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As filed with the Securities and Exchange Commission on December 10, 2001
Securities Act Registration No. 333-73154
Investment Company Registration No. 811-10501
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [X]
Post-Effective Amendment No. __ [ ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT No. 5 [X]
BlackRock Municipal 2018 Term Trust
(Exact Name of Registrant as Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
BlackRock Municipal 2018 Term Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
-------------------------------------
Copies to:
Michael K. Hoffman, Esq. Leonard B. Mackey, Jr., Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Clifford Chance Rogers & Wells LLP
Four Times Square 200 Park Avenue
New York, New York 10036 New York, New York 10166
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=====================================================================================================================
Proposed Proposed
Amount Being Maximum Offering Maximum Aggregate Amount of
Title of Securities Being Registered Registered Price per Unit Offering Price(1) Registration Fee
---------------------------------------------------------------------------------------------------------------------
Preferred Shares, $.001 par value 5,504 shares $25,000 $137,600,000 $32,887(2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) In connection with the most recent Registration Statement relating to the
common shares, registration fees of approximately $375 were paid with
respect to the $137,600,000 of securities being carried forward herewith.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
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BlackRock Municipal 2018 Term Trust
CROSS REFERENCE SHEET
Part A--Prospectus
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1 Outside Front Cover .......................... Cover page
Item 2 Inside Front and Outside Back Cover Page ..... Cover page
Item 3. Fee Table and Synopsis ....................... Prospectus Summary
Item 4. Financial Highlights ......................... Financial Highlights (unaudited)
Item 5. Plan of Distribution ......................... Cover Page; Prospectus Summary; Underwriting
Item 6. Selling Shareholders ......................... Not Applicable
Item 7. Use of Proceeds .............................. Use of Proceeds; The Trust's Investments
Item 8. General Description of the Registrant ........ The Trust; The Trust's Investments; Risks;
Description of AMPS; Certain Provisions in the
Declaration of Trust
Item 9. Management ................................... Management of the Trust; Custodian and Transfer
Agent; Auction Agent
Item 10. Capital Stock, Long-Term Debt, and
Other Securities ............................. Description of AMPS; Description of
Common Shares; Certain Provisions in the
Declaration of Trust; Tax Matters
Item 11. Defaults and Arrears on Senior Securities .... Not Applicable
Item 12. Legal Proceedings ............................ Legal Opinions
Item 13. Table of Contents of the Statement of
Additional Information ....................... Table of Contents for the Statement of Additional
Information
Part B--Statement of Additional Information
Item 14. Cover Page ................................... Cover Page
Item 15. Table of Contents ............................ Cover Page
Item 16. General Information and History .............. Not Applicable
Item 17. Investment Objectives and Policies ........... Investment Objectives and Policies; Investment
Policies and Techniques; Portfolio Transactions and Brokerage
Item 18. Management ................................... Management of the Trust; Portfolio Transactions
and Brokerage
Item 19. Control Persons and Principal Holders of
Securities ................................... Management of the Trust
Item 20. Investment Advisory and Other Services ....... Management of the Trust; Experts
Item 21. Brokerage Allocation and Other Practices ..... Portfolio Transactions and Brokerage
Item 22. Tax Status ................................... Tax Matters
Item 23. Financial Statements ......................... Report of Independent Auditors; Financial
Highlights (unaudited)
Part C--Other Information
Items 24-33 have been answered in Part C of this Registration Statement
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated December 10, 2001
PROSPECTUS
[BLACKROCK LOGO]
$137,600,000
BlackRock Municipal 2018 Term Trust
Auction Market Preferred Shares ("AMPS"(TM))
2,752 Shares, Series W7
2,752 Shares, Series R7
Liquidation Preference $25,000 per share
---------------
Investment Objectives. BlackRock Municipal 2018 Term Trust (the "Trust") is
a recently organized, diversified, closed-end management investment company. The
Trust's investment objectives are:
o to provide current income that is exempt from regular Federal income
tax; and
o to return $15 per common share (the initial public offering price per
common share) to holders of common shares on or about December 31,
2018.
Portfolio Contents. The Trust will invest primarily in municipal bonds that
pay interest that is exempt from regular Federal income tax. The Trust will
invest in municipal bonds that, in the opinion of the Trust's investment advisor
and sub-advisor, are underrated or undervalued. Under normal market conditions,
the Trust expects to be fully invested in these tax-exempt municipal bonds. The
Trust will invest at least 80% of its total assets in municipal bonds that at
the time of investment are investment grade quality. Investment grade quality
bonds are bonds rated within the four highest grades (Baa or BBB or better by
Moody's Investor Service, Inc. ("Moody's"), Standard & Poors Ratings Group
("S&P") or Fitch IBCA, Inc. ("Fitch")) or bonds that are unrated but judged to
be of comparable quality by the Trust's investment advisor and sub-advisor. The
Trust may invest up to 20% of its total assets in municipal bonds that at the
time of investment are rated Ba/BB or B by Moody's, S&P or Fitch or bonds that
are unrated but judged to be of comparable quality by the Trust's investment
advisor and sub-advisor. Bonds of below investment grade quality are regarded as
having predominately speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal, and are commonly referred to as
"junk bonds." The Trust intends to actively manage the maturity of its bonds and
expects bonds in its portfolio to have an initial dollar weighted average
maturity of approximately 17 years under current market conditions. Over time,
the dollar weighted average maturity of the Trust's portfolio is expected to
shorten as the remaining term of the Trust shortens. The Trust cannot ensure
that it will achieve its investment objective.
Term Trust. The Trust seeks to return $15 per common share to common
shareholders on or about December 31, 2018 (when the Trust will terminate) by
actively managing its portfolio of municipal obligations which will have an
average final maturity on or about such date and by retaining each year a
percentage of its net investment income, but continuing to maintain its status
as a regulated investment company for Federal income tax purposes. No assurance
can be given that the Trust will achieve its investment objectives.
Investing in the AMPS involves risks that are described in the "Risks"
section beginning on page 15 of this prospectus. The minimum purchase amount of
the AMPS is $25,000.
---------------
Per Share Total
------- ----
Public offering price ......................... $ $
Sales load .................................... $ $
Proceeds, before expenses, to the Trust ....... $ $
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The underwriters are offering the AMPS subject to various conditions. The
underwriters expect to deliver the AMPS to purchasers, in book-entry form,
through the facilities of The Depository Trust Company on or about , 2001.
---------------
Merrill Lynch & Co. Salomon Smith Barney
Prudential Securities
UBS Warburg
---------------
The date of this prospectus is December , 2001.
-------
"AMPS" is a trade mark of Merrill Lynch & Co., Inc.
You should read the prospectus, which contains important information about
the Trust, before deciding whether to invest in the AMPS and retain it for
future reference. A Statement of Additional Information, dated , 2001,
containing additional information about the Trust, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 38 of this
prospectus, by calling (888) 825-2257 or by writing to the Trust, or obtain a
copy (and other information regarding the Trust) from the Securities and
Exchange Commission's web site (http://www.sec.gov).
The AMPS do not represent a deposit or obligation of, and are not
guaranteed or endorsed by, any bank or other insured depository institution, and
are not federally insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other government agency.
The Trust is offering 2,752 shares of Series W7 Auction Market Preferred
Shares and 2,752 shares of Series R7 Auction Rate Municipal Preferred Shares.
The shares are referred to in this prospectus as "AMPS." The AMPS have a
liquidation preference of $25,000 per share, plus any accumulated, unpaid
dividends. The AMPS also have priority over the Trust's common shares as to
distribution of assets as described in this prospectus. It is a condition of
closing this offering that the AMPS be offered with a rating of "Aaa" from
Moody's and "AAA" from S&P.
The dividend rate for the initial dividend rate period will be % for Series
W7 and % for Series R7. The initial rate period is from the date of issuance
through January 9, 2002 for Series W7 and January 10, 2002 for Series R7. For
subsequent rate periods, AMPS pay dividends based on a rate set at auction,
usually held weekly. Prospective purchasers should carefully review the auction
procedures described in this prospectus and should note: (1) a buy order (called
a "bid order") or sell order is a commitment to buy or sell AMPS based on the
results of an auction; and (2) purchases and sales will be settled on the next
business day after the auction.
The AMPS are redeemable, in whole or in part, at the option of the Trust on
the second business day prior to any date dividends are paid on the AMPS, and
will be subject to mandatory redemption in certain circumstances at a redemption
price of $25,000 per share, plus accumulated but unpaid dividends to the date of
redemption, plus a premium in certain circumstances. The Trust intends to redeem
all of the AMPS no later than the last dividend payment date prior to December
31, 2018 (when the Trust will terminate).
The AMPS will not be listed on an exchange. You may only buy or sell AMPS
through an order placed at an auction with or through a broker-dealer that has
entered into an agreement with the auction agent and the Trust or in a secondary
market maintained by certain broker-dealers. These broker-dealers are not
required to maintain this market, and it may not provide you with liquidity.
Dividends on the AMPS, to the extent payable from tax-exempt income earned
on the Trust's investments, will be exempt from regular Federal income tax in
the hands of owners of such shares. All or a portion of the Trust's dividends
may be subject to the Federal alternative minimum tax. The Trust is required to
allocate net capital gains and other taxable income, if any, proportionately
between common and preferred shares, including the AMPS, based on the percentage
of total dividends distributed to each class for that year. The Trust may, at
its election, give notice of the amount of any income subject to Federal income
tax to be included in a dividend on a share of AMPS in advance of the related
auction. If no such notice is given, whether or not by reason of the fact that a
taxable allocation was made retroactively as a result of a redemption of all or
part of the AMPS or the liquidation of the Trust, the Trust will be required to
pay additional amounts to holders of the AMPS in order to adjust for their
receipt of income subject to regular Federal income tax.
2
TABLE OF CONTENTS
Page
Prospectus Summary........................................................................................ 4
Financial Highlights (Unaudited).......................................................................... 9
The Trust................................................................................................. 10
Use of Proceeds........................................................................................... 10
Capitalization (Unaudited)................................................................................ 10
Portfolio Composition..................................................................................... 11
The Trust's Investments................................................................................... 11
Risks..................................................................................................... 15
Management of the Trust................................................................................... 17
Description of AMPS....................................................................................... 20
The Auction............................................................................................... 27
Description of Common Shares.............................................................................. 31
Certain Provisions in the Agreement and Declaration of Trust.............................................. 32
Repurchase of Common Shares............................................................................... 33
Tax Matters............................................................................................... 34
Underwriting.............................................................................................. 36
Custodian and Transfer Agent; Auction Agent............................................................... 36
Legal Opinions............................................................................................ 37
Available Information..................................................................................... 37
Table of Contents for the Statement of Additional Information............................................. 38
APPENDIX A Tax Equivalent Yield Table..................................................................... A-1
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
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. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information in this prospectus is accurate only as of the
date of this prospectus. Our business, financial condition and prospects may
have changed since that date.
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its shareholders and
to safeguarding their non-public personal information. The following information
is provided to help you understand what personal information the Trust collects,
how the Trust protects that information and why, in certain cases, the Trust may
share information with select other parties.
Generally, the Trust does not receive any non-public personal information
relating to its shareholders, although certain non-public personal information
of its shareholders may become available to the Trust. The Trust does not
disclose any non-public personal information about its shareholders or former
shareholders to anyone, except as permitted by law or as is necessary in order
to service shareholder accounts (for example, to a transfer agent or third-party
administrator).
The Trust restricts access to non-public personal information about its
shareholders to employees of the Trust's investment advisor and its affiliates
with a legitimate business need for the information. The Trust maintains
physical, electronic and procedural safeguards designed to protect the
non-public personal information of its shareholders.
3
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in our AMPS. You should read the more
detailed information contained in this prospectus, the Statement of Additional
Information and the Trust's Statement of Preferences of Auction Market Preferred
Shares (the "Statement") attached as Appendix A to the Statement of Additional
Information. Capitalized terms used but not defined in this prospectus shall
have the meanings given to such terms in the Statement.
The Trust ............................ BlackRock Municipal 2018 Term Trust is a
recently organized, diversified,
closed-end management investment
company. The Trust will distribute
substantially all of its net assets on
or about December 31, 2018, when the
Trust will terminate. Throughout the
prospectus, we refer to BlackRock
Municipal 2018 Term Trust simply as the
"Trust" or as "we," "us" or "our." See
"The Trust." The Trust's common shares
are traded on the New York Stock
Exchange under the symbol "BPK". See
"Description of the Common Shares." As
of November 30, 2001, the Trust had
15,508,028 common shares outstanding and
net assets of $218,818,275.
Investment Objectives ................ The Trust's investment objectives are to
provide current income exempt from
regular Federal income tax and to return
$15 per common share (the initial
offering price per common share) to
holders of common shares on or about
December 31, 2018. No assurance can be
given that the Trust will achieve its
investment objectives.
Investment Policies .................. The Trust will invest primarily in
municipal bonds that pay interest that
is exempt from regular Federal income
tax. The Trust will invest in municipal
bonds that, in the opinion of BlackRock
Advisors, Inc. ("BlackRock Advisors" or
the "Advisor") and BlackRock Financial
Management, Inc. ("BlackRock Financial
Management" or the "Sub-Advisor") are
underrated or undervalued. Underrated
municipal bonds are those whose ratings
do not, in the Advisor's or
Sub-Advisor's opinion, reflect their
true creditworthiness. Undervalued
municipal bonds are bonds that, in the
Advisor's or Sub-Advisor's opinion, are
worth more than the value assigned to
them in the marketplace. Under normal
market conditions, the Trust expects to
be fully invested in these tax-exempt
municipal bonds. The Trust will invest
at least 80% of its total assets in
municipal bonds that at the time of
investment are investment grade quality.
Investment grade quality bonds are bonds
rated within the four highest grades
(Baa or BBB or better by Moody's, S&P or
Fitch) or bonds that are unrated but
judged to be of comparable quality by
the Advisor and the Sub-Advisor. The
Trust may invest up to 20% of its total
assets in municipal bonds that at the
time of investment are rated Ba/BB or B
by Moody's, S&P or Fitch or bonds that
are unrated but judged to be of
comparable quality by the Advisor and
the Sub-Advisor. Bonds of below
investment grade quality are regarded as
having predominately speculative
characteristics with respect to the
issuer's capacity to pay interest and
repay principal, and are commonly
4
referred to as "junk bonds." The Trust
intends to actively manage the maturity
of its bonds and expects bonds in its
portfolio to have an initial dollar
weighted average maturity of
approximately 17 years under current
market conditions. Over time, the dollar
weighted average maturity of the Trust's
Portfolio is expected to shorten as the
remaining term of the Trust shortens.
See "The Trust's Investments."
The Trust seeks to return $15 per common
share to holders of common shares on or
about December 31, 2018 (when the Trust
will terminate) by actively managing its
portfolio of tax-exempt municipal
obligations which will have an average
final maturity on or about such date and
by retaining each year a portion of its
net investment income, but continuing to
maintain its status as a regulated
investment company for Federal income
tax purposes.
Investment Advisor ................... BlackRock Advisors will be the Trust's
investment advisor and BlackRock
Advisors' affiliate, BlackRock Financial
Management, will provide certain
day-to-day investment management
services to the Trust. Throughout the
prospectus, we sometimes refer to
BlackRock Advisors and BlackRock
Financial Management collectively as
"BlackRock."
The Offering ......................... The Trust is offering 2,752 shares of
Series W7 AMPS and 2,752 shares of
Series R7 AMPS at a purchase price of
$25,000 per share. The AMPS are being
offered by the underwriters listed under
"Underwriting." The Trust intends to
redeem all of the AMPS no later than the
last dividend payment date prior to
December 31, 2018 (when the Trust will
terminate).
Risk Factors Summary ................. Risk is inherent in all investing.
Therefore, before investing in the AMPS
you should consider certain risks
carefully. The primary risks of
investing in the AMPS are:
o if an auction fails you may not be
able to sell some or all of your
shares;
o because of the nature of the market
for AMPS, you may receive less than
the price you paid for your shares if
you sell them outside of the auction,
especially when market interest rates
are rising;
o a rating agency could downgrade the
rating assigned to the AMPS, which
could affect liquidity;
o the Trust may be forced to redeem
your shares to meet regulatory or
rating agency requirements or may
voluntarily redeem your shares in
certain circumstances;
o in extraordinary circumstances, the
Trust may not earn sufficient income
from its investments to pay
dividends;
o if interest rates rise, the value of
the Trust's investment portfolio will
decline, reducing the asset coverage
for the AMPS. This risk is increased
during the early years of the Trust
when it will
5
invest primarily in long-term bonds
which fluctuate more in price than
shorter-term bonds;
o if an issuer of a municipal bond in
which the Trust invests experiences
financial difficulty or defaults,
there may be a negative impact on the
income and net asset value of the
Trust's portfolio;
o the Trust may invest up to 20% of its
total assets in securities that are
below investment grade quality which
are regarded as having predominately
speculative characteristics with
respect to the issuer's capacity to
pay interest and principal; and
o as a result of the terrorist attacks
on the World Trade Center and the
Pentagon on September 11, 2001, some
of the United States securities
markets were closed for a four-day
period. These terrorist attacks and
related events have led to increased
short-term market volatility and may
have long-term effects on United
States and world economies and
markets. A similar disruption of the
financial markets could impact
interest rates, auctions, secondary
trading, ratings, credit risk,
inflation and other factors relating
to the securities.
For additional risks of investing in the
Trust, see "Risks" below.
Trading Market ....................... The AMPS will not be listed on an
exchange. Instead, you may buy or sell
the AMPS at an auction that normally is
held weekly, by submitting orders to a
broker-dealer that has entered into an
agreement with the auction agent and the
Trust (a "Broker-Dealer"), or to a
broker-dealer that has entered into a
separate agreement with a Broker-Dealer.
In addition to the auctions,
Broker-Dealers and other broker-dealers
may maintain a secondary trading market
in AMPS outside of auctions, but may
discontinue this activity at any time.
There is no assurance that a secondary
market will provide shareholders with
liquidity. You may transfer shares
outside of auctions only to or through a
Broker-Dealer or a broker-dealer that
has entered into a separate agreement
with a Broker-Dealer.
The table below shows the first auction
date for each series of AMPS and the day
on which each subsequent auction will
normally be held for each series of
AMPS. The first auction date for each
series of AMPS will be the business day
before the dividend payment date for the
initial rate period for that series of
AMPS. The start date for subsequent rate
periods will normally be the business
day following the auction date unless
the then-current rate period is a
special rate period or the first day of
the subsequent rate period is not a
business day.
Series First Auction Date Subsequent
------ ------------------ ----------
W7 January 9, 2002 Wednesday
R7 January 10, 2002 Thursday
6
Dividends and Rate Periods ........... The table below shows the dividend rate
for the initial rate period on each
series of AMPS offered in this
prospectus. For subsequent rate periods,
each series of AMPS will pay dividends
based on a rate set at auctions,
normally held weekly. In most instances,
dividends are also paid weekly, on the
day following the end of the rate
period. The rate set at auction will not
exceed the maximum applicable rate. See
"Description of AMPS--Dividends and
Dividend Periods."
The table below also shows the date from
which dividends on each series of AMPS
will accumulate at the initial rate, the
dividend payment date for the initial
rate period and the day on which
dividends will normally be paid. If the
day on which dividends otherwise would
be paid is not a business day, then your
dividends will be paid on the first
business day that falls after that day.
Finally, the table below shows the
number of days of the initial rate
period for each series of AMPS.
Subsequent rate periods generally will
be seven days. The dividend payment date
for special rate periods of more than
seven days will be set out in the notice
designating a special rate period. See
"Description of AMPS--Dividends and
Dividend Periods--Designation of Special
Dividend Periods."
Number
Dividend of Days
Date of Payment Subsequent of
Initial Accumulation Date for Dividend Initial
Dividend at Initial Initial Rate Payment Rate
Rate Rate* Period** Day Period
---- ----- -------- --- ------
Series W7 % December January 10 Thursday
Series R7 % December January 11 Friday
* Dates are 2001.
** Dates are 2002.
Special Tax Considerations ........... Because under normal circumstances the
Trust will invest substantially all of
its assets in municipal bonds that pay
interest that is exempt from regular
Federal income tax, the income you
receive will ordinarily be exempt from
Federal income tax. Your income may be
subject to state and local taxes. All or
a portion of the income from these bonds
will be subject to the Federal
alternative minimum tax, so AMPS may not
be a suitable investment if you are
subject to this tax or would become
subject to such tax by investing in
AMPS. Taxable income or gain earned by
the Trust will be allocated
proportionately to holders of AMPS and
common shares, based on the percentage
of total dividends paid to each class
for that year. Accordingly, certain
specified AMPS dividends may be subject
to income tax on income or gains
attributed to the Trust. The Trust may
give notice before any applicable
auction of the amount of any taxable
income and gain included in a dividend
to be distributed for the period
relating to that auction. If no such
notice is given, whether or not by
reason of the fact that a taxable
allocation was made retroactively as a
result of a redemption of all or part of
the AMPS or the liquidation of the
Trust, the Trust will be required to pay
additional amounts to
7
holders of AMPS in order to adjust for
their receipt of income subject to
regular Federal income tax. See "Tax
Matters" and "Description of
AMPS--Dividends and Dividend Periods."
Ratings .............................. Each series of AMPS is expected to be
issued with a rating of "Aaa" from
Moody's and "AAA" from S&P. In order to
maintain this rating, the Trust must own
portfolio securities of a sufficient
value and with adequate credit quality
to meet the rating agencies' guidelines.
See "Description of AMPS--Rating Agency
Guidelines and Asset Coverage."
Redemption ........................... The Trust may be required to redeem
shares if, for example, the Trust does
not meet an asset coverage ratio
required by law or to correct a failure
to meet a rating agency guideline in a
timely manner. The Trust voluntarily may
redeem AMPS under certain conditions.
See "Description of AMPS--Redemption"
and "Description of AMPS--Rating Agency
Guidelines and Asset Coverage."
Liquidation Preference ............... The liquidation preference for shares of
each series of AMPS will be $25,000 per
share plus accumulated but unpaid
dividends. See "Description of
AMPS--Liquidation."
Voting Rights ........................ The holders of preferred shares,
including AMPS, voting as a separate
class, have the right to elect at least
two trustees of the Trust at all times.
Such holders also have the right to
elect a majority of the trustees in the
event that two years' dividends on the
preferred shares are unpaid. In each
case, the remaining trustees will be
elected by holders of common shares and
preferred shares, including AMPS, voting
together as a single class. The holders
of preferred shares, including AMPS,
will vote as a separate class or classes
on certain other matters as required
under the Trust's Agreement and
Declaration of Trust, as amended and
restated, the Investment Company Act of
1940 (the "Investment Company Act") and
Delaware law. See "Description of
AMPS--Voting Rights," and "Certain
Provisions in the Agreement and
Declaration of Trust."
8
FINANCIAL HIGHLIGHTS (Unaudited)
Information contained in the table below shows the unaudited operating
performance of the Trust from the commencement of the Trust's investment
operations on October 26, 2001 through October 31, 2001. Since the Trust was
recently organized and commenced investment operations on October 26, 2001, the
table covers less than one week of operations, during which a substantial
portion of the Trust's portfolio was held in temporary investments pending
investment in municipal securities that meet the Trust's investment objectives
and policies. Accordingly, the information presented may not provide a
meaningful picture of the Trust's future operating performance.
For the Period
October 26, 20011
Through
October 31, 2001
-----------------
Per Common Share Operating Performance:(2)
Net asset value, beginning of period(3) .......................... $14.33
------
Net investment income .......................................... --
Net unrealized gain on investments ............................. --
------
Net increase from investment operations .......................... --
------
Capital charge with respect to issuance of common shares ......... (0.03)
------
Net asset value, end of period(3) ................................ $14.30
Market value, end of period(3) ................................... $15.00
======
Total Investment Return(4) ....................................... -0.21%
======
Ratios To Average Net Assets Of Common Shareholders:
Expenses ......................................................... 1.23%(5)
Net investment income ............................................ 0.00%(5)
Supplemental Data:
Average net assets of common shareholders (000) .................. $210,347
Portfolio turnover ............................................... 0%
Net assets of common shareholders, end of period (000) ........... $210,347
---------------
(1) Commencement of investment operations. Net asset value immediately after
the closing of the first public offering was $14.30.
(2) Calculated using the average shares outstanding method.
(3) Net asset value and market value are published in Barron's on Saturday and
The Wall Street Journal on Monday.
(4) Total investment return is calculated assuming a purchase of common shares
at the current market price on the first day and a sale at the current
market price on the last day of the period reported. Total investment
return does not reflect brokerage commissions. Total investment returns for
years less than a full year are not annualized. Past performance is not a
guarantee of future results.
(5) Annualized.
The information above represents the unaudited operation performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the periods indicated. This information has been
determined based upon financial information provided in the financial statements
and market value data for the Trust's common shares.
9
THE TRUST
The Trust is a recently organized, diversified, closed-end management
investment company registered under the Investment Company Act. The Trust was
organized as a Delaware business trust on September 7, 2001, pursuant to an
Agreement and Declaration of Trust, as later amended and restated, governed by
the laws of the State of Delaware. The Trust will distribute substantially all
of its net assets on or about December 31, 2018, when the Trust is expected to
terminate. On October 30, 2001, the Trust issued an aggregate of 14,700,000
common shares of beneficial interest, par value $.001 per share, pursuant to the
initial public offering and commenced its investment operations. The Trust
issued 800,000 common shares on November 30, 2001, and intends to issue an
additional 400,000 common shares on December 10, 2001, pursuant to an
over-allotment provision. The Trust's common shares are traded on the New York
Stock Exchange under the symbol "BPK". The Trust's principal office is located
at 100 Bellevue Parkway, Wilmington, Delaware 19809, and its telephone number is
(888) 825-2257.
The following provides information about the Trust's outstanding shares as
of November 30, 2001.
Amount held by
Amount the Trust or for Amount
Title of Class Authorized its Account Outstanding
----------- ---------- ------------- -----------
Common Unlimited 0 15,508,028
Preferred Unlimited 0 0
Series W7 4,490 0 0
Series R7 4,490 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $135,892,257 after
payment of the estimated offering costs. The Trust will invest the net proceeds
of the offering in accordance with the Trust's investment objectives and
policies as stated below. We currently anticipate that the Trust will be able to
invest substantially all of the net proceeds in municipal bonds that meet the
Trust's investment objective and policies within approximately three months
after the completion of the offering. Pending such investment, it is anticipated
that the proceeds will be invested in short-term, tax-exempt or taxable
investment grade securities.
CAPITALIZATION (Unaudited)
The following table sets forth the capitalization of the Trust as of
November 30, 2001, and as adjusted to give effect to the issuance of the AMPS
offered hereby.
Actual As Adjusted
------ -----------
Shareholder's Equity:
Preferred Shares, $.001 par value, $25,000 stated value per share, at
liquidation value; unlimited shares authorized (no shares issued;
5,504 shares issued, as adjusted) ............................................ $ -- $137,600,000
Common shares, $.001 par value per share; unlimited shares
authorized, 15,508,028 shares outstanding ..................................... 15,508 15,508
Paid-in surplus ................................................................. 218,802,767 217,095,024
Balance of undistributed net investment income .................................. 452,248 452,248
Accumulated net realized gain/loss from investment transactions ............... -- --
Net unrealized appreciation/depreciation of investments ....................... (3,329,388) (3,329,388)
Net assets .................................................................... 215,941,135 351,833,392
--------------
* None of these outstanding shares are held by or for the account of the Trust.
10
PORTFOLIO COMPOSITION
As of November 30, 2001, approximately 91.80% of the market value of the
Trust's portfolio was invested in long-term municipal securities and
approximately 8.20% of the market value of the Trust's portfolio was invested in
short-term municipal securities. The following table sets forth certain
information with respect to the composition of the Trust's investment portfolio
as of November 30, 2001, based on the highest rating assigned.
Value
Credit Rating (000) Percent
------------ ----- -------
AAA/Aaa* .................................. $ 90,703 30.79%
AA/Aa ..................................... 51,461 17.47
A/A ....................................... 76,056 25.82
BBB/Baa ................................... 46,273 15.71
BB/Ba ..................................... 5,910 2.01
Unrated+ .................................. -- --
Short-Term ................................ 24,157 8.20
-------- ------
TOTAL ................................... 294,560 100.00%
======== ======
--------------
* Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government Securities to ensure the timely payment of
principal and interest.
+ Refers to securities that have not been rated by Moody's, S&P or Fitch, but
that have been assessed by BlackRock as being of comparable credit quality to
rated securities in which the Trust may invest. See "The Trust's
Investments--Investment Objectives and Policies."
THE TRUST'S INVESTMENTS
Investment Objectives and Policies
The Trust's investment objectives are to provide current income exempt from
regular Federal income tax and to return $15 per common share to holders of
common shares on or about December 31, 2018. No assurance can be given that the
Trust will achieve its investment objectives.
The Trust will invest primarily in municipal bonds that pay interest that
is exempt from regular Federal income tax. Under normal market conditions, the
Trust expects to be fully invested (at least 95% of its net assets) in
tax-exempt municipal bonds and generally will invest at least 80% of its total
assets in such tax-exempt municipal bonds. Under normal market conditions, the
Trust will invest at least 80% of its total assets in investment grade quality
municipal bonds. Investment grade quality means that such bonds are rated, at
the time of investment, within the four highest grades (Baa or BBB or better by
Moody's, S&P or Fitch) or are unrated but judged to be of comparable quality by
BlackRock. Municipal bonds rated Baa by Moody's are investment grade, but
Moody's considers municipal bonds rated Baa to have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity for issuers of municipal bonds that are rated BBB or Baa (or
that have equivalent ratings) to make principal and interest payments than is
the case for issuers of higher grade municipal bonds. The Trust may invest up to
20% of its total assets in municipal bonds that are rated, at the time of
investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged
to be of comparable quality by BlackRock. Bonds of below investment grade
quality (Ba/BB or below) are commonly referred to as "junk bonds." Bonds of
below investment grade quality are regarded as having predominantly speculative
characteristics with respect to the issuer's capacity to pay interest and repay
principal. These credit quality policies apply only at the time a security is
purchased, and the Trust is not required to dispose of a security if a rating
agency downgrades its assessment of the credit characteristics of a particular
issue. In determining whether to retain or sell a security that a rating agency
has downgraded, BlackRock may consider such factors as BlackRock's assessment of
the credit quality of the issuer of the security, the price at which the
security could be sold and the rating, if any, assigned to the security by other
rating agencies. Appendix B to the Statement of Additional Information contains
a general description of Moody's, S&P's and Fitch's ratings of municipal bonds.
The Trust may also invest in securities of other open-
11
or closed-end management investment companies that invest primarily in municipal
bonds of the types in which the Trust may invest directly and in tax-exempt
preferred shares that pay dividends exempt from regular Federal income tax. See
"--Other Investment Companies," "--Tax-Exempt Preferred Shares" and "Portfolio
Composition."
The Trust seeks to return $15 per common share to holders of common shares
on or about December 31, 2018 (when the Trust will terminate) by actively
managing its portfolio of tax-exempt municipal obligations, which will have an
average final maturity on or about such date, and by retaining each year a
percentage of its net investment income, but continuing to maintain its status
as a regulated investment company for Federal income tax purposes. The purpose
of retaining a portion of the net investment income is to enhance the Trust's
ability to return to investors $15 per common share outstanding upon the Trust's
termination. Such retained net investment income will generally serve to
increase the net asset value of the Trust. However, if the Trust realizes any
capital losses on dispositions of securities that are not offset by capital
gains on the disposition of other securities, the Trust may return less than $15
for each common share outstanding at the end of the Trust's term. In addition,
the leverage caused by the Trust's issuance of AMPS may increase the possibility
of incurring capital losses and the difficulty of subsequently incurring capital
gains to offset such losses. However, BlackRock believes that it will be able to
manage the Trust's assets so that the Trust will not realize capital losses
which are not offset by capital gains over the life of the Trust on the
disposition of its other assets and retained net investment income. Although
neither BlackRock nor the Trust can guarantee these results, their achievement
should enable the Trust, on or about December 31, 2018, to have available for
distribution to holders of its common shares $15 for each common share then
outstanding.
The Trust will invest in municipal bonds that, in BlackRock's opinion, are
underrated or undervalued. Underrated municipal bonds are those whose ratings do
not, in BlackRock's opinion, reflect their true creditworthiness. Undervalued
municipal bonds are bonds that, in the opinion of BlackRock, are worth more than
the value assigned to them in the marketplace. BlackRock may at times believe
that bonds associated with a particular municipal market sector (for example,
electrical utilities), or issued by a particular municipal issuer, are
undervalued. BlackRock may purchase those bonds for the Trust's portfolio
because they represent a market sector or issuer that BlackRock considers
undervalued, even if the value of those particular bonds appears to be
consistent with the value of similar bonds. Municipal bonds of particular types
(for example, hospital bonds, industrial revenue bonds or bonds issued by a
particular municipal issuer) may be undervalued because there is a temporary
excess of supply in that market sector, or because of a general decline in the
market price of municipal bonds of the market sector for reasons that do not
apply to the particular municipal bonds that are considered undervalued. The
Trust's investment in underrated or undervalued municipal bonds will be based on
BlackRock's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other forms of
risk, and that their prices will ultimately rise, relative to the market, to
reflect their true value. Any capital appreciation realized by the Trust will
generally result in capital gains distributions subject to Federal capital gains
taxation.
The Trust may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements or escrow accounts. The credit quality of
companies which provide these credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Trust's income. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or
Fitch. The insurance feature does not guarantee the market value of the insured
obligations or the net asset value of the common shares. The Trust may purchase
insured bonds and may purchase insurance for bonds in its portfolio.
During temporary defensive periods, including the period during which the
net proceeds of this offering are being invested, and in order to keep the
Trust's cash fully invested, the Trust may invest up to 100% of its net assets
in liquid, short-term investments, including high quality, short-term securities
that may be either tax-exempt or taxable. The Trust may not achieve its
investment objective under these circumstances. The Trust intends to invest in
taxable short-term investments only if suitable tax-exempt short-term
investments are not
12
available at reasonable prices and yields. If the Trust invests in taxable
short-term investments, a portion of your dividends may be subject to regular
Federal income tax.
The Trust cannot change its investment objectives without the approval of
the holders of a majority of the outstanding common shares and, once the AMPS
are issued, the common shares and AMPS voting together as a single class, and of
the holders of a majority of the outstanding AMPS voting as a separate class. A
"majority of the outstanding" means (1) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (2) more than 50% of the shares, whichever is less. See
"Description of AMPS--Voting Rights" for additional information with respect to
the voting rights of holders of AMPS.
Municipal Bonds
Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects, such as roads or public
buildings, to pay general operating expenses or to refinance outstanding debt.
Municipal bonds may also be issued for private activities, such as housing,
medical and educational facility construction or for privately owned industrial
development and pollution control projects. General obligation bonds are backed
by the full faith and credit, or taxing authority, of the issuer and may be
repaid from any revenue source. Revenue bonds may be repaid only from the
revenues of a specific facility or source. The Trust also may purchase municipal
bonds that represent lease obligations. These carry special risks because the
issuer of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Trust will only
purchase municipal bonds representing lease obligations where BlackRock believes
the issuer has a strong incentive to continue making appropriations until
maturity.
The municipal bonds in which the Trust will invest pay interest that, in
the opinion of bond counsel to the issuer, or on the basis of another authority
believed by BlackRock to be reliable, is exempt from regular Federal income tax.
BlackRock will not conduct its own analysis of the tax status of the interest
paid by municipal bonds held by the Trust. The Trust may also invest in
municipal bonds issued by United States Territories (such as Puerto Rico or
Guam) that are exempt from regular Federal income tax. In addition to the types
of municipal bonds described in the prospectus, the Trust may invest in other
securities that pay interest that is, or make other distributions that are,
exempt from regular Federal income tax and/or state and local personal taxes,
regardless of the technical structure of the issuer of the instrument. The Trust
treats all of such tax-exempt securities as municipal bonds.
The yields on municipal bonds are dependent on a variety of factors,
including prevailing interest rates and the condition of the general money
market and the municipal bond market, the size of a particular offering, the
maturity of the obligation and the rating of the issue. The market value of
municipal bonds will vary with changes in interest rate levels and as a result
of changing evaluations of the ability of bond issuers to meet interest and
principal payments.
The Trust will actively manage the maturity of its bonds and expects bonds
in its portfolio to have an initial dollar weighted average maturity of
approximately 17 years, but the initial weighted average maturity of obligations
held by the Trust may be shortened, depending on market conditions. Over time,
the dollar weighted average maturity of the Trust's portfolio is expected to
shorten as the remaining term of the Trust shortens.
When-Issued and Forward Commitment Securities
The Trust may buy and sell municipal bonds on a when-issued basis and may
purchase or sell municipal bonds on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities takes place at a later date. This type of transaction may involve
an element of risk because no interest accrues on the bonds prior to settlement
and, because bonds are subject to market fluctuations, the value of the bonds at
the time of delivery may be less or more than cost.
13
Other Investment Companies
The Trust may invest up to 10% of its total assets in securities of other
open- or closed-end management investment companies that invest primarily in
municipal bonds of the types in which the Trust may invest directly. The Trust
generally expects to invest in other investment companies either during periods
when it has large amounts of uninvested cash, such as the period shortly after
the Trust receives the proceeds of the offering of its common shares or AMPS, or
during periods when there is a shortage of attractive, high-yielding municipal
bonds available in the market. As a shareholder in an investment company, the
Trust will bear its ratable share of that investment company's expenses, and
will remain subject to payment of the Trust's advisory and other fees and
expenses with respect to assets so invested. Holders of common shares will
therefore be subject to duplicative expenses to the extent the Trust invests in
other investment companies. BlackRock will take expenses into account when
evaluating the investment merits of an investment in an investment company
relative to available municipal bond investments. In addition, the securities of
other investment companies may also be leveraged and will therefore be subject
to leverage risks. The net asset value and market value of leveraged shares will
be more volatile and the yield to shareholders will tend to fluctuate more than
the yield generated by unleveraged shares. Investment companies may have
investment policies that differ from those of the Trust. In addition, to the
extent the Trust invests in other investment companies, the Trust will be
dependent upon the investment and research abilities of persons other than
BlackRock. The Trust treats its investments in such open- or closed-end
investment management companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
The Trust may also invest up to 10% of its total assets in preferred
interests of other investment funds that pay dividends that are exempt from
regular Federal income tax. A portion of such dividends may be capital gain
distributions subject to Federal capital gains tax. Such funds in turn invest in
municipal bonds and other assets that generally pay interest or make
distributions that are exempt from regular Federal income tax, such as revenue
bonds issued by state or local agencies to fund the development of low-income,
multi-family housing. Investment in such tax-exempt preferred shares involves
many of the same issues as investing in other open- or closed-end management
investment companies as discussed above. These investments also have additional
risks, including liquidity risk, the absence of regulation governing investment
practices, capital structure and leverage, affiliated transactions and other
matters, and concentration of investments in particular issuers or industries.
The Trust will treat investments in tax-exempt preferred shares as investments
in municipal bonds.
High Yield Securities
The Trust may invest up to 20% of its total assets in securities rated
below investment grade such as those rated Ba or lower by Moody's and BB or
lower by S&P or securities comparably rated by other rating agencies or in
unrated securities determined by BlackRock to be of comparable quality. These
lower grade securities are commonly known as "junk bonds." Securities rated
below investment grade are judged to have speculative characteristics with
respect to the interest and principal payments. Such securities may face major
ongoing uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments.
Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade securities may be less
liquid than that of higher rated securities; adverse conditions could make it
difficult at times for the Trust to sell certain of these securities or could
result in lower prices than those used in calculating the Trust's net asset
value.
14
RISKS
Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or that you may lose part or all of your investment.
Therefore, before investing you should consider carefully the following risks
that you assume when you invest in AMPS.
Interest Rate Risk
Interest rate risk is the risk that bonds, and the Trust's net assets, will
decline in value because of changes in interest rates. Generally, municipal
bonds will decrease in value when interest rates rise and increase in value when
interest rates decline. The value of longer-term bonds fluctuates more in
response to changes in interest rates than does the value of shorter-term bonds.
Because the Trust, in its early years, will primarily invest in long-term bonds,
the value of the Trust's investment portfolio will fluctuate more in response to
changes in market interest rates than if the Trust invested primarily in
shorter-term bonds. The Trust issues AMPS, which pay dividends based on
short-term interest rates. The Trust then uses the proceeds from the sale of
AMPS to buy municipal bonds, which pay interest based on long-term rates. Both
long-term and short-term interest rates may fluctuate. If short-term interest
rates rise, the AMPS dividend rates may rise so that the amount of dividends
paid to holders of AMPS exceeds the income from the portfolio securities
purchased with the proceeds from the sale of AMPS. Because income from the
Trust's entire investment portfolio (not just the portion of the portfolio
purchased with the proceeds of the AMPS offering) is available to pay AMPS
dividends, however, AMPS dividend rates would need to greatly exceed the yield
on the Trust's portfolio before the Trust's ability to pay AMPS dividends would
be impaired. If long-term rates rise, the value of the Trust's investment
portfolio will decline, reducing the amount of assets serving as asset coverage
for the AMPS.
Auction Risk
The dividend rate for the AMPS normally is set through an auction process.
In the auction, holders of AMPS may indicate the dividend rate at which they
would be willing to hold or sell their AMPS or purchase additional AMPS. The
auction also provides liquidity for the sale of AMPS. An auction fails if there
are more AMPS offered for sale than there are buyers. You may not be able to
sell your AMPS at an auction if the auction fails. Also, if you place hold
orders (orders to retain AMPS) at an auction only at a specified dividend rate,
and that rate exceeds the rate set at the auction, you will not retain your
AMPS. Finally, if you buy shares or elect to retain shares without specifying a
dividend rate below which you would not wish to buy or continue to hold those
shares, you could receive a lower rate of return on your shares than the market
rate. See "Description of AMPS" and "The Auction--Auction Procedures."
Secondary Market Risk
If you try to sell your AMPS between auctions you may not be able to sell
any or all of your shares or you may not be able to sell them for $25,000 per
share or $25,000 per share plus accumulated dividends. If the Trust has
designated a special rate period (a rate period of more than seven days),
changes in interest rates could affect the price you would receive if you sold
your shares in the secondary market. Broker-dealers that maintain a secondary
trading market for AMPS are not required to maintain this market, and the Trust
is not required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. The AMPS will not be listed on a
stock exchange or the NASDAQ stock market. If you sell your AMPS to a
broker-dealer between auctions, you may receive less than the price you paid for
them, especially if market interest rates have risen since the last auction.
Ratings and Asset Coverage Risk
While it is expected that Moody's will assign a rating of "Aaa" to the AMPS
and S&P will assign a rating of "AAA" to the AMPS, such ratings do not eliminate
or necessarily mitigate the risks of investing in AMPS.
15
Moody's or S&P could downgrade the AMPS, which may make your shares less liquid
at an auction or in the secondary market. If Moody's or S&P downgrades the AMPS,
the Trust may alter its portfolio or redeem AMPS in an effort to improve the
rating, although there is no assurance that it will be able to do so to the
extent necessary to restore the prior rating. The Trust may voluntarily redeem
AMPS under certain circumstances. See "Description of AMPS--Rating Agency
Guidelines and Asset Coverage" for a description of the asset maintenance tests
the Trust must meet.
Credit Risk
Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower-rated municipal bonds carry a greater degree of risk that the
issuer will lose its ability to make interest and principal payments, which
could have a negative impact on the Trust's net asset value or dividends. The
Trust may invest up to 20% of its total assets in municipal bonds that are rated
Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of
comparable quality by BlackRock. Bonds rated Ba/BB or B are regarded as having
predominately speculative characteristics with respect to the issuer's capacity
to pay interest and repay principal, and these bonds are commonly referred to as
junk bonds. These securities are subject to a greater risk of default. The
prices of these lower grade bonds are more sensitive to negative developments,
such as a decline in the issuer's revenues or a general economic downturn, than
are the prices of higher grade securities. Lower grade securities tend to be
less liquid than investment grade securities. The market values of lower grade
securities tend to be more volatile than is the case for investment grade
securities.
