amount of such holder's dividends received on the
shares of Preferred Stock with respect to the fiscal year in question (excluding
the Additional Dividend) if there had been no Retroactive Taxable Allocations.
An Additional Dividend shall be calculated (i) without consideration being given
to the time value of money; (ii) assuming that none of the dividends received
from the Fund is a preference item for purposes of AMT; and (iii) assuming that
each Retroactive Taxable Allocation would be taxable to each holder of shares of
Preferred Stock at the maximum marginal federal income tax rate (including any
surtax) applicable to the taxable character of the distribution (i.e., ordinary
income or net capital gain) in the hands of an individual or a corporation,
whichever is greater (disregarding the effect of any state and local taxes and
the phase out of, or provisions limiting, personal exemptions, itemized
deductions, or the benefit of lower tax brackets). Although the Fund generally
intends to designate any Additional Dividend as an "exempt-interest" dividend to
the extent permitted by applicable law, it is possible that all or a portion of
any Additional Dividend will be taxable to the recipient thereof. See
"Taxes--Tax Treatment of Additional Dividends." The Fund will not pay a further
Additional Dividend with respect to any taxable portion of an Additional
Dividend.
If the Fund does not give advance notice of the amount of taxable income to
be included in a dividend on the shares of Preferred Stock in the related
Auction, as described above under "The Auction--Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends," the
Fund may include such taxable income in a dividend on the shares of Preferred
Stock if it increases the dividend by an additional amount calculated as if such
income were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend and notifies the Auction Agent of such inclusion at least
five days prior to the applicable Dividend Payment Date.
ASSET MAINTENANCE
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Charter. These requirements are summarized
below.
INVESTMENT COMPANY ACT PREFERRED STOCK ASSET COVERAGE. The Fund will be
required under the Charter to maintain, with respect to the shares of Preferred
Stock, as of the last Business Day of each month in which any shares of
Preferred Stock are outstanding, asset coverage of at least 200% with respect to
senior securities which are shares in the Fund, including the shares of
Preferred Stock (or such other asset coverage as in the future may be specified
in or under the Investment Company Act as the minimum asset coverage for senior
securities which are shares of a closed-end investment company as a condition of
paying dividends on its common stock) ("Investment Company Act Preferred Stock
Asset Coverage"). If the Fund fails to maintain Investment Company Act Preferred
Stock Asset Coverage and such failure is not cured as of the last Business Day
of the following month (the "Investment Company Act Cure Date"), the Fund will
be required under certain circumstances to redeem certain of the shares of
Preferred Stock. See "Redemption" below.
The Investment Company Act Preferred Stock Asset Coverage immediately
following the issuance of shares of Preferred Stock offered hereby (after giving
effect to the deduction of the sales load and offering expenses for the shares
of Preferred Stock) computed using the Fund's net assets as of August 31,
1999 and assuming the shares of Preferred Stock had been issued as of such date
will be as follows:
Value of Fund assets less liabilities not
constituting senior securities $283,240,827
- ----------------------------------------------------
Senior securities representing indebtedness plus
liquidation value of the shares of Preferred Stock = $100,000,000 = 283%
PREFERRED STOCK BASIC MAINTENANCE AMOUNT. So long as the shares of
Preferred Stock are outstanding, the Fund will be required under the Charter to
maintain as of each Business Day (a "Valuation Date") S&P Eligible Assets and
having in the aggregate a Discounted Value at least equal to the Preferred Stock
Basic Maintenance Amount. If the Fund fails to meet such requirement as of any
Valuation Date and such failure is not cured on or before the second Business
Day after such Valuation Date (the "Preferred Stock Basic Maintenance Cure
Date"), the Fund will be required in certain circumstances to redeem certain of
the shares of Preferred Stock. Upon any failure to maintain the required
Discounted Value, the Fund will use its best efforts to alter the composition of
its portfolio to retain a Discounted Value at least equal to the Preferred Stock
Basic Maintenance Amount on or before the Preferred Stock Basic Maintenance Cure
Date. See "Redemption" below.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in connection
with rating the shares of Preferred Stock. These factors include the sensitivity
of the market value of the relevant asset to changes in interest rates, the
liquidity and depth of the market for the relevant asset, the credit quality of
the relevant asset (for example, the lower the rating of a debt obligation, the
higher the related discount factor) and the frequency with which the relevant
asset is marked to market. In no event will the Discounted Value of any asset of
the Fund exceed its unpaid principal balance or face amount as of the date of
calculation. The Discount Factor relating to any asset of the Fund and the
Preferred Stock Basic Maintenance Amount, the assets eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Fund, without shareholder approval, but only in the event the
Fund receives written confirmation from S&P, and any Substitute Rating Agency
that any such changes would not impair the ratings then assigned to the shares
of Preferred Stock by S&P or any Substitute Rating Agency.
On or before the third Business Day after a Valuation Date on which the
Fund fails to maintain S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the Preferred Stock Basic Maintenance Amount, the Fund
is required to deliver to the Auction Agent and S&P a report with respect to the
calculation of the Preferred Stock Basic Maintenance Amount and the value of its
portfolio holdings as of the date of such failure (a "Preferred Stock Basic
Maintenance Report"). Additionally, on or before the third Business Day after
the first day of a Special Dividend Period, the Fund will deliver a Preferred
Stock Basic Maintenance Report to S&P and the Auction Agent. The Fund also will
deliver a Preferred Stock Basic Maintenance Report as of the last Business Day
of the last month of each fiscal quarter of the Fund on or before the third
Business Day after such day. Within ten Business Days after delivery of such
report relating to the last Business Day of the last month of each fiscal
quarter of the Fund, the Fund will deliver a letter prepared by the Fund's
independent auditors regarding the accuracy of the calculations made by the Fund
in its most recent Preferred Stock Basic Maintenance Report. Also, on or before
5:00 p.m., New York City time, on the first Business Day after shares of the
Fund's common stock are repurchased by the Fund, the Fund will complete and
deliver to S&P a Preferred Stock Basic Maintenance Report as of the close of
business on such date that shares of the Fund's common stock are repurchased. If
any such letter prepared by the Fund's independent auditors shows that an error
was made in the most recent Preferred Stock Basic Maintenance Report, the
calculation or determination made by the Fund's independent auditors will be
conclusive and binding on the Fund.
REDEMPTION
OPTIONAL REDEMPTION. To the extent permitted under the Investment Company
Act and under Maryland law, upon giving a Notice of Redemption, as provided
below, the Fund, at its option, may redeem the shares of Preferred Stock, in
whole or in part, out of funds legally available therefor, at the Optional
Redemption Price per share on any Dividend Payment Date; provided that no shares
of Preferred Stock may be redeemed at the option of the Fund during (a) the
Initial Dividend Period with respect to the shares of Preferred Stock or (b) a
Non-Call Period to which such share is subject. "Optional Redemption Price"
means $25,000 per share of Preferred Stock plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) to the date fixed for
redemption plus any applicable redemption premium, if any, attributable to the
designation of a Premium Call Period. In addition, holders of shares of
Preferred Stock may be entitled to receive Additional Dividends in the event of
redemption of such shares of Preferred Stock to the extent provided herein. See
"Description of Preferred Stock--Dividends--Additional Dividends." The Fund has
the authority to redeem the shares of Preferred Stock for any reason and may
redeem all or part of the outstanding shares of Preferred Stock if it
anticipates that the Fund's leveraged capital structure will result in a lower
rate of return to holders of shares of the Fund's common stock for any
significant period of time than that obtainable if the shares of common stock
were unleveraged.
