[LOGO] Dreyfus $186,000,000
Dreyfus Strategic Municipal Bond Fund, Inc.
2,480 Shares Series A
2,480 Shares Series B
2,480 Shares Series C
Auction Preferred Stock
Liquidation Preference $25,000 Per Share
-----------
Dreyfus Strategic Municipal Bond Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company. Its investment objective is to
maximize current income exempt from federal income tax to the extent believed by
the Fund's investment adviser to be consistent with the preservation of capital.
The Fund ordinarily seeks to invest 100% of its assets in municipal obligations
and at least 80% of its assets in municipal obligations considered investment
grade. The Fund may invest the remainder of its assets in higher risk, higher
yielding municipal obligations of lesser quality. 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.
Per Share Sales Load(2) Proceeds to Fund(1)
------------ ------------- -------------------
Public Offering Price............ $25,000 $250 $24,750
TOTAL............................ $186,000,000 $1,860,000 $184,140,000
- -----
(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."
The Applicable Rate for the Initial Dividend Period will be 3.47% per annum
for Series A Preferred Stock, 3.47% per annum for Series B Preferred Stock, and
3.47% per annum for Series C 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 October 19, 1999 for Series A Preferred
Stock, October 21, 1999 for Series B Preferred Stock and October 25, 1999 for
Series C Preferred Stock and, generally, on each succeeding fourth Tuesday for
Series A Preferred Stock, each succeeding fourth Thursday for Series B Preferred
Stock and each succeeding fourth Monday for Series C 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 22, 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 47 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 22, 1999.
<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 27, 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.............................. 39
Description of Capital Structure... 42
Page
----
Conversion to Open-End Fund........ 43
Certain Provisions of the Charter.. 44
Underwriting....................... 45
Custodian and Transfer Agent....... 45
Legal Opinions..................... 45
Independent Auditors............... 45
Additional Information............. 46
Special Note Regarding Forward-
Looking Statements................ 46
Table of Contents of the SAI....... 47
Glossary........................... 48
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 diversified, closed-end management
investment company. The Fund was organized under
Maryland law on September 26, 1989, 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 and
Administrator.............. Dreyfus is the Fund's investment adviser and
administrator.
Investment Objective and The Fund's investment objective is to maximize
Policies................... current income exempt from federal income tax to
the extent believed by Dreyfus to be 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. Under normal market conditions, the
Fund will invest at least 80% 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. The remainder of the Fund's assets may
be invested in municipal obligations considered
below investment grade, but rated no lower than C
by such Rating Agencies.
The Offering................ The Fund is offering an aggregate of:
. 2,480 shares of Series A Preferred Stock
. 2,480 shares of Series B Preferred Stock
. 2,480 shares of Series C 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:
. if an Auction fails, you may not be able
to sell some or all of your shares;
. 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;
. the Rating Agency could downgrade the
shares of Preferred Stock, which could
adversely affect liquidity;
. 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;
. the Fund may not earn sufficient income
from its investments to pay dividends;
. 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
. 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 Tuesday for Series A Preferred
Stock, on each succeeding fourth Thursday for
Series B Preferred Stock, and on each succeeding
fourth Monday for Series C 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:
. 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,
. 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
. 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
Allocation 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:
. with respect to any 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,
. with respect to any Short Term Dividend
Period having more than 28 but fewer than
183 days, the applicable "AA" Composite
Commercial Paper Rate,
. 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
. with respect to any Long Term Dividend
Period, the applicable U.S. Treasury Note
Rate.
The Applicable Percentage will be determined
based on:
. 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
. 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
Percentage of Applicable
Reference Rate Percentage of
-- Reference Rate--
S&P Credit 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:
. 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.
. 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.
. 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, the
Investment Company Act Preferred Stock Asset
Coverage with respect to shares of Preferred
Stock will be approximately 328% immediately
after the issuance of the shares of Preferred
Stock offered hereby in an amount representing
approximately 30% 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 presented. The
financial highlights for each of the ten years in the period ended November 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 November 30,
1998 is included in the Fund's November 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 November 30, 1998 Annual Report and Semi-Annual Report for the six months
ended May 31, 1999, which are available without charge from the Fund.
Six-Month
Period Ended
May 31, 1999
(Unaudited)
------------
PER SHARE DATA:
Net asset value,
beginning of
period.......... $ 9.52
--------
Investment
Operations:
Investment
income--net.... .29
Net realized and
unrealized gain
(loss) on
investments.... (.22)
--------
Total from
Investment
Operations..... $ .07
--------
Distributions:
Dividends from
investment
income--net.... $ (.30)
Dividends from
net realized
gain on
investments.... --
Dividends in
excess of net
realized gains
on
investments.... --
--------
Total
Distributions.. $ (.30)
--------
Net asset value,
end of period... $ 9.29
========
Market value, end
of period....... $ 9 1/8
========
TOTAL RETURN*.... (15.02%)(3)
RATIOS/SUPPLEMENTAL
DATA:
Ratio of
expenses to
average net
assets......... .81%(3)
Ratio of net
investment
income
to average net
assets......... 6.24%(3)
Portfolio
turnover rate.. 16.60%(4)
Net assets, end
of
period (000's
omitted)....... $443,816
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989(1)
---------- --------- --------- --------- ---------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net asset value,
beginning of
period.......... $ 9.49 $ 9.54 $ 9.60 $ 8.68 $ 9.93 $ 9.78 $ 9.61 $ 9.44 $ 9.32 $ 9.32(2)
---------- --------- --------- --------- ---------- --------- --------- --------- ---------- ------------
Investment
Operations:
Investment
income--net.... .60 .62 .64 .66 .65 .70 .70 .69 .69 --
Net realized and
unrealized gain
(loss) on
investments.... .05 (.01) (.08) .90 (1.16) .17 .18 .19 .02 --
---------- --------- --------- --------- ---------- --------- --------- --------- ---------- ------------
Total from
Investment
Operations..... $ .65 $ .61 $ .56 $ 1.56 $ (.51) $ .87 $ .88 $ .88 $ .71 --
---------- --------- --------- --------- ---------- --------- --------- --------- ---------- ------------
Distributions:
Dividends from
investment
income--net.... $ (.62) $ (.66) $ (.62) $ (.64) $ (.67) $ (.68) $ (.71) $ (.71) $ (.59) --
Dividends from
net realized
gain on
investments.... -- -- -- -- -- (.04) -- -- -- --
Dividends in
excess of net
realized gains
on
investments.... -- -- -- -- (.07) -- -- -- -- --
---------- --------- --------- --------- ---------- --------- --------- --------- ---------- ------------
Total
Distributions.. $ (.62) $ (.66) $ (.62) $ (.64) $ (.74) $ (.72) $ (.71) $ (.71) $ (.59) --
---------- --------- --------- --------- ---------- --------- --------- --------- ---------- ------------
Net asset value,
end of period... $ 9.52 $ 9.49 $ 9.54 $ 9.60 $ 8.68 $ 9.93 $ 9.78 $ 9.61 $ 9.44 $ 9.32
========== ========= ========= ========= ========== ========= ========= ========= ========== ============
Market value, end
of period....... $10 3/16 $ 10 5/8 $ 9 3/4 $ 9 1/4 $ 8 5/8 $ 10 1/4 $ 10 1/4 $ 9 7/8 $ 9 1/2 $ 10 1/8
========== ========= ========= ========= ========== ========= ========= ========= ========== ============
TOTAL RETURN*.... (2.23%) 16.60% 12.61% 15.12% (8.97%) 7.37% 11.65% 12.02% (.13%) 1.25%(4)
RATIOS/SUPPLEMENTAL
DATA:
Ratio of
expenses to
average net
assets......... .81% .81% .82% .84% .86% .85% .84% .88% .56% --
Ratio of net
investment
income
to average net
assets......... 6.26% 6.55% 6.82% 7.12% 6.94% 7.05% 7.16% 7.27% 7.49% --
Portfolio
turnover rate.. 6.33% 2.95% 13.47% 13.19% 10.96% 13.87% 8.58% 22.41% 16.51% --
Net assets, end
of
period (000's
omitted)....... $453,893 $446,152 $440,681 $439,192 $396,316 $447,691 $428,824 $408,314 $389,342 $326,391
- -------
* Total return is calculated based on market value.
(1) From November 22, 1989 (commencement of operations) to November 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 diversified, closed-end management investment company that
commenced operations in 1989. The Fund's investment objective is to maximize
current income exempt from federal income tax to the extent believed by Dreyfus
to be consistent with the preservation of capital. The Fund invests primarily in
a diversified portfolio of investment grade municipal obligations.
The Fund was organized as a Maryland corporation on September 26, 1989 and
has registered with the SEC under the Investment Company Act. In November 1989,
the Fund issued 35,000,000 shares of common stock pursuant to the initial public
offering thereof and commenced operations. The net proceeds of such offering
were $327,250,000. The Fund's common stock is traded on the New York Stock
Exchange ("NYSE") under the symbol "DSM." 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 $183,940,000 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.
Actual As Adjusted
------------ ------------
Shareholders' equity:
Preferred Stock, par value $0.001 per share (no
shares issued; 7,440 shares of Preferred Stock,
as adjusted, at $25,000 per share liquidation
preference)..................................... -- $186,000,000
Common Stock, par value $0.001 per share
(47,783,925 shares
issued and outstanding)......................... $ 47,784 47,784
Capital in excess of par value attributable to
common stock...................................... 447,839,246 445,779,246
Undistributed investment income--net............... 1,749,303 1,749,303
Accumulated realized gain (loss)--net.............. (13,517,364) (13,517,364)
Unrealized depreciation on investments--net........ (10,303,293) (10,303,293)
------------ ------------
Net assets......................................... $425,815,676 $609,755,676
============ ============
PORTFOLIO COMPOSITION
As of August 31, 1999, approximately 98.5% 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 12 $ 62,296 14.8%
AA Aa AA 8 55,431 13.1
A A A 8 49,019 11.6
BBB Baa BBB 20 93,302 22.1
BB Ba BB 4 21,829 5.2
B B B 2 12,662 3.0
NR+ NR+ NR+ 25 121,187 28.7
Cash 5 6,500 1.5
--- -------- -----
Total................... 84 $422,226 100.0%
=== ======== =====
- --------
* Ratings: Using the highest of S&P, Moody or Fitch's ratings on the
Fund's municipal obligations. See "Appendix A" to the SAI. S&P and Fitch
rating categories may be modified further by a plus (+) or minus (-) in AA,
A, BBB, BB and B ratings. Moody's rating categories may be modified further
by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.
+ Securities that are not rated by S&P, Moody's or Fitch. These municipal
obligations may be rated by a Rating Agency other than S&P, Moody's or
Fitch, or may not be rated by any Rating Agency.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is to maximize current income exempt from
federal income tax to the extent believed by Dreyfus to be consistent with the
preservation of capital. The Fund invests primarily in a diversified portfolio
of investment grade municipal obligations. 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 its 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. At least 65% of
the value of the Fund's net assets (except when maintaining a temporary
defensive position) will be invested in bonds and debentures. Under normal
market conditions, the weighted average maturity of the Fund's portfolio is
expected to exceed ten years.
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 multi-state 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 invests at least 80% of its net
assets in municipal obligations considered 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. The Fund may invest the
remainder of its assets in municipal obligations considered below investment
grade by Moody's, S&P and Fitch, including those rated no lower than C, but it
currently is the intention of the Fund to invest such remainder of its assets
primarily in bonds rated no lower than Ba by Moody's and BB by S&P and Fitch.
Bonds rated below investment grade and short term obligations rated below the
two highest rating categories of Moody's, S&P and Fitch will be purchased only
if Dreyfus determines that the purchase is consistent with the Fund's investment
objective. 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. Securities
rated below investment grade or unrated securities of comparable quality are
subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations ("credit risk") and also may be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity ("market
risk"). The prices of lower quality securities also are more likely to react to
real or perceived developments affecting market and credit risk than are prices
of investment grade quality securities, which react primarily to movements in
the general level of interest rates.
The Fund is permitted to invest in securities rated Baa by Moody's or BBB
by S&P or Fitch and up to 20% of its assets may be invested in securities rated
below Baa by Moody's and BBB by S&P or Fitch, but in no event lower than C by
such Rating Agencies. 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. Because up to 20% of the Fund's portfolio may consist of bonds
rated below investment grade and as low as C by Moody's, S&P and Fitch (commonly
known as junk bonds), the Fund may be subject to investment risks as to these
securities that are greater in some respects than those incurred by a fund which
invests only in securities rated in a higher category by these Rating Agencies.
These higher yielding (and, therefore, higher risk) securities generally may be
subject to certain risks with respect to the issuing entity and to greater
market fluctuation than certain lower yielding, higher rated fixed-income
securities. The retail secondary market for these securities may be less liquid
than that of higher rated securities; adverse conditions could make it difficult
at times for the Fund to sell certain securities or could result in lower
prices. See "Appendix A" to 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.
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:
. 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.
. 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.
. 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.
. 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."
<PAGE>
DESCRIPTION OF PREFERRED STOCK
The following 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.
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 more 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 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 sixty 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 October 18, 1999 for Series A
Preferred Stock, October 20, 1999 for Series B Preferred Stock, and October 22,
1999 for Series C Preferred Stock. Auctions for the shares of Preferred Stock
for Dividend Periods after the Initial Dividend Period ordinarily will be held
every fourth Monday after the preceding Dividend Payment Date for Series A
Preferred Stock, every such fourth Wednesday for Series B Preferred Stock, and
every such fourth Friday for Series C Preferred Stock; and each subsequent
Dividend Period ordinarily will begin on the following Tuesday for Series A
Preferred Stock, on the following Thursday for Series B Preferred Stock, and on
the following Monday for Series C 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:
Applicable Applicable
Percentage of Percentage of
Reference Reference
Rate--No Rate--
S&P Credit Ratings 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
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 its 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 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, 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 of
greater than 28 days (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:
<TABLE>
<CAPTION>
<S> <C>
Value of Fund assets less liabilities not
constituting senior securities $609,755,676
----------------------------------------------------- = -------------- = 328%
Senior securities representing indebtedness plus $186,000,000
liquidation value of the shares of Preferred Stock
</TABLE>
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 or series of preferred stock
which is substantially identical in all respects to the shares of Preferred
Stock, if the Fund obtains written confirmation from 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., 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 an
Investment Advisory Agreement, subject to the authority of the Fund's Board of
Directors in accordance with Maryland law. The Fund's primary portfolio manager
is A. Paul Disdier. He has held that position since January 1996 and has been
employed by Dreyfus since 1988. 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 Investment Advisory Agreement, the Fund has agreed
to pay Dreyfus a monthly fee at the annual rate of 0.50% of the value of the
Fund's average weekly net assets.
The Investment Advisory 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 Investment Advisory 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 Investment Advisory
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 Investment Advisory 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.
Administrator. Dreyfus also serves as the Fund's administrator pursuant to
an Administration Agreement with the Fund, pursuant to which Dreyfus, subject to
the overall authority of the Fund's Board of Directors in accordance with
Maryland law, generally assists in all aspects of the Fund's administration and
operation. Among other things, Dreyfus provides to the Fund statistical and
research data, clerical help and accounting, data processing, bookkeeping,
internal auditing and certain other services (including calculation of the net
asset value of the Fund's shares) required by the Fund, prepares reports to
holders of the common stock and prepares tax returns and reports to and filings
with the SEC. Dreyfus bears all expenses in connection with the performance of
these services. The Fund pays an aggregate monthly fee at the annual rate of
0.25% of the value of the Fund's average weekly net assets for the
administrative services provided by Dreyfus and for the custody and transfer
agency services provided by the Fund's custodian and transfer agent,
respectively.