Municipal Bond Market Risk
Investing in the municipal bond market involves certain risks. The amount
of public information available about the municipal bonds in the Trust's
portfolio is generally less than that for corporate equities or bonds, and the
investment performance of the Trust may therefore be more dependent on the
analytical abilities of BlackRock than would be a stock fund or taxable bond
fund. The secondary market for municipal bonds, particularly the below
investment grade bonds in which the Trust may invest, also tends to be less
well-developed or liquid than many other securities markets, which may adversely
affect the Trust's ability to sell its bonds at attractive prices.
The ability of municipal issuers to make timely payments of interest and
principal may be diminished in general economic downturns and as governmental
cost burdens are reallocated among Federal, state and local governments. In
addition, laws enacted in the future by Congress or state legislatures or
referenda could extend the time for payment of principal and/or interest, or
impose other constraints on enforcement of such obligations or on the ability of
municipalities to levy taxes. Issuers of municipal bonds might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Trust could experience delays in collecting principal and interest and the Trust
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in the
payment of interest or repayment of principal, or both, the Trust may take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Trust's operating expenses. Any income
derived from the Trust's ownership or operation of such assets may not be
tax-exempt.
Reinvestment Risk
Reinvestment risk is the risk that income from the Trust's bond portfolio
will decline if and when the Trust invests the proceeds from matured, traded,
prepaid or called bonds at interest rates that are below the portfolio's current
earnings rate. A decline in income could affect the Trust's ability to pay
dividends on the AMPS. The Trust's income and distributions may decline over the
term of the Trust as the dollar weighted average maturity of the Trust's
portfolio securities shortens.
16
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation occurs, the real value of the AMPS and distributions
declines. In an inflationary period, however, it is expected that, through the
auction process, dividend rates on the AMPS would increase, tending to offset
this risk.
Economic Sector Risk
The Trust may invest 25% or more of its total assets in municipal
obligations of issuers in the same economic sector, including without limitation
the following: lease rental obligations of state and local authorities;
obligations dependent on annual appropriations by a state's legislature for
payment; obligations of state and local housing finance authorities; municipal
utilities systems or public housing authorities; obligations of hospitals or
life care facilities; and industrial development or pollution control bonds
issued for electrical utility systems, steel companies, paper companies or other
purposes. This may make the Trust more susceptible to adverse economic,
political or regulatory occurrences affecting a particular state or economic
sector. For example, health care related issuers are susceptible to Medicare,
Medicaid and other third party payor reimbursement policies, and national and
state health care legislation. As concentration increases, so does the potential
for fluctuation in the value of the Trust's assets.
High Yield Risk
Investing in high yield bonds involves additional risks, including credit
risk. The value of high yield, lower quality bonds is affected by the
creditworthiness of the issuers of the securities and by general economic and
specific industry conditions. Issuers of high yield bonds are not as strong
financially as those with higher credit ratings, so the bonds are usually
considered speculative investments. These issuers are more vulnerable to
financial setbacks and recession than more creditworthy issuers which may impair
their ability to make interest and principal payments. Investments in lower
grade securities will expose the Trust to greater risks than if the Trust owned
only higher grade securities.
Recent Developments
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the United States securities markets
were closed for a four-day period. These terrorist attacks and related events
have led to increased short-term market volatility and may have long-term
effects on United States and world economies and markets. A similar disruption
of the financial markets could impact interest rates, auctions, secondary
trading, ratings, credit risk, inflation and other factors relating to the
securities.
MANAGEMENT OF THE TRUST
Trustees and Officers
The board of trustees is responsible for the overall management of the
Trust, including supervision of the duties performed by BlackRock. There are
eight trustees of the Trust. Two of the trustees are "interested persons" (as
defined in the Investment Company Act). The names and business addresses of the
trustees and officers of the Trust and their principal occupations and other
affiliations during the past five years are set forth under "Management of the
Trust" in the Statement of Additional Information.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock
Financial Management, Inc. acts as the Trust's sub-advisor. BlackRock Advisors
and BlackRock Financial Management both are wholly owned subsidiaries of
BlackRock, Inc., which is one of the largest publicly traded investment
management firms
17
in the United States with $225 billion of assets under management as of
September 30, 2001. BlackRock, Inc. and its affiliates manage assets on behalf
of more than 3,300 institutions and 200,000 individuals worldwide, through a
variety of equity, fixed income, liquidity and alternative investment separate
accounts and mutual funds, including the company's flagship fund families,
BlackRock Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is
the nation's 26th largest asset management firm according to PENSIONS &
INVESTMENTS, May 14, 2001.
The BlackRock organization has over 13 years of experience managing
closed-end products and currently advises a closed-end family of 29 funds.
BlackRock has 21 leveraged municipal closed-end funds and six open-end municipal
funds under management and approximately $17 billion in municipal assets
firm-wide. Clients are served from the company's headquarters in New York City,
as well as offices in Wilmington, Delaware, San Francisco, California, Hong
Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The
PNC Financial Services Group, Inc. ("PNC"), one of the largest diversified
financial services organizations in the United States, and is majority-owned by
PNC and by BlackRock employees.
BlackRock Advisors, Inc. manages or managed fourteen other "term trusts."
To date, four of these term trusts have reached their respective termination
dates and have met their investment objective of returning the initial offering
price per share as of their respective termination date. Past performance is no
guarantee of future performance.
Investment Philosophy. BlackRock's investment decision-making process for
the municipal bond sector is subject to the same discipline, oversight and
investment philosophy that the firm applies to other sectors of the fixed income
market.
BlackRock uses a relative value strategy that evaluates the trade-off
between risk and return to seek to achieve the Trust's investment objective of
generating current income exempt from regular Federal income tax. This strategy
is combined with disciplined risk control techniques and applied in sector,
sub-sector and individual security selection decisions. BlackRock's extensive
personnel and technology resources are the key drivers of the investment
philosophy.
BlackRock's Municipal Bond Team. BlackRock uses a team approach to managing
municipal portfolios. BlackRock believes that this approach offers substantial
benefits over one that is dependent on the market wisdom or investment expertise
of only a few individuals.
BlackRock's municipal bond team includes five portfolio managers with an
average experience of 14 years and five credit research analysts with an average
experience of 11 years. Kevin M. Klingert, a managing director, senior portfolio
manager and head of municipal bonds at BlackRock, leads the team, a position he
has held since joining BlackRock in 1991. Mr. Klingert has over 17 years of
experience in the municipal market.
Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant Vice
President at Merrill Lynch, Pierce, Fenner & Smith Incorporated, which he joined
in 1985. The portfolio management team also includes Craig Kasap, James
McGinley, F. Howard Downs and Anthony Pino. Mr. Kasap, CFA, has been a portfolio
manager at BlackRock for over four years and is a member of BlackRock's
Investment Strategy Group. Prior to joining BlackRock in 1997, Mr. Kasap spent
the previous three years as a municipal bond trader with Keystone Investments
Inc. in Boston where he was involved in formulating the firm's municipal bond
investment strategies. Mr. McGinley has been a portfolio manager and a member of
the Investment Strategy Group at BlackRock since 1999. Prior to joining
BlackRock in 1999, Mr. McGinley was Vice President of Municipal Trading from
1996 to 1999 and Manager of the Municipal Strategy Group from 1995 to 1999 with
Prudential Securities Incorporated. Mr. McGinley joined Prudential Securities
Incorporated in 1993 as an Associate in Municipal Research. F. Howard Downs has
been a portfolio manager since joining BlackRock in 1999. Prior to joining
BlackRock in 1999, Mr. Downs was a Vice President, Institutional Salesman and
Sales Manager from 1990 to 1999 at William E. Simon & Sons Municipal Securities,
Inc. Mr. Downs was one of the original employees of William E. Simon & Sons
Municipal Securities, Inc., founded in 1990, and was responsible for sales of
municipal bonds. Anthony Pino has been a portfolio manager since joining
BlackRock in 1999. Prior to
18
joining BlackRock in 1999, he was a Brokerage Coordinator at CPI Capital. From
1996 to 1999, Mr. Pino was an Assistant Vice President and trader in the
Municipal Strategy Group at Prudential Securities Incorporated.
BlackRock's municipal bond portfolio managers are responsible for over 70
municipal bond portfolios, valued at approximately $13 billion. Municipal
mandates include the management of open- and closed-end mutual funds,
municipal-only separate accounts or municipal allocations within larger
institutional mandates. In addition BlackRock manages 14 municipal liquidity
accounts valued at approximately $4.6 billion. Currently, the team manages 18
closed-end municipal funds with approximately $4.6 billion in managed assets as
of September 30, 2001. Of the $4.6 billion in closed-end municipal funds, six of
these funds are municipal term trusts valued at $2.8 billion and twelve are
perpetual trusts valued at $1.8 billion.
BlackRock's Investment Process. BlackRock has in-depth expertise in the
fixed income market. BlackRock applies the same risk-controlled, active sector
rotation style to the management process for all of its fixed income portfolios.
BlackRock believes that it is unique in its integration of taxable and municipal
bond specialists. Both taxable and municipal bond portfolio managers share the
same trading floor and interact frequently for determining the firm's overall
investment strategy. This interaction allows each portfolio manager to access
the combined experience and expertise of the entire portfolio management group
at BlackRock.
BlackRock's portfolio management process emphasizes research and analysis
of specific sectors and securities, not interest rate speculation. BlackRock
believes that market-timing strategies can be highly volatile and potentially
produce inconsistent results. Instead, BlackRock thinks that value over the
long-term is best achieved through a risk-controlled approach, focusing on
sector allocation, security selection and yield curve management.
In the municipal market, BlackRock believes one of the most important
determinants of value is supply and demand. BlackRock's ability to monitor
investor flows and frequency and seasonality of issuance is helpful in
anticipating the supply and demand for sectors. BlackRock believes that the
breadth and expertise of its municipal bond team allow it to anticipate issuance
flows, forecast which sectors are likely to have the most supply and plan its
investment strategy accordingly.
BlackRock also believes that over the long term, intense credit analysis
will add incremental value and avoid significant relative performance
impairments. The municipal credit team is led by Susan C. Heide, Ph.D., who has
been, since 1999, Managing Director, Head of Municipal Credit Research and
co-chair of BlackRock's Credit Committee. From 1995 to 1999, Dr. Heide was a
Director and Head of Municipal Credit Research. Dr. Heide specializes in the
credit analysis of municipal securities and as such chairs the monthly municipal
bond presentation to the Credit Committee. In addition, Dr. Heide supervises the
team of municipal bond analysts that assists with the ongoing surveillance of
the $13 billion in municipal bonds managed by BlackRock.
Prior to joining BlackRock as a Vice President and Head of Municipal Credit
Research in 1993, Dr. Heide was Director of Research and a portfolio manager at
OFFITBANK. For eight years prior to this assignment (1984 to 1992), Dr. Heide
was with American Express Company's Investment Division where she was the Vice
President of Credit Research, responsible for assessing the creditworthiness of
$6 billion in municipal securities. Dr. Heide began her investment career in
1983 at Moody's Investors Service, Inc. where she was a municipal bond analyst.
Dr. Heide initiated the Disclosure Task Force of the National Federation of
Municipal Analysts in 1988 and was co-chairperson of this committee from its
inception through the completion of the Disclosure Handbook for Municipal
Securities--1992 Update, published in January 1993. Dr. Heide has authored a
number of articles on municipal finance and edited The Handbook of Municipal
Bonds published in the fall of 1994. Dr. Heide was selected by the Bond Buyer as
a first team All-American Municipal Analyst in 1990.
BlackRock's approach to credit risk incorporates a combination of
sector-based, top-down macro-analysis of industry sectors to determine relative
weightings with a name-specific (issuer-specific), bottom-up detailed credit
analysis of issuers and structures. The sector-based approach focuses on
rotating into sectors that are undervalued and exiting sectors when fundamentals
or technicals become unattractive. The name-specific
19
approach focuses on identifying special opportunities where the market
undervalues a credit, and devoting concentrated resources to research the credit
and monitor the position. BlackRock's analytical process focuses on anticipating
change in credit trends before market recognition. Credit research is a
critical, independent element of BlackRock's municipal process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock Advisors
and the Trust, the Trust has agreed to pay for the investment advisory services
and facilities provided by BlackRock Advisors a fee payable monthly in arrears
at an annual rate equal to 0.40% of the average weekly value of the Trust's
Managed Assets (the "management fee"). The Trust will also reimburse BlackRock
Advisors for expenses BlackRock Advisors incurs in connection with performing
administrative services for the Trust. In addition, with the approval of the
board of trustees, a pro rata portion of the salaries, bonuses, health
insurance, retirement benefits and similar employment costs for the time spent
on Trust operations (other than the provision of services required under the
investment management agreement) of all personnel employed by BlackRock Advisors
who devote substantial time to Trust operations or the operations of other
investment companies advised by the Advisor may be reimbursed to BlackRock
Advisors. Managed Assets are the total assets of the Trust, which includes any
proceeds from the AMPS, minus the sum of accrued liabilities (other than
indebtedness attributable to leverage). This means that during periods in which
the Trust is using leverage, the fee paid to BlackRock Advisors will be higher
than if the Trust did not use leverage because the fee is calculated as a
percentage of the Trust's Managed Assets, which include those assets purchased
with leverage.
In addition to the management fee of BlackRock Advisors, the Trust pays all
other costs and expenses of its operations, including compensation of its
trustees (other than those affiliated with BlackRock Advisors), custodian,
transfer and dividend disbursing agent expenses, legal fees, rating agency fees,
listing fees and expenses, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, please refer to the detailed description of the AMPS
in the Statement of Preferences (the "Statement") attached as Appendix A to the
Statement of Additional Information.
General
The Trust's Agreement and Declaration of Trust, as amended and restated,
authorizes the issuance of an unlimited number of preferred shares, par value
$.001 per share, in one or more classes or series with rights as determined by
the board of trustees without the approval of common shareholders. The Statement
currently authorizes the issuance of 4,490 AMPS, Series W7 and 4,490 AMPS,
Series R7. All AMPS will have a liquidation preference of $25,000 per share,
plus an amount equal to accumulated but unpaid dividends (whether or not earned
or declared). The Trust intends to redeem all of the AMPS no later than the last
dividend payment date prior to December 31, 2018 (when the Trust will
terminate).
The AMPS of each series will rank on parity with any other series of AMPS
and any other series of preferred shares of the Trust as to the payment of
dividends and the distribution of assets upon liquidation. Each share of AMPS
carries one vote on matters on which AMPS can be voted. The AMPS, when issued,
will be fully paid and non-assessable and have no preemptive, conversion or
cumulative voting rights.
20
Dividends and Rate Periods
The following is a general description of dividends and Rate Periods.
Rate Periods. The Initial Rate Period for each series of AMPS is as set
forth below:
Series Initial Rate Period
------ -------------------
W7 [ ] Days
R7 [ ] Days
Any subsequent Rate Periods of a series of AMPS will generally be seven
days. The Trust, subject to certain conditions, may change the length of
Subsequent Rate Periods designating them as Special Rate Periods. See
"--Designation of Special Dividend Periods" below.
Dividend Payment Dates. Dividends on each series of AMPS will be payable,
when, as and if declared by the board of trustees, out of legally available
funds in accordance with the Agreement and Declaration of Trust, as amended and
restated, the Statement and applicable law. Dividends are scheduled to be paid
for each series as follows:
Subsequent Dividend
Initial Dividend Payment Dates
Series Payment Date on Each
------ ------------ ------------------
W7 January 10, 2002 Thursday
R7 January 11, 2002 Friday
If dividends are payable on a day that is not a business day, then
dividends will be payable on the next business day. In addition, the Trust may
specify different Dividend Payment Dates for any Special Rate Period of more
than 28 Rate Period Days.
Dividends will be paid through the Securities Depository on each Dividend
Payment Date. The Securities Depository, in accordance with its current
procedures, is expected to distribute dividends received from the Trust in
next-day funds on each Dividend Payment Date to Agent Members. These Agent
Members are in turn expected to distribute such dividends to the persons for
whom they are acting as agents. However, each of the current Broker-Dealers has
indicated to the Trust that dividend payments will be available in same-day
funds on each Dividend Payment Date to customers that use such Broker-Dealer or
that Broker-Dealer's designee as Agent Member.
Calculation of Dividend Payment. The Trust computes the dividends per share
payable on shares of a series of AMPS by multiplying the applicable rate for
shares of such series in effect by a fraction. The numerator of this fraction
will normally be seven (I.E., the number of days in the Dividend Period) and the
denominator will normally be 365 if such Rate Period consists of seven days and
360 for all other Rate Periods. In either case, this rate is then multiplied by
$25,000 to arrive at dividends per share.
Dividends on shares of each series of AMPS will accumulate from the date of
their original issue. For each dividend payment period after the initial
dividend period, the dividend rate will be the dividend rate determined at
auction, except that the dividend rate that results from an auction will not be
greater than the maximum applicable rate described below.
The maximum applicable rate for any rate period for a series of AMPS will
be the applicable percentage (set forth in the Applicable Percentage Payment
Table below) of the reference rate (set forth in the Reference Rate Table below)
for the applicable rate period. The applicable percentage for a series of AMPS
is determined on the day that a notice of a special dividend period is delivered
if the notice specifies a maximum applicable rate for a special dividend period.
If Moody's or S&P or both shall not make such rating available, the rate shall
be determined by reference to equivalent ratings issued by a substitute rating
agency. If the Trust has provided
21
notification to the auction agent prior to an auction establishing the
applicable rate for a dividend period that net capital gains or other taxable
income will be included in the dividend determined at such auction, the
applicable percentage will be derived from the column captioned "Applicable
Percentage: Notification" in the Applicable Percentage Table below:
Applicable Percentage Table
Credit Ratings Applicable Percentage Table
---------------------------------------- -------------------------------------------------
Applicable Percentage: Applicable Percentage:
Moody's S&P No Notification Notification
------- ---- -------------------- -------------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
"ba3" to "ba1" BB- to BB+ 200% 275%
Below "Ba3" Below BB- 250% 300%
The reference rate used to determine the maximum applicable rate generally
varies depending on the length of the applicable rate period, as set forth in
the Reference Rate Table below:
Reference Rate Table
Rate Period Reference Rate
----------- --------------
28 days or less Greater of:
o "AA" Composite
Commercial Paper Rate
o Taxable Equivalent of the
Short-Term Municipal Bond Rate
29 days to 182 days "AA" Composite Commercial Paper Rate
183 days to 364 days Treasury Bill Rate
365 days or more Treasury Note Rate
The "AA Composite Commercial Paper Rate" is as set forth in the table set
forth below:
AA Composite Commercial Paper Rate Table.
AA Composite
Rate Period Special Rate Period Commercial Paper Rate*
---------- ----------------- ----------------------
7 days or less 48 days or fewer 30-day rate
49 days to 69 days 60-day rate
70 days to 84 days Average of 60-day and 90-day rates
85 days to 98 days 90-day rate
99 days to 119 days Average of 90-day and 120-day rates
120 days to 140 days 120-day rate
141 days to 161 days Average of 120-day and 180-day rates
162 days to 182 days 180-day rate
--------------
* Rates stated on a discount basis
If the Federal Reserve Bank of New York does not make available any such
rate, the rate shall be the average rate quoted on a discount basis by
commercial paper dealers to the Auction Agent at the close of business on the
business day next preceding such date. If any commercial paper dealer does not
quote a rate, the rate shall be determined by quotes provided by the remaining
commercial paper dealers.
22
"Taxable Equivalent of the Short-Term Municipal Bond Rate" means 90% of an
amount equal to the per annum rate payable on taxable bonds in order for such
rate, on an after-tax basis, to equal the per annum rate payable on tax-exempt
bonds issued by "high grade" issuers as determined in accordance with the
procedures set forth in the Statement.
Prior to each dividend payment date, the Trust is required to deposit with
the auction agent sufficient funds for the payment of declared dividends. The
failure to make such deposit will not result in the cancellation of any auction.
The Trust does not intend to establish any reserves for the payment of
dividends.
If an auction for any series of AMPS is not held when scheduled for any
reason, the dividend rate for the corresponding rate period will be the maximum
applicable rate on the date the auction was scheduled to be held.
Additional Dividends. Under Federal income tax rules applicable to the
Trust, the Trust may, in certain circumstances, allocate net capital gains or
other taxable income to a dividend paid on AMPS after the dividend has been paid
(a "Retroactive Taxable Allocation"). If the Trust makes a Retroactive Taxable
Allocation on the AMPS without giving advance notice thereof as described under
"The Auction--Auction Proceeds", the Trust will, whether or not by reason of the
fact that such allocation was made retroactively as a result of a redemption of
all or a portion of the AMPS or liquidation of the Fund, pay to the holders of
AMPS, out of funds legally available therefore, an additional dividend. The
additional dividend will be in an amount equal to the amount of taxes paid by a
holder of AMPS on the Retroactive Taxable Allocation, provided that the
additional dividend will be calculated:
o without consideration being given to the time value of money;
o assuming that no holder of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Trust; and
o assuming that each Retroactive Taxable Allocation would be taxable in
the hands of each holder of AMPS at the maximum marginal regular Federal
income tax rate applicable to individuals or corporations, whichever is
greater, in effect during the fiscal year in question.
Although the Trust 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." The Trust will not pay a further additional
dividend with respect to any taxable portion of an additional dividend.
The Trust will, within 90 days (and generally within 60 days) after the end
of its fiscal year for which a Retroactive Taxable Allocation is made, provide
notice thereof to the auction agent. The Trust will pay, out of legally
available funds, any additional dividend due on all Retroactive Taxable
Allocations made during the fiscal year in question, within 30 days after such
notice is given to the auction agent.
Restrictions on Dividends and Other Distributions. While the AMPS are
outstanding, the Trust generally may not declare, pay or set apart for payment,
any dividend or other distribution in respect of its common shares. In addition,
the Trust may not call for redemption or redeem any of its common shares.
However, the Trust is not confined by the above restrictions if:
o immediately after such transaction, the Discounted Value of the Trust's
portfolio would be equal to or greater than the Preferred Shares Basic
Maintenance Amount and the Investment Company Act Preferred Shares Asset
Coverage (see "--Rating Agency Guidelines and Asset Coverage" below);
o full cumulative dividends on each series of AMPS due on or prior to the
date of the transaction have been declared and paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
auction agent; and
o the Trust has redeemed the full number of AMPS required to be redeemed
by any provision for mandatory redemption contained in the Statement.
23
The Trust generally will not declare, pay or set apart for payment any
dividend on any class or series of shares of the Trust ranking, as to the
payment of dividends, on a parity with AMPS unless the Trust has declared and
paid or contemporaneously declares and pays full cumulative dividends on each
series of the AMPS through its most recent dividend payment date. However, when
the Trust has not paid dividends in full upon the shares of each series of AMPS
through the most recent dividend payment date or upon any other class or series
of shares of the Trust ranking, as to the payment of dividends, on a parity with
AMPS through their most recent respective dividend payment dates, the amount of
dividends declared per share on AMPS and such other class or series of shares
will in all cases bear to each other the same ratio that accumulated dividends
per share on the AMPS and such other class or series of shares bear to each
other.
Designation of Special Rate Periods. The Trust may, at its sole option,
declare a special rate period of shares of a particular series of AMPS. To
declare a special rate period, the Trust will give notice (a "request for
special dividend period") to the auction agent and to each Broker-Dealer. The
notice will request that the next succeeding rate period for the series of AMPS
be a number of days (other than seven) evenly divisible by seven as specified in
such notice and not more than 1,820 days long; provided, however, that a special
rate period may be a number of days not evenly divisible by seven if all shares
of the series of AMPS are to be redeemed at the end of such special rate period.
The Trust may not request a special rate period unless sufficient clearing bids
for shares of such series were made in the most recent auction.
Redemption
Mandatory Redemption. The Trust is required to maintain (a) a Discounted
Value of eligible portfolio securities equal to the Preferred Shares Basic
Maintenance Amount and (b) the Investment Company Act Preferred Shares Asset
Coverage. Eligible portfolio securities for these purposes will be determined
from time to time by the rating agencies then rating the AMPS. If the Trust
fails to maintain such asset coverage amounts and does not timely cure such
failure in accordance with the requirements of the rating agency that rates the
AMPS, the Trust must redeem all or a portion of the AMPS. This mandatory
redemption will take place on a date that the board of trustees specifies out of
legally available funds in accordance with the Agreement and Declaration of
Trust, as amended and restated, the Statement and applicable law, at the
redemption price of $25,000 per share plus accumulated but unpaid dividends
(whether or not earned or declared) to the date fixed for redemption. The number
of AMPS that must be redeemed in order to cure such failure will be allocated
pro rata among the outstanding AMPS of the Trust. The mandatory redemption will
be limited to the number of AMPS necessary to restore the required Discounted
Value or the Investment Company Act Preferred Shares Asset Coverage, as the case
may be.
Optional Redemption. The Trust, at its option, may redeem the shares of
each series of AMPS, in whole or in part, out of funds legally available
therefor. Any optional redemption will occur on any dividend payment date at the
optional redemption price per share 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, specified in a special redemption provision. No shares of a
series of AMPS may be redeemed if the redemption would cause the Trust to
violate the Investment Company Act or applicable law. In addition, holders of a
series of AMPS may be entitled to receive additional dividends if the redemption
causes the Trust to make a Retroactive Taxable Allocation without having given
advance notice to the auction agent. Shares of a series of AMPS may not be
redeemed in part if fewer than 300 Shares would remain outstanding after the
redemption. The Trust has the authority to redeem the series of AMPS for any
reason. The Trust intends to redeem all of the AMPS no later than the last
dividend payment date prior to December 31, 2018 (when the Trust will
terminate).
Liquidation
If the Trust is liquidated, the holders of any series of outstanding AMPS
will receive the liquidation preference on such series, plus all accumulated but
unpaid dividends, plus any applicable additional dividends payable before any
payment is made to the common shares. The holders of AMPS will be entitled to
receive these amounts from the assets of the Trust available for distribution to
its shareholders. In addition, the rights of
24
holders of AMPS to receive these amounts are subject to the rights of holders of
any series or class of shares, including other series of preferred shares,
ranking on a parity with the AMPS with respect to the distribution of assets
upon liquidation of the Trust. After the payment to the holders of AMPS of the
full preferential amounts as described, the holders of AMPS will have no right
or claim to any of the remaining assets of the Trust.
For purpose of the foregoing paragraph, a voluntary or involuntary
liquidation of the Trust does not include:
o the sale of all or substantially all the property or business of the
Trust;
o the merger or consolidation of the Trust into or with any other business
trust or corporation; or
o the merger or consolidation of any other business trust or corporation
into or with the Trust.
Rating Agency Guidelines and Asset Coverage
The Trust is required under guidelines of Moody's and S&P to maintain
assets having in the aggregate a Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount. Moody's and S&P have each established
separate guidelines for calculating Discounted Value. To the extent any
particular portfolio holding does not satisfy a rating agency's guidelines, all
or a portion of the holding's value will not be included in the rating agency's
calculation of Discounted Value. The Moody's and S&P guidelines do not impose
any limitations on the percentage of the Trust's assets that may be invested in
holdings not eligible for inclusion in the calculation of the Discounted Value
of the Trust's portfolio. The amount of ineligible assets included in the
Trust's portfolio at any time may vary depending upon the rating,
diversification and other characteristics of the eligible assets included in the
portfolio. The Preferred Shares Basic Maintenance Amount includes the sum of (a)
the aggregate liquidation preference of the AMPS then outstanding and (b)
certain accrued and projected payment obligations of the Trust.
The Trust is also required under the Investment Company Act to maintain
asset coverage of at least 200% with respect to senior securities which are
equity shares, including the AMPS ("Investment Company Act Preferred Shares
Asset Coverage"). The Trust's Investment Company Act Preferred Shares Asset
Coverage is tested as of the last business day of each month in which any senior
equity securities are outstanding. The minimum required Investment Act Preferred
Shares Asset Coverage amount of 200% may be increased or decreased if the
Investment Company Act is amended. Based on the composition of the portfolio of
the Trust and market conditions as of November 30, 2001, the Investment Company
Act Preferred Shares Asset Coverage with respect to all of the Trust's preferred
shares, assuming the issuance on that date of all AMPS offered hereby and giving
effect to the deduction of related sales load and related offering costs
estimated at $1,707,743 would have been computed as follows:
Value of Trust assets less liabilities not constituting senior securities = $351,833,392 = 256%
------------------------------------------------------- -----------
Senior securities representing indebtedness plus liquidation value of $137,600,000
the preferred shares
In the event the Trust does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the Investment Company Act Preferred Shares Asset
Coverage, in each case in accordance with the requirements of the rating agency
or agencies then rating the AMPS, the Trust will be required to redeem AMPS as
described under "--Redemption--Mandatory Redemption" above.
The Trust may, but is not required to, adopt any modifications to the
guidelines that may be established by Moody's or S&P. Failure to adopt any such
modifications, however, may result in a change in the ratings described above or
a withdrawal of ratings altogether. In addition, any rating agency providing a
rating for the AMPS may, at any time, change or withdraw any such rating. The
board of trustees may, without shareholder approval, amend, alter or repeal any
or all of the definitions and related provisions which have been adopted by the
Trust pursuant to the rating agency guidelines in the event the Trust receives
written confirmation from
25
Moody's or S&P, as the case may be, that any such amendment, alteration or
repeal would not impair the rating then assigned to the AMPS.
As recently described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The rating on the AMPS is not a recommendation to purchase, hold or
sell those shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The rating agency guidelines described
above also do not address the likelihood that an owner of AMPS will be able to
sell such shares in an auction or otherwise. The rating is based on current
information furnished to Moody's and S&P by the Trust and the Advisor 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 common shares have not been rated by a nationally recognized statistical
rating organization.
The rating agency's guidelines will apply to the AMPS only so long as the
rating agency is rating the shares. The Trust will pay certain fees to Moody's
and S&P for rating the AMPS.
Voting Rights
Except as otherwise provided in this prospectus and in the Statement of
Additional Information or as otherwise required by law, holders of AMPS will
have equal voting rights with holders of common shares and any other preferred
shares (one vote per share) and will vote together with holders of common shares
and any preferred shares as a single class.
Holders of outstanding preferred shares, including AMPS, voting as a
separate class, are entitled to elect two of the Trust's trustees. The remaining
trustees are elected by holders of common shares and preferred shares, including
AMPS, voting together as a single class. In addition, if at any time dividends
(whether or not earned or declared) on outstanding preferred shares, including
AMPS, are due and unpaid in an amount equal to two full years of dividends, and
sufficient cash or specified securities have not been deposited with the auction
agent for the payment of such dividends, then, the sole remedy of holders of
outstanding preferred shares, including AMPS, is that the number of trustees
constituting the Board will be automatically increased by the smallest number
that, when added to the two trustees elected exclusively by the holders of
preferred shares, including AMPS, as described above, would constitute a
majority of the Board. The holders of preferred shares, including AMPS, will be
entitled to elect that smallest number of additional trustees at a special
meeting of shareholders held as soon as possible and at all subsequent meetings
at which trustees are to be elected. The terms of office of the persons who are
trustees at the time of that election will continue. If the Trust thereafter
shall pay, or declare and set apart for payment, in full, all dividends payable
on all outstanding preferred shares, including AMPS, the special voting rights
stated above will cease, and the terms of office of the additional trustees
elected by the holders of preferred shares, including AMPS, will automatically
terminate.
As long as any AMPS are outstanding, the Trust will not, without the
affirmative vote or consent of the holders of at least a majority of the AMPS
outstanding at the time (voting together as a separate class):
(a) authorize, create or issue, or increase the authorized or issued
amount of, any class or series of shares ranking prior to or on a parity
with the AMPS with respect to payment of dividends or the distribution of
assets on liquidation, or authorize, create or issue additional shares of
any series of AMPS or any other preferred shares, unless, in the case of
shares of preferred shares on parity with the AMPS, the Trust obtains
written confirmation from Moody's (if Moody's is then rating preferred
shares), S&P (if S&P is then rating preferred shares) or any substitute
rating agency (if any such substitute rating agency is then rating
preferred shares) that the issuance of a class or series would not impair
the rating then assigned by such rating agency to the AMPS and the Trust
continues to comply with Section 13 of the Investment Company Act, the
Investment Company Act Preferred Shares Asset Coverage requirements and the
Preferred Shares Basic Maintenance Amount requirements, in which case the
vote or consent of the holders of the AMPS is not required;
26
(b) amend, alter or repeal the provisions of the Agreement and
Declaration of Trust, as amended and restated, or the Statement, by merger,
consolidation or otherwise, so as to adversely affect any preference, right
or power of the AMPS or holders of AMPS; provided, however, that (i) none
of the actions permitted by the exception to (a) above will be deemed to
affect such preferences, rights or powers, (ii) a division of AMPS will be
deemed to affect such preferences, rights or powers only if the terms of
such division adversely affect the holders of AMPS and (iii) the
authorization, creation and issuance of classes or series of shares ranking
junior to the AMPS with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, will be deemed to affect such preferences, rights or
powers only if Moody's or S&P is then rating the AMPS and such issuance
would, at the time thereof, cause the Trust not to satisfy the Investment
Company Act Preferred Shares Asset Coverage or the Preferred Shares Basic
Maintenance Amount;
(c) authorize the Trust's conversion from a closed-end to an
open-end investment company;
(d) amend the provisions of the Agreement and Declaration of Trust,
as amended and restated, which provide for the classification of the board
of directors of the Trust into three classes, each with a term of office of
three years with only one class of directors standing for election in any
year; or
(e) approve any reorganization (as such term is used in the
Investment Company Act) adversely affecting the AMPS.
So long as any shares of the AMPS are outstanding, the Trust shall not,
without the affirmative vote or consent of the Holders of at least 66-2/3% of
the AMPS outstanding at the time, in person or by proxy, either in writing or at
a meeting, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent.
To the extent permitted under the Investment Company Act, the Trust will
not approve any of the actions set forth in (a) or (b) above which adversely
affects the rights expressly set forth in the Agreement and Declaration of
Trust, as amended and restated, or the Statement, of a holder of shares of a
series of preferred shares differently than those of a holder of shares of any
other series of preferred shares without the affirmative vote or consent of the
holders of at least a majority of the shares of each series adversely affected.
Unless a higher percentage is provided for under the Agreement and Declaration
of Trust, as amended and restated, or the Statement, the affirmative vote of the
holders of a majority of the outstanding AMPS, voting together as a single
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.
However, to the extent permitted by the Agreement and Declaration of Trust, as
amended and restated, or the Statement, no vote of holders of common shares,
either separately or together with holders of preferred shares as a single
class, is necessary to take the actions contemplated by (a) and (b) above. The
holders of common shares will not be entitled to vote in respect of such
matters, unless, in the case of the actions contemplated by (b) above, the
action would adversely affect the contract rights of the holders of common
shares expressly set forth in the Trust's Agreement and Declaration of Trust, as
amended and restated.
The foregoing voting provisions will not apply with respect to AMPS if, at
or prior to the time when a vote is required, such shares have been (i) redeemed
or (ii) called for redemption and sufficient funds have been deposited in trust
to effect such redemption.
THE AUCTION
General
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the shares of each series of AMPS for each
rate period after the initial rate period will be the rate that results from an
auction conducted as set forth in the Statement and summarized below. In such an
auction, persons determine
27
to hold or offer to sell or, based on dividend rates bid by them, offer to
purchase or sell shares of a series of AMPS. See the Statement included in the
Statement of Additional Information for a more complete description of the
auction process.
Auction Agency Agreement. The Trust will enter into an auction agency
agreement with the auction agent (currently, The Bank of New York) which
provides, among other things, that the auction agent will follow the auction
procedures to determine the applicable rate for shares of each series of AMPS,
so long as the applicable rate for shares of such series of AMPS is to be based
on the results of an auction.
The auction agent may terminate the auction agency agreement upon 45 days'
notice to the Trust. If the auction agent should resign, the Trust will use its
best efforts to enter into an agreement with a successor auction agent
containing substantially the same terms and conditions as the auction agency
agreement. The Trust may remove the auction agent provided that, prior to
removal, the Trust has entered into a replacement agreement with a successor
auction agent.
Broker-Dealer Agreements. Each auction requires the participation of one or
more Broker-Dealers. The auction agent will enter into agreements with several
Broker-Dealers selected by the Trust, which provide for the participation of
those Broker-Dealers in auctions for AMPS.
The auction agent will pay to each Broker-Dealer after each auction, from
funds provided by the Trust, a service charge at the annual rate of 1/4 of 1% in
the case of any auction before a rate period of 364 days or less, or a
percentage agreed to by the Trust and the Broker-Dealers, in the case of any
auction before a rate period of 365 days or longer, of the purchase price of
AMPS placed by a Broker-Dealer at the auction.
The Trust may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that at
least one Broker-Dealer Agreement is in effect after termination of the
agreement.
Auction Procedures
Prior to the submission deadline on each auction date for shares of a
series of AMPS, each customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the auction agent) as a beneficial owner
of such series of AMPS may submit the following types of orders with respect to
shares of such series of AMPS to that Broker-Dealer.
1. Hold order--indicating its desire to hold shares of such series without
regard to the applicable rate for the next dividend period.
2. Bid--indicating its desire to sell shares of such series at $25,000 per
share if the applicable rate for shares of such series for the next dividend
period is less than the rate or spread specified in the bid.
3. Sell order--indicating its desire to sell shares of such series at
$25,000 per share without regard to the applicable rate for shares of such
series for the next dividend period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to shares of a series of AMPS then held by the
beneficial owner. A beneficial owner for shares of such series that submits its
bid with respect to shares of such series to its Broker-Dealer having a rate
higher than the maximum applicable rate for shares of such series on the auction
date will be treated as having submitted a sell order to its Broker-Dealer. A
beneficial owner of shares of such series that fails to submit an order to its
Broker-Dealer with respect to such shares will ordinarily be deemed to have
submitted a hold order with respect to such shares of such series to its
Broker-Dealer. However, if a beneficial owner of shares of such series fails to
submit an order with respect to such shares of such series to its Broker-Dealer
for an auction relating to a dividend period of more than 28 days such
beneficial owner will be deemed to have submitted a sell order to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the AMPS
subject to the sell order. A beneficial owner that offers to become the
beneficial owner of additional AMPS is, for purposes of such offer, a potential
holder as discussed below.
28
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of a series of AMPS but that wishes to purchase shares of such
series or that is a beneficial owner of shares of such series that wishes to
purchase additional shares of such series. A potential holder may submit bids to
its Broker-Dealer in which it offers to purchase shares of such series at
$25,000 per share if the applicable rate for shares of such series for the next
dividend period is not less than the specified rate in such bid. A bid placed by
a potential holder of shares of such series specifying a rate higher than the
maximum applicable rate for shares of such series on the auction date will not
be accepted.
The Broker-Dealers in turn will submit the orders of their respective
customers who are beneficial owners and potential holders to the auction agent.
They will designate themselves (unless otherwise permitted by the Trust) as
existing holders of shares subject to orders submitted or deemed submitted to
them by beneficial owners. They will designate themselves as potential holders
of shares subject to orders submitted to them by potential holders. However,
neither the Trust nor the auction agent will be responsible for a
Broker-Dealer's failure to comply with these procedures. Any order placed with
the auction agent by a Broker-Dealer as or on behalf of an existing holder or a
potential holder will be treated the same way as an order placed with a
Broker-Dealer by a beneficial owner or potential holder. Similarly, any failure
by a Broker-Dealer to submit to the auction agent an order for any AMPS held by
it or customers who are beneficial owners will be treated as a beneficial
owner's failure to submit to its Broker-Dealer an order in respect of AMPS held
by it. A Broker-Dealer may also submit orders to the auction agent for its own
account as an existing holder or potential holder, provided it is not an
affiliate of the Trust.
There are sufficient clearing bids for shares of a series in an auction if
the number of shares of such series subject to bids submitted or deemed
submitted to the auction agent by Broker-Dealers for potential holders with
rates or spreads equal to or lower than the maximum applicable rate for such
series is at least equal to or exceeds the sum of the number of shares of such
series subject to sell orders and the number of shares of such series subject to
bids specifying rates or spreads higher than the maximum applicable rate for
such series submitted or deemed submitted to the auction agent by Broker-Dealers
for existing holders of such series. If there are sufficient clearing bids for
shares of a series, the applicable rate for shares of such series for the next
succeeding dividend period thereof will be the lowest rate specified in the
submitted bids which, taking into account such rate and all lower rates bid by
Broker-Dealers as or on behalf of existing holders and potential holders, would
result in existing holders and potential holders owning the shares of such
series available for purchase in the auction.
If there are not sufficient clearing bids for shares of such series, the
applicable rate for the next dividend period will be the maximum applicable rate
for shares of such series on the auction date. If this happens, beneficial
owners of shares of such series that have submitted or are deemed to have
submitted sell orders may not be able to sell in the auction all shares of such
series subject to such sell orders. If all of the outstanding shares of such
series are the subject of submitted hold orders, then the dividend period
following the auction will automatically be the same length as the preceding
dividend period for such series. The applicable rate for the next dividend
period will then be:
o (i) if the applicable rate period is less than 183 days, the "AA"
Composite Commercial Paper Rate, (ii) if the applicable rate period is
more than 182 days but fewer than 365 days, the Treasury Bill Rate, and
(iii) if the applicable rate period is more than 364 days, the Treasury
Note Rate (the applicable rate being referred to as the "Benchmark
Rate"); multiplied by
o 1 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal
corporate income tax rate applicable to ordinary income, whichever is
greater.
If the applicable rate period is less than 183 days and the Kenny Index is
less than amount determined above for a rate period of less than 183 days, then
the applicable rate for an all hold period will be the rate equal to the Kenny
Index.
29
The "Kenny Index" is the Kenny S&P 30 day High Grade Index or any successor
index.
The "Treasury Bill Rate" is either (i) the bond equivalent yield,
calculated in accordance with prevailing industry convention, of the rate on the
most recently auctioned Treasury bill with a remaining maturity closest to the
length of such Rate Period, as quoted in The Wall Street Journal on such date
for the business day next preceding such date; or (ii) in the event that any
such rate is not published in The Wall Street Journal, the bond equivalent
yield, calculated in accordance with prevailing industry convention, as
calculated by reference to the arithmetic average of the bid price quotations of
the most recently auctioned Treasury bill with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of the
close of business on the business day immediately preceding such date obtained
by the auction agent.
The "Treasury Note Rate" on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the business day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street Journal, the yield as
calculated by reference to the arithmetic average of the bid price quotations of
the most recently auctioned Treasury note with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of the
close of business on the business day immediately preceding such date obtained
by the auction agent.
If all the shares of a series are subject to hold orders and the Trust has
notified the auction agent of its intent to allocate to a series of AMPS any net
capital gains or other income taxable for Federal income tax purposes ("Taxable
Income"), the applicable rate for the series of AMPS for the applicable rate
period will be (i) if the Taxable Yield Rate is greater than the Benchmark Rate,
the Benchmark Rate, or (ii) if the Taxable Yield Rate is less than or equal to
the Benchmark Rate, the rate equal to the sum of (x) the amount determined
pursuant to the two bullet points above, and (y) the product of the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater, multiplied by the Taxable
Yield Rate.
The "Taxable Yield Rate" is the rate determined by (i) dividing the amount
of Taxable Income available for distribution on each share of AMPS in the
affected series by the number of days in the Dividend Period in respect of which
the Taxable Income is contemplated to be distributed, (ii) multiplying the
amount determined in (i) by 365 (in the case of a Dividend Period of 7 days) or
360 (in the case of any other Dividend Period), and (iii) dividing the amount
determined in (ii) by $25,000.