MANDATORY REDEMPTION. The Fund will be required to redeem, out of funds
legally available therefor, at the Mandatory Redemption Price per share, the
shares of Preferred Stock to the extent permitted under the Investment Company
Act and Maryland law, on a date fixed by the Fund's Board of Directors, if the
Fund fails to maintain S&P Eligible Assets with an aggregate Discounted Value
equal to or greater than the Preferred Stock Basic Maintenance Amount or to
satisfy the Investment Company Act Preferred Stock Asset Coverage and such
failure is not cured on or before the Preferred Stock Basic Maintenance Cure
Date or the Investment Company Act Cure Date (herein collectively referred to as
a "Cure Date"), as the case may be. "Mandatory Redemption Price" for each series
of Preferred Stock means $25,000 per share plus an amount equal to accumulated
but unpaid dividends (whether or not earned or declared) to the date fixed for
redemption. In addition, holders of shares of Preferred Stock may be entitled to
receive Additional Dividends in the event of redemption of such shares of
Preferred Stock to the extent provided herein. See "Description of Preferred
Stock--Dividends--Additional Dividends." The number of shares of Preferred Stock
to be redeemed will be equal to the lesser of (a) the minimum number of shares
of Preferred Stock the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with all
other shares of the preferred stock subject to redemption or retirement, would
result in the Fund having S&P Eligible Assets each with an aggregate Discounted
Value equal to or greater than the Preferred Stock Basic Maintenance Amount or
satisfaction of the Investment Company Act Preferred Stock Asset Coverage, as
the case may be, on such Cure Date (provided that, if there is no such minimum
number of shares the redemption of which would have such result, all shares of
Preferred Stock then outstanding will be redeemed), and (b) the maximum number
of shares of Preferred Stock, together with all other shares of preferred stock
subject to redemption or retirement, that can be redeemed out of funds expected
to be legally available therefor on such redemption date. In determining the
number of shares of Preferred Stock required to be redeemed in accordance with
the foregoing, the Fund shall allocate the number required to be redeemed which
would result in the Fund having S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Stock Basic Maintenance Amount or
satisfaction of the Investment Company Act Preferred Stock Asset Coverage, as
the case may be, pro rata among shares of Preferred Stock and other preferred
stock subject to redemption pursuant to provisions similar to those set forth
below; provided, that shares of Preferred Stock that may not be redeemed at the
option of the Fund due to the designation of a Non-Call Period applicable to
such shares (A) will be subject to mandatory redemption only to the extent that
other shares are not available to satisfy the number of shares required to be
redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the lowest
number of days to be redeemed first) and by lot in the event of shares having an
equal number of days in such Non-Call Period. The Fund is required to effect
such a mandatory redemption not later than 35 days after such Cure Date, except
that if the Fund does not have funds legally available for the redemption of all
of the required number of shares of Preferred Stock which are subject to
mandatory redemption or the Fund otherwise is unable to effect such redemption
on or prior to 35 days after such Cure Date, the Fund will redeem those shares
of Preferred Stock which it was unable to redeem on the earliest practicable
date on which it is able to effect such redemption.
GENERAL. If the shares of Preferred Stock are to be redeemed, a notice of
redemption will be mailed to each record holder of such shares of Preferred
Stock (initially Cede as nominee of the Securities Depository) and to the
Auction Agent not less than 17 nor more than 30 days before the date fixed for
the redemption thereof. Each notice of redemption will include a statement
setting forth: (i) the redemption date, (ii) the aggregate number of shares of
Preferred Stock to be redeemed, (iii) the redemption price, (iv) the place or
places where shares of Preferred Stock are to be surrendered for payment of the
redemption price, (v) a statement that dividends on the shares to be redeemed
will cease to accumulate on such redemption date (except that holders may be
entitled to Additional Dividends) and (vi) the provision of the Charter pursuant
to which such shares are being redeemed. The notice also will be published in
THE WALL STREET JOURNAL. No defect in the notice of redemption or in the mailing
or publication thereof will affect the validity of the redemption proceedings,
except as required by applicable law.
If less than all of the outstanding shares of Preferred Stock are to be
redeemed, the shares to be redeemed will be selected by lot or such other method
as the Fund deems fair and equitable, and the results thereof will be
communicated to the Auction Agent. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all shares of
Preferred Stock, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of the
series of Preferred Stock, the particular shares to be redeemed will be selected
by the Fund by lot or by such other method as the Fund deems fair and equitable.
If the Fund gives notice of redemption, and concurrently or thereafter
deposits in trust with the Auction Agent, or segregates in an account at the
Fund's custodian bank for the benefit of the Auction Agent, Deposit Securities
(with a right of substitution) having an aggregate Discounted Value (utilizing
an S&P Exposure Period of three Business Days) equal to the redemption payment
for the shares of Preferred Stock as to which notice of redemption has been
given, with irrevocable instructions and authority to pay the redemption price
to the record holders thereof, then upon the date of such deposit or, if no such
deposit is made, upon such date fixed for redemption (unless the Fund defaults
in making payment of the redemption price), all rights of the holders of such
shares called for redemption will cease and terminate, except the right of such
holders to receive the redemption price thereof and any Additional Dividends,
but without interest, and such shares no longer will be deemed to be
outstanding. The Fund will be entitled to receive, from time to time, the
interest, if any, earned on such Deposit Securities deposited with the Auction
Agent, and the holders of any shares so redeemed will have no claim to any such
interest. Any funds so deposited which are unclaimed at the end of one year from
such redemption date will be repaid, upon demand, to the Fund, after which the
holders of the shares of Preferred Stock of such series so called for redemption
may look only to the Fund for payment thereof.
So long as any shares of Preferred Stock are held of record by the nominee
of the Securities Depository (initially Cede), the redemption price for such
shares will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it to
distribute the amount of the redemption price to Agent Members who, in turn, are
expected to distribute such funds to the persons for whom they are acting as
agent.
Notwithstanding the provisions for redemption described above, no shares of
Preferred Stock will be subject to optional redemption (i) unless all dividends
in arrears on the outstanding shares of Preferred Stock, and all capital stock
of the Fund ranking on a parity with the shares of Preferred Stock with respect
to the payment of dividends or upon liquidation, have been or are being
contemporaneously paid or declared and set aside for payment and (ii) if
redemption thereof would result in the Fund's failure to maintain S&P Eligible
Assets with an aggregate Discounted Value equal to or greater than the shares of
Preferred Stock Basic Maintenance Amount.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of Preferred Stock of each
series will be entitled to receive, out of the assets of the Fund available for
distribution to shareholders, before any distribution or payment is made upon
any common stock or any other shares of the Fund ranking junior in right of
payment upon liquidation of the Preferred Stock, $25,000 per share together with
the amount of any dividends accumulated but unpaid (whether or not earned or
declared) thereon to the date of distribution, and after such payment the
holders of the Preferred Stock will be entitled to no other payments except for
any Additional Dividends. If such assets of the Fund are insufficient to make
the full liquidation payment on outstanding shares of Preferred Stock and
liquidation payments on any other outstanding class or series of preferred stock
of the Fund ranking on a parity with the Preferred Stock as to payment upon
liquidation, then such assets will be distributed among the holders of the
Preferred Stock and the holders of shares of such other class or series ratably
in proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of liquidation distribution to which they are
entitled, the holders of shares of Preferred Stock will not be entitled to any
further participation in any distribution of assets by the Fund except for any
Additional Dividends. A consolidation, merger or share exchange of the Fund with
or into any other entity or entities or a sale, whether for cash, shares of
stock, securities or properties, of all or substantially all or any part of the
assets of the Fund will not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of shares of Preferred Stock will be
entitled to one vote per share on each matter submitted to a vote of
shareholders and will vote together with holders of shares of the Fund's common
stock and any other preferred stock as a single class.
