PROSPECTUS [BLACKROCK LOGO]
$44,650,000
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
AUCTION MARKET PREFERRED SHARES ("AMPS"-REGISTERED TRADEMARK-)
1,786 SHARES, SERIES W7
LIQUIDATION PREFERENCE $25,000 PER SHARE
-----------
INVESTMENT OBJECTIVE. BlackRock New York Municipal Income Trust II (the
"Trust") is a recently organized, non-diversified, closed-end management
investment company. The Trust's investment objective is to provide current
income exempt from regular Federal income tax and New York State and New York
City personal income taxes.
PORTFOLIO CONTENTS. The Trust will invest primarily in municipal bonds that
pay interest that is exempt from regular Federal income tax and New York State
and New York City personal income taxes. 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 Managed Assets (as defined herein) 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 Investors Service, Inc. ("Moody's"), Standard & Poor's 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/or sub-advisor.
The Trust may invest up to 20% of its Managed 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/or 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 invest primarily in long-term
bonds and expects bonds in its portfolio to have a dollar weighted average
maturity of 15 years or more under current market conditions. The Trust cannot
ensure that it will achieve its investment objective.
INVESTING IN THE AMPS INVOLVES CERTAIN RISKS. SEE "RISKS" BEGINNING ON
PAGE 18. THE MINIMUM PURCHASE AMOUNT OF THE AMPS IS $25,000.
----------------
PER SHARE(2) TOTAL
------------ -----
Public offering price...................................... $25,000.00 $44,650,000
Sales load................................................. $250.00 $446,500
Estimated offering expenses................................ $55.79 $99,639
Proceeds, after expenses, to the Trust(1).................. $24,694.21 $44,103,861
(1) The Trust, its investment advisor, BlackRock Advisors, Inc., and its
investment sub-advisor, BlackRock Financial Management, Inc., have agreed
to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended.
(2) Rounded to the nearest penny.
Neither the Securities and Exchange Commission ("SEC") 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
September 19, 2002.
--------------------------------------------------------------------------------------------
MERRILL LYNCH & CO. UBS WARBURG
PRUDENTIAL SECURITIES SALOMON SMITH BARNEY
--------------------------------------------------------------------------------------------
The date of this prospectus is September 17, 2002.
"AMPS" is a registered service 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 September 17,
2002, 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 45 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 1,786 shares of Series W7 Auction Market Preferred
Share. 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 1.35%. The
initial rate period is from the date of issuance through October 2, 2002. 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; (2) auctions will be conducted by telephone; and
(3) 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
any dividend payment date for 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 date of the redemption, plus a premium
in certain circumstances.
AMPS ARE NOT 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 the Trust does not give such advance notice, 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, it
generally will be required to pay additional amounts to holders of AMPS in order
to adjust for their receipt of income subject to regular Federal income tax and
New York State and New York City personal income taxes.
2
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................................ 4
Financial Highlights (Unaudited).................. 9
The Trust......................................... 10
Use of Proceeds................................... 10
Capitalization (Unaudited)........................ 11
Portfolio Composition............................. 12
The Trust's Investments........................... 12
Risks............................................. 18
Management of the Trust........................... 21
Description of AMPS............................... 25
The Auction....................................... 33
Description of Common Shares...................... 38
Certain Provisions in the Agreement and
Declaration of Trust............................ 38
Repurchase of Common Shares....................... 40
Tax Matters....................................... 40
Underwriting...................................... 43
Custodian, Transfer Agent and Auction Agent....... 44
Legal Opinions.................................... 44
Available Information............................. 44
Table of Contents of Statement of Additional
Information..................................... 45
APPENDIX A Taxable 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 New York Municipal Income Trust II is a
recently organized, non-diversified, closed-end,
management investment company. Throughout the
prospectus, we refer to BlackRock New York
Municipal Income Trust II simply as the "Trust" or
as "we," "us" or "our." See "The Trust." The
Trust's common shares are traded on the American
Stock Exchange under the symbol "BFY". See
"Description of Common Shares." As of
September 10, 2002, the Trust had 4,933,028 common
shares outstanding and net assets of $72,106,512.
INVESTMENT OBJECTIVE.............................. The Trust's investment objective is to provide
current income exempt from regular Federal income
tax and New York State and New York City personal
income taxes.
INVESTMENT POLICIES............................... The Trust will invest primarily in municipal bonds
that pay interest that is exempt from regular
Federal income tax and New York State and New York
City personal income taxes. The Trust will invest
in municipal bonds that, in the opinion of
BlackRock Advisors, Inc. ("BlackRock Advisors" or
the "Advisor") and/or 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 Managed Assets in
municipal bonds that at the time of investment are
investment grade quality. "Managed Assets" means
the total assets of the Trust (including any
assets attributable to any AMPS that may be
outstanding) minus the sum of accrued liabilities
(other than debt representing financial leverage).
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/or the Sub-Advisor. The Trust may
invest up to 20% of its Managed 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/or 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
4
and repay principal, and are commonly referred to
as "junk bonds." The Trust intends to invest
primarily in long-term bonds and expects bonds in
its portfolio to have a dollar weighted average
maturity of 15 years or more under current market
conditions. The Trust cannot ensure that it will
achieve its investment objective. See "The Trust's
Investments."
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." BlackRock Advisors will receive an
annual fee, payable monthly. See "Management of
the Trust."
THE OFFERING...................................... The Trust is offering 1,786 shares of Series W7
AMPS at a purchase price of $25,000 per share. The
AMPS are being offered by the underwriters listed
under "Underwriting."
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:
- if an auction fails you may not be able to sell
some or all of your shares;
- because of the nature of the market for 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;
- a rating agency could downgrade the rating
assigned to the AMPS, which could affect
liquidity;
- 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;
- in certain circumstances, the Trust may not
earn sufficient income from its investments to
pay dividends;
- if interest rates rise, the value of the
Trust's investment portfolio will decline,
reducing the asset coverage for the AMPS;
- 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; and
- the Trust may invest up to 20% of its Managed
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.
- the Trust is a non-diversified management
investment company and therefore may be more
susceptible to any single economic, political
or regulatory occurrence; and
5
- the Trust's policy of investing primarily in
municipal obligations of issuers located in New
York makes the Trust more susceptible to
adverse economic, political or regulatory
occurrences affecting those issuers. The New
York state economy has a comparatively large
share of the nation's finance, insurance,
transportation, communications and services
employment. To the extent that a particular
industry sector represents a larger portion of
the state's total economy, the greater the
impact that a downturn in such sector is likely
to have on the state's economy. The combined
state and local taxes of residents of the state
of New York, and particularly of residents of
New York City, are among the highest in the
country, which may limit the ability of the
state and its localities to raise additional
revenue. In addition, the combined state and
local debt per capita is above the national
average and debt service expenditures have
represented an increasing claim on state and
local budgets. Recent events have created
significant risk factors that could result in a
reduction in economic activity in New York
State and New York City. For a discussion of
economic and other considerations in New York,
see "The Trust's Investments--Municipal
Bonds--Risks Pertaining to New York."
For additional risks of investing in the Trust,
see "Risks" below.
TRADING MARKET.................................... The AMPS are not 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 first auction date for the AMPS will be
October 2, 2002, the business day before the
dividend payment date for the initial rate period
for the AMPS. Each subsequent auction for the AMPS
will normally be held on Wednesday. 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.
DIVIDENDS AND RATE PERIODS........................ The dividend rate for the initial rate period on
the AMPS offered in this prospectus will be 1.35%.
For subsequent rate periods, the AMPS will pay
dividends based on a rate set at auctions,
normally held weekly. In most instances, dividends
are also paid weekly, on the first business day
following the end of the rate period. The
6
rate set at auction will not exceed the maximum
applicable rate. See "Description of
AMPS--Dividends and Rate Periods."
Dividends on the AMPS will accumulate at the
initial rate from September 19, 2002. The dividend
payment date for the initial rate period will be
October 3, 2002. Dividends will normally be paid
on Thursday. 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.
The initial rate period for the AMPS will be 14
days. Subsequent rate periods generally will be
seven days. A requested special rate period will
not be effective unless sufficient clearing bids
were made in the auction immediately preceding the
special rate period. In addition, full cumulative
dividends, any amounts due with respect to
mandatory redemptions and any additional dividends
payable prior to such date must be paid in full.
The Trust must also have received confirmation
from Moody's and S&P or any substitute rating
agency that the proposed special rate period will
not adversely affect such rating agency's
then-current rating on the AMPS, and the lead
Broker-Dealers designated by the Trust, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and UBS
Warburg LLC, must not have objected to declaration
of a special rate period. 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 Rate Periods--Designation of Special
Rate Periods."
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 and New York State
and New York City personal income taxes, the
income you receive will ordinarily be exempt from
Federal income tax and New York State and New York
City personal income taxes. Your income may be
subject to state and local taxes of a state other
than New York. All or a portion of the income from
these bonds may 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 at
its election 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 the Trust
does not give advance notice 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 generally will be required to pay
additional amounts to holders of AMPS in order
7
to offset the Federal income tax and New York
State and New York City personal income taxes
effect of the taxable income so allocated. See
"Tax Matters" and "Description of AMPS--Dividends
and Rate Periods."
RATINGS........................................... The shares of AMPS are expected to be issued with
a rating of "Aaa" from Moody's and "AAA" from S&P.
In order to maintain these ratings, 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 AMPS 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 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, 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 July 30, 2002 through August 23, 2002. Since the Trust was
recently organized and commenced investment operations on July 30, 2002, the
table covers less than three weeks 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 objective
and policies. Accordingly, the information presented may not provide a
meaningful picture of the Trust's future operating performance.
FOR THE PERIOD
JULY 30, 2002(1)
THROUGH
AUGUST 23, 2002
------------------
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period(2)......... $ 14.33
-------
Investment operations:
Net investment income(3)...................... 0.02
Net realized and unrealized gain on
investments(3).............................. 0.06
-------
Net increase from investment operations......... 0.08
-------
Capital charges with respect to issuance of:
Common shares................................. (0.03)
Net asset value, end of period(2)............... $ 14.38
Market value, end of period(2).................. $ 15.35
=======
Total Investment Return(3)...................... 2.33%
=======
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(4)
Expenses after fee waiver....................... 0.08%
Expenses before fee waiver...................... 0.09%
Net investment income after fee waiver.......... 0.11%
SUPPLEMENTAL DATA:
Average net assets of common shareholders
(000)......................................... $64,622
Portfolio turnover.............................. 0%
Net assets of common shareholders, end of period
(000)......................................... $64,831
-------------------
(1) Commencement of investment operations. This information includes the intial
investment by BlackRock Advisors, Inc. (Note 1) Net assets value
immediately after the closing of the public offering was $14.30.
(2) Net asset value and market value are published in Barron's on Saturday and
The Wall Street Journal on Monday.
(3) 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. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
Total invesment return does not reflect brokerage commissions. The total
investment return, which is for less than a full year, is not annualized.
Past performance is not a guarantee of future results.
(4) Not Annualized.
The information above represents the unaudited operating performance for a
common share outstanding, total investment return, ratios to average net assets
and other supplemental data for the period 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, non-diversified, closed-end, management
investment company registered under the Investment Company Act. The Trust was
organized as a Delaware business trust on June 21, 2002 pursuant to an Agreement
and Declaration of Trust, governed by the laws of the State of Delaware. On
Juy 25, 2002, the Trust issued an aggregate of 4,500,000 common shares of
beneficial interest, par value $.001 per share, in an initial public offering
and commenced its investment operations. On August 27, 2002, the Trust issued an
additional 300,000 common shares, and on September 10, 2002, the Trust issued an
additional 75,000 common shares, each pursuant to an overallotment provision in
connection with the initial public offering. The Trust's common shares are
traded on the American Stock Exchange under the symbol "BFY". 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 September 10, 2002:
AMOUNT HELD BY
AMOUNT THE TRUST OR FOR AMOUNT
TITLE OF CLASS AUTHORIZED ITS ACCOUNT OUTSTANDING
-------------- ---------- ---------------- --------------
Common Shares Unlimited 0 4,933,028
AMPS Unlimited 0 0
Series W7 2,885 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $44,103,861 after
payment of the sales load and estimated offering costs. The Trust will invest
the net proceeds of the offering in accordance with the Trust's investment
objective and policies as stated below. We currently anticipate that the Trust
will be able to invest primarily in tax exempt municipal bonds that meet the
Trust's investment objective and policies within six to eight weeks 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.