The auction procedure includes a pro rata allocation of shares for purchase
and sale, which may result in an existing holder continuing to hold or selling,
or a potential holder purchasing, a number of shares of a series of AMPS that is
different than the number of shares of such series specified in its order. To
the extent the allocation procedures have that result, Broker-Dealers that have
designated themselves as existing holders or potential holders in respect of
customer orders will be required to make appropriate pro rata allocations among
their respective customers.
Settlement of purchases and sales will be made on the next business day
(which is also a dividend payment date) after the auction date through DTC.
Purchasers will make payment through their Agent Members in same-day funds to
DTC against delivery to their respective Agent Members. DTC will make payment to
the sellers' Agent Members in accordance with DTC's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
The auctions for Series W7 will normally be held every Wednesday, and each
subsequent dividend period will normally begin on the following Thursday. The
auctions for Series R7 will normally be held every Thursday, and each subsequent
dividend period will normally begin on the following Friday.
If an Auction Date is not a business day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or a loss
or malfunction of utilities or communications services, or the auction agent is
not able to conduct an Auction in accordance with the Auction Procedures for any
such reason, then the Auction Rate for the next Dividend Period will be the
Auction Rate determined on the previous Auction Date.
30
If a Dividend Payment Date is not a business day because the New York Stock
Exchange is closed for business due to an act of God, natural disaster, act of
war, civil or military disturbance, act of terrorism, sabotage, riots or a loss
or malfunction of utilities or communications services, or the dividend payable
on such date can not be paid for any such reason, then:
o the Dividend Payment Date for the affected Dividend Period will be the
next Business Day on which the Trust and its paying agent, if any, can
pay the dividend;
o the affected Dividend Period will end on the day it otherwise would have
ended; and
o the next Dividend Period will begin and end on the dates on which it
otherwise would have begun and ended.
Whenever the Trust intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on AMPS, the Trust may
notify the auction agent of the amount to be so included not later than the
dividend payment date before the auction date. Whenever the auction agent
receives such notice from the Trust, it will be required in turn to notify each
Broker-Dealer, who, on or prior to such auction date, will be required to notify
its customers who are beneficial owners and potential holders believed by it to
be interested in submitting an order in the auction to be held on such auction
date. In the event of such notice, the Trust will not be required to pay an
additional dividend with respect to such dividend.
Secondary Market Trading and Transfers of AMPS
The Broker-Dealers are expected to maintain a secondary trading market in
AMPS outside of auctions, but are not obligated to do so, and may discontinue
such activity at any time. There can be no assurance that any secondary trading
market in AMPS will provide owners with liquidity of investment. The AMPS will
not be registered on any stock exchange or on the Nasdaq Stock Market.
A beneficial owner or an existing holder may sell, transfer or otherwise
dispose of AMPS only in whole shares and only:
o pursuant to a bid or sell order placed with the auction agent in
accordance with the auction procedures;
o to a Broker-Dealer; or
o to such other persons as may be permitted by the Trust;
provided, however, that:
o a sale, transfer or other disposition of AMPS from a customer of
Broker-Dealer who is listed on the records of that Broker-Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other
disposition if such Broker-Dealer remains the existing holder of the
shares; and
o in the case of all transfers other than pursuant to auctions, the
Broker-Dealer (or other person, if permitted by the Trust) to whom such
transfer is made will advise the auction agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the AMPS, the Agreement and Declaration of Trust, as amended
and restated, authorizes the issuance of an unlimited number of common shares of
beneficial interest, par value $.001 per share. Each common share has one vote
and is fully paid and non-assessable, except that the trustees shall have the
power to cause shareholders to pay expenses of the Trust by setting off charges
due from common shareholders from declared but unpaid dividends or distributions
owed by the common shareholders and/or reducing the number of
31
common shares owned by each respective common shareholder. So long as any
preferred shares, including AMPS, are outstanding, the holders of common shares
will not be entitled to receive any distributions from the Trust unless all
accrued dividends on preferred shares, including AMPS, have been paid, unless
asset coverage (as defined in the Investment Company Act) with respect to
preferred shares would be at least 200% after giving effect to the distributions
and unless certain other requirements imposed by any rating agencies rating such
preferred shares have been met. All common shares are equal as to dividends,
assets and voting privileges and have no conversion, preemptive or other
subscription rights.
The Trust's common shares are traded on the New York Stock Exchange under
the symbol "BPK".
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust, as amended and restated, includes
provisions that could have the effect of limiting the ability of other entities
or persons to acquire control of the Trust or to change the composition of its
board of trustees. This could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control over the Trust. Such
attempts could have the effect of increasing the expenses of the Trust and
disrupting the normal operation of the Trust. The board of trustees is divided
into three classes, with the terms of one class expiring at each annual meeting
of shareholders. At each annual meeting, one class of trustees is elected to a
three-year term. This provision could delay for up to two years the replacement
of a majority of the board of trustees. A trustee may be removed from office by
the action of a majority of the remaining trustees followed by a vote of the
holders of at least 75% of the shares then entitled to vote for the election of
the respective trustee.
In addition, the Trust's Agreement and Declaration of Trust, as amended and
restated, requires the favorable vote of a majority of the Trust's board of
trustees followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of the Trust, voting
separately as a class or series, to approve, adopt or authorize certain
transactions with 5% or greater holders of a class or series of shares and their
associates, unless the transaction has been approved by at least 80% of the
trustees, in which case "a majority of the outstanding voting securities" (as
defined in the Investment Company Act) of the Trust shall be required. For
purposes of these provisions, a 5% or greater holder of a class or series of
shares (a "Principal Shareholder") refers to any person who, whether directly or
indirectly and whether alone or together with its affiliates and associates,
beneficially owns 5% or more of the outstanding shares of any class or series of
shares of beneficial interest of the Trust.
The 5% holder transactions subject to these special approval requirements
are:
o the merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder;
o the issuance of any securities of the Trust to any Principal Shareholder
for cash;
o the sale, lease or exchange of all or any substantial part of the assets
of the Trust to any Principal Shareholder, except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the
purpose of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period; or
o the sale, lease or exchange to the Trust or any subsidiary of the Trust,
in exchange for securities of the Trust, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within a
twelve-month period.
To convert the Trust to an open-end management investment company, the
Trust's Agreement and Declaration of Trust, as amended and restated, requires
the favorable vote of a majority of the board of the trustees followed by the
favorable vote of the holders of at least 75% of the outstanding shares of each
affected
32
class or series of shares of the Trust, voting separately as a class or series,
unless such amendment has been approved by at least 80% of the trustees, in
which case "a majority of the outstanding voting securities" (as defined in the
Investment Company Act) of the Trust shall be required. The foregoing vote would
satisfy a separate requirement in the Investment Company Act that any conversion
of the Trust to an open-end management investment company be approved by the
shareholders. If approved in the foregoing manner, conversion of the Trust to an
open-end management investment company could not occur until 90 days after the
shareholders' meeting at which such conversion was approved and would also
require at least 30 days' prior notice to all shareholders. Conversion of the
Trust to an open-end management investment company would require the redemption
of all outstanding preferred shares, including AMPS, which could eliminate or
alter the leveraged capital structure of the Trust with respect to the common
shares. Following any such conversion, it is also possible that certain of the
Trust's investment policies and strategies would have to be modified to assure
sufficient portfolio liquidity. In the event of conversion, the common shares
would cease to be listed on the New York Stock Exchange or other national
securities exchanges or market systems. Shareholders of an open-end management
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 a redemption. The Trust expects to pay all such
redemption requests in cash, but intends to reserve the right to pay redemption
requests in a combination of cash or securities. If such partial payment in
securities were made, investors may incur brokerage costs in converting such
securities to cash. If the Trust were converted to an open-end fund, it is
likely that new shares would be sold at net asset value plus a sales load. The
board of trustees believes, however, that the closed-end structure is desirable
in light of the Trust's investment objectives and policies. Therefore, you
should assume that it is not likely that the board of trustees would vote to
convert the Trust to an open-end fund.
To liquidate the Trust prior to December 31, 2018, the Trust's Agreement
and Declaration of Trust, as amended and restated, requires the favorable vote
of a majority of the board of trustees followed by the favorable vote of the
holders of at least 75% of the outstanding shares of each affected class or
series of the Trust, voting separately as a class or series, unless such
liquidation has been approved by at least 80% of trustees, in which case "a
majority of the outstanding voting securities" (as defined in the Investment
Company Act) of the Trust shall be required.
For the purposes of calculating "a majority of the outstanding voting
securities" under the Trust's Agreement and Declaration of Trust, as amended and
restated, each class and series of the Trust shall vote together as a single
class, except to the extent required by the Investment Company Act or the
Trust's Agreement and Declaration of Trust, as amended and restated, with
respect to any class or series of shares. If a separate vote is required, the
applicable proportion of shares of the class or series, voting as a separate
class or series, also will be required.
The board of trustees has determined that provisions with respect to the
board of trustees and the shareholder voting requirements described above, which
voting requirements are greater than the minimum requirements under Delaware law
or the Investment Company Act, are in the best interest of shareholders
generally. Reference should be made to the Agreement and Declaration of Trust,
as amended and restated, on file with the Securities and Exchange Commission for
the full text of these provisions.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to
their net asset values, and the Trust's common shares may also trade at a
discount to their net asset value. The market price of the Trust's common shares
will be determined by such factors as relative demand for and supply of such
common shares in the market, the Trust's net asset value, general market and
economic conditions and other factors beyond the control of the Trust. Although
the Trust's common shareholders will not have the right to redeem their common
shares, the Trust may take action to repurchase common shares in the open market
or make tender offers for its common shares at their net asset value. This may
have the effect of reducing any market discount from net asset
33
value. Any such repurchase may cause the Trust to repurchase AMPS to maintain
asset coverage requirements imposed by the Investment Company Act or any rating
agency rating the AMPS at that time.
TAX MATTERS
Federal Income Tax Matters
The following is a description of certain Federal income tax consequences
to a shareholder who is a United States person, within the meaning of Section
7701(a)(30) of the Internal Revenue Code of 1986, as amended (the "Code"), of
acquiring, holding and disposing of AMPS of the Trust. The discussion reflects
applicable tax laws of the United States as of the date of this prospectus,
which tax laws may be changed or subject to new interpretations by the courts or
the Internal Revenue Service (the "IRS") retroactively or prospectively. No
attempt is made to present a detailed explanation of all Federal, state, local
and foreign tax concerns affecting the Trust and its shareholders, and the
discussion set forth herein does not constitute tax advice. Investors are urged
to consult their tax advisers to determine the tax consequences to them of
investing in the Trust.
The Trust intends to elect to be treated and to qualify to be taxed as a
regulated investment company under Subchapter M of the Code and intends to
distribute substantially all of its net income and gains to its shareholders.
Therefore, it is not expected that the Trust will be subject to any Federal
income tax to the extent such distributions are made. The Trust expects that
substantially all of the dividends it distributes to its common shareholders and
preferred shareholders, including holders of the AMPS, will qualify as
"exempt-interest dividends." A shareholder treats an exempt-interest dividend as
interest on state and local bonds which is exempt from regular Federal income
tax. Some or all of an exempt-interest dividend, however, may be subject to
Federal alternative minimum tax imposed on the shareholder. Different Federal
alternative minimum tax rules apply to individuals and to corporations. In
addition to exempt-interest dividends, the Trust also may distribute to its
shareholders amounts that are treated as long-term capital gain or ordinary
income. The Trust will allocate tax-exempt interest income, long-term capital
gain and other taxable income, if any, proportionately among the common shares
and preferred shares, including the AMPS, in proportion to total dividends paid
to each class for the year. The Trust intends to notify holders of AMPS in
advance if it will allocate income to them that is not exempt from regular U.S.
federal income tax. In certain circumstances, the Trust will make payments to
holders of AMPS to offset the tax effects of the taxable distribution. See
"Description of AMPS--Dividends and Dividend Periods--Additional Dividends." The
sale or other disposition of common shares or preferred shares, including the
AMPS, of the Trust will generally result in capital gain or loss to
shareholders. Both long-term and short-term capital gains of corporations are
taxed at the rates applicable to ordinary income. For non-corporate taxpayers,
short-term capital gains and ordinary income are taxed currently at a maximum
rate of 39.1%, while long-term capital gains are generally taxed at a maximum
rate of 20% (or 18% for capital assets that have been held for more than five
years and the holding period of which began after December 31, 2000).1 Because
of certain limitations on itemized deductions and the deduction for personal
exemptions applicable to higher income taxpayers, the effective rate of tax may
be higher in certain circumstances. Losses realized by a shareholder on the sale
or exchange of shares of the Trust held for six months or less are disallowed to
the extent of any exempt-interest dividends received with respect to such
shares, and, if not disallowed, such losses are treated as long-term capital
losses to the extent of any capital gain dividends received (or amounts credited
as an undistributed capital gain) with respect to such shares. A shareholder's
holding period is suspended for any periods during which the shareholder's risk
of loss is diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or short
sales. Any loss realized on a sale or exchange of shares of the Trust will be
disallowed to the extent those shares of the Trust are replaced by other shares
within a period of 61 days beginning 30 days before and ending 30 days after the
date
--------------
1 The Economic Growth and Tax Relief Reconciliation Act of 2001, effective for
taxable years beginning after December 31, 2000, creates a new 10 percent
income tax bracket and reduces the tax rates applicable to ordinary income
over a six year phase-in period. Beginning in the taxable year 2006, ordinary
income will be subject to a 35% maximum rate, with approximately
proportionate reductions in the other ordinary rates.
34
of disposition of the original shares. In that event, the basis of the
replacement shares of the Trust will be adjusted to reflect the disallowed loss.
This summary of tax consequences is intended for general information only.
You should consult a tax advisor concerning the tax consequences of your
investment in the Trust. The foregoing discussion is subject to and qualified in
its entirety by the discussion in "Tax Matters" in the Statement of Additional
Information below.
State and Local Tax Matters
While exempt-interest dividends are exempt from regular Federal income tax,
they may not be exempt from state or local income or other taxes. Some states
exempt from state income tax that portion of any exempt-interest dividend that
is derived from interest that a regulated investment company receives on its
holdings of securities of that state and its political subdivisions and
instrumentalities. Therefore, the Trust will report annually to its shareholders
the percentage of interest income the Trust earned during the preceding year on
tax-exempt obligations and the Trust will indicate, on a state-by-state basis,
the source of this income. You should consult with your tax adviser about state
and local tax matters.
35
UNDERWRITING
Subject to the terms and conditions of the purchase agreement dated the
date hereof, each Underwriter named below has severally agreed to purchase, and
the Trust has agreed to sell to such Underwriter the number of AMPS set forth
opposite the name of such Underwriter.
Number
of Shares
--------
U.S. Underwriter SeriesW7 AMPS Series R7 AMPS
--------------- --------------- ------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .........................
Salomon Smith Barney Inc. .........................
Prudential Securities Incorporated ................
UBS Warburg LLC ...................................
---------- ------------------
Total
========== ==================
The purchase agreement provides that the obligations of the underwriters to
purchase the shares included in this offering are subject to the approval of
certain legal matters by counsel and to certain other conditions. The
Underwriters are obligated to purchase all the AMPS if they purchase any of the
shares. In the purchase agreement, the Trust, the Advisor and the Sub-Advisor
have agreed to indemnify the Underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, as amended, or to
contribute payments the Underwriters may be required to make for any of those
liabilities.
The Underwriters propose to initially offer some of the AMPS directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the AMPS to certain dealers at the public offering price
less a concession not in excess of $ per share. The underwriting discount the
Trust will allow is equal to 1% of the initial offering price of the AMPS. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share on sales to certain other dealers. After the initial public
offering, the Underwriters may change the public offering price and the
concession. Investors must pay for any shares purchased in the initial public
offering on or before , 2001.
The Trust anticipates that the Underwriters may from time to time act as
broker or dealer in executing the Trust's portfolio transactions after they have
ceased to be underwriters. The Underwriters are active underwriters of, and
dealers in, securities and act as market makers in a number of such securities,
and therefore can be expected to engage in portfolio transactions with the
Trust.
The Trust anticipates that its affiliates may, from time to time, act in
auctions as Broker-Dealers and receive fees as set forth under "The Auction."
Each of the Underwriters and its affiliates may engage in transactions with, and
perform services for, the Trust in the ordinary course of business.
The principal business address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated is North Tower, World Financial Center, New York, New York 10080.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013.
The settlement date for the purchase of the AMPS will be , 2001, as agreed
upon by the Underwriters, the Trust and BlackRock pursuant to Rule 15c6-1 under
the Securities Exchange Act of 1934.
CUSTODIAN AND TRANSFER AGENT; AUCTION AGENT
The Custodian of the assets of the Trust is State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting
36
services. EquiServe Trust Company, N.A., 150 Royall Street, Canton,
Massachusetts 02021, will serve as the Trust's Transfer Agent with respect to
the common shares.
The Bank of New York, 5 Penn Plaza, 13th Floor, New York, New York 10001, a
banking corporation organized under the laws of New York, is the auction agent
with respect to the AMPS and acts as transfer agent, registrar, dividend
disbursing agent, and redemption agent with respect to such shares.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed
upon for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York and for the underwriters by Clifford Chance Rogers & Wells LLP. Clifford
Change Rogers & Wells LLP may rely as to certain matters of Delaware law on the
opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
AVAILABLE INFORMATION
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act and is required to file
reports, proxy statements and other information with the Securities and Exchange
Commission. These documents can be inspected and copied for a fee at the SEC's
public reference room, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the SEC's Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661-2511. Reports, proxy statements,
and other information about the Trust can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus does not contain all of the information in the Trust's
registration statement, including amendments, exhibits, and schedules.
Statements in this prospectus about the contents of any contact or other
document are not necessarily complete and in each instance reference is made to
the copy of the contact or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.
Additional information about the Trust and AMPS can be found in the Trust's
registration statement (including amendments, exhibits, and schedules) on Form
N-2 filed with the SEC. The SEC maintains a web site (http://www.sec.gov) that
contains the Trust's registration statement, other documents incorporated by
reference, and other information the Trust has filed electronically with the
Commission, including proxy statements and reports filed under the Securities
Exchange Act of 1934.
37
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds ....................................................... B-2
Investment Objectives and Policies .................................... B-2
Investment Policies and Techniques .................................... B-4
Other Investment Policies and Techniques .............................. B-11
Management of the Trust ............................................... B-14
Portfolio Transactions and Brokerage .................................. B-20
Additional Information Concerning the Auctions for AMPS ............... B-21
Description of Common Shares .......................................... B-22
Repurchase of Common Shares ........................................... B-22
Tax Matters ........................................................... B-24
Experts ............................................................... B-27
Additional Information ................................................ B-27
Financial Statements .................................................. F-1
Independent Auditors' Report .......................................... F-3
Financial Statements (unaudited) ...................................... F-4
APPENDIX A Statement of Preferences of Auction Market Preferred Shares A-1
APPENDIX B Ratings of Investments ..................................... B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies .... C-1
38
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like the
Trust with taxable alternative investments, the table below presents the taxable
equivalent yields for a range of hypothetical tax-free yields assuming the
stated marginal federal tax rates for 2001 listed below:
Tax-Free Yields
Tax Rate 1.50% 2.00% 2.50% 3.00% 3.50% 4.00%
-------- ----- ----- ------ ------ ------ ------
15.0% 1.76% 2.35% 2.94% 3.53% 4.12% 4.71%
27.5% 2.07% 2.76% 3.45% 4.14% 4.83% 5.52%
30.5% 2.16% 2.88% 3.60% 4.32% 5.04% 5.76%
35.5% 2.33% 3.10% 3.88% 4.65% 5.43% 6.20%
39.1% 2.46% 3.28% 4.11% 4.93% 5.75% 6.57%
A-1
================================================================================
$137,600,000
BlackRock
Municipal 2018 Term Trust
Auction Market Preferred Shares ("AMPS")
2,752 Shares, Series W7
2,752 Shares, Series R7
--------
PROSPECTUS
--------
Merrill Lynch & Co.
Salomon Smith Barney
Prudential Securities
UBS Warburg
December , 2001
================================================================================
BlackRock Municipal 2018 Term Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock Municipal 2018 Term Trust (the "Trust") is a recently organized,
diversified, closed-end management investment company. This Statement of
Additional Information relating to common shares does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
thereto dated December , 2001. This Statement of Additional Information does not
include all information that a prospective investor should consider before
purchasing common shares, and investors should obtain and read the prospectus
prior to purchasing such shares. A copy of the prospectus may be obtained
without charge by calling (888) 825-2257. You may also obtain a copy of the
prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the prospectus
or the Statement attached as Appendix A.
TABLE OF CONTENTS
Page
----
Use of Proceeds ....................................................... B-2
Investment Objectives and Policies .................................... B-2
Investment Policies and Techniques .................................... B-4
Other Investment Policies and Techniques .............................. B-11
Management of the Trust ............................................... B-14
Portfolio Transactions and Brokerage .................................. B-20
Additional Information Concerning the Auctions for AMPS ............... B-21
Description of Common Shares .......................................... B-22
Repurchase of Common Shares ........................................... B-22
Tax Matters ........................................................... B-24
Experts ............................................................... B-27
Additional Information ................................................ B-27
Financial Statements .................................................. F-1
Independent Auditors' Report .......................................... F-3
Financial Statements (unaudited) ...................................... F-4
APPENDIX A Statement of Preferences of Auction Market Preferred Shares A-1
APPENDIX B Ratings of Investments ..................................... B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies .... C-1
This Statement of Additional Information is dated December , 2001.
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objectives and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Policies and
Techniques--Short-Term Taxable Fixed Income Securities," the income on which is
subject to regular Federal income tax, and securities of other open- or
closed-end management investment companies that invest primarily in municipal
bonds of the type in which the Trust may invest directly.
INVESTMENT OBJECTIVES AND POLICIES
The Trust has not established any limit on the percentage of its portfolio
that may be invested in municipal bonds subject to the alternative minimum tax
provisions of Federal tax law, and the Trust expects that a portion of the net
investment income it produces will be includable in alternative minimum taxable
income. Common shares therefore would not ordinarily be a suitable investment
for investors who are subject to the Federal alternative minimum tax or who
would become subject to such tax by purchasing common shares. The suitability of
an investment in common shares will depend upon a comparison of the after-tax
yield likely to be provided from the Trust with that from comparable tax-exempt
investments not subject to the alternative minimum tax, and from comparable
fully taxable investments, in light of each such investor's tax position.
Special considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Trust, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding common
shares and AMPS voting together as a single class, and of the holders of a
majority of the outstanding AMPS voting as a separate class:
(1) invest 25% or more of the value of its total assets in any one
industry, provided that this limitation does not apply to municipal bonds
other than those municipal bonds backed only by assets and revenues of
non-governmental issuer;
(2) with respect to 75% of its total assets, invest more than 5% of the
value of its total assets in the securities of any single issuer or
purchase more than 10% of the outstanding voting securities of any one
issuer;
(3) issue senior securities or borrow money other than as permitted by
the Investment Company Act or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar investment
strategies;
(4) make loans of money or property to any person, except through loans
of portfolio securities, the purchase of fixed income securities consistent
with the Trust's investment objectives and policies or the entry into
repurchase agreements;
(5) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or the sale
of its own securities the Trust may be deemed to be an underwriter;
(6) purchase or sell real estate or interests therein other than
municipal bonds secured by real estate or interests therein, provided that
the Trust may hold and sell any real estate acquired in connection with its
investment in portfolio securities; or
B-2
(7) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable law without
the Trust becoming subject to registration with the Commodity Futures
Trading Commission (the "CFTC") as a commodity pool.
When used with respect to particular shares of the Trust, "majority of the
outstanding" means (i) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the shares are present or represented by proxy, or
(ii) more than 50% of the shares, whichever is less.
For purposes of applying the limitation set forth in subparagraph (1)
above, securities of the U.S. government, its agencies, or instrumentalities,
and securities backed by the credit of a governmental entity are not considered
to represent industries. However, obligations backed only by the assets and
revenues of non-governmental issuers may for this purpose be deemed to be issued
by such non-governmental issuers. Thus, the 25% limitation would apply to such
obligations. It is nonetheless possible that the Trust may invest more than 25%
of its total assets in a broader economic sector of the market for municipal
obligations, such as revenue obligations of hospitals and other health care
facilities or electrical utility revenue obligations. The Trust reserves the
right to invest more than 25% of its assets in industrial development bonds and
private activity securities.
For the purposes of applying the limitation set forth in subparagraph (2)
above, a non-governmental issuer shall be deemed the sole issuer of a security
when its assets and revenues are separate from other governmental entities and
its securities are backed only by its assets and revenues. Similarly, in the
case of a non-governmental issuer, such as an industrial corporation or a
privately owned or operated hospital, if the security is backed only by the
assets and revenues of the non-governmental issuer, then such non-governmental
issuer would be deemed to be the sole issuer. Where a security is also backed by
the enforceable obligation of a superior or unrelated governmental or other
entity (other than a bond insurer), it shall also be included in the computation
of securities owned that are issued by such governmental or other entity. Where
a security is guaranteed by a governmental entity or some other facility, such
as a bank guarantee or letter of credit, such a guarantee or letter of credit
would be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or guaranteed by
the insurer; instead, the issuer of such municipal bond will be determined in
accordance with the principles set forth above. The foregoing restrictions do
not limit the percentage of the Trust's assets that may be invested in municipal
bonds insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10% of its
total assets in the aggregate in shares of other investment companies and up to
5% of its total assets in any one investment company, provided the investment
does not represent more than 3% of the voting stock of the acquired investment
company at the time such shares are purchased. As a shareholder in any
investment company, the Trust will bear its ratable share of that investment
company's expenses, and will remain subject to payment of the Trust's advisory
fees and other expenses with respect to assets so invested. Holders of common
shares will therefore be subject to duplicative expenses to the extent the Trust
invests in other investment companies. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein and in the prospectus. As described in the
prospectus in the section entitled "Risks," the net asset value and market value
of leveraged shares will be more volatile and the yield to shareholders will
tend to fluctuate more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the Trust is
also subject to the following non-fundamental restrictions and policies, which
may be changed by the board of trustees. The Trust may not:
(1) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless after giving effect to
such sale, the market value of all securities sold short does not exceed
25% of the value of the Trust's total assets and the Trust's aggregate
short sales of a particular class of securities does not exceed 25% of the
then outstanding securities of that class. The Trust may also make short
sales "against the box" without respect to such limitations. In this type
of short sale, at the time of the sale, the
B-3
Trust owns or has the immediate and unconditional right to acquire at no
additional cost the identical security;
(2) purchase securities of open-end or closed-end management investment
companies except in compliance with the Investment Company Act or any
exemptive relief obtained thereunder; or
(3) purchase securities of companies for the purpose of exercising
control.
The restrictions and other limitations set forth above will apply only at
the time of purchase of securities and will not be considered violated unless an
excess or deficiency occurs or exists immediately after and as a result of the
acquisition of securities.
In addition, to comply with Federal tax requirements for qualification as a
"regulated investment company," the Trust's investments will be limited in a
manner such that at the close of each quarter of each fiscal year, (a) no more
than 25% of the value of the Trust's total assets are invested in the securities
(other than United States government securities or securities of other regulated
investment companies) of a single issuer or two or more issuers controlled by
the Trust and engaged in the same, similar or related trades or businesses and
(b) with regard to at least 50% of the Trust's total assets, no more than 5% of
its total assets are invested in the securities (other than United States
government securities or securities of other regulated investment companies) of
a single issuer. These tax-related limitations may be changed by the Trustees to
the extent appropriate in light of changes to applicable tax requirements.
The Trust intends to apply for ratings for the AMPS from Moody's and/or
S&P. In order to obtain and maintain the required ratings, the Trust will be
required to comply with investment quality, diversification and other guidelines
established by Moody's and/or S&P. Such guidelines will likely be more
restrictive than the restrictions set forth above. The Trust does not anticipate
that such guidelines would have a material adverse effect on the Trust's holders
of common shares or its ability to achieve its investment objectives. The Trust
presently anticipates that any AMPS that it intends to issue would be initially
given the highest ratings by Moody's ( Aaa) or by S&P (AAA), but no assurance
can be given that such ratings will be obtained. No minimum rating is required
for the issuance of AMPS by the Trust. Moody's and S&P receive fees in
connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Trust's
investment objectives, policies and techniques that are described in the
prospectus.
Portfolio Investments
The Trust will invest primarily in a portfolio of investment grade
municipal bonds that are exempt from regular Federal income tax.
Issuers of bonds rated Ba/BB or B are regarded as having current capacity
to make principal and interest payments but are subject to business, financial
or economic conditions which could adversely affect such payment capacity.
Municipal bonds rated Baa or BBB are considered "investment grade" securities;
municipal bonds rated Baa are considered medium grade obligations which lack
outstanding investment characteristics and have speculative characteristics,
while issuers of municipal bonds rated BBB are regarded as having adequate
capacity to pay principal and interest. Municipal bonds rated AAA in which the
Trust may invest may have been so rated on the basis of the existence of
insurance guaranteeing the timely payment, when due, of all principal and
interest. Municipal bonds rated below investment grade quality are obligations
of issuers that are considered predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy and increased market price
volatility. Municipal bonds rated below investment grade tend to be less
marketable than higher-quality bonds because the market for them is less broad.
The market for
B-4
unrated municipal bonds is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely to increase
significantly and the Trust may have greater difficulty selling its portfolio
securities. The Trust will be more dependent on BlackRock's research and
analysis when investing in these securities.
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Trust will actively manage the maturity of its bonds and will initially
invest in municipal bonds with long-term maturities in order to maintain a
weighted average maturity of approximately 17 years, but the average weighted
maturity shortens as the Trust approaches maturity. Moreover, during temporary
defensive periods (e.g., times when, in BlackRock's opinion, temporary
imbalances of supply and demand or other temporary dislocations in the
tax-exempt bond market adversely affect the price at which long-term or
intermediate-term municipal bonds are available), and in order to keep cash on
hand fully invested, including the period during which the net proceeds of the
offering are being invested, the Trust may invest any percentage of its assets
in short-term investments including high quality, short-term securities which
may be either tax-exempt or taxable and securities of other open- or closed-end
management investment companies that invest primarily in municipal bonds of the
type in which the Trust may invest directly. The Trust intends to invest in
taxable short-term investments only in the event that suitable tax-exempt
temporary investments are not available at reasonable prices and yields.
Tax-exempt temporary investments include various obligations issued by state and
local governmental issuers, such as tax-exempt notes (bond anticipation notes,
tax anticipation notes and revenue anticipation notes or other such municipal
bonds maturing in three years or less from the date of issuance) and municipal
commercial paper. The Trust will invest only in taxable temporary investments
which are U.S. government securities or securities rated within the highest
grade by Moody's, S&P or Fitch, and which mature within one year from the date
of purchase or carry a variable or floating rate of interest. Taxable temporary
investments of the Trust may include certificates of deposit issued by U.S.
banks with assets of at least $1 billion, commercial paper or corporate notes,
bonds or debentures with a remaining maturity of one year or less, or repurchase
agreements. See "Other Investment Policies and Techniques--Repurchase
Agreements." To the extent the Trust invests in taxable investments, the Trust
will not at such times be in a position to achieve its investment objective of
tax-exempt income.
The foregoing policies as to ratings of portfolio investments will apply
only at the time of the purchase of a security and the Trust will not be
required to dispose of securities in the event Moody's, S&P or Fitch downgrades
its assessment of the credit characteristics of a particular issuer.
Also included within the general category of municipal bonds described in
the prospectus are participations in lease obligations or installment purchase
contract obligations (hereinafter collectively called "Municipal Lease
Obligations") of municipal authorities or entities. Although a Municipal Lease
Obligation does not constitute a general obligation of the municipality for
which the municipality's taxing power is pledged, a Municipal Lease Obligation
is ordinarily backed by the municipality's covenant to budget for, appropriate
and make the payments due under the Municipal Lease Obligation. However, certain
Municipal Lease Obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Trust's ability to
recover under the lease in the event of non-appropriation or default will be
limited solely to the repossession of the leased property, without recourse to
the general credit of the lessee, and the disposition or re-leasing of the
property might prove difficult. In order to reduce this risk, the Trust will
only purchase Municipal Lease Obligations where BlackRock believes the issuer
has a strong incentive to continue making appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Bankruptcy Reform Act of 1978. In addition, the
B-5
obligations of such issuers may become subject to the laws enacted in the future
by Congress, state legislatures or referenda extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon municipalities to levy taxes. There is also the
possibility that, as a result of legislation or other conditions, the power or
ability of any issuer to pay, when due, the principal of and interest on its
municipal bonds may be materially affected.
In addition to the types of municipal bonds described in the prospectus,
the Trust may invest in other securities that pay interest that is, or make
other distributions that are, exempt from regular Federal income tax and/or
state and local personal taxes, regardless of the technical structure of the
issuer of the instrument. The Trust treats all such tax-exempt securities as
municipal bonds.
Short-Term Taxable Fixed-Income Securities
For temporary defensive purposes or to keep cash on hand fully invested,
the Trust may invest up to 100% of its total assets in cash equivalents and
short-term taxable fixed-income securities, although the Trust intends to invest
in taxable short-term investments only in the event that suitable tax-exempt
short-term investments are not available at reasonable prices and yields.
Short-term taxable fixed income investments are defined to include, without
limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government securities include securities issued by
(a) the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration, and
the Government National Mortgage Association, whose securities are
supported by the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a bank or
a savings and loan association. Such certificates are for a definite period
of time, earn a specified rate of return, and are normally negotiable. The
issuer of a certificate of deposit agrees to pay the amount deposited plus
interest to the bearer of the certificate on the date specified thereon.
Certificates of deposit purchased by the Trust may not be fully insured by
the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities.
At the time the Trust purchases securities pursuant to a repurchase
agreement, it simultaneously agrees to resell and redeliver such securities
to the seller, who also simultaneously agrees to buy back the securities at
a fixed price and time. This assures a predetermined yield for the Trust
during its holding period, since the resale price is always greater than
the purchase price and reflects an agreed-upon market rate. Such actions
afford an opportunity for the Trust to invest temporarily available cash.
The Trust may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or instrumentalities;
certificates of deposit; or bankers' acceptances in which the Trust may
invest. Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Trust is
limited to the ability of the seller to pay the agreed-upon sum on the
repurchase date; in the event of default, the repurchase agreement provides
that the Trust is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, and if the
seller defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the Trust could
incur a loss of both principal and
B-6
interest. BlackRock monitors the value of the collateral at the time the
action is entered into and at all times during the term of the repurchase
agreement. BlackRock does so in an effort to determine that the value of
the collateral always equals or exceeds the agreed-upon repurchase price to
be paid to the Trust. If the seller were to be subject to a Federal
bankruptcy proceeding, the ability of the Trust to liquidate the collateral
could be delayed or impaired because of certain provisions of the
bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory
notes, including variable rate master demand notes issued by corporations
to finance their current operations. Master demand notes are direct lending
arrangements between the Trust and a corporation. There is no secondary
market for such notes. However, they are redeemable by the Trust at any
time. BlackRock will consider the financial condition of the corporation
(e.g., earning power, cash flow and other liquidity ratios) and will
continuously monitor the corporation's ability to meet all of its financial
obligations, because the Trust's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of
interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that are
exempt from regular Federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of state
and local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local governments
to finance the current operations of such governments. Repayment is generally to
be derived from specific future tax revenues. TANs are usually general
obligations of the issuer. A weakness in an issuer's capacity to raise taxes due
to, among other things, a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very short-term
unsecured, negotiable promissory notes, issued by states, municipalities and
their agencies. Payment of principal and interest on issues of municipal paper
may be made from various sources, to the extent the funds are available
therefrom.
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Maturities on municipal paper generally will be shorter than the maturities
of TANs, BANs or RANs. There is a limited secondary market for issues of
municipal paper.
Certain municipal bonds may carry variable or floating rates of interest
whereby the rate of interest is not fixed but varies with changes in specified
market rates or indices, such as a bank prime rate or tax-exempt money market
indices.
While the various types of notes described above as a group represent the
major portion of the tax-exempt note market, other types of notes are available
in the marketplace and the Trust may invest in such other types of notes to the
extent permitted under its investment objectives, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
Duration Management and Other Management Techniques
The Trust may use a variety of other investment management techniques and
instruments. The Trust may purchase and sell futures contracts, enter into
various interest rate transactions and may purchase and sell exchange-listed and
over-the-counter put and call options on securities, financial indices and
futures contracts (collectively, "Additional Investment Management Techniques").
These Additional Investment Management Techniques may be used for duration
management and other risk management techniques in an attempt to protect against
possible changes in the market value of the Trust's portfolio resulting from
trends in the debt securities markets and changes in interest rates, to protect
the Trust's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to establish a
position in the securities markets as a temporary substitute for purchasing
particular securities and to enhance income or gain. There is no particular
strategy that requires use of one technique rather than another as the decision
to use any particular strategy or instrument is a function of market conditions
and the composition of the portfolio. The Additional Investment Management
Techniques are described below. The ability of the Trust to use them
successfully will depend on BlackRock's ability to predict pertinent market
movements as well as sufficient correlation among the instruments, which cannot
be assured. Inasmuch as any obligations of the Trust that arise from the use of
Additional Investment Management Techniques will be covered by segregated liquid
assets or offsetting transactions, the Trust and BlackRock believe such
obligations do not constitute senior securities and, accordingly, will not treat
them as being subject to its borrowing restrictions. Commodity options and
futures contracts regulated by the CFTC have specific margin requirements
described below and are not treated as senior securities. The use of certain
Additional Investment Management Techniques may give rise to taxable income and
have certain other consequences. See "Tax Matters."
Interest Rate Transactions. The Trust may enter into interest rate swaps
and the purchase or sale of interest rate caps and floors. The Trust expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities the
Trust anticipates purchasing at a later date. The Trust will ordinarily use
these transactions as a hedge or for duration or risk management although it is
permitted to enter into them to enhance income or gain. The Trust will not sell
interest rate caps or floors that it does not own. Interest rate swaps involve
the exchange by the Trust with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for fixed
rate payments with respect to a notional amount of principal. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that a
specified index falls below a predetermined interest rate, to receive payments
of interest on a notional principal amount from the party selling such interest
rate floor.
The Trust may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Trust receiving or paying, as the case may be, only the net amount of the two
payments on the payment dates. The Trust will accrue the net amount of the
excess, if any, of the Trust's obligations over its entitlements
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with respect to each interest rate swap on a daily basis and will segregate with
a custodian an amount of cash or liquid high grade securities having an
aggregate net asset value at all times at least equal to the accrued excess. The
Trust will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in the highest rating category of at least one nationally
recognized statistical rating organization at the time of entering into such
transaction. If there is a default by the other party to such a transaction, the
Trust will have contractual remedies pursuant to the agreements related to the
transaction.
Futures Contracts and Options on Futures Contracts. The Trust may also
enter into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. The Trust will ordinarily engage in such transactions only
for bona fide hedging, risk management (including duration management) and other
portfolio management purposes. However, the Trust is also permitted to enter
into such transactions for non-hedging purposes to enhance income or gain, in
accordance with the rules and regulations of the CFTC, which currently provide
that no such transaction may be entered into if at such time more than 5% of the
Trust's net assets would be posted as initial margin and premiums with respect
to such non-hedging transactions.
Calls on Securities, Indices and Futures Contracts. The Trust may sell or
purchase call options ("calls") on municipal bonds and indices based upon the
prices of futures contracts and debt securities that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets. A call gives
the purchaser of the option the right to buy, and obligates the seller to sell,
the underlying security, futures contract or index at the exercise price at any
time or at a specified time during the option period. All such calls sold by the
Trust must be "covered" as long as the call is outstanding (i.e., the Trust must
own the securities or futures contract subject to the call or other securities
acceptable for applicable escrow requirements). A call sold by the Trust exposes
the Trust during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security, index or
futures contract and may require the Trust to hold a security or futures
contract which it might otherwise have sold. The purchase of a call gives the
Trust the right to buy a security, futures contract or index at a fixed price.
Calls on futures on municipal bonds must also be covered by deliverable
securities or the futures contract or by liquid high grade debt securities
segregated to satisfy the Trust's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may purchase
put options ("puts") that relate to municipal bonds (whether or not it holds
such securities in its portfolio), indices or futures contracts. The Trust may
also sell puts on municipal bonds, indices or futures contracts on such
securities if the Trust's contingent obligations on such puts are secured by
segregated assets consisting of cash or liquid high grade debt securities having
a value not less than the exercise price. The Trust will not sell puts if, as a
result, more than 50% of the Trust's assets would be required to cover its
potential obligations under its hedging and other investment transactions. In
selling puts, there is a risk that the Trust may be required to buy the
underlying security at a price higher than the current market price.
Municipal Market Data Rate Locks. The Trust may purchase and sell Municipal
Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock permits the Trust to
lock in a specified municipal interest rate for a portion of its portfolio to
preserve a return on a particular investment or a portion of its portfolio as a
duration management technique or to protect against any increase in the price of
securities to be purchased at a later date. The Trust will ordinarily use these
transactions as a hedge or for duration or risk management although it is
permitted to enter into them to enhance income or gain. An MMD Rate Lock is a
contract between the Trust and an MMD Rate Lock provider pursuant to which the
parties agree to make payments to each other on a notional amount, contingent
upon whether the Municipal Market Data AAA General Obligation Scale is above or
below a specified level on the expiration date of the contract. For example, if
the Trust buys an MMD Rate Lock and the Municipal Market Data AAA General
Obligation Scale is below the specified level on the expiration date, the
counterparty to the contract will make a payment to the Trust equal to the
specified level minus the actual level, multiplied by the notional amount of the
contract. If the Municipal Market Data AAA General Obligation
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Scale is above the specified level on the expiration date, the Trust will make a
payment to the counterparty equal to the actual level minus the specified level,
multiplied by the notional amount of the contract. In entering into MMD Rate
Locks, there is a risk that municipal yields will move in the direction opposite
of the direction anticipated by the Trust. The Trust will not enter into MMD
Rate Locks if, as a result, more than 50% of its assets would be required to
cover its potential obligations under its hedging and other investment
transactions.
Appendix C contains further information about the characteristics, risks
and possible benefits of Additional Investment Management Techniques and the
Trust's other policies and limitations (which are not fundamental policies)
relating to investment in futures contracts and options. The principal risks
relating to the use of futures contracts and other Additional Investment
Management Techniques are: (a) less than perfect correlation between the prices
of the instrument and the market value of the securities in the Trust's
portfolio; (b) possible lack of a liquid secondary market for closing out a
position in such instruments; (c) losses resulting from interest rate or other
market movements not anticipated by BlackRock; and (d) the obligation to meet
additional variation margin or other payment requirements, all of which could
result in the Trust being in a worse position than if such techniques had not
been used.
Certain provisions of the Code may restrict or affect the ability of the
Trust to engage in Additional Investment Management Techniques.
See "Tax Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is a
transaction in which the Trust sells a security it does not own in anticipation
that the market price of that security will decline. The Trust may make short
sales to hedge positions, for duration and risk management, in order to maintain
portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Trust may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities. The Trust will also be
required to segregate similar collateral with its custodian to the extent, if
any, necessary so that the aggregate collateral value is at all times at least
equal to the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Trust on such security,
the Trust may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Trust replaces the borrowed security, the Trust will
incur a loss; conversely, if the price declines, the Trust will realize a gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. Although the Trust's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
The Trust will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Trust's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Trust
may also make short sales "against the box" without respect to such limitations.
In this type of short sale, at the time of the sale, the Trust owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
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OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid securities are
subject to legal or contractual restrictions on disposition or lack an
established secondary trading market. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities exchanges or in the over-the-counter
markets. Restricted securities may sell at a price lower than similar securities
that are not subject to restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis and may
purchase or sell municipal bonds on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued and forward commitment
securities may be sold prior to the settlement date, but the Trust will enter
into when-issued and forward commitment securities only with the intention of
actually receiving or delivering the securities, as the case may be. If the
Trust disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss.