In connection with the election of the Fund's directors, holders of the
shares of Preferred Stock and any other preferred stock, voting as a separate
class, shall be entitled at all times to elect two of the Fund's directors, and
the remaining directors will be elected by holders of shares of the Fund's
common stock and shares of Preferred Stock and any other preferred stock, voting
together as a single class. In addition, if at any time dividends on outstanding
shares of Preferred Stock are unpaid in an amount equal to at least two full
years' dividends thereon or if at any time holders of the shares of Preferred
Stock are entitled, together with the holders of shares of any other preferred
stock, to elect a majority of the Fund's directors under the Investment Company
Act, then the number of directors constituting the Fund's Board of Directors
automatically will be increased by the smallest number that, when added to the
two directors elected exclusively by the holders of the Preferred Stock and any
other preferred stock as described above, would constitute a majority of the
Fund's Board of Directors 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 holders of the shares of Preferred Stock and any other preferred
stock, 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
in any event will be 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 pays, or declares and sets apart for payment in full, all
dividends payable on all outstanding shares of Preferred Stock and any other
preferred stock for all past Dividend Periods, the additional voting rights of
the holders of shares of Preferred Stock and any other preferred stock as
described above will cease, and the terms of office of all of the additional
directors elected by the holders of shares of Preferred Stock and any other
preferred stock (but not of the directors with respect to whose election the
holders of shares of common stock were entitled to vote or the two directors the
holders of shares of Preferred Stock and any other preferred stock have the
right to elect in any event) will terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast by
holders of outstanding shares of Preferred Stock and any other preferred stock,
voting as a separate class, will be required to (i) authorize, create or issue
any class or series of stock ranking prior to the shares of Preferred Stock or
any other series of Preferred Stock with respect to the payment of dividends or
the distribution of assets on liquidation; provided, however, that no vote is
required to authorize the issuance of another class of preferred stock which is
substantially identical in all respects to the shares of Preferred Stock, if the
Fund obtains written confirmation form S&P that the issuance of any additional
shares would not impair the rating then assigned by S&P to the Preferred Stock,
or (ii) amend, alter or repeal the provisions of the Charter, whether by merger,
consolidation or otherwise, so as to adversely affect any of the contract rights
expressly set forth in the Charter of holders of shares of Preferred Stock or
any other preferred stock. The Fund may not, without the affirmative vote of the
holders of at least 66 2/3% of the shares of Preferred Stock 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. To the extent
permitted under the Investment Company Act, in the event shares of more than one
series of Preferred Stock are outstanding, the Fund will not approve any of the
actions set forth in clause (i) or (ii) which adversely affects the contract
rights expressly set forth in the Charter of a holder of shares of a series of
Preferred Stock differently than those of a holder of shares of any other series
of Preferred Stock without the affirmative vote of at least a majority of votes
entitled to be cast by holders of the shares of Preferred Stock of each series
adversely affected and outstanding at such time (each such adversely affected
series voting separately as a class). The Fund's Board of Directors, however,
without shareholder approval, may amend, alter or repeal any or all of the
various rating agency guidelines described herein in the event the Fund receives
confirmation from S&P that any such amendment, alteration or repeal would not
impair the rating then assigned to the shares of Preferred Stock.
Unless a higher percentage is provided for under the charter, as described
in "Description of Capital Structure" or "Certain Provisions of the Charter,"
the affirmative vote of a majority of the votes entitled to be cast by holders
of outstanding shares of Preferred Stock and any other preferred stock, voting
as a separate class, will be required to approve any plan of reorganization
(including bankruptcy proceedings) adversely affecting such shares or any action
requiring a vote of security holders under Section 13(a) of the Investment
Company Act including, among other things, changes in the Fund's investment
objective or changes in the investment restrictions described as fundamental
policies under "Investment Objective and Policies." The class vote of holders of
shares of Preferred Stock and any other preferred stock described above in each
case will be in addition to a separate vote of the requisite percentage of
shares of common stock and shares of Preferred Stock and any other preferred
stock, voting together as a single class, necessary to authorize the action in
question.
The foregoing voting provisions will not apply to the shares of Preferred
Stock if, at or before the time when the act with respect to which such vote
otherwise would be required to be taken, such shares were (i) redeemed or (ii)
called for redemption and sufficient funds were deposited in trust to effect
such redemption.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS. The business affairs of the Fund are managed under the
general supervision of its Board of Directors in accordance with Maryland law.
The names and business addresses of the Directors and officers of the Fund and
their principal occupations during the past five years are set forth in the SAI.
INVESTMENT ADVISER. Dreyfus is a wholly-owned subsidiary of Mellon Bank,
N.A. ("Mellon Bank"), which is a wholly-owned subsidiary of Mellon Bank
Corporation ("Mellon"). Mellon is a publicly owned multi-bank holding company
incorporated under Pennsylvania law in 1971 and registered under the Federal
Bank Holding Company Act of 1956, as amended. Mellon provides a comprehensive
range of financial products and services in domestic and selected international
markets. Mellon is among the twenty-five largest bank holding companies in the
United States based on total assets.
Dreyfus provides investment management services to the Fund pursuant to a
Management Agreement, subject to the authority of the Fund's Board of Directors
in accordance with Maryland law. The Fund's primary portfolio manager is Joseph
P. Darcy. He has held that position since August 1999 and has been employed by
Dreyfus since 1994. The Fund's other portfolio managers are identified in the
SAI. Dreyfus also provides research services for the Fund and for other funds
advised by Dreyfus through a professional staff of portfolio managers and
securities analysts.
Under the terms of the Management Agreement, the Fund has agreed to pay
Dreyfus a monthly fee at the annual rate of 0.70% of the value of the Fund's
average weekly net assets.
The Management Agreement provides that Dreyfus shall not be liable for any
error of judgment or mistake of law, or for any loss suffered by the Fund in
connection with the matters to which the Management Agreement relates, except
for a loss resulting from willful misfeasance, bad faith or gross negligence on
the part of Dreyfus in the performance of its duties or from reckless disregard
of its obligations and duties under the Management Agreement.
Dreyfus has a personal securities trading policy (the "Policy") which
restricts the personal securities transactions of its employees. Its primary
purpose is to ensure that personal trading by Dreyfus's employees does not
disadvantage any fund managed by Dreyfus. Under the Policy, Dreyfus's employees
must preclear personal transactions in securities not exempt under the Policy.
In addition, Dreyfus's employees must report their personal securities
transactions and holdings, which are reviewed for compliance with the Policy. In
that regard, Dreyfus's portfolio managers and other investment personnel also
are subject to the oversight of Mellon's Investment Ethics Committee (the
"Committee"). Portfolio managers and other investment personnel of Dreyfus who
comply with the Policy's preclearance and disclosure procedures and the
requirements of the Committee may be permitted to purchase, sell or hold
securities which also may be or are held in fund(s) they manage or for which
they otherwise provide investment advice.
The Management Agreement may be terminated without penalty upon 60 days'
written notice by the Fund's Board of Directors or by a majority vote of the
outstanding shares of the Fund or, upon not less than 90 days' notice, by
Dreyfus, and automatically terminates in the event of its assignment.
TAXES
GENERAL
The Fund qualifies and has elected to be treated as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code and intends to
continue to qualify under those provisions each year. To qualify as a RIC, the
Fund must, among other things, satisfy certain requirements as to the sources of
its income and the composition of its assets (see below). In addition, the Fund
is required, each year, to distribute at least 90% of its net investment income
(i.e., the Fund's investment company taxable income, as that term is defined in
the Internal Revenue Code, without regard to the deduction for dividends paid)
and 90% of its net tax-exempt income. As a RIC, the Fund (but not its
stockholders) generally will be relieved of U.S. federal income taxes on its
taxable investment income and capital gains that it distributes to its
stockholders. The Fund intends, each year, to distribute to its stockholders
substantially all of its taxable investment income and capital gains as well as
its tax-exempt income.
Under present law and based, in part, on certain representations of the
Fund, Stroock & Stroock & Lavan LLP, counsel to the Fund, is of the opinion that
the Preferred Stock will constitute stock of the Fund, and thus distributions
with respect to the Preferred Stock (other than distributions in redemption of
the Preferred Stock that are treated as exchanges of stock under section 302(b)
of the Internal Revenue Code) will constitute dividends to the extent of the
Fund's current and accumulated earnings and profits, as calculated for federal
income tax purposes. It is possible, however, that the IRS might take a contrary
position, asserting, for example, that the Preferred Stock constitutes debt of
the Fund. If this position were upheld, the discussion of the treatment of
distributions herein would not apply. Instead, distributions by the Fund to the
holders of the Preferred Stock would constitute interest, whether or not they
exceeded the earnings and profits of the Fund, would be included in full in the
income of the recipient and would be taxed as ordinary income. Stroock & Stroock
& Lavan LLP believes that such a position, if asseted by the IRS, would be
unlikely to prevail if the issue were properly litigated. The following
discussion assumes that the Preferred Stock constitutes stock of the Fund.