10
CAPITALIZATION (UNAUDITED)
The following table sets forth the capitalization of the Trust as of
September 10, 2002, and as adjusted to give effect to the issuance of the AMPS
offered hereby.
ACTUAL AS ADJUSTED
------ -----------
Shareholder's Equity:
AMPS, $.001 par value, $25,000
stated value per share, at
liquidation value; unlimited
shares authorized (no shares
issued; 1,786 shares issued, as
adjusted)....................... $ -- 44,650,000
Common shares, $.001 par value per
share; unlimited shares
authorized, 4,933,028 shares
outstanding*.................... 4,933 4,933
Paid-in surplus....................... 70,532,443 69,986,304
Balance of undistributed net
investment income................... 180,686 180,686
Accumulated net realized
gain/loss from investment
transactions.................. -- --
Net unrealized
appreciation/depreciation of
investments................... 1,388,450 1,388,450
Net assets...................... 72,106,512 116,210,373
---------
* None of these outstanding shares are held by or for the account of the
Trust.
11
PORTFOLIO COMPOSITION
As of September 10, 2002, approximately 90.31% of the market value of the
Trust's portfolio was invested in long-term municipal securities and
approximately 9.69% 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 September 10, 2002, based on the highest rating assigned.
VALUE
CREDIT RATING (000) PERCENT
------------- ------- -------
AAA/Aaa*................................ 19,936 28.06%
AA/Aa................................... 36,531 51.42%
A/A..................................... 4,098 5.77%
BBB/Baa................................. 0 0.00%
BB/Ba................................... 0 0.00%
B/B..................................... 3,595 5.06%
Unrated+................................ 0 0.00%
Short-Term.............................. 6,887 9.69%
TOTAL................................... 71,047 100.00%
-------------------
* 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 Objective and Policies."
THE TRUST'S INVESTMENTS
The following section describes the Trust's investment objectives,
significant investment policies and investment techniques. More complete
information describing the Trust's significant investment policies and
techniques, including the Trust's fundamental investment restrictions, can be
found in the Statement of Additional Information, which is herein incorporated
by reference.
INVESTMENT OBJECTIVE AND POLICIES
The Trust's investment objective is to provide current income exempt from
regular Federal income tax and New York State and New York City personal income
taxes.
The Trust will invest primarily in municipal bonds that pay interest that is
exempt from regular Federal income tax and New York State and New York City
personal income taxes. Under normal market conditions, the Trust expects to be
fully invested in such tax-exempt municipal bonds. Under normal market
conditions, the Trust will invest at least 80% of its Managed 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 issues of higher grade
municipal bonds. The Trust may invest up to 20% of its Managed 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
12
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. See "Risks" below for a
general description of the economic and credit characteristics of municipal
issuers in New York. The Trust may also invest in securities of other open- or
closed-end investment companies that invest primarily in municipal bonds of the
types in which the Trust may invest directly and in tax-exempt preferred shares
that pay dividends exempt from regular Federal income tax. See "--Other
Investment Companies," and "--Tax-Exempt Preferred Shares." Subject to the
Trust's policy of investing at least 80% of its Managed Assets in municipal
bonds, the interest from which is exempt from New York State and New York City
personal income taxes, the Trust may invest in securities that pay interest that
is not exempt from New York State and New York City personal income taxes when,
in the judgment of BlackRock, the return to the shareholders after payment of
applicable New York State and New York City personal income taxes would be
higher than the return available from comparable securities that pay interest
that is, or make other distributions that are, exempt from New York State and
New York City personal income taxes
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,
but not limited to, 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, but not limited to 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
13
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 available at reasonable prices and yields.
If the Trust invests in taxable short term investments a portion of your
dividends would be subject to regular Federal income tax and New York State and
New York City personal income taxes.
The Trust cannot change its investment objective without the approval of the
holders of a majority of the outstanding common shares and the 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
GENERAL. 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
and New York State and New York City personal income taxes. 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 and New York State and New York City personal income
taxes. 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 invest primarily in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15 or more years, but the
weighted average maturity of obligations held by the Trust may be shortened,
depending on market conditions.
14
RISKS PERTAINING TO NEW YORK
Except during defensive periods, the Trust invests primarily in New York
municipal obligations. The Trust is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
obligations. In addition, the specific New York municipal obligations in which
the Trust invests are expected to change from time to time.
The following information is a summary of a more detailed description of
certain factors affecting New York municipal obligations which is contained in
the Trust's Statement of Additional Information. Investors should obtain a copy
of the Trust's Statement of Additional Information for the more detailed
discussion of such factors. Such information is derived from certain official
statements of the State of New York published in connection with the issuance of
specific New York municipal securities, as well as from other publicly available
documents. Such information has not been independently verified by the Trust and
may not apply to all New York municipal obligations acquired by the Trust. The
Trust assumes no responsibility for the completeness or accuracy of such
information.
Investors should be aware of certain factors that might affect the financial
condition of the issuers of New York municipal securities. The events of
September 11, 2001 had a significant impact upon the State economy generally and
more directly on that of the City. The City and State expect, based on actions
of the U.S. Congress and the President, that they will be fully reimbursed for
the cost to recover from, clean up and repair the consequences of the World
Trade Center attack. However, prior to September 11, the nation's and the
State's economies had been weakening and the loss of over seventy thousand jobs
in the City as a direct result of September 11 will produce material budgetary
pressures including increases to later year budget gaps for the City and
reductions to State surpluses. The State has not quanti.ed the impact of
expected reductions in receipts and increased expenditures for unemployment and
economic revitalization resulting from September 11. The City of New York
Executive Budget Fiscal Year 2003 released by the Mayor of the City on
April 17, 2002 (the "Executive Budget"), projects total revenue lost to the City
as a result of September 11 during the 2002-2006 fiscal years will be $3.9
billion and that expenses over the same period have increased by $6.1 billion
from projections prepared prior to September 11.
The State of New York has historically been one of the wealthiest states in
the nation. For decades, however, the economy of the State of New York has grown
more slowly than that of the nation as a whole, and the result has been a
gradual erosion of the State's relative economic affluence. New York City, for
example, has faced greater competition as other major cities have developed
financial and business capabilities which make them less dependent on the
specialized services traditionally available almost exclusively in New York
City.
The State of New York has for many years had a very high state and local tax
burden. The burden of state and local taxation, in combination with the many
other causes of regional economic dislocations, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State of New York.
There can be no assurance that the State of New York and its political
subdivisions will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain programs at
current levels. To address any potential budgetary imbalance, the State of New
York and such subdivisions may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
15
Although revenue obligations of the State of New York or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Trust or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
In its January 22, 2002 quarterly update, in part as a result of September
11, the State has projected a decline in economic growth and lower employment
levels in 2002. As a result of declines in State employment, Wall Street
bonuses, and non-wage income levels, personal income is expected to decline in
2001-2002 and increase minimally in 2002-2003. In the quarterly update, the
State Division of the Budget projects a closing balance in the General Fund of
$2.1 billion in 2001-2002. The State has noted that there are significant risk
factors that could result in a reduction in economic activity statewide such as
greater job losses, weaker financial markets and smaller bonus payments by Wall
Street firms.
The Governor presented his 2002-03 Executive Budget to the Legislature on
January 22, 2002. The Executive Budget contains financial projections for the
State's 2001-2002 through 2004-05 fiscal years. The Executive Budget projects
total General Fund receipts, including transfers of available General Fund
balances at $40.2 billion, and disbursements at $40.2 billion for fiscal year
2002-2003, a balanced budget for that fiscal year.
On May 15, 2002, the Governor and legislative leaders announced that they
had come to an agreement on a final balance 2002-03 State Budget (the "State
Budget"). The agreement includes actions to close the budget gap previously
identified in the State Executive Budget plus an additional $1.4billion gap
identified in March and April 2002. Under the State Budget, taxpayer-supported
General Fund spending falls by nearly $1 billion, or 2.6 percent. General Fund
spending will total $40.2 billion. All Funds spending will increase by less than
1 percent (0.8%) from that proposed in the State Executive Budget and will total
$89.6 billion.
The State Budget includes a series of one-time actions to close this budget
gap. These actions included using $1.2 billion of available cash reserves and
other fund balances; implementing a tax amnesty program; offering early
retirement to state workers; and converting hard dollar capital financing to
bonding while reducing overall capital authorizations. The State's Tax
Stabilization Reserve Fund, a fund to address unforeseen budget needs, will be
maintained at $710 million. On April 17, 2002, the Mayor of the City released
the Executive Budget for fiscal year 2003 (July 1, 2002 to June 30, 2003), which
includes a financial plan for fiscal years 2003 through 2006. The Executive
Budget incorporates a number of steps to close a projected $5.0 billion budget
gap, including city agency cuts ranging up to 36%, staffing changes requiring
union consent, stretching out some elements of the City's four year construction
plan to five years, debt restructuring and asset sales and proposed State and
federal initiatives to generate up to $2.2 billion of gap closing actions in
fiscal year 2003 and an aggregate of $5.5 billion in fiscal years 2004 through
2006. The Mayor has also proposed that the City issue $1.5 billion of its
general obligation bonds in fiscal year 2003 to help close the budget gap. As a
result of extraordinary actions to address the impact of September 11, the City
ended fiscal year 2002 with a surplus of $677 million. Prior to its gap closing
program, the City projected a $4.8 billion budget gap for fiscal year 2002-03
and even larger gaps in subsequent years. Some of the gap closing measures
proposed in the Executive Budget for fiscal year 2003 have recurring effects and
are projected to reduce the fiscal year 2004, 2005 and 2006 budget gaps to $3.7
billion, $4.2 billion and $4.6 billion, respectively. The Mayor proposed to
close these outyear gaps through unspecified additional City agency cuts,
federal and State initiatives and other actions. On June 19, 2002, the Mayor and
the City Council announced a budget agreement which, while it restored some of
the funds cut in the City Executive Budget adopted the City Executive Budget
with no material changes.
16
If the State, the State agencies, the City, other municipalities or school
districts were to suffer serious financial difficulties jeopardizing their
respective access to the public credit markets, or increasing the risk of a
default, the market price of municipal bonds issued by such entities could be
adversely affected.
For more information, see "Investment Policies and Techniques--Factors
Pertaining to New York" in the Statement of Additional Information.
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. The Trust will designate on
its books and records cash or other liquid debt securities having a market value
at all times, at least equal to the amount of the commitment.
OTHER INVESTMENT COMPANIES
The Trust may invest up to 10% of its total assets in securities of other
open- or closed-end 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 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 AMPS 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 the same leverage risks to which
the Trust is subject. 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 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. Investing in such tax-exempt preferred shares involves
many of the same issues as investing in other open- or closed-end investment
companies as discussed above. These investments also have additional risks,
including liquidity risk, the absence of
17
regulation governing investment practices, capital structure and leverage,
affiliated transactions and other matters, and concentration of investments in
particular issuers or industries.
HIGH YIELD SECURITIES
The Trust may invest up to 20% of its Managed Assets in securities rated
below investment grade such as those rated Ba or B by Moody's and BB or B 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 their
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 risk 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.
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.
RECENTLY ORGANIZED
The Trust is a recently organized, non-diversified, closed-end management
investment company and has a limited operating history.
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 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 dividends
on AMPS, however, dividend rates on AMPS would need to greatly exceed the yield
on the Trust's portfolio before the Trust's ability to pay dividends on AMPS
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
18
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. 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. AMPS are not 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
It is expected that while 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. Moody's or S&P could
downgrade AMPS, which may make your shares less liquid at an auction or in the
secondary market. If Moody's or S&P downgrades 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 Managed 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 investment grade
securities.
STATE CONCENTRATION RISK
Because the Trust primarily purchases municipal bonds issued by the State of
New York or county or local government municipalities or their agencies,
districts, political subdivisions or other entities, shareholders may be exposed
to additional risks. In particular, the Trust is susceptible to political,
19
economic or regulatory factors affecting issuers of New York municipal bonds.
There can be no assurance that New York will not experience a decline in
economic conditions or that the New York municipal bonds purchased by the Trust
will not be affected by such a decline.
For a discussion of economic and other considerations in New York, see "The
Trust's Investments--Municipal Bonds--Risk Factors Pertaining to New York."
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.