Borrowing
Although it has no present intention of doing so, the Trust reserves the
right to borrow funds to the extent permitted as described under the caption
"Investment Objectives and Policies--Investment Restrictions." The proceeds of
borrowings may be used for any valid purpose including, without limitation,
liquidity, investments and repurchases of shares of the Trust. Borrowing is a
form of leverage and, in that respect, entails risks comparable to those
associated with the issuance of AMPS.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with respect to its
portfolio investments subject to the investment restrictions set forth herein.
Reverse repurchase agreements involve the sale of securities held by the Trust
with an agreement by the Trust to repurchase the securities at an agreed upon
price, date and interest payment. At the time the Trust enters into a reverse
repurchase agreement, it may establish and maintain a segregated account with
the custodian containing liquid instruments having a value not less than the
repurchase price (including accrued interest). If the Trust establishes and
maintains such a segregated account, a reverse repurchase agreement will not be
considered a borrowing by the Trust; however, under certain circumstances in
which the Trust does not establish and maintain such a segregated account, such
reverse repurchase agreement will be considered a borrowing for the purpose of
the Trust's limitation on borrowings. The use by the Trust of reverse repurchase
agreements involves many of the same risks of leverage since the proceeds
derived from such reverse repurchase agreements may be invested in additional
securities. Reverse repurchase agreements involve the risk that the market value
of the securities acquired in connection with the reverse repurchase agreement
may decline below the price of the securities the Trust has sold but is
obligated to repurchase. Also, reverse repurchase agreements involve the risk
that the market value of the securities retained in lieu of sale by the Trust in
connection with the reverse repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Trust's
obligation to repurchase the securities, and the Trust's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision. Also, the Trust would bear the risk of loss to the
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extent that the proceeds of the reverse repurchase agreement are less than the
value of the securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during the Trust's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
common shares and AMPS. The Trust will only enter into repurchase agreements
with registered securities dealers or domestic banks that, in the opinion of
BlackRock, present minimal credit risk. The risk to the Trust is limited to the
ability of the issuer to pay the agreed-upon repurchase price on the delivery
date; however, although the value of the underlying collateral at the time the
transaction is entered into always equals or exceeds the agreed-upon repurchase
price, if the value of the collateral declines there is a risk of loss of both
principal and interest. In the event of default, the collateral may be sold but
the Trust might incur a loss if the value of the collateral declines, and might
incur disposition costs or experience delays in connection with liquidating the
collateral. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by the Trust may be
delayed or limited. BlackRock will monitor the value of the collateral at the
time the transaction is entered into and at all times subsequent during the term
of the repurchase agreement in an effort to determine that such value always
equals or exceeds the agreed-upon repurchase price. In the event the value of
the collateral declines below the repurchase price, BlackRock will demand
additional collateral from the issuer to increase the value of the collateral to
at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Trust may invest in zero coupon bonds. A zero coupon bond is a bond
that does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Trust accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.
Lending of Securities
The Trust may lend its portfolio securities to brokers, dealers and other
financial institutions which meet the creditworthiness standards established by
the board of trustees of the Trust ("Qualified Institutions"). By lending its
portfolio securities, the Trust attempts to increase its income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that may occur during the term of the loan will be for the
account of the Trust. The Trust may lend its portfolio securities so long as the
terms and the structure of such loans are not inconsistent with the requirements
of the Investment Company Act, which currently require that (a) the borrower
pledge and maintain with the Trust collateral consisting of cash, a letter of
credit issued by a U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e., the value of the loan is "marked to the
market" on a daily basis), (c) the loan be made subject to termination by the
Trust at any time and (d) the Trust receive reasonable interest on the loan
(which may include the Trust's investing any cash collateral in interest bearing
short-term investments), any distributions on the loaned securities and any
increase in their market value. The Trust will not lend portfolio securities if,
as a result, the aggregate value of such loans exceeds 33-1/3% of the value of
the Trust's total assets (including such loans). Loan arrangements made by the
Trust will comply with all other applicable
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regulatory requirements, including the rules of the New York Stock Exchange. All
relevant facts and circumstances, including the creditworthiness of the
Qualified Institution, will be monitored by BlackRock and will be considered in
making decisions with respect to lending of securities, subject to review by the
Trust's board of trustees.
The Trust may pay reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the Trust's board of trustees. In addition, voting rights may pass
with the loaned securities, but if a material event were to occur affecting such
a loan, the loan must be called and the securities voted.
High Yield Securities
The Trust may invest up to 20% of its assets in securities rated below
investment grade such as those rated Ba or lower by Moody's and BB or lower by
S&P or securities comparably rated by other rating agencies or in unrated
securities determined by BlackRock to be of comparable quality. Securities rated
Ba by Moody's are judged to have speculative elements; their future cannot be
considered as well assured and often the protection of interest and principle
payments may be very moderate. Securities rated BB by S&P are regarded as having
predominantly speculative characteristics and, while such obligations have less
near-term vulnerability to default than other speculative grade debt, they face
major ongoing uncertainties or exposure to adverse business, financial or
economic conditions which could lead to inadequate capacity to meet timely
interest and principal payments. The lowest rated security that the Trust will
invest in is one rated B by either Moody's or S&P.
Lower grade securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuing entity
and to greater market fluctuations than certain lower yielding, higher rated
securities. The retail secondary market for lower grade securities may be less
liquid than that of higher rated securities; adverse conditions could make it
difficult at times for the Trust to sell certain securities or could result in
lower prices than those used in calculating the Trust's net asset value.
The prices of debt securities generally are inversely related to interest
rate changes; however, the price volatility caused by fluctuating interest rates
of securities also is inversely related to the coupons of such securities.
Accordingly, below investment grade securities may be relatively less sensitive
to interest rate changes than higher quality securities of comparable maturity
because of their higher coupon. This higher coupon is what the investor receives
in return for bearing greater credit risk. The higher credit risk associated
with below investment grade securities potentially can have a greater effect on
the value of such securities than may be the case with higher quality issues of
comparable maturity.
Lower grade securities may be particularly susceptible to economic
downturns. It is likely that an economic recession could severely disrupt the
market for such securities and may have an adverse impact on the value of such
securities. In addition, it is likely that any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principle and pay interest thereon and increase the incidence of default for
such securities.
The ratings of Moody's, S&P and other rating agencies represent their
opinions as to the quality of the obligations which they undertake to rate.
Ratings are relative and subjective and, although ratings may be useful in
evaluating the safety of interest and principle payments, they do not evaluate
the market value risk of such obligations. Although these ratings may be an
initial criterion for selection of portfolio investments, BlackRock also will
independently evaluate these securities and the ability for the issuers of such
securities to pay interest and principal. To the extent that the Trust invests
in lower grade securities that have not been rated by a rating agency, the
Trust's ability to achieve its investment objectives will be more dependent on
BlackRock's credit analysis than would be the case when the Trust invests in
rated securities.
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Residual Interest Municipal Bonds
The Trust currently does not intend to invest in residual interest
municipal bonds. Residual interest municipal bonds pay interest at rates that
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 Trust when short-term interest rates rise,
and increase the interest paid to the Trust 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. Investment in inverse floaters may amplify the
effects of the Trust's use of leverage. Should short-term interest rates rise,
the combination of the Trust's investment in inverse floaters and the use of
leverage likely will adversely affect the Trust's income and distributions to
common shareholders. Although the Trust does not intend initially to invest in
inverse floaters, the Trust may do so at some point in the future. The Trust
will provide shareholders 30 days' written notice prior to any change in its
policy of not investing in inverse floaters.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although BlackRock Advisors intends to devote such time and effort to the
business of the Trust as is reasonably necessary to perform its duties to the
Trust, the services of BlackRock Advisors are not exclusive and BlackRock
Advisors provides similar services to other investment companies and other
clients and may engage in other activities.
The investment management agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, BlackRock Advisors is not liable to the Trust or any of
the Trust's shareholders for any act or omission by BlackRock Advisors in the
supervision or management of its respective investment activities or for any
loss sustained by the Trust or the Trust's shareholders and provides for
indemnification by the Trust of BlackRock Advisors, its directors, officers,
employees, agents and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain limitations and
conditions.
The investment management agreement was approved by the Trust's board of
trustees at an in-person meeting of the board of trustees held on October 15,
2001, including a majority of the trustees who are not parties to the agreement
or interested persons of any such party (as such term is defined in the
Investment Company Act). This agreement provides for the Trust to pay a
management fee at an annual rate equal to 0.40% of the average weekly value of
the Trust's Managed Assets.
The investment management agreement was approved by the sole common
shareholder of the Trust as of October 19, 2001. The investment management
agreement will continue in effect for a period of two years from its effective
date, and if not sooner terminated, will continue in effect for successive
periods of 12 months thereafter, provided that each continuance is specifically
approved at least annually by both (1) the vote of a majority of the Trust's
board of trustees or the vote of a majority of the outstanding voting securities
of the Trust (as such term is defined in the Investment Company Act) and (2) by
the vote of a majority of the trustees who are not parties to the investment
management agreement or interested persons (as such term is defined in the
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Investment Company Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval. The investment management agreement
may be terminated as a whole at any time by the Trust, without the payment of
any penalty, upon the vote of a majority of the Trust's board of trustees or a
majority of the outstanding voting securities of the Trust or by BlackRock
Advisors, on 60 days' written notice by either party to the other. The
investment management agreement will terminate automatically in the event of its
assignment (as such term is defined in the Investment Company Act and the rules
thereunder).
Sub-Investment Advisory Agreement
BlackRock Financial Management, the Sub-Advisor, is a wholly owned
subsidiary of BlackRock, Inc. Pursuant to the sub-investment advisory agreement,
BlackRock Advisors has appointed BlackRock Financial Management, one of its
affiliates, to perform certain of the day-to-day investment management of the
Trust. BlackRock Financial Management will receive a portion of the management
fee paid by the Trust to BlackRock Advisors. From the management fees, BlackRock
Advisors will pay BlackRock Financial Management, for serving as Sub-Advisor, a
fee equal to: (i) prior to October 31, 2002, 38% of the monthly management fees
received by BlackRock Advisors, (ii) from November 1, 2002 to October 31, 2003,
19% of the monthly management fees received by BlackRock Advisors; and (iii)
after October 31, 2003, 0% of the management fees received by BlackRock
Advisors; provided thereafter that the Sub-Advisor may be compensated at cost
for any services rendered to the Trust at the request of BlackRock Advisors and
approved of by the board of trustees.
The sub-investment advisory agreement also provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Trust will indemnify BlackRock Financial Management,
its directors, officers, employees, agents, associates and control persons for
liabilities incurred by them in connection with their services to the Trust,
subject to certain limitations.
Although BlackRock Financial Management intends to devote such time and
effort to the business of the Trust as is reasonably necessary to perform its
duties to the Trust, the services of BlackRock Financial Management are not
exclusive and BlackRock Financial Management provides similar services to other
investment companies and other clients and may engage in other activities.
The sub-investment advisory agreement was approved by the Trust's board of
trustees at an in-person meeting of the board of trustees held on October 15,
2001, including a majority of the trustees who are not parties to the agreement
or interested persons of any such party (as such term is defined in the
Investment Company Act). The sub-investment advisory agreement was approved by
the sole common shareholder of the Trust as of October 19, 2001. The
sub-investment advisory agreement will continue in effect for a period of two
years from its effective date, and if not sooner terminated, will continue in
effect for successive periods of 12 months thereafter, provided that each
continuance is specifically approved at least annually by both (1) the vote of a
majority of the Trust's board of trustees or the vote of a majority of the
outstanding voting securities of the Trust (as defined in the Investment Company
Act) and (2) by the vote of a majority of the trustees who are not parties to
such agreement or interested persons (as such term is defined in the Investment
Company Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The sub-investment advisory agreement may be
terminated as a whole at any time by the Trust, without the payment of any
penalty, upon the vote of a majority of the Trust's board of trustees or a
majority of the outstanding voting securities of the Trust, or by BlackRock
Advisors or BlackRock Financial Management, on 60 days' written notice by any
party to the others. The sub-investment advisory agreement will also terminate
automatically in the event of its assignment (as such term is defined in the
Investment Company Act and the rules thereunder).
Trustees and Officers
The officers of the Trust manage its day-to-day operations. The officers
are directly responsible to the Trust's board of trustees, which sets broad
policies for the Trust and chooses its officers. The following is a list of the
trustees and officers of the Trust and a brief statement of their present
positions and principal occupations during the past five years. Trustees who are
interested persons of the Trust (as defined in the Investment
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Company Act) are denoted by an asterisk (*). Trustees who are independent
trustees (as defined in the Investment Company Act) (the "Independent Trustees")
are not denoted with an asterisk. The business address of the Trust, BlackRock
Advisors and their board members and officers is 100 Bellevue Parkway,
Wilmington, Delaware 19809, unless specified otherwise below. The trustees
listed below are either trustees or directors of other closed-end funds for
which BlackRock Advisors acts as investment advisor.
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
------------- ---- ---------------------------
Andrew F. Brimmer Trustee President of Brimmer & Company, Inc., a Washington, D.C.- based economic and
4400 MacArthur Blvd., N.W. financial consulting firm. Director of CarrAmerica Realty Corporation and Borg-Warner
Suite 302 Automotive. Formerly member of the Board of Governors of the Federal Reserve System.
Washington, DC 20007 Formerly Director of AirBorne Express, BankAmerica Corporation (Bank of America),
Age: 74 Bell South Corporation, College Retirement Equities Fund (Trustee), Commodity
Exchange, Inc. (Public Governor), Connecticut Mutual Life Insurance Company, E.I.
Dupont de Nemours & Company, Equitable Life Assurance Society of the United States,
Gannett Company, Mercedes-Benz of North America, MNC Financial Corporation (American
Security Bank), NMC Capital Management, Navistar International Corporation, PHH Corp.
and UAL Corporation (United Airlines).
Richard E. Cavanagh Trustee President and Chief Executive Officer of The Conference Board, Inc., a leading global
845 Third Avenue business membership organization, from 1995-present. Former Executive Dean of the
New York, NY 10022 John F. Kennedy School of Government at Harvard University from 1988-1995. Acting
Age: 54 Director, Harvard Center for Business and Government (1991-1993). Formerly Partner
(principal) of McKinsey & Company, Inc. (1980 1988).Former Executive Director of
Federal Cash Management, White House Office of Management and Budget (1977-1979).
Co-author, The Winning Performance (best selling management book published in 13
national editions). Trustee Emeritus, Wesleyan University. Trustee, Drucker
Foundation, Airplanes Group, Aircraft Finance Trust (AFT) and Educational Testing
Service (ETS). Director, Arch Chemicals, Fremont Group and The Guardian Life
Insurance Company of America.
Kent Dixon Trustee Consultant/Investor. Former President and Chief Executive Officer of Empire Federal
430 Sandy Hook Road Savings Bank of America and Banc PLUS Savings Association, former Chairman of the
St. Petersburg, FL 33706 Board, President and Chief Executive Officer of Northeast Savings. Former Director of
Age: 63 ISFA (the owner of INVEST, a national securities brokerage service designed for banks
and thrift institutions).
B-16
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
------------- ---- ---------------------------
Frank J. Fabozzi Trustee Consultant. Editor of The Journal of Portfolio Management and Adjunct Professor of
858 Tower View Circle Finance at the School of Management at Yale University. Director, Guardian Mutual
New Hope, PA 18938 Funds Group. Author and editor of several books on fixed income portfolio management.
Age: 52 Visiting Professor of Finance and Accounting at the Sloan School of Management,
Massachusetts Institute of Technology from 1986 to August 1992.
Laurence D. Fink* Trustee Director, Chairman and Chief Executive Officer of BlackRock, Inc. since its formation
Age: 48 in 1998 and of BlackRock, Inc.'s predecessor entities since 1988. Chairman of the
Management Committee of BlackRock, Inc. Formerly, Managing Director of the First
Boston Corporation, Member of its Management Committee, Co-head of its Taxable Fixed
Income Division and Head of its Mortgage and Real Estate Products Group. Currently,
Chairman of the Board of each of the closed-end Trusts in which BlackRock Advisors,
Inc. acts as investment advisor, President, Treasurer and a Trustee of the BlackRock
Funds, Chairman of the Board and Director of Anthracite Capital, Inc., a Director of
BlackRock's offshore funds and alternative products and Chairman of the Board of
Nomura BlackRock Asset Management Co., Ltd. Currently, Vice Chairman of the Board of
Trustees of Mount Sinai-New York University Medical Center and Health System and a
Member of the Board of Phoenix House.
James Clayburn LaForce, Jr. Trustee Dean Emeritus of The John E. Anderson Graduate School of Management, University of
P.O. Box 1595 California since July 1, 1993. Director, Jacobs Engineering Group, Inc., Payden &
Pauma Valley, CA 92061 Rygel Investment Trust, Provident Investment Counsel Funds, Timken Company, Motor
Age: 72 Cargo Industries and Trust for Investment Managers. Acting Dean of The School of
Business, Hong Kong University of Science and Technology 1990-1993. From 1978 to
September 1993, Dean of The John E. Anderson Graduate School of Management,
University of California.
Walter F. Mondale Trustee Partner, Dorsey & Whitney, a law firm (December 1996-present, September 1987-August
220 South Sixth Street 1993). Formerly, U.S. Ambassador to Japan (1993-1996). Formerly Vice President of the
Minneapolis, MN 55402 United States, U.S. Senator and Attorney General of the State of Minnesota. 1984
Age: 73 Democratic Nominee for President of the United States. Director, Northwest Airlines
Corporation, NWA Inc., Northwest Airlines, Inc. and UnitedHealth Group Corporation.
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Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
------------- ---- ---------------------------
Ralph L. Schlosstein* Trustee Director since 1999 and President of BlackRock, Inc. since its formation in 1998 and
Age: 50 and of BlackRock, Inc.'s predecessor entities since 1988. Member of the Management
President Committee and Investment Strategy Group of BlackRock, Inc. Formerly, Managing
Director of Lehman Brothers, Inc. and Co-head of its Mortgage and Savings
Institutions Group. Currently, President of each of the closed-end Trusts in which
BlackRock Advisors, Inc. acts as investment advisor and a Director and Officer of
BlackRock's alternative products. Currently, a Member of the Visiting Board of
Overseers of the John F. Kennedy School of Government at Harvard University, the
Financial Institutions Center Board of the Wharton School of the University of
Pennsylvania, and a Trustee of New Visions for Public Education in New York City.
Formerly, a Director of Pulte Corporation and a Member of Fannie Mae's Advisory
Council.
Anne F. Ackerley Secretary Managing Director of BlackRock, Inc. since 2000. Formerly First Vice President and
Age: 39 Chief Operating Officer, Mergers and Acquisitions Group at Merrill Lynch & Co. from
1997 to 2000; First Vice President and Chief Operating Officer, Public Finance Group
at Merrill Lynch & Co. from 1995 to 1997; First Vice President, Emerging Markets
Fixed Income Research at Merrill Lynch & Co. prior thereto.
Henry Gabbay Treasurer Managing Director of BlackRock, Inc. and its predecessor entities.
Age: 53
Robert S. Kapito Vice Vice Chairman of BlackRock, Inc. and its predecessor entities.
Age: 44 President
Kevin Klingert Vice Managing Director of BlackRock, Inc. and its predecessor entities.
Age 38 President
James Kong Assistant Managing Director of BlackRock, Inc. and its predecessor entities.
Age: 38 Treasurer
Richard Shea, Esq. Vice Managing Director of BlackRock, Inc. since 2000; Chief Operating Officer and Chief
Age: 41 President/ Financial Officer of Anthracite Capital, Inc. since 1998. Formerly, Director of
Tax BlackRock, Inc. and its predecessor entities.
Prior to this offering, all of the outstanding shares of the Trust were
owned by BlackRock Advisors.
The fees and expenses of the Independent Trustees of the Trust are paid by
the Trust. The trustees who are members of the BlackRock organization receive no
compensation from the Trust. During the year ended December 31, 2000, the
Independent Trustees/Directors earned the compensation set forth below in their
capacities as trustees/directors of the funds in the BlackRock Family of Funds.
It is estimated that the Independent Trustees will receive from the Trust the
amounts set forth below for the Trust's calendar year ending December 31, 2001,
assuming the Trust had been in existence for the full calendar year.
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Total Compensation from
Estimated the Trust and Fund
Compensation Complex Paid to
Name of Board Member From Trust Board Member(1)
--------------------- ------------ ----------------------
Andrew F. Brimmer ............................. $6,000(2)(3) $160,000(4)
Richard E. Cavanagh ........................... $6,000(2) $160,000(4)
Kent Dixon .................................... $6,000 $160,000
Frank J. Fabozzi .............................. $6,000 $160,000
James Clayburn La Force, Jr. .................. $6,000(2) $160,000(4)
Walter F. Mondale ............................. $6,000(2) $160,000(4)
--------------
(1) Represents the total compensation earned by such persons during the
calendar year ended December 31, 2000 from the twenty-two closed-end funds
advised by the Advisor (the "Fund Complex"). Two of these funds, BlackRock
Target Term Trust and the BlackRock 2001 Term Trust, were terminated on
December 29, 2000 and June 30, 2001, respectively. On July 31, 2001, five
additional closed-end funds advised by the Advisor were added to the Fund
Complex and on October 30, 2001, three additional closed-end funds advised
by the Advisor were added to the Fund Complex.
(2) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, La Force
and Mondale will defer $1,500, $1,500, $3,750 and $1,500, respectively,
pursuant to the Fund Complex's deferred compensation plan.
(3) At a meeting of the boards of directors/trustees of the Fund Complex held
on August 24, 2000, Andrew F. Brimmer was appointed "lead director" for
each board of trustees/directors in the Fund Complex. For his services as
lead trustee/director, Andrew F. Brimmer will be compensated in the amount
of $40,000 per annum by the Fund Complex to be allocated among the funds in
the Fund Complex based on each fund's relative net assets.
(4) Of this amount, Messrs. Brimmer, Cavanagh, La Force and Mondale deferred
$12,000, $12,000, $77,500 and $31,000, respectively, pursuant to the Fund
Complex's deferred compensation plan.
Each Independent Trustee/Director receives an annual fee calculated as
follows: (i) $6,000 from each fund/trust in the Fund Complex and (ii) $1,500 for
each meeting of each board in the Fund Complex attended by such Independent
Trustee/Director. The total annual aggregate compensation for each Independent
Trustee/Director is capped at $160,000 per annum, except that Dr. Brimmer
receives an additional $40,000 from the Fund Complex for acting as the lead
trustee/director for each board of trustees/directors in the Fund Complex. In
the event that the $160,000 cap is met with respect to an Independent
Trustee/Director, the amount of the Independent Trustee/Director's fee borne by
each fund in the Fund Complex is reduced by reference to the net assets of the
Trust relative to the other funds in the Fund Complex. In addition, the
attendance fees of each Independent Trustee/Director of the funds/trusts are
reduced proportionately, based on each respective fund's/trust's net assets, so
that the aggregate per meeting fee for all meetings of the boards of
trustees/directors of the funds/trusts held on a single day does not exceed
$20,000 for any Independent Trustee/Director.
Codes of Ethics
The Trust, the Advisor, the Sub-Advisor and the Trust's principal
underwriters have adopted codes of ethics under Rule 17j-1 of the Investment
Company Act. These codes permit personnel subject to the codes to invest in
securities, including securities that may be purchased or held by the Trust.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor. BlackRock
Financial Management acts as the Trust's sub-advisor. BlackRock Advisors and
BlackRock Financial Management are both wholly owned subsidiaries of BlackRock,
Inc., which is one of the largest publicly traded investment management firms in
the United States with $225 billion of assets under management as of September
30, 2001. BlackRock Advisors is one of the nation's leading fixed income
managers with over $205 billion of fixed income and liquidity assets under
management. BlackRock, Inc. and its affiliates manage assets on behalf of more
than 3,300 institutions and 200,000 individuals worldwide, through a variety of
equity, fixed income, liquidity and alternative
B-19
investment separate accounts and mutual funds, including the company's flagship
fund families, BlackRock Funds and BlackRock Provident Institutional Funds.
BlackRock, Inc. is the nation's 26th largest asset management firm according to
Pensions & Investments, May 14 , 2001.
The BlackRock organization has over 13 years of experience managing
closed-end products and currently advises a closed-end family of 29 funds.
BlackRock has 21 leveraged municipal closed-end funds under management and
approximately $17 billion in municipal assets firm-wide. As of September 30,
2001, BlackRock managed over $6.7 billion in closed-end products. In addition,
BlackRock provides risk management and investment system services to a growing
number of institutional investors under the BlackRock Solutions name. Clients
are served from the company's headquarters in New York City, as well as offices
in Wilmington, Delaware, San Francisco, California, Hong Kong, Edinburgh,
Scotland and Tokyo, Japan. BlackRock, Inc. is a member of The PNC Financial
Services Group, Inc. ("PNC"), one of the largest diversified financial services
organizations in the United States, and is majority-owned by PNC and by
BlackRock employees. The BlackRock organization invented the term trust in 1988
and has successfully managed four consecutive term trusts to returning principal
on maturity.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor and the Sub-Advisor are responsible for decisions to buy and
sell securities for the Trust, the selection of brokers and dealers to effect
the transactions and the negotiation of prices and any brokerage commissions.
The securities in which the Trust invests are traded principally in the
over-the-counter market. In the over-the-counter market, securities are
generally traded on a "net" basis with dealers acting as principal for their own
accounts without a stated commission, although the price of such securities
usually includes a mark-up to the dealer. Securities purchased in underwritten
offerings generally include, in the price, a fixed amount of compensation for
the manager(s), underwriter(s) and dealer(s). The Trust may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. Purchases and sales of debt securities on a
stock exchange are effected through brokers who charge a commission for their
services.
The Advisor and the Sub-Advisor are responsible for effecting securities
transactions of the Trust and will do so in a manner deemed fair and reasonable
to shareholders of the Trust and not according to any formula. The Advisor's and
the Sub-Advisor's primary considerations in selecting the manner of executing
securities transactions for the Trust will be prompt execution of orders, the
size and breadth of the market for the security, the reliability, integrity and
financial condition and execution capability of the firm, the difficulty in
executing the order, and the best net price. There are many instances when, in
the judgment of the Advisor or the Sub-Advisor, more than one firm can offer
comparable execution services. In selecting among such firms, consideration is
given to those firms which supply research and other services in addition to
execution services. Consideration may also be given to the sale of shares of the
Trust. However, it is not the policy of BlackRock, absent special circumstances,
to pay higher commissions to a firm because it has supplied such research or
other services.
The Advisor and the Sub-Advisor are able to fulfill their obligation to
furnish a continuous investment program to the Trust without receiving research
or other information from brokers; however, each considers access to such
information to be an important element of financial management. Although such
information is considered useful, its value is not determinable, as it must be
reviewed and assimilated by the Advisor and/or the Sub-Advisor, and does not
reduce the Advisor's and/or the Sub-Advisor's normal research activities in
rendering investment advice under the investment management agreement or the
sub-investment advisory agreement. It is possible that the Advisor's and/or the
Sub-Advisor's expenses could be materially increased if it attempted to purchase
this type of information or generate it through its own staff.
One or more of the other investment companies or accounts which the Advisor
and/or the Sub-Advisor manages may own from time to time some of the same
investments as the Trust. Investment decisions for the Trust are made
independently from those of such other investment companies or accounts;
however, from time
B-20
to time, the same investment decision may be made for more than one company or
account. When two or more companies or accounts seek to purchase or sell the
same securities, the securities actually purchased or sold will be allocated
among the companies and accounts on a good faith equitable basis by the Advisor
and/or the Sub-Advisor in their discretion in accordance with the accounts'
various investment objectives. In some cases, this system may adversely affect
the price or size of the position obtainable for the Trust. In other cases,
however, the ability of the Trust to participate in volume transactions may
produce better execution for the Trust. It is the opinion of the Trust's board
of trustees that this advantage, when combined with the other benefits available
due to the Advisor's or the Sub-Advisor's organization, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
It is not the Trust's policy to engage in transactions with the objective
of seeking profits from short-term trading. It is expected that the annual
portfolio turnover rate of the Trust will be approximately 100% excluding
securities having a maturity of one year or less. Because it is difficult to
predict accurately portfolio turnover rates, actual turnover may be higher or
lower. Higher portfolio turnover results in increased Trust costs, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of securities and on the reinvestment in other securities.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR AMPS
General
Securities Depository. The Depository Trust Company ("DTC") will act as the
Securities Depository with respect to each series of AMPS. One certificate for
all of the shares of each series will be registered in the name of Cede & Co.,
as nominee of the Securities Depository. Such certificate will bear a legend to
the effect that such certificate is issued subject to the provisions restricting
transfers of shares of AMPS contained in the Statement. The Trust will also
issue stop-transfer instructions to the transfer agent for AMPS. Prior to the
commencement of the right of holders of AMPS to elect a majority of the Trust's
trustees, as described under "Description of AMPS--Voting Rights" in the
prospectus, Cede & Co. will be the holder of record of each series of AMPS and
owners of such shares will not be entitled to receive certificates representing
their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs services
for its participants, some of whom (and/or their representatives) own DTC. DTC
maintains lists of its participants and will maintain the positions (ownership
interests) held by each such participant in shares of AMPS, whether for its own
account or as a nominee for another person. Additional information concerning
DTC and the DTC depository system is included as an Exhibit to the Registration
Statement of which this statement of additional information forms a part.
Concerning the Auction Agent
The auction agent will act as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the auction
agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the auction
agency agreement between the Trust and the auction agent and will not be liable
for any error of judgment made in good faith unless the auction agent was
negligent in ascertaining the pertinent facts.
The auction agent may rely upon, as evidence of the identities of the
holders of AMPS, the auction agent's registry of holders and the results of
auctions and notices from any Broker-Dealer (or other person, if permitted by
the Trust) with respect to transfers described under "The Auction--Secondary
Market Trading and Transfers of AMPS" in the prospectus and notices from the
Trust. The auction agent is not required to accept any such notice for an
auction unless it is received by the auction agent by 3:00 p.m., New York City
time, on the business day preceding such auction.
B-21
The auction agent may terminate its auction agency agreement with the Trust
upon notice to the Trust on a date no earlier than 45 days after such notice. If
the auction agent should resign, the Trust will use its best efforts to enter
into an agreement with a successor auction agent containing substantially the
same terms and conditions as the auction agency agreement. The Trust may remove
the auction agent provided that prior to such removal the Trust shall have
entered into such an agreement with a successor auction agent.
Broker-Dealers
The auction agent after each auction for shares of each series of AMPS will
pay to each Broker-Dealer, from funds provided by the Trust, a service charge at
the annual rate of 1/4 of 1% in the case of any auction immediately preceding a
dividend period of less than one year, or a percentage agreed to by the Trust
and the Broker-Dealers in the case of any auction immediately preceding a
dividend period of one year or longer, of the purchase price of the series of
AMPS placed by such Broker-Dealer at such auction. For the purposes of the
preceding sentence, AMPS will be placed by a Broker-Dealer if such shares were
(a) the subject of hold orders deemed to have been submitted to the auction
agent by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
beneficial owners or (b) the subject of an order submitted by such Broker-Dealer
that is (i) a submitted bid of an existing holder that resulted in the existing
holder continuing to hold such shares as a result of the auction or (ii) a
submitted bid of a potential holder that resulted in the potential holder
purchasing such shares as a result of the auction or (iii) a valid hold order.
The Trust may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one Broker-Dealer
agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other than an
affiliate of the Trust) may submit orders in auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit hold orders and sell orders for
their own accounts. Any Broker-Dealer that is an affiliate of the Trust may
submit orders in auctions, but only if such orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any auction, it might
have an advantage over other bidders because it would have knowledge of all
orders submitted by it in that auction; such Broker-Dealer, however, would not
have knowledge of orders submitted by other Broker-Dealers in that auction.
DESCRIPTION OF COMMON SHARES
A description of the common shares is contained in the prospectus. The
Trust intends to hold annual meetings of shareholders so long as the common
shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end management investment company and as such its
shareholders will not have the right to cause the Trust to redeem their shares.
Instead, the Trust's common shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-end
management investment company may frequently trade at prices lower than net
asset value, the Trust's board of trustees may consider action that might be
taken to reduce or eliminate any material discount from net asset value in
respect of common shares, which may include the repurchase of such shares in the
open market or in private transactions, the making of a tender offer for such
shares, or the conversion of the Trust to an open-end management investment
company. The board of trustees may decide not to take any of these actions. In
addition, there can be no assurance that share repurchases or tender offers, if
undertaken, will reduce market discount.
B-22
Notwithstanding the foregoing, at any time when the Trust's AMPS are
outstanding, the Trust may not purchase, redeem or otherwise acquire any of its
common shares unless (1) all accrued AMPS dividends have been paid and (2) at
the time of such purchase, redemption or acquisition, the net asset value of the
Trust's portfolio (determined after deducting the acquisition price of the
common shares) is at least 200% of the liquidation value of the outstanding AMPS
(expected to equal the original purchase price per share plus any accrued and
unpaid dividends thereon). Any service fees incurred in connection with any
tender offer made by the Trust will be borne by the Trust and will not reduce
the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to finance the
repurchase of shares or to make a tender offer. Interest on any borrowings to
finance share repurchase transactions or the accumulation of cash by the Trust
in anticipation of share repurchases or tenders will reduce the Trust's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Trust's board of trustees would have to comply with the Securities
Exchange Act of 1934, as amended, the Investment Company Act and the rules and
regulations thereunder.
Although the decision to take action in response to a discount from net
asset value will be made by the board of trustees at the time it considers such
issue, it is the board's present policy, which may be changed by the board of
trustees, not to authorize repurchases of common shares or a tender offer for
such shares if: (1) such transactions, if consummated, would (a) result in the
delisting of the common shares from the New York Stock Exchange, or (b) impair
the Trust's status as a regulated investment company under the Code (which would
make the Trust a taxable entity, causing the Trust's income to be taxed at the
corporate level in addition to the taxation of shareholders who receive
dividends from the Trust), or as a registered closed-end management investment
company under the Investment Company Act; (2) the Trust would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Trust's investment objectives and policies in order to repurchase shares; or (3)
there is, in the board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Trust, (b) general suspension of or limitation on prices
for trading securities on the New York Stock Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or New York banks, (d) material limitation affecting the Trust
or the issuers of its portfolio securities by Federal or state authorities on
the extension of credit by lending institutions or on the exchange of foreign
currency, (e) commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States, or (f)
other event or condition which would have a material adverse effect (including
any adverse tax effect) on the Trust or its shareholders if shares were
repurchased. The board of trustees may in the future modify these conditions in
light of experience.
The repurchase by the Trust of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or tender
offers at or below net asset value will result in the Trust's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Trust's
shares may be the subject of repurchase or tender offers from time to time, or
that the Trust may be converted to an open-end management investment company,
may reduce any spread between market price and net asset value that might
otherwise exist.
In addition, a purchase by the Trust of its common shares will decrease the
Trust's total assets which would likely have the effect of increasing the
Trust's expense ratio. Any purchase by the Trust of its common shares at a time
when AMPS are outstanding will increase the leverage applicable to the
outstanding common shares then remaining.
Before deciding whether to take any action if the common shares trade below
net asset value, the Trust's board of trustees would likely consider all
relevant factors, including the extent and duration of the discount, the
liquidity of the Trust's portfolio, the impact of any action that might be taken
on the Trust or its shareholders and market considerations. Based on these
considerations, even if the Trust's shares should trade at a discount, the board
of trustees may determine that, in the interest of the Trust and its
shareholders, no action should be taken.
B-23
TAX MATTERS
The following is a description of certain Federal income tax consequences
to a shareholder who is a United States person, within the meaning of Section
7701(a)(30) of the Code, of acquiring, holding and disposing of AMPS of the
Trust. The discussion reflects applicable tax laws of the United States as of
the date of this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service retroactively or
prospectively.
The Trust intends to qualify under Subchapter M of the Code for tax
treatment as a regulated investment company. In order to qualify as a regulated
investment company, the Trust must satisfy certain requirements relating to the
source of its income, diversification of its assets, and distributions of its
income to its shareholders. First, the Trust must derive at least 90% of its
annual gross income (including tax-exempt interest) from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures and forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "90% gross income test"). Second, the Trust must diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the value of its total assets is comprised of cash, cash items, United
States government securities, securities of other regulated investment companies
and other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the value of the Trust's total assets and to not
more than 10% of the outstanding voting securities of such issuer, and (ii) not
more than 25% of the value of the total assets is invested in the securities of
any one issuer (other than United States government securities and securities of
other regulated investment companies) or two or more issuers controlled by the
Trust and engaged in the same, similar or related trades or businesses.
As a regulated investment company, the Trust will not be subject to Federal
income tax on its income that it distributes each taxable year to its
shareholders, provided that in such taxable year it distributes at least 90% of
the sum of (i) its "investment company taxable income" (which includes
dividends, taxable interest, taxable original issue discount and market discount
income, income from securities lending, net short-term capital gain in excess of
net long-term capital loss, and any other taxable income other than "net capital
gain" (as defined below) and is reduced by deductible expenses) determined
without regard to the deduction for dividends paid and (ii) its net tax-exempt
interest (the excess of its gross tax-exempt interest income over certain
disallowed deductions). The Trust may retain for investment its net capital gain
(which consists of the excess of its net long-term capital gain over its net
short-term capital loss). However, if the Trust retains any net capital gain or
any investment company taxable income, it will be subject to tax at regular
corporate rates on the amount retained. If the Trust retains any net capital
gain, it may designate the retained amount as undistributed capital gains in a
notice to its shareholders who, if subject to Federal income tax on long-term
capital gains, (i) will be required to include in income for Federal income tax
purposes, as long-term capital gain, their share of such undistributed amount
and (ii) will be entitled to credit their proportionate shares of the tax paid
by the Trust against their Federal income tax liabilities, if any, and to claim
refunds to the extent the credit exceeds such liabilities. For Federal income
tax purposes, the tax basis of shares owned by a shareholder of the Trust will
be increased by the amount of undistributed capital gains included in the gross
income of the shareholder less the tax deemed paid by the shareholder under
clause (ii) of the preceding sentence.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain, to elect to treat
all or part of any net capital loss, any net long-term capital loss or any net
foreign currency loss incurred after October 31 as if it had been incurred in
the succeeding year.
Distributions by the Trust that do not constitute capital gain dividends or
exempt-interest dividends (as defined below) will be taxable as ordinary income
to the extent of the current or accumulated earnings and profits of the Trust
and any excess over such earnings and profits will be treated first as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis in
his or her shares and then as gain from the sale of his or her shares, as
discussed below.
B-24
If the Trust engages in hedging transactions involving financial futures
and options, these transactions will be subject to special tax rules, the effect
of which may be to accelerate income to the Trust, defer the Trust's losses,
cause adjustments in the holding periods of the Trust's securities, convert
long-term capital gains into short-term capital gains and convert short-term
capital losses into long-term capital losses. These rules could, therefore,
affect the amount, timing and character of distributions to holders of AMPS.
Although there is a dividend reinvestment plan available, the tax status of
your dividend is not affected by whether you reinvest your dividends or receive
them in cash. In addition, although dividends generally will be treated as
distributed when paid, dividends declared in October, November or December,
payable to holders of AMPS of record on a specified date in one of those months
and paid during the following January, will be treated as having been
distributed by the Trust (and received by the holder of AMPS) on December 31.
The Trust intends to invest in sufficient tax-exempt municipal bonds to
permit payment of "exempt-interest dividends" (as defined in the Code).
Generally, exempt-interest dividends paid to holders of AMPS retain their
tax-exempt character and are not includable in the holder's gross income for
Federal income tax purposes. However, exempt-interest dividends are included in
determining what portion, if any, of a person's Social Security and railroad
retirement benefits will be includable in gross income subject to Federal income
tax and, as noted below, may generate a tax preference for alternative minimum
tax purposes. In addition, the Trust may distribute "capital gains dividends" as
defined in the Code. The Trust will not be taxed on such distributed gains and
the shareholder will be taxed on the distribution at long term capital gains
rates regardless of the shareholder's holding period.
The Internal Revenue Service's position in a published revenue ruling
indicates that the Trust is required to designate distributions paid with
respect to its common shares and its preferred shares, including the AMPS, as
consisting of a portion of each type of income distributed by the Trust. The
portion of each type of income deemed received by the holders of each class of
shares will be equal to the portion of total Trust dividends received by such
class. Thus, the Trust will designate dividends paid as exempt-interest
dividends in a manner that allocates such dividends between the holders of the
common shares and the holders of preferred shares, including the AMPS, in
proportion to the total dividends paid to each such class during or with respect
to the taxable year, or otherwise as required by applicable law. Capital gain
dividends and ordinary income dividends will similarly be allocated between the
two classes.
Federal income tax law imposes an alternative minimum tax with respect to
both corporations and individuals based on certain items of tax preference. To
the extent the Trust receives income treated as tax preference items for
purposes of the alternative minimum tax, a portion of the dividends paid by it,
although otherwise exempt from Federal income tax, will be taxable to holders of
AMPS to the extent that their tax liability is determined under the alternative
minimum tax. The Trust will annually supply holders of AMPS with reports
indicating the amount and nature of all income distributed to them as well as
the percentage of Trust income attributable to tax preference items subject to
the alternative minimum tax.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The
Trust may invest a portion of its assets in municipal bonds subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. For corporations, alternative minimum taxable income is
increased by 75% of the difference between an alternative measure of income
("adjusted current earnings") and the amount otherwise determined to be the
alternative minimum taxable income. Interest on municipal bonds, and therefore
all exempt-interest dividends received from the Trust, are included in
calculating adjusted current earnings. Accordingly, investment in the Trust
could cause a holder of AMPS to be subject to, or result in an increased
liability under, the alternative minimum tax.
Although exempt-interest dividends generally may be treated by holders of
AMPS as items of interest excluded from their gross income, each holder is
advised to consult his tax advisor with respect to whether exempt-interest
dividends retain their exclusion if the shareholder would be treated as a
"substantial user," or a
B-25
"related person" of a substantial user, of the facilities financed with respect
to any of the tax-exempt obligations held by the Trust.
The redemption, sale or exchange of AMPS generally will result in capital
gain or loss to the holders of such AMPS who hold their shares as capital
assets. Generally, a shareholder's gain or loss will be long-term capital gain
or loss if the shares have been held for more than one year even though the
increase in value in such AMPS is attributable to tax-exempt interest income.
Present law taxes both long-term and short-term capital gains of corporations at
the rates applicable to ordinary income. For non-corporate taxpayers, however,
long-term capital gains will be taxed at a maximum rate of 20%, while short-term
capital gains and other ordinary income will currently be taxed at a maximum
rate of 39.1%.*
All or a portion of a sales charge paid in purchasing AMPS cannot be taken
into account for purposes of determining gain or loss on the redemption, sale or
exchange of such shares within 90 days after their purchase to the extent shares
of another fund are subsequently acquired without payment of a sales charge
pursuant to the reinvestment or exchange privilege. Any disregarded portion of
such charge will result in an increase in the shareholder's tax basis in the
shares subsequently acquired. In addition, no loss will be allowed on the
redemption, sale or exchange of AMPS if the shareholder purchases other AMPS of
the Trust (whether through reinvestment of distributions or otherwise) or the
shareholder acquires or enters into a contract or option to acquire securities
that are substantially identical to AMPS of the Trust within a period of 61 days
beginning 30 days before and ending 30 days after such redemption, sale or
exchange. If disallowed, the loss will be reflected in an adjustment to the
basis of the shares acquired. Further, any losses realized on the redemption,
sale or exchange of AMPS held for six months or less (i) will be disallowed to
the extent of any exempt-interest dividends received with respect to such AMPS
and, (ii) such losses will be treated as long-term capital losses to the extent
of any capital gain dividends received (or credited as undistributed capital
gain) with respect to such AMPS.