Each dividend distribution ordinarily will constitute income exempt from
federal income tax (i.e., qualify as an "exempt-interest dividend," which is
excludable from the shareholder's gross income). A portion of dividends
attributable to interest on certain municipal obligations, however, may be a
preference item for purposes of AMT. Furthermore, exempt-interest dividends are
included in determining what portion, if any, of a person's social security and
railroad retirement benefits will be includible in gross income subject to
federal income tax. Distributions of any taxable net investment income and net
short term capital gain will be taxable as ordinary income. Finally,
distributions of the Fund's net capital gain (the excess of net long term
capital gain over net short term capital loss) as capital gain dividends, if
any, will be taxable to shareholders as long term capital gains, regardless of
the length of time they held their shares. Distributions, if any, in excess of
the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after that basis has been reduced to zero, will constitute
capital gains to the shareholder (assuming the shares are held as a capital
asset).
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. The IRS has taken
the position that if a RIC has more than one class of shares, it may designate
distributions made to each class in any year as consisting of no more than that
class's proportionate share of particular types of income for that year,
including tax-exempt interest and net capital gain. A class's proportionate
share of a particular type of income for a year is determined according to the
percentage of total dividends paid by the RIC during that year that was paid to
the class. Thus, the Fund is required to allocate a portion of its net capital
gains and other taxable income to the shares of Preferred Stock. The Fund
generally will notify the Auction Agent of the amount of any net capital gain
and other taxable income to be included in any dividend on the shares of
Preferred Stock prior to the Auction establishing the Applicable Rate for that
dividend. Except for the portion of any dividend that it informs the Auction
Agent will be treated as net capital gain or other taxable income, the Fund
anticipates that the dividends paid on the shares of Preferred Stock will
constitute exempt-interest dividends. The amount of net capital gains and
ordinary income allocable to the shares of Preferred Stock (a "taxable
distribution") will depend upon the amount of such gains and income realized by
the Fund and the total dividends paid by the Fund to its holders of common stock
and holders of preferred stock during a taxable year, but taxable distributions
generally are not expected to be significant. The tax treatment of Additional
Dividends also may affect the Fund's calculation of each class's allocable share
of capital gains and other taxable income. See "Tax Treatment of Additional
Dividends" below.
Although the matter is not free from doubt, due to the absence of direct
regulatory or judicial authority, Stroock & Stroock & Lavan LLP has advised the
Fund that under current law the manner in which the Fund intends to allocate
items of tax-exempt income, net capital gain, and other taxable income, if any,
among the Fund's shares of common stock and the shares of Preferred Stock will
be respected for federal income tax purposes. It is possible that the IRS could
disagree with counsel's opinion and attempt to reallocate the Fund's net capital
gain or other taxable income. In the event of such a reallocation, some of the
dividends identified by the Fund as exempt-interest dividends to holders of
shares of Preferred Stock may be recharacterized as additional net capital gain
or other taxable income. In the event of such recharacterization, however, the
Fund would not be required to make payments to such shareholders to offset the
tax effect of such reallocation. Stroock & Stroock & Lavan LLP has advised the
Fund that, in its opinion, if the IRS were to challenge in court the Fund's
allocation of income and gain and the issue were properly litigated, the IRS
would be unlikely to prevail. You should be aware, however, that the opinion of
Stroock & Stroock & Lavan LLP represents only its best legal judgment and is not
binding on the IRS or the courts.
Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of Preferred Stock is not deductible for federal income tax
purposes to the extent that interest relates to exempt-interest dividends
received from the Fund.
If at any time when shares of Preferred Stock are outstanding the Fund does
not meet the asset coverage requirements of the Investment Company Act, the Fund
will be required to suspend distributions to holders of common stock until the
asset coverage is restored. See "Description of Preferred
Stock--Dividends--Restrictions on Dividends and Other Payments." Such a
suspension may prevent the Fund from distributing the amounts required for
maintaining its RIC status, and may, therefore, jeopardize the Fund's
qualification for taxation as a RIC. Upon any failure to meet the asset coverage
requirements of the Investment Company Act, the Fund, in its sole discretion,
may redeem shares of Preferred Stock in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and its
shareholders of failing to qualify for treatment as a RIC. See "Description of
Preferred Stock-- Redemption." There can be no assurance, however, that any such
action would achieve that objective.
Certain of the Fund's investment practices are subject to Internal Revenue
Code provisions that, among other things, may defer the use of certain losses of
the Fund and affect the holding period of securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in the amounts necessary to satisfy the requirements for
maintaining RIC status and for avoiding income and excise taxes. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a RIC.
The Fund's classification as a "non-diversified" investment company means
that the proportion of its assets that may be invested in the securities of a
single issuer is not limited by the Investment Company Act. However, the Fund
intends to conduct its operations so as to qualify as a RIC for purposes of the
Internal Revenue Code, which requires that, at the end of each quarter of the
taxable year, (i) at least 50% of the market value of the Fund's total assets be
invested in cash, cash items, U.S. Government securities, the securities of
other RICs and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets, and (ii) not more than 25% of the value of
the Fund's total assets be invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other RICs, or of any two
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses.
TAX TREATMENT OF ADDITIONAL DIVIDENDS
If the Fund makes a Retroactive Taxable Allocation, it will pay Additional
Dividends to holders of shares of Preferred Stock who are subject to the
Retroactive Taxable Allocation. See "Description of Preferred
Stock--Dividends--Additional Dividends." The federal income tax consequences of
the receipt of Additional Dividends under existing law are uncertain. An
Additional Dividend generally will be designated by the Fund as an
exempt-interest dividend except to the extent net capital gain or other taxable
income is allocated thereto as described above.
SALES OF SHARES OF PREFERRED STOCK
The sale of shares of Preferred Stock (including transfers in connection
with a redemption or repurchase of shares of Preferred Stock) will be a taxable
transaction for federal income tax purposes. A selling shareholder generally
will recognize gain or loss equal to the difference between the holder's
adjusted tax basis in the shares of Preferred Stock and the amount received. If
the shares of Preferred Stock are held as a capital asset, the gain or loss will
be a capital loss and will be long term if the shares of Preferred Stock have
been held for more than one year. Any loss realized on a disposition of shares
of Preferred Stock held for six months or less will be disallowed to the extent
of any exempt-interest dividends received with respect to those shares of
Preferred Stock, and any such loss that is not disallowed will be treated as a
long-term, rather than a short-term, capital loss to the extent of any capital
gain dividends received with respect to those shares of Preferred Stock. A
shareholder's holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of shares of
Preferred Stock will be disallowed to the extent those shares of Preferred Stock
are replaced by other shares of Preferred Stock within a period of 61 days
beginning 30 days before and ending 30 days after the date of disposition of the
original shares of Preferred Stock. In that event, the basis of the replacement
shares of Preferred Stock will be adjusted to reflect the disallowed loss.
BACKUP WITHHOLDING
The Fund is required to withhold 31% of all taxable dividends, capital gain
dividends and repurchase proceeds payable to any individuals and certain other
non-corporate shareholders who do not provide the Fund with a correct taxpayer
identification number. Withholding at that rate from taxable dividends and
capital gain dividends also is required for such shareholders who otherwise are
subject to backup withholding.
------------------------------
The foregoing briefly summarizes some of the important federal income tax
consequences of investing in the shares of Preferred Stock, reflects the federal
income tax law, as of the date of this Prospectus, and does not address special
tax rules applicable to certain types of investors, such as corporate and
foreign investors. Other federal, state or local tax considerations may apply to
a particular investor, including state alternative minimum tax. Investors should
consult their tax advisers regarding the tax consequences of purchasing, holding
and disposing of Preferred Stock and any proposed tax law change.