Revenue bonds issued by state or local agencies to finance the development
of low-income, multi-family housing involve special risks in addition to those
associated with municipal bonds generally, including that the underlying
properties may not generate sufficient income to pay expenses and interest
costs. Such bonds are generally non-recourse against the property owner, may be
junior to the rights of others with an interest in the properties, may pay
interest that changes based in part on the financial performance of the
property, may be prepayable without penalty and may be used to finance the
construction of housing developments which, until completed and rented, do not
generate income to pay interest. Increases in interest rates payable on senior
obligations may make it more difficult for issuers to meet payment obligations
on subordinated bonds. The Trust will treat investments in tax-exempt preferred
shares as investments in municipal bonds.
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 market 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.
INFLATION RISK
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the AMPS
20
and distributions on those shares can decline. 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 AND GEOGRAPHIC RISK
The Trust may invest 25% or more of its Managed Assets in municipal
obligations of issuers located in the same state (or U.S. territory) or in
municipal obligations 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 net asset 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 their 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.
NON-DIVERSIFICATION
The Trust has registered as a "non-diversified" investment company under the
Investment Company Act. For Federal income tax purposes, the Trust, with respect
to up to 50% of its total assets, will be able to invest more than 5% (but not,
with respect to securities other than United States government securities and
securities of other regulated investment companies, more than 25%) of the value
of its total assets in the obligations of any single issuer. To the extent the
Trust invests a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Trust may be more susceptible than a more widely
diversified investment company to any single economic, political or regulatory
occurrence.
RECENT DEVELOPMENTS
As a result of the terrorist attacks on the World Trade Center and the
Pentagon on September 11, 2001, some of the U.S. securities markets were closed
for a four-day period. These terrorist attacks and related events have led to
increased short-term market volatility and may have long-term effects on U.S.
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
21
"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 acts as the Trust's investment advisor. BlackRock
Financial Management acts as the Trust's sub-advisor. BlackRock Advisors,
located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and BlackRock
Financial Management, located at 40 East 52nd Street, New York, New York 10022,
are wholly owned subsidiaries of BlackRock, Inc., which is one of the largest
publicly traded investment management firms in the United States with
approximately $250 billion of assets under management as of June 30, 2002.
BlackRock manages assets on behalf of institutional and individual investors
worldwide through a variety of equity, fixed income, liquidity and alternative
investment products, including the BLACKROCK FUNDS and BLACKROCK PROVIDENT
INSTITUTIONAL FUNDS. In addition, BlackRock provides risk management and
investment system services to institutional investors under the BLACKROCK
SOLUTIONS name.
The BlackRock organization has over 13 years of experience managing
closed-end products and currently advises a closed-end family of 40 funds with
approximately $9.9 billion in assets. BlackRock has 31 leveraged municipal
closed-end funds and six open-end municipal funds under management. As of June
30, 2002, BlackRock had approximately $17.5 billion in municipal assets
firm-wide. Clients are served from the company's headquarters in New York City,
as well as offices in Wilmington, San Francisco, Boston, Edinburgh, Tokyo and
Hong Kong. BlackRock 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.
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 and New York
State and New York City personal income taxes. 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 in 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 three portfolio managers with an
average experience of 20 years and five credit research analysts with an average
experience of 13 years. Kevin M. Klingert, senior portfolio manager and head of
municipal bonds at BlackRock, leads the team, a position he has held since
joining BlackRock in 1991. A Managing Director since 1996, Mr. Klingert was a
Vice President from 1991 through 1993 and a Director in 1994 and 1995.
Mr. Klingert has over 18 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 James McGinley and F. Howard Downs.
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
22
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.
As of June 30, 2002, BlackRock's municipal bond portfolio managers were
responsible for over 85 municipal bond portfolios, valued at approximately $12.7
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 managed 12 municipal liquidity
accounts valued at approximately $4.8 billion. The team currently manages 31
closed-end municipal funds with over $7 billion in assets under management.
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
approximately $12.7 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.
23
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 and was nominated for the
same award in several subsequent years.
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 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 0.55% of the average weekly value of the Trust's
Managed Assets (the "Management Fee"). BlackRock has voluntarily agreed to waive
receipt of a portion of its Management Fee in the amount of 0.15% of the average
weekly value of the Trust's Managed Assets for the first five years of the
Trust's operations (through July 31, 2007), and for a declining amount for an
additional five years (through July 31, 2012). The Trust will also reimburse
BlackRock Advisors for certain expenses BlackRock Advisors incurs in connection
with performing certain 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 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, leverage expenses,
rating agency fees, listing fees and expenses, expenses of independent auditors,
expenses of repurchasing shares, expenses of preparing, printing and
distributing shareholder reports, notices, proxy statements and reports to
governmental agencies, and taxes, if any.
24
For the first 10 years of the Trust's operation, BlackRock Advisors has
undertaken to waive its investment advisory fees and expenses payable by the
Trust in the amounts, and for the time periods, set forth below:
PERCENTAGE WAIVED
TWELVE MONTH (AS A PERCENTAGE OF
PERIOD ENDING AVERAGE WEEKLY
JULY 31 MANAGED ASSETS)*
------- -------------------
2003** 0.15%
2004 0.15%
2005 0.15%
2006 0.15%
2007 0.15%
2008 0.10%
2009 0.10%
2010 0.05%
2011 0.05%
2012 0.05%
-------------------
* Including net assets attributable to AMPS.
** From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the Trust's
fees and expenses beyond July 31, 2012 or after termination of the investment
management agreement.
DESCRIPTION OF AMPS
The following is a brief description of the terms of the AMPS. For the
complete terms of the AMPS, including the meanings of the defined terms used
herein but not otherwise defined, 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 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 1,786 AMPS, Series W7. 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 AMPS 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.
DIVIDENDS AND RATE PERIODS
The following is a general description of dividends and Rate Periods.
25
RATE PERIODS. The Initial Rate Period will be 14 days.
Any subsequent Rate Periods 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 Rate
Periods" below.
DIVIDEND PAYMENT DATES. Dividends on the 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, the Statement and
applicable law. The initial dividend payment date is October 3, 2002. Subsequent
dividends are scheduled to be paid on each Thursday.
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 AMPS by multiplying the applicable rate for shares of AMPS
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 Dividend Period consists of seven days, 360 for all
other Dividend Periods. In either case, this rate is then multiplied by $25,000
to arrive at dividends per share.
Dividends on 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 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. 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. The applicable percentage for 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
the Trust has provided 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
26
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 PAYMENT TABLE
APPLICABLE PERCENTAGE TABLE
CREDIT RATINGS ----------------------------------------------
------------------------------------------------------------------------ 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:
- AA Composite Commercial Paper Rate
- 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.
MINIMUM RATE PERIOD SPECIAL RATE PERIOD AA COMPOSITE 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.
27
"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 AMPS is not held when scheduled for any reason, other than
by reason of force majeure, 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. 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 provided advance notice (a "Taxable Allocation"), whether or not
such allocation is made retroactively as a result of the redemption of all or a
portion of the AMPS or a liquidation of the Trust, the Trust shall pay an
additional dividend. The additional dividend will be in an amount approximately
equal to the amount of taxes paid by a holder of AMPS on the Taxable Allocation
and the additional dividend, provided that the additional dividend will be
calculated:
- without consideration being given to the time value of money;
- assuming that no holder of AMPS is subject to the Federal alternative
minimum tax with respect to dividends received from the Trust; and
- assuming that each Taxable Allocation and such additional dividend
(except to the extent such additional dividend 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 combined regular Federal individual income, New York
State and New York City personal income tax rate applicable to ordinary
income or net capital gain, as applicable, or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income
or net capital gain, as applicable whichever is greater, in effect during
the fiscal year in question.
The Trust will not pay Additional Dividends with respect to 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.
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 "Tax Matters." 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 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 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
28
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:
- 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);
- full cumulative dividends on 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
- the Trust has redeemed the full number of AMPS required to be redeemed by
any provision for mandatory redemption contained in the Statement.
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 the
AMPS through its most recent dividend payment date. However, when the Trust has
not paid dividends in full upon the shares 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, in certain situations,
declare a special rate period on AMPS. Prior to declaring a special rate period,
the Trust will give notice to the auction agent and to each Broker-Dealer. The
notice will request that the next succeeding rate period for the 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 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 such AMPS were made in
the most recent auction. In addition, full cumulative dividends, any amounts due
with respect to mandatory redemptions and any additional dividends payable prior
to such date must be paid in full or deposited with the auction agent. The Trust
must also have received confirmation from Moody's and S&P or any substitute
rating agency that the proposed special rate period will not adversely affect
such rating agency's then-current rating on the AMPS, and the lead
Broker-Dealers designated by the Trust, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and UBS Warburg LLC must not have objected to declaration of a
special rate period.
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
29
the outstanding preferred shares 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
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 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 AMPS may be entitled to receive
additional dividends if the redemption causes the Trust to make a Taxable
Allocation without having given advance notice to the auction agent. 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 AMPS for any reason.
LIQUIDATION
If the Trust is liquidated, the holders of any outstanding AMPS will receive
the liquidation preference on such AMPS, 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 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:
- the sale of all or substantially all the property or business of the
Trust;
- the merger or consolidation of the Trust into or with any other business
trust or corporation; or
- 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
30
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 Company 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
September 10, 2002, 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 $546,139, would have
been computed as follows:
Value of Trust assets less
liabilities
not constituting senior
securities 116,210,373
= = 260%
------------------------------ ----------
Senior securities representing 44,650,000
indebtedness
plus
liquidation value of 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 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.
31
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 stock ranking prior to or on a parity with the AMPS
with respect to payment of dividends or the distribution of assets on
liquidation, authorize, create or issue additional shares of or increase the
authorized amount of the AMPS or any other preferred shares, unless, in the case
of shares of preferred stock 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;
(b) amend, alter or repeal the provisions of the Agreement and Declaration
of Trust 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 or the
Statement, 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
32
(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 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. However, to the extent permitted by the
Agreement and Declaration of Trust 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 charter.
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 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 to hold or offer to sell or, based on dividend rates bid by them,
offer to purchase or sell 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, Deutsche Bank Trust Company
Americas) which provides, among other things, that the auction agent will follow
the auction procedures to determine the applicable rate for AMPS, so long as the
applicable rate for such 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 dividend
33
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 dividend 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
agreements.
AUCTION PROCEDURES
Prior to the submission deadline on each auction date for 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 AMPS may
submit the following types of orders with respect to such AMPS to that
Broker-Dealer.
1. Hold order--indicating its desire to hold such AMPS without regard to the
applicable rate for the next dividend period.
2. Bid--indicating its desire to sell such AMPS at $25,000 per share if the
applicable rate for such AMPS for the next dividend period is less than the rate
or spread specified in the bid.
3. Sell order--indicating its desire to such AMPS at $25,000 per share
without regard to the applicable rate for such AMPS for the next dividend
period.
A beneficial owner may submit different types of orders to its Broker-Dealer
with respect to AMPS then held by the beneficial owner. A beneficial owner for
such AMPS that submits its bid with respect to such AMPS to its Broker-Dealer
having a rate higher than the maximum applicable rate for such AMPS on the
auction date will be treated as having submitted a sell order to its
Broker-Dealer. A beneficial owner of such AMPS 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 AMPS to its Broker-Dealer. However,
if a beneficial owner of such AMPS fails to submit an order with respect to such
AMPS 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.
A potential holder is either a customer of a Broker-Dealer that is not a
beneficial owner of AMPS but that wishes to purchase AMPS or that is a
beneficial owner of AMPS that wishes to purchase additional AMPS. A potential
holder may submit bids to its Broker-Dealer in which it offers to purchase such
AMPS at $25,000 per share if the applicable rate for such AMPS for the next
dividend period is not less than the specified rate in such bid. A bid placed by
a potential holder of such AMPS specifying a rate higher than the maximum
applicable rate for such AMPS 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
34
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 AMPS in an auction if the number of
AMPS 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 AMPS is at least equal to or exceeds
the sum of the number of such AMPS subject to sell orders and the number of such
AMPS subject to bids specifying rates or spreads higher than the maximum
applicable rate for such AMPS submitted or deemed submitted to the auction agent
by Broker-Dealers for existing holders of such AMPS. If there are sufficient
clearing bids for AMPS, the applicable rate for such AMPS 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 such AMPS available for
purchase in the auction.
If there are not sufficient clearing bids for such AMPS, the applicable rate
for the next dividend period will be the maximum applicable rate for such AMPS
on the auction date. If this happens, beneficial owners of such AMPS that have
submitted or are deemed to have submitted sell orders may not be able to sell in
the auction all such AMPS subject to such sell orders. If all of the outstanding
such AMPS are the subject of submitted hold orders, the applicable rate for the
next dividend period will then be:
- (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
- 1 minus the maximum marginal combined regular Federal individual income
tax rate and New York State and New York City personal income tax rates
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 the 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.