If you borrow money to invest in AMPS of the Trust, you may not be able to
deduct the interest with respect to that loan. Moreover, Trust shares may be
treated as being financed by a loan even if the loan cannot be traced directly
to the investment in such shares.
In order to avoid a 4% Federal excise tax, the Trust must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of its capital gain net
income (the excess of its realized capital gains over its realized capital
losses, generally computed on the basis of the one-year period ending on October
31 of such year) and 100% of any taxable ordinary income and capital gain net
income for the prior year that was not distributed during such year and on which
the Trust paid no Federal income tax. The Trust intends to make timely
distributions in compliance with these requirements and consequently it is
anticipated that it generally will not be required to pay the excise tax.
If in any year the Trust should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Trust would incur a regular
corporate Federal income tax upon its income for that year, and distributions to
its shareholders, which distributions would not be required to be made, would be
taxable to shareholders as ordinary dividend income for Federal income tax
purposes to the extent of the Trust's earnings and profits.
The Trust is required to withhold on certain dividends and other payments
paid to non-corporate shareholders who have not furnished to the Trust their
correct taxpayer identification number (in the case of individuals, their Social
Security number) and certain certifications, or who are otherwise subject to
backup
--------------
* The Economic Growth and Tax Relief Reconciliation Act of 2001, effective for
taxable years beginning after December 31, 2000, creates a new 10 percent income
tax bracket and reduces the tax rate applicable to ordinary income over a six
year phase-in period. Beginning in taxable year 2006, ordinary income will be
subject to a 35% maximum rate.
B-26
withholding. Backup withholding is not an additional tax and any amount withheld
maybe credited against the shareholder's Federal income tax liability.
The foregoing is a general and abbreviated summary of the provisions of the
Code and the Treasury regulations presently in effect as they directly govern
the taxation of the Trust and its shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
regulations. The Code and the Treasury regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Trust transactions. Holders of AMPS are advised to consult their
tax advisors for more detailed information concerning the Federal taxation of
the Trust and the income tax consequences to its holders of AMPS.
EXPERTS
The Statement of Net Assets of the Trust as of October 18, 2001 appearing
in this Statement of Additional Information has been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Deloitte & Touche
LLP, located at 200 Berkeley Street, Boston, Massachusetts 02116, provides
accounting and auditing services to the Trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares offered hereby, has been filed by the Trust with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. The
prospectus and this Statement of Additional Information do not contain all of
the information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Trust and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in the prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission.
B-27
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF ASSETS AND LIABILITIES
October 18, 2001
ASSETS:
Cash $115,001
LIABILITIES:
Payable for organization costs 15,000
--------
Net Assets $100,001
========
Net assets were comprised of:
Common stock at par (Note 1) $ 8
Paid-in capital in excess of par 114,993
--------
115,001
Undistributed net investment loss (15,000)
--------
Net assets, October 25, 2001 $100,001
========
Net asset value per share:
Equivalent to 8,028 shares of common stock issued
and outstanding, par value $0.001, unlimited shares authorized $ 12.46
========
STATEMENT OF OPERATIONS
For the period September 7, 2001 (date of inception)
to October 18, 2001
Investment Income $ --
Expenses
Organization expenses 15,000
--------
Net investment loss $(15,000)
========
STATEMENT OF CHANGES IN NET ASSETS
For the period September 7, 2001 (date of inception)
to October 18, 2001
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment loss $(15,000)
--------
Net decrease in net assets resulting from operations (15,000)
--------
Capital Stock Transactions
Net proceeds from the issuance of common shares 115,001
--------
Total increase 100,001
========
NET ASSETS
Beginning of year 0
--------
End of year $100,001
========
F-1
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization
The Blackrock Municipal 2018 Term Trust (the "Trust") was organized as a
Delaware business trust on September 7, 2001 and is registered as a diversified,
closed-end management investment company under the Investment Company Act of
1940. The Trust had no operations other than a sale to Blackrock Advisors, Inc.
of 8,028 shares of common stock for $115,001 ($14.325 per share).
Note 2. Agreements
The Trust has entered into an Investment Advisory Agreement with BlackRock
Advisors, Inc. The Trust will pay BlackRock Advisors, Inc. a monthly fee (the
"Investment Management Fee") at an annual rate of 0.40% of the average weekly
value of the Trust's Managed Assets.
Note 3. Organization Expenses and Offering Costs
Organization expenses of $15,000 have been expensed. Offering costs, estimated
to be approximately $500,000 will be charged to paid-in capital at the time
shares of beneficial interest are sold.
Note 4. Cash & Cash Equivalents
The Trust considers all highly liquid debt instruments with a maturity of three
months or less at time of purchase to be cash equivalents.
F-2
Independent Auditors' Report
The Board of Trustees and Shareholder of
BlackRock Municipal 2018 Term Trust
We have audited the accompanying statement of assets and liabilities of
BlackRock Municipal 2018 Term Trust (the "Trust") as of October 18, 2001 and the
related statements of operations and changes in net assets for the period
September 7, 2001 (date of inception) to October 18, 2001. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust at October 18, 2001 and the
results of its operations and changes in its net assets for the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
October 19, 2001
F-3
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2001
(Unaudited)
ASSETS:
Investments at value (cost $236,116,770) (Note 1) ......................................... $236,197,118
Interest receivable ....................................................................... 1,018,235
Cash ...................................................................................... 12,151,527
------------
.......................................................................................... 249,366,880
------------
LIABILITIES:
Payable for investments purchased ......................................................... 38,624,818
Investment advisory fee payable (Note 2) .................................................. 11,552
Payable for organization and offering costs ............................................... 367,500
Other accrued expenses .................................................................... 16,026
------------
Payable for organization costs ............................................................ 39,019,896
------------
Net Investment Assets ..................................................................... 210,346,984
============
Net assets were comprised of:
Common shares of beneficial interest:
Par value (Note 4) .................................................................... 14,708
Paid in capital in excess of par ...................................................... 210,251,793
------------
.......................................................................................... 210,266,501
Net investment income (Note 1) ........................................................ 135
Net unrealized appreciation (Note 1) .................................................. 80,348
------------
Net investment assets, October 31, 2001 ............................................... $210,346,984
============
Net asset value per share:
Equivalent to 14,708,028 common shares of beneficial interest issued
and outstanding, par value $0.001, unlimited shares authorized ............................ $14.30
============
See Notes to Financial Statements
F-4
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF OPERATIONS
For the period October 26, 2001 (commencement of operations) to October 31, 2001
(Unaudited)
Net Investment Income
Income
Interest ................................................................................ $42,713
-------
Expenses
Offering cost ........................................................................... 15,000
Investment advisory ..................................................................... 11,552
Independent accountants ................................................................. 4,161
Reports to shareholders ................................................................. 3,743
Insurance ............................................................................... 3,646
Custodian ............................................................................... 1,288
Trustees ................................................................................ 991
Transfer agent .......................................................................... 832
Ratings ................................................................................. 492
Miscellaneous ........................................................................... 873
-------
Total expenses .......................................................................... 42,578
-------
Net investment income ..................................................................... 135
=======
Net change in unrealized appreciation on investments ...................................... 80,348
-------
Net Increase in Net Investment Assets Resulting from Operations ........................... $80,483
=======
See Notes to Financial Statements
F-5
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF CHANGES IN NET ASSETS
For the period October 26, 2001 (commencement of operations) to October 31, 2001
(Unaudited)
Increase in Net Investment Assets
Operations:
Net Investment income ................................................................... $ 135
Net change in unrealized appreciation on investments .................................... 80,348
------------
Net increase in net assets resulting from operations .................................. 80,483
------------
Capital Share Transactions:
Net proceeds from the issuance of common shares ......................................... 210,266,501
------------
Total increase ........................................................................ 210,346,984
------------
Net Investment Assets
Beginning of period ....................................................................... --
------------
End of period (including net investment income of $135) ................................... $210,346,984
============
See Notes to Financial Statements
F-6
BLACKROCK MUNICIPAL 2018 TERM TRUST
PORTFOLIO OF INVESTMENTS
October 31, 2001
(Unaudited)
Principal
Amount Option Call Value
Rating* (000) Description Provisions+ (Note 1)
----------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS -- 20.0%
Florida -- 2.6%
Aaa $ 5,000 Escambia Cnty. Hlth. Facs. Auth., Hlth. Care.
Fac. Rev., 5.95%, 7/01/20, AMBAC .................... No Opt. Call $ 5,507,200
-----------
Illinois -- 3.6%
A- 4,500 Illinois Dev. Fin. Auth. Hosp. Rev., Adventist Hlth.
Sys. Sunbelt Obl., 5.50%, 11/15/20 .................. 11/09 @ 101 4,426,290
AAA 3,000 Illinois St., G.O., First Ser., 5.375%, 11/01/19 ...... 11/11 @ 100 3,113,610
-----------
7,539,900
-----------
Indiana -- 1.9%
A3 4,000 Petersburg P.C.R., Indiana Pwr. Lt. Conv.,
5.75%, 8/01/21 ...................................... 8/11 @ 102 4,085,680
-----------
Michigan -- 4.8%
BBB 5,000 Dickinson Cnty. Econ. Dev. Corp. P.C.R.,
Champion Intl. Corp. Proj., 5.85%, 10/01/18 ......... 10/03 @ 102 5,031,250
AA+ 5,000 Michigan St. Bldg. Auth. Rev., Facs. Prog.,
Ser. I, 5.125%, 10/15/20 ............................ 10/11 @ 100 5,052,250
-----------
10,083,500
-----------
Mississipi -- 1.6%
A- 3,000 Lowndes Cnty. Solid Wst. Disp. & P.C.R.,
Weyerhaeuser Co. Proj., Ser. A, 6.80%, 4/01/22 ...... No Opt. Call 3,394,830
-----------
South Carolina -- 5.5%
A1 10,960 Tobacco Settlement Rev. Mgmt. Auth. So. Carolina,
Ser. B, 6.00%, 5/15/22 .............................. 5/11 @ 101 11,451,008
-----------
Total Long-Term Investments (cost $41,981,770) ........ 42,062,118
-----------
SHORT-TERM INVESTMENTS** -- 92.3%
California -- 7.0%
VMIG1 14,750 Rancho Mirage California Jt. Pwrs. Fin. Auth.,
C.O.P., Eisenhower Med. Ctr., Ser. B,
1.67%, 11/07/01, MBIA ............................... N/A 14,750,000
-----------
Indiana -- 7.1%
A1+ 14,985 Indiana Hlth. Fac. Fin. Auth. Hosp. Rev.,
Clarian Hlth. Oblig., Ser. B, 2.05%, 11/01/01, FRDD . N/A 14,985,000
-----------
Maryland -- 10.4%
Maryland St. Hlth. & High Edl. Facs. Auth. Lease Rev.,
A1+ 18,300 John Hopkins Hosp., Ser. A, 1.93%, 11/07/01 ......... N/A 18,300,000
A1+ 3,500 Pooled Loan Prog., Ser. D, 2.10%, 11/01/01, FRDD .... N/A 3,500,000
-----------
21,800,000
-----------
F-7
Principal
Amount Option Call Value
Rating* (000) Description Provisions+ (Note 1)
----------------------------------------------------------------------------------------------------------------
Massachusetts -- 24.5%
Massachusetts St. Hlth. Edl. Facs. Auth. Rev., Boston Univ.,
A1 23,800 Ser. Q-1, 1.95%, 11/07/01, FRDD ..................... N/A $ 23,800,000
A1 27,800 Ser. Q-2, 1.95%, 11/07/01, FRDD ..................... N/A 27,800,000
------------
51,600,000
------------
New York -- 38.1%
A1+ 18,600 Long Island Pwr. Auth. New York Elec.
Sys. Rev., Ser. 7, 1.70%, 11/07/01, MBIA ............ N/A 18,600,000
A1+ 17,500 New York City Hsg. Dev. Corp., Mult. Family
Rental Hsg. Rev., Ser. A, 1.70%, 11/07/01 ........... N/A 17,500,000
A1+ 42,300 New York City Mun. Wtr. Fin. Auth., Wtr. &
Swr. Sys. Rev., Ser. C, 1.95%, 11/01/01, FRDD ....... N/A 42,300,000
A1+ 1,600 New York St. Energy Research & Dev. Auth.,
P.C.R., New York St. Elec. & Gas Corp.,
Ser. C, 1.90%, 11/01/01, FRDD ....................... N/A 1,600,000
------------
80,000,000
------------
Pennsylvania -- 5.2%
A1+ 11,000 Delaware River Port Auth. Pennsylvania &
New Jersey Rev., Pennsylvania 606,
2.01%, 11/01/01, FSA, FRDD .......................... N/A 11,000,000
------------
Total Short-Term Investments (cost $194,135,000) ...... 194,135,000
------------
Total Investments -- 112.3% (cost $236,116,770) ....... 236,197,118
Liabilities in excess of other assets -- (12.3)% ...... (25,850,134)
------------
Net Assets Applicable to Common Shareholders -- 100% .. $210,346,984
============
----------
* Rating: Using the higher of Standard & Poor's, Moody's or Fitch's rating.
** For purposes of amortized cost valuation, the maturity date of these
instruments is considered to be the earlier of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
+ Option call provisions: Date (month/year) and prices of the earliest optional
call or redemption. There may be other call provisions at varying prices at
later dates.
------------------------------------------------------------------------------------------------
KEY TO ABBREVIATIONS:
AMBAC -- American Municipal Bond Assurance FRDD -- Floating Rate Daily Demand
Corporation MBIA -- Municipal Bond Insurance
G.O. -- Government Obligations Association
P.C.R. -- Pollution Control Revenue
------------------------------------------------------------------------------------------------
See Notes to Financial Statements
F-8
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization & Accounting Policies
The BlackRock Municipal 2018 Term Trust (the "Trust") was organized as a
Delaware business trust on September 7, 2001 and is registered as a
non-diversified, closed-end management investment company under the Investment
Company Act of 1940. The Trust had no other transactions other than when it sold
8,028 Common Shares for $115,001 ($14.325 per share) to BlackRock Advisors, Inc.
until investment operations commenced on October 26, 2001. The Trust's
investment objectives are to provide current income exempt from regular Federal
income taxes and to invest in municipal bonds that over time will perform better
than the broader municipal bond market. The ability of issuers of debt
securities held by the Trust to meet their obligations may be affected by
economic developments in certain states, a specific industry or region. No
assurance can be given that the Trust's investment objective will be achieved.
The following is a summary of significant accounting policies followed by
the Trust.
Securities Valuation: Municipal securities (including commitments to purchase
such securities on a "when-issued" basis) are valued on the basis of prices
provided by dealers or pricing services approved by the Trustees. In determining
the value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from bond dealers,
market transactions in comparable securities and various relationships between
securities in determining values. Short-term investments are valued at amortized
cost. Any securities or other assets for which such current market quotations
are not readily available are valued at fair value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Trustees.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. The Trust also records interest income
on an accrual basis and amortizes premium and accretes discount, respectively,
to interest income on securities purchased using the interest method.
Federal Income Taxes: It is the Trust's intention to elect to be treated as a
regulated investment company under the Internal Revenue Code and to distribute
sufficient net income to shareholders. For this reason and because substantially
all of the Trust's gross income consists of Tax-exempt interest, no Federal
income tax provision is required.
Dividends and Distributions: The Trust declares and pays dividends and
distributions to common shareholders monthly from net investment income, net
realized short-term capital gains and other sources, if necessary. Net long-term
capital gains, if any, in excess of loss carry forwards may be distributed
annually. Dividends and distributions are recorded on the ex-dividend date.
Estimates: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Deferred Compensation Plan: Under a deferred compensation plan approved by the
Board of Trustees on February 24, 2000, non-interested Trustees may elect to
defer receipt of all or a portion of their annual compensation.
Deferred amounts earn a return as though equivalent dollar amounts had been
invested in common shares of other BlackRock funds selected by the Trustees.
This has the same economic effect as if the Trustees had invested the deferred
amounts in such other BlackRock funds.
F-9
The deferred compensation plan is not funded and obligations there under
represent general unsecured claims against the general assets of the Trust. The
Trust may, however, elect to invest in common shares of those funds selected by
the Trustees in order to match its deferred compensation obligations.
Note 2. Agreements
The Trust has an Investment Advisory Agreement with BlackRock Advisors,
Inc. (the "Advisor"), a wholly owned subsidiary of BlackRock, Inc., which in
turn is an indirect majority-owned subsidiary of PNC Financial Services Group,
Inc. The investment management agreement covers both investment advisory and
administration services.
The investment advisory fee paid to the Advisor is computed weekly and
payable monthly at an annual rate of 0.40% of the Trust's average weekly Managed
Assets.
Pursuant to the agreements, the Advisor provides continuous supervision of
the investment portfolio, pays the compensation of officers of the Trust who are
affiliated persons of the Advisor and pays occupancy and certain clerical and
accounting costs. The Trust bears all other costs and expenses.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments, for the period ended October 31, 2001 aggregated $41,981,770 and
$0, respectively.
The federal income tax basis of the Trust's investments at October 31, 2001
was $236,116,770, and accordingly, net unrealized appreciation was $80,348
(gross unrealized appreciation--$80,348, gross unrealized depreciation--$0).
Note 4. Capital
There are an unlimited number of $.001 par value common shares of
beneficial interest authorized. Of the 14,708,028 common shares of beneficial
interest outstanding at October 31, 2001, the Advisor owned 8,028 shares.
Transactions in common shares of beneficial interest for the period October
26, 2001 (commencement of investment operations) to October 31, 2001 were as
follows:
Shares issued in connection with initial public offering 14,708,028
-----------
Net increase in shares outstanding 14,708,028
===========
Offering costs of $352,500 incurred in connection with the Trust's offering
of common shares have been charged to paid-in capital in excess of par of the
common shares.
The Trust may classify or reclassify any unissued common shares of
beneficial interest into one or more series of preferred shares of beneficial
interest into one or more series of preferred shares of beneficial interest.
F-10
APPENDIX A
BLACKROCK MUNICIPAL 2018 TERM TRUST
STATEMENT OF PREFERENCES OF
AUCTION MARKET PREFERRED SHARES
("AMPSSM")
-------
"AMPS" is a service mark of Merrill Lynch & Co., Inc.
TABLE OF CONTENTS
DEFINITIONS ....................................................................................... A-2
PART I. ........................................................................................... A-13
1. Number of Authorized Shares ................................................................. A-13
2. Dividends ................................................................................... A-13
3. Gross-Up Payments ........................................................................... A-16
4. Designation of Special Rate Periods ......................................................... A-17
5. Voting Rights ............................................................................... A-18
6. Investment Company Act Preferred Shares Asset Coverage ...................................... A-22
7. Preferred Shares Basic Maintenance Amount ................................................... A-22
8. Reserved .................................................................................... A-23
9. Restrictions on Dividends and Other Distributions ........................................... A-23
10. Rating Agency Restrictions .................................................................. A-24
11. Redemption .................................................................................. A-25
12. Liquidation Rights .......................................................................... A-28
13. Miscellaneous ............................................................................... A-29
PART II. .......................................................................................... A-30
1. Orders ...................................................................................... A-30
2. Submission of Orders by Broker-Dealers to Auction Agent ..................................... A-31
3. Determination of Sufficient Clearing Bids, Winning Bids Rate and Applicable Rate ............ A-33
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and Allocation of Shares A-34
5. Notification of Allocations ................................................................. A-36
6. Auction Agent ............................................................................... A-36
7. Transfer of AMPS ............................................................................ A-36
8. Global Certificate .......................................................................... A-36
9. Force Majeur ................................................................................ A-37
Annex A ........................................................................................... AA-1
BLACKROCK MUNICIPAL 2018 TERM TRUST, a Delaware business trust (the
"Trust"), certifies that:
First: Pursuant to authority expressly vested in the Board of Trustees of
the Trust by Article VI of the Trust's Agreement and Declaration of Trust, as
amended and restated (which, as hereafter restated or amended from time to time
is, together with this Statement, herein called the "Declaration"), the Board of
Trustees has, by resolution, authorized the issuance of shares of the Trust's
authorized AMPS, liquidation preference $25,000 per share, having such
designation or designations as to series as is set forth in Section 1 of Annex A
hereto and such number of shares per such series as is set forth in Section 2 of
Annex A hereto.
Second: The preferences, voting powers, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption, of the shares
of each series of AMPS now or hereafter described in Section 1 of Annex A hereto
are as follows (each such series being referred to herein as a series of AMPS,
and shares of all such series being referred to herein collectively as AMPS).
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Annex A hereto,
as used in Parts I and II of this Statement, the following terms shall have the
following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:
A-2
(1) "AA" COMPOSITE COMMERCIAL PAPER RATE, on any date for any Rate Period
of shares of a series of AMPS, shall mean (i) (A) in the case of any Minimum
Rate Period or any Special Rate Period of fewer than 49 Rate Period Days, the
interest equivalent of the 30-day rate; provided, however, that if such Rate
Period is a Minimum Rate Period and the "AA" Composite Commercial Paper Rate is
being used to determine the Applicable Rate for shares of such series when all
of the Outstanding shares of such series are subject to Submitted Hold Orders,
then the interest equivalent of the seven-day rate, and (B) in the case of any
Special Rate Period of (1) 49 or more but fewer than 70 Rate Period Days, the
interest equivalent of the 60-day rate; (2) 70 or more but fewer than 85 Rate
Period Days, the arithmetic average of the interest equivalent of the 60-day and
90-day rates; (3) 85 or more but fewer than 99 Rate Period Days, the interest
equivalent of the 90-day rate; (4) 99 or more but fewer than 120 Rate Period
Days, the arithmetic average of the interest equivalent of the 90-day and
120-day rates; (5) 120 or more but fewer than 141 Rate Period Days, the interest
equivalent of the 120-day rate; (6) 141 or more but fewer than 162 Rate Period
Days, the arithmetic average of the 120-day and 180-day rates; and (7) 162 or
more but fewer than 183 Rate Period Days, the interest equivalent of the 180-day
rate, in each case on commercial paper placed on behalf of issuers whose
corporate bonds are rated "AA" by S&P or the equivalent of such rating by S&P or
another rating agency, as made available on a discount basis or otherwise by the
Federal Reserve Bank of New York for the Business Day next preceding such date;
or (ii) in the event that the Federal Reserve Bank of New York does not make
available any such rate, then the arithmetic average of such rates, as quoted on
a discount basis or otherwise, by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day next preceding such date. If
any Commercial Paper Dealer does not quote a rate required to determine the "AA"
Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall
be determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute
Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by the
Trust to provide such rate or rates not being supplied by any Commercial Paper
Dealer or Commercial Paper Dealers, as the case may be, or, if the Trust does
not select any such Substitute Commercial Paper Dealer or Substitute Commercial
Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper
Dealers. For purposes of this definition, the "interest equivalent" of a rate
stated on a discount basis (a "discount rate") for commercial paper of a given
days' maturity shall be equal to the quotient (rounded upwards to the next
higher one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction, the numerator of which shall be
the product of the discount rate times the number of days in which such
commercial paper matures and the denominator of which shall be 360.
(2) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.
(3) "AFFILIATE" shall mean, for purposes of the definition of
"Outstanding," any Person known to the Auction Agent to be controlled by, in
control of or under common control with the Trust; provided, however, that no
Broker- Dealer controlled by, in control of or under common control with the
Trust shall be deemed to be an Affiliate nor shall any corporation or any Person
controlled by, in control of or under common control with such corporation one
of the trustees, directors or executive officers of which is a trustee of the
Trust be deemed to be an Affiliate solely because such trustee, director or
executive officer is also a trustee of the Trust.
(4) "AGENT MEMBER" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.
(5) "AMPS" shall have the meaning set forth on the first page of this
Statement.
(6) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation Notes
(BANs) that are rated by S&P.
(7) "APPLICABLE RATE" shall have the meaning specified in subparagraph (e)
(i) of Section 2 of Part I of this Statement.
(8) "AUCTION" shall mean each periodic implementation of the Auction
Procedures
A-3
(9) "AUCTION AGENCY AGREEMENT" shall mean the agreement between the Trust
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of AMPS so long as the Applicable Rate for shares of
such series is to be based on the results of an Auction.
(10) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees or the Executive Committee of the Board of
Trustees in accordance with Section 6 of Part II of this Statement.
(11) "AUCTION DATE," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(12) "AUCTION PROCEDURES" shall mean the procedures for conducting Auctions
set forth in Part II of this Statement.
(13) "AVAILABLE AMPS" shall have the meaning specified in paragraph (a) of
Section 3 of Part II of this Statement.
(14) "BENCHMARK RATE" shall have the meaning specified in Section 12 of
Annex A hereto.
(15) "BENEFICIAL OWNER," with respect to shares of a series of AMPS, means
a customer of a Broker- Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares of
such series.
(16) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(17) "BIDDER" and "BIDDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement; provided, however, that
neither the Trust nor any affiliate thereof shall be permitted to be a Bidder in
an Auction, except that any Broker-Dealer that is an affiliate of the Trust may
be a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer
are not for its own account.
(18) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Trust or
any duly authorized committee thereof.
(19) "BROKER-DEALER" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Statement, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has been
selected by the Trust and has entered into a Broker-Dealer Agreement that
remains effective.
(20) "BROKER-DEALER AGREEMENT" shall mean an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures specified in Part II of this Statement.
(21) "BUSINESS DAY" shall mean a day on which the New York Stock Exchange
is open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.
(22) "CODE" means the Internal Revenue Code of 1986, as amended.
(23) "COMMERCIAL PAPER DEALERS" shall mean Lehman Commercial Paper
Incorporated, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and any other commercial paper dealer selected by the Trust as to
which Moody's, S&P or any substitute rating agency then rating the AMPS shall
not have objected or, in lieu of any thereof, their respective affiliates or
successors, if such entity is a commercial paper dealer.
(24) "COMMON SHARES" shall mean the common shares of beneficial interest,
par value $.001 per share, of the Trust.
A-4
(25) "CURE DATE" shall mean the Preferred Shares Basic Maintenance Cure
Date or the Investment Company Act Cure Date, as the case may be.
(26) "DATE OF ORIGINAL ISSUE," with respect to shares of a series of AMPS,
shall mean the date on which the Trust initially issued such shares.
(27) "DECLARATION" shall have the meaning specified on the first page of
this Statement.
(28) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations rated
at least P-1, MIG-1 or VMIG-1 by Moody's, or A-1+ or SP-1+ by S&P.
(29) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Moody's Discount Factor, or (b) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or call price thereof, including any call premium,
divided by (2) the applicable Moody's Discount Factor, and (ii) with respect to
a S&P Eligible Asset, the quotient of the Market Value thereof divided by the
applicable S&P Discount Factor.
(30) "DIVIDEND PAYMENT DATE," with respect to shares of a series of AMPS,
shall mean any date on which dividends are payable on shares of such series
pursuant to the provisions of paragraph (d) of Section 2 of Part I of this
Statement.
(31) "DIVIDEND PERIOD," with respect to shares of a series of AMPS, shall
mean the period from and including the Date of Original Issue of shares of such
series to but excluding the initial Dividend Payment Date for shares of such
series and any period thereafter from and including one Dividend Payment Date
for shares of such series to but excluding the next succeeding Dividend Payment
Date for shares of such series.
(32) "EXISTING HOLDER," with respect to shares of a series of AMPS, shall
mean a Broker-Dealer (or any such other Person as may be permitted by the Trust)
that is listed on the records of the Auction Agent as a holder of shares of such
series.
(33) "FAILURE TO DEPOSIT," with respect to shares of a series of AMPS,
shall mean a failure by the Trust to pay to the Auction Agent, not later than
12:00 noon, New York City time, (A) on the Business Day next preceding any
Dividend Payment Date for shares of such series, in funds available on such
Dividend Payment Date in The City of New York, New York, the full amount of any
dividend (whether or not earned or declared) to be paid on such Dividend Payment
Date on any share of such series or (B) on the Business Day next preceding any
redemption date in funds available on such redemption date for shares of such
series in The City of New York, New York, the Redemption Price to be paid on
such redemption date for any share of such series after notice of redemption is
mailed pursuant to paragraph (c) of Section 11 of Part I of this Statement;
provided, however, that the foregoing clause (B) shall not apply to the Trust's
failure to pay the Redemption Price in respect of AMPS when the related Notice
of Redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.
(34) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in the
definition of "Moody's Volatility Factor."
(35) "GROSS-UP PAYMENT" shall have the meaning specified in Section 4 of
Annex A hereto.
(36) "HOLDER," with respect to shares of a series of AMPS, shall mean the
registered holder of such shares as the same appears on the record books of the
Trust.
(37) "HOLD ORDER" and "HOLD ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
A-5
(38) "INDEPENDENT ACCOUNTANT" shall mean a nationally recognized
accountant, or firm of accountants, that is with respect to the Trust an
independent public accountant or firm of independent public accountants under
the Securities Act of 1933, as amended from time to time.
(39) "INITIAL RATE PERIOD," with respect to shares of a series of AMPS,
shall have the meaning specified with respect to shares of such series in
Section 5 of Annex A hereto.
(40) "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.
(41) "INVESTMENT COMPANY ACT" shall mean the Investment Company Act of
1940, as amended from time to time.
(42) "INVESTMENT COMPANY ACT CURE DATE," with respect to the failure by the
Trust to maintain the Investment Company Act Preferred Shares Asset Coverage (as
required by Section 6 of Part I of this Statement) as of the last Business Day
of each month, shall mean the last Business Day of the following month.
(43) "INVESTMENT COMPANY ACT PREFERRED SHARES ASSET COVERAGE" shall mean
asset coverage, as defined in Section 18(h) of the Investment Company Act, of at
least 200% with respect to all outstanding senior securities of the Trust which
are shares of beneficial interest including all outstanding AMPS (or such other
asset coverage as may in the future be specified in or under the Investment
Company Act as the minimum asset coverage for senior securities which are shares
or stock of a closed-end investment company as a condition of declaring
dividends on its common shares or stock).
(44) "KENNY INDEX" shall have the meaning specified in the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."
(45) "LATE CHARGE" shall have the meaning specified in subparagraph (e) (1)
(B) of Section 2 of Part I of this Statement.
(46) "LIQUIDATION PREFERENCE," with respect to a given number of AMPS,
means $25,000 times that number.
(47) "MARKET VALUE" of any asset of the Trust shall be the market value
thereof determined by Muller Data Corporation Evaluation services or any other
pricing service or services designated by the Board of Trustees of the Trust,
provided that the Trust obtains written assurance from Moody's and S&P, if
Moody's and S&P are then rating the AMPS, and from any substitute rating agency
then rating the AMPS that such designation will not impair the rating then
assigned by Moody's, S&P or such substitute rating agency to the AMPS (the
"Pricing Service"). Market Value of any asset shall include any interest accrued
thereon. The Pricing Service shall value portfolio securities at the lower of
the quoted bid price or the mean between the quoted bid and ask price or the
yield equivalent when quotations are not readily available. Securities for which
quotations are not readily available shall be valued at fair value as determined
by the Pricing Service using methods which include consideration of: yields or
prices of municipal obligations of comparable quality, type of issue, coupon,
maturity and rating; indications as to value from dealers; and general market
conditions. The Pricing Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. If the Pricing Service fails to
provide the Market Value of any Municipal Obligation, such Municipal Obligation
shall be valued at the lower of two bid quotations (one of which shall be in
writing) obtained by the Trust from two dealers who are members of the National
Association of Securities Dealers, Inc. and are making a market in such
Municipal Obligations. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value as determined by the Pricing Service or if the Pricing
Service is not able to value such instruments they shall be valued at fair value
on a consistent basis using methods determined in good faith by the Board of
Trustees.
A-6
(48) "MAXIMUM POTENTIAL GROSS-UP PAYMENT LIABILITY," as of any Valuation
Date, shall mean the aggregate amount of Gross-up Payments that would be due if
the Trust were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized net
capital gains and other taxable income earned by the Trust, as of the end of the
calendar month immediately preceding such Valuation Date, and assuming such
Gross-up Payments are fully taxable.
(49) "MAXIMUM RATE," for shares of a series of AMPS on any Auction Date for
shares of such series, shall mean:
(1) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of this Statement,
the product of (A) the Reference Rate on such Auction Date for the next
Rate Period of shares of such series and (B) the Rate Multiple on such
Auction Date, unless shares of such series have or had a Special Rate
Period (other than a Special Rate Period of 28 Rate Period Days or fewer)
and an Auction at which Sufficient Clearing Bids existed has not yet
occurred for a Minimum Rate Period of shares of such series after such
Special Rate Period, in which case the higher of:
(1) the dividend rate on shares of such series for the
then-ending Rate Period; and
(2) the product of (1) the higher of (x) the Reference Rate
on such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in
length to the then-ending Rate Period of shares of such series, if
such then-ending Rate Period was more than 364 Rate Period Days, and
(y) the Reference Rate on such Auction Date for a Rate Period equal
in length to such Special Rate Period of shares of such series, if
such Special Rate Period was 364 Rate Period Days or fewer, or the
Treasury Note Rate on such Auction Date for a Rate Period equal in
length to such Special Rate Period, if such Special Rate Period was
more than 364 Rate Period Days and (2) the Rate Multiple on such
Auction Date; or
(2) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period
designated by the Trust pursuant to Section 4 of Part I of this Statement,
the product of (A) the highest of (1) the Reference Rate on such Auction
Date for a Rate Period equal in length to the then-ending Rate Period of
shares of such series, if such then-ending Rate Period was 364 Rate Period
Days or fewer, or the Treasury Note Rate on such Auction Date for a Rate
Period equal in length to the then-ending Rate Period of shares of such
series, if such then-ending Rate Period was more than 364 Rate Period Days,
(2) the Reference Rate on such Auction Date for the Special Rate Period for
which the Auction is being held if such Special Rate Period is 364 Rate
Period Days or fewer or the Treasury Note Rate on such Auction Date for the
Special Rate Period for which the Auction is being held if such Special
Rate Period is more than 364 Rate Period Days, and (3) the Reference Rate
on such Auction Date for Minimum Rate Periods and (B) the Rate Multiple on
such Auction Date.
(50) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of 7 Rate
Period Days.
(51) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(52) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in Section
4 of Annex A hereto.
(53) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in Section 4
of Annex A hereto.
(54) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a given
Valuation Date and ending 56 days thereafter.
(55) "MOODY'S VOLATILITY FACTOR" shall mean, as of any Valuation Date, (i)
in the case of any Minimum Rate Period, any Special Rate Period of 28 Rate
Period Days or fewer, or any Special Rate Period of 57 Rate Period Days or more,
a multiplicative factor equal to 275%, except as otherwise provided in the last
A-7
sentence of this definition; (ii) in the case of any Special Rate Period of more
than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal to
203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a multiplicative
factor equal to 235%. If, as a result of the enactment of changes to the Code,
the greater of the maximum marginal Federal individual income tax rate
applicable to ordinary income and the maximum marginal Federal corporate income
tax rate applicable to ordinary income will increase, such increase being
rounded up to the next five percentage points (the "Federal Tax Rate Increase"),
until the effective date of such increase, the Moody's Volatility Factor in the
case of any Rate Period described in (i) above in this definition instead shall
be determined by reference to the following table:
Volatility
Federal Tax Rate Increase Factor
----------------------------------- ----------
5% ..................................... 295%
10% .................................... 317%
15% .................................... 341%
20% .................................... 369%
25% .................................... 400%
30% .................................... 436%
35% .................................... 477%
40% .................................... 525%
(56) "MUNICIPAL OBLIGATIONS" shall mean any and all instruments that pay
interest or make other distributions that are exempt from regular Federal income
tax and in which the Trust may invest consistent with the investment policies
and restrictions contained in its registration statement on Form N-2
(333-86589), ("Registration Statement"), as the same may be amended from time to
time.
(57) "NOTICE OF REDEMPTION" shall mean any notice with respect to the
redemption of AMPS pursuant to paragraph (c) of Section 11 of Part I of this
Statement.
(58) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with respect to
a Special Rate Period of AMPS pursuant to subparagraph (d)(i) of Section 4 of
Part I of this Statement.
(59) "ORDER" and "ORDERS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(60) "OUTSTANDING" shall mean, as of any Auction Date with respect to
shares of a series of AMPS, the number of shares of such series theretofore
issued by the Trust except, without duplication, (i) any shares of such series
theretofore cancelled or delivered to the Auction Agent for cancellation or
redeemed by the Trust, (ii) any shares of such series as to which the Trust or
any Affiliate thereof shall be an Existing Holder and (iii) any shares of such
series represented by any certificate in lieu of which a new certificate has
been executed and delivered by the Trust.
(61) "PERSON" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.
(62) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a series of
AMPS, shall mean a customer of a Broker-Dealer that is not a Beneficial Owner of
shares of such series but that wishes to purchase shares of such series, or that
is a Beneficial Owner of shares of such series that wishes to purchase
additional shares of such series.
(63) "POTENTIAL HOLDER," with respect to shares of a series of AMPS, shall
mean a Broker-Dealer (or any such other person as may be permitted by the Trust)
that is not an Existing Holder of shares of such series or that is an Existing
Holder of shares of such series that wishes to become the Existing Holder of
additional shares of such series.
A-8
(64) "PREFERRED SHARES BASIC MAINTENANCE AMOUNT," as of any Valuation Date,
shall mean the dollar amount equal to the sum of (i)(A) the product of the
number of AMPS outstanding on such date multiplied by $25,000 (plus the product
of the number of shares of any other series of preferred shares outstanding on
such date multiplied by the liquidation preference of such shares), plus any
redemption premium applicable to the AMPS (or other preferred shares) then
subject to redemption; (B) the aggregate amount of dividends that will have
accumulated at the respective Applicable Rates (whether or not earned or
declared) to (but not including) the first respective Dividend Payment Dates for
the AMPS outstanding that follow such Valuation Date (plus the aggregate amount
of dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding preferred shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of the AMPS outstanding from such first respective
Dividend Payment Date therefor through the 56th day after such Valuation Date,
at the Maximum Rate (calculated as if such Valuation Date were the Auction Date
for the Rate Period commencing on such Dividend Payment Date) for a Minimum Rate
Period of shares of such series to commence on such Dividend Payment Date,
assuming, solely for purposes of the foregoing, that if on such Valuation Date
the Trust shall have delivered a Notice of Special Rate Period to the Auction
Agent pursuant to Section 4(d)(i) of this Part I with respect to shares of such
series, such Maximum Rate shall be the higher of (a) the Maximum Rate for the
Special Rate Period of shares of such series to commence on such Dividend
Payment Date and (b) the Maximum Rate for a Minimum Rate Period of shares of
such series to commence on such Dividend Payment Date, multiplied by the
Volatility Factor applicable to a Minimum Rate Period, or, in the event the
Trust shall have delivered a Notice of Special Rate Period to the Auction Agent
pursuant to section 4(d)(i) of this Part I with respect to shares of such series
designating a Special Rate Period consisting of 56 Rate Period Days or more, the
Volatility Factor applicable to a special Rate Period of that length (plus the
aggregate amount of dividends that would accumulate at the maximum dividend rate
or rates on any other preferred shares outstanding from such respective dividend
payment dates through the 56th day after such Valuation Date, as established by
or pursuant to the respective statements establishing and fixing the rights and
preferences of such other preferred shares) (except that (1) if such Valuation
Date occurs at a time when a Failure to Deposit (or, in the case of preferred
shares other than the AMPS, a failure similar to a Failure to Deposit) has
occurred that has not been cured, the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in respect
of which such failure has occurred and (2) for those days during the period
described in this subparagraph (C) in respect of which the Applicable Rate in
effect immediately prior to such Dividend Payment Date will remain in effect
(or, in the case of preferred shares other than the AMPS, in respect of which
the dividend rate or rates in effect immediately prior to such respective
dividend payment dates will remain in effect), the dividend for purposes of
calculation would accumulate at such Applicable Rate (or other rate or rates, as
the case may be) in respect of those days); (D) the amount of anticipated
expenses of the Trust for the 90 days subsequent to such Valuation Date; (E) the
amount of the Trust's Maximum Potential Gross-up Payment Liability in respect of
AMPS (and similar amounts payable in respect of other preferred shares pursuant
to provisions similar to those contained in Section 3 of Part I of this
Statement) as of such Valuation Date; (F) the amount of any indebtedness or
obligations of the Trust senior in right of payment to the AMPS; and (G) any
current liabilities as of such Valuation Date to the extent not reflected in any
of (i)(A) through (i)(F) (including, without limitation, any payables for
Municipal Obligations purchased as of such Valuation Date and any liabilities
incurred for the purpose of clearing securities transactions) less (ii) the
value (i.e., for purposes of current Moody's guidelines, the face value of cash,
short-term Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short-term
securities that are the direct obligation of the U.S. government, provided in
each case that such securities mature on or prior to the date upon which any of
(i) (A) through (i) (G) become payable, otherwise the Moody's Discounted Value)
(i.e., for the purposes of the current S&P guidelines, the face value of cash,
short-term Municipal Obligations rate SP-1 or A-1 or Municipal Obligations rated
A, provided in each case that such securities mature on or prior to the date
upon which any of (i)(A) through (i)(G) becomes payable, otherwise the S&P
Discounted value) of any of the Trust's assets irrevocably deposited by the
Trust for the payment of any of (i)(A) through (i)(G).
(65) "PREFERRED SHARES BASIC MAINTENANCE CURE DATE," with respect to the
failure by the Trust to satisfy the Preferred Shares Basic Maintenance Amount
(as required by paragraph (a) of Section 7 of Part I of this Statement) as of a
given Valuation Date, shall mean the seventh Business Day following such
Valuation Date.
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(66) "PREFERRED SHARES BASIC MAINTENANCE REPORT" shall mean a report signed
by the President, Treasurer or any Senior Vice President or Vice President of
the Trust which sets forth, as of the related Valuation Date, the assets of the
Trust, the Market Value and the Discounted Value thereof (seriatim and in
aggregate), and the Preferred Shares Basic Maintenance Amount.
(67) "QUARTERLY VALUATION DATE" shall mean the last Business Day of each
January, April, July and October of each year, commencing on the date set forth
in Section 6 of Annex A hereto.
(68) "RATE MULTIPLE" shall have the meaning specified in Section 4 of Annex
A hereto.
(69) "RATE PERIOD," with respect to shares of a series of AMPS, shall mean
the Initial Rate Period of shares of such series and any Subsequent Rate Period,
including any Special Rate Period, of shares of such series.
(70) "RATE PERIOD DAYS," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but for
the application of paragraph (d) of Section 2 of Part I of this Statement or
paragraph (b) of Section 4 of Part I of this Statement.
(71) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean (A) for
purposes of calculation of Moody's Eligible Assets as of any Valuation Date, no
more than the aggregate of the following: (i) the book value of receivables for
Municipal Obligations sold as of or prior to such Valuation Date if such
receivables are due within five business days of such Valuation Date, and if the
trades which generated such receivables are (x) settled through clearing house
firms with respect to which the Trust has received prior written authorization
from Moody's or (y) with counterparties having a Moody's long-term debt rating
of at least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations
sold as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculation of S&P Eligible Assets as of any Valuation Date the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date.
(72) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this Statement.
(73) "REFERENCE RATE" shall mean (i) the higher of the Taxable Equivalent
of the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper
Rate in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate
Period Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case
of Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate
Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate
Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days.
(74) "REGISTRATION STATEMENT" has the meaning specified in the definition
of "Municipal Obligations."
(75) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
(76) "S&P DISCOUNT FACTOR" shall have the meaning specified in Section 4 of
Annex A hereto.
(77) "S&P ELIGIBLE ASSET" shall have the meaning specified in Section 4 of
Annex A hereto.
(78) "S&P EXPOSURE PERIOD" shall mean the maximum period of time following
a Valuation Date that the Fund has under this Statement to cure any failure to
maintain, as of such Valuation Date, the Discounted Value for its portfolio at
least equal to the Preferred Shares Basic Maintenance Amount (as described in
paragraph (a) of Section 7 of Part I of this Statement).
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(79) "S&P VOLATILITY FACTOR" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.