DESCRIPTION OF CAPITAL STRUCTURE
The Fund was incorporated in Maryland on September 2, 1988. It is
authorized to issue 109,996,000 shares of common stock, $.001 par value per
share. All shares of common stock have equal non-cumulative voting rights and
equal rights with respect to dividends and liquidation. Shares of common stock
are fully paid and non-assessable when issued and have no pre-emptive,
conversion or exchange rights. So long as any preferred stock is outstanding,
holders of common stock will not be entitled to receive any net income of or
other distributions from the Fund unless all accrued dividends on any preferred
stock have been paid, and unless asset coverage (as defined in the Investment
Company Act) would be at least 200% after giving effect to such distributions.
The following table shows the amount of (i) shares authorized, and (ii) shares
outstanding (no shares are held for the Fund's own account), for each class of
authorized securities of the Fund as of August 31, 1999.
<TABLE>
<CAPTION>
Amount Amount
TITLE OF CLASS Authorized Outstanding
<S> <C> <C>
Common Stock.................................................. 109,996,000 20,382,927
Shares of Preferred Stock
Series A................................................. 2,000 -0-
Series B................................................. 2,000 -0-
</TABLE>
Holders of shares of common stock are entitled to share equally in
dividends declared by the Fund's Board of Directors payable to holders of shares
of common stock and in the net assets of the Fund available for distribution to
holders of shares of common stock after payment of the preferential amounts
payable to holders of any outstanding preferred stock. Neither holders of shares
of common stock nor holders of shares of Preferred Stock have pre-emptive or
conversion rights and shares of common stock are not redeemable. Upon
liquidation of the Fund, after paying or adequately providing for the payment of
all liabilities of the Fund and the liquidation preference with respect to any
outstanding shares of Preferred Stock, and upon receipt of such releases,
indemnities and refunding agreements as they deem necessary for their
protection, the Directors may distribute the remaining assets of the Fund among
the holders of shares of common stock.
Holders of shares of common stock are entitled to one vote for each share
held and will vote with the holders of any outstanding shares of Preferred Stock
or other shares of preferred stock on each matter submitted to a vote of holders
of shares of common stock, except as described under "Description of Preferred
Stock--Voting Rights."
The shares of common stock, shares of Preferred Stock and any other shares
of preferred stock do not have cumulative voting rights, which means that the
holders of more than 50% of the shares of common stock, shares of Preferred
Stock and any other shares of preferred stock voting for the election of
directors can elect all of the directors standing for election by such holders,
and, in such event, the holders of the remaining shares of common stock, shares
of Preferred Stock and any other shares of preferred stock will not be able to
elect any of such directors.
So long as shares of Preferred Stock or other shares of preferred stock are
outstanding, holders of shares of common stock will not be entitled to receive
any dividends of or other distributions from the Fund, unless at the time of
such declaration, (1) all accrued dividends on shares of Preferred Stock or
accrued interest on borrowings has been paid and (2) the value of the Fund's
total assets (determined after deducting the amount of such dividend or other
distribution), less all liabilities and indebtedness of the Fund not represented
by senior securities, is at least 300% of the aggregate amount of such
securities representing indebtedness and at least 200% of the aggregate amount
of securities representing indebtedness plus the aggregate liquidation value of
the outstanding preferred stock (expected to equal the aggregate original
purchase price of the outstanding shares of Preferred Stock plus redemption
premium, if any, together with any accrued and unpaid dividends thereon, whether
or not earned or declared and on a cumulative basis). In addition to the
requirements of the Investment Company Act, the Fund is required to comply with
other asset coverage requirements as a condition of the Fund obtaining a rating
of the shares of Preferred Stock from a Rating Agency. These requirements
include an asset coverage test more stringent than under the Investment Company
Act. See "Description of Preferred Stock--Dividends--Restrictions on Dividends
and Other Payments."
So long as any shares of the Fund's preferred stock are outstanding, the
Fund may not purchase, redeem or otherwise acquire any shares of its common
stock unless (i) all accrued preferred stock dividends have been paid and (ii)
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 stock) is at least 200% of the liquidation value of the outstanding
preferred stock (expected to equal the original purchase price per share plus
any accrued and unpaid dividends thereon). In addition, any purchase by the Fund
of the shares of its common stock at a time when shares of Preferred Stock are
outstanding will increase the leverage applicable to the outstanding shares of
common stock then remaining.
The shares of common stock commenced trading on the AMEX on October 21,
1988. At August 31, 1999, the net asset value per share of common stock was
$9.05, and the closing price per share of common stock on the AMEX was $7.94.
Under the Investment Company Act, the Fund is permitted to have outstanding
more than one series of preferred stock as long as no single series has priority
over another series as to the distribution of assets of the Fund or the payment
of dividends. Neither holders of shares of common stock nor holders of the
shares of Preferred Stock have pre-emptive rights to purchase any shares of
preferred stock. It is anticipated that the net asset value per share of
preferred stock will equal its original purchase price per share plus
accumulated dividends per share.
CONVERSION TO OPEN-END FUND
Conversion to an open-end investment company would require the approval of
the holders of the Fund's shares then entitled to be voted and of the holders of
shares of the Fund's preferred stock then entitled to be voted, voting as a
separate class. See "Certain Provisions of the Charter" for a discussion of
voting requirements applicable to conversion of the Fund to an open-end
investment company. The conversion to an open-end investment company would
require the redemption of any shares of preferred stock outstanding and would
make shares of the Fund's common stock redeemable at any time (except in certain
circumstances as authorized by or under the Investment Company Act) at their net
asset value, less such redemption charge, if any, as might be in effect at the
time of redemption. If the Fund converted to an open-end investment company, it
could be required to liquidate portfolio securities to meet requests for
redemptions, and its shares of common stock would no longer be listed on the
AMEX. The Board of Directors may propose at any time conversion of the Fund to
an open-end investment company depending upon the Directors' judgment as to the
advisability of such action in light of circumstances then prevailing. If shares
of the Fund's common stock have traded at an average discount from net asset
value of more than 10% during 12 consecutive calendar weeks, the Fund's Board
will consider submitting to the Fund's shareholders a proposal to convert the
Fund to an open-end investment company.
CERTAIN PROVISIONS OF THE CHARTER
The Charter includes provisions that could have the effect of limiting the
ability of other entities or persons to acquire control of the Fund or to change
the composition of its Board of Directors and could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Fund. The Fund's Board of Directors is divided into three classes, with the
term of office of one class expiring each year. This provision could delay for
up to two years the replacement of a majority of the Board of Directors. The
Charter provides that the maximum number of Directors that may constitute the
Fund's entire Board is twelve. A Director may be removed from office or the
maximum number of Directors increased only by vote of the holders of at least
75% of the shares of the Fund entitled to be voted on the matter. Moreover,
under Maryland law, a director on a classified board, such as the Fund's may be
removed from office only for cause.
In addition, the Charter requires the favorable vote of the holders of at
least 75% of the shares of the Fund then entitled to be voted to authorize the
conversion of the Fund from a closed-end to an open-end investment company, or
to approve, adopt or authorize any of the following actions:
(i) a merger or consolidation or statutory share exchange of the Fund with
or into another corporation;
(ii) a sale of all or substantially all of the Fund's assets (other than in
the regular course of the Fund's investment activities or in connection with the
repurchase of the Fund's shares); or
(iii) a liquidation or dissolution of the Fund;
unless such action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
By-Laws, in which case the affirmative vote of a majority of the outstanding
shares is required. Such approval, adoption or authorization of the foregoing
actions also would require the favorable vote of the Fund's shares of preferred
stock then entitled to be voted, including the Preferred Stock, voting as a
separate class as described above.
The Board of Directors has determined that the 75% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the Investment Company Act and which can be changed only by a similar 75%
vote, are in the best interests of shareholders generally. Reference should be
made to the Charter on file with the SEC for the full text of these provisions.
UNDERWRITING
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York
10019, acting as underwriter (the "Underwriter"), has agreed, subject to the
terms and conditions of the Underwriting Agreement with the Fund and Dreyfus
(the "Underwriting Agreement"), to purchase from the Fund the number of shares
set forth below. The Underwriter is committed to purchase all of such shares of
Preferred Stock if any are purchased.