<PAGE>
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 asserted 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.
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.
<PAGE>
DESCRIPTION OF CAPITAL STRUCTURE
The Fund was incorporated in Maryland on September 26, 1989. It is
authorized to issue 109,992,560 shares of common stock, $0.001 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.
Amount Amount
Title of Class Authorized Outstanding
-------------- ----------- -----------
Common Stock........................................ 109,992,560 47,783,925
Shares of Preferred Stock
Series A.......................................... 2,480 -0-
Series B.......................................... 2,480 -0-
Series C.......................................... 2,480 -0-
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 NYSE on November 22,
1989. At August 31, 1999, the net asset value per share of common stock was
$8.91, and the closing price per share of common stock on the NYSE was $8.13.
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
If the Fund's common stock has traded on the principal securities exchange
where listed at an average discount from net asset value of more than 10%,
determined on the basis of the discount as of the end of the last trading day in
each week, during the 12 calendar weeks preceding the beginning of such fiscal
year, the Fund will submit to its shareholders at the next succeeding annual
meeting of shareholders a proposal to convert the Fund to an open-end investment
company. Conversion of the Fund to an open-end investment company would require
an amendment of the Fund's Charter. The Fund's Board of Directors also at any
time may propose conversion of the Fund to an open-end investment company
depending upon the Directors' judgment as to the suitability of such action in
light of circumstances then prevailing. Conversion to an open-end investment
company would require the approval of the holders of at least a majority of the
Fund's outstanding shares of common stock and outstanding shares of preferred
stock, voting separately by class.
Shareholders of an open-end investment company may require the company to
redeem their shares at any time (except in certain circumstances as authorized
by or under the 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 is 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 NYSE. Conversion of the Fund to
an open-end investment company also would require the redemption of all
outstanding shares of Preferred Stock.
<PAGE>
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 a majority of each class of 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, and the favorable vote of the holders of at least 75% of the
outstanding shares of the Fund 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 Continuing Directors (defined as
those Directors who either were members of the Fund's Board of Directors on
November 22, 1989 or subsequently became or will become Directors and whose
election was or is approved by a majority of the Continuing Directors then on
the Board, in which case the affirmative vote of a majority of the outstanding
shares of the Fund is required. Such approval, adoption or authorization of the
foregoing actions also would require the favorable vote of at least a majority
of the Fund's shares of preferred stock then entitled to be voted, including
the Preferred Stock, voting as a separate class as described under "Description
of Preferred Stock--Voting Rights."
The Fund's Board of Directors has determined that the voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the Investment Company Act and which can only be changed by a favorable
vote of the holders of at least 75% of the Fund's shares entitled to vote on the
matter, 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.
<PAGE>
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.
<TABLE>
<CAPTION>
Number of Number of Number of
Shares of Shares of Shares of
Series A Series B Series C
Preferred Preferred Preferred
Underwriter Stock Stock Stock
----------- --------- --------- ---------
<S> <C> <C> <C>
PaineWebber Incorporated....................... 2,480 2,480 2,480
</TABLE>
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 $150 per share. The Underwriter may allow,
and such dealers may reallow, a discount not in excess of $100 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 September
27, 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.
CUSTODIAN AND TRANSFER AGENT
Boston Safe Deposit and Trust Company, an indirect wholly-owned subsidiary
of Mellon, located at One Boston Place, Boston, Massachusetts 02108, acts as
Custodian for the assets of the Fund. First Data Investor Services Group, Inc.,
a subsidiary of First Data Corporation, located at One Exchange Place, Boston,
Massachusetts 02109, 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 November 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: Northeast Regional Office, at Seven World Trade
Center, 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 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. 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 New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
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.
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.
<PAGE>
TABLE OF CONTENTS OF THE SAI
Page
----
General Information...................................................... 2
Additional Information About Certain Portfolio Securities and Investment
Techniques.............................................................. 2
Investment Restrictions.................................................. 13
Rating Agency Guidelines................................................. 15
Management of the Fund................................................... 20
Ownership of Fund Shares................................................. 32
Portfolio Trading........................................................ 32
Repurchase of Shares..................................................... 33
Taxation................................................................. 34
Financial Statements..................................................... 36
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 14 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 NYSE 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.
"Continuing Directors" has the meaning set forth on page 44 of this
Prospectus.
"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 28-Day
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 and
administrator.
"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 Strategic Municipal Bond Fund, 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 October 19, 1999 for Series A
Preferred Stock, October 21, 1999 for Series B Preferred Stock and October 25,
1999 for Series C 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 30 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 $0.001 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" has the meaning set forth on page 4 of this Prospectus.
"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 15 of the SAI.
"S&P Eligible Assets" has the meaning set forth on page 15 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 277% 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 28-Day 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 45 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>
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Dreyfus Strategic Municipal Bond Fund, Inc.
2,480 Shares Series A
2,480 Shares Series B
2,480 Shares Series C
Auction Preferred Stock
Liquidation Preference $25,000 Per Share
[LOGO] Dreyfus
---------------
PROSPECTUS
---------------
PaineWebber Incorporated
----------------
September 22, 1999
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
September 22, 1999
DREYFUS STRATEGIC MUNICIPAL BOND FUND, INC.
200 Park Avenue
New York, NY 10166
(800) 334-6899
AUCTION PREFERRED STOCK
TABLE OF CONTENTS
PAGE
General Information..........................................................2
Additional Information About Certain Portfolio Securities and
Investment Techniques.......................................................2
Investment Restrictions.....................................................13
Rating Agency Guidelines....................................................15
Management of the Fund......................................................20
Ownership of Fund Shares....................................................32
Portfolio Trading...........................................................32
Repurchase of Shares........................................................33
Taxation....................................................................34
Financial Statements........................................................36
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
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY THE
PROSPECTUS OF DREYFUS STRATEGIC MUNICIPAL BOND FUND, INC. (THE "FUND") DATED
SEPTEMBER 22, 1999, AS SUPPLEMENTED FROM TIME TO TIME, WHICH IS INCORPORATED
HEREIN BY REFERENCE. THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ IN
CONJUNCTION WITH THE PROSPECTUS, A COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE
BY CONTACTING YOUR FINANCIAL INTERMEDIARY OR CALLING THE FUND AT 1-800-334-6899.
<PAGE>
Capitalized terms used in this Statement of Additional Information and
not otherwise defined have the meanings given them in the Fund's Prospectus.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
The Fund is a diversified, closed-end management investment company
registered under the Investment Company Act. The Fund's investment adviser is
The Dreyfus Corporation ("Dreyfus"). The Fund's investment objective is to
maximize current income exempt from Federal income tax to the extent believed by
Dreyfus to be consistent with the preservation of capital.
ADDITIONAL INFORMATION ABOUT CERTAIN PORTFOLIO SECURITIES
AND INVESTMENT TECHNIQUES
CERTAIN PORTFOLIO SECURITIES
The following information supplements and should be read in
conjunction with the Fund's Prospectus.
MUNICIPAL OBLIGATIONS. The Fund will invest at least 80% of the value
of its net assets (except when maintaining a temporary defensive position) 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, the interest from which, in the opinion of
bond counsel to the issuer, is exempt from Federal income tax. Municipal
obligations generally include debt obligations issued to obtain funds for
various public purposes as well as certain industrial development bonds issued
by or on behalf of public authorities. 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. Tax exempt industrial development bonds, in most
cases, are revenue bonds that do not carry the pledge of the credit of the
issuing municipality, but generally are guaranteed by the corporate entity on
whose behalf they are issued. 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.
Municipal obligations include municipal lease/purchase agreements which are
similar to installment purchase contracts for property or equipment issued by
municipalities. Municipal obligations bear fixed, floating or variable rates of
interest, which are determined in some instances by formulas under which the
municipal obligation's interest rate will change directly or inversely to
changes in interest rates or an index, or multiples thereof, in many cases
subject to a maximum and minimum. Certain municipal obligations are subject to
redemption at a date earlier than their stated maturity pursuant to call
options, which may be separated from the related municipal obligation and
purchased and sold separately.
The yields on municipal obligations are dependent on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the municipal obligations market, size of a particular
offering, maturity of the obligation, and rating of the issue.
CERTAIN TAX EXEMPT OBLIGATIONS. The Fund may purchase floating and variable rate
demand notes and bonds, which are tax exempt obligations ordinarily having
stated maturities in excess of one year, but which permit the holder to demand
payment of principal at any time or at specified intervals. Variable rate demand
notes include master demand notes which are obligations that permit the Fund to
invest fluctuating amounts at varying rates of interest, pursuant to direct
arrangements between the Fund, as lender, and the borrower. These obligations
permit daily changes in the amount borrowed. Because these obligations are
direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest. Accordingly, where these
obligations are not secured by letters of credit or other credit support
arrangements, the Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Each obligation purchased by
the Fund will meet the quality criteria established for the purchase of
municipal obligations.
TAX EXEMPT PARTICIPATION INTERESTS. The Fund may purchase from financial
institutions participation interests in municipal obligations (such as
industrial development bonds and municipal lease/purchase agreements). A
participation interest gives the Fund an undivided interest in the municipal
obligation in the proportion that the Fund's participation interest bears to the
total principal amount of the municipal obligation. These instruments may have
fixed, floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Fund's Board has determined meet prescribed quality standards for
banks, or the payment obligation otherwise will be collateralized by U.S.
Government securities. For certain participation interests, the Fund will have
the right to demand payment, on not more than seven days' notice, for all or any
part of the Fund's participation interest in the municipal obligation, plus
accrued interest. As to these instruments, the Fund intends to exercise its
right to demand payment only upon a default under the terms of the municipal
obligation, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of its investment portfolio. Municipal lease obligations
or installment purchase contract obligations (collectively, "lease obligations")
have special risks not ordinarily associated with municipal obligations.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation ordinarily is backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. The staff of the SEC currently considers certain lease
obligations to be illiquid. Determination as to the liquidity of such securities
is made in accordance with guidelines established by the Fund's Board. Pursuant
to such guidelines, the Board has directed Dreyfus to monitor carefully the
Fund's investment in such securities with particular regard to: (1) the
frequency of trades and quotes for the lease obligation; (2) the number of
dealers willing to purchase or sell the lease obligation and the number of other
potential buyers; (3) the willingness of dealers to undertake to make a market
in the lease obligation; (4) the nature of the marketplace trades, including the
time needed to dispose of the lease obligation, the method of soliciting offers
and the mechanics of transfer; and (5) such other factors concerning the trading
market for the lease obligation as Dreyfus may deem relevant. In addition, in
evaluating the liquidity and credit quality of a lease obligation that is
unrated, the Fund's Board has directed Dreyfus to consider: (a) whether the
lease can be cancelled; (b) what assurance there is that the assets represented
by the lease can be sold; (c) the strength of the lessee's general credit (e.g.,
its debt, administrative, economic, and financial characteristics); (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (e.g., the potential for an "event of
nonappropriation"); (e) the legal recourse in the event of failure to
appropriate; and (f) such other factors concerning credit quality as Dreyfus may
deem relevant.
TENDER OPTION BONDS. The Fund may purchase tender option bonds. A tender option
bond is a municipal obligation (generally held pursuant to a custodial
arrangement) having a relatively long maturity and bearing interest at a fixed
rate substantially higher than prevailing short-term tax exempt rates, that has
been coupled with the agreement of a third party, such as a bank, broker-dealer
or other financial institution, pursuant to which such institution grants the
security holders the option, at periodic intervals, to tender their securities
to the institution and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the municipal obligation's fixed coupon rate and the
rate, as determined by a remarketing or similar agent at or near the
commencement of such period, that would cause the securities, coupled with the
tender option, to trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a demand obligation
that bears interest at the prevailing short-term tax exempt rate. Dreyfus, on
behalf of the Fund, will consider on an ongoing basis the creditworthiness of
the issuer of the underlying municipal obligations, of any custodian and of the
third party provider of the tender option. In certain instances and for certain
tender option bonds, the option may be terminable in the event of a default in
payment of principal or interest on the underlying municipal obligations and for
other reasons.
The Fund will purchase tender option bonds only when it is satisfied
that the custodial and tender option arrangements, including the fee payment
arrangements, will not adversely affect the tax exempt status of the underlying
municipal obligations and that payment of any tender fees will not have the
effect of creating taxable income for the Fund. Based on the tender option bond
agreement, the Fund expects to be able to value the tender option bond at par;
however, the value of the instrument will be monitored to assure that it is
valued at fair value.
CUSTODIAL RECEIPTS. The Fund may purchase custodial receipts representing the
right to receive certain future principal and interest payments on municipal
obligations which underlie the custodial receipts. A number of different
arrangements are possible. In a typical custodial receipt arrangement, an issuer
or a third party owner of municipal obligations deposits such obligations with a
custodian in exchange for two classes of custodial receipts. The two classes
have different characteristics, but, in each case, payments on the two classes
are based on payments received on the underlying municipal obligations. One
class has the characteristics of a typical auction rate security, where at
specified intervals its interest rate is adjusted, and ownership changes, based
on an auction mechanism. This class's interest rate generally is expected to be
below the coupon rate of the underlying municipal obligations and generally is
at a level comparable to that of municipal obligations of similar quality and
having a maturity equal to the period between interest rate adjustments. The
second class bears interest at a rate that exceeds the interest rate typically
borne by a security of comparable quality and maturity; this rate also is
adjusted, but in this case inversely to changes in the rate of interest of the
first class. In no event will the aggregate interest paid with respect to the
two classes exceed the interest paid by the underlying municipal obligations.
The value of the second class and similar securities should be expected to
fluctuate more than the value of a municipal obligation of comparable quality
and maturity and their purchase by the Fund should increase the volatility of
its net asset value and, thus, its price per share. These custodial receipts are
sold in private placements. The Fund also may purchase directly from issuers,
and not in a private placement, municipal obligations having characteristics
similar to custodial receipts. These securities may be issued as a part of a
multi-class offering and the interest rate on certain classes may be subject to
a cap or floor.
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 and, 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 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. Gains realized in connection with stand-by commitments will be
taxable. The Fund also 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 that it owns on a specific
municipal obligation could result in the receipt of taxable income by the Fund.
RATINGS OF MUNICIPAL OBLIGATIONS. Under normal market conditions, at least 80%
of the value of the Fund's net assets will consist of municipal obligations
considered investment grade by Moody's, S&P or Fitch (the "Rating Agencies") in
the case of bonds, and in the two highest rating categories of a Rating Agency
in the case of short-term obligations having or deemed to have maturities of
less than one year. The Fund may invest the remainder of its net assets in
municipal obligations which, in the case of bonds, are considered below
investment grade by the Rating Agencies, including those rated no lower than C,
but it currently is the intention of the Fund to invest such remainder of its
assets primarily in bonds rated no lower than Ba by Moody's and BB by S&P and
Fitch. The Fund also may invest in securities which, while not rated, are
determined by Dreyfus to be of comparable quality to the rated securities in
which the Fund may invest; for purposes of the 80% requirement described in this
paragraph, such unrated securities will be considered to have the rating so
determined.