(80) "SECURITIES DEPOSITORY" shall mean The Depository Trust Company and
its successors and assigns or any other securities depository selected by the
Trust which agrees to follow the procedures required to be followed by such
securities depository in connection with the AMPS.
(81) "SELL ORDER" and "SELL ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(82) "SPECIAL RATE PERIOD," with respect to shares of a series of AMPS,
shall have the meaning specified in paragraph (a) of Section 4 of Part I of this
Statement.
(83) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning specified in
subparagraph (a)(i) of Section 11 of Part I of this Statement.
(84) "SUBMISSION DEADLINE" shall mean 1:30 P.M., New York city time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
(85) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(86) "SUBMITTED HOLD ORDER" and "SUBMITTED HOLD ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(87) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this Statement.
(88) "SUBMITTED SELL ORDER" and "SUBMITTED SELL ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(89) "SUBSEQUENT RATE PERIOD," with respect to shares of a series of AMPS,
shall mean the period from and including the first day following the Initial
Rate Period of shares of such series to but excluding the next Dividend Payment
Date for shares of such series and any period thereafter from and including one
Dividend Payment Date for shares of such series to but excluding the next
succeeding Dividend Payment Date for shares of such series; provided, however,
that if any Subsequent Rate Period is also a Special Rate Period, such term
shall mean the period commencing on the first day of such Special Rate Period
and ending on the last day of the last Dividend Period thereof.
(90) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean any commercial paper
dealer selected by the Trust as to which Moody's, S&P or any substitute rating
agency then rating the AMPS shall not have objected; provided, however, that
none of such entities shall be a Commercial Paper Dealer.
(91) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" any U.S. Government
securities dealer selected by the Trust as to which Moody's, S&P or any
substitute rating agency then rating the AMPS shall not have objected; provided,
however, that none of such entities shall be a U.S. Government Securities
Dealer.
(92) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(93) "TAXABLE ALLOCATION" shall have the meaning specified in Section 3 of
Part I of this Statement.
(94) "TAXABLE INCOME" shall have the meaning specified in Section 12 of
Annex A hereto.
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(95) "TAXABLE EQUIVALENT OF THE SHORT-TERM MUNICIPAL BOND RATE," on any
date for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days
or fewer, shall mean 90% of the quotient of (A) the per annum rate expressed on
an interest equivalent basis equal to the Kenny S&P 30 day High Grade Index or
any successor index (the "Kenny Index") (provided, however, that any such
successor index must be approved by Moody's (if Moody's is then rating the
AMPS)), made available for the Business Day immediately preceding such date but
in any event not later than 8:30 A.M., New York City time, on such date by Kenny
S&P Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds the interest on which is excludable for
regular Federal income tax purposes under the Code of "high grade" component
issuers selected by Kenny S&P Evaluation Services or any such successor from
time to time in its discretion, which component issuers shall include, without
limitation, issuers of general obligation bonds, but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57 (a)(5)
of the Code, or successor provisions, for purposes of the "alternative minimum
tax," divided by (B) 1.00 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income (in each case
expressed as a decimal), whichever is greater; provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., New York City time, on such
date by Kenny S&P Evaluation Services or any successor, the Taxable Equivalent
of the Short-Term Municipal Bond Rate shall mean the quotient of (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 maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.
(96) "TREASURY BILL" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.
(97) "TREASURY BILL RATE," on any date for any Rate Period, shall mean (i)
the bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury Bill
with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government Securities
Dealers to the Auction Agent.
(98) "TREASURY NOTE" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.
(99) "TREASURY NOTE RATE," on any date for any Rate Period, shall mean (i)
the yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the event
that any such rate is not published in The Wall Street Journal, then the yield
as calculated by reference to the arithmetic average of the bid price quotations
of the most recently auctioned Treasury Note with a remaining maturity closest
to the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction Agent. If
any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill
Rate or the Treasury Note Rate shall be determined on the basis of the quotation
or quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any substitute U.S. Government Securities
Dealers selected by the Trust to provide such rate or rates not being supplied
by any U.S. Governmental Securities Dealer or U.S. Government Securities
Dealers, as the case may be, or, if the Trust does not select any such
Substitute U.S. Government Securities Dealer or Substitute U.S. Government
Securities Dealers, by the remaining U.S. Government Securities Dealer or U.S.
Government Securities Dealers.
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(100) "TRUST" shall mean the entity named on the first page of this
statement, which is the issuer of the AMPS.
(101) "U.S. GOVERNMENT SECURITIES DEALER" shall mean Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers Inc., Morgan
Guaranty Trust Company of New York and any other U.S. Government Securities
dealer selected by the Trust as to which Moody's shall not have objected or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer.
(102) "VALUATION DATE" shall mean, for purposes of determining whether the
Trust is maintaining the Preferred Shares Basic Maintenance Amount, each
Business Day.
(103) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the Moody's
Volatility Factor and the S&P Volatility Factor.
(104) "VOTING PERIOD" shall have the meaning specified in paragraph (b) of
Section 5 of Part I of this Statement.
(105) "WINNING BID RATE" shall have the meaning specified in paragraph (a)
of Section 3 of Part II of this Statement.
Any additional definitions specifically set forth in Section 8 of Annex A
hereto shall be incorporated herein and made part hereof by reference thereto.
PART I.
1. Number of Authorized Shares.
The number of authorized shares constituting a series of the AMPS shall be
as set forth with respect to such series in Section 2 of Annex A hereto.
2. Dividends.
(a) Ranking. The shares of a series of the AMPS shall rank on a parity with
each other, with shares of any other series of the AMPS and with shares of any
other series of preferred shares as to the payment of dividends by the Trust.
(b) Cumulative Cash Dividends. The Holders of any series of AMPS shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration and
applicable law, cumulative cash dividends at the Applicable Rate for shares of
such series, determined as set forth in paragraph (e) of this Section 2, and no
more (except to the extent set forth in Section 3 of this Part I), payable on
the Dividend Payment Dates with respect to shares of such series determined
pursuant to paragraph (d) of this Section 2. Holders of AMPS shall not be
entitled to any dividend, whether payable in cash, property or shares, in excess
of full cumulative dividends, as herein provided, on AMPS. No interest, or sum
of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on AMPS which may be in arrears, and, except to the extent
set forth in subparagraph (e)(i) of this Section 2, no additional sum of money
shall be payable in respect of any such arrearage.
(c) Dividends Cumulative From Date of Original Issue. Dividends on any
series of AMPS shall accumulate at the Applicable Rate for shares of such series
from the Date of Original Issue thereof.
(d) Dividend Payment Dates and Adjustment Thereof. The Dividend Payment
Dates with respect to shares of a series of AMPS shall be as set forth with
respect to shares of such series in Section 9 of Annex A hereto; provided,
however, that:
(i) if the day on which dividends would otherwise be payable on
shares of such series is not a Business Day, then such dividends shall be
payable on such shares on the first Business Day that falls after such day;
and
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(ii) notwithstanding Section 9 of Annex A hereto, the Trust in its
discretion may establish the Dividend Payment Dates in respect of any
Special Rate Period of shares of a series of AMPS consisting of more than
28 Rate Period Days; provided, however, that such dates shall be set forth
in the Notice of Special Rate Period relating to such Special Rate Period,
as delivered to the Auction Agent, which Notice of Special Rate Period
shall be filed with the Secretary of the Trust; and further provided that
(1) any such Dividend Payment Date shall be a Business Day and (2) the last
Dividend Payment in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last day
is determined in accordance with paragraph (b) of Section 4 of this Part I.
(e) Dividend Rates and Calculation of Dividends.
(i) Dividend Rates. The dividend rate on AMPS of any series during
the period from and after the Date of Original Issue of shares of such
series to and including the last day of the Initial Rate Period of shares
of such series shall be equal to the rate per annum set forth with respect
to shares of such series under "Designation" in Section 1 of Annex A
hereto. For each Subsequent Rate Period of shares of such series
thereafter, the dividend rate on shares of such series shall be equal to
the rate per annum that results from an Auction for shares of such series
on the Auction Date next preceding such Subsequent Rate Period; provided,
however, that if:
(A) an Auction for any such Subsequent Rate Period is not
held for any reason other than as described below, the dividend rate
on shares of such series for such Subsequent Rate Period will be the
Maximum Rate for shares of such series on the Auction Date therefor;
(B) any Failure to Deposit shall have occurred with respect
to shares of such series during any Rate Period thereof (other than
any Special Rate Period consisting of more than 364 Rate Period Days
or any Rate Period succeeding any Special Rate Period consisting of
more than 364 Rate Period Days during which a Failure to Deposit
occurred that has not been cured), but, prior to 12:00 Noon, New
York City time, on the third Business Day next succeeding the date
on which such Failure to Deposit occurred, such Failure to Deposit
shall have been cured in accordance with paragraph (f) of this
Section 2 and the Trust shall have paid to the Auction Agent a late
charge ("Late Charge") equal to the sum of (1) if such Failure to
Deposit consisted of the failure timely to pay to the Auction Agent
the full amount of dividends with respect to any Dividend Period of
the shares of such series, an amount computed by multiplying (x)
200% of the Reference Rate for the Rate Period during which such
Failure to Deposit occurs on the Dividend Payment Date for such
Dividend Period by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit has not been
cured in accordance with paragraph (f) of this Section 2 (including
the day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which shall be
360, and applying the rate obtained against the aggregate
Liquidation Preference of the outstanding shares of such series and
(2) if such Failure to Deposit consisted of the failure timely to
pay to the Auction Agent the Redemption Price of the shares, if any,
of such series for which Notice of Redemption has been mailed by the
Trust pursuant to paragraph (c) of Section 11 of this Part I, an
amount computed by multiplying (x) 200% of the Reference Rate for
the Rate Period during which such Failure to Deposit occurs on the
redemption date by (y) a fraction, the numerator of which shall be
the number of days for which such Failure to Deposit is not cured in
accordance with paragraph (f) of this Section 2 (including the day
such Failure to Deposit occurs and excluding the day such Failure to
Deposit is cured) and the denominator of which shall be 360, and
applying the rate obtained against the aggregate Liquidation
Preference of the outstanding shares of such series to be redeemed,
no Auction will be held in respect of shares of such series for the
Subsequent Rate Period thereof and the dividend rate for shares of
such series for such Subsequent Rate Period will be the Maximum Rate
for shares of such series on the Auction Date for such Subsequent
Rate Period;
(C) any Failure to Deposit shall have occurred with respect
to shares of such series during any Rate Period thereof (other than
any Special Rate Period consisting of more than 364 Rate
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Period Days or any Rate Period succeeding any Special Rate Period
consisting of more than 364 Rate Period Days during which a Failure
to Deposit occurred that has not been cured), and, prior to 12:00
Noon, New York City time, on the third Business Day next succeeding
the date on which such Failure to Deposit occurred, such Failure to
Deposit shall not have been cured in accordance with paragraph (f)
of this Section 2 or the Trust shall not have paid the applicable
Late Charge to the Auction Agent, no Auction will be held in respect
of shares of such series for the first Subsequent Rate Period
thereof thereafter (or for any Rate Period thereof thereafter to and
including the Rate Period during which (1) such Failure to Deposit
is cured in accordance with paragraph (f) of this Section 2 and (2)
the Trust pays the applicable Late Charge to the Auction Agent (the
condition set forth in this clause (2) to apply only in the event
Moody's is rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00 Noon, New York
City time, on the fourth Business Day prior to the end of such Rate
Period), and the dividend rate for shares of such series for each
such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for such
Subsequent Rate Period (but with the prevailing rating for shares of
such series, for purposes of determining such Maximum Rate, being
deemed to be "Below "ba3"/BB"); or
(D) any Failure to Deposit shall have occurred with respect
to shares of such series during a Special Rate Period thereof
consisting of more than 364 Rate Period Days, or during any Rate
Period thereof succeeding any Special Rate Period consisting of more
than 364 Rate Period Days during which a Failure to Deposit occurred
that has not been cured, and, prior to 12:00 Noon, New York City
time, on the fourth Business Day preceding the Auction Date for the
Rate Period subsequent to such Rate Period, such Failure to Deposit
shall not have been cured in accordance with paragraph (f) of this
Section 2 or, in the event Moody's is then rating such shares, the
Trust shall not have paid the applicable Late Charge to the Auction
Agent (such Late Charge, for purposes of this subparagraph (D), to
be calculated by using, as the Reference Rate, the Reference Rate
applicable to a Rate Period (x) consisting of more than 182 Rate
Period Days but fewer than 365 Rate Period Days and (y) commencing
on the date on which the Rate Period during which Failure to Deposit
occurs commenced), no Auction will be held in respect of shares of
such series for such Subsequent Rate Period (or for any Rate Period
thereof thereafter to and including the Rate Period during which (1)
such Failure to Deposit is cured in accordance with paragraph (f) of
this Section 2 and (2) the Trust pays the applicable Late Charge to
the Auction Agent (the condition set forth in this clause (2) to
apply only in the event Moody's is rating such shares at the time
the Trust cures such Failure to Deposit), in each case no later than
12:00 Noon, New York City time, on the fourth Business Day prior to
the end of such Rate Period), and the dividend rate for shares of
such series for each such Subsequent Rate Period shall be a rate per
annum equal to the Maximum Rate for shares of such series on the
Auction Date for such Subsequent Rate Period (but with the
prevailing rating for shares of such series, for purposes of
determining such Maximum Rate, being deemed to be "Below "ba3"/BB")
(the rate per annum at which dividends are payable on shares of a
series of AMPS for any Rate Period thereof being herein referred to
as the "Applicable Rate" for shares of such series).
(ii) Calculation of Dividends. The amount of dividends per share
payable on shares of a series of AMPS on any date on which dividends shall
be payable on shares of such series shall be computed by multiplying the
Applicable Rate for shares of such series in effect for such Dividend
Period or Dividend Periods or part thereof for which dividends have not
been paid by a fraction, the numerator of which shall be the number of days
in such Dividend Period or Dividend Periods or part thereof and the
denominator of which shall be 365 if such Dividend Period consists of 7
Rate Period Days and 360 for all other Dividend Periods, and applying the
rate obtained against $25,000.
(f) Curing a Failure to Deposit. A Failure to Deposit with respect to
shares of a series of AMPS shall have been cured (if such Failure to Deposit is
not solely due to the willful failure of the Trust to make the required payment
to the Auction Agent) with respect to any Rate Period of shares of such series
if, within the
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respective time periods described in subparagraph (e)(i) of this Section 2, the
Trust shall have paid to the Auction Agent (A) all accumulated and unpaid
dividends on shares of such series and (B) without duplication, the Redemption
Price for shares, if any, of such series for which Notice of Redemption has been
mailed by the Trust pursuant to paragraph (c) of Section 11 of Part I of this
Statement; provided, however, that the foregoing clause (B) shall not apply to
the Trust's failure to pay the Redemption Price in respect of AMPS when the
related Redemption Notice provides that redemption of such shares is subject to
one or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.
(g) Dividend Payments by Trust to Auction Agent. The Trust shall pay to the
Auction Agent, not later than 12:00 Noon, New York City time, on the Business
Day next preceding each Dividend Payment Date for shares of a series of AMPS, an
aggregate amount of funds available on the next Business Day in the City of New
York, New York, equal to the dividends to be paid to all Holders of shares of
such series on such Dividend Payment Date.
(h) Auction Agent as Trustee of Dividend Payments by Trust. All moneys paid
to the Auction Agent for the payment of dividends (or for the payment of any
Late Charge) shall be held in trust for the payment of such dividends (and any
such Late Charge) by the Auction Agent for the benefit of the Holders specified
in paragraph (i) of this Section 2. Any moneys paid to the Auction Agent in
accordance with the foregoing but not applied by the Auction Agent to the
payment of dividends (and any such Late Charge) will, to the extent permitted by
law, be repaid to the Trust at the end of 90 days from the date on which such
moneys were so to have been applied.
(i) Dividends Paid to Holders. Each dividend on AMPS shall be paid on the
Dividend Payment Date therefor to the Holders thereof as their names appear on
the record books of the Trust on the Business Day next preceding such Dividend
Payment Date.
(j) Dividends Credited Against Earliest Accumulated but Unpaid Dividends.
Any dividend payment made on AMPS shall first be credited against the earliest
accumulated but unpaid dividends due with respect to such shares. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the Holders as their
names appear on the record books of the Trust on such date, not exceeding 15
days preceding the payment date thereof, as may be fixed by the Board of
Trustees.
(k) Dividends Designated as Exempt-Interest Dividends. Dividends on AMPS
shall be designated as exempt-interest dividends up to the amount of tax-exempt
income of the Trust, to the extent permitted by, and for purposes of, section
852 of the Code.
3. Gross-Up Payments.
Holders of AMPS shall be entitled to receive, when, as and if declared by
the Board of Trustees, out of funds legally available therefor in accordance
with the Declaration and applicable law, dividends in an amount equal to the
aggregate Gross-up Payments as follows:
(a) Taxable Allocation Without Notice. If, but only if, the Trust allocates
any net capital gain or other income taxable for Federal income tax purposes to
a dividend paid on AMPS without having given advance notice thereof to the
Auction Agent as provided in Section 5 of Part II of this Statement (such
allocation being referred to herein as a "Taxable Allocation"), whether or not
by reason of the fact that such allocation is made retroactively as a result of
the redemption of all or a portion of the outstanding AMPS or the liquidation of
the Trust, the Trust shall, during the Trust's fiscal year in which the Taxable
Allocation was made or within 90 days after the end of such fiscal year, provide
notice thereof to the Auction Agent and direct the Trust's dividend disbursing
agent to send such notice and a Gross-up Payment to each Holder of such shares
that was entitled to such dividend payment during such fiscal year at such
Holder's address as the same appears or last appeared on the record books of the
Trust.
(b) Reserved.
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(c) No Gross-Up Payments in the Event of a Reallocation. The Trust shall
not be required to make Gross-up Payments with respect to any net capital gains
or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Trust.
4. Designation of Special Rate Periods.
(a) Length of and Preconditions for Special Rate Period. The Trust, at its
option, may designate any succeeding Subsequent Rate Period of shares of a
series of AMPS as a Special Rate Period consisting of a specified number of Rate
Period Days evenly divisible by seven and not more than 1,820; provided,
however, that such Special Rate Period may consist of a number of Rate Period
Days not evenly divisible by seven if all shares of such series of AMPS are to
be redeemed at the end of such Special Rate Period, subject to adjustment as
provided in paragraph (b) of this Section 4. A designation of a Special Rate
Period shall be effective only if (A) notice thereof shall have been given in
accordance with paragraph (c) and subparagraph (d)(i) of this Section 4, (B) an
Auction for shares of such series shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period and
Sufficient Clearing Bids for shares of such series shall have existed in such
Auction, and (C) if any Notice of Redemption shall have been mailed by the Trust
pursuant to paragraph (c) of Section 11 of this Part I with respect to any
shares of such series, the Redemption Price with respect to such shares shall
have been deposited with the Auction Agent. In the event the Trust wishes to
designate any succeeding Subsequent Rate Period for shares of a series of AMPS
as a Special Rate Period consisting of more than 28 Rate Period Days, the Trust
shall notify Moody's (if Moody's is then rating such series) and S&P (if S&P is
then rating such series) in advance of the commencement of such Subsequent Rate
Period that the Trust wishes to designate such Subsequent Rate Period as a
Special Rate Period and shall provide Moody's (if Moody's is then rating such
series) and S&P (if S&P is then rating such series) with such documents as it
may request.
(b) Adjustment of Length of Special Rate Period. With respect to the Series
W7 AMPS, if the Trust wishes to designate a Subsequent Rate Period as a Special
Rate Period, but the day following what would otherwise be the last day of such
Special Rate Period is not a Thursday that is a Business Day in the case of a
series of AMPS designated as "Series W7 AMPS" in Section 1 of Annex A hereto,
then the Trust shall designate such Subsequent Rate Period as a Special Rate
Period consisting of the period commencing on the first day following the end of
the immediately preceding Rate Period and ending on the first Wednesday that is
followed by a Thursday that is a Business Day preceding what would otherwise be
such last day, in the case of Series W7 AMPS.
With respect to the Series R7 AMPS, if the Trust wishes to designate a
Subsequent Rate Period as a Special Rate Period, but the day following what
would otherwise be the last day of such Special Rate Period is not a Friday that
is a Business Day in the case of a series of AMPS designated as "Series R7 AMPS"
in Section 1 of Annex A hereto, then the Trust shall designate such Subsequent
Rate Period as a Special Rate Period consisting of the period commencing on the
first day following the end of the immediately preceding Rate Period and ending
on the first Thursday that is followed by a Friday that is a Business Day
preceding what would otherwise be such last day, in the case of Series R7 AMPS.
(c) Notice of Proposed Special Rate Period. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of AMPS as
a Special Rate Period pursuant to paragraph (a) of this Section 4, not less than
20 (or such lesser number of days as may be agreed to from time to time by the
Auction Agent) nor more than 30 days prior to the date the Trust proposes to
designate as the first day of such Special Rate Period (which shall be such day
that would otherwise be the first day of a Minimum Rate Period), notice shall be
(i) published or caused to be published by the Trust in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) mailed by the Trust by first-class mail,
postage prepaid, to the Holders of shares of such series. Each such notice shall
state (A) that the Trust may exercise its option to designate a succeeding
Subsequent Rate Period of shares of such series as a Special Rate Period,
specifying the first day thereof and (B) that the Trust will, by 11:00 A.M., New
York City time, on the second Business Day next preceding such date (or by such
later time or date, or both, as may be agreed to by the Auction Agent) notify
the Auction Agent of either (x) its determination, subject to certain
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conditions, to exercise such option, in which case the Trust shall specify the
Special Rate Period designated, or (y) its determination not to exercise such
option.
(d) Notice of Special Rate Period. No later than 11:00 A.M., New York City
time, on the second Business Day next preceding the first day of any proposed
Special Rate Period of shares of a series of AMPS as to which notice has been
given as set forth in paragraph (c) of this Section 4 (or such later time or
date, or both, as may be agreed to by the Auction Agent), the Trust shall
deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Trust has determined to designate the next succeeding Rate Period of shares
of such series as a Special Rate Period, specifying the same and the first
day thereof, (B) the Auction Date immediately prior to the first day of
such Special Rate Period, (C) that such Special Rate Period shall not
commence if (1) an Auction for shares of such series shall not be held on
such Auction Date for any reason or (2) an Auction for shares of such
series shall be held on such Auction Date but Sufficient Clearing Bids for
shares of such series shall not exist in such Auction, (D) the scheduled
Dividend Payment Dates for shares of such series during such Special Rate
Period and (E) the Special Redemption Provisions, if any, applicable to
shares of such series in respect of such Special Rate Period, such notice
to be accompanied by a Preferred Shares Basic Maintenance Report showing
that, as of the third Business Day next preceding such proposed Special
Rate Period, Moody's Eligible Assets (if Moody's is then rating such
series) and S&P (if S&P is then rating such series) each have an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount as of such Business Day (assuming for purposes of the foregoing
calculation that (a) the Maximum Rate is the Maximum Rate on such Business
Day as if such Business Day were the Auction Date for the proposed Special
Rate Period, and (b) the Moody's Discount Factors applicable to Moody's
Eligible Assets are determined by reference to the first Exposure Period
longer than the Exposure Period then applicable to the Trust, as described
in the definition of Moody's Discount Factor herein); or
(ii) a notice stating that the Trust has determined not to exercise
its option to designate a Special Rate Period of shares of such series and
that the next succeeding Rate Period of shares of such series shall be a
Minimum Rate Period.
(e) Failure to Deliver Notice of Special Rate Period. If the Trust fails to
deliver either of the notices described in subparagraphs (d)(i) or (d)(ii) of
this Section 4 (and, in the case of the notice described in subparagraph (d)(i)
of this Section 4, a Preferred Shares Basic Maintenance Report to the effect set
forth in such subparagraph (if either Moody's or S&P is then rating the series
in question)) with respect to any designation of any proposed Special Rate
Period to the Auction Agent by 11:00 A.M., New York City time, on the second
Business Day next preceding the first day of such proposed Special Rate Period
(or by such later time or date, or both, as may be agreed to by the Auction
Agent), the Trust shall be deemed to have delivered a notice to the Auction
Agent with respect to such Special Rate Period to the effect set forth in
subparagraph (d)(ii) of this Section 4. In the event the Trust delivers to the
Auction Agent a notice described in subparagraph (d)(i) of this Section 4, it
shall file a copy of such notice with the Secretary of the Trust, and the
contents of such notice shall be binding on the Trust. In the event the Trust
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of this
Section 4, the Trust will provide Moody's (if Moody's is then rating the series
in question) and S&P (if S&P is then rating the series in question) a copy of
such notice.
5. Voting Rights.
(a) One Vote Per Share of AMPS. Except as otherwise provided in the
Declaration or as otherwise required by law, (i) each Holder of AMPS shall be
entitled to one vote for each share of AMPS held by such Holder on each matter
submitted to a vote of shareholders of the Trust, and (ii) the holders of
outstanding preferred shares, including each share of AMPS, and of Common Shares
shall vote together as a single class; provided, however, that, at any meeting
of the shareholders of the Trust held for the election of trustees, the holders
of outstanding preferred shares, including the AMPS, represented in person or by
proxy at said meeting, shall be entitled, as a class, to the exclusion of the
holders of all other securities and classes of shares of beneficial interest of
the Trust, to elect two trustees of the Trust, each share of AMPS entitling the
holder thereof to one vote. Subject to
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paragraph (b) of this Section 5, the holders of outstanding Common Shares and
AMPS voting together as a single class, shall elect the balance of the trustees.
(b) Voting For Additional Trustees.
(i) Voting Period. Except as otherwise provided in the Declaration
or as otherwise required by law, during any period in which any one or more
of the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to herein as a
"Voting Period"), the number of trustees constituting the Board of Trustees
shall be automatically increased by the smallest number that, when added to
the two trustees elected exclusively by the holders of preferred shares,
including the AMPS, would constitute a majority of the Board of Trustees as
so increased by such smallest number, and the holders of preferred shares,
including the AMPS, shall be entitled, voting as a class on a
one-vote-per-share basis (to the exclusion of the holders of all other
securities and classes of shares of beneficial interest of the Trust), to
elect such smallest number of additional trustees, together with the two
trustees that such holders are in any event entitled to elect. A Voting
Period shall commence:
(A) if at the close of business on any dividend payment date
accumulated dividends (whether or not earned or declared) on any
outstanding AMPS, equal to at least two full years' dividends shall
be due and unpaid and sufficient cash or specified securities shall
not have been deposited with the Auction Agent for the payment of
such accumulated dividends; or
(B) if at any time holders of preferred shares, including the
AMPS, are entitled under the Investment Company Act to elect a
majority of the trustees of the Trust.
Upon the termination of a Voting Period, the voting rights described in
this subparagraph (b)(i) shall cease, subject always, however, to the revesting
of such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).
(ii) Notice of Special Meeting. As soon as practicable after the
accrual of any right of the holders of preferred shares, including the
AMPS, to elect additional trustees as described in subparagraph (b)(i) of
this Section 5, the Trust shall notify the Auction Agent and the Auction
Agent shall call a special meeting of such holders, by mailing a notice of
such special meeting to such holders, such meeting to be held not less than
10 nor more than 20 days after the date of mailing of such notice. If the
Trust fails to send such notice to the Auction Agent or if the Auction
Agent does not call such a special meeting, it may be called by any such
holder on like notice. The record date for determining the holders entitled
to notice of and to vote at such special meeting shall be the close of
business on the fifth Business Day preceding the day on which such notice
is mailed. At any such special meeting and at each meeting of holders of
preferred shares, including the AMPS, held during a Voting Period at which
trustees are to be elected, such holders, voting together as a class (to
the exclusion of the holders of all other securities and classes of shares
of beneficial interest of the Trust), shall be entitled to elect the number
of trustees prescribed in subparagraph (b)(i) of this Section 5 on a
one-vote-per-share basis.
(iii) Terms of Office of Existing Trustees. The terms of office of
all persons who are trustees of the Trust at the time of a special meeting
of Holders and holders of other preferred shares to elect trustees shall
continue, notwithstanding the election at such meeting by the Holders and
such other holders of the number of trustees that they are entitled to
elect, and the persons so elected by the Holders and such other holders,
together with the two incumbent trustees elected by the Holders and such
other holders of preferred shares and the remaining incumbent trustees
elected by the holders of the Common Shares and AMPS, shall constitute the
duly elected trustees of the Trust.
(iv) Terms of Office of Certain Trustees to Terminate Upon
Termination of Voting Period. Simultaneously with the termination of a
Voting Period, the terms of office of the additional trustees elected by
the Holders and holders of other AMPS pursuant to subparagraph (b)(i) of
this Section 5 shall terminate, the remaining trustees shall constitute the
trustees of the Trust and the voting rights of the
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Holders and such other holders to elect additional trustees pursuant to
subparagraph (b)(i) of this Section 5 shall cease, subject to the
provisions of the last sentence of subparagraph (b)(i) of this Section 5.
(c) Holders of AMPS to Vote on Certain Other Matters.
(i) Increases in Capitalization. So long as any AMPS are
outstanding, the Trust shall not, without the affirmative vote or consent
of the Holders of at least a majority of the AMPS outstanding at the time,
in person or by proxy, either in writing or at a meeting, voting as a
separate class: (a) authorize, create or issue any class or series of
shares ranking prior to or on a parity with the AMPS with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, or authorize, create
or issue additional shares of any series of AMPS (except that,
notwithstanding the foregoing, but subject to the provisions of paragraph
(c) of Section 10 of this Part I, the Board of Trustees, without the vote
or consent of the Holders of AMPS, may from time to time authorize and
create, and the Trust may from time to time issue, additional shares of any
series of AMPS or classes or series of other preferred shares ranking on a
parity with AMPS with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust; provided, however, that if Moody's or S&P is not then
rating the AMPS, the aggregate liquidation preference of all preferred
shares of the Trust outstanding after any such issuance, exclusive of
accumulated and unpaid dividends, may not exceed the amount set forth in
Section 10 of Annex A hereto) or (b) amend, alter or repeal the provisions
of the Declaration or this Statement, whether by merger, consolidation or
otherwise, so as to adversely affect any preference, right or power of such
AMPS or the Holders thereof; provided, however, that (i) none of the
actions permitted by the exception to (a) above will be deemed to affect
such preferences, rights or powers, (ii) a division of AMPS will be deemed
to affect such preferences, rights or powers only if the terms of such
division adversely affect the Holders of AMPS and (iii) the authorization,
creation and issuance of classes or series of shares ranking junior to the
AMPS with respect to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the
Trust, will be deemed to affect such preferences, rights or powers only if
Moody's or S&P is then rating the AMPS and such issuance would, at the time
thereof, cause the Trust not to satisfy the Investment Company Act
Preferred Shares Asset Coverage or the Preferred Shares Basic Maintenance
Amount. So long as any shares of the AMPS are outstanding, the Trust shall
not, without the affirmative vote or consent of the Holders of at least
66-2/3% of the AMPS outstanding at the time, in person or by proxy, either
in writing or at a meeting, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar
application under state law for so long as the Trust is solvent and does
not foresee becoming insolvent. If any action set forth above would
adversely affect the rights of one or more series (the "Affected Series")
of AMPS in a manner different from any other series of AMPS, the Trust will
not approve any such action without the affirmative vote or consent of the
Holders of at least a majority of the shares of each such Affected Series
outstanding at the time, in person or by proxy, either in writing or at a
meeting (each such Affected Series Voting as a separate class).
(ii) Investment Company Act Matters. Unless a higher percentage is
provided for in the Declaration, (A) the affirmative vote of the Holders of
at least a majority of the AMPS outstanding at the time, voting as a
separate class, shall be required to approve any conversion of the Trust
from a closed-end to an open-end investment company and (B) the affirmative
vote of the Holders of a "majority of the outstanding AMPS," voting as a
separate class, shall be required to approve any plan of reorganization (as
such term is used in the Investment Company Act) adversely affecting such
shares. The affirmative vote of the holders of a "majority of the
outstanding AMPS," voting as a separate class, shall be required to approve
any action not described in the first sentence of this Section 5(c)(ii)
requiring a vote of security holders of the Trust under section 13(a) of
the Investment Company Act. For purposes of the foregoing, "majority of the
outstanding AMPS" means (i) 67% or more of such shares present at a
meeting, if the Holders of more than 50% of such shares are present or
represented by proxy, or (ii) more than 50% of such shares, whichever is
less. In the event a vote of Holders of AMPS is required pursuant to the
provisions of section 13(a) of the Investment Company Act, the Trust shall,
not later than ten Business Days prior to the date on which such vote is to
be taken, notify Moody's (if Moody's is then rating the AMPS) and S&P (if
S&P is then rating the AMPS) that such vote is to
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be taken and the nature of the action with respect to which such vote is to
be taken. The Trust shall, not later than ten Business Days after the date
on which such vote is taken, notify Moody's (if Moody's is then rating the
AMPS) and S&P (if S&P is then rating the AMPS of the results of such vote.
(d) Board May Take Certain Actions Without Shareholder Approval. The Board
of Trustees, without the vote or consent of the shareholders of the Fund, may
from time to time amend, alter or repeal any or all of the definitions of the
terms listed below, or any provision of this Statement viewed by Moody's or S&P
as a predicate for any such definition, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of AMPS or
the Holders thereof; provided, however, that the Board of Trustees receives
written confirmation from Moody's or S&P (such confirmation being required to be
obtained only in the event Moody's or S&P is rating the AMPS and in no event
being required to be obtained in the case of the definitions of (x) Deposit
Securities, Discounted Value and Receivables for Municipal Obligations Sold as
such terms apply to S&P Eligible Assets and (y) S&P Discount Factor, S&P
Eligible Asset, S&P Exposure Period and S&P Volatility Factor) and S&P (such
confirmation being required to be obtained only in the event S&P is rating the
AMPS and in no event being required to be obtained in the case of the
definitions of (x) Discounted Value and Receivables for Municipal Obligations
Sold as such terms apply to Moody's Eligible Assets, and (y) Moody's Discount
Factor, Moody's Eligible Asset, Moody's Exposure Period and Moody's Volatility
Factor) that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's or S&P, as the case may be, to the AMPS:
Deposit Securities Preferred Shares Basic Maintenance Amount
Discounted Value Preferred Shares Basic Maintenance Cure Date
Escrowed Bonds Preferred Shares Basic Maintenance Report
Market Value Quarterly Valuation Date
Maximum Potential Gross-up Payment Liability Receivables for Municipal Obligations Sold
Moody's Discount Factor S&P Discount Factor
Moody's Eligible Asset S&P Eligible Asset
Moody's Exposure Period S&P Exposure Period
Moody's Volatility Factor S&P Volatility Factor
1940 Act Cure Date Valuation Date
1940 Act Preferred Asset Coverage Volatility Factor
(e) Voting Rights Set Forth Herein Are Sole Voting Rights. Unless otherwise
required by law, the Holders of AMPS shall not have any relative rights or
preferences or other special rights other than those specifically set forth
herein.
(f) No Preemptive Rights Or Cumulative Voting. The Holders of AMPS shall
have no preemptive rights or rights to cumulative voting.
(g) Voting For Trustees Sole Remedy For Trust's Failure To Pay Dividends.
In the event that the Trust fails to pay any dividends on the AMPS, the
exclusive remedy of the Holders shall be the right to vote for trustees pursuant
to the provisions of this Section 5.
(h) Holders Entitled To Vote. For purposes of determining any rights of the
Holders to vote on any matter, whether such right is created by this Statement,
by the other provisions of the Declaration, by statute or otherwise, no Holder
shall be entitled to vote any share of AMPS and no share of AMPS shall be deemed
to be "outstanding" for the purpose of voting or determining the number of
shares required to constitute a quorum if, prior to or concurrently with the
time of determination of shares entitled to vote or shares deemed outstanding
for quorum purposes, as the case may be, the requisite Notice of Redemption with
respect to such shares shall have been mailed as provided in paragraph (c) of
Section 11 of this Part I and the Redemption Price for the redemption of such
shares shall have been deposited in trust with the Auction Agent for that
purpose. No share of AMPS held by the Trust or any affiliate of the Trust
(except for shares held by a Broker-Dealer that is an affiliate of the Trust for
the account of its customers) shall have any voting rights or be deemed to be
outstanding for voting or other purposes.
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6. Investment Company Act Preferred Shares Asset Coverage.
The Trust shall maintain, as of the last Business Day of each month in
which any AMPS are outstanding, the Investment Company Act Preferred Shares
Asset Coverage.
7. Preferred Shares Basic Maintenance Amount.
(a) So long as AMPS are outstanding, the Trust shall maintain, on each
Valuation Date, and shall verify to its satisfaction that it is maintaining on
such Valuation Date (i) Moody's Eligible Assets having an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic Maintenance Amount (if
Moody's is then rating the AMPS) and S&P Eligible Assets having an aggregate
Discounted Value equal to or greater than the Preferred Shares Basic Maintenance
Amount (if S&P is then rating the AMPS).
(b) On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the Preferred Shares
Basic Maintenance Amount, and on the third Business Day after the Preferred
Shares Basic Maintenance Cure Date with respect to such Valuation Date, the
Trust shall complete and deliver to Moody's (if Moody's is then rating the
AMPS), S&P (if S&P is then rating the AMPS) and the Auction Agent (if either
Moody's or S&P is then rating the AMPS) a Preferred Shares Basic Maintenance
Report as of the date of such failure or such Preferred Shares Basic Maintenance
Cure Date, as the case may be, which will be deemed to have been delivered to
the Auction Agent if the Auction Agent receives a copy or telecopy, telex or
other electronic transcription thereof and on the same day the Trust mails to
the Auction Agent for delivery on the next Business Day the full Preferred
Shares Basic Maintenance Report. The Trust shall also deliver a Preferred Shares
Basic Maintenance Report to (i) the Auction Agent (if either Moody's or S&P is
then rating the AMPS) as of (A) the fifteenth day of each month (or, if such day
is not a Business Day, the next succeeding Business Day) and (B) the last
Business Day of each month, (ii) Moody's (if Moody's is then rating the AMPS)
and S&P (if S&P is than rating the AMPS) as of any Quarterly Valuation Date, in
each case on or before the third Business Day after such day, and S&P, if and
when requested for any Valuation Date, on or before the third Business Day after
such request. A failure by the Trust to deliver a Preferred Shares Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Preferred Shares Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Preferred Shares
Basic Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to a Quarterly Valuation Date, the Trust shall cause the Independent
Accountant to confirm in writing to Moody's (if Moody's is then rating the
AMPS), S&P (if S&P is then rating the AMPS) and the Auction Agent (if either
Moody's or S&P is then rating the AMPS) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Preferred Shares Basic
Maintenance Report, randomly selected by the Independent Accountant, that was
prepared by the Trust during the quarter ending on such Quarterly Valuation
Date), (ii) that, in such Report (and in such randomly selected Report), the
Trust determined in accordance with this Statement whether the Trust had, at
such Quarterly Valuation Date (and at the Valuation Date addressed in such
randomly selected Report), Moody's Eligible Assets (if Moody's is then rating
the AMPS) and S&P Eligible Assets (if S&P is then rating the AMPS) of an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount (such confirmation being herein called the "Accountant's
Confirmation"), (iii) that, in such Report (and in such randomly selected
Report), the Trust determined whether the Trust had, at such Quarterly Valuation
Date (and at the Valuation Date addressed in such randomly selected Report) in
accordance with this Statement, Moody's Eligible Assets of an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance Amount
and S&P Eligible Assets of an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount, (iv) with respect to the S&P ratings
on Municipal Obligations, the issuer name, issue size and coupon rate listed in
such Report, that the Independent Accountant has sought to verify by reference
to Bloomberg Financial Services or another independent source approved in
writing by S&P, and the Independent Accountant shall provide a listing in its
letter of any differences, (v) with respect to the Moody's ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that the Independent
A-22
Accountant has sought to verify by reference to Bloomberg Financial Services or
another independent source approved in writing by Moody's, and the Independent
Accountant shall provide a listing in its letter of any differences, (vi) with
respect to the bid or mean price (or such alternative permissible factor used in
calculating the Market Value) provided by the custodian of the Trust's assets to
the Trust for purposes of valuing securities in the Trust's portfolio, the
Independent Accountant has traced the price used in such Report to the bid or
mean price listed in such Report as provided to the Trust and verified that such
information agrees (in the event such information does not agree, the
Independent Accountant will provide a listing in its letter of such differences)
and (vii) with respect to such confirmation to Moody's and S&P, that the Trust
has satisfied the requirements of Section 13 of Annex A to this Statement (such
information is herein called the "Accountant's Confirmation").
(d) Within ten Business Days after the date of delivery of a Preferred
Shares Basic Maintenance Report in accordance with paragraph (b) of this Section
7 relating to any Valuation Date on which the Trust failed to satisfy the
Preferred Shares Basic Maintenance Amount, and relating to the Preferred Shares
Basic Maintenance Cure Date with respect to such failure to satisfy the
Preferred Shares Basic Maintenance Amount, the Trust shall cause the Independent
Accountant to provide to Moody's (if Moody's is then rating the AMPS), S&P (if
S&P is then rating the AMPS) and the Auction Agent (if either Moody's or S&P is
then rating the AMPS) an Accountant's Confirmation as to such Preferred Shares
Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph (c) or
(d) of this Section 7 shows that an error was made in the Preferred Shares Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation was required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all Moody's Eligible Assets (if Moody's is
then rating the AMPS) or S&P Eligible Assets (if S&P is then rating the AMPS),
as the case may be, of the Trust was determined by the Independent Accountant,
the calculation or determination made by such Independent Accountant shall be
final and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the Preferred Shares Basic Maintenance Report to
Moody's (if Moody's is then rating the AMPS), S&P (if S&P is then rating the
AMPS) and the Auction Agent (if either Moody's or S&P is then rating the AMPS)
promptly following receipt by the Trust of such Accountant's Confirmation.
(f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any AMPS, the Trust shall complete and
deliver to Moody's (if Moody's is then rating the AMPS) and S&P (if S&P is then
rating the AMPS) a Preferred Shares Basic Maintenance Report as of the close of
business on such Date of Original Issue. Within five Business Days of such Date
of Original Issue, the Trust shall cause the Independent Accountant to confirm
in writing to S&P (if S&P is then rating the AMPS) (i) the mathematical accuracy
of the calculations reflected in such Report and (ii) that the Discounted Value
of S&P Eligible Assets reflected thereon equals or exceeds the Preferred Shares
Basic Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business Day
after either (i) the Trust shall have redeemed Common Shares or (ii) the ratio
of the Discounted Value of Moody's Eligible Assets or the S&P Eligible Assets to
the Preferred Shares Basic Maintenance Amount is less than or equal to 105%, or
(iii) whenever requested by Moody's or S&P, the Trust shall complete and deliver
to Moody's (if Moody's is then rating the AMPS) or S&P (if S&P is then rating
the AMPS), as the case may be, a Preferred Shares Basic Maintenance Report as of
the date of such event.
8. Reserved.
9. Restrictions on Dividends and Other Distributions.
(a) Dividends on Shares Other than the AMPS. Except as set forth in the
next sentence, no dividends shall be declared or paid or set apart for payment
on the shares of any class or series of shares of beneficial interest of the
Trust ranking, as to the payment of dividends, on a parity with the AMPS for any
period unless full cumulative dividends have been or contemporaneously are
declared and paid on the shares of each series of the AMPS through its most
recent Dividend Payment Date. When dividends are not paid in full upon the
shares of
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each series of the AMPS through its most recent Dividend Payment Date or upon
the shares of any other class or series of shares of beneficial interest of the
Trust ranking on a parity as to the payment of dividends with the AMPS through
their most recent respective dividend payment dates, all dividends declared upon
the AMPS and any other such class or series of shares of beneficial interest
ranking on a parity as to the payment of dividends with AMPS shall be declared
pro rata so that the amount of dividends declared per share on AMPS and such
other class or series of shares of beneficial interest shall in all cases bear
to each other the same ratio that accumulated dividends per share on the Trust
and such other class or series of shares of beneficial interest bear to each
other (for purposes of this sentence, the amount of dividends declared per share
of AMPS shall be based on the Applicable Rate for such share for the Dividend
Periods during which dividends were not paid in full).