<PAGE>
Number of Number of
Shares of Shares of
UNDERWRITER Series A Series B
Preferred Preferred
Stock Stock
PaineWebber Incorporated..............
The Underwriter has advised the Fund that it proposes initially to offer
the shares of Preferred Stock to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $___ per share. The Underwriter may allow,
and such dealers may reallow, a discount not in excess of $___ per share to
other dealers. After the initial public offering, the public offering price,
concession and discount may be changed. Investors must pay for any shares of
Preferred Stock purchased in the initial public offering on or before
__________, 1999.
The Underwriter will act in Auctions as a Broker-Dealer as set forth under
"Description of Preferred Stock--The Auction--Broker-Dealer Agreements" and will
be entitled to fees for services as A Broker-Dealer as set forth under
"Description of Preferred Stock--Broker-Dealers." The Underwriter also may
provide information to be used in ascertaining the Reference Rate.
The Fund anticipates that the Underwriter from time to time may act as a
dealer in connection with the execution of the Fund's portfolio transactions.
See "Investment Restrictions" and "Portfolio Trading" in the SAI.
The Fund and Dreyfus have agreed to indemnify the Underwriter against
certain liabilities including liabilities under the Securities Act of 1933.
As described below under "Shareholder Servicing Agent, Custodian and
Transfer Agent," PaineWebber Incorporated does and will continue to provide
shareholder services to the Fund pursuant to an agreement with Dreyfus. Dreyfus
has agreed to pay for such services.
SHAREHOLDER SERVICING AGENT, CUSTODIAN AND TRANSFER AGENT
Pursuant to an agreement, Dreyfus has agreed to make quarterly payments of
$42,638 to PaineWebber Incorporated for providing statistical, economic,
financial and fixed income market information with respect to the Fund's market
performance and general economic and interest rate conditions in the United
States and consultation regarding the relationship of the market price of the
common stock of the Fund and other closed-end investment companies to (i) the
net asset value of such stock, (ii) the distribution rate of the Fund and such
other companies, (iii) various market indices and (iv) other performance
indicators. PaineWebber Incorporated also provides consultation with respect to
any issuer tender offers or stock repurchase programs effectuated by the Fund
or other closed-end investment companies. PaineWebber Incorporated will have no
responsibility with respect to the Fund's investments.
Mellon Bank, located at One Mellon Bank Center, Pittsburgh, Pennsylvania
15258, acts as Custodian for the assets of the Fund. Mellon Bank, located at 85
Challenger Road, Ridgefield Park, New Jersey 07660, acts as the Fund's Transfer
Agent, Dividend-Paying Agent and Registrar.
LEGAL OPINIONS
Stroock & Stroock & Lavan LLP, New York, New York, serves as counsel to the
Fund and will pass on the legality of the shares of Preferred Stock. Certain
legal matters will be passed on for the Underwriter by Skadden, Arps, Slate,
Meagher & Flom (Illinois), Chicago, Illinois.
INDEPENDENT AUDITORS
The data in the "Financial Highlights" section of this Prospectus for each
of the ten years in the period ended September 30, 1998 are based upon financial
statements that have been audited by Ernst & Young LLP, independent auditors,
787 Seventh Avenue, New York, New York 10019, as indicated in their reports with
respect thereto, and are included in reliance on their report given on their
authority as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and in accordance therewith
is required to file reports, proxy statements and other information with the
SEC. Any such reports, proxy statements and other information can be inspected
and copied at the public reference facilities of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the SEC: Regional Office, at Seven World Trade Center, 61
Suite 1300, New York, New York 10048; Pacific Regional Office, at 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, California 90036; and Midwest Regional
Office, at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such materials can be obtained from the
public reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The SEC maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants, including the Fund, that file electronically with the
SEC. Reports, proxy statements and other information concerning the Fund can
also be inspected at the offices of the American Stock Exchange, 86 Trinity
Place, New York, New York 10006.
Additional information regarding the Fund and the shares of Preferred Stock
is contained in the Registration Statement on Form N-2, including amendments,
exhibits and schedules thereto, relating to such shares filed by the Fund with
the SEC in Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the Fund
and the shares of Preferred Stock offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement may be inspected without charge 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.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute forward-looking statements,
which involve known and unknown risks, uncertainties and other factors that may
cause the actual results, levels of activity, performance or achievements of the
Fund to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements. As a result, no assurance can be given as to the future results,
levels of activity, performance or achievements, and neither the Fund nor any
other person assumes responsibility for the accuracy and completeness of such
statements.
TABLE OF CONTENTS OF THE SAI
PAGE
General Information......................................................2
Additional Information About Certain Portfolio Securities
and Investment Techniques............................................2
Investment Restrictions.................................................11
Rating Agency Guidelines................................................13
Management of the Fund..................................................18
Ownership of Fund Shares................................................26
Portfolio Trading.......................................................26
Repurchase of Shares....................................................27
Taxation................................................................28
Financial Statements....................................................31
Appendix A: Ratings of Municipal Obligations..........................A-1
Appendix B: Tax Equivalent Yield Table................................B-1
Appendix C: Settlement Procedures.....................................C-1
Appendix D: Auction Procedures........................................D-1
<PAGE>
GLOSSARY
"'AA' COMPOSITE COMMERCIAL PAPER RATE," on any Valuation Date, means (i)
the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately preceding
such date, or (ii) in the event that the Federal Reserve Bank of New York does
not make available such a rate, then the arithmetic average of the Interest
Equivalent of the rate on commercial paper placed on behalf of such issuers, as
quoted on a discount basis or otherwise by PaineWebber Incorporated or its
successors that are Commercial Paper Dealers, to the Auction Agent for the close
of business on the Business Day immediately preceding such date. If one of the
Commercial Paper Dealers does not quote a rate required to determine the "AA"
Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will
be determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7 or
more but fewer than 49 days, such rate shall be the Interest Equivalent of the
30-day rate on such commercial paper; (ii) 49 or more but fewer than 70 days,
such rate shall be the Interest Equivalent of the 60-day rate on such commercial
paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the
arithmetic average of the Interest Equivalent of the 60-day and 90-day rates on
such commercial paper; (iv) 85 or more days but fewer than 99 days, such rate
shall be the Interest Equivalent of the 90-day rate on such commercial paper;
(v) 99 or more days but fewer than 120 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 90-day and 120-day rates on such
commercial paper; (vi) 120 or more days but fewer than 141 days, such rate shall
be the Interest Equivalent of the 120-day rate on such commercial paper; (vii)
141 or more days but fewer than 162 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 120-day and 180-day rates on such
commercial paper; and (viii) 162 or more days but fewer than 183 days, such rate
shall be the Interest Equivalent of the 180-day rate on such commercial paper.
"ADDITIONAL DIVIDEND" has the meaning set forth on page 32 of this
Prospectus.
"AGENT MEMBER" means the member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more shares of Preferred Stock or on
behalf of a Potential Beneficial Owner.
"AMT" has the meaning set forth on page 13 of this Prospectus.
"ANTICIPATION NOTES" means the following municipal obligations: revenue
anticipation notes, tax anticipation notes, tax and revenue anticipation notes,
grant anticipation notes and bond anticipation notes.
"APPLICABLE PERCENTAGE" has the meaning set forth on page 22 of this
Prospectus.
"APPLICABLE RATE" means the rate per annum at which cash dividends are
payable on shares of Preferred Stock for any Dividend Period.
"AUCTION" means a periodic operation of the Auction Procedures.
"AUCTION AGENT" means Bankers Trust Company unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Fund's Board of Directors or a duly authorized committee
thereof enters into an agreement with the Board of Directors to follow the
Auction Procedures for the purpose of determining the Applicable Rate and to act
as transfer agent, registrar, dividend disbursing agent and redemption agent for
the shares of Preferred Stock.
"AUCTION AGENT AGREEMENT" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for the purpose of determining the Applicable
Rate.
"AUCTION DATE" has the meaning set forth on page 21 of this Prospectus.