The average distribution of investments (at value) in municipal
obligations by ratings for the fiscal year ended November 30, 1998, computed on
a monthly basis, was as follows:
PERCENTAGE
FITCH or MOODY'S or S&P OF VALUE
AAA Aaa AAA 16.3%
AA Aa AA 11.9%
A A A 6.0%
BBB Baa BBB 24.8%
BB Ba BB 8.1%
B B B 1.8%
Not Rated Not Rated Not Rated 36.1%
-------
100.00%
=======
Subsequent to its purchase by the Fund, an issue of rated municipal
obligations may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. Neither event will require the sale of such
municipal obligations by the Fund, but Dreyfus will consider such event in
determining whether the Fund should continue to hold the municipal obligations.
To the extent that the ratings given by the Rating Agencies for municipal
obligations may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings as standards for
its investments in accordance with the investment policies contained in the
Prospectus and this Statement of Additional Information.
The ratings of the Rating Agencies represent their opinions as to the quality of
the municipal obligations which they undertake to rate. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards
of quality. Although these ratings may be an initial criterion for selection of
portfolio investments, Dreyfus also will evaluate these securities and the
creditworthiness of the issuers of such securities.
ZERO COUPON SECURITIES. The Fund may invest in zero coupon securities
which are debt securities issued or sold at a discount from their face value
which do not entitle the holder to any periodic payment of interest prior to
maturity or a specified redemption date (or cash payment date). The amount of
the discount varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and perceived
credit quality of the issuer. Zero coupon securities also may take the form of
debt securities that have been stripped of their unmatured interest coupons, the
coupons themselves and receipts or certificates representing interests in such
stripped debt obligations and coupons. The market prices of zero coupon
securities generally are more volatile than the market prices of securities that
pay interest periodically and are likely to respond to a greater degree to
changes in interest rates than non- zero coupon securities having similar
maturities and credit qualities. Federal income tax law requires the holder of a
zero coupon security or of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain
its qualification as a regulated investment company and avoid liability for
Federal income taxes, the Fund may be required to distribute such income accrued
with respect to these securities and may have to dispose of portfolio securities
under disadvantageous circumstances in order to generate cash to satisfy these
distribution requirements.
TAXABLE INVESTMENTS. From time to time, on a temporary basis other
than for temporary defensive purposes (but not to exceed 20% of the value of the
Fund's net assets) or for temporary defensive purposes, 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 not lower than P-2 by
Moody's, A-2 by S&P or F-2 by Fitch; certificates of deposit of U.S. domestic
banks, including foreign branches of domestic banks, with assets of $1 billion
or more; time deposits; bankers' acceptances and other short-term bank
obligations; and repurchase agreements in respect of any of the foregoing.
Dividends paid by the Fund that are attributable to income earned by the Fund
from Taxable Investments will be taxable to investors. See "Taxation." Under
normal market conditions, the Fund anticipates that not more than 5% of the
value of its total assets will be invested in any one category of Taxable
Investments.
INVESTMENT TECHNIQUES
The following information supplements and should be read in
conjunction with the Fund's Prospectus. The Fund's use of certain of the
investment techniques described below may give rise to taxable income. 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 shares of the Fund's Preferred Stock "AAA." See
"Rating Agency Guidelines."
LENDING PORTFOLIO SECURITIES. The Fund may lend securities from its
portfolio to brokers, dealers and other financial institutions needing to borrow
securities to complete certain transactions. The Fund continues to be entitled
to payments in amounts equal to the interest or other distributions payable on
the loaned securities, which affords the Fund an opportunity to earn interest on
the amount of the loan and on the loaned securities' collateral. Loans of
portfolio securities may not exceed 30% of the value of the Fund's total assets,
and the Fund will receive collateral consisting of cash, U.S. Government
securities or irrevocable letters of credit which will be maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. Such loans are terminable by the Fund at any time upon
specified notice. The Fund might experience risk of loss if the institution with
which it has engaged in a portfolio loan transaction breaches its agreement with
the Fund. In connection with its securities lending transactions, the Fund may
return to the borrower or a third party which is unaffiliated with the Fund, and
which is acting as a "placing broker," a part of the interest earned from the
investment of collateral received for securities loaned. The rating agency
guidelines prohibit the Fund from lending portfolio securities. See "Rating
Agency Guidelines."
DERIVATIVES. The Fund may invest in, or enter into, derivatives, such
as options and futures, for a variety of reasons, including to hedge certain
market risks, to provide a substitute for purchasing or selling particular
securities or to increase potential income gain. Derivatives may provide a
cheaper, quicker or more specifically focused way for the Fund to invest than
"traditional" securities would. The rating agency guidelines for the Preferred
Stock limit the use of derivatives. See "Rating Agency Guidelines."
Derivatives can be volatile and involve various types and degrees of
risk, depending upon the characteristics of the particular derivative and the
portfolio as a whole. Derivatives permit the Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities. However, 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.
Derivatives may be purchased on established exchanges or through
privately negotiated transactions referred to as over-the-counter derivatives.
Exchange-traded derivatives generally are guaranteed by the clearing agency
which is the issuer or counterparty to such derivatives. This guarantee usually
is supported by a daily payment system (i.e., variation margin requirements)
operated by the clearing agency in order to reduce overall credit risk. As a
result, unless the clearing agency defaults, there is relatively little
counterparty credit risk associated with derivatives purchased on an exchange.
By contrast, no clearing agency guarantees over-the-counter derivatives.
Therefore, each party to an over-the-counter derivative bears the risk that the
counterparty will default. Accordingly, Dreyfus will consider the
creditworthiness of counterparties to over-the-counter derivatives in the same
manner as it would review the credit quality of a security to be purchased by
the Fund. Over-the-counter derivatives are less liquid than exchange-traded
derivatives since the other party to the transaction may be the only investor
with sufficient understanding of the derivative to be interested in bidding for
it.
FUTURES TRANSACTIONS--IN GENERAL. The Fund may enter into futures contracts in
U.S. domestic markets, such as the Chicago Board of Trade. Engaging in these
transactions involves risk of loss to the Fund which could adversely affect the
value of the Fund's net assets. Although the Fund intends to purchase or sell
futures contracts only if there is an active market for such contracts, no
assurance can be given that a liquid market will exist for any particular
contract at any particular time. Many futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit or trading
may be suspended for specified periods during the trading day. Futures contract
prices could move to the limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of futures positions and
potentially subjecting the Fund to substantial losses.
Successful use of futures by the Fund also is subject to Dreyfus's
ability to predict correctly movements in the direction of the relevant market,
and, to the extent the transaction is entered into for hedging purposes, to
ascertain the appropriate correlation between the securities being hedged and
the price movements of the futures contract. For example, if the Fund uses
futures to hedge against the possibility of a decline in the market value of
securities held in its portfolio and the prices of such securities instead
increase, the Fund will lose part or all of the benefit of the increased value
of securities which it has hedged because it will have offsetting losses in its
futures positions. Furthermore, if in such circumstances the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. The Fund may have to sell such securities at a time when it may be
disadvantageous to do so.
Pursuant to regulations and/or published positions of the Securities
and Exchange Commission, the Fund may be required to segregate permissible
liquid assets to cover its obligations relating to its transactions in
derivatives. To maintain this required cover, the Fund may have to sell
portfolio securities at disadvantageous prices or times since it may not be
possible to liquidate a derivative position at a reasonable price. In addition,
the segregation of such assets will have the effect of limiting the Fund's
ability otherwise to invest those assets.
SPECIFIC FUTURES TRANSACTIONS. The Fund may purchase and sell interest
rate futures contracts. An interest rate future obligates the Fund to purchase
or sell an amount of a specific debt security at a future date at a specific
price.
OPTIONS--IN GENERAL. The Fund may purchase call and put options and may write
(i.e., sell) covered call and put option contracts. A call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, the
underlying security or securities at the exercise price at any time during the
option period, or at a specific date. Conversely, a put option gives the
purchaser of the option the right to sell, and obligates the writer to buy, the
underlying security or securities at the exercise price at any time during the
option period, or at a specific date.
A covered call option written by the Fund is a call option with
respect to which the Fund owns the underlying security or otherwise covers the
transaction by segregating cash or other securities. A put option written by the
Fund is covered when, among other things, the Fund segregates cash or liquid
securities having a value equal to or greater than the exercise price of the
option to fulfill the obligation undertaken. The principal reason for writing
covered call and put options is to realize, through the receipt of premiums, a
greater return than would be realized on the underlying securities alone. The
Fund receives a premium from writing covered call or put options which it
retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a
liquid secondary market on a securities exchange will exist for any particular
option or at any particular time, and for some options no such secondary market
may exist. A liquid secondary market in an option may cease to exist for a
variety of reasons. In the past, for example, higher than anticipated trading
activity or order flow, or other unforeseen events, at times have rendered
certain of the clearing facilities inadequate and resulted in the institution of
special procedures, such as trading rotations, restrictions on certain types of
orders or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Successful use by the Fund of options will be subject to Dreyfus's
ability to predict correctly movements in interest rates. To the extent
Dreyfus's predictions are incorrect, the Fund may incur losses.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivatives which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Before entering into such transactions or
making any such investment, the Fund will provide investors with appropriate
notice.
FORWARD COMMITMENTS. The Fund may purchase or sell municipal
obligations and other securities on a forward commitment, when-issued or delayed
delivery basis, which means that delivery and payment take place a number of
days after the date of the commitment to purchase. The payment obligation and
the interest rate receivable on a forward commitment or when-issued security are
fixed when the Fund enters into the commitment, but the Fund does not make
payment until it receives delivery from the counterparty. The Fund will commit
to purchase such securities 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. The Fund will segregate permissible liquid assets at
least equal at all times to the amount of the Fund's purchase commitments. No
additional purchase commitments will be made if more than 20% of the Fund's net
assets would be so committed.
Municipal obligations and other securities purchased on a forward
commitment or when-issued basis are subject to changes in value (generally
changing in the same way, i.e., appreciating when interest rates decline and
depreciating when interest rates rise) based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates. Securities purchased on a when-issued basis may expose the Fund
to risks because they may experience such fluctuations before their actual
delivery. Purchasing securities on a forward commitment or when-issued basis can
involve the additional risk that the yield available in the market when the
delivery takes place actually may be higher than that obtained in the
transaction itself. Purchasing securities on a forward commitment or when-issued
basis when the Fund is fully or almost fully invested may result in greater
potential fluctuation in the value of the Fund's net assets and its net asset
value per share.
INVESTMENT CONSIDERATION AND RISKS
INVESTING IN MUNICIPAL OBLIGATIONS. The Fund may invest more than 25%
of the value of its total assets in municipal obligations which are related in
such a way that an economic, business or political development or change
affecting one such security also would affect the other securities; for example,
securities the interest upon which is paid from revenues of similar types of
projects, or securities whose issuers are located in the same state. As a
result, the Fund may be subject to greater risk as compared to a fund that does
not follow this practice.
Certain municipal lease/purchase obligations in which the Fund may
invest may contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease payments in future years unless
money is appropriated for such purpose on a yearly basis. Although
"non-appropriation" lease/purchase obligations are secured by the leased
property, disposition of the leased property in the event of foreclosure might
prove difficult. In evaluating the credit quality of a municipal lease/purchase
obligation that is unrated, Dreyfus will consider, on an ongoing basis, a number
of factors including the likelihood that the issuing municipality will
discontinue appropriating funding for the leased property.
Certain provisions in the Internal Revenue Code relating to the
issuance of municipal obligations may reduce the volume of municipal obligations
qualifying for Federal tax exemption. One effect of these provisions could be to
increase the cost of the municipal obligations available for purchase by the
Fund and thus reduce available yield. Shareholders should consult their tax
advisers concerning the effect of these provisions on an investment in the Fund.
Proposals that may restrict or eliminate the income tax exemption for interest
on municipal obligations may be introduced in the future. If any such proposal
were enacted that would reduce the availability of municipal obligations for
investment by the Fund so as to adversely affect Fund shareholders, the Fund
would reevaluate its investment objective and policies and submit possible
changes in the Fund's structure to shareholders for their consideration. If
legislation were enacted that would treat a type of municipal obligation as
taxable, the Fund would treat such security as a permissible Taxable Investment
within the applicable limits set forth herein.
LOWER RATED BONDS. The Fund may invest up to 20% of its net assets in
higher yielding (and, therefore, higher risk) debt securities, such as those
rated below investment grade by the Rating Agencies (commonly known as junk
bonds). They may be subject to greater risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
municipal obligations. See "Appendix" for a general description of the Rating
Agencies' 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. The Fund will rely on Dreyfus's judgment,
analysis and experience in evaluating the creditworthiness of an issuer.
You should be aware that the market values of many of these bonds tend
to be more sensitive to economic conditions than are higher rated securities.
These bonds generally are considered by the Rating Agencies to be, on balance,
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation and generally will
involve more credit risk than securities in the higher rating categories.
Because there is no established retail secondary market for many of
these securities, the Fund anticipates that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market for these bonds does exist, it generally is not as
liquid as the secondary market for higher rated securities. The lack of a liquid
secondary market may have an adverse impact on market price and yield and the
Fund's ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio and calculating its net asset value. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of these securities. In such cases, judgment may play a
greater role in valuation because less reliable, objective data may be
available.
These bonds may be particularly susceptible to economic downturns. It
is likely that any economic recession would disrupt severely the market for such
securities and have an adverse impact on the value of such securities, and could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon which would increase the incidence of default
for such securities.
The Fund may acquire these bonds during an initial offering. Such
securities may involve special risks because they are new issues. The Fund has
no arrangement with any persons concerning the acquisition of such securities,
and Dreyfus will review carefully the credit and other characteristics pertinent
to such new issues.
The credit risk factors pertaining to lower rated securities also
apply to lower rated zero coupon bonds and pay-in-kind bonds, in which the Fund
may invest up to 5% of its net assets. Zero coupon securities and pay-in-kind or
delayed interest bonds carry an additional risk in that, unlike bonds which pay
interest throughout the period to maturity, the Fund will realize no cash until
the cash payment date unless a portion of such securities are sold and, if the
issuer defaults, the Fund may obtain no return at all on its investment. See
"Taxation."
SIMULTANEOUS INVESTMENTS. Investment decisions for the Fund are made
independently from those of other investment companies advised by Dreyfus. If,
however, such other investment companies desire to invest in, or dispose of, the
same securities as the Fund, available investments or opportunities for sales
will be allocated equitably to each investment company. In some cases, this
procedure may adversely affect the size of the position obtained for or disposed
of by the Fund or the price paid or received by the Fund.
INVESTMENT RESTRICTIONS
The Fund's investment objective, its policy to invest at least 80% of
its net assets in municipal obligations and the following investment
restrictions have been adopted by the Fund as fundamental policies that cannot
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,
voting together as a single class and of the Fund's outstanding shares of
Preferred Stock and any other preferred stock, voting as a separate class. All
other investment policies or practices are considered by the Fund not to be
fundamental and accordingly may be changed without shareholder approval. For
purposes of the Investment Company Act, "majority" means (a) 67% or more of the
Fund's outstanding voting securities present at a meeting, if the holders of
more than 50% of the Fund's outstanding voting securities are present or
represented by proxy, or (b) more than 50% of the Fund's outstanding voting
securities, whichever is less. The Fund may not:
1. Purchase securities other than municipal obligations and Taxable
Investments or as provided in Investment Restriction Nos. 7 and 12 or otherwise
in the Fund's Prospectus.
2. Borrow money, except to the extent permitted under the Investment
Company Act. For purposes of this investment restriction, the entry into
options, futures contracts, including those relating to indexes, and options on
futures contracts or indexes shall not constitute borrowing.
3. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings and to the extent related to the
deposit of assets in escrow in connection with writing covered put and call
options and the purchase of securities on a when-issued or delayed-delivery
basis and collateral and initial or variation margin arrangements with respect
to options, futures contracts, including those relating to indexes, and options
on futures contracts or indexes.
4. Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of transactions, but
the Fund may make margin deposits in connection with transactions in options,
futures and options on futures.
5. Underwrite any issue of securities, except to the extent that the
sale of portfolio securities by the Fund may be deemed to be an underwriting.
6. Purchase, hold or deal in real estate or oil and gas interests, but
the Fund may purchase and sell securities that are secured by real estate or
interests therein.
7. Invest in commodities, except that the Fund may purchase and sell
futures contracts, including those relating to indexes, and options on futures
contracts or indexes, as described in the Fund's Prospectus.
8. Lend any funds or other assets except through the purchase of all
or a portion of securities or obligations of the type in which the Fund may
invest; however, the Fund may lend its portfolio securities in an amount not to
exceed 30% of the value of its total assets. Any loans of portfolio securities
will be made according to guidelines established by the SEC and the Fund's Board
of Directors.
9. Issue any senior security (as such term is defined in Section 18(f)
of the Investment Company Act) other than preferred stock, except as permitted
in Investment Restriction Nos. 2, 3, 4 and 7.
10. Invest more than 5% of its assets in the securities of any one
issuer, except that up to 25% of the value of the Fund's total assets may be
invested, and securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities may be purchased, without regard to such
limitation.
11. Invest more than 25% of its total assets in the securities of
issuers in any single industry; provided that there shall be no such limitation
on the purchase of municipal obligations and obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
12. Purchase securities of other investment companies except (a) in
the open market where no commission except the ordinary broker's commission is
paid, which purchases are limited to a maximum of (i) 3% of the total voting
stock of any one investment company, (ii) 5% of the Fund's net assets with
respect to any one investment company and (iii) 10% of the Fund's net assets in
the aggregate, or (b) those received as part of a merger, sale of assets or
consolidation.
Notwithstanding Investment Restriction No. 11, industrial development
bonds, where the payment of principal and interest is the ultimate
responsibility of companies within the same industry, are grouped together as an
"industry."
While not a fundamental policy, regulations of the Commodity Futures
Trading Commission currently restrict the sum of initial margin and option
premiums on commodity contracts to 5% of total assets. The regulations of the
Commodity Futures Trading Commission do not limit, and the Fund is not otherwise
limited in, the amount of variation margin the Fund may pay.
If a percentage restriction set forth above is adhered to at the time
an investment is made, a later change in percentage resulting from a change in
values or assets will not constitute a violation of such restriction.
RATING AGENCY GUIDELINES
S&P AAA Rating Guidelines. The Discounted Value of the Fund's S&P
Eligible Assets is calculated on each Valuation Date. See in the Prospectus
"Description of Preferred Stock--Asset Maintenance--Preferred Stock Basic
Maintenance Amount." S&P Eligible Assets include cash, Receivables for Municipal
Obligations Sold and municipal obligations eligible for consideration under
S&P's current guidelines. For purposes of calculating the Discounted Value of
the Fund's portfolio under current S&P guidelines, the fair market value of
municipal obligations eligible for consideration under such guidelines must be
discounted by the applicable S&P Discount Factor set forth in the table below.
The Discounted Value of a municipal obligation eligible for consideration under
S&P guidelines is the fair market value thereof divided by the S&P Discount
Factor. The S&P Discount Factor used to discount a particular municipal
obligation will be determined by reference to (a) the rating by S&P on such
municipal obligation and (b) the S&P Exposure Period. The S&P Exposure Period is
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 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 Discount Factors applicable to municipal obligations for a range
of S&P Exposure Periods are set forth below:
<TABLE>
<CAPTION>
S&P Discount Factors Rating Category
Exposure Period AAA AA A BBB UNRATED*
<S> <C> <C> <C> <C> <C>
45 Business Days................................... 190% 195% 210% 250% 220%
25 Business Days................................... 170 175 190 230 220
10 Business Days................................... 155 160 175 215 220
7 Business Days.................................... 150 155 170 210 220
3 Business Days.................................... 130 135 150 190 220
- -----------------
* Eligible Assets not rated by S&P or rated less than BBB by S&P and not
rated at least the equivalent of an "A" rating by another Rating Agency.
</TABLE>
Since the S&P Exposure Period currently applicable to the Fund is
three Business Days, the S&P Discount Factors currently applicable to municipal
obligations eligible for consideration under S&P guidelines will be determined
by reference to the factors set forth opposite the exposure period line entitled
"3 Business Days." Notwithstanding the foregoing, (i) the S&P Discount Factor
for short-term municipal obligations will be 115%, so long as such municipal
obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand feature
exercisable in 30 days or less, 120% if such Municipal Obligations are rated A-1
or SP-1- by S&P and mature or have a demand feature exercisable within 30 days
or less, or 125% if such municipal obligations are not rated by S&P but are
rated VMIG- 1, P-1 or MIG-1 by Moody's; provided, however, such short-term
municipal obligations rated by Moody's but not rated by S&P having a demand
feature exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
having a short-term rating of at least A-1+ from S&P; and further provided that
such short-term municipal obligations rated by Moody's but not rated by S&P may
comprise no more than 50% of short-term municipal obligations that qualify as
S&P Eligible Assets; (ii) no S&P Discount Factor will be applied to cash,
options or to Receivables for Municipal Obligations Sold; and (iii) except as
set forth in clause (i) above, in the case of any municipal obligation that is
not rated by S&P but qualifies as a S&P Eligible Asset pursuant to clause (1)(c)
of the following paragraph, such municipal obligation will be deemed to have a
S&P rating one full rating category lower than the S&P rating category that is
the equivalent of the rating category in which such municipal obligation is
placed by another Rating Agency. "Receivables for Municipal Obligations Sold,"
for purposes of calculating S&P Eligible Assets as of any Valuation Date, means
the book value of Receivables for Municipal Obligations Sold as of or before
such Valuation Date if the receivables are due within five Business Days of the
Valuation Date. For purposes of the foregoing, Anticipation Notes rated SP-1+
or, if not rated by S&P, rated VMIG-1 by Moody's, which do not mature or have a
demand feature exercisable in 30 days and which do not have a long-term rating,
will be considered to be short-term municipal obligations. In calculating the
Discounted Value of the Corporation's portfolion (1) the S&P Discount Factors
will be applied to futures and Inverse Floaters and (2) a Discount Factor of
388% will be applied to Municipal Obligations rated AAA by S&P which are not
interest bearing or do not pay interest at least semi-annually.
The S&P guidelines impose certain minimum issue size, issuer and
geographical diversification and other requirements for purposes of determining
S&P Eligible Assets:
(1) To be considered S&P Eligible Assets, municipal obligations
must:
(a) be interest bearing and pay interest at least
semi-annually;
(b) be payable with respect to principal and interest in
U.S. dollars;
(c) be publicly rated BBB or higher by S&P or (except in the
case of Anticipation Notes that are grant anticipation notes or
bond anticipation notes, which must be rated by S&P to be
included in S&P Eligible Assets), if not rated by S&P but rated
by another Rating Agency, be rated at least A by such agency;
(d) not be private placements (except in the case of inverse
floaters);
(e) not be subject to a covered call or covered put option
written by the Fund; and
(f) be part of an issue with an original issue size of at
least $20 million or, if of an issue with an original issue size
below $20 million (but in no event below $10 million), be issued
by an issuer with a total of at least $50 million of securities
outstanding.
(2) Municipal obligations (excluding escrow bonds described
below) of any one issuer or guarantor (excluding bond insurers) will
be considered S&P Eligible Assets only to the extent the fair market
value of such obligations does not exceed 10% of the aggregate fair
market value of the S&P Eligible Assets, provided that 2% is added to
the applicable S&P Discount Factor for every 1% by which the fair
market value of such municipal obligations exceeds 5% of the aggregate
fair market value of the S&P Eligible Assets, and provided that
municipal obligations (excluding escrow bonds) not rated or rated less
than BBB by S&P or not rated at least A by another Rating Agency with
respect to any one issuer or guarantor (excluding bond insurers) will
be considered S&P Eligible Assets only to the extent the fair market
value of such municipal obligations does not exceed 5% of the
aggregate fair market value of S&P Eligible Assets.
(3) Municipal obligations not rated at least BBB by S&P or not
rated by S&P, or not rated at least A by another Rating Agency, will
be considered S&P Eligible Assets only to the extent the fair market
value of such municipal obligations does not exceed 20% of the
aggregate fair market value of S&P Eligible Assets; provided however,
that if the fair market value of such municipal obligations exceeds
20% of the aggregate fair market value of S&P Eligible Assets, a
portion of such municipal obligations (selected by the Fund) will not
be considered S&P Eligible Assets, so that the fair market value of
such municipal obligations (excluding such portion) does not exceed
20% of the aggregate fair market value of S&P Eligible Assets.
(4) Municipal Obligations not rated at least BBB by S&P or not
rated by S&P, but rated at least A by another Rating Agency, will
be considered S&P Eligible Assets only to the extent the fair market
value of such Municipal Obligations does not exceed 50% of the
aggregate fair market value of S&P Eligible Assets; provided however,
that if the fair market value of such Municipal Obligations exceeds
50% of the aggregate fair market value of S&P Eligible Assets, a
portion of such Municipal Obligations (selected by the Fund) will not
be considered S&P Eligible Assets, so that the fair market value of
such Municipal Obligations (excluding such portion) does not exceed
50% of the aggregate fair market value of S&P Eligible Assets.
(5) Long-term municipal obligations (excluding escrow bonds)
issued by issuers in any one state or territory will be considered S&P
Eligible Assets only to the extent the fair market value of such
municipal obligations does not exceed 25% of the aggregate fair market
value of S&P Eligible Assets.
(6) Municipal obligations which are not interest bearing or do
not pay interest at least semi-annually will be considered S&P
Eligible Assets if rated AAA by S&P.
Escrow bonds (defeased bonds) may comprise 100% of the Fund's S&P
Eligible Assets. Escrow bonds are municipal obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's, or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating.
Inverse floaters will qualify as S&P Eligible Assets provided that the
ratio of aggregate dollar amount of floating rate instruments to inverse
floating rate instruments issued by the same issuer does not exceed a ratio of
one-to-one at their time of original issuance. Leveraged inverse floaters will
not qualify as S&P Eligible Assets unless the leveraged bond has only one reset
remaining before its maturity.
The Fund may include municipal obligations as S&P Eligible Assets
pursuant to guidelines and restrictions to be established by S&P, provided that
S&P advises the Fund in writing that such action will not adversely affect its
then-current rating on the shares of Preferred Stock. As discussed herein, the
Fund may engage in options or futures transactions. For so long as any shares of
Preferred Stock are rated by S&P, the Fund will not purchase or sell financial
futures contracts, write, purchase or sell options on financial futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the shares of Preferred Stock by S&P, except that the
Fund may purchase or sell financial futures contracts based on the Bond Buyer
Municipal Bond Index (the "Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds") and write, purchase or sell put and call options on
such contracts (collectively "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any S&P Hedging Transaction based
on the Municipal Index (other than transactions that terminate a
financial futures contract or option held by the Fund by the Fund's
taking an opposite position thereto ("Closing Transactions")), that
would cause the Fund at the time of such transaction to own or have
sold the least of (A) more than 1,000 outstanding financial futures
contracts based on the Municipal Index, (B) outstanding financial
futures contracts based on the Municipal Index exceeding in number 25%
of the quotient of the fair market value of the Fund's total assets
divided by $1,000 or (C) outstanding financial futures contracts based
on the Municipal Index exceeding in number 10% of the average number
of daily traded financial futures contracts based on the Municipal
Index in the 30 days preceding the time of effecting such transaction
as reported by THE WALL STREET JOURNAL;
(ii) the Fund will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) that would
cause the Fund at the time of such transaction to own or have sold the
lesser of (A) outstanding financial futures contracts based on
Treasury Bonds and on the Municipal Index exceeding in number 25% of
the quotient of the fair market value of the Fund's total assets
divided by $100,000 ($200,000 in the case of the two-year United
States Treasury Note) or (B) outstanding financial futures contracts
based on Treasury Bonds exceeding in number 10% of the average number
of daily traded financial futures contracts based on Treasury Bonds in
the 30 days preceding the time of effecting such transaction as
reported by THE WALL STREET JOURNAL;
(iii) the Fund will engage in Closing Transactions to close out
any outstanding financial futures contract that the Fund owns or has
sold or any outstanding option thereon owned by the Fund in the event
(A) the Fund does not have S&P Eligible Assets with an aggregate
Discounted Value equal to or greater than the Preferred Stock Basic
Maintenance Amount on two consecutive Valuation Dates and (B) the Fund
is required to pay Variation Margin on the second such Valuation Date;
(iv) the Fund will engage in a Closing Transaction to close out
any outstanding financial futures contract or option thereon in the
month before the delivery month under the terms of such financial
futures contract or option thereon unless the Fund holds the
securities deliverable under such terms; and
(v) when the Fund writes a financial futures contract or an
option thereon, it will either segregate an amount of cash, cash
equivalents or high grade (rated A or better by S&P) fixed-income
securities that, together with the amount of Initial Margin and
Variation Margin held in the account of or on behalf of the Fund's
broker with respect to such financial futures contract or option,
equals the fair market value of the financial futures contract or
option, or, in the event the Fund writes a financial futures contract
or option thereon that requires delivery of an underlying security, it
will hold such underlying security in its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the Preferred Stock Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin will be zero and the aggregate
Discounted Value of S&P Eligible Assets will be reduced by an amount equal to
(i) 30% of the aggregate settlement value, as marked to market, of any
outstanding financial futures contracts based on the Municipal Index that are
owned by the Fund plus (ii) 25% of the aggregate settlement value, as marked to
market, of any outstanding financial futures contracts based on Treasury Bonds
which contracts are owned by the Fund.
For so long as the shares of Preferred Stock are rated by S&P, the
Fund, unless it has received written confirmation from S&P that such action
would not impair the ratings then assigned to the shares of Preferred Stock by
S&P, will not (i) borrow money except for the purpose of clearing transactions
in portfolio securities (which borrowings under any circumstances will be
limited to the lesser of $10 million and an amount equal to 5% of the fair
market value of the Fund's assets at the time of such borrowings and which
borrowings will be repaid within 60 days and not be extended or renewed and will
not cause the aggregate Discounted Value of S&P Eligible Assets to be less than
the Preferred Stock Basic Maintenance Amount), (ii) engage in short sales of
securities, (iii) lend any securities, (iv) issue any class or series of stock
ranking prior to or on a parity with the shares of Preferred Stock with respect
to the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, (v) reissue any shares of Preferred Stock
previously purchased or redeemed by the Fund, (vi) merge or consolidate into or
with any other corporation or entity, (vii) change the Fund's pricing service or
(vii) engage in reverse repurchase agreements.
For so long as the shares of Preferred Stock are rated by S&P, the
Fund will not purchase or sell financial futures contracts, write, purchase or
sell options on financial futures contracts or write put options (except covered
put options) or call options (except covered call options) on portfolio
securities unless it receives written confirmation from S&P that engaging in
such transactions will not impair the ratings then assigned to the shares of
Preferred Stock by S&P, except that the Fund may engage in S&P Hedging
Transactions subject to the limitations described herein.
<PAGE>
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND ADMINISTRATOR. Dreyfus serves as the Fund's
investment adviser and administrator. Dreyfus is a wholly-owned subsidiary of
Mellon Bank, N.A., which is a wholly-owned subsidiary of Mellon Bank Corporation
("Mellon").