(b) Dividends and Other Distributions with Respect to Common Shares Under
the Investment Company Act. The Board of Trustees shall not declare any dividend
(except a dividend payable in Common Shares), or declare any other distribution,
upon the Common Shares, or purchase Common Shares, unless in every such case the
AMPS have, at the time of any such declaration or purchase, an asset coverage
(as defined in and determined pursuant to the Investment Company Act) of at
least 200% (or such other asset coverage as may in the future be specified in or
under the Investment Company Act as the minimum asset coverage for senior
securities which are shares or stock of a closed- end investment company as a
condition of declaring dividends on its common shares or stock) after deducting
the amount of such dividend, distribution or purchase price, as the case may be.
(c) Other Restrictions on Dividends and Other Distributions. For so long as
any AMPS are outstanding, and except as set forth in paragraph (a) of this
Section 9 and paragraph (c) of Section 12 of this Part I, (A) the Trust shall
not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or in options,
warrants or rights to subscribe for or purchase, Common Shares or other shares,
if any, ranking junior to the AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of the Common Shares or any other shares of the Trust ranking junior to or on a
parity with the AMPS as to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or any
other such junior shares (except by conversion into or exchange for shares of
the Trust ranking junior to the AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), or any such
parity shares (except by conversion into or exchange for shares of the Trust
ranking junior to or on a parity with AMPS as to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up), unless
(i) full cumulative dividends on shares of each series of AMPS through its most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent
and (ii) the Trust has redeemed the full number of AMPS required to be redeemed
by any provision for mandatory redemption pertaining thereto, and (B) the Trust
shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to AMPS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up) in respect
of Common Shares or any other shares of the Trust ranking junior to AMPS as to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up, or call for redemption, redeem, purchase or otherwise
acquire for consideration any Common Shares or any other such junior shares
(except by conversion into or exchange for shares of the Trust ranking junior to
AMPS as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the AMPS) and S&P Eligible Assets (if S&P is then rating the AMPS) would
at least equal the Preferred Shares Basic Maintenance Amount.
10. Rating Agency Restrictions.
For so long as any AMPS are outstanding and Moody's or S&P or both is
rating such shares, the Trust will not, unless it has received written
confirmation from Moody's or S&P, or both, as applicable, that any such action
would not impair the rating then assigned by such rating agency to such shares,
engage in any one or more of the following transactions:
A-24
(a) buy or sell futures or write put or call options;
(b) borrow money, except that the Trust may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions if (i) the Preferred Shares Basic Maintenance Amount
would continue to be satisfied after giving effect to such borrowing and (ii)
such borrowing (A) is privately arranged with a bank or other person and is
evidenced by a promissory note or other evidence of indebtedness that is not
intended to be publicly distributed or (B) is for "temporary purposes," is
evidenced by a promissory note or other evidence of indebtedness and is in an
amount not exceeding 5 per centum of the value of the total assets of the Trust
at the time of the borrowing; for purposes of the foregoing, "temporary purpose"
means that the borrowing is to be repaid within sixty days and is not to be
extended or renewed;
(c) issue additional shares of any series of AMPS or any class or series of
shares ranking prior to or on a parity with AMPS with respect to the payment of
dividends or the distribution of assets upon dissolutions, liquidation or
winding up of the Trust, or reissue any AMPS previously purchased or redeemed by
the Trust;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the pricing service (currently Muller Data Corporation) referred
to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
In the event any AMPS are outstanding and another rating agency is rating
such shares in addition to or in lieu of Moody's or S&P, the Trust shall comply
with any restrictions imposed by such rating agency, which restrictions may be
more restrictive than those imposed by Moody's or S&P.
11. Redemption.
(a) Optional Redemption.
(i) Subject to the provisions of subparagraph (v) of this paragraph
(a), AMPS of any series may be redeemed, at the option of the Trust, as a
whole or from time to time in part, on any Dividend Payment Date for shares
of such series, out of funds legally available therefor, at a redemption
price per share equal to the sum of $25,000 plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption; provided,
however, that (1) shares of a series of AMPS may not be redeemed in part if
after such partial redemption fewer than 300 shares of such series remain
outstanding; (2) unless otherwise provided in Section 11 of Annex A hereto,
shares of a series of AMPS are redeemable by the Trust during the Initial
Rate Period thereof only on the Dividend Payment Date for such Initial Rate
Period; and (3) subject to subparagraph (ii) of this paragraph (a), the
Notice of Special Rate Period relating to a Special Rate Period of shares
of a series of AMPS, as delivered to the Auction Agent and filed with the
Secretary of the Trust, may provide that shares of such series shall not be
redeemable during the whole or any part of such Special Rate Period (except
as provided in subparagraph (iv) of this paragraph (a)) or shall be
redeemable during the whole or any part of such Special Rate Period only
upon payment of such redemption premium or premiums as shall be specified
therein ("Special Redemption Provisions").
(ii) A Notice of Special Rate Period relating to shares of a series
of AMPS for a Special Rate Period thereof may contain Special Redemption
Provisions only if the Trust's Board of Trustees, after consultation with
the Broker-Dealer or Broker-Dealers for such Special Rate Period of shares
of such series, determines that such Special Redemption Provisions are in
the best interest of the Trust.
A-25
(iii) If fewer than all of the outstanding shares of a series of
AMPS are to be redeemed pursuant to subparagraph (i) of this paragraph (a),
the number of shares of such series to be redeemed shall be determined by
the Board of Trustees, and such shares shall be redeemed pro rata from the
Holders of shares of such series in proportion to the number of shares of
such series held by such Holders.
(iv) Subject to the provisions of subparagraph (v) of this paragraph
(a), shares of any series of AMPS may be redeemed, at the option of the
Trust, as a whole but not in part, out of funds legally available therefor,
on the first day following any Dividend Period thereof included in a Rate
Period consisting of more than 364 Rate Period Days if, on the date of
determination of the Applicable Rate for shares of such series for such
Rate Period, such Applicable Rate equaled or exceeded on such date of
determination the Treasury Note Rate for such Rate Period, at a redemption
price per share equal to the sum of $25,000 plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or
declared) to (but not including) the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption
pursuant to paragraph (c) of this Section 11 in respect of a redemption
contemplated to be effected pursuant to this paragraph (a) unless on such
date (a) the Trust has available Deposit Securities with maturity or tender
dates not later than the day preceding the applicable redemption date and
having a value not less than the amount (including any applicable premium)
due to Holders of AMPS by reason of the redemption of such shares on such
redemption date, and (b) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the AMPS) and S&P Eligible Assets (if S&P is
then rating the AMPS) each at least equals the Preferred Shares Basic
Maintenance Amount, and would at least equal the Preferred Shares Basic
Maintenance Amount immediately subsequent to such redemption if such
redemption were to occur on such date. For purposes of determining in
clause (b) of the preceding sentence whether the Discounted Value of
Moody's Eligible Assets at least equals the Preferred Shares Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's
Eligible Assets shall be determined by reference to the first Exposure
Period longer than the Exposure Period then applicable to the Trust, as
described in the definition of Moody's Discount Factor herein.
(b) Mandatory Redemption. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by the
Board of Trustees for redemption, certain of the AMPS, if the Trust fails to
have either Moody's Eligible Assets or S&P Eligible Assets with a Discounted
Value greater than or equal to the Preferred Shares Basic Maintenance Amount or
fails to maintain the Investment Company Act Preferred Shares Asset Coverage, in
accordance with the requirements of the rating agency or agencies then rating
the AMPS, and such failure is not cured on or before the Preferred Shares Basic
Maintenance Cure Date or the Investment Company Act Cure Date, as the case may
be. The number of AMPS to be redeemed shall be equal to the lesser of (i) the
minimum number of AMPS, together with all other preferred shares subject to
redemption or retirement, the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, would have
resulted in the Trust's having Moody's Eligible Assets and S&P Eligible Assets
with a Discounted Value greater than or equal to the Preferred Shares Basic
Maintenance Amount or maintaining the Investment Company Act Preferred Shares
Asset Coverage, as the case may be, on such Cure Date (provided, however, that
if there is no such minimum number of AMPS and other preferred shares the
redemption or retirement of which would have had such result, all AMPS and other
preferred shares then outstanding shall be redeemed), and (ii) the maximum
number of AMPS, together with all other preferred shares subject to redemption
or retirement, that can be redeemed out of funds expected to be legally
available therefor in accordance with the Declaration and applicable law. In
determining the AMPS required to be redeemed in accordance with the foregoing,
the Trust shall allocate the number required to be redeemed to satisfy the
Preferred Shares Basic Maintenance Amount or the Investment Company Act
Preferred Shares Asset Coverage, as the case may be, pro rata among AMPS and
other preferred shares (and, then, pro rata among each series of AMPS) subject
to redemption or retirement. The Trust shall effect such redemption on the date
fixed by the Trust therefor, which date shall not be earlier than 20 days nor
later than 40 days after such Cure Date, except that if the Trust does not have
funds
A-26
legally available for the redemption of all of the required number of the AMPS
and other preferred shares which are subject to redemption or retirement or the
Trust otherwise is unable to effect such redemption on or prior to 40 days after
such Cure Date, the Trust shall redeem those AMPS and other preferred shares
which it was unable to redeem on the earliest practicable date on which it is
able to effect such redemption. If fewer than all of the outstanding shares of a
series of AMPS are to be redeemed pursuant to this paragraph (b), the number of
shares of such series to be redeemed shall be redeemed pro rata from the Holders
of shares of such series in proportion to the number of shares of such series
held by such Holders.
(c) Notice of Redemption. If the Trust shall determine or be required to
redeem shares of a series of AMPS pursuant to paragraph (a) or (b) of this
Section 11, it shall mail a Notice of Redemption with respect to such redemption
by first-class mail, postage prepaid, to each Holder of the shares of such
series to be redeemed, at such Holder's address as the same appears on the
record books of the Trust on the record date established by the Board of
Trustees, and to the Auction Agent. Such Notice of Redemption shall be so mailed
not less than 20 nor more than 45 days prior to the date fixed for redemption.
Each such Notice of Redemption shall state: (i) the redemption date; (ii) the
number of AMPS to be redeemed and the series thereof; (iii) the CUSIP number for
shares of such series; (iv) the Redemption Price; (v) the place or places where
the certificate(s) for such shares (properly endorsed or assigned for transfer,
if the Board of Trustees shall so require and the Notice of Redemption shall so
state) are to be surrendered for payment of the Redemption Price; (vi) that
dividends on the shares to be redeemed will cease to accumulate on such
redemption date; (vii) that the Holders of any shares of a series of AMPS being
so redeemed shall not participate in the Auction, if any, immediately preceeding
the redemption date; and (viii) the provisions of this Section 11 under which
such redemption is made. If fewer than all shares of a series of AMPS held by
any Holder are to be redeemed, the Notice of Redemption mailed to such Holder
shall also specify the number of shares of such series to be redeemed from such
Holder. The Trust may provide in any Notice of Redemption relating to a
redemption contemplated to be effected pursuant to paragraph (a) of this Section
11 that such redemption is subject to one or more conditions precedent and that
the Trust shall not be required to effect such redemption unless each such
condition shall have been satisfied at the time or times and in the manner
specified in such Notice of Redemption.
(d) No Redemption Under Certain Circumstances. Notwithstanding the
provisions of paragraphs (a) or (b) of this Section 11, if any dividends on
shares of a series of AMPS (whether or not earned or declared) are in arrears,
no shares of such series shall be redeemed unless all outstanding shares of such
series are simultaneously redeemed, and the Trust shall not purchase or
otherwise acquire any shares of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted by,
Holders of all outstanding shares of such series.
(e) Absence of Funds Available for Redemption. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration and applicable law, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem AMPS
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Trust shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been mailed;
provided, however, that the foregoing shall not apply in the case of the Trust's
failure to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares where (1) the Notice of Redemption relating to such
redemption provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.
Notwithstanding the fact that the Trust may not have redeemed AMPS for which a
Notice of Redemption has been mailed, dividends may be declared and paid on AMPS
and shall include those AMPS for which a Notice of Redemption has been mailed.
(f) Auction Agent as Trustee of Redemption Payments by Trust. All moneys
paid to the Auction Agent for payment of the Redemption Price of AMPS called for
redemption shall be held in trust by the Auction Agent for the benefit of
Holders of shares so to be redeemed.
A-27
(g) Shares for Which Notice of Redemption Has Been Given Are no Longer
Outstanding. Provided a Notice of Redemption has been mailed pursuant to
paragraph (c) of this Section 11, upon the deposit with the Auction Agent (on
the Business Day next preceding the date fixed for redemption thereby, in funds
available on the next Business Day in The City of New York, New York) of funds
sufficient to redeem the AMPS that are the subject of such notice, dividends on
such shares shall cease to accumulate and such shares shall no longer be deemed
to be outstanding for any purpose, and all rights of the Holders of the shares
so called for redemption shall cease and terminate, except the right of such
Holders to receive the Redemption Price, but without any interest or other
additional amount, except as provided in subparagraph (e)(i) of Section 2 of
this Part I and in Section 3 of this Part I. Upon surrender in accordance with
the Notice of Redemption of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Trustees shall so
require and the Notice of Redemption shall so state), the Redemption Price shall
be paid by the Auction Agent to the Holders of AMPS subject to redemption. In
the case that fewer than all of the shares represented by any such certificate
are redeemed, a new certificate shall be issued, representing the unredeemed
shares, without cost to the Holder thereof. The Trust shall be entitled to
receive from the Auction Agent, promptly after the date fixed for redemption,
any cash deposited with the Auction Agent in excess of (i) the aggregate
Redemption Price of the AMPS called for redemption on such date and (ii) all
other amounts to which Holders of AMPS called for redemption may be entitled.
Any funds so deposited that are unclaimed at the end of 90 days from such
redemption date shall, to the extent permitted by law, be repaid to the Trust,
after which time the Holders of AMPS so called for redemption may look only to
the Trust for payment of the Redemption Price and all other amounts to which
they may be entitled.
(h) Compliance with Applicable Law. In effecting any redemption pursuant to
this Section 11, the Trust shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the
Investment Company Act and any applicable Delaware law, but shall effect no
redemption except in accordance with the Investment Company Act and any
applicable Delaware law.
(i) Only Whole AMPS May be Redeemed. In the case of any redemption pursuant
to this Section 11, only whole AMPS shall be redeemed, and in the event that any
provision of the Declaration would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
(j) Modification of Redemption Procedures. Notwithstanding any of the
foregoing provisions of this Section 11, the Trust may modify any or all of the
requirements relating to the Notice of Redemption provided that (i) any such
modification does not materially and adversely affect any Holder of the relevant
series of AMPS, and (ii) the Trust receives written notice from Moody's (if
Moody's is then rating the AMPS) and S&P (if S&P is then rating the AMPS) that
such modification would not impair the ratings assigned by Moody's and S&P to
shares of AMPS.
12. Liquidation Rights.
(a) Ranking. The shares of a series of AMPS shall rank on a parity with
each other, with shares of any other series of preferred shares and with shares
of any other series of AMPS as to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust.
(b) Distributions Upon Liquidation. Upon the dissolution, liquidation or
winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of AMPS then outstanding shall be entitled to receive and to be paid out
of the assets of the Trust available for distribution to its shareholders,
before any payment or distribution shall be made on the Common Shares or on any
other class of shares of the Trust ranking junior to the AMPS upon dissolution,
liquidation or winding up, an amount equal to the Liquidation Preference with
respect to such shares plus an amount equal to all dividends thereon (whether or
not earned or declared) accumulated but unpaid to (but not including) the date
of final distribution in same day funds, together with any payments required to
be made pursuant to Section 3 of this Part I in connection with the liquidation
of the Trust. After the payment to the Holders of the AMPS of the full
preferential amounts provided for in this paragraph (b), the Holders of AMPS as
such shall have no right or claim to any of the remaining assets of the Trust.
A-28
(c) Pro Rata Distributions. In the event the assets of the Trust available
for distribution to the Holders of AMPS upon any dissolution, liquidation, or
winding up of the affairs of the Trust, whether voluntary or involuntary, shall
be insufficient to pay in full all amounts to which such Holders are entitled
pursuant to paragraph (b) of this Section 12, no such distribution shall be made
on account of any shares of any other class or series of preferred shares
ranking on a parity with the AMPS with respect to the distribution of assets
upon such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the AMPS, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
(d) Rights of Junior Shares. Subject to the rights of the holders of shares
of any series or class or classes of shares ranking on a parity with the AMPS
with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust, after payment shall have been made in
full to the Holders of the AMPS as provided in paragraph (b) of this Section 12,
but not prior thereto, any other series or class or classes of shares ranking
junior to the AMPS with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust shall, subject to the
respective terms and provisions (if any) applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, and the Holders
of the AMPS shall not be entitled to share therein.
(e) Certain Events Not Constituting Liquidation. Neither the sale of all or
substantially all the property or business of the Trust, nor the merger or
consolidation of the Trust into or with any business trust or corporation nor
the merger or consolidation of any business trust or corporation into or with
the Trust shall be a dissolution, liquidation or winding up, whether voluntary
or involuntary, for the purposes of this Section 12.
13. Miscellaneous.
(a) Amendment of Annex A to Add Additional Series. Subject to the
provisions of paragraph (c) of Section 10 of this Part I, the Board of Trustees
may, by resolution duly adopted, without shareholder approval (except as
otherwise provided by this Statement or required by applicable law), amend Annex
A hereto to (1) reflect any amendments hereto which the Board of Trustees is
entitled to adopt pursuant to the terms of this Statement without shareholder
approval or (2) add additional series of AMPS or additional shares of a series
of AMPS (and terms relating thereto) to the series and AMPS theretofore
described thereon. Each such additional series and all such additional shares
shall be governed by the terms of this statement.
(b) Annex A Incorporated by Reference. Annex A hereto is incorporated in
and made a part of this Statement by reference thereto.
(c) No Fractional Shares. No fractional shares of AMPS shall be issued.
(d) Status of AMPS Redeemed, Exchanged or Other Wise Acquired by the Trust.
AMPS which are redeemed, exchanged or otherwise acquired by the Trust shall
return to the status of authorized and unissued preferred shares without
designation as to series.
(e) Board May Resolve Ambiguities. To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Statement to resolve any inconsistency or ambiguity or to remedy any formal
defect, and may amend this Statement with respect to any series of AMPS prior to
the issuance of shares of such series.
(f) Headings Not Determinative. The headings contained in this Statement
are for convenience of reference only and shall not affect the meaning or
interpretation of this statement.
(g) Notices. All notices or communications, unless otherwise specified in
the By-Laws of the Trust or this Statement, shall be sufficiently given if in
writing and delivered in person or mailed by first-class mail, postage prepaid.
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PART II.
1. Orders.
(a) Prior to the Submission Deadline on each Auction Date for shares of a
series of AMPS:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or otherwise information as to:
(A) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owner desires to
continue to hold without regard to the Applicable Rate for shares of
such series for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owner offers to
sell if the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall be less than
the rate per annum specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of such series
held by such Beneficial Owner which such Beneficial Owner offers to
sell without regard to the Applicable Rate for shares of such series
for the next succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a competitive
Auction in a commercially reasonable manner, contact Potential Beneficial
Owners (by telephone or otherwise), including Persons that are not
Beneficial Owners, on such lists to determine the number of shares, if any,
of such series which each such Potential Beneficial Owner offers to
purchase if the Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series shall not be less than the
rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A), (i) (B), (i) (C) or
(ii) of this paragraph (a) is hereinafter referred to as an "Order" and
collectively as "Orders" and each Beneficial Owner and each Potential Beneficial
Owner placing an Order with a Broker-Dealer, and such Broker-Dealer placing an
order with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this paragraph (a) is hereinafter referred to as a "Hold Order"
and collectively as "Hold Orders"; an Order containing the information referred
to in clause (i)(B) or (ii) of this paragraph (a) is hereinafter referred to as
a "Bid" and collectively as "Bids"; and an Order containing the information
referred to in clause (i)(C) of this paragraph (a) is hereinafter referred to as
a "Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of AMPS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified
in such Bid if the Applicable Rate for shares of such series
determined on such Auction Date shall be less than the rate
specified therein;
(B) such number or a lesser number of Outstanding shares of
such series to be determined as set forth in clause (iv) of
paragraph (a) of Section 4 of this Part II if the Applicable Rate
for shares of such series determined on such Auction Date shall be
equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified
in such Bid if the rate specified therein shall be higher than the
Maximum Rate for shares of such series, or such number or a lesser
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number of Outstanding shares of such series to be determined as set
forth in clause (iii) of paragraph (b) of Section 4 of this Part II
if the rate specified therein shall be higher than the Maximum Rate
for shares of such series and Sufficient Clearing Bids for shares of
such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of AMPS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series specified
in such Sell Order; or
(B) such number or a lesser number of Outstanding shares of
such series as set forth in clause (iii) of paragraph (b) of Section
4 of this Part II if Sufficient Clearing Bids for shares of such
series do not exist; provided, however, that a Broker-Dealer that is
an Existing Holder with respect to shares of a series of AMPS shall
not be liable to any Person for failing to sell such shares pursuant
to a Sell Order described in the proviso to paragraph (c) of Section
2 of this Part II if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner
or its transferee Broker-Dealer (or other transferee person, if
permitted by the Trust) with the provisions of Section 7 of this
Part II or (2) such Broker-Dealer has informed the Auction Agent
pursuant to the terms of its Broker-Dealer Agreement that, according
to such Broker-Dealer's records, such Broker- Dealer believes it is
not the Existing Holder of such shares.
(iii) A Bid by a Potential Beneficial Holder or a Potential Holder
of shares of a series of AMPS subject to an Auction on any Auction Date
shall constitute an irrevocable offer to purchase:
(A) the number of Outstanding shares of such series specified
in such Bid if the Applicable Rate for shares of such series
determined on such Auction Date shall be higher than the rate
specified therein; or
(B) such number or a lesser number of Outstanding shares of
such series as set forth in clause (v) of paragraph (a) of Section 4
of this Part II if the Applicable Rate for shares of such series
determined on such Auction Date shall be equal to the rate specified
therein.
(c) No Order for any number of AMPS other than whole shares shall be valid.
2. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for AMPS of a series
subject to an Auction on such Auction Date obtained by such Broker- Dealer,
designating itself (unless otherwise permitted by the Trust) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and shall specify with
respect to each Order for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares
of such series:
(A) the number of shares, if any, of such series subject to
any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series subject to
any Bid of such Existing Holder and the rate specified in such Bid;
and
(C) the number of shares, if any, of such series subject to
any Sell Order of such Existing Holder; and
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(iv) to the extent such Bidder is a Potential Holder of shares of
such series, the rate and number of shares of such series specified in such
Potential Holder's Bid.
(b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.
(c) If an Order or Orders covering all of the outstanding AMPS of a series
held by any Existing Holder is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order to have been
submitted by or on behalf of such Existing Holder covering the number of
Outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent; provided, however, that if an Order or
Orders covering all of the Outstanding shares of such series held by any
Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline for an Auction relating to a Special Rate Period consisting of more
than 28 Rate Period Days, the Auction Agent shall deem a Sell order to have been
submitted by or on behalf of such Existing Holder covering the number of
outstanding shares of such series held by such Existing Holder and not subject
to Orders submitted to the Auction Agent.
(d) If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of Outstanding AMPS of a
series subject to an Auction held by such Existing Holder, such Orders shall be
considered valid in the following order of priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number of
Outstanding shares of such series held by such Existing Holder, and if the
number of shares of such series subject to such Hold Orders exceeds the
number of Outstanding shares of such series held by such Existing Holder,
the number of shares subject to each such Hold Order shall be reduced pro
rata to cover the number of Outstanding shares of such series held by such
Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered valid
up to and including the excess of the number of Outstanding shares of such
series held by such Existing Holder over the number of shares of such
series subject to any Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid of an
Existing Holder for shares of such series is submitted to the
Auction Agent with the same rate and the number of Outstanding
shares of such series subject to such Bids is greater than such
excess, such Bids shall be considered valid up to and including the
amount of such excess, and the number of shares of such series
subject to each Bid with the same rate shall be reduced pro rata to
cover the number of shares of such series equal to such excess;
(C) subject to subclauses (A) and (B), if more than one Bid
of an Existing Holder for shares of such series is submitted to the
Auction Agent with different rates, such Bids shall be considered
valid in the ascending order of their respective rates up to and
including the amount of such excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion of Bids
considered not valid in whole or in part under this clause (ii)
shall be treated as the subject of a Bid for shares of such series
by or on behalf of a Potential Holder at the rate therein specified;
and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding shares of
such series held by such Existing Holder over the sum of shares of such
series subject to valid Hold Orders referred to in clause (i) above and
valid Bids referred to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of AMPS is
submitted to the Auction Agent by or on behalf of any Potential Holder, each
such Bid submitted shall be a separate Bid with the rate and number of shares
therein specified.
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(f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior to
the Submission Deadline on any Auction Date, shall be irrevocable.
3. Determination of Sufficient Clearing Bids, Winning Bids Rate and Applicable
Rate.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of AMPS, the Auction Agent shall assemble all valid Orders
submitted or deemed submitted to it by the Broker-Dealers in respect of shares
of such series (each such Order as submitted or deemed submitted by a
Broker-Dealer being hereinafter referred to individually as a "Submitted Hold
Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be, or as
a "Submitted Order" and collectively as "Submitted Hold Orders," "Submitted
Bids" or "Submitted Sell Orders," as the case may be, or as "Submitted Orders")
and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series
over the number of Outstanding shares of such series subject to Submitted
Hold Orders (such excess being hereinafter referred to as the "Available
AMPS" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series subject
to Submitted Bids of Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series subject
to Submitted Bids of Existing Holders specifying one or more rates
higher than the Maximum Rate for shares of such series; and
(C) the number of Outstanding shares of such series subject
to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B) and
(C) above is zero because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), such Submitted Bids in
subclause (A) above being hereinafter referred to collectively as
"Sufficient Clearing Bids" for shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist,
the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
for shares of such series) which if:
(A) (I) each such Submitted Bid of Existing Holders
specifying such lowest rate and (II) all other such Submitted Bids
of Existing Holders specifying lower rates were rejected, thus
entitling such Existing Holders to continue to hold the shares of
such series that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid of Potential Holders
specifying such lowest rate and (II) all other such Submitted Bids
of Potential Holders specifying lower rates were accepted;
would result in such Existing Holders described in subclause (A)
above continuing to hold an aggregate number of Outstanding shares
of such series which, when added to the number of Outstanding shares
of such series to be purchased by such Potential Holders described
in subclause (B) above, would equal not less than the Available AMPS
of such series.
(b) Promptly after the Auction Agent has made the determinations pursuant
to paragraph (a) of this Section 3, the Auction Agent shall advise the Trust of
the Maximum Rate for shares of the series of AMPS for which an Auction is being
held on the Auction Date and, based on such determination the Applicable Rate
for shares of such series for the next succeeding Rate Period thereof as
follows:
(i) if Sufficient Clearing Bids for shares of such series exist,
that the Applicable Rate for all shares of such series for the next
Succeeding Rate Period thereof shall be equal to the Winning Bid Rate for
shares of such series so determined;
A-33
(ii) if sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), that the Applicable Rate for all shares
of such series for the next succeeding Rate Period thereof shall be equal
to the Maximum Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares of such
series for the next succeeding Rate Period thereof shall be as set forth in
Section 12 of Annex A hereto.
4. Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares.
Existing Holders shall continue to hold the AMPS that are subject to
Submitted Hold Orders, and, based on the determinations made pursuant to
paragraph (a) of Section 3 of this Part II, the Submitted Bids and Submitted
Sell Orders shall be accepted or rejected by the Auction Agent and the Auction
Agent shall take such other action as set forth below:
(a) If sufficient Clearing Bids for shares of a series of AMPS have
been made, all Submitted Sell Orders with respect to shares of such series shall
be accepted and, subject to the provisions of paragraphs (d) and (e) of this
section 4, Submitted Bids with respect to shares of such series shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids with respect to shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate for shares of
such series shall be accepted, thus requiring each such Existing Holder to
sell the AMPS subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be rejected, thus entitling each such Existing Holder to
continue to hold the AMPS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for shares of
such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be rejected, thus entitling such Existing Holder to continue
to hold the AMPS subject to such Submitted Bid, unless the number of
Outstanding AMPS subject to all such Submitted Bids shall be greater than
the number of AMPS ("remaining shares") in the excess of the Available AMPS
of such series over the number of AMPS subject to Submitted Bids described
in clauses (ii) and (iii) of this paragraph (a), in which event such
Submitted Bid of such Existing Holder shall be rejected in part, and such
Existing Holder shall be entitled to continue to hold AMPS subject to such
Submitted Bid, but only in an amount equal to the number of AMPS of such
series obtained by multiplying the number of remaining shares by a
fraction, the numerator of which shall be the number of Outstanding AMPS
held by such Existing Holder subject to such Submitted Bid and the
denominator of which shall be the aggregate number of Outstanding AMPS
subject to such Submitted Bids made by all such Existing Holders that
specified a rate equal to the Winning Bid Rate for shares of such series;
and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for shares of such
series shall be accepted but only in an amount equal to the number of
shares of such series obtained by multiplying the number of shares in the
excess of the Available AMPS of such series over the number of AMPS subject
to Submitted Bids described in clauses (ii) through (iv) of this paragraph
(a) by a fraction, the numerator of which shall be the number of
Outstanding AMPS subject to such Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding AMPS subject to such Submitted
Bids made by all such Potential Holders that specified a rate equal to the
Winning Bid Rate for shares of such series.
A-34
(b) If Sufficient Clearing Bids for shares of a series of AMPS have not
been made (other than because all of the Outstanding shares of such series are
subject to Submitted Hold Orders), subject to the provisions of paragraph (d) of
this Section 4, Submitted Orders for shares of such series shall be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids for shares of such series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be rejected, thus entitling such Existing
Holders to continue to hold the AMPS subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum Rate for
shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for shares of such
series and the Submitted Sell Orders for shares of such series of each
Existing Holder shall be accepted, thus entitling each Existing Holder that
submitted or on whose behalf was submitted any such Submitted Bid or
Submitted Sell Order to sell the shares of such series subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in an amount
equal to the number of shares of such series obtained by multiplying the
number of shares of such series subject to Submitted Bids described in
clause (ii) of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which shall be the aggregate number of Outstanding
shares of such series subject to all such Submitted Bids and Submitted Sell
Orders.
(c) If all of the Outstanding shares of a series of AMPS are subject to
Submitted Hold Orders, all Submitted Bids for shares of such series shall be
rejected.
(d) If, as a result of the procedures described in clause (iv) or (v) of
paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of a series of AMPS on
any Auction Date, the Auction Agent shall, in such manner as it shall determine
in its sole discretion, round up or down the number of AMPS of such series to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date as a result of such procedures so that the number of shares so purchased or
sold by each Existing Holder or Potential Holder on such Auction Date shall be
whole AMPS.
(e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this Section 4, any Potential Holder would be entitled or required to
purchase less than a whole share of a series of AMPS on any Auction Date, the
Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate AMPS of such series for purchase among Potential Holders so
that only whole shares of AMPS of such series are purchased on such Auction Date
as a result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing AMPS of such series on
such Auction Date.
(f) Based on the results of each Auction for shares of a series of AMPS,
the Auction Agent shall determine the aggregate number of shares of such series
to be purchased and the aggregate number of shares of such series to be sold by
Potential Holders and Existing Holders and, with respect to each Potential
Holder and Existing Holder, to the extent that such aggregate number of shares
to be purchased and such aggregate number of shares to be sold differ, determine
to which other Potential Holder(s) or Existing Holder(s) they shall deliver, or
from which other Potential Holder(s) or Existing Holder(s) they shall receive,
as the case may be, AMPS of such series. Notwithstanding any provision of the
Auction Procedures to the contrary, in the event an Existing Holder or
Beneficial Owner of a series of AMPS with respect to whom a Broker-Dealer
submitted a Bid to the Auction Agent for such shares that was accepted in whole
or in part, or submitted or is deemed to have submitted a Sell Order for such
shares that was accepted in whole or in part, fails to instruct its Agent Member
to deliver such shares against payment therefor, partial deliveries of AMPS that
have been made in respect of Potential Holders' or Potential Beneficial Owners'
submitted Bids for shares of such series that have been accepted in whole or in
part shall constitute good delivery to such Potential Holders and Potential
Beneficial Owners.
A-35
(g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver AMPS of any series or to pay for
AMPS of any series sold or purchased pursuant to the Auction Procedures or
otherwise.
5. Notification of Allocations.
Whenever the Trust intends to include any net capital gains or other income
taxable for Federal income tax purposes in any dividend on AMPS, the Trust may,
but shall not be required to, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding the Auction
Date on which the Applicable Rate for such dividend is to be established.
Whenever the Auction Agent receives such notice from the Trust, it will be
required in turn to notify each Broker-Dealer, who, on or prior to such Auction
Date, in accordance with its Broker-Dealer Agreement, will be required to notify
its Beneficial Owners and Potential Beneficial Owners of AMPS believed by it to
be interested in submitting an Order in the Auction to be held on such Auction
Date.
6. Auction Agent.
For so long as any AMPS are outstanding, the Auction Agent, duly appointed
by the Trust to so act, shall be in each case a commercial bank, trust company
or other financial institution independent of the Trust and its affiliates
(which however may engage or have engaged in business transactions with the
Trust or its affiliates) and at no time shall the Trust or any of its affiliates
act as the Auction Agent in connection with the Auction Procedures. If the
Auction Agent resigns or for any reason its appointment is terminated during any
period that any AMPS are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of a series of AMPS shall be conclusive and
binding on the Broker-Dealers. A Broker-Dealer may inquire of the Auction Agent
between 3:00 p.m. on the Business Day preceding an Auction for a series of AMPS
and 9:30 a.m. on the Auction Date for such Auction to ascertain the number of
shares of such series in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is the
Existing Holder of fewer shares of such series than specified by the Auction
Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer may so
inform the Auction Agent of that belief. Such Broker-Dealer shall not, in its
capacity as Existing Holder of shares of such series, submit Orders in such
Auction in respect of shares of such series covering in the aggregate more than
the number of shares of such series specified by the Auction Agent in response
to such Broker-Dealer's inquiry.
7. Transfer of AMPS.
Unless otherwise permitted by the Trust, a Beneficial Owner or an Existing
Holder may sell, transfer or otherwise dispose of AMPS only in whole shares and
only pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the procedures described in this Part II or to a Broker-Dealer; provided,
however, that (a) a sale, transfer or other disposition of AMPS from a customer
of a Broker-Dealer who is listed on the records of that Broker- Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of this Section 7 if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than pursuant
to Auctions, the Broker-Dealer (or other Person, if permitted by the Trust) to
whom such transfer is made shall advise the Auction Agent of such transfer.
8. Global Certificate.
Prior to the commencement of a Voting Period, (i) all of the shares of a
series of AMPS outstanding from time to time shall be represented by one global
certificate registered in the name of the Securities Depository or
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its nominee and (ii) no registration of transfer of shares of a series of AMPS
shall be made on the books of the Trust to any Person other than the Securities
Depository or its nominee.
9. Force Majeure.
(a) Notwithstanding anything else set forth herein, if an Auction Date is
not a Business Day because the New York Stock Exchange is closed for business
due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services or the Auction Agent is not able to conduct
an Auction in accordance with the Auction Procedures for any such reason, then
the Auction Rate for the next Dividend Period shall be the Auction Rate
determined on the previous Auction Date.
(b) Notwithstanding anything else set forth herein, if a Dividend Payment
Date is not a Business Day because the New York Stock Exchange is closed for
business due to an act of God, natural disaster, act of war, civil or military
disturbance, act of terrorism, sabotage, riots or a loss or malfunction of
utilities or communications services or the dividend payable on such date can
not be paid for any such reason, then:
(i) the Dividend Payment Date for the affected Dividend Period shall
be the next Business Day on which the Trust and its paying agent, if any,
are able to cause the dividend to be paid using their reasonable best
efforts;
(ii) the affected Dividend Period shall end on the day it would have
ended had such event not occurred and the Dividend Payment Date had
remained the scheduled date; and
(iii) the next Dividend Period will begin and end on the dates on
which it would have begun and ended had such event not occurred and the
Dividend Payment Date remained the scheduled date.
A-37
IN WITNESS WHEREOF, BLACKROCK MUNICIPAL 2018 TERM TRUST, has caused these
presents to be signed as of [ ], 2001 in its name and on its behalf by its Vice
President and attested by its Secretary. Said officers of the Trust have
executed this Statement as officers and not individually, and the obligations
and rights set forth in this Statement are not binding upon any such officers,
or the trustees or shareholders of the Trust, individually, but are binding only
upon the assets and property of the Trust.
BLACKROCK MUNICIPAL
2018 TERM TRUST
By: ____________________________
Name: Kevin Klingert
Title: Vice President
ATTEST: ______________________________
Name: Anne F. Ackerley
Title: Secretary
[ ], 2001
A-38
ANNEX A
BLACKROCK MUNICIPAL 2018 TERM TRUST
SECTION 1
Designation as to Series.
SERIES W7: A series of 2,752 AMPS, par value $0.001 per share, liquidation
preference $25,000 per share, is hereby designated "Auction Market Preferred
Shares, Series W7." Each of the 2,752 shares of Series W7 AMPS issued on
December [ ], 2001 shall, for purposes hereof, be deemed to have a Date of
Original Issue of December [ ], 2001; have an Applicable Rate for its Initial
Rate Period equal to [ ] per annum; have an initial Dividend Payment Date of
January 10, 2002; and have such other preferences, limitations and relative
voting rights, in addition to those required by applicable law or set forth in
the Agreement and Declaration of Trust, as amended and restated, applicable to
AMPS of the Trust, as set forth in Part I and Part II of this Statement. Any
shares of Series W7 AMPS issued thereafter shall be issued on the first day of
a Rate Period of the then outstanding shares of Series W7 AMPS, shall have, for
such Rate Period, an Applicable Rate equal to the Applicable Rate for shares of
such series established in the first Auction for shares of such series preceding
the date of such issuance; and shall have such other preferences, limitations
and relative voting rights, in addition to those required by applicable law or
set forth in the Agreement and Declaration of Trust, as amended and restated,
applicable to AMPS of the Trust, as set forth in Part I and Part II of this
Statement. The Series W7 AMPS shall constitute a separate series of AMPS of the
Trust, and each share of Series W7 AMPS shall be identical except as provided in
Section 11 of Part I of this statement.
SERIES R7: A series of 2,752 AMPS, par value $0.001 per share, liquidation
preference $25,000 per share, is hereby designated "Auction Rate Municipal
Preferred Shares, Series R7." Each of the 2,752 shares of Series R7 AMPS issued
on December [ ], 2001 shall, for purposes hereof, be deemed to have a Date of
Original Issue of December [ ], 2001; have an Applicable Rate for its Initial
Rate Period equal to [ ] per annum; have an initial Dividend Payment Date of
January 11, 2002; and have such other preferences, limitations and relative
voting rights, in addition to those required by applicable law or set forth in
the Agreement and Declaration of Trust, as amended and restated, applicable to
AMPS of the Trust, as set forth in Part I and Part II of this Statement. Any
shares of Series R7 AMPS issued thereafter shall be issued on the first day of a
Rate Period of the then outstanding shares of Series R7 AMPS, shall have, for
such Rate Period, an Applicable Rate equal to the Applicable Rate for shares of
such series established in the first Auction for shares of such series preceding
the date of such issuance; and shall have such other preferences, limitations
and relative voting rights, in addition to those required by applicable law or
set forth in the Agreement and Declaration of Trust, as amended and restated,
applicable to AMPS of the Trust, as set forth in Part I and Part II of this
Statement. The Series R7 AMPS shall constitute a separate series of AMPS of the
Trust, and each share of Series R7 AMPS shall be identical except as provided in
Section 11 of Part I of this statement.
SECTION 2
Number of Authorized Shares Per Series.
The number of authorized shares constituting Series W7 AMPS is 4,490.
The number of authorized shares constituting Series R7 AMPS is 4,490.
SECTION 3
Exceptions to Certain Definitions.
Notwithstanding the definitions contained under the heading "Definitions"
in this Statement, the following terms shall have the following meanings for
purposes of this Statement:
Not applicable.
AA-1
SECTION 4
Certain Definitions.
For purposes of this Statement, the following terms shall have the
following meanings (with terms defined in the singular having comparable
meanings when used in the plural and vice versa), unless the context otherwise
requires:
"ESCROWED BONDS" shall mean Municipal Obligations that (i) have been
determined to be legally defeased in accordance with S&P's legal defeasance
criteria, (ii) have been determined to be economically defeased in accordance
with S&P's economic defeasance criteria and assigned a rating of AAA by S&P,
(iii) are not rated by S&P but have been determined to be legally defeased by
Moody's or (iv) have been determined to be economically defeased by Moody's and
assigned a rating no lower than the rating that is Moody's equivalent of S&P's
AAA rating.
"GROSS-UP PAYMENT" means payment to a Holder of AMPS of an amount which,
when taken together with the aggregate amount of Taxable Allocations made to
such Holder to which such Gross-up Payment relates, would cause such Holder's
dividends in dollars (after Federal income tax consequences) from the aggregate
of such Taxable Allocations and the related Gross-up Payment to be at least
equal to the dollar amount of the dividends which would have been received by
such Holder if the amount of such aggregate Taxable Allocations had been
excludable from the gross income of such Holder. Such Gross-up Payment shall be
calculated (i) without consideration being given to the time value of money;
(ii) assuming that no Holder of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Trust; and (iii)
assuming that each Taxable Allocation and each Gross-up Payment (except to the
extent such Gross-up Payment is designated as an exempt-interest dividend under
Section 852(b)(5) of the Code or successor provisions) would be taxable in the
hands of each Holder of AMPS at the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or net capital gain, as
applicable, or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income or net capital gain, as applicable, which ever is
greater, in effect at the time such Gross-up Payment is made.
"INVERSE FLOATER" shall mean trust certificates or other instruments
evidencing interests in one or more Municipal Obligations that qualify as S&P
Eligible Assets, the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time of original
issuance unless the floating instruments have only one reset remaining until
maturity.
"MOODY'S DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the Moody's
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
------------------------------------------------------ --------------------------
EXPOSURE PERIOD Aaa Aa* A* Baa* OTHER** (V)MIG-1*** SP-1+**** UNRATED*****
----------------- ----- ---- --- ----- -------- ----------- --------- --------------
7 weeks .................... 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
than seven weeks ........ 154 161 168 176 190 137 149 231
9 weeks or less but greater
than eight weeks ........ 156 163 170 177 192 138 150 240
-------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P.
*** Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a
demand feature at par exercisable in 30 days and which do not have a
long-term rating.
AA-2
**** Municipal Obligations not rated by Moody's but rated SP-1+ by S&P, which
do not mature or have a demand feature at par exercisable in 30 days and
which do not have a long-term rating.
***** Municipal Obligations rated less than Baa3 by Moody's or less than BBB by
S&P or not rated by Moody's or S&P.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-l or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% as long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold.
"MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for Municipal
Obligations Sold or a Municipal Obligation that (i) pays interest in cash, (ii)
does not have its Moody's rating, as applicable, suspended by Moody's, and (iii)
is part of an issue of Municipal Obligations of at least $10,000,000. Municipal
Obligations issued by any one issuer and rated BBB or lower by S&P, Ba or B by
Moody's or not rated by S&P and Moody's ("Other Securities") may comprise no
more than 4% of total Moody's Eligible Assets; such other Securities, if any,
together with any Municipal Obligations issued by the same issuer and rated Baa
by Moody's or A by S&P, may comprise no more than 6% of total Moody's Eligible
Assets; such Other Securities, Baa and A-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated A by
Moody's or AA by S&P, may comprise no more than 10% of total Moody's Eligible
Assets; and such Baa, A and AA-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by the same issuer and rated Aa by Moody's
or AAA by S&P, may comprise no more than 20% of total Moody's Eligible Assets.