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, if the length of the Rate Period
exceeds the remaining maturity of any recently auctioned Treasury Bill, the
weighted average rate of the most recently auctioned Treasury Bill and Treasury
Note with maturities closest to the length of the Rate Period; or (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
35
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 , 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 by the auction agent.
If all the AMPS are subject to hold orders and the Trust has notified the
auction agent of its intent to allocate to the AMPS any net capital gains or
other income taxable for Federal income tax purposes ("Taxable Income"), the
applicable rate for such AMPS for the applicable rate period will be (i) if the
Taxable Yield Rate is greater than the Benchmark 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 amount determined pursuant to the two
bullet points above, and (y) the product of the maximum marginal combined
regular individual Federal income tax rate and New York State and New York City
personal income tax rates 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 of the AMPS 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 AMPS that is different than the
number of such AMPS 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 AMPS Series W7 will normally be held every Wednesday, and
each subsequent dividend period will normally begin on the following Thursday.
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 Applicable Rate for the next Dividend Period will be the
Applicable Rate determined on the previous Auction Date.
36
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:
- 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;
- the affected Dividend Period will end on the day it otherwise would have
ended; and
- 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. Investors
who purchase shares in an auction for a special rate period in which the Bid
Requirements, if any, do not require a bid to specify a spread, should note that
because the dividend rate on such shares will be fixed for the length of such
rate period, the value of the shares may fluctuate in response to changes in
interest rates and may be more or less than their original cost if sold on the
open market in advance of the next auction. Investors who purchase shares in an
auction for a special rate period in which the Bid Requirements require a bid to
specify a spread should be aware that the value of their shares may also
fluctuate and may be more or less than their original cost if sold in the open
market in advance of the next auction, particularly if market spreads narrow or
widen in a manner unfavorable to such purchaser's position.
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 auction procedures;
- to a Broker-Dealer; or
- to such other persons as may be permitted by the Trust; provided,
however, that
- 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 if such Broker-Dealer remains the existing holder of the
shares; and
37
- 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 dated as of
June 21, 2002, 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 by reducing the number of
common shares owned by each respective common shareholder. So long as any AMPS
are outstanding, the holders of common shares will not be entitled to receive
any distributions from the Trust unless all accrued dividends on AMPS have been
paid, unless asset coverage (as defined in the Investment Company Act) with
respect to AMPS would be at least 200% after giving effect to the distributions
and unless certain other requirements imposed by any rating agencies rating the
AMPS 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 American Stock Exchange under
the symbol "BFY".
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST
The Agreement and Declaration of Trust includes provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the 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 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:
- the merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder;
38
- the issuance of any securities of the Trust to any Principal Shareholder
for cash, except pursuant to any automatic dividend reinvestment plan;
- 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
- 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 investment company, the Trust's
Agreement and Declaration of Trust 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 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
investment company be approved by the shareholders. If approved in the foregoing
manner, conversion of the Trust to an open-end investment company could not
occur until 90 days after the shareholders' meeting at which such conversion was
approved and would also require at least 30 days' prior notice to all
shareholders. Conversion of the Trust to an open-end investment company would
require the redemption of any outstanding 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 American Stock Exchange or other national
securities exchanges or market systems. Shareholders of an open-end investment
company may require the company to redeem their shares at any time, except in
certain circumstances as authorized by or under the 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 reserves the right to pay redemption requests in a
combination of cash or securities. If such partial payment in securities were
made, investors may incur brokerage costs in converting such securities to cash.
If the Trust were converted to an open-end fund, it is likely that new shares
would be sold at new 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 objective 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, the Trust's Agreement and Declaration of Trust
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 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 the purposes of calculating "a majority of the outstanding voting
securities" under the Trust's Agreement and Declaration of Trust, 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 with respect to any class or series of shares. If a separate class vote
is required,
39
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 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 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 U.S. federal income tax
consequences to a investor 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 U.S. 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 own 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 Internal Revenue Code of
1986, as amended (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 U.S. federal income tax. The Trust expects that
substantially all of the dividends it distributes to its common shareholders and
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 U.S. federal income tax. Some or all of an exempt-interest
dividend, however, may be subject to U.S. federal alternative minimum tax
imposed on the shareholder. Different U.S. 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, among the common shares and 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 AMPS of the Trust will normally
result in capital gain or loss to shareholders. Both long-term and short-term
capital gains
40
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 38.6%, 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).*
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. 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 substantially identical
shares within a period of 61 days beginning 30 days before and ending 30 days
after the date 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.
NEW YORK TAX MATTERS
The discussion under this heading applies only to shareholders of the Trust
that are residents of New York for New York tax purposes. Individual
shareholders will not be subject to New York State or New York City personal
income tax on distributions attributable to interest on New York municipal
bonds. Individual shareholders will generally be subject to New York State or
New York City personal income tax on distributions attributable to other income
of the Trust (including net capital gain), and gain on the sale of shares of the
Trust. Corporations should note that all or a part of any distribution from the
Trust, and gain on the sale of shares of the Trust, may be subject to the New
York State corporate franchise tax and the New York City general corporation
tax.
Under currently applicable New York State law, the highest marginal New York
State income tax rate imposed on individuals is 6.85%. The highest marginal New
York City income tax rate currently imposed on individuals is 3.648%. In
addition, individual taxpayers with New York adjusted gross income in excess of
$100,000 must pay a supplemental tax to recognize the benefit of graduated tax
rates. Shareholders subject to taxation in a state other than New York will
realize a lower after-tax rate of return if distributions from the Trust are not
exempt from taxation in such other state.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code, Treasury Regulations and New York State and New York
City tax laws presently in effect. For the complete provisions, reference should
be made to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and the Treasury Regulations, as well as the New York State
and New York City tax laws, are subject to change by legislative, judicial or
administrative action either prospectively or retroactively.
-------------------
* 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. 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.
41
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local tax consequences of an
investment in the Trust.
Please refer to the Statement of Additional Information for more detailed
information. You are urged to consult your tax advisor.
42
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.
UNDERWRITER NUMBER OF SHARES
----------- ----------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................... 696
UBS Warburg LLC...................................................... 679
Prudential Securities Incorporated................................... 232
Salomon Smith Barney Inc............................................. 179
-----
Total..................................................... 1,786
=====
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, including,
without limitation, the receipt by the Underwriters of customary closing
certificates, opinions and other documents and the receipt by the Trust of Aaa
and AAA ratings on the AMPS by Moody's and S&P, respectively, as of the time of
the offering. The Underwriters are obligated to purchase all the AMPS if they
purchase any shares. In the purchase agreement, the Trust, BlackRock Advisors
and BlackRock Financial Management 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 $137.50 per share. The sales load the Trust
will pay of $250 per share is equal to 1% of the initial offering price of the
AMPS. After the initial public offering, the Underwriters may change the public
offering price and the concession. Investors must pay for any AMPS purchased in
the initial public offering on or before September 19, 2002.
The Trust anticipates that the Underwriters may from time to time act as
brokers or dealers in connection with the execution of the Trust's portfolio
transactions and that the Underwriters, or their affiliates, may act as a
counterparty with the interest rate transactions described above 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, and
perform services for, the Trust.
The Trust anticipates that the Underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers and receive
fees as set forth under "The Auction."
The principal business address of Merrill Lynch, Pierce, Fenner & Smith
Incorporated is 4 World Financial Center, New York, New York, 10080. The
principal business address of UBS Warburg LLC is 299 Park Avenue, New York,
New York 10080.
The settlement date for the purchase of the AMPS will be September 19, 2002,
as agreed upon by the Underwriters, the Trust and BlackRock Advisors pursuant to
Rule 15c6-1 under the Securities Exchange Act of 1934.
43
CUSTODIAN, TRANSFER AGENT AND 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 services. EquiServe
Trust Company, N.A., 150 Royall Street, Canton, Massachusetts 02021, acts as the
Trust's Transfer Agent with respect to the common shares.
Deutsche Bank Trust Company Americas, 100 Plaza One, Jersey City,
New Jersey 07311. 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 AMPS offered hereby 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 US LLP. Clifford Chance US
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 SEC. 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
SEC, including proxy statements and reports filed under the Securities Exchange
Act of 1934.
44
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE
----
Use of Proceeds................................... B-2
Investment Objective and Policies................. B-2
Investment Policies and Techniques................ B-4
Other Investment Policies and Techniques.......... B-17
Management of the Trust........................... B-21
Portfolio Transactions and Brokerage.............. B-28
Additional Information Concerning the Auctions for
AMPS............................................ B-29
Description of Common Shares...................... B-31
Other Shares...................................... B-31
Repurchase of Common Shares....................... B-31
Tax Matters....................................... B-32
Experts........................................... B-37
Additional Information............................ B-37
Independent Auditors' Report...................... F-1
Financial Statements.............................. F-2
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 Transactions............................ C-1
45
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 2002 listed below:
2002-2003 FEDERAL TAXABLE VS. TAX-FREE YIELDS
FEDERAL
JOINT RETURN TAX
SINGLE RETURN BRACKET RATE
------------- ------------------ -------
$0 - 6,000 $0 - 12,000 10.00%
$6,001 - 27,950 $12,001 - 46,700 15.00%
$27,951 - 67,700 $46,701 - 112,850 27.00%
$67,701 - 141,250 $112,851 - 171,950 30.00%
$141,251 - 307,050 $171,951 - 307,050 35.00%
Over $307,050 Over $307,050 38.60%
TAXABLE EQUIVALENT ESTIMATE CURRENT RETURN
JOINT RETURN -------------------------------------------------
SINGLE RETURN BRACKET 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
------------- ------------------ ----- ----- ----- ----- ----- ------ ------
$0 - 6,000 $0 - 12,000 4.44% 5.00% 5.56% 6.11% 6.67% 7.22% 7.78%
$6,001 - 27,950 $12,001 - 46,700 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
$27,951 - 67,700 $46,701 - 112,850 5.48% 6.16% 6.85% 7.53% 8.22% 8.90% 9.59%
$67,701 - 141,250 $112,851 - 171,950 5.71% 6.43% 7.14% 7.86% 8.57% 9.29% 10.00%
$141,251 - 307,050 $171,951 - 307,050 6.15% 6.92% 7.69% 8.46% 9.23% 10.00% 10.77%
Over $307,050 Over $307,050 6.51% 7.33% 8.14% 8.96% 9.77% 10.59% 11.40%
The following tables show the approximate taxable yields for individuals
that are equivalent to tax-free yields under combined Federal and New York State
and New York City taxes, using published 2002 marginal Federal tax rates and
marginal New York State and New York City tax rates currently available and
scheduled to be in effect.