Dreyfus provides investment management services pursuant to an
investment advisory agreement dated August 24, 1994 with the Fund (the
"Investment Advisory Agreement"), which is subject to annual approval by (i) the
Fund's Board or (ii) vote of a majority (as defined in the Investment Company
Act) of the outstanding voting securities of the Fund, provided that in either
event the continuance also is approved by a majority of the Board members who
are not "interested persons" (as defined in the Investment Company Act) of the
Fund or Dreyfus, by vote cast in person at a meeting called for the purpose of
voting on such approval. The Investment Advisory Agreement was approved by
shareholders on August 24, 1994, and was last approved by the Fund's Board,
including a majority of the Board members who are not "interested persons" of
any party to the Investment Advisory Agreement, at a meeting held on April 26,
1999. The Investment Advisory Agreement is terminable without penalty, on 60
days' notice, by the Fund's Board or by a vote of the holders of a majority of
the Fund's outstanding voting shares, or, upon not less than 90 days' notice, by
Dreyfus. The Investment Advisory Agreement will terminate automatically in the
event of its assignment (as defined in the Investment Company Act).
The following persons are officers and/or directors of Dreyfus:
Christopher M. Condron, Chairman of the Board and Chief Executive Officer;
Stephen E. Canter, President, Chief Operating Officer, Chief Investment Officer
and a director; Thomas F. Eggers, Vice Chairman--Institutional; Lawrence S.
Kash, Vice Chairman and a director; J. David Officer, Vice Chairman and a
director; Ronald P. O'Hanley III, Vice Chairman; William T. Sandalls, Jr.,
Executive Vice President; Mark N. Jacobs, Vice President, General Counsel and
Secretary; Diane P. Durnin, Vice President--Product Development; Patrice M.
Kozlowski, Vice President--Corporate Communications; Mary Beth Leibig, Vice
President--Human Resources; Andrew S. Wasser, Vice President--Information
Systems; Theodore A. Schachar, Vice President; Wendy Strutt, Vice President;
Richard Terres, Vice President; William H. Maresca, Controller; James Bitetto,
Assistant Secretary; Steven F. Newman, Assistant Secretary; and Mandell L.
Berman, Burton C. Borgelt, Steven G. Elliott, Martin C. McGuinn, Richard W. Sabo
and Richard F. Syron, directors.
Dreyfus manages the Fund's investments in accordance with the stated
policies of the Fund, subject to the approval of the Fund's Board. Dreyfus is
responsible for investment decisions, and provides the Fund with portfolio
managers who are authorized by the Board to execute purchases and sales of
securities. The Fund's portfolio managers are A. Paul Disdier, Joseph P. Darcy,
Richard J. Moynihan, Jill C. Shaffro, Samuel J. Weinstock and Monica S.
Wieboldt. Dreyfus also maintains a research department with a professional staff
of portfolio managers and securities analysts who provide research services for
the Fund as well as for other funds advised by Dreyfus.
Dreyfus serves as the Fund's administrator pursuant to an
administration agreement with the Fund dated November 1, 1995 (the
"Administration Agreement"), pursuant to which Dreyfus, subject to the overall
authority of the Fund's Board of Directors in accordance with Maryland law,
generally assists in all aspects of the Fund's administration and operation.
Among other things, Dreyfus provides to the Fund statistical and research data,
clerical help and accounting, data processing, bookkeeping, internal auditing
and certain other services (including calculation of the net asset value of the
Fund's shares) required by the Fund, prepares reports to shareholders of the
Fund's common stock and prepares tax returns and reports to and filings with the
SEC and state Blue Sky authorities. Dreyfus bears all expenses in connection
with the performance of these services.
The Administration Agreement continues in effect from year to year so
long as such continuance is approved at least annually by the Fund's Board. The
Administration Agreement is terminable without penalty, on 60 days' notice, by
the Fund's Board, by a vote of the holders of a majority of the Fund's
outstanding voting shares or by Dreyfus. The Administration Agreement will
terminate automatically in the event of its assignment. The Administration
Agreement provides that, in the absence of willful misfeasance, bad faith or
gross negligence of Dreyfus's obligations or duties to the Fund under such
Agreement, Dreyfus will not be liable to the Fund for any loss incurred.
EXPENSES. All expenses incurred in the operation of the Fund are borne
by the Fund, except to the extent specifically assumed by Dreyfus. The expenses
borne by the Fund include: taxes, interest, loan commitment fees, interest and
distributions paid on securities sold short, brokerage fees and commissions, if
any, and other expenses in any way related to the execution, recording and
settlement of portfolio securities transactions, fees of Board members who are
not officers, directors, employees or holders of 5% or more of the outstanding
voting securities of Dreyfus, SEC fees, state Blue Sky qualification fees,
advisory and administration fees, charges of custodians, transfer and dividend
disbursing agents' fees, certain insurance premiums, industry association fees,
outside auditing and legal expenses, expenses of listing, and maintaining the
listing of, the Fund's common stock on any stock exchange, costs incurred in the
offering of any preferred stock of the Fund, costs of independent pricing
services, costs of maintaining the Fund's corporate existence, expenses of
reacquiring shares of common stock and/or any preferred stock of the Fund,
expenses in connection with the Fund's Dividend Reinvestment Plan, costs of
maintaining the required books and accounts, costs attributable to investor
services (including, without limitation, telephone and personnel expenses),
costs of shareholders' reports and meetings, costs of preparing, printing and
mailing share certificates, proxy statements and prospectuses, and any
extraordinary expenses.
Dreyfus maintains office facilities on behalf of the Fund, and
furnishes statistical and research data, clerical help, accounting, data
processing, bookkeeping and internal auditing and certain other required
services to the Fund. Dreyfus also may make such advertising and promotional
expenditures, using its own resources, as it from time to time deemed
appropriate.
As compensation for Dreyfus's services under the Investment Advisory
Agreement, the Fund has agreed to pay Dreyfus a monthly fee at the annual rate
of 0.50% of the value of the Fund's average weekly net assets. For the fiscal
years ended November 30, 1996, 1997 and 1998, the investment advisory fees
payable by the Fund amounted to $2,161,268, $2,200,532, and $2,257,767,
respectively. The Fund has agreed to pay Dreyfus, Boston Safe Deposit and Trust
Company and First Data Investor Services Group, Inc. for administration, custody
and transfer agency services, respectively, a monthly fee at the aggregate
annual rate of 0.25% of the value of the Fund's average weekly net assets. For
the fiscal years ended November 30, 1996, 1997 and 1998, such fees payable by
the Fund amounted to $1,080,634, $1,100,266, and $1,128,883, respectively. All
fees and expenses are accrued and deducted before the declaration of dividends
to investors.
DIRECTORS AND OFFICERS. Directors and officers of the Fund, together
with information as to their principal business operations during at least the
last five years, are shown below.
<TABLE>
<CAPTION>
Principal Occupations
During the
Name, Address and Age Position with the Fund Past Five Years
- ----------------------- ------------------------ --------------------
<S> <C> <C>
Joseph S. DiMartino Chairman of the Since January 1995, he has been Chairman of the
200 Park Avenue Board Board of various funds in the Dreyfus Family of
New York, NY 10166 Funds. He also is a director of The Noel
Age: 55 Group, Inc., a venture capital company (for which,
from February 1995 until November 1997, he was
Chairman of the Board), Career Blazers, Inc.
(formerly, Staffing Resources, Inc.), a
temporary placement agency, HealthPlan
Services Corporation, a provider of marketing,
administrative and risk management services to
health and other benefit programs, Carlyle Industries,
Inc. (formerly, Belding Heminway Company, Inc.), a
button packager and distributor, and Century Business
Services, Inc. (formerly, International Alliances
Services, Inc.), a provider of various outsourcing
functions for small and medium sized companies. For
more than five years prior to January 1995, he was
President, a director and, until August 1994, Chief
Operating Officer of Dreyfus and Executive Vice President
and a director of Dreyfus Service Corporation, a
wholly-owned subsidiary of Dreyfus. From August 1994 until
December 31, 1994, he was a director of Mellon.
David W. Burke Director Board member of various funds in the Dreyfus Family of
Box 654 Funds. Chairman of the Broadcasting Board of Governors,
Eastham, MA 02642 an independent board within the United States Information
Age: 63 Agency, from August 1994 to November 1998. From August
1994 to December 1994, Mr. Burke was a consultant to
Dreyfus, and from October 1990 to August 1994, he was
Vice President and Chief Administrative Officer of Dreyfus.
From 1977 to 1990, Mr. Burke was involved in the
management of national television news, as Vice
President and Executive Vice President of ABC
News, and subsequently as President of CBS News.
Hodding Carter, III Director Since February 1998, he has been President and Chief
Knight Foundation Executive Officer of the John S. and James L. Knight
1 South Biscayne Boulevard Foundation. From 1985 to 1998, he was President and
Suite 3800 Chairman of MainStreet TV, a television production company.
Miami, FL 33131 From 1995 to 1998, he was Knight Professor of Public
Age: 63 Affairs Journalism at the University of Maryland. From 1980
to 1991 he was "OpEd" Columnist for The Wall Street
Journal. From 1985 to 1986, he was editor and chief
correspondent of "Capitol Journal," a weekly Public
Broadcasting System ("PBS") series on Congress. From 1981
to 1984, he was anchorman and chief correspondent for
PBS' "Inside Story," a regularly scheduled half- hour
critique of press performance. From 1977 to July 1,
1980, Mr. Carter served as Assistant Secretary of State
for Public Affairs and as Department of State spokesman.
Ehud Houminer Director Since July 1991, he has been Professor and Executive-in-
c/o Columbia Business Residence at the Columbia Business School, Columbia
School University. Since January 1996, he has been Principal of
Columbia University Lear, Yavitz, and Associates, a management
Uris Hall, Room 526 consultant firm. He also is a director of Avnet Inc. and
New York, NY 10027 SuperSol, Inc.
Age: 58
Richard C. Leone Director President of The Century Foundation (formerly, The
41 East 70th Street Twentieth Century Fund, Inc.), a tax exempt research
New York, NY 10021 foundation engaged in the studies of economic, foreign
Age: 58 policy and domestic issues. Mr. Leone also is a director
of Dynex, Inc. From April 1990 to March 1994, he was
Chairman, and from April 1988 to March 1994, a Commissioner
of The Port Authority of New York and New Jersey.
From January 1986 to January 1989, he was Managing Director of
Dillon, Reed & Co., Inc.
Hans C. Mautner Director Vice Chairman and a Director of Simon Property, Group,
305 East 47th Street Inc., a real estate investment company and also a Director
New York, NY 10017 of Cornerstone Properties. From 1977 to 1998, he was
Age: 61 Chairman, Trustee and Chief Executive Officer of Corporate
Property Investors, which merged into Simon Property
Group, Inc. in September 1998. Since January 1986,
he has been a Director of Julius Baer Investment
Management, Inc., a wholly-owned subsidiary of Julius
Baer Securities, Inc.
*Robin A. Pringle Director Since March 1996, she has been President of the Boisi Family
621 South Plymouth Court Foundation, a private family foundation located
Chicago, IL 60605 in New York City devoted to youths and higher
Age: 35 education. Also, she has been Assistant
to the Chief Executive Officer of The Beacon Group,
LLC, a private equity firm and advisory
partnership. Since 1993, she has been Vice President, and
from March 1992 to October 1993, she was Executive
Director of One-to-One Partnership, Inc., a national
non-profit organization that seeks to promote
mentoring and economic empowerment for at-risk youths.
From June 1986 to February 1992, she was an investment
banker with Goldman, Sachs & Co.
*John E. Zuccotti Director Since November 1996, he has been Chairman and Chief
One Liberty Plaza Executive Officer of World Financial Properties, Inc. Mr.
New York, NY 10006 Properties, Inc. Mr. Zuccotti also is a
Age: 61 Director of Starrett Housing Corporation, a construction,
development and management of real estate properties
corporation and Capstone Pharmacy Services, Inc. From
1990 to November 1996, he was President and Chief
Executive Officer of Olympia & York Companies (U.S.A.)
and a member of its Board of Directors since the inception
of the Board on July 27, 1993. From 1986 to 1990, he was a
partner in the law firm of Brown & Wood, and from 1978
to 1986, he was a partner in the law firm of Tufo &
Zuccotti. He was First Deputy Mayor of the City of New
York from December 1975 to June 1977, and Chairman of the
City Planning Commission for the City of New York
from 1973 to 1975.
Marie E. Connolly President and President, Chief Executive Officer, Chief Compliance
200 Park Avenue Treasurer Officer and a Director of Premier Mutual Fund
New York, NY 10166 Services, Inc., and Funds Distributor,
Age: 41 Inc., the ultimate parent of which is Boston
Institutional Group, Inc., and an officer of other investment
companies advised or administered by Dreyfus.
Margaret W. Chambers Vice President and Senior Vice President and General Counsel of Funds Distributor,
200 Park Avenue Secretary Inc., and an officer of other investment companies advised or
New York, NY 10166 administered by Dreyfus. From August 1996 to March 1998,
Age: 38 she was Vice President and Assistant General
Counsel for Loomis, Sayles & Company, L.P. From January
1986 to July 1996, she was an associate with the law firm of
Ropes & Gray.
Frederick C. Dey Vice President and Vice President, New Business Development of Funds Distributor,
60 State Street Assistant Treasurer Inc. since September 1994, and an officer of other investment
Boston, MA 02109 and Assistant Secretary companies advised or administered by Dreyfus.
Age: 37
Stephanie D. Pierce Vice President, Vice President of Premier Mutual Fund Services, Inc.
200 Park Avenue Assistant Secretary and and Funds Distributor, Inc., and an officer of other
New York, NY 10166 Assistant Treasurer investment companies advised or administered by
Age: 30 Dreyfus. From April 1997 to March 1998, she was employed as
a Relationship Manager with Citibank, N.A. From
August 1995 to April 1997, she was an Assistant Vice
President with Hudson Valley Bank, and from September
1990 to August 1995, she was Second Vice President with Chase
Manhattan Bank.
John P. Covino Vice President and Vice President and Treasury Group Manager of Treasury
60 State Street Assistant Treasurer Servicing and Administration of Funds Distributor, Inc.,
Boston, MA 02109 since December 1998, and an officer of other investment
Age: 35 companies advised or administered by Dreyfus. From December
1995 to November 1998, he was employed by Fidelity Investments
where he held multiple positions in their
Institutional Brokerage Group. Prior to joining
Fidelity, he was employed by SunGard Brokerage Systems.
Mary A. Nelson Vice President and Vice President of Premier Mutual Fund Services, Inc.
200 Park Avenue Assistant Treasurer and Funds Distributor, Inc., and an officer of other
New York, NY 10166 investment companies advised or administered by Dreyfus.
Age: 34 From September 1989 to July 1994, she was an Assistant
Vice President and Client Manager for The Boston Company, Inc.
George A. Rio Vice President and Executive Vice President and Client Service Director of Funds
60 State Street Assistant Treasurer Distributor, Inc., and an officer of other investment companies
Boston, MA 02109 advised or administered by Dreyfus. From June 1995 to March 1998,
Age: 43 he was Senior Vice President and Senior Key Account Manager
for Putnam Mutual Funds. From May 1994 to June 1995, he was
Director of Business Development for First Data
Corporation. From September 1983 to May 1994, he was
Senior Vice President and Manager of Client
Services and Director of Internal Audit at The Boston
Company, Inc.