"AUCTION PROCEDURES" means the procedures for conducting Auctions set forth
in Appendix D to the SAI.
"AVAILABLE SHARES OF PREFERRED STOCK" has the meaning specified in
Paragraph 3(d)(i) of the Auction Procedures.
"BENEFICIAL OWNER" 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 Preferred Stock or a Broker-Dealer that holds shares of Preferred
Stock for its own account.
"BID" has the meaning specified in Paragraph 3(b)(i) of the Auction
Procedures.
"BIDDER" has the meaning specified in Paragraph 3(b)(i) of the Auction
Procedures.
"BOARD OF DIRECTORS" OR "BOARD" means the Fund's Board of Directors and, to
the extent permitted by law, any committee thereof.
"BROKER-DEALER" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer in the Auction Procedures,
that has been selected by the Fund and has entered into a Broker-Dealer
Agreement with the Auction Agent that remains effective.
"BROKER-DEALER AGREEMENT" means an agreement entered into between the
Auction Agent and a Broker-Dealer, including PaineWebber Incorporated, pursuant
to which such Broker-Dealer agrees to follow the Auction Procedures.
"BUSINESS DAY" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close.
"CEDE" means Cede & Co., the nominee of DTC, and in whose name the shares
of Preferred Stock initially will be registered.
"CHARTER" means the Fund's Articles of Incorporation, as amended.
"COMMERCIAL PAPER DEALERS" means PaineWebber Incorporated and such other
commercial paper dealer or dealers as the Fund from time to time may appoint or,
in lieu thereof, their respective affiliates and successors.
"CURE DATE" has the meaning set forth on page 34 of this Prospectus.
"DATE OF ORIGINAL ISSUE" means, with respect to each share of Preferred
Stock, the date on which such share first is issued by the Fund.
"DEPOSIT SECURITIES" means cash and municipal obligations rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.
"DISCOUNT FACTOR" means a S&P Discount Factor.
"DISCOUNTED VALUE" of any asset of the Fund means with respect to an S&P
Eligible Asset, the quotient of the market value thereof divided by the
applicable S&P Discount Factor.
"DIVIDEND PAYMENT DATE" means any date on which dividends on shares of
Preferred Stock are payable as provided under "Description of Preferred
Stock--Dividends--General."
"DIVIDEND PERIODS" means any of the Initial Dividend Period, 28-Day
Dividend Periods or the Special Dividend Periods. If the Fund changes the
dividend period to seven days, then 7-Day Dividend Periods will be substituted
for 28-Day Dividend Periods.
"DREYFUS" means The Dreyfus Corporation, the Fund's investment adviser.
"DTC" means The Depository Trust Company.
"EXISTING HOLDER" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of shares of
Preferred Stock in the records of the Auction Agent.
"FITCH" means Fitch IBCA, Inc. or its successors.
"FUND" means Dreyfus Municipal Income, Inc., a Maryland corporation that is
the issuer of the shares of Preferred Stock.
"HOLD ORDER" has the meaning specified in Paragraph 3(b)(i) of the Auction
Procedures.
"INITIAL DIVIDEND PAYMENT DATE" means _____________, 1999 for Series A
Preferred Stock and __________, 1999 for Series B Preferred Stock.
"INITIAL DIVIDEND PERIOD" means, with respect to the shares of Preferred
Stock, the period from and including the Date of Original Issue to but excluding
the Initial Dividend Payment Date of the shares of Preferred Stock.
"INITIAL MARGIN" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a financial
futures contract.
"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.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as
amended.
"INVESTMENT ADVISERS ACT" means the Investment Advisers Act of 1940, as
amended from time to time.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as
amended from time to time.
"INVESTMENT COMPANY ACT PREFERRED STOCK ASSET COVERAGE" has the meaning set
forth on page 32 of this Prospectus.
"INVESTMENT COMPANY ACT CURE DATE" has the meaning set forth on page 32 of
this Prospectus.
"IRS" means the United States Internal Revenue Service.
"LONG TERM DIVIDEND PERIOD" has the meaning specified in the definition of
"SPECIAL DIVIDEND PERIOD."
"MANDATORY REDEMPTION PRICE" has the meaning set forth on page 34 of this
Prospectus.
"MARGINAL TAX RATE" means the maximum marginal federal individual income
tax rate applicable to an individual's or a corporation's ordinary income,
whichever is greater.
"MAXIMUM APPLICABLE RATE" has the meaning specified under "Description of
Preferred Stock--The Auction--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" of this Prospectus.
"MAXIMUM POTENTIAL ADDITIONAL DIVIDEND LIABILITY" has the meaning set forth
under "Preferred Stock Basic Maintenance Amount" below.
"MOODY'S" means Moody's Investors Service, Inc. or its successors.
"NON-CALL PERIOD" has the meaning set forth under "SPECIFIC REDEMPTION
PROVISIONS" below.
"NON-PAYMENT PERIOD" has the meaning set forth on page 30 of this
Prospectus.
"NON-PAYMENT PERIOD RATE" has the meaning set forth on page 5 of this
Prospectus.
"NORMAL DIVIDEND PAYMENT DATE" has the meaning set forth on page 28 of this
Prospectus.
"NOTICE OF REVOCATION" has the meaning set forth on page 29 of this
Prospectus.
"NOTICE OF SPECIAL DIVIDEND PERIOD" has the meaning set forth on page 29 of
this Prospectus.
"OPTIONAL REDEMPTION PRICE" has the meaning set forth on page 34 of this
Prospectus.
"ORDER" has the meaning specified in Paragraph 3(b)(i) of the Auction
Procedures.
"POTENTIAL BENEFICIAL OWNER" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of Preferred Stock but
that wishes to purchase such shares, or that is a Beneficial Owner that wishes
to purchase additional shares of Preferred Stock.
"POTENTIAL HOLDER" means any Broker-Dealer or any such other person as may
be permitted by the Fund, including any Existing Holder, who may be interested
in acquiring shares of Preferred Stock (or, in the case of an Existing Holder,
additional shares of Preferred Stock).
"PREFERRED STOCK" means shares of preferred stock, par value $.001 per
share, of the Fund.
"PREFERRED STOCK BASIC MAINTENANCE AMOUNT." The Preferred Stock Basic
Maintenance Amount as of any Valuation Date is defined as the dollar amount
equal to (i) the sum of (A) the product of the number of shares of Preferred
Stock outstanding on such Valuation Date multiplied by the sum of $25,000 and
any applicable redemption premium attributable to the designation of a Premium
Call Period; (B) the aggregate amount of cash dividends (whether or not earned
or declared) that will have accumulated for each share of Preferred Stock
outstanding to (but not including) the end of the current Dividend Period that
follows such Valuation Date in the event the then-current Dividend Period will
end within 49 calendar days of such Valuation Date or through the 49th day after
such Valuation Date in the event the then-current Dividend Period for the shares
of Preferred Stock will not end within 49 calendar days of such Valuation Date;
(C) in the event the then-current Dividend Period will end within 49 calendar
days of such Valuation Date, the aggregate amount of cash dividends that would
accumulate at the Maximum Applicable Rate applicable to a Dividend Period of 28
or fewer days on any shares of Preferred Stock outstanding from the end of such
Dividend Period through the 49th day after such Valuation Date, multiplied by
the S&P Volatility Factor determined from time to time by S&P (except that if
such Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then-current Non-Payment Period
Rate); (D) the amount of anticipated Fund expenses for the 90 days subsequent to
such Valuation Date; (E) the amount of the Fund's Maximum Potential Additional
Dividend Liability as of such Valuation Date; and (F) any current liabilities as
of such Valuation Date to the extent not reflected in any of (i) (A) through (i)
(E) (including, without limitation, and immediately upon determination, any
amounts due and payable by the Fund pursuant to repurchase agreements and any
amounts payable for municipal obligations purchased as of such Valuation Date)
less (ii) either (A) the Discounted Value of any Fund assets, or (B) the face
value of any of the Fund's assets if such assets mature prior to or on the date
of redemption of the shares of Preferred Stock or payment of a liability and are
either securities issued or guaranteed by the United States Government or
Deposit Securities, in both cases irrevocably deposited by the Fund for the
payment of the amount needed to redeem the shares of Preferred Stock subject to
redemption or to satisfy any of (i) (B) through (i) (F). For purposes of the
foregoing, "Maximum Potential Additional Dividend Liability," as of any
Valuation Date, means the aggregate amount of Additional Dividends that would be
due if the Fund were to make Retroactive Taxable Allocations, with respect to
any fiscal year, estimated based upon dividends paid and the amount of
undistributed realized net capital gains and other taxable income earned by the
Fund, as of the end of the calendar month immediately preceding such Valuation
Date and assuming such Additional Dividends are fully taxable.