A-1
2002-2003 TAX YIELD
NEW YORK
FEDERAL STATE COMBINED
TAX TAX TAX
SINGLE RETURN JOINT RETURN BRACKET BRACKET BRACKET*
------------- ------------------ ------- ------- --------
$0 - 6,000 $0 - 12,000 10.00% 6.550% 15.90%
$6,001 - 8,000 $12,001 - 16,000 15.00% 6.550% 20.57%
$8,001 - 11,000 $16,001 - 21,600 15.00% 7.050% 20.99%
$21,601 - 22,000 15.00% 7.600% 21.46%
$11,001 - 12,000 15.00% 7.800% 21.63%
$12,001 - 13,000 $22,001 - 26,000 15.00% 8.350% 22.10%
$13,001 - 20,000 $26,001 - 40,000 15.00% 9.000% 22.65%
$20,001 - 25,000 $10,001 - 45,000 15.00% 9.950% 23.46%
$25,001 - 27,950 $45,001 - 46,700 15.00% 10.000% 23.50%
$27,951 - 50,000 $46,701 - 90,000 27.00% 10.000% 34.30%
$50,001 - 67,700 $90,000 - 112,850 27.00% 10.050% 34.34%
$67,701 - 141,250 $112,851 - 171,950 30.00% 10.050% 37.04%
$141,251 - 307,050 $171,951 - 307,050 35.00% 10.050% 41.53%
Over $307,050 Over $307,050 38.60% 10.050% 44.77%
SINGLE RETURN JOINT RETURN 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%
------------- ------------------ ------ ----- ----- ----- ----- ------ ------ ------
$0 - 6,000 $0 - 12,000 4.16% 4.76% 5.35% 5.94% 6.54% 7.13% 7.73% 8.32%
$6,001 - 8,000 $12,001 - 16,000 4.41% 5.04% 5.67% 6.29% 6.92% 7.55% 8.18% 8.81%
$8,001 - 11,000 $16,001 - 21,600 4.43% 5.06% 5.70% 6.33% 6.96% 7.59% 8.23% 8.86%
$21,601 - 22,000 4.46% 5.09% 5.73% 6.37% 7.00% 7.64% 8.28% 8.91%
$11,001 - 12,000 4.47% 5.10% 5.74% 6.38% 7.02% 7.66% 8.29% 8.93%
$12,001 - 13,000 $22,001 - 26,000 4.49% 5.13% 5.78% 6.42% 7.06% 7.70% 8.34% 8.99%
$13,001 - 20,000 $26,001 - 40,000 4.52% 5.17% 5.82% 6.46% 7.11% 7.76% 8.40% 9.05%
$20,001 - 25,000 $40,001 - 45,000 4.57% 5.23% 5.88% 6.53% 7.19% 7.84% 8.49% 9.15%
$25,001 - 27,950 $45,001 - 46,700 4.58% 5.23% 5.88% 6.54% 7.19% 7.84% 8.50% 9.15%
$27,951 - 50,000 $46,701 - 90,000 5.33% 6.09% 6.85% 7.61% 8.37% 9.13% 9.89% 10.65%
$50,001 - 67,700 $90,000 - 112,850 5.33% 6.09% 6.85% 7.61% 8.38% 9.14% 9.90% 10.66%
$67,701 - 141,250 $112,851 - 171,950 5.56% 6.35% 7.15% 7.94% 8.74% 9.53% 10.32% 11.12%
$141,251 - 307,050 $171,951 - 307,050 5.99% 6.84% 7.70% 8.55% 9.41% 10.26% 11.12% 11.97%
Over $307,050 Over $307,050 6.34% 7.24% 8.15% 9.05% 9.96% 10.86% 11.77% 12.67%
-------------------
* Combined Tax Bracket includes Federal, State and New York City income
taxes. Please note that the table does not reflect (i) any Federal or state
limitations on the amounts of allowable itemized deductions, phase-outs of
personal or dependent exemption credits or other allowable credits,
(ii) any local taxes imposed (other than New York City), or (iii) any taxes
other than personal income taxes. The table assumes that Federal taxable
income is equal to state income subject to tax. Further, the table does not
reflect the New York State supplemental income tax based upon a taxpayer's
New York State taxable income and New York State adjusted gross income.
This supplemental tax results in an increased marginal State income tax
rate to the extent a taxpayer's New York State adjusted gross income ranges
between $100,000 and $150,000.
A-2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$44,650,000
BLACKROCK
NEW YORK MUNICIPAL INCOME TRUST II
AUCTION MARKET PREFERRED SHARES ("AMPS"-REGISTERED TRADEMARK-)
1,786 SHARES, SERIES W7
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------
PROSPECTUS
------------------
MERRILL LYNCH & CO.
UBS WARBURG
PRUDENTIAL SECURITIES
SALOMON SMITH BARNEY
SEPTEMBER 17, 2002
"AMPS" IS A REGISTERED SERVICE MARK OF MERRILL LYNCH & CO., INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
BLACKROCK NEW YORK MUNICIPAL INCOMETRUST II
STATEMENT OF ADDITIONAL INFORMATION
BlackRock New York Municipal Income Trust II (the "Trust") is a recently
organized, non-diversified, closed-end, management investment company. This
Statement of Additional Information relating to AMPS does not constitute a
prospectus, but should be read in conjunction with the prospectus relating
hereto dated September 17, 2002. This Statement of Additional Information, which
is not a prospectus, does not include all information that a prospective
investor should consider before purchasing AMPS, 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 Objective and Policies................. B-2
Investment Policies and Techniques................ B-4
Other Investment Policies and Techniques.......... B-17
Management of the Trust........................... B-21
Portfolio Transactions and Brokerage.............. B-28
Additional Information Concerning the Auctions for
AMPS............................................ B-29
Description of Common Shares...................... B-31
Other Shares...................................... B-31
Repurchase of Common Shares....................... B-31
Tax Matters....................................... B-32
Experts........................................... B-37
Additional Information............................ B-37
Independent Auditors' Report...................... F-1
Financial Statements.............................. F-2
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 Transactions............................ C-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED SEPTEMBER 17, 2002.
B-1
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objective and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
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 New York State and New York City
personal income taxes and securities of other open- or closed-end investment
companies that invest primarily in municipal bonds of the type in which the
Trust may invest directly.
INVESTMENT OBJECTIVE 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
income it produces will be includable in alternative minimum taxable income.
AMPS 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 AMPS. The suitability of an investment in AMPS 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 Managed 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 issuers;
(2) 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;
(3) 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 objective and policies or the entry into
repurchase agreements;
(4) 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;
(5) 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
(6) 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 Managed 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 Managed Assets in
industrial development bonds and private activity securities.
For the purpose of applying the limitation set forth in subparagraph
(1) 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.
As a fundamental policy, under normal market conditions, the Trust will
invest at least 80% of its Managed Assets in municipal bonds, the interest of
which is exempt from regular Federal income tax and New York State and New York
City personal income taxes.
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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 Managed 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 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 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 taxable 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 objective. The Trust
presently anticipates that any AMPS that it intends to issue would be initially
given the highest ratings by Moody's (Aaa) and/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 and New York State and New
York City personal income taxes.
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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 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 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 B hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Trust will primarily invest in municipal bonds with long-term maturities
in order to maintain a weighted average maturity of 15 or more years, but the
average weighted maturity may be shortened from time to time depending on market
conditions. As a result, the Trust's portfolio at any given time may include
both long-term and intermediate-term municipal bonds. 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
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.
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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
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
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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
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
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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. 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 objective, policies and limitations. Such
notes may be issued for different purposes and may be secured differently from
those mentioned above.
FACTORS PERTAINING TO NEW YORK
GENERAL. As described in the Prospectus, except during temporary periods,
the Trust will invest primarily in New York municipal securities. In addition,
the specific New York municipal securities in which the Trust will invest will
change from time to time. The Trust is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may impact issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York
B-8
municipal securities, as well as from other publicly available documents. Such
information has not been independently veri.ed by the Trust, and the Trust
assumes no responsibility for the completeness or accuracy of such information.
The summary below does not include all of the information pertaining to the
budget, receipts and disbursements of the State of New York that would
ordinarily be included in various public documents issued thereby, such as an
Official Statement prepared in connection with the issuance of general
obligation bonds of the State of New York. Such an Official Statement, together
with any updates or supplements thereto, may generally be obtained upon request
to the Budget Office of the State of New York.
THE NEW YORK STATE ECONOMY. New York is the third most populous state in the
nation and has a relatively high level of personal wealth. The state's economy
is diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. Travel and tourism constitute an
important part of the state's economy. Like the rest of the nation, New York has
a declining proportion of its workforce engaged in manufacturing, and an
increasing proportion engaged in service industries. To the extent that a
particular industry sector represents a larger portion of the state's total
economy, the greater impact that a downturn in such sector is likely to have on
the state's economy.
The service sector, which includes entertainment, personal services, such as
health care and auto repairs, and business-related services, such as information
processing, law and accounting, is the state's leading economic sector. The
services sector accounts for more than three of every ten nonagricultural jobs
in New York and has a noticeably higher proportion of total jobs than does the
rest of the nation.
Manufacturing employment continues to decline in importance in New York, as
in most other states, and New York's economy is less reliant on this sector than
in the past. However, it remains an important sector of the state economy,
particularly for the upstate economy, as high concentrations of manufacturing
industries for transportation equipment, optics and imaging, materials
processing, and refrigeration, heating and electrical equipment products are
located in the upstate region. Wholesale and retail trade is the second largest
sector in terms of nonagricultural jobs in New York but is considerably smaller
when measured by income share. Trade consists of wholesale business and retail
businesses, such as department stores and eating and drinking establishments.
New York City is the nation's leading center of banking and finance and, as
a result, this is a far more important sector in the state than in the nation as
a whole. Although the sector accounts for under one-tenth of all nonagricultural
jobs in the state, it contributes about one-fifth of total wages.
Farming is an important part of the economy in rural areas, although it
constitutes a very minor part of total state output. Principal agricultural
products of the state include milk and diary products, greenhouse and nursery
products, apples and other fruits, and fresh vegetables. New York ranks among
the nation's leaders in the production of these commodities.
Federal, state and local government together are the third largest sector in
terms of nonagricultural jobs, with the bulk of the employment accounted for by
local governments. Public education is the source of nearly one-half of total
state and local government employment.
RECENT EVENTS. The ramifications of the terrorist attack in New York raise
many complex issues related to state finances. The State of New York expects
substantial federal aid to be available to pay for most of the costs for
disaster assistance and reconstruction. On September 15, 2001, the United States
Congress enacted an emergency supplemental appropriation of $40 billion for
disaster assistance and counter-terrorism measures, with not less than $20
billion allocated to disaster relief and recovery initiatives in New York,
Virginia, and Pennsylvania. To expedite the flow of Federal aid and other
assistance, the New York State Legislature enacted $5.5 billion in
appropriations on September 13,
B-9
2001. It also authorized $2.5 billion in additional bonding authority to fund
New York City costs related to or arising from the terrorist attack.
Federal funding for disaster assistance is available in several forms. Under
current law, the Federal government pays 75 percent or more of the costs for
emergency response activities and the repair of public buildings. On
September 21, 2001, the President waived any matching requirement for New York
State and New York City, clearing the way for 100 percent reimbursement for all
eligible disaster-related costs. On March 9, 2002 the President signed
nation-wide economic stimulus legislation, which includes $5 billion toward the
$20 billion commitment in the form of temporary tax provisions aimed at
redevelopment incentives for businesses located in the Liberty Zone, the areas
surrounding the World Trade Center site. The Liberty Zone provisions expand the
work opportunity tax credit, authorize the issuance of $8 billion in tax-exempt
private activity bonds, allow for advance refunding of certain bonds for
facilities in New York City and increase the small business expensing limit.
Other significant assistance is available through the Small Business
Administration for property losses, cashflow needs, and hazard mitigation.
As expected, the World Trade Center terrorist attacks had an even more
devastating impact on the State economy than on the national economy as a whole.
The Division of the Budget is now estimating State employment to have declined
0.5 percent in 2001 to be followed by an estimated decline of 0.8 percent for
2002. Wages and salaries are expected to show an increase of 2.4 percent for
2001, and a projected decline of 1.5 percent for 2002. Total State personal
income, of which wages and salaries are the largest component, is projected to
grow 0.5 percent in 2002, following growth of 2.9 percent for 2001.
2000-2001 FISCAL YEAR. The State finished its 2000-2001 fiscal year with a
General Fund operating surplus of $24.5 million.
2001-2002 FISCAL YEAR. The Division of the Budget at the State ended its
2001-2002 fiscal year with a General Fund operating deficit of $3.42 billion.
This operating deficit was financed by reducing the State's accumulated General
Fund surplus from $3.91 billion to .49 billion.
2002-2003 FISCAL YEAR. The Governor released his 2002-2003 Executive Budget
(the "Executive Budget") on January 22, 2002. The Executive Budget contains
financial projections for the State's 2001-2002 through 2004-2005 fiscal years,
and a proposed Capital Program and Financing Plan for the 2002-2003 through
2006-2007 fiscal years. The State Executive Budget projected a total budget gap
of $6.8 billion in the 2001-2002 and 2002-2003 fiscal years.
On May 15, 2002, the Governor and legislative leaders announced that they
had come to an agreement on a final balanced 2002-2003 State Budget (the "State
Budget"). The agreement includes actions to close the budget gap previously
identified in the State Executive Budget plus an additional $1.4 billion gap
identified in March and April 2002. Under the State Budget, taxpayer-supported
General Fund spending falls by nearly $1.0 billion, or 2.6 percent. General Fund
spending will total $40.2 billion. All Funds spending will increase by less than
1 percent (0.8%) from that proposed in the State Executive Budget and will total
$89.6 billion. This represents a 6 percent annual increase reflecting $2.5
billion in increased Federal aid. State Funds will total $59.5 billion, a 4.4
percent annual increase.
The State Budget includes a series of one-time actions to close this budget
gap. These actions included using $1.2 billion of available cash reserves and
other fund balances; implementing a tax amnesty program; offering early
retirement to state workers; and converting hard dollar capital financing to
bonding while reducing overall capital authorizations. The State's Tax
Stabilization Reserve Fund, a fund to address unforeseen budget needs, will be
maintained at $710 million. A 1.0 billion tax cut is included in the State
Budget targeted to job creation, victims of September 11, economic incentives to
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lower Manhattan and senior citizens. The State proposes to eliminate 5,000
positions through the early retirement initiative.