Joseph F. Tower, III Vice President and Senior Vice President, Treasurer, Chief Financial Officer
200 Park Avenue Assistant Treasurer and a Director of Premier Mutual Fund Services, Inc. and
New York, NY 10166 Funds Distributor, Inc., and an officer of other
Age: 36 investment companies advised or
administered by Dreyfus. From July
1988 to August 1994, he was employed by
The Boston Company, Inc. where he held
various management positions in the
Corporate Finance and Treasury areas.
Douglas C. Conroy Vice President and Assistant Vice President of Funds Distributor, Inc.,
200 Park Avenue Assistant Secretary and an officer of other investment companies
New York, NY 10166 advused or Dreyfus. From April 1993 to January
Age: 29 1995, he was a Senior Fund Accountant for
Investors Bank & Trust Company.
Karen Jacoppo-Wood Vice President and Vice President and Senior Counsel of Funds Distributor,
60 State Street Assistant Secretary Inc., since February 1997, and an officer of
Boston, MA 02109 other investment companies advised or
Age: 32 administered by Dreyfus. From June
1994 to January 1996, she was
Manager of SEC Registration at
Scudder, Stevens & Clark, Inc. Prior to
June 1994, she was a senior paralegal at
The Boston Company Advisors, Inc.
Christopher J. Kelley Vice President and Vice President and Senior Associate General
200 Park Avenue Assistant Secretary Counsel of Premier Mutuakl Fund Services, Inc.
New York, NY 10166 and Funds Distributor, Inc., and an officer of other
Age: 33 investment companies advised or administered by
Dreyfus. From April 1994 to July 1996, he was Assistant
Counsel at Forum Financial Group. From October 1992 to
March 1994, he was employed by Putnam Investments in legal
and compliance capacities.
Kathleen M. Morrissey Vice President and Vice President and Assistant Secretary of Funds Distributor,
200 Park Avenue Assistant Secretary Inc., and an officer of other investment companies advised or
New York, NY 10166 administered by Dreyfus. From July 1994 to November
Age: 26 1995, she was a Fund Accountant for Investors Bank &
Trust Company.
Elba Vasquez Vice President and Assistant Vice President of Funds Distributor, Inc., and an
200 Park Avenue Assistant Secretary officer of other investment companies advised or administered by
New York, NY 10166 Dreyfus. From March 1990 to May 1996, she was employed by
Age: 32 U.S. Trust Company of New York. As an officer of U.S.
Trust, she held various sales and marketing positions.
- ----------------
* Designated Preferred Stock Director
</TABLE>
The Fund has as audit committee comprised of its Board members who are
not "interested persons" (as defined in the Investment Company Act) of the Fund
(which currently is comprised of all of the Fund's Board members), the function
of which is to routinely review financial statements and other audit-related
matters as they arise throughout the year. The Fund has no standing nominating
or compensation committee or any committee performing similar functions. The
Fund typically pays the Directors an annual retainer and a per meeting fee and
reimburses them for their expenses. The Chairman of the Board receives an
additional 25% in annual retainer and per meeting fees. The Fund does not pay
any other remuneration to its Directors and officers and the Fund has no bonus,
pension, profit-sharing or retirement plan.
The aggregate amount of compensation paid to each Director by the Fund
for its fiscal year ended November 30, 1998, and the aggregate amount of
compensation paid to each such Director by all other funds in the Dreyfus Family
of Funds for which such Director is a Board member (the number of which is set
forth in parenthesis next to each Director's total compensation)* for the year
ended December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Compensation the Fund and Fund Complex
Name of Director and Fund from the Fund** Paid to Director
- ------------------------------------------------------ ----------------------- -----------------------------
<S> <C> <C>
Joseph S. DiMartino $7,500 $619,660 (187)
David W. Burke $6,000 $233,500 (62)
Hodding Carter III $4,500 $ 32,500 (7)
Ehud Houminer $6,000 $ 62,250 (21)
Richard C. Leone $5,500 $ 35,500 (7)
Hans C. Mautner $4,500 $ 29,500 (7)
Robin A. Pringle $5,500 $ 38,500 (7)
John E. Zuccotti $5,000 $ 32,500 (7)
</TABLE>
- -------------------
* Represents the number of separate portfolios comprising the investment
companies in the Fund Complex, including the Fund, for which the
Director is a Board member.
** Amount does not include reimbursed expenses for attending Board
meetings, which amounted to $1,098 for all Directors as a group.
OWNERSHIP OF FUND SHARES
As of September 1, 1999, the Board members and officers of the Fund as
a group owned less than 1% of the outstanding shares of the Fund.
As of September 1, 1999, no shareholders owned of record 5% or more of
the outstanding shares of the Fund.
PORTFOLIO TRADING
Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly-issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases and
sales usually are placed with those dealers from which it appears that the best
price or execution will be obtained. Usually no brokerage commissions, as such,
are paid by the Fund for such purchases and sales, although the price paid
usually includes an undisclosed compensation to the dealer acting as agent. The
prices paid to underwriters of newly-issued securities usually include a
concession paid by the issuer to the underwriter, and purchases of after-market
securities from dealers ordinarily are executed at a price between the bid and
asked price.
Transactions are allocated to various dealers by the Fund's portfolio
managers in their best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to enable Dreyfus to supplement its own research and analysis
with the views and information of other securities firms, and also may be
selected based upon their sales of shares of funds advised by Dreyfus or its
affiliates.
Research services furnished by brokers through which the Fund effects
securities transactions may be used by Dreyfus in advising other funds it
advises and, conversely, research services furnished to Dreyfus by brokers in
connection with other funds Dreyfus advises may be used by Dreyfus in advising
the Fund. Although it is not possible to place a dollar value on these services,
it is Dreyfus's opinion that the receipt and study of such services should not
reduce the expenses of its research department.
Generally, the Fund will not purchase securities for short-term
trading profits. However, the Fund may dispose of securities without regard to
the time they have been held when such actions, for defensive or other reasons,
appear advisable to Dreyfus. (The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes of
determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) The annual rate of the Fund's
total portfolio turnover for the years ended November 30, 1998, 1997 and 1996,
was 6.33%, 2.95% and 13.47%, respectively.
The Fund paid no brokerage commissions during the fiscal years ended
November 30, 1998, 1997, and 1996.
REPURCHASE OF SHARES
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).
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of its shares. Interest on any borrowing to finance share
repurchase transactions or the accumulation of cash by the Fund in anticipation
of share repurchases or tenders will reduce the Fund's net income. Any share
repurchase or tender offer that might be approved by the Board of Directors
would have to comply with the Securities and Exchange Act of 1934 and the
Investment Company Act and the rules and regulations thereunder.
It is the Board's announced policy, which may be changed by the Board,
not to authorize repurchases of shares of the Fund's common stock or a tender
offer if (1) such purchases would (a) result in the delisting of the Fund's
common stock from the New York Stock Exchange or (b) impair the Fund's status as
a regulated investment company under the Internal Revenue Code (which would make
the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends or distributions from the Fund); (2) the Fund would not be able to
liquidate portfolio securities in a manner which is orderly and consistent with
the Fund's investment objective and policies in order to repurchase shares; or
(3) there is, in the Board's judgment, any (a) legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) suspension of or limitation on prices for
trading securities generally on the NYSE, (c) declaration of a banking
moratorium by Federal or state authorities or any suspension of payment by banks
in the United States or New York State in which the Fund invests, which is
material to the Fund, (d) limitation imposed by Federal or state authorities on
the extension of credit by lending institutions materially adversely affecting
the Fund, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States which is
material to the Fund, or (f) other event or condition which would have a
material adverse effect on the Fund or its remaining shareholders if shares were
repurchased. The Board of Directors may modify these conditions in light of
circumstances existing at the time.
The repurchase by the Fund of its shares of common stock at prices
below net asset value will result in an increase in the net asset value of those
shares that remain outstanding. However, there can be no assurance that share
repurchases or tenders at or below net asset value will result in the shares of
common stock trading at a price equal to their net asset value. Nevertheless,
the fact that the shares of common stock may be the subject of repurchase or
tender offers at net asset value from time to time, or that the Fund may be
converted to an open-end investment company, may reduce any spread between
market price and net asset value that might otherwise exist.
Before deciding whether to take any action in response to a discount
from net asset value, the Board would consider all relevant factors, including
the extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders,
and market considerations. Based on these considerations, even if shares of the
common stock should trade at a discount, the Board of Directors may determine
that, in the interest of the Fund and its shareholders, no action should be
taken.
TAXATION
The Fund has qualified and intends to continue to so qualify as a
registered investment company (RIC) under the Internal Revenue Code.
Accordingly, the Fund intends to satisfy certain requirements relating to
sources of its income and diversification of its assets and to distribute
substantially all of its net investment income (including tax-exempt income) and
net capital gains in accordance with the timing requirements imposed by the
Internal Revenue Code, so as to maintain its RIC status. By doing so, the Fund
will avoid any federal income tax on any income and gains it distributes to its
shareholders. If the Fund failed to qualify as a RIC for any taxable year, it
would be taxed on the full amount of its taxable income for that year without
being able to deduct the distributions it makes to its shareholders and the
shareholders would treat all distributions, including those that otherwise would
qualify as "exempt-interest dividends" (described below), as dividends (that is,
ordinary income) to the extent of the Fund's earnings and profits.
To avoid incurring a federal excise tax obligation, the Fund must
distribute (or be deemed to have distributed) each calendar year at least an
amount equal to the sum of (i) 98% of its ordinary income (not including
tax-exempt income) for that year, (ii) 98% of its capital gain net income (which
is the excess of its realized capital gains over its realized capital losses),
generally computed on the basis of the one-year period ending on October 31 of
that year, after reduction by any available capital loss carryforwards and (iii)
100% of certain other amounts.
The Fund's investment in zero coupon and certain other securities will
cause it to realize income prior to the receipt of cash payments with respect to
these securities. The Fund may be required to liquidate securities that it might
otherwise have continued to hold in order to generate cash to enable it to
distribute that income to Fund shareholders and thereby remain qualified for
treatment as a RIC and avoid imposition of the income and excise taxes described
above.
Distributions by the Fund of net tax-exempt interest income that are
properly designated as "exempt-interest dividends" may be treated by
shareholders as interest excludable from gross income under Section 103(a) of
the Internal Revenue Code. In order for the Fund to be able to pay
exempt-interest dividends, at least 50% of the Fund's total assets at the close
of each quarter of its taxable year must consist of obligations the interest on
which is exempt from regular federal income tax under Internal Revenue Code
Section 103(a). The portion of exempt-interest dividends attributable to
interest on certain municipal obligations is treated as a tax preference item
for purposes of the 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 regular
federal income tax. Shareholders are required to report exempt-interest
dividends on their federal income tax returns.
The Fund will designate distributions made to holders of shares of
common stock and to holders of shares of preferred stock, including the shares
of Preferred Stock, in accordance with each class's proportionate share of each
item of Fund income (such as tax-exempt interest, net capital gains and other
taxable income).
A portion of exempt-interest dividends paid by the Fund will not be
tax-exempt to any shareholder who is a "substantial user" of the facilities
financed by tax-exempt obligations held by the Fund or "related persons" of such
substantial users.
Any recognized gain or other income attributable to market discount on
long-term tax-exempt municipal obligations (i.e., obligations with a term of
more than one year) other than, in general, at their original issue, is taxable
as ordinary income. Such an obligation generally is treated as acquired at a
market discount if purchased after its original issue at a price less than (i)
the stated principal amount payable at maturity, in the case of an obligation
that does not have original issue discount, or (ii) in the case of an obligation
that does have original issue discount, the sum of the issue price and any
original issue discount that accrued before the obligation was purchased,
subject to a de minimis exclusion.
Some of the Fund's investment practices are subject to special
provisions of the Internal Revenue Code that, among other things, may defer the
use of certain losses of the Fund and affect the holding period of the
securities held by the Fund and the character of the gains or losses realized by
the Fund. These provisions also may 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.
On a sale or exchange of shares of Preferred Stock, the holder will
recognize taxable gain or loss equal to the difference between the holder's
adjusted basis for the shares of Preferred Stock and the amount realized. Any
such gain or loss will be treated as capital gain or loss if the shares of
Preferred Stock are capital assets in the holder's hands and as long-term
capital gain or loss if the shares of Preferred Stock are held for more than one
year. Any loss realized on the sale or exchange of shares of Preferred Stock
held by a shareholder for six months or less will be disallowed to the extent
the shareholder has received exempt-interest dividends with respect to those
shares of Preferred Stock, and any such loss that exceeds the disallowed amount
will be treated as a long-term capital loss to the extent of any distribution of
net capital gain with respect to those shares of Preferred Stock. In addition, a
loss realized on a sale of shares of Preferred Stock will be disallowed to the
extent the shareholder acquires other shares of Preferred Stock within the
period beginning 30 days before, and ending 30 days after, the sale.
Taxable dividends (including capital gain dividends) payable by the
Fund to individuals and certain other non-corporate shareholders who have not
provided the Fund with their correct taxpayer identification number ("TIN") and
certain certifications required by the Internal Revenue Service ("IRS"), as well
as shareholders with respect to whom the Fund has received certain notifications
from the IRS are subject to "backup" withholding of federal income tax at a rate
of 31%. An individual's TIN is generally his or her social security number.
Taxable distributions to individuals and certain other non-corporate
shareholders, including those who have not provided their correct taxpayer
identification number and other required certifications, may be subject to
"backup" federal income tax withholding at the rate of 31%.
Investments in shares of Preferred Stock are not appropriate for
non-U.S. investors or as a Retirement Plan investment.
The exemption of interest income for federal income tax purposes does
not necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Shareholders of the Fund may be exempt from
state and local taxes on distributions of tax-exempt interest income derived
from obligations of the state and/or municipalities of the state in which they
are resident, but taxable generally on income derived from obligations of other
jurisdictions. The Fund will report annually to shareholders the percentages
representing the proportionate ratio of its net tax-exempt income earned in each
state.
The foregoing discussion does not address the special tax rules
applicable to certain classes of investors, such as non-U.S. investors,
insurance companies and financial institutions. Shareholders should consult
their own tax advisers with respect to special tax rules that may apply to their
particular situations, as well as the state or local tax consequences of
investing in the Fund and any proposed tax law changes.
FINANCIAL STATEMENTS
INDEPENDENT AUDITORS. Ernst & Young LLP are the Fund's independent
auditors providing audit and tax return preparation services and assistance and
consultation in connection with the review of various SEC filings. The address
of Ernst & Young LLP is 787 Seventh Avenue, New York, New York 10019. The
financial statements for the year ended November 30, 1998 incorporated by
reference in this SAI have been so incorporated and the financial highlights
included in the Prospectus have been so included, in reliance upon the report of
Ernst & Young LLP given on their authority as experts in auditing and
accounting.
INCORPORATION BY REFERENCE. The Fund's Annual Report for the fiscal
year ended November 30, 1998 and Semi-Annual Report for the six-month period
ended May 31, 1999 (the "Reports"), which either accompany this SAI or have
previously been provided to the person to whom this SAI is being sent, are
incorporated herein by reference with respect to all information. The Fund will
furnish, without charge, a copy of the Reports upon written request to Dreyfus
Strategic Municipal Bond Fund, Inc., 200 Park Avenue, New York, New York 10166;
or upon phone request by calling (800) 334-6899.