"PREFERRED STOCK BASIC MAINTENANCE CURE DATE" has the meaning set forth on
page 33 of this Prospectus.
"PREFERRED STOCK BASIC MAINTENANCE REPORT" has the meaning set forth on
page 33 of this Prospectus.
"PREMIUM CALL PERIOD" has the meaning set forth under "SPECIFIC REDEMPTION
PROVISIONS" below.
"RATING AGENCY" means a nationally recognized statistical rating
organization.
"REFERENCE RATE" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short Term
Municipal Obligation Rate, (ii) with respect to any Short Term Dividend Period,
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable U.S.
Treasury Note Rate.
"REPRESENTATIVE" means PaineWebber Incorporated, or its successors.
"REQUEST FOR SPECIAL DIVIDEND PERIOD" has the meaning set forth on page 28
of this Prospectus.
"RESPONSE" has the meaning set forth on page 29 of this Prospectus.
"RETROACTIVE TAXABLE ALLOCATION" has the meaning set forth on page 31 of
this Prospectus.
"RIC" means regulated investment company under the Internal Revenue Code.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.
"S&P DISCOUNT FACTOR" has the meaning set forth on page 13 of the SAI.
"S&P ELIGIBLE ASSETS" has the meaning set forth on page 13 of the SAI.
"S&P EXPOSURE PERIOD" means the maximum period of time following a
Valuation Date, including the Valuation Date and the Preferred Stock Basic
Maintenance Cure Date, that the Fund has under the Charter to cure any failure
to maintain, as of such Valuation Date, a Discounted Value for its portfolio at
least equal to the Preferred Stock Basic Maintenance Amount.
"S&P VOLATILITY FACTOR" means ___% or such other potential dividend rate
increase factor as S&P advises the Fund in writing is applicable.
"SECURITIES DEPOSITORY" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the shares of Preferred Stock.
"SELL ORDER" has the meaning specified in Paragraph 3(b)(i) of the Auction
Procedures.
"SHORT TERM DIVIDEND PERIOD" has the meaning specified in the definition of
"SPECIAL DIVIDEND PERIOD" below.
"SPECIAL DIVIDEND PERIOD" means a Dividend Period consisting of a specified
number of days (other than 28), evenly divisible by seven and not fewer than
seven nor more than 364 (a "Short Term Dividend Period") or a Dividend Period
consisting of a specified period of one whole year or more but not greater than
five years (a "Long Term Dividend Period").
"SPECIFIC REDEMPTION PROVISIONS" means, with respect to a Special Dividend
Period, either, or any combination of, (i) a period (a "Non-Call Period")
determined by the Fund's Board of Directors, after consultation with the Auction
Agent and the Broker-Dealers, during which the shares of Preferred Stock subject
to such Dividend Period shall not be subject to redemption at the option of the
Fund and (ii) a period (a "Premium Call Period"), consisting of a number of
whole years and determined by the Fund's Board of Directors, after consultation
with the Auction Agent and the Broker-Dealers, during each year of which the
shares of Preferred Stock subject to such Dividend Period shall be redeemable at
the Fund's option at a price per share equal to $25,000 plus accumulated but
unpaid dividends plus a premium expressed as a percentage of $25,000, as
determined by the Fund's Board of Directors after consultation with the Auction
Agent and the Broker-Dealers.
"SUBMISSION DEADLINE" has the meaning specified in Paragraph 3(a)(x) of the
Auction Procedures.
"SUBMITTED BID" has the meaning specified in Paragraph 3(d)(i) of the
Auction Procedures.
"SUBMITTED HOLD ORDER" has the meaning specified in Paragraph 3(d)(i) of
the Auction Procedures.
"SUBMITTED ORDER" has the meaning specified in Paragraph 3(d)(i) of the
Auction Procedures.
"SUBMITTED SELL ORDER" has the meaning specified in Paragraph 3(d)(i) of
the Auction Procedures.
"SUBSEQUENT DIVIDEND PERIOD" means each Dividend Period after the Initial
Dividend Period.
"SUBSTITUTE RATING AGENCY" and "SUBSTITUTE RATING AGENCIES" shall mean a
nationally recognized statistical rating organization or two nationally
recognized statistical rating organizations, respectively, selected by
PaineWebber Incorporated, or its respective affiliates and successors, after
consultation with the Fund, to act as a substitute rating agency or substitute
rating agencies, as the case may be, to determine the credit ratings of the
shares of Preferred Stock.
"SUFFICIENT CLEARING BIDS" has the meaning specified in Paragraph 3(d)(i)
of the Auction Procedures.
"TAXABLE EQUIVALENT OF THE SHORT TERM MUNICIPAL OBLIGATIONS RATE" on any
date means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30-day High Grade Index (the
"Kenny Index"), or any successor index 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 Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of bonds the interest on
which is excludable for federal income tax purposes under the Internal Revenue
Code of "high grade" component issuers selected by Kenny Information Systems
Inc. 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 a Preference Item,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
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 Information Systems Inc. or any
successor, the Taxable Equivalent of the Short Term Municipal Obligations Rate
shall mean the quotient of (A) 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 (B) 1.00 minus the marginal tax rate noted
above (expressed as a decimal). The Fund may not utilize a successor index to
the Kenny Index unless S&P provides the Fund with written confirmation that the
use of such successor index will not adversely affect the then-current S&P
rating of the shares of Preferred Stock.
"TAXABLE INVESTMENTS" has the meaning set forth on page 14 of this
Prospectus.
"28-DAY DIVIDEND PERIOD" means a Dividend Period consisting of 28 days. If
the Fund changes the dividend period to seven days, then 7-Day Dividend Periods
will be substituted for 28-Day Dividend Periods.
"UNDERWRITING AGREEMENT" has the meaning set forth on page 44 of this
Prospectus.
"U.S. TREASURY BILL RATE" on any date means (i) the Interest Equivalent of
the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. "Alternate Treasury Bill Rate" on
any date means the Interest Equivalent of the yield as calculated by reference
to the arithmetic average of the bid price quotations of the actively traded
Treasury Bill with a maturity most nearly comparable to the length of the
related Dividend Period, as determined by bid price quotations as of any time on
the Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.
"U.S. TREASURY NOTE RATE" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. "Alternate Treasury Note Rate" on
any date means the yield as calculated by reference to the arithmetic average of
the bid price quotations of the actively traded, current coupon Treasury Note
with a maturity most nearly comparable to the length of the related Dividend
Period, as determined by the bid price quotations as of any time on the Business
Day immediately preceding such date, obtained from at least three recognized
primary U.S. Government securities dealers selected by the Auction Agent.
"VALUATION DATE" has the meaning set forth on page 33 of this Prospectus.
"VARIATION MARGIN" means, in connection with an outstanding financial
futures contract owned or sold by the Fund, the amount of cash or securities
paid to or received from a broker (subsequent to the Initial Margin payment)
from time to time as the price of such financial futures contract fluctuates.
"WINNING BID RATE" has the meaning specified in Paragraph 3(d)(i) of the
Auction Procedures.
<PAGE>
DREYFUS MUNICIPAL INCOME, INC.
2,000 Shares Series A
2,000 Shares Series B
Auction Preferred Stock
Liquidation Preference $25,000 Per Share
[Logo] DREYFUS
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PROSPECTUS
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PaineWebber Incorporated
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September __, 1999