The State Executive Budget, however, projected potential budget gaps of
$2.8 billion and $3.3 billion, in fiscal years 2004 and 2005, respectively.
The most significant risks to the State's financial plan set forth in the
Executive Budget are the rate of layoffs related to September 11, and the impact
of the event upon the City and the personal income statewide. In addition, the
occurrence of other terrorist attacks whether within or outside of New York
could have a significant adverse effect on the State's economy. The volatility
of the financial markets even before September 11 and its impact upon financial
sector compensation and capital gains recognition by investors also represent a
significant risk to the State's financial plan, as set forth in the Executive
Budget.
Owing to these and other factors, the State may face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues from lower receipts and the spending required to maintain State
programs at mandated levels. Any such recurring imbalance would be exacerbated
by the use by the State of nonrecurring resources to achieve budgetary balance
in a particular fiscal year. To correct any recurring budgetary imbalance, the
State would need to take significant actions to align recurring receipts and
disbursements in future fiscal years.
NEW YORK CITY. New York City, with a population of approximately 8 million,
is an international center of business and culture. Its non-manufacturing
economy is broadly based, with the banking and securities, life insurance,
communications, publishing, fashion design, retailing and construction
industries accounting for a significant portion of the city's total employment
earnings. Additionally, the city is the nation's leading tourist destination.
Manufacturing activity in the city is conducted primarily in apparel and
printing.
The fiscal health of the state may also be affected by the fiscal health of
New York City, which continues to receive significant financial assistance from
the state. State aid contributes to the city's ability to balance its budget and
meet its cash requirements. The state may also be affected by the ability of the
city and certain entities issuing debt for the benefit of the city to market
their securities successfully in the public credit markets. The city has
achieved balance operating results for each of its fiscal years since 1981 as
measured by the GAAP standards in force at that time. The city prepares a
four-year financial plan annually and updates it periodically, and prepares a
comprehensive annual financial report each October describing its most recent
fiscal year.
In recent years, the state Constitutional debt limit would have prevented
New York City from entering into new capital contracts without the creation of
the New York City Transitional Finance Authority in 1997 and TSASC, Inc. in 1999
(a local development corporation empowered to issue tax-exempt debt backed by
tobacco settlement revenues).
For fiscal year 2001 the City had an operating surplus of $2.9 billion.
Preliminary estimates indicate that the State ended 2001-02 with a $677 million
surplus. On April 17, 2002, the Mayor of the City released the Executive Budget
for fiscal year 2003 (July 1, 2002 to June 30, 2003), which includes a fianncial
plan for fiscal years 2003 through 2006. The Executive Budget incorporates a
number of steps to close a projected $5.0 billion budget gap, including city
agency cuts ranging up to 36%, staffing changes requiring union consent,
stretching out some elements of the City's four year construction plan to five
years, debt restructuring and asset sales and proposed State and federal
initiatives to generate up to $2.2 billion of gap closing actions in fiscal year
2003 and an aggregate of $5.5 billion in fiscal years 2004 through 2006. The
Mayor has also proposed that the City issue $1.5 billion of its general
obligation bonds in fiscal year 2003 to help close the budget gap. As a result
of extraordinary actions to
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address the impact of September 11, the Executive Budget projects a balanced
budget in the 2002-03 fiscal year and budget gaps of $5.2 billion, $5.6 billion
and $6.0 billion, respectively, for the 2004, 2005 and 2006 fiscal years prior
to any gap closing actions. Some of the gap closing measures proposed in the
Executive Budget for fiscal year 2003 have recurring effects and are projected
to reduce the fiscal year 2003-04, 2004-05 and 2005-06 budget gaps to $3.7
billion, $4.2 billion and $4.6 billion, respectively. The Mayor proposed to
close these outyear gaps through unspecified additional City agency cuts,
federal and State initiatives and other actions. Mayor and the City Council
announced a budget agreement which, while it restored some of the funds cut in
the City Executive Budget, adopted the City Executive Budget with no material
changes.
On July 18, 2002, the Mayor announced he was reserving 7.5 percent of City
funding and requiring agencies to implement programs to accommodate this
reduction on an annually recurring basis. The approximately $1 billion in
reduced City spending would provide an available reserve if required in 2002-03,
but is primarily intended as a first step toward addressing the substantial
projected gaps in 2003-04 and thereafter.
As of September 15, 2002, Moody's rated the City's outstanding general
obligation bonds A2, Standard and Poor's rated such bonds A and Fitch rated such
bonds A+. Such ratings reflect only the view of Moody's, Standard and Poor's and
Fitch, from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
period of time or that they will not be revised downward or withdrawn entirely.
Any such downward revision or withdrawal could have an adverse effect on the
market prices of City bonds and could increase the City's borrowing costs.
2001 FISCAL YEAR. For the 2001 fiscal year (July 1, 2000 - June 30, 2001)
the City had an operating surplus of $2.9 billion, before discretionary and
other transfers, and achieved balanced operating results, after discretionary
and other transfers, in accordance with GAAP. The 2001 fiscal year was the
twenty-first year that the City has achieved an operating surplus, before
discretionary and other transfers, and balanced operating results, after
discretionary and other transfers.
2002-2006 FINANCIAL PLAN. Pursuant to the laws of the State, the Mayor is
responsible for preparing the City's financial plan, including the City's
current financial plan for the 2002 through 2006 fiscal years, the City
Financial Plan released on February 13, 2002. The projections set forth in the
City Financial Plan are based on various assumptions and contingencies that are
uncertain and may not materialize. Changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet annual cash flow and financing requirements.
The City Financial Plan reflects certain extraordinary actions necessitated
by September 11 and projects balanced revenues and expenditures for the 2002
fiscal year. Prior to its gap closing program, the City projected a $4.8 billion
budget gap for fiscal year 2002-03, and even larger gaps for subsequent years.
Some of the gap closing measures proposed by the Mayor for fiscal year 2003 have
recurring effects and are projected to reduce the fiscal year 2004, 2005 and
2006 budget gaps to $3.7 billion, $4.2 billion and $4.6 billion, respectively.
The Mayor proposes to close these outyear gaps through unspecified additional
City agency cuts, federal and State initiatives and other actions. It should be
noted that the City Council must approve the 2003 City budget and that it may
not adopt certain of the Mayor's gap closing proposals. If any gap closing
measures are not replaced by equivalent alternatives, budget gaps for fiscal
year 2003 and thereafter will be increased.
The City Financial Plan includes a proposed discretionary transfer in the
2002 fiscal year of $260 million to pay debt service due in the fiscal year
2003. In addition, the City Financial Plan reflects a proposed cigarette tax
increase resulting in increased revenues totaling $249 million in fiscal year
2003 and declining yearly to a total increase of $241 million in fiscal year
2006 which is subject to State
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legislative approval. The Mayor has proposed restoring the City's stock transfer
tax, which in the past generated $114 million annually which also must be
approved by the State legislature.
ASSUMPTIONS. The City Financial Plan is based on numerous assumptions,
including the impact of September 11 on the City's economy, the general
condition of the City's and the region's economies and the receipt of
economically sensitive tax revenues in the amounts projected and reimbursement
by the federal government and State of expenditures necessitated by
September 11. The City Financial Plan is subject to various other uncertainties
and contingencies relating to, among other factors: (i) the extent, if any, to
which wage increases for City employees exceed the annual wage costs assumed for
the 2002 through 2006 fiscal years; (ii) interest earnings and wage projections
underlying projections of the City's required pension fund contributions;
(iii) the willingness and ability of the State and Federal governments to
provide the aid and enact the revenue enhancing or expenditure relief
initiatives contemplated by the City Financial Plan and to take various other
actions to assist the City in its gap closing actions; (iv) the ability of
Health and Hospitals Corporation, the Board of Education and other agencies to
maintain balanced budgets; (v) the impact on City revenues and expenditures of
Federal and State welfare reform and any future legislation affecting Medicare
or other entitlement programs; (vi) the ability of the City to control
expenditures and implement cost reduction and gap closing initiatives identified
in the City Financial Plan for the 2003 fiscal year and proposed but unspecified
for later years; (vii) the City's ability to market its securities successfully
in the public credit markets; (viii) the impact of conditions in the real estate
market on real estate tax revenues; (ix) the sale of OTB in fiscal year 2004,
which requires State legislative approval; and (x) unanticipated expenditures
that may be incurred as a result of the need to maintain the City's
infrastructure or future terrorist acts.
The City Financial Plan assumes a sudden economic downturn as the result of
September 11 in the last half of 2001 and job and income losses in the first
half of 2002 as the City economy shrinks by 4.6% for calendar year 2002. The
Plan forecasts a sluggish recovery thereafter. The City does not expect to
recover all of the jobs lost as a result of September 11 until fiscal year 2006.
Given the uncertain impact of September 11 on the city's economy, including the
loss of jobs and business, impact on tourism in the City and the slowdown in the
securities industry, there can be no assurance that the economic projections
included in the City Financial Plan are accurate or that the tax revenues
projected in the Financial Plan to be received will be received in the amounts
anticipated.
CITY'S FINANCING PROGRAM. Implementation of the City Financial Plan is in
part dependent upon the City's ability to market its securities successfully in
the public credit markets. The City's financing program for fiscal years 2002
through 2006 contemplates the issuance of $13.2 billion of general obligation
bonds, $4.0 billion of bonds to be issued by the New York City Transitional
Finance Authority (the "Transitional Finance Authority"), $1.8 billion of bonds
to be issued by TSASC, Inc., a not-for-profit corporation empowered to issue
tax-exempt debt backed by tobacco settlement revenues, and $9.3 billion of bonds
and notes to be issued by New York City Municipal Water Finance Authority (the
"Water Authority"). In 1997, the State created the Transitional Finance
Authority, to assist the City in keeping the City's indebtedness within the
forecast level of the constitutional restrictions on the amount of debt the City
is authorized to incur. The City had faced limitations on its borrowing capacity
after 1998 under the State's constitution that would have prevented it from
borrowing additional funds, as a result of the decrease in real estate values
within the City. The Transitional Finance Authority is authorized to issue up to
$11.5 billion of bonds. In addition, the City issues revenue notes and tax
anticipation notes to finance seasonal working capital requirements. The success
of projected public sales of these bonds and notes will be subject to prevailing
market conditions. The City's planned capital and operating expenditures are
dependent upon the sale of its general obligation bonds and notes, and the Water
Authority and Transitional Finance Authority bonds. In September 2001, the state
legislature granted the City an additional $2.5 billion in debt-incurring
capacity to pay costs related to September 11.
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RECENT FEDERAL STIMULUS LEGISLATION. On March 9, 2002 the President signed
nation-wide economic stimulus legislation, which includes $5 billion toward the
$20 billion commitment in the form of temporary tax provisions aimed at
redevelopment incentives for businesses located in the Liberty Zone, the areas
surrounding the World Trade Center site. The Liberty Zone provisions expand the
work opportunity tax credit, authorize the issuance of $8 billion in tax-exempt
private activity bonds, allow for advance refunding of certain bonds for
facilities in New York City and increase the small business expensing limit.
Certain components of this package have the potential to adversely affect
State tax revenues. The most significant impact concerns a provision that allows
expanded expensing of investment costs against federal taxable income. Since the
State uses federal taxable income as the starting point for calculating taxable
income, the provision will adversely impact State tax revenues unless the State
acts to restructure the basis for calculating the tax.
OTHER NEW YORK RISK FACTORS. When compared with the average ratings among
other states of full faith and credit state debt obligations, the credit risk
associated with obligations of the state of New York and its agencies and
authorities, including general obligation and revenue bonds, "moral obligation"
bonds, lease debt, appropriation debt and notes is somewhat higher than average.
Moreover, the credit quality of such obligations may be more volatile insofar as
the state's credit rating has historically been upgraded and downgraded much
more frequently than most other states.