<PAGE>
APPENDIX A
RATINGS OF MUNICIPAL OBLIGATIONS
Description of certain S&P, Moody's and Fitch ratings:
S&P
MUNICIPAL ISSUE RATINGS DEFINITIONS
An S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
Issue credit ratings can be either long term or short term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium- term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
o Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;
o Nature of and provisions of the obligation; and
o Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA
An obligation rated 'AAA' has the highest rating assigned by S&P. The obligor's
capacity to meet its financial commitment on the obligation is extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB, B, CCC, CC, AND C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions, which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated
'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C
The 'C' rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.
D
An obligation rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
PLUS (+) OR MINUS (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
c
The 'c' subscript is used to provide additional information to investors that
the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment-grade level and/or
the issuer's bonds are deemed taxable.
p
The letter 'p' indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
*
Continuance of the ratings is contingent upon S&P receipt of an executed copy of
the escrow agreement or closing documentation confirming investments and cash
flows.
r
The 'r' highlights derivative, hybrid, and certain other obligations that S&P
believes may experience high volatility or high variability in expected returns
as a result of noncredit risks. Examples of such obligations are securities with
principal or interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only mortgage
securities. The absence of an 'r' symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in total return.
N.R.
Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of the
Currency, bonds rated in the top four categories ('AAA', 'AA', 'A', 'BBB',
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
SHORT-TERM ISSUE CREDIT RATINGS
NOTES
An S&P note ratings reflects the liquidity factors and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
o Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
o Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus (+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
ISSUER CREDIT RATING DEFINITIONS
An S&P Issuer Credit Rating is a current opinion of an obligor's overall
financial capacity (its creditworthiness) to pay its financial obligations. This
opinion focuses on the obligor's capacity and willingness to meet its financial
commitments as they come due It does not apply to any specific financial
obligation, as it does not take into account the nature of and provisions of the
obligation, its standing in bankruptcy or liquidation, statutory preferences, or
the legality and enforceability of the obligation. In addition, it does not take
into account the creditworthiness of the guarantors, insurers, or other forms of
credit enhancement on the obligation. The Issuer Credit Rating is not a
recommendation to purchase, sell or hold a financial obligation issued by an
obligor, as it does not comment on market price or suitability for a particular
investor.
CREDITWATCH AND RATING OUTLOOKS
An S&P rating evaluates default risk over the life of a debt issue,
incorporating an assessment of all future events to the extent they are known or
considered likely. But S&P also recognizes the potential for future performance
to differ from initial expectations. Rating outlooks and CreditWatch listings
address this possibility by focusing on the scenarios that could result in a
rating change.
CreditWatch highlights potential changes in ratings of bonds, short-term, and
other fixed-income securities. Issues appear on CreditWatch when an event or
deviation from an expected trend has occurred or is expected and additional
information is necessary to take a rating action. Such rating reviews normally
are completed within 90 days, unless the outcome of a specific event is pending.
A listing does not mean a rating change is inevitable. However, in some cases,
it is certain that a rating change will occur and only the magnitude of the
change is unclear.
Wherever possible, a range of alternative ratings that could result is shown.
CreditWatch is not intended to include all issues under review, and rating
changes will occur without the issue appearing on CreditWatch. An issuer cannot
automatically appeal a CreditWatch listing, but analysts are sensitive to issuer
concerns and the fairness of the process.
A rating outlook is assigned to all long-term debt issues--except for structured
finance--and also assesses potential for change. Outlooks have a longer time
frame than CreditWatch listings and incorporate trends or risks with less
certain implications for credit quality. An outlook is not necessarily a
precursor of a rating change or a CreditWatch listing.
CreditWatch designations and outlooks may be "positive," which indicates a
rating may be raised, or "negative," which indicates a rating may be lowered.
"Developing" is used for those unusual situations in which future events are so
unclear that the rating potentially may be raised or lowered. "Stable" is the
outlook assigned when ratings are not likely to be changed, but should not be
confused with expected stability of the company's financial performance.
COMMERCIAL PAPER
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A' for the
highest-quality obligations to 'D' for the lowest. These categories are as
follows:
A-1
This designation indicates that the degree of safety regarding timely payment is
strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2
Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3
Issues carrying this designation have an adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B
Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C
This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D
Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments of principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
VARIABLE-RATE DEMAND BONDS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and interest
as due, and the second rating addresses only the demand feature. The long-term
debt rating symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example, 'AAA/A-1+').
With short-term demand debt, note rating symbols are used with the commercial
paper rating symbols (for example, 'SP-1+/A-1+').
Moody's
MUNICIPAL BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca present obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 to show relative
standing within the major rating categories, except in the Aaa category and in
the categories below B. The modifier 1 indicates a ranking for the security in
the higher end of a rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates a ranking in the lower end of a rating
category.
MUNICIPAL NOTE RATINGS
Moody's ratings for state municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity of the borrower and short-term cyclical elements are critical in
short-term ratings, while other factors of major importance in bond risk,
long-term secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand
feature. Such ratings will be designated as VMIG or, if the demand feature is
not rated, as NR. Short-term ratings on issues with demand features are
differentiated by the use of the VMIG symbol to reflect such characteristics as
payment upon periodic demand rather than fixed maturity dates and payment
relying on external liquidity. Additionally, investors should be alert to the
fact that the source of payment may be limited to the external liquidity with no
or limited legal recourse to the issuer in the event the demand is not met.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1
This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.
COMMERCIAL PAPER RATING
The rating Prime-1 (P-1) is the highest commercial paper rating
assigned by Moody's. Issuers of P-1 paper must have a superior capacity for
repayment of short-term promissory obligations, and ordinarily will be evidenced
by leading market positions in well established industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a wide range of financial markets and assured sources of alternative
liquidity.
Issuers (or related supporting institutions) rated Prime-2 (P-2) have
a strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
MUNICIPAL BOND RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
AAA
Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA
Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A
Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB
Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB
Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B
Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the obligor's
limited margin of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC
Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC
Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C
Bonds rated C are in imminent default in payment of interest or
principal.
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and minus
signs, however, are not used in the AAA category covering 12-36 months.
SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating
analysis, the short-term rating places greater emphasis than bond ratings on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
F-1+
EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1
VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2
GOOD CREDIT QUALITY. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
<PAGE>
APPENDIX B
TAX EQUIVALENT YIELD TABLE
The table below gives the approximate yield a taxable security must
earn at various income brackets to produce after-tax yields equivalent to those
of tax-exempt bonds yielding from 4% to 6% under the regular federal income tax
law and tax rates applicable to individuals for 1999.
<TABLE>
<CAPTION>
Marginal A Federal Tax-Exempt Yield of:
Taxable Income* Income Tax 4.00% 4.50% 5.00% 5.50% 6.00%
SINGLE RETURN Joint Return Bracket Is Equitable to a Fully Taxable Yield of:
- ------------- ------------ ----------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to $25,750 Up to $43,050 15.00% 4.71% 5.29% 5.88% 6.47% 7.06%
$25,751 - $62,450 $43,051 - $104,050 28.00 5.56 6.25 6.94 7.64 8.33
$62,451 - $130,250 $104,051 - $158,550 31.00 5.80 6.52 7.25 7.97 8.70
$130,251 - $283,150 $158,551 - $283,150 36.00 6.25 7.03 7.81 8.59 9.38
Over $283,150 Over $283,150 39.60 6.62 7.45 8.28 9.11 9.93
</TABLE>
- ---------------
* Net amounts subject to federal personal income tax after deductions
and exemptions.
The above indicated federal income tax brackets do not take into
account the effect of a reduction in the deductibility of itemized deductions
for individual taxpayers with adjusted gross income in excess of $126,600. The
tax brackets also do not show the effects of phaseout of personal exemptions for
single filers with adjusted gross income in excess of $126,600 and joint filers
with adjusted gross income in excess of $189,950. The effective tax brackets and
equivalent taxable yields of those taxpayers will be higher than those indicated
above.
Yields shown are for illustration purposes only and are not meant to
represent the Fund's actual yield. No assurance can be given that the Fund will
achieve any specific tax-exempt yield. While it is expected that the Fund will
invest principally in obligations the interest from which is exempt from federal
income tax, other income received by the Fund may be taxable. The table does not
take into account state or local taxes, if any, payable on Fund distributions.
The interest earned on certain "private activity bonds," while exempt from
federal income tax, is treated as a tax preference item which could subject the
recipient to the federal alternative minimum tax ("AMT"). The illustrations
assume that the AMT is not applicable and do not take into account any tax
credits that may be available.
The information set forth above is as of the date of this Statement of
Additional Information. Subsequent tax law changes could result in prospective
or retroactive changes in the tax brackets, tax rates, and tax-equivalent yields
set forth above. Investors should consult their tax advisers for additional
information.
<PAGE>
APPENDIX C
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the
procedures expected to be followed in connection with the settlement of each
Auction and will be incorporated by reference in the Auction Agent Agreement and
each Broker-Dealer Agreement. Nothing contained in this Appendix C constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by the
party. Capitalized terms used herein shall have the respective meanings
specified in the glossary of the Fund's Prospectus or Appendix D hereto, as the
case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone
or through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding Dividend
Period;
(ii) whether Sufficient Clearing Bids existed for the
determination of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted a Bid or a Sell Order on behalf of a Beneficial Owner, the number of
shares, if any, of shares of preferred stock to be sold by such Beneficial
Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Beneficial Owner, the number of shares, if any,
of shares of preferred stock to be purchased by such Potential Beneficial Owner;
(v) if the aggregate number of shares of preferred stock to be
sold by all Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid
or a Sell Order exceeds the aggregate number of shares of preferred stock to be
purchased by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Buyer's Broker-Dealers (and
the name of the Agent Member, if any, of each such Buyer's Broker- Dealer)
acting for one or more purchasers of such excess number of shares of preferred
stock and the number of such shares to be purchased from one or more Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more Potential
Beneficial Owners on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of preferred stock to be
purchased by all Potential Beneficial Owners on whose behalf such Broker-Dealer
submitted a Bid exceeds the aggregate number of shares of preferred stock to be
sold by all Beneficial Owners on whose behalf such Broker-Dealer submitted a Bid
or a Sell Order, the name or names of one or more Seller's Broker-Dealers (and
the name of the Agent Member, if any, of each such Seller's Broker- Dealer)
acting for one or more sellers of such excess number of shares of preferred
stock and the number of such shares to be sold to one or more Potential
Beneficial Owners on whose behalf such Broker-Dealer acted by one or more
Beneficial Owners on whose behalf each of such Seller's Broker-Dealers acted;
and
(vii) the Auction Date of the next succeeding Auction with
respect to the shares of preferred stock.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, instruct each Potential Beneficial Owner on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Beneficial Owner's Agent Member to pay to such
Broker-Dealer (or its Agent Member) through the Securities Depository the amount
necessary to purchase the number of shares of preferred stock to be purchased
pursuant to such Bid against receipt of such shares and advise such Potential
Beneficial Owner of the Applicable Rate for the next succeeding Dividend Period;
(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Beneficial Owner on whose behalf such Broker-Dealer
submitted a Sell Order that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Beneficial Owner's Agent Member
to deliver to such Broker-Dealer (or its Agent Member) through the Securities
Depository the number of shares of preferred stock to be sold pursuant to such
Order against payment therefor and advise any such Beneficial Owner that will
continue to hold shares of preferred stock of the Applicable Rate for the next
succeeding Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Hold Order of the Applicable Rate for the next
succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted an Order of the Auction Date for the next succeeding
Auction; and
(v) advise each Potential Beneficial Owner on whose behalf such
Broker- Dealer submitted a Bid that was accepted, in whole or in part, of the
Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker- Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of preferred stock
received by it pursuant to (b)(ii) above among the Potential Beneficial Owners,
if any, on whose behalf such Broker-Dealer submitted Bids, the Beneficial
Owners, if any, on whose behalf such Broker-Dealer submitted Bids that were
accepted or Sell Orders, and any Broker-Dealer or Broker-Dealers identified to
it by the Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner shall
instruct its Agent Member as provided in (b)(i) or (ii) above, as the case may
be;
(ii) each Seller's Broker-Dealer which is not an Agent Member of
the Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to the Agent Member of the Beneficial Owner delivering
shares to such Broker- Dealer pursuant to (b)(ii) above the amount necessary to
purchase such shares against receipt of such shares, and (B) deliver such shares
through the Securities Depository to a Buyer's Broker- Dealer (or its Agent
Member) identified to such Seller's Broker-Dealer pursuant to (a)(v) above
against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent Member of
the Securities Depository shall instruct its Agent Member to (A) pay through the
Securities Depository to a Seller's Broker-Dealer (or its Agent Member)
identified pursuant to (a)(vi) above the amount necessary to purchase the shares
to be purchased pursuant to (b)(i) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent Member of the
purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above shall
instruct the Securities Depository to execute the transactions described in
(b)(i) or (ii) above, and the Securities Depository shall execute such
transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions described in
(d)(ii) above, and the Securities Depository shall execute such transactions;
and
(iii) each Buyer's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions described in
(d)(iii) above, and the Securities Depository shall execute such transactions.
(f) If a Beneficial Owner selling shares of preferred stock in an
Auction fails to deliver such shares (by authorized book-entry), a Broker-Dealer
may deliver to the Potential Beneficial Owner on behalf of which it submitted a
Bid that was accepted a number of whole shares of preferred stock that is less
than the number of shares that otherwise was to be purchased by such Potential
Beneficial Owner. In such event, the number of shares of preferred stock to be
so delivered shall be determined solely by such Broker-Dealer. Delivery of such
lesser number of shares shall constitute good delivery. Notwithstanding the
foregoing terms of this paragraph (f), any delivery or non-delivery of shares
which shall represent any departure from the results of an Auction, as
determined by the Auction Agent, shall be of no effect unless and until the
Auction Agent shall have been notified of such delivery or non-delivery in
accordance with the provisions of the Auction Agent Agreement and the
Broker-Dealer Agreements.
<PAGE>
APPENDIX D
AUCTION PROCEDURES
The following procedures will be set forth in Article FIRST, paragraph
3 of the Fund's Articles Supplementary relating to the shares of Preferred Stock
and will be incorporated by reference in the Auction Agent Agreement and each
Broker-Dealer Agreement. The terms not defined below are defined in the
Prospectus, except that the term "Corporation" means the Fund. Nothing contained
in this Appendix D constitutes a representation by the Fund that in each Auction
each party referred to herein will actually perform the procedures described
herein to be performed by such party.
PARAGRAPH 3(a). CERTAIN DEFINITIONS.
As used in this Paragraph 3, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "Auction Date" shall mean the first Business Day preceding the
first day of a Dividend Period.
(ii) "Available Preferred Stock" shall have the meaning specified in
Paragraph 3(d)(i) below.
(iii) "Bid" shall have the meaning specified in Paragraph 3(b)(i)
below.
(iv) "Bidder" shall have the meaning specified in Paragraph 3(b)(i)
below.
(v) "Hold Order" shall have the meaning specified in Paragraph 3(b)(i)
below.
(vi) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. 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 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 shares of Preferred Stock as follows:
<TABLE>
<CAPTION>
APPLICABLE PERCENTAGE OF APPLICABLE PERCENTAGE OF
S&P CREDIT RATINGS REFERENCE RATE--NO NOTIFICATION REFERENCE RATE--NOTIFICATION
- ------------------- --------------------------------- -------------------------------
<S> <C> <C>
AA- or Higher 110% 150%
A- to A+ 125% 160%
BBB- to BBB+ 150% 250%
Below BBB- 200% 275%
</TABLE>
<PAGE>
The Corporation shall take all reasonable action necessary to enable
S&P to provide a rating for the shares of Preferred Stock. If S&P shall not make
such a rating available, PaineWebber Incorporated or its affiliates and
successors, after consultation with the Corporation, shall select a nationally
recognized statistical rating organization to act as a Substitute Rating Agency.