For purposes of the foregoing sentence any Municipal Obligation backed by the
guaranty, letter of credit or insurance issued by a third party shall be deemed
to be issued by such third party if the issuance of such third party credit is
the sole determinant of the rating on such Municipal Obligation. Other
Securities issued by issuers located within a single state or territory may
comprise no more than 12% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated Baa by Moody's or A by S&P,
may comprise no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by issuers located within the same state or
territory and rated A by Moody's or AA by S&P, may comprise no more than 40% of
total Moody's Eligible Assets; and such Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations issued by
issuers located within the same state or territory and rated Aa by Moody's or
AAA by S&P, may comprise no more than 60% of total Moody's Eligible Assets. For
purposes of applying the foregoing requirements, a Municipal Obligation shall be
deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by S&P, Moody's
Eligible Assets shall be calculated without including cash, and Municipal
Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's, rated
A-1+/AA or SP-1+/AA by S&P, shall be considered to have a long-term rating of A.
When the Trust sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the Preferred Basic
Maintenance Amount. When the Trust purchases a Moody's Eligible Asset and agrees
to sell it at a future date, such Eligible Asset shall be valued at the amount
of cash to be received by the Trust upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at least A2 from
Moody's and the transaction has a term of no more than 30 days, otherwise, such
Eligible Asset shall be valued at the Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for taxes
that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by BlackRock Advisors, Inc., BlackRock Financial Management, Inc.,
State Street Bank and Trust or the Auction Agent and (d) Liens by
AA-3
virtue of any repurchase agreement; or (iii) deposited irrevocably for the
payment of any liabilities for purposes of determining the Preferred Shares
Basic Maintenance Amount.
"RATE MULTIPLE," for shares of a series of AMPS on any Auction Date for
shares of such series, shall mean the percentage, determined as set forth in the
columns below (depending on whether the trust has notified the Auction Agent of
its intent to allocate income taxable for Federal income tax purposes to shares
of such series prior to the Auction establishing the Applicable Rate for shares
of such series as provided in this statement) based on the prevailing rating of
shares of such series in effect at the close of business on the Business Day
next preceding such Auction Date:
APPLICABLE PERCENTAGE APPLICABLE PERCENTAGE
PREVAILING RATING NO NOTIFICATION NOTIFICATION
--------------------- ---------------------------- ---------------------------
"aa3"/AA- or higher 110% 150%
"a3"/A- 125% 160%
"baa3"/BBB- 150% 250%
"ba3"/BB- 200% 275%
Below "ba3"/BB- 250% 300%
For purposes of this definition, the "prevailing rating" of shares of a
series of AMPS shall be (i) "aa3"/AA- or higher if such shares have a rating of
"aa3" or better by Moody's and AA- or better by S&P or the equivalent of such
ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (ii) if not "aa3"/AA- or higher, then
"a3"/A- if such shares have a rating of "a3" or better by Moody's and A- or
better by S&P or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected as provided below, (iii) if
not "aa3"/AA- or higher or a3/A- then "baa3"/BBB- if such shares have a rating
of "baa3" or better by Moody's and BBB- or better by S&P or the equivalent of
such ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (iv) if not "aa3"/AA- or higher, "a3"/A- or
"baa3"/BBB-, then "ba3"/BB- if such shares have a rating of "ba3" or better by
Moody's and BB- or better by S&P or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"/BBB-, or
"ba3"/BB-, then Below "ba3"/BB-; provided, however, that if such shares are
rated by only one rating agency, the prevailing rating will be determined
without reference to the rating of any other rating agency. The Trust shall take
all reasonable action necessary to enable either S&P or Moody's to provide a
rating for the AMPS. If neither S&P nor Moody's shall make such a rating
available, the party set forth in Section 7 of Annex A or its successor shall
select one nationally recognized statistical rating organization (as that term
is used in the rules and regulations of the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended from time, to time) to act
as a substitute rating agency in respect of shares of the series of AMPS set
forth opposite such party's name in Section 7 of Annex A and the Trust shall
take all reasonable action to enable such rating agency to provide a rating for
such shares.
"S&P DISCOUNT FACTOR" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set forth
opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:
RATING CATEGORY
------------------------------------------
EXPOSURE PERIOD AAA* AA* A* BBB* HIGH YIELD
-------------------- ------ ---- ---- ----- -------------
45 Business Days ................... 190% 195% 210% 250% 220%
25 Business Days ................... 170 175 190 230 220
10 Business Days ................... 155 160 175 215 220
7 Business Days .................... 150 155 170 210 220
3 Business Days .................... 130 135 150 190 220
--------
* S&P rating.
AA-4
Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
within 30 days or less, or 120% so long as such Municipal Obligations are rated
A-1 or SP-1 by S&P and mature or have a demand feature exercisable in 30 days or
less or 125% if such Municipal Obligations are not rated by S&P but are rated
equivalent to A-1+ or SP-1+ by another nationally recognized statistical rating
organization, on a case by case basis; provided, however, that any such non-S&P
rated short-term Municipal Obligations which have demand features exercisable
within 30 days or less must be backed by a letter of credit, liquidity facility
or guarantee from a bank or other financial institution with a short-term rating
of at least A-1+ from S&P; and further provided that such non-S&P rated
short-term Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets; provided, however,
that Municipal Obligations not rated by S&P but rated equivalent to BBB or lower
by another nationally recognized statistical rating organization, rated BB+ or
lower by S&P or non-rated (such Municipal Obligations are hereinafter referred
to as "High Yield Securities") may comprise no more than 20% of the short-term
Municipal Obligations that qualify as S&P Eligible Assets; (ii) the S&P Discount
Factor for Receivables for Municipal Obligations Sold that are due in more than
five Business Days from such Valuation Date will be the S&P Discount Factor
applicable to the Municipal Obligations sold; (iii) no S&P Discount Factor will
be applied to cash or to Receivables for Municipal Obligations Sold if such
receivables are due within five Business Days of such Valuation Date; and (iv)
except as set forth in clause (i) above, in the case of any Municipal Obligation
that is not rated by S&P but qualifies as an S&P Eligible Asset pursuant to
clause (iii) of that definition, such Municipal Obligation will be deemed to
have an S&P rating one full rating category lower than the S&P rating category
that is the equivalent of the rating category in which such Municipal Obligation
is placed by a nationally recognized statistical rating organization.
"Receivables for Municipal Obligations Sold," for purposes of calculating S&P
Eligible Assets as of any Valuation Date, means the book value of receivables
for Municipal Obligations sold as of or prior to such Valuation Date. The Trust
may adopt S&P Discount Factors for Municipal Obligations other than Municipal
Obligations provided that S&P advises the Trust in writing that such action will
not adversely affect its then current rating on the AMPS. For purposes of the
foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, equivalent to
A-1+ or SP-1+ by another nationally recognized statistical rating organization,
on a case by case basis, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Municipal Obligations.
"S&P ELIGIBLE ASSET" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Preferred Shares Basic Maintenance Amount), Receivables for Municipal
Obligations Sold or a Municipal Obligation owned by the Trust that (i) is
interest bearing and pays interest at least semi-annually; (ii) is payable with
respect to principal and interest in U.S. Dollars; (iii) is publicly rated BBB
or higher by S&P or, if not rated by S&P but rated equivalent or higher to an A
by another nationally recognized statistical rating organization, on a case by
case basis; (iv) is not subject to a covered call or put option written by the
Trust; (v) except for Inverse Floaters, is not part of a private placement of
Municipal Obligations; and (vi) except for Inverse Floaters, is part of an issue
of Municipal Obligations with an original issue size of at least $10 million or,
if of an issue with an original issue size below $10 million (but in no event
below $5 million), is issued by an issuer with a total of at least $50 million
of securities outstanding. Solely for purposes of this definition, the term
"Municipal Obligation" means any obligation the interest on which is exempt from
regular Federal income taxation and which is issued by any of the fifty United
States, the District of Columbia or any of the territories of the United States,
their subdivisions, counties, cities, towns, villages, school districts and
agencies (including authorities and special districts created by the states),
and federally sponsored agencies such as local housing authorities.
Notwithstanding the foregoing limitations:
(1) Municipal Obligations (excluding Escrowed Bonds) of any one
issuer or guarantor (excluding bond insurers) shall be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations (including short-term Municipal Obligations) does not exceed
10% of the aggregate Market Value of S&P Eligible Assets, provided that 2%
is added to the applicable S&P Discount Factor for every 1% by which the
Market Value of such Municipal Obligations exceeds 5% of the aggregate
Market Value of S&P Eligible Assets. High Yield Securities of any one
issuer shall be considered S&P Eligible
AA-5
Assets only to the extent the Market Value of such Municipal Obligations
does not exceed 5% of the aggregate Market Value of S&P Eligible Assets;
(2) Municipal Obligations not rated by S&P shall be considered S&P
Eligible Assets only to the extent the Market Value of such Municipal
Obligations does not exceed 50% of the aggregate Market Value of S&P
Eligible Assets; provided, however, that High Yield Securities shall be
considered S&P Eligible Assets only to the extent the Market Value of such
Municipal Obligations does not exceed 20% of the aggregate Market Value of
S&P Eligible Assets; and
(3) Out of State Bonds shall be considered S&P Eligible Assets only
to the extent that the Market Value of such Municipal Obligations does not
exceed 20% of the aggregate Market Value of S&P Eligible Assets.
(4) Municipal Obligations (excluding Escrowed Bonds) of any one
Issue Type Category shall be considered S&P Eligible Assets only to the
extent the Market Value of such Municipal Obligations does not exceed 25%
of the aggregate Market Value of S&P Eligible Assets; provided, however,
that Municipal Obligations falling within the utility Issue Type Category
will be broken down into three sub-categories and such Municipal
Obligations will be considered S&P Eligible Assets to the extent the Market
Value of such Municipal Obligations in each sub-category does not exceed
25% of the aggregate Market Value of S&P Eligible Assets per each
sub-category provided that the total utility Issue Type Category does not
exceed 60% of the Aggregate Market Value of S&P Eligible Assets; provided,
however, that Municipal Obligations falling within the transportation Issue
Type Category will be broken down into two sub-categories and such
Municipal Obligations will be considered S&P Eligible Assets to the extent
the Market Value of such Municipal Obligations in both sub-categories
combined does not exceed 40% of the aggregate Market Value of S&P Eligible
Assets (exposure to transportation sub-category (i) described in the
definition of Issue Type Category is limited to 25% of the aggregate Market
Value of S&P Eligible Assets, provided, however, exposure to transportation
sub-category (ii) can exceed the 25% limit to the extent that exposure to
transportation sub- category (i) is reduced, for a total exposure up to and
not exceeding 40% of the aggregate Market Value of S&P Eligible Assets for
the transportation Issue Type Category); and provided, however, that the
general obligation issues will be considered S&P Eligible Assets only to
the extent the Market Value of such general obligation issues does not
exceed 50% of the aggregate Market Value of S&P Eligible Assets;
SECTION 5
Initial Rate Periods.
The Initial Rate Period for shares of Series W7 AMPS shall be the period
from and including the Date of Original Issue thereof to but excluding January
10, 2002.
The Initial Rate Period for shares of Series R7 AMPS shall be the period
from and including the Date of Original Issue thereof to but excluding January
11, 2002.
SECTION 6
Date for Purposes of the Definition of "Quarterly Valuation Date" Contained
Under the Heading "Definitions" in this Statement.
December 31, 2001
SECTION 7
Party Named for Purposes of the Definition of "Rate Multiple" in this Statement.
PARTY: SERIES OF AMPS
------- -----------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated W7
Merrill Lynch, Pierce, Fenner & Smith Incorporated R7
AA-6
SECTION 8
Additional Definitions.
Not applicable.
SECTION 9
Dividend Payment Dates.
Except as otherwise provided in paragraph (d) of Section 2 of Part I of
this Statement, dividends shall be payable on shares of: Series [ ] AMPS, for
the Initial Rate Period on December [ ], 2001, and on each [ ] thereafter and
Series [ ] AMPS, for the Initial Rate Period on December [ ], 2001, and on each
[ ] thereafter.
SECTION 10
Amount for Purposes of Subparagraph (c) (i) of Section 5 of Part I of this
Statement.
$[ ]
SECTION 11
Redemption Provisions Applicable to Initial Rate Periods.
Not applicable.
SECTION 12
Applicable Rate for Purposes of Subparagraph (b) (iii) of Section 3 of Part II
of this Statement.
For purposes of subparagraph (b)(iii) of Section 3 of Part II of this
Statement, the Applicable Rate for shares of such series for the next succeeding
Rate Period of shares of such series shall be equal to the lesser of the Kenny
Index (if such Rate Period consists of fewer than 183 Rate Period Days) or the
product of (A) (I) the "AA" Composite Commercial Paper Rate on such Auction Date
for such Rate Period, if such Rate Period consists of fewer than 183 Rate Period
Days; (II) the Treasury Bill Rate on such Auction Date for such Rate Period, if
such Rate Period consists of more than 182 but fewer than 365 Rate Period Days;
or (III) the Treasury Note Rate on such Auction Date for such Rate Period, if
such Rate Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (A)(I), (II) or (III), as applicable, being referred to herein
as the Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income,
whichever is greater; provided, however, that if the Trust has notified the
Auction Agent of its intent to allocate to shares of such series in such Rate
Period any net capital gains or other income taxable for Federal income tax
purposes ("Taxable Income"), the Applicable Rate for shares of such series for
such Rate Period will be (i) if the Taxable Yield Rate (as defined below) is
greater than the Bench mark Rate, then the Benchmark Rate, or (ii) if the
Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate
equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax applicable to ordinary income, whichever is greater, multiplied by
the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate
AA-7
means the rate determined by (a) dividing the amount of Taxable Income available
for distribution per such AMPS by the number of days in the Dividend Period in
respect of which such Taxable Income is contemplated to be distributed, (b)
multiplying the amount determined in (a) above by 365 (in the case of a Dividend
Period of 7 Rate Period Days) or 360 (in the case of any other Dividend Period),
and (c) dividing the amount determined in (b) above by $25,000.
SECTION 13
Certain Other Restrictions and Requirements.
(a) For so long as any AMPS are rated by Moody's, the Trust will not buy or
sell futures contracts, write, purchase or sell call options on futures
contracts or purchase put options on futures contracts or write call options
(except covered call options) on portfolio securities unless it receives written
confirmation from Moody's that engaging in such transactions would not impair
the ratings then assigned to the AMPS by Moody's, except that the Trust may
purchase or sell exchange-traded futures contracts based on the Bond Buyer
Municipal Bond Index (the Municipal Index") or United States Treasury Bonds or
Notes ("Treasury Bonds"), and purchase, write or sell exchange-traded Put
options on such futures contracts and purchase, write or sell exchange-traded
call options on such futures contracts (collectively, "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Trust will not engage in any Moody's Hedging Transaction
based on the Municipal Index (other than transactions which terminate a
futures contract or option held by the Trust by the Trust's taking an
opposite position thereto ("Closing Transactions")) which would cause the
Trust at the time of such transaction to own or have sold (A) outstanding
futures contracts based on the Municipal Index exceeding in number 10% of
the average number of daily traded futures contracts based on the Municipal
Index in the 30 days preceding the time of effecting such transaction as
reported by the Wall Street Journal or (B) outstanding futures contracts
based on the Municipal Index having a Market Value exceeding 50% of the
Market Value of all Municipal Bonds constituting Moody's Eligible Assets
owned by the Trust (other than Moody's Eligible Assets already subject to a
Moody's Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which would cause
the Trust at the time of such transaction to own or have sold (A)
outstanding futures contracts based on Treasury Bonds having an aggregate
Market Value exceeding 20% of the aggregate Market Value of Moody's
Eligible Assets owned by the Trust and rated Aa by Moody's (or, if not
rated by Moody's but rated by S&P, rated AAA by S&P) or (B) outstanding
futures contracts based on Treasury Bonds having an aggregate Market Value
exceeding 40% of the aggregate Market Value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Trust (other than Moody's
Eligible Assets already subject to a Moody's Hedging Transaction) and rated
Baa or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A
or AA by S&P (for purpose of the foregoing clauses (i) and (ii), the Trust
shall be deemed to own the number of futures contracts that underlie any
outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if the amount of
open interest in the Municipal Index as reported by The Wall Street Journal
is less than 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth Business Day of the
month in which such contracts expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such option
expires;
(v) the Trust will engage in Moody's Hedging Transaction only with
respect to futures contracts or options thereon having the next settlement
date of the settlement date immediately thereafter;
AA-8
(vi) the Trust will not engage in options and futures transactions
for leveraging or speculative purposes and will not write any call options
or sell any futures contracts for the purpose of hedging the anticipated
purchase of an asset prior to completion of such purchase; and
(vii) the Trust will not enter into an option of futures transaction
unless, after giving effect thereto, the Trust would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets which
the Trust is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows: (i) assets subject to call options
written by the Trust which are either exchange-traded and "readily reversible"
or which expire within 49 days after the date as of which such valuation is made
shall be valued at the lesser of (a) Discounted Value and (b) the exercise price
of the call option written by the Trust; (ii) assets subject to call options
written by the Trust not meeting the requirements of clause (i) of this sentence
shall have no value; (iii) assets subject to put options written by the Trust
shall be valued at the lesser of (A) the exercise price and (B) the Discounted
Value of the subject security; (iv) futures contracts shall be valued at the
lesser of (A) settlement price and (B) the Discounted Value of the subject
security, provided that, if a contract matures within 49 days after the date as
of which such valuation is made, where the Trust is the seller the contract may
be valued at the settlement price and where the Trust is the buyer the contract
may be valued at the Discounted Value of the subject securities; and (v) where
delivery may be made to the Trust with any security of a class of securities,
the Trust shall assume that it will take delivery of the security with the
lowest Discounted Value.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Trust: (i)
10% of the exercise price of a written call option; (ii) the exercise price of
any written put option; (iii) where the Trust is the seller under a futures
contract, 10% of the settlement price of the futures contract; (iv) where the
Trust is the purchaser under a futures contract, the settlement price of assets
purchased under such futures contract; (v) the settlement price of the
underlying futures contract if the Trust writes put options on a futures
contract; and (vi) 105% of the Market Value of the underlying futures contracts
if the Trust writes call options on a futures contract and does not own the
underlying contract.
(b) For so long as any AMPS are rated by Moody's, the Trust will not enter
into any contract to purchase securities for a fixed price at a future date
beyond customary settlement time (other than such contracts that constitute
Moody's Hedging Transactions that are permitted under Section 13(b) of this
Statement), except that the Trust may enter into such contracts to purchase
newly-issued securities on the date such securities are issued ("Forward
Commitments"), subject to the following limitation:
(i) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short- term, fixed-income securities
rated P-1, MTG-1 or MIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of
the Trust's obligations under any Forward Commitments to which it is from
time to time a party or long-term fixed income securities with a Discounted
Value that equals or exceeds the amount of the Trust's obligations under
any Forward Commitment to which it is from time to time a party; and
(ii) the Trust will not enter into a Forward Commitment unless,
after giving effect thereto, the Trust would continue to have Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than
the Preferred Shares Basic Maintenance Amount.
For purposes of determining whether the Trust has Moody's Eligible Assets
with an aggregate Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Trust is a party and of all securities deliverable to the Trust
pursuant to such Forward Commitments shall be zero.
AA-9
(c) For so long as any AMPS are rated by S&P, the Trust will not purchase
or sell futures contracts, write, purchase or sell options on futures contracts
or write put options (except covered put options) or call options (except
covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the AMPS by S&P, except that the Fund may purchase or
sell futures contracts based on the Bond Buyer Municipal Bond Index (the
"Municipal Index") or United States Treasury Bonds or Notes ("Treasury Bonds")
and write, purchase or sell put and call options on such contracts
(collectively, "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based
on the Municipal Index (other than transactions which terminate a futures
contract or option held by the fund by the Trust's taking an opposite
position thereto ("Closing Transactions")), which would cause the Trust at
the time of such transaction to own or have sold the least of (A) more than
1,000 outstanding futures contracts based on the Municipal Index, (B)
outstanding futures contracts based on the Municipal Index exceeding in
number 25% of the quotient of the Market Value of the Trust's total assets
divided by $1,000 or (C) outstanding futures contracts based on the
Municipal Index exceeding in number 10% of the average number of daily
traded futures contracts based on the Municipal Index in the 30 days
preceding the time of effecting such transaction as reported by The Wall
Street Journal;
(ii) the Trust will not engage in any S&P Hedging Transaction based
on Treasury Bonds (other than Closing Transactions) which would cause the
Trust at the time of such transaction to own or have sold the lesser of (A)
outstanding futures contracts based on Treasury Bonds exceeding in number
50% of the quotient of the Market Value of the Trust's total assets divided
by $100,000 ($200,000 in the case of the two-year United States Treasury
Note) or (B) outstanding futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded futures
contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal.
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract which the Trust owns or has sold or any
outstanding option thereon owned by the Trust in the event (A) the Trust
does not have S&P Eligible Assets with an aggregate Discounted Value equal
to or greater than the Preferred Shares Basic Maintenance Amount on two
consecutive Valuation Dates and (B) the Trust is required to pay Variation
Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month prior to the
delivery month under the terms of such futures contract or option thereon
unless the Trust holds the securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it
will either maintain an amount of cash, cash equivalents or high grade
(rated A or better by S&P), fixed-income securities in a segregated account
with the Trust's custodian, so that the amount so segregated plus the
amount of Initial Margin and Variation Margin held in the account of or on
behalf of the Trust's broker with respect to such futures contract or
option equals the Market Value of the futures contract or option, or, in
the event the Trust writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible Assets with
a Discounted Value that equals or exceeds the Preferred Shares Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (ii)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the Fund.
AA-10
APPENDIX B
RATINGS OF INVESTMENTS
Standard & Poor's Corporation -- A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings (as
published by S&P) follows:
Long-Term Debt
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. 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.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by
S&P. Capacity to pay interest and repay principal is
extremely strong.
AA Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the
highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest
and repay principal although it is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in
higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate
capacity to pay interest and repay principal. Whereas
it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category
than in higher rated categories.
Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
B-1
BB Debt rated "BB" has less near-term vulnerability to
default than other speculative issues. However, it
faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely
interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB"
rating.
B Debt rated "B" has a greater vulnerability to default
but currently has the capacity to meet interest
payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for
debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BB" rating.
CCC Debt rated "CCC" has a currently identifiable
vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial,
or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt
subordinated to senior debt that is assigned an actual
or implied "B" or "B" rating.
CC Debt rated "CC" has a currently identifiable high
vulnerability to default. It typically is applied to
debt subordinated to senior debt that is assigned an
actual or implied "CCC" debt rating.
C Debt rated "C" is currently vulnerable to nonpayment
and is dependent upon business, financial and economic
conditions for the obligor to meet its financial
commitment or obligation. It typically is applied to
debt subordinated to senior debt which is assigned an
actual or implied "CCC" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are
continued.
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments 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 if debt service
payments 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.
Provisional Ratings: 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 and
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 judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to
the principal amount of those bonds to the extent that
the underlying deposit collateral is Federally insured
by the Federal Savings & Loan Insurance Corporation or
the Federal Deposit Insurance Corporation* and interest
is adequately collateralized. In the case of
certificates of deposit the letter "L" indicates that
the deposit, combined with other deposits being held in
the same right and capacity will be honored for
principal and accrued pre-default interest up to the
Federal insurance limits within 30 days after closing
of the insured institution or, in the event that the
deposit is assumed by a successor insured institution,
upon maturity.
B-2
* Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash
flow.
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or
that S&P does not rate a particular type of obligation
as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely it will be treated as a note).
-- 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 Very strong or strong capacity to pay principal and
interest. Those issues determined to possess
overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
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-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category 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 adequate capacity
for timely payment. They are, however, somewhat 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 currently high vulnerability for nonpayment.
B-3
D Debt rated "D" is in payment default. The "D" rating
category is used when interest payments or principal
payments 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.
A commercial rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Moody's Investors Service, Inc.-- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
Municipal Bonds
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 are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate, but
elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
Ba Bonds which are 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 thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present
elements of danger with respect to principal or
interest.
Ca Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
B-4
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.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each
generic rating category from Aa to B in the public
finance sectors. The modifier 1 indicates that the
issuer is in the higher end of its letter rating
category; the modifier 2 indicates a mid-range ranking;
the modifier 3 indicates that the issuer is in the
lower end of the letter ranking category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes superior credit
quality. There is present strong protection by
established cash flows, superior liquidity support or
demonstrated broadbased access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins
of protection are ample although not so large as in
the preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit
quality. Liquidity and cash flow protection may be
narrow and market access for refinancing is likely to
be less well-established.
S.G. This designation denotes speculative quality. Debt
instruments in this category may lack margins of
protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc.-- A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
B-5
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA" ratings denote the
lowest expectation of credit risk. They are
assigned only in case of exceptionally strong
capacity for timely payment of financial
commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AA Very high credit quality. "AA " ratings denote a
very low expectation of credit risk. They
indicate very strong capacity for timely payment
of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. "A " ratings denote a low
expectation of credit risk. The capacity for
timely payment of financial commitments is
considered strong. This capacity may,
nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is
the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that
there is currently a low expectation of credit
risk. The capacity for timely payment of
financial commitments is considered adequate, but
adverse changes in circumstances and in economic
conditions are more likely to impair this
capacity. This is the lowest investment-grade
category.
Speculative Grade
BB Speculative. "BB" ratings indicate that there is
a possibility of credit risk developing,
particularly as the result of adverse economic
change over time; however, business or financial
alternatives may be available to allow financial
commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. "B" ratings indicate that
significant credit risk is present, but a limited
margin of safety remains. Financial commitments
are currently being met; however, capacity for
continued payment is contingent upon a sustained,
favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is
solely reliant upon sustained, favorable business
or economic developments. A "CC" rating indicates
that default of some kind appears probable. "C"
ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this
category are based on their prospects for
achieving partial or full recovery in a
reorganization or liquidation of the obligor.
While expected recovery values are highly
speculative and cannot be estimated with any
precision, the following serve as general
guidelines. "DDD" obligations have the highest
potential for recovery, around 90%-100% of
outstanding amounts and accrued interest. "DD"
indicates potential recoveries in the range of
50%-90%, and "D" the lowest recovery potential,
i.e., below 50%.
Entities rated in this category have defaulted on
some or all of their obligations. Entities rated
"DDD" have the highest prospect for resumption of
performance or continued operation with or
without a formal reorganization process. Entities
rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process;
those rated "DD" are likely to satisfy a higher
portion of their outstanding obligations, while
entities rated "D" have a poor prospect for
repaying all obligations.
B-6
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest
capacity for timely payment of financial commitments;
may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely
payment of financial commitments, but the margin of
safety is not as great as in the case of the higher
ratings.
F3 Fair credit quality. The capacity for timely payment of
financial commitments is adequate; however, near-term
adverse changes could result in a reduction to
non-investment grade.
B Speculative. Minimal capacity for timely payment of
financial commitments, plus vulnerability to near-term
adverse changes in financial and economic conditions.
C High default risk. Default is a real possibility.
Capacity for meeting financial commitments is solely
reliant upon a sustained, favorable business and
economic environment.
D Default. Denotes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the "AAA" long-term
rating category, to categories below "CCC," or to short-term ratings other than
"F1."
`NR' indicates that Fitch does not rate the issuer or issue in question.
`Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive," indicating a potential upgrade,
"Negative," for a potential downgrade, or "Evolving," if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
B-7
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B-8
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING STRATEGIES
In order to manage the risk of its securities portfolio, or to enhance
income or gain as described in the prospectus, the Trust will engage in
Additional Investment Management Techniques. The Trust will engage in such
activities in the Advisor's or Sub-Advisor's discretion, and may not necessarily
be engaging in such activities when movements in interest rates that could
affect the value of the assets of the Trust occur. The Trust's ability to pursue
certain of these strategies may be limited by applicable regulations of the
CFTC. Certain Additional Investment Management Techniques may give rise to
taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Trust may also purchase and sell options on bond
indices ("index options"). Index options are similar to options on securities
except that, rather than taking or making delivery of securities underlying the
option at a specified price upon exercise, an index option gives the holder the
right to receive cash upon exercise of the option if the level of the bond index
upon which the option is based is greater, in the case of a call, or less, in
the case of a put, than the exercise price of the option. The purchase of a put
option on a debt security could protect the Trust's holdings in a security or a
number of securities against a substantial decline in the market value. A call
option gives the purchaser of the option the right to buy and the seller the
obligation to sell the underlying security or index at the exercise price during
the option period or for a specified period prior to a fixed date. The purchase
of a call option on a security could protect the Trust against an increase in
the price of a security that it intended to purchase in the future. In the case
of either put or call options that it has purchased, if the option expires
without being sold or exercised, the Trust will experience a loss in the amount
of the option premium plus any related commissions. When the Trust sells put and
call options, it receives a premium as the seller of the option. The premium
that the Trust receives for selling the option will serve as a partial hedge, in
the amount of the option premium, against changes in the value of the securities
in its portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium received on the
sale of the option. The Trust is authorized to purchase and sell exchange-listed
options and over-the-counter options ("OTC Options") which are privately
negotiated with the counterparty. Listed options are issued by the Options
Clearing Corporation ("OCC") which guarantees the performance of the obligations
of the parties to such options.
The Trust's ability to close out its position as a purchaser or seller of
an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC Options are
purchased from or sold to dealers, financial institutions or other
counterparties
C-1
which have entered into direct agreements with the Trust. With OTC Options, such
variables as expiration date, exercise price and premium will be agreed upon
between the Trust and the counterparty, without the intermediation of a third
party such as the OCC. If the counterparty fails to make or take delivery of the
securities underlying an option it has written, or otherwise settle the
transaction in accordance with the terms of that option as written, the Trust
would lose the premium paid for the option as well as any anticipated benefit of
the transaction. As the Trust must rely on the credit quality of the
counterparty rather than the guarantee of the OCC, it will only enter into OTC
Options with counterparties with the highest long-term credit ratings, and with
primary United States government securities dealers recognized by the Federal
Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or purchase
put and call options on such futures as a hedge against anticipated interest
rate changes or other market movements. The sale of a futures contract creates
an obligation by the Trust, as seller, to deliver the specific type of financial
instrument called for in the contract at a specified future time for a specified
price. Options on futures contracts are similar to options on securities except
that an option on a futures contract gives the purchaser the right in return for
the premium paid to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased or sold,
the Trust must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Trust will pay may
range from approximately 1% to approximately 5% of the value of the securities
or commodities underlying the contract. In certain circumstances, however, such
as periods of high volatility, the Trust may be required by an exchange to
increase the level of its initial margin payment. Additionally, initial margin
requirements may be increased generally in the future by regulatory action. An
outstanding futures contract is valued daily and the payment in case of
"variation margin" may be required, a process known as "marking to the market."
Transactions in listed options and futures are usually settled by entering into
an offsetting transaction, and are subject to the risk that the position may not
be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's use of
futures and options on futures will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the CFTC.
Under such regulations the Trust currently may enter into such transactions
without limit for bona fide hedging purposes, including risk management and
duration management and other portfolio strategies. The Trust may also engage in
transactions in futures contracts or related options for non-hedging purposes to
enhance income or gain provided that the Trust will not enter into a futures
contract or related option (except for closing transactions) for purposes other
than bona fide hedging, or risk management including duration management if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Trust's
liquidation value, i.e., net assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. Also,
when required, a segregated account of cash equivalents will be maintained and
marked to market on a daily basis in an amount equal to the market value of the
contract. The Trust reserves the right to comply with such different standard as
may be established from time to time by CFTC rules and regulations with respect
to the purchase or sale of futures contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, short sales, reverse repurchase agreements and dollar
rolls, and listed or OTC options on securities, indices and
C-2
futures contracts sold by the Trust are generally subject to segregation and
coverage requirements of either the CFTC or the SEC, with the result that, if
the Trust does not hold the security or futures contract underlying the
instrument, the Trust will be required to segregate on an ongoing basis with its
custodian, cash, U.S. government securities, or other liquid high grade debt
obligations in an amount at least equal to the Trust's obligations with respect
to such instruments. Such amounts fluctuate as the obligations increase or
decrease. The segregation requirement can result in the Trust maintaining
securities positions it would otherwise liquidate, segregating assets at a time
when it might be disadvantageous to do so or otherwise restrict portfolio
management.
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged create the possibility that losses on the hedge may be
greater than gains in the value of the Trust's position. The same is true for
such instruments entered into for income or gain. In addition, certain
instruments and markets may not be liquid in all circumstances. As a result, in
volatile markets, the Trust may not be able to close out a transaction without
incurring losses substantially greater than the initial deposit. Although the
contemplated use of these instruments predominantly for hedging should tend to
minimize the risk of loss due to a decline in the value of the position, at the
same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Trust to successfully
utilize Additional Investment Management Techniques will depend on the Advisor's
and the Sub-Advisor's ability to predict pertinent market movements and
sufficient correlations, which cannot be assured. Finally, the daily deposit
requirements in futures contracts that the Trust has sold create an on going
greater potential financial risk than do options transactions, where the
exposure is limited to the cost of the initial premium. Losses due to the use of
Additional Investment Management Techniques will reduce net asset value.
C-3
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PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A--Financial Highlights (unaudited).
Part B--Statement of Assets and Liabilities.
Statement of Operations.
Statement of Changes in Net Assets.
Portfolio of Investments (unaudited).
(2) Exhibits
(a) Amended and Restated Agreement and Declaration of Trust.(3)
(b) By-Laws.(1)
(c) Inapplicable.
(d)(1) Statement of Preferences of Auction Market Preferred Shares.(7)
(d)(2) Form of Specimen Share Certificate.(6)
(e) Dividend Reinvestment Plan.(3)
(f) Inapplicable.
(g)(1) Investment Management Agreement.(3)
(g)(2) Sub-Investment Advisory Agreement.(3)
(h) Form of Purchase Agreement.(6)
(i) Form of Deferred Compensation Plan for Independent Trustees.(3)
(j) Custodian Agreement.(4)
(k)(1) Transfer Agency Agreement.(3)
(k)(2) Form of Auction Agency Agreement.(5)
(k)(3) Form of Broker-Dealer Agreement.(5)
(k)(4) Form of DTC Letter of Representations.(5)
(l) Opinion and Consent of Counsel to the Trust.(6)
(m) Inapplicable.
(n) Consent of Independent Public Accountants.(5)
(o) Inapplicable.
(p) Initial Subscription Agreement.(3)
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.(3)
(r)(2) Code of Ethics of Advisor and Sub-Advisor.(3)
(s) Powers of Attorney(2)
-------
1 Previously filed in the initial filing on September 18, 2001.
2 Previously filed with Pre-Effective Amendment No. 1 to the Registration
Statement of the Common Shares on September 27, 2001.
3 Previously filed with Pre-Effective Amendment No. 2 to the Registration
Statement of the Common Shares on October 25, 2001.
4 Previously filed with the initial Registration Statement of the preferred
shares on November 9, 2001.
5 Filed herewith.
6 To be filed by amendment.
7 Incorporated by reference to Appendix A of the Statement of Additional
Information filed herewith.
Part C-1
Item 25. Marketing Arrangements
Reference is made to the Form of Purchase Agreement for the Registrant's
preferred shares of beneficial interest filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this registration statement:
Registration fees................................................ $34,400
New York Stock Exchange listing fee.............................. 0
Printing (other than certificates)............................... 50,000
Engraving and printing certificates.............................. 0
Moody's fee...................................................... 41,280
S&P fee.......................................................... 55,040
Accounting fees and expenses..................................... 1,500
Legal fees and expenses.......................................... 138,022
NASD fee......................................................... 0
Miscellaneous.................................................... 10,000
Total.......................................................... 330,242
Item 27. Persons Controlled by or under Common Control with the Registrant
None.
Item 28. Number of Holders of Common Shares
Number of
Title of Class Record Holders
------------ ---------------
Common Shares of Beneficial Interest.............................. [ ]
Preferred Shares.................................................. 0
Item 29. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust, as
amended and restated, provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No Shareholder of
the Trust shall be subject in such capacity to any personal liability whatsoever
to any Person in connection with Trust Property or the acts, obligations or
affairs of the Trust. Shareholders shall have the same limitation of personal
liability as is extended to stockholders of a private corporation for profit
incorporated under the Delaware General Corporation Law. No Trustee or officer
of the Trust shall be subject in such capacity to any personal liability
whatsoever to any Person, save only liability to the Trust or its Shareholders
arising from bad faith, willful misfeasance, gross negligence or reckless
disregard for his duty to such Person; and, subject to the foregoing exception,
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee or officer, as such, of the Trust, is made a party to any
suit or proceeding to enforce any such liability, subject to the foregoing
exception, he shall not, on account thereof, be held to any personal liability.
Any repeal or modification of this Section 5.1 shall not adversely affect any
right or protection of a Trustee or officer of the Trust existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
Part C-2
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to indemnify
each person who at any time serves as a Trustee or officer of the Trust (each
such person being an "indemnitee") against any liabilities and expenses,
including amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and reasonable counsel fees reasonably incurred by such
indemnitee in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, before any court or administrative
or investigative body in which he may be or may have been involved as a party or
otherwise or with which he may be or may have been threatened, while acting in
any capacity set forth in this Article V by reason of his having acted in any
such capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the best
interest of the Trust or, in the case of any criminal proceeding, as to which he
shall have had reasonable cause to believe that the conduct was unlawful,
provided, however, that no indemnitee shall be indemnified hereunder against any
liability to any person or any expense of such indemnitee arising by reason of
(i) willful misfeasance, (ii) bad faith, (iii) gross negligence, or (iv)
reckless disregard of the duties involved in the conduct of his position (the
conduct referred to in such clauses (i) through (iv) being sometimes referred to
herein as "disabling conduct"). Notwithstanding the foregoing, with respect to
any action, suit or other proceeding voluntarily prosecuted by any indemnitee as
plaintiff, indemnification shall be mandatory only if the prosecution of such
action, suit or other proceeding by such indemnitee (1) was authorized by a
majority of the Trustees or (2) was instituted by the indemnitee to enforce his
or her rights to indemnification hereunder in a case in which the indemnitee is
found to be entitled to such indemnification. The rights to indemnification set
forth in this Declaration shall continue as to a person who has ceased to be a
Trustee or officer of the Trust and shall inure to the benefit of his or her
heirs, executors and personal and legal representatives. No amendment or
restatement of this Declaration or repeal of any of its provisions shall limit
or eliminate any of the benefits provided to any person who at any time is or
was a Trustee or officer of the Trust or otherwise entitled to indemnification
hereunder in respect of any act or omission that occurred prior to such
amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be made
hereunder unless there has been a determination (i) by a final decision on the
merits by a court or other body of competent jurisdiction before whom the issue
of entitlement to indemnification hereunder was brought that such indemnitee is
entitled to indemnification hereunder or, (ii) in the absence of such a
decision, by (1) a majority vote of a quorum of those Trustees who are neither
"interested persons" of the Trust (as defined in Section 2(a)(19) of the
Investment Company Act) nor parties to the proceeding ("Disinterested Non-Party
Trustees"), that the indemnitee is entitled to indemnification hereunder, or (2)
if such quorum is not obtainable or even if obtainable, if such majority so
directs, independent legal counsel in a written opinion concludes that the
indemnitee should be entitled to indemnification hereunder. All determinations
to make advance payments in connection with the expense of defending any
proceeding shall be authorized and made in accordance with the immediately
succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the expenses
of defending any action with respect to which indemnification might be sought
hereunder if the Trust receives a written affirmation by the indemnitee of the
indemnitee's good faith belief that the standards of conduct necessary for
indemnification have been met and a written undertaking to reimburse the Trust
unless it is subsequently determined that the indemnitee is entitled to such
indemnification and if a majority of the Trustees determine that the applicable
standards of conduct necessary for indemnification appear to have been met. In
addition, at least one of the following conditions must be met: (i) the
indemnitee shall provide adequate security for his undertaking, (ii) the Trust
shall be insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a written
opinion, shall conclude, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is substantial reason to
believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions shall not
exclude any other right which any person may have or hereafter acquire under
this Declaration, the By-Laws of the Trust, any statute,
Part C-3
agreement, vote of stockholders or Trustees who are "disinterested persons" (as
defined in Section 2(a)(19) of the Investment Company Act) or any other right to
which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the Investment Company Act and
this Declaration, the Trust shall have the power and authority to indemnify and
provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Trust or serving in any capacity at the
request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such indemnification has
been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be obligated
to give any bond or other security for the performance of any of his duties
hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees or
with any officer, employee or agent of the Trust shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
undertaking, instrument, certificate, Share, other security of the Trust, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively taken to have been executed or done by the executors thereof
only in their capacity as Trustees under this Declaration or in their capacity
as officers, employees or agents of the Trust. The Trustees may maintain
insurance for the protection of the Trust Property, its Shareholders, Trustees,
officers, employees and agents in such amount as the Trustees shall deem
adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable or is required by the
Investment Company Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee of the
Trust shall, in the performance of its duties, be fully and completely justified
and protected with regard to any act or any failure to act resulting from
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel, or upon reports made to the Trust by any of the
Trust's officers or employees or by any advisor, administrator, manager,
distributor, selected dealer, accountant, appraiser or other expert or
consultant selected with reasonable care by the Trustees, officers or employees
of the Trust, regardless of whether such counsel or expert may also be a
Trustee.
Insofar as indemnification for liabilities arising under the Act, may be
terminated to Trustees, officers and controlling persons of the Trust, pursuant
to the foregoing provisions or otherwise, the Trust has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a Trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue. Reference is made to Section 6 of the purchase
agreement attached as Exhibit (h), which is incorporated herein by reference.
Item 30. Business and Other Connections of Investment Advisor
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently located
at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100 Bellevue
Parkway, Wilmington, Delaware 19809 and at the offices of State
Part C-4
Street Bank and Trust Company, the Registrant's Custodian, and EquiServe Trust
Company, N.A., the Registrant's Transfer Agent and Dividend Disbursing Agent.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of its units
until it amends its prospectus if (a) subsequent to the effective date of its
registration statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement or
(b) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant under Rule 497 (h) under the Securities
Act of 1933 shall be deemed to be part of the Registration Statement as of the
time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be deemed to be
the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, any Statement of Additional Information.
Part C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the [ ] day of
December, 2001.
/s/ RALPH L. SCHLOSSTEIN
-----------------------------
Ralph L. Schlosstein
Trustee, President, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities set forth below on the [ ] day of December, 2001.
Name Title
---- -----
/s/ Ralph L. Schlosstein Trustee, President,
-------------------------------------------- Chief Executive Officer and
Ralph L. Schlosstein Chief Financial Officer
* Trustee
--------------------------------------------
Andrew Brimmer
* Trustee
--------------------------------------------
Richard E. Cavanagh
* Trustee
--------------------------------------------
Kent Dixon
* Trustee
--------------------------------------------
Frank J. Fabozzi
* Trustee
--------------------------------------------
Laurence D. Fink
* Trustee
--------------------------------------------
James Clayburn La Force, Jr.
* Trustee
--------------------------------------------
Walter Mondale
* By /s/ Ralph L. Schlosstein
------------------------------------
Ralph L. Schlosstein
Attorney-in-fact
Part C-6
Index to Exhibits
(k)(2) Form of Auction Agency Agreement
(k)(3) Form of Broker-Dealer Agreement
(k)(4) Form of DTC Letter of Representations
(n) Consent of Independent Public Accountants
Part C-7