The combined state and local taxes of residents of the state of New York,
and particularly of residents of New York City, are among the highest in the
country, which may limit the ability of the state and its localities to raise
additional revenue. In addition, combined state and local debt per capita in the
state is significantly above the national average and debt service expenditures
have represented an increasing claim on state and local budgets.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial conditions of such
issuers. The Trust cannot predict whether or to what extent such factors or
other factors may affect the issuers of New York municipal securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by the Trust to pay interest on
or principal of such securities. The creditworthiness of obligations issued by
local New York issuers may be unrelated to the creditworthiness of obligations
issued by the state of New York, and there is no responsibility of the part of
the state of New York to make payments on such local obligations. There may be
specific factors that are applicable in connection with investment in the
obligations of particular issuers located within New York, and it is possible
the Trust will invest in obligations of particular issuers as to which such
specific factors are applicable. However, the information set forth above is
intended only as a general summary and not a discussion of any specific factors
that may affect any particular issuer of New York municipal securities.
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
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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 designating liquid assets on the books and records of the Trust 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 with respect to
each interest rate swap on a daily basis and will designate on its books and
records 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.
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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 total 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 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 total assets would be required to cover its
potential obligations under its hedging and other investment transactions.
Appendix D 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
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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 liquid securities. The Trust will also be required to
earmark 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
Managed 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.
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.
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WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Trust may purchase Securities on a "when-issued" basis and may purchase
or sell Securities on a "forward commitment" basis in order to acquire the
security or to hedge against anticipated changes in interest rates and prices.
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 securities
and forward commitments may be sold prior to the settlement date, but the Trust
will enter into when-issued and forward commitments 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 might incur a gain or loss. At the time the Trust enters into a
transaction on a when-issued or forward commitment basis, it will designate on
its books and records cash or liquid debt securities equal to at least the value
of the when-issued or forward commitment securities. The value of these assets
will be monitored daily to ensure that their marked to market value will at all
times equal or exceed the corresponding obligations of the Trust. There is
always a risk that the securities may not be delivered and that the Trust may
incur a loss. Settlements in the ordinary course, which may take substantially
more than five business days, are not treated by the Trust as when-issued or
forward commitment transactions and accordingly are not subject to the foregoing
restrictions.
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 Objective 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 designate on its books and records 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
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bear the risk of loss to the 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 banks or dealers 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
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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 regulatory requirements, including the
rules of the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of five business days. 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 Managed Assets in securities rated
below investment grade such as those rated Ba or B by Moody's and BB or B 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 risk 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.
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
B-20
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. 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.
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. 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 and certain scheduled waivers of
investment advisory fees were approved by the Trust's board of trustees at an in
person meeting of the board of trustees held on July 12, 2002, 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
B-21
provides for the Trust to pay a management fee at an annual rate equal to 0.55%
of the average weekly value of the Trust's Managed Assets. A related waiver
letter from BlackRock Advisors provided for temporary fee waiver of 0.15% the
average weekly value of the Trust's Managed Assets in each of the first five
years of the Trust's operations (through July 31, 2007) and for a declining
amount for an additional five years (through July 31, 2012). In approving this
agreement the board of trustees considered, among other things, the nature and
quality of services to be provided by BlackRock Advisors, the profitability of
BlackRock Advisors of its relationship with the Trust, economies of scale and
comparative fees and expense ratios.
The investment management agreement and the waivers of management fees were
approved by the sole common shareholder of the Trust as of July 16, 2002. 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 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 July 31, 2003, 38% of the monthly management fees
received by BlackRock Advisors, (ii) from August 1, 2003 to July 31, 2004, 19%
of the monthly management fees received by BlackRock Advisors; and (iii) after
July 31, 2004, 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 held on July 12, 2002, including a majority of
the trustees who are not parties to the
B-22
agreement or interested persons of any such party (as such term is defined in
the Investment Company Act). In approving this agreement the board of trustees
considered, among other things, the nature and quality of services to be
provided by BlackRock Financial Management, the profitability to BlackRock
Financial Management of its relationship with the Trust, economies of scale and
comparative fees and expense ratios.
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 their present positions and principal occupations
during the past five years. Trustees who are interested persons of the Trust (as
defined in the Investment Company Act) are denoted by an asterisk (*). Trustees
who are independent trustees (as defined in the Investment Company Act) (the
"Independent Trustees") are denoted without 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 in which BlackRock Advisors acts as investment advisor.
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF OVERSEEN BY
NAME, ADDRESS, AGE OFFICE AND PRINCIPAL OCCUPATION DURING THE TRUSTEE OR
AND POSITION(S) LENGTH OF PAST FIVE YEARS AND OTHER NOMINEE FOR OTHER DIRECTORSHIPS
HELD WITH REGISTRANT TIME SERVED AFFILIATIONS TRUSTEE HELD BY TRUSTEE
-------------------- -------------------- ------------------------------- ------------- -----------------------------------
INDEPENDENT
TRUSTEES:
Andrew F. Brimmer 3 years(1)(2) President of Brimmer & 40 Director of CarrAmerica Realty
P.O. Box 4546 Company, Inc., a Washington, Corporation and Borg-Warner
New York, NY 10163 D.C.- based economic and Automotive. Formerly member of the
Age: 76 financial consulting firm. Lead Board of Governors of the Federal
Trustee Director and Chairman of the Reserve System. Formerly Director
Audit Committee of each of the of AirBorne Express, BankAmerica
closed-end Trusts in which Corporation (Bank of America), Bell
BlackRock Advisors Inc. acts as South Corporation, College
investment advisor. 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).
B-23
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF OVERSEEN BY
NAME, ADDRESS, AGE OFFICE AND PRINCIPAL OCCUPATION DURING THE TRUSTEE OR
AND POSITION(S) LENGTH OF PAST FIVE YEARS AND OTHER NOMINEE FOR OTHER DIRECTORSHIPS
HELD WITH REGISTRANT TIME SERVED AFFILIATIONS TRUSTEE HELD BY TRUSTEE
-------------------- -------------------- ------------------------------- ------------- -----------------------------------
Richard E. Cavanagh 3 years(1)(2) President and Chief Executive 40 Trustee Emeritus, Wesleyan
P.O. Box 4546 Officer of The Conference University, Trustee: Drucker
New York, NY 10163 Board, Inc., a leading global Foundation, Airplanes Group,
Age: 56 business membership Aircraft Finance Trust (AFT) and
Trustee organization, from Education Testing Service (ETS).
1995-present. Former Executive Director, Arch Chemicals, Fremont
Dean of the John F. Kennedy Group and The Guardian Life
School of Government at Harvard Insurance Company of America.
University from 1988-1995.
Acting 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).
Kent Dixon 3 years(1),(2) Consultant/Investor. Former 40 Former Director of ISFA (the owner
P.O. Box 4546 President and Chief Executive of INVEST, a national securities
New York, NY 10163 Officer of Empire Federal brokerage service designed for
Age: 65 Savings Bank of America and banks and thrift institutions).
Trustee Banc PLUS Savings Association,
former Chairman of the Board,
President and Chief Executive
Officer of Northeast Savings.
Frank J. Fabozzi 3 years(1)(2) Consultant. Editor of THE 40 Director, Guardian Mutual Funds
P.O. Box 4546 JOURNAL OF PORTFOLIO MANAGEMENT Group.
New York, NY 10163 and Adjunct Professor of
Age: 54 Finance at the School of
Trustee Management at Yale University.
Author and editor of several
books on fixed income portfolio
management. Visiting Professor
of Finance and Accounting at
the Sloan School of Management,
Massachusetts Institute of
Technology from 1986 to August
1992.
James Clayburn 3 years(1)(2) Dean Emeritus of The John E. 40 Director, Jacobs Engineering
LaForce, Jr. Anderson Graduate School of Group, Inc., Payden & Rygel
P.O. Box 4546 Management, University of Investment Trust, Provident
New York, NY 10163 California since July 1, 1993. Investment Counsel Funds.
Age: 73 Acting Dean of The School of
Trustee 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 3 years(1)(2) Partner, Dorsey & Whitney, a 40 Director, Northwest Airlines Corp.,
P.O. Box 4546 law firm (December UnitedHealth Group, Formerly,
New York, NY 10163 1996-present, September Director, RBC Dain Rauscher, Inc.
Age: 74 1987-August 1993). Formerly
Trustee U.S. Ambassador to Japan
(1993-1996). Formerly, Vice
President of the United States,
U.S. Senator and Attorney
General of the State of
Minnesota. 1984 Democratic
Nominee for President of the
United States.
B-24
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF OVERSEEN BY
NAME, ADDRESS, AGE OFFICE AND PRINCIPAL OCCUPATION DURING THE TRUSTEE OR
AND POSITION(S) LENGTH OF PAST FIVE YEARS AND OTHER NOMINEE FOR OTHER DIRECTORSHIPS
HELD WITH REGISTRANT TIME SERVED AFFILIATIONS TRUSTEE HELD BY TRUSTEE
-------------------- -------------------- ------------------------------- ------------- -----------------------------------
INTERESTED
TRUSTEES
Robert S. Kapito Vice Chairman of 40 Mr. Kapito currently serves as
Age: 45 BlackRock, Inc., is Head of the President of the Board of Directors
Trustee and President Portfolio Management Group, a of Periwinkle National Theatre, a
member of the Management national non-profit effort to help
Committee, the Investment disadvantaged youth, and Chairman
Strategy Group, the Fixed of the Hope & Heroes/Babies &
Income and Global Equity Children's Cancer Fund.
Operating Committees and the
Equity Investment Strategy
Group. Formerly, Vice President
of the First Boston
Corporation, head of its
Mortgage Capital Markets Group.
Currently, President and
Director of each of the
closed-end Trusts which
BlackRock Advisors, Inc. acts
as investment advisor.
Ralph L. Schlosstein* 3 years Director since 1999 and 40 Chairman and President of the
Age: 51 President of BlackRock, Inc. BlackRock Provident Institutional
Chairman since its formation in 1998 and Funds. Director of several of
of BlackRock, Inc.'s BlackRock's alternative investment
predecessor entities since vehicles. Currently, a Member of
1988. Member of the Management the Visiting Board of Overseers of
Committee and Investment the John F. Kennedy School of
Strategy Group of Government at Harvard University,
BlackRock, Inc. Formerly, the Financial Institutions Center
Managing Director of Lehman Board of the Wharton School of the
Brothers, Inc. and Co-head of University of Pennsylvania, a
its Mortgage and Savings trustee of Trinity School in New
Institutions Group. Currently, York City and a Trustee of New
Chairman and Director of each Visions for Public Education in New
of the closed-end Trusts in York Council. Formerly, a Director
which BlackRock Advisors, Inc. of Pulte Corporation and a Member
acts as investment advisor. of Fannie Mae's Advisory.
---------------------------
(1) After a Trustee's initial term, each Trustee is expected to serve a three
year term concurrent with the class of trustees for which he serves:
-- Messrs. Cavanagh and La Force, as Class I trustees, are expected to
stand for re-election at the Trust's 2003 annual meeting of shareholders
-- Messrs. Schlosstein, Fabozzi and Mondale, as Class II trustees, are
expected to stand for re- election at the Trust's 2004 annual meeting of
shareholders
-- Messrs. Kapito, Brimmer and Dixon, as Class III Trustees, are expected
to stand for re-election at the Trust's 2005 annual meeting of shareholders
(2) Each Trustee has served in such capacity since the Trust's inception.
PRINCIPAL OCCUPATION DURING THE PAST
NAME AND AGE TITLE FIVE YEARS AND OTHER AFFILIATIONS
------------ -------------------- ---------------------------------------------
OFFICERS:
Anne F. Ackerley Secretary Managing Director of BlackRock, Inc. since
Age: 40 2000. Formerly First Vice President and Chief
Operating Officer, Mergers and Acquisition
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
Age: 55 predecessor entities.
B-25
PRINCIPAL OCCUPATION DURING THE PAST
NAME AND AGE TITLE FIVE YEARS AND OTHER AFFILIATIONS
------------ -------------------- ---------------------------------------------
Kevin Klingert Vice President Managing Director of BlackRock, Inc. and its
Age: 40 predecessor entities.
James Kong Assistant Treasurer Managing Director of BlackRock, Inc. and its
Age: 41 predecessor entities.
Richard Shea, Esq. Vice President/Tax Managing Director of BlackRock, Inc. since
Age: 42 2000; Chief Operating Officer and Chief
Financial Officer of Anthracite
Capital, Inc. since 1998. Formerly, Director
of BlackRock, Inc. and its predecessor
entities.
Prior to this offering, all of the outstanding shares of the Trust were owned
by BlackRock Advisors.