(vii) "Order" shall have the meaning specified in Paragraph 3(b)(i)
below.
(viii) "Preferred Stock" shall mean the shares of preferred stock
being auctioned pursuant to Paragraph 3.
(ix) "Sell Order" shall have the meaning specified in Paragraph
3(b)(i) below.
(x) "Submission Deadline" shall mean 1:00 p.m., New York City time, on
any Auction Date or such other time on any Auction Date as may be specified by
the Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in Paragraph
3(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning specified in
Paragraph 3(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in Paragraph
3(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning specified in
Paragraph 3(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning specified in
Paragraph 3(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in Paragraph
3(d)(i) below.
PARAGRAPH 3(b). ORDERS BY BENEFICIAL OWNERS, POTENTIAL BENEFICIAL OWNERS,
EXISTING HOLDERS AND POTENTIAL HOLDERS.
(i) Unless otherwise permitted by the Corporation, Beneficial Owners
and Potential Beneficial Owners may only participate in Auctions 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. A Broker-Dealer also may hold shares of Preferred
Stock in its own account as a Beneficial Owner. A Broker-Dealer may thus 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. On or prior to the Submission
Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of outstanding shares of Preferred Stock, if
any, held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for the next succeeding
Dividend Period;
(2) the number of outstanding shares of Preferred Stock, if
any, held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by such
Beneficial Owner; and/or
(3) the number of outstanding shares of Preferred Stock, if
any, held by such Beneficial Owner which such Beneficial Owner offers to sell
without regard to the Applicable Rate for the next succeeding Dividend Period;
and
(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
persons that are not Beneficial Owners, on such list to determine the number of
outstanding shares of Preferred Stock, if any, which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable Rate for the
next succeeding Dividend Period shall not be less than the rate per annum
specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 3(b)(i) is hereinafter
referred to as an "Order," and each Beneficial Owner and each 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"; an Order
containing the information referred to in clause (A)(1) of this Paragraph
3(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing the
information referred to in clause (A)(2) or (B) of this Paragraph 3(b)(i) is
hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this Paragraph 3(b)(i) is hereinafter referred
to as a "Sell Order." Inasmuch 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.
(ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:
(1) the number of outstanding shares of Preferred Stock
specified in such Bid if the Applicable Rate determined on such Auction Date
shall be less than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of
Preferred Stock to be determined as set forth in Paragraph 3(e)(i)(D) if the
Applicable Rate determined on such Auction Date shall be equal to the rate per
annum specified therein; or
(3) a lesser number of outstanding shares of Preferred Stock
to be determined as set forth in Paragraph 3(e)(ii)(C) if such specified rate
per annum shall be higher than the Maximum Applicable Rate and Sufficient
Clearing Bids do not exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of Preferred Stock
specified in such Sell Order; or
(2) such number or a lesser number of outstanding shares of
Preferred Stock to be determined as set forth in Paragraph 3(e)(ii)(C) if
Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an irrevocable
offer to purchase:
(1) the number of outstanding shares of Preferred Stock
specified in such Bid if the Applicable Rate determined on such Auction Date
shall be higher than the rate per annum specified in such Bid; or
(2) such number or a lesser number of outstanding shares of
Preferred Stock to be determined as set forth in Paragraph 3(e)(i)(E) if the
Applicable Rate determined on such Auction Date shall be equal to the rate per
annum specified therein.
PARAGRAPH 3(c). SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Corporation) as an
Existing Holder in respect of shares subject to Orders submitted or deemed
submitted to it by Beneficial Owners and as a Potential Holder in respect of
shares subject to Orders submitted to it by Potential Beneficial Owners, and
specifying with respect to each Order:
(A) the name of the Bidder placing such Order (which shall be the
Broker- Dealer unless otherwise permitted by the Corporation);
(B) the aggregate number of outstanding shares of Preferred Stock
that are the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder:
(1) the number of outstanding shares of Preferred Stock, if
any, subject to any Hold Order placed by such Existing Holder;
(2) the number of outstanding shares of Preferred Stock, if
any, subject to any Bid placed by such Existing Holder and the rate per annum
specified in such Bid; and
(3) the number of outstanding shares of Preferred Stock, if
any, subject to any Sell Order placed by such Existing Holder; and
(D) to the extent such Bidder is a Potential Holder, the rate per
annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall round
such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of
Preferred Stock held by an Existing Holder are not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent shall deem a Hold
Order (in the case of an Auction relating to a Dividend Period which is not a
Special Dividend Period) and a Sell Order (in the case of an Auction relating to
a Special Dividend Period) to have been submitted on behalf of such Existing
Holder covering the number of outstanding shares of Preferred Stock held by such
Existing Holder and not subject to Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of outstanding shares of Preferred Stock held
by such Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing Holder
shall 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 on behalf of 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 shall be
reduced pro rata so that such Hold Orders, in the aggregate, cover exactly the
number of outstanding shares of Preferred Stock held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of 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 shares of Preferred Stock subject to
any Hold Order referred to in Paragraph 3(c)(iv)(A) above (and if more than one
Bid submitted on behalf of 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 Paragraph 3(c)(iv)(A) above
and of the foregoing portion of this Paragraph 3(c)(iv)(B) to any Bid or Bids
specifying a lower rate or rates per annum, the number of shares subject to each
of such Bids shall be reduced pro rata so that such Bids, in the aggregate,
cover exactly such remaining number of shares); and the number of shares, if
any, subject to Bids not valid under this Paragraph 3(c)(iv)(B) shall be treated
as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall 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 number of shares of Preferred Stock subject to Hold
Orders referred to in Paragraph 3(c)(iv)(A) and Bids referred to in Paragraph
3(c)(iv)(B); provided that if more than one Sell Order is submitted on behalf of
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 shall be reduced pro rata so that such Sell
Orders, in the aggregate, cover exactly the number of shares of Preferred Stock
equal to such excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum and
number of shares of Preferred Stock therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
PARAGRAPH 3(d). DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID
RATE AND APPLICABLE RATE.
(i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of
Preferred Stock over the number of outstanding shares of Preferred Stock that
are the subject of Submitted Hold Orders (such excess being hereinafter referred
to as the "Available Preferred Stock");
(B) from the Submitted Orders whether the number of outstanding
shares of Preferred Stock that are the subject of Submitted Bids by Potential
Holders specifying one or more rates per annum equal to or lower than the
Maximum Applicable Rate exceeds or is equal to the sum of:
(1) the number of outstanding shares of Preferred Stock that
are the subject of Submitted Bids by Existing Holders specifying one or more
rates per annum higher than the Maximum Applicable Rate; and
(2) the number of outstanding shares of Preferred Stock that
are subject to Submitted Sell Orders (if such excess or such equality exists
(other than because the number of outstanding shares of Preferred Stock in
clauses (1) and (2) above are each zero because all of the outstanding shares of
Preferred Stock are the subject of Submitted Hold Orders), such Submitted Bids
by Potential Holders hereinafter being referred to collectively as "Sufficient
Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:
(1) each Submitted Bid from Existing Holders specifying the
Winning Bid Rate and all other submitted Bids from Existing Holders specifying
lower rates per annum were rejected, thus entitling such Existing Holders to
continue to hold the shares of Preferred Stock that are the subject of such
Submitted Bids; and
(2) each Submitted Bid from Potential Holders specifying the
Winning Bid Rate and all other Submitted Bids from Potential Holders specifying
lower rates per annum were accepted, thus entitling the Potential Holders to
purchase the shares of Preferred Stock that are the subject of such Submitted
Bids, would result in the number of shares subject to all Submitted Bids
specifying the Winning Bid Rate or a lower rate per annum being at least equal
to the Available Preferred Stock.
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 3(d)(i), the Auction Agent shall advise the Corporation of
the Maximum Applicable Rate and, based on such determinations, the Applicable
Rate for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable Rate
for the next succeeding Dividend Period shall be equal to the Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than because
all of the outstanding shares of Preferred Stock are the subject of Submitted
Hold Orders), that the Applicable Rate for the next succeeding Dividend Period
shall be equal to the Maximum Applicable Rate; or
(C) if all of the outstanding shares of Preferred Stock are the
subject of Submitted Hold Orders, that the Dividend Period next succeeding the
Auction automatically shall be the same length as the immediately preceding
Dividend Period, and the Applicable Rate for the next succeeding Dividend Period
shall be equal to 40% of the Reference Rate (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 shares of Preferred Stock) on the date of
the Auction.
PARAGRAPH 3(e). ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND
SUBMITTED SELL ORDERS AND ALLOCATION OF SHARES.
Based on the determinations made pursuant to Paragraph 3(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of Paragraph 3(e)(iii) and Paragraph 3(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is higher than the Winning Bid Rate shall be accepted, thus
requiring each such Existing Holder to sell the outstanding shares of Preferred
Stock that are the subject of such Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holder specifying
any rate per annum that is lower than the Winning Bid Rate shall be rejected,
thus entitling each such Existing Holder to continue to hold the outstanding
shares of Preferred Stock that are the subject of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders specifying
any rate per annum that is lower than the Winning Bid Rate shall be accepted;
(D) the Submitted Bid of each of the Existing Holders specifying
a rate per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the outstanding shares
of Preferred Stock that are the subject of such Submitted Bid, unless the number
of outstanding shares of shares of Preferred Stock subject to all such Submitted
Bids shall be greater than the number of outstanding shares of Preferred Stock
("Remaining Shares") equal to the excess of the Available Preferred Stock over
the number of outstanding shares of Preferred Stock subject to Submitted Bids
described in Paragraph 3(e)(i)(B) and Paragraph 3(e)(i)(C), in which event the
Submitted Bids of each such Existing Holder shall be accepted, and each such
Existing Holder shall be required to sell outstanding shares of Preferred Stock,
but only in an amount equal to the difference between (1) the number of
outstanding shares of Preferred Stock then held by such Existing Holder subject
to such Submitted Bid and (2) the number of shares of Preferred Stock obtained
by multiplying (x) the number of Remaining Shares by (y) a fraction the
numerator of which shall be the number of outstanding shares of Preferred Stock
held by such Existing Holder subject to such Submitted Bid and the denominator
of which shall be the sum of the numbers of outstanding shares of Preferred
Stock subject to such Submitted Bids made by all such Existing Holders that
specified a rate per annum equal to the Winning Bid Rate; and
(E) the Submitted Bid of each of the Potential Holders specifying
a rate per annum that is equal to the Winning Bid Rate shall be accepted, but
only in an amount equal to the number of outstanding shares of Preferred Stock
obtained by multiplying (x) the difference between the Available Preferred Stock
and the number of outstanding shares of Preferred Stock subject to Submitted
Bids described in Paragraph 3(e)(i)(B), Paragraph 3(e)(i)(C) and Paragraph
3(e)(i)(D) by (y) a fraction the numerator of which shall be the number of
outstanding shares of Preferred Stock subject to such Submitted Bid and the
denominator of which shall be the sum of the number of outstanding shares of
Preferred Stock subject to such Submitted Bids made by all such Potential
Holders that specified rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the outstanding shares of Preferred Stock are subject to
Submitted Hold Orders), subject to the provisions of Paragraph 3(e)(iii),
Submitted Orders shall be accepted or rejected as follows in the following order
of priority and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any rate
per annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
outstanding shares of Preferred Stock that are the subject of such Submitted
Bid;
(B) the Submitted Bid of each Potential Holder specifying any
rate per annum that is equal to or lower than the Maximum Applicable Rate shall
be accepted, thus requiring such Potential Holder to purchase the outstanding
shares of Preferred Stock that are the subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying any
rate per annum that is higher than the Maximum Applicable Rate shall be accepted
and the Submitted Sell Orders of each Existing Holder shall be accepted, in both
cases only in an amount equal to the difference between (1) the number of
outstanding shares of Preferred Stock then held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and (2) the number of shares of
Preferred Stock obtained by multiplying (x) the difference between the Available
Preferred Stock and the aggregate number of outstanding shares of Preferred
Stock subject to Submitted Bids described in Paragraph 3(e)(ii)(A) and Paragraph
3(e)(ii)(B) by (y) a fraction the numerator of which shall be the number of
outstanding shares of Preferred Stock held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and the denominator of which shall be
the number of outstanding shares of Preferred Stock subject to all such
Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph 3(e)(i)
or Paragraph 3(e)(ii), any Existing Holder would be entitled or required to
sell, or any Potential Holder would be entitled or required to purchase, a
fraction of a share of Preferred Stock on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine, round up or
down the number of shares of Preferred Stock to be purchased or sold by any
Existing Holder or Potential Holder on such Auction Date so that each
outstanding share of Preferred Stock purchased or sold by each Existing Holder
or Potential Holder on such Auction Date shall be a whole share of Preferred
Stock.
(iv) If, as a result of the procedures described in Paragraph 3(e)(i),
any Potential Holder would be entitled or required to purchase less than a whole
share of Preferred Stock on any Auction Date, the Auction Agent, in such manner
as in its sole discretion it shall determine, shall allocate shares of Preferred
Stock for purchase among Potential Holders so that only whole shares of
Preferred Stock are purchased on such Auction Date by any Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing any shares of Preferred Stock on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of the
outstanding shares of Preferred Stock to be purchased and the aggregate number
of outstanding shares of Preferred Stock to be sold by such Potential Holders
and Existing Holders and, to the extent that such aggregate number of
outstanding shares to be purchased and such aggregate number of outstanding
shares to be sold differ, the Auction Agent shall determine to which other
Broker-Dealer or Broker-Dealers acting for one or more purchasers such
Broker-Dealer shall deliver, or from which other Broker-Dealer or Broker-Dealers
acting for one or more sellers such Broker-Dealer shall receive, as the case may
be, outstanding shares of Preferred Stock.
<PAGE>
PARAGRAPH 3(f). MISCELLANEOUS.
The Corporation may interpret the provisions of this Paragraph 3 to
resolve any inconsistency or ambiguity, remedy any formal defect or make any
other change or modification that does not substantially adversely affect the
rights of Beneficial Owners of shares of Preferred Stock. A Beneficial Owner or
an Existing Holder (A) may sell, transfer or otherwise dispose of shares of
Preferred Stock only pursuant to a Bid or Sell Order in accordance with the
procedures described in this Paragraph 3 or to or through a Broker-Dealer,
provided that in the case of all transfers other than pursuant to Auctions such
Beneficial Owner or Existing Holder, its Broker- Dealer, if applicable, or its
Agent Member advises the Auction Agent of such transfer and (B) except as
otherwise required by law, shall have the ownership of the shares of Preferred
Stock held by it maintained in book entry form by the Securities Depository in
the account of its Agent Member, which in turn will maintain records of such
Beneficial Owner's beneficial ownership. Neither the Corporation nor any
Affiliate shall submit an Order in any Auction. Any Beneficial Owner that is an
Affiliate shall not sell, transfer or otherwise dispose of shares of Preferred
Stock to any person other than the Corporation. All of the outstanding shares of
Preferred Stock of a series shall be represented by a single certificate
registered in the name of the nominee of the Securities Depository unless
otherwise required by law or unless there is no Securities Depository. If there
is no Securities Depository, at the Corporation's option and upon its receipt of
such documents as it deems appropriate, any shares of Preferred Stock may be
registered in the stock register in the name of the Beneficial Owner thereof and
such Beneficial Owner thereupon will be entitled to receive certificates
therefor and required to deliver certificates thereof or upon transfer or
exchange thereof.