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES
DOLLAR RANGE OF EQUITY IN ALL REGISTERED INVESTMENT COMPANIES
SECURITIES IN THE OVERSEEN BY DIRECTORS IN THE FAMILY
NAME OF DIRECTOR TRUST(*) INVESTMENT COMPANIES(*)
---------------- ---------------------- -------------------------------------------
Andrew F. Brimmer....................... $ 0 $1-$10,000
Richard E. Cavanagh..................... $ 0 $50,001-$100,000
Kent Dixon.............................. $ 0 over $100,000
Frank J. Fabozzi........................ $ 0 $1-$10,000
James Clayburn La Force, Jr............. $ 0 $50,001-$100,000
Robert S. Kapito........................ $ 0 over $100,000
Walter F. Mondale....................... $ 0 $50,001-$100,000
Ralph L. Schlosstein.................... $ 0 $50,001-$100,000
-------------------
(*) As of December 31, 2001. The Trustees do not own shares in the Trust as it
is a newly formed closed-end investment company.
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, 2001, 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, 2002,
assuming the Trust had been in existence for the full calendar year.
TOTAL COMPENSATION FROM THE
TRUST AND FUND COMPLEX PAID
NAME OF BOARD MEMBER ESTIMATED COMPENSATION FROM TRUST TO BOARD MEMBER(1)
-------------------- --------------------------------- ---------------------------
Andrew F. Brimmer....................... $2,000(2) $195,000(3),(4),(5)
Richard E. Cavanagh..................... $2,000(2) $160,000(4)
Kent Dixon.............................. $2,000(2) $160,000(4)
Frank J. Fabozzi........................ $2,000(2) $160,000(4)
James Clayburn La Force, Jr............. $2,000(2) $160,000(4)
Walter F. Mondale....................... $2,000(2) $160,000(4)
-------------------
(1) Represents the total compensation earned by such person during the calendar
year ended December 31, 2001 from the thirty closed-end funds advised by a
the Advisor (the "Fund Complex"). One of these funds, The BlackRock 2001
Term Trust, was terminated on June 30, 2001. On February 28, 2002, one
additional fund, on April 30, 2002 seven additional funds and on July 30
three additional funds were added to the Fund Complex.
(2) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, Dixon,
Fabozzi, La Force and Mondale may defer $0, $0, $0, $0, $2,000 and $1,000,
respectively, pursuant to the Fund Complex's deferred compensation plan.
B-26
(3) Andrew F. Brimmer serves as "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
$24,000, $24,000, $139,000 and $68,000, respectively, pursuant to the Fund
Complex's deferred compensation plan.
(5) In 2002, it is anticipated that Dr. Brimmer's compensation will be
$200,000.
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.
The Board of Trustees of the Trust currently has three committees: an
Executive Committee, an Audit Committee and a Governance Committee.
The Executive Committee consists of Robert S. Kapito and Ralph L.
Schlosstein and acts in accordance with the powers permitted to such a committee
under the Agreement and Declaration of Trust and By-Laws of the Trust. The
Executive Committee, subject to the Trust's Agreement and Declaration of Trust,
By-Laws and applicable law, acts on behalf of the full Board of Trustees in the
intervals between meetings of the Board.
The Audit Committee consists of Richard E. Cavanagh, Walter F. Mondale,
Dr. Andrew F. Brimmer, Kent Dixon, Frank J. Fabozzi and James Clayburn La Force,
Jr. The Audit Committee acts according to the Audit Committee charter.
Dr. Andrew F. Brimmer has been appointed as Chairman of the Audit Committee. The
Audit Committee is responsible for reviewing and evaluating issues related to
the accounting and financial reporting policies of the Trust, overseeing the
quality and objectivity of the Trust's financial statements and the audit
thereof and to act as a liaison between the Board of Trustees and the Trust's
independent accountants.
The governance committee consists of Dr. Andrew F. Brimmer, Richard E.
Cavanagh, Kent Dixon, Frank J. Fabozzi, James Clayburn La Force, Jr. and Walter
F. Mondale. The Governance committee acts in accordance with the Governance
Committee charter. Dr. Andrew F. Brimmer has been appointed as Chairman of the
Governance Committee. The Governance Committee consists of the independent
Trustees and performs those functions enumerated in the Governance Committee
Charter including, but not limited to, making nominations for the appointment or
election of independent Trustees, reviewing independent Trustee compensation,
retirement policies and personnel training policies and administrating the
provisions of the Code of Ethics applicable to the independent Trustees.
As the Trust is a newly organized closed-end investment company, no meetings
of the above committees have been held.
B-27
No Trustee who is not an interested person of the Trust owns beneficially or
of record, any security of BlackRock Advisors or any person (other than a
registered investment company) directly or indirectly controlling, controlled by
or under common control with BlackRock Advisors.
CODES OF ETHICS
The Trust, the Advisor, the Sub-Advisor and the affiliate 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. These codes can be
reviewed and copied at the Security and Exchange Commission's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling the Security and Exchange Commission at
1-202-942-8090. The code of ethics are available on the EDGAR Database on the
Security and Exchange Commission's web site (http://www.sec.gov), and copies of
these codes may be obtained, after paying a duplicating fee, by electronic
request at the following e-mail address: publicinfo@sec.gov, or by writing the
Security and Exchange Commission's Public Reference Section, 1100 L Street NW,
Washington, D.C. 20549-0102.
INVESTMENT ADVISOR AND SUB-ADVISOR
BlackRock Advisors acts as the Trust's investment advisor. BlackRock
Financial Management acts as the Trust's sub-advisor. BlackRock Advisors,
located at 100 Bellevue Parkway, Wilmington, Delaware, 19809, and BlackRock
Financial Management, located at 40 East 52nd Street, New York, New York 10022,
are wholly owned subsidiaries of BlackRock, Inc., which is one of the largest
publicly traded investment management firms in the United States with
approximately $250 billion of assets under management as of June 30, 2002.
BlackRock manages assets on behalf of institutional and individual investors
worldwide through a variety of equity, fixed income, liquidity and alternative
investment products, including the BlackRock Funds and BlackRock Provident
Institutional Funds. In addition, BlackRock provides risk management and
investment system services to institutional investors under the BlackRock
Solutions name.
The BlackRock organization has over 13 years of experience managing
closed-end products and currently advises a closed-end family of 40 funds with
approximately $9.9 billion in assets. BlackRock has 31 leveraged municipal
closed-end funds and six open-end municipal funds under management. As of June
30, 2002, BlackRock managed approximately $17.5 billion in municipal assets
firm-wide. Clients are served from the company's headquarters in New York City,
as well as offices in Wilmington, San Francisco, Boston, Edinburgh, Tokyo and
Hong Kong. BlackRock 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.
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.
B-28
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 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 PREFERRED SHARES
GENERAL
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act as the
Securities Depository with respect to AMPS. One certificate for all of the AMPS
will be registered in the name of Deutsche Bank Trust Company Americas, 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
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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, Deutsche
Bank Trust Company Americas will be the holder of record 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 will have
been 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, 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.
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 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 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.
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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 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.
OTHER SHARES
The board of trustees (subject to applicable law and the Trust's Agreement
and Declaration of Trust) may authorize an offering, without the approval of the
holders of either common shares or AMPS, of other classes of shares, or other
classes or series of shares, as they determine to be necessary, desirable or
appropriate, having such terms, rights, preferences, privileges, limitations and
restrictions as the board of trustees see fit. The Trust currently does not
expect to issue any other classes of shares, or series of shares, except for the
common shares and the AMPS.
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
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 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.
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.
B-31
Subject to its investment restrictions, the Trust may borrow to finance the
repurchase of common 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 American 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 investment company under
the Investment Company Act; (2) the Trust would not be able to liquidate
portfolio securities in an orderly manner consistent with the Trust's investment
objective and policies in order to repurchase shares; or (3) there is, in the
board's judgment, any (a) material legal action or proceeding instituted or
threatened challenging such transactions or otherwise materially adversely
affecting the Trust, (b) general suspension of or limitation on prices for
trading securities on the American 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 common shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Trust's common 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 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 Managed 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.
TAX MATTERS
The following is a description of certain Federal income tax consequences to
a shareholder of acquiring, holding and disposing of AMPS of the Trust. The
discussion reflects applicable tax laws of
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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.
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 to satisfy
conditions which will enable dividends on common shares or AMPS which are
attributable to interest on tax-exempt municipal securities to be exempt from
Federal income tax in the hands of its shareholders, subject to the possible
application of the Federal alternative minimum tax.
In order to qualify to be taxed 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 among other things: (a) derive at least 90%
of its annual gross income (including tax-exempt interest) from dividends,
interest, payments with respect to certain 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"), and (b) diversify its
holdings so that, at the end of each quarter of its taxable year (i) at least
50% of the market value of its total assets is represented by cash, cash items,
U.S. government securities, securities of other regulated investment companies,
and other securities, with these other securities limited, with respect to any
one issuer, to an amount not greater in value than 5% 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 market value of the total assets is
invested in the securities of any one issuer (other than U.S. government
securities or 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. In meeting these requirements of Subchapter M of the Code,
the Trust may be restricted in the utilization of certain of the investment
techniques described above and in the prospectus.
As a regulated investment company, the Trust generally is not subject to
U.S. federal income tax on income and gains that it distributes each taxable
year to its shareholders, provided that in such taxable year it distributes at
least 90% of the sum of its (i) "investment company taxable income" (which
includes, among other items, dividends, taxable interest, taxable original issue
discount and market discount income, income from securities lending, any 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 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 an
undistributed capital gains dividend 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 their share of such undistributed long-term capital gain
and (ii) will be entitled to credit their proportionate share of the tax paid by
the Trust against their Federal tax liability, if any, and to claim refunds to
the extent the credit exceeds such liability. 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 gain included in the gross income of such
shareholder less the tax deemed paid by such shareholder under clause (ii) of
the preceding sentence. The Trust intends to distribute at least annually to its
shareholders all or substantially all of its net tax exempt interest and any
investment company taxable income and net capital gain.
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
federal corporate income tax upon its taxable
B-33
income for that year, and distributions to its shareholders would be taxable to
such holders as ordinary income to the extent of the earnings and profits of the
Trust. In addition, a regulated investment company that fails to distribute, by
the close of each calendar year, at least an amount equal to the sum of (i) 98%
of its ordinary taxable income for such year, (ii) 98% of its capital gain net
income (adjusted for certain ordinary losses) for a one year period generally
ending October 31 of such year, and (iii) 100% of all ordinary income and
capital gains for previous years that were not distributed and on which the
Trust paid no federal income tax, is liable for a nondeductible 4% excise tax on
the portion of the undistributed amount of such income that is less than the
required amount for such distributions. To avoid the imposition of this excise
tax, the Trust intends, to the extent possible, to make the required
distributions of its ordinary taxable income, if any, and its capital gain net
income, by the close of each calendar year.
Certain of the Trust's investment practices are subject to special
provisions of the Code that, among other things, may defer the use of certain
deductions or losses of the Trust and affect the holding period of securities
held by the Trust and the character of the gains or losses realized by the
Trust. These provisions may also require the Trust to recognize income or gain
without receiving cash with which to make distributions in the amounts necessary
to satisfy the requirements for maintaining regulated investment company status
and for avoiding income and excise taxes. The Trust will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Trust as a regulated
investment company.
The Trust intends to invest a sufficient amount of its assets in tax-exempt
municipal bonds to permit payment of "exempt-interest" dividends, as defined in
the Code, on its common shares and AMPS. Under the Code, if at the close of each
quarter of its taxable year, at least 50% of the value of the total assets of
the Trust consists of municipal bonds, the Trust will be qualified to pay
exempt-interest dividends to its shareholders. Exempt-interest dividends are
dividends or any part thereof (other than a capital gain dividend) paid by the
Trust which are attributable to interest on municipal bonds and are so
designated by the Trust. Exempt-interest dividends will be exempt from federal
income tax, subject to the possible application of the U.S. federal alternative
minimum tax. Insurance proceeds received by the Trust under any insurance
policies in respect of scheduled interest payments on defaulted municipal bonds,
as described herein, will generally be excludable from gross income under
Section 103(a) of the Code. See "Investment Policies and Techniques" above.
Gains of the Trust that are attributable to accrued market discount on certain
municipal obligations are treated as ordinary income. Distributions by the Trust
of investment company taxable income, if any, will be taxable to its
shareholders as ordinary income whether received in cash or additional shares.
Distributions by the Trust of net capital gain, if any, are taxable as long-term
capital gain, regardless of the length of time the shareholder has owned common
shares or AMPS and whether such distributions are made in cash or additional
shares. The amount of taxable income allocable to the Trust's AMPS will depend
upon the amount of such income realized by the Trust, but is not generally
expected to be significant. Except for dividends paid on AMPS which include an
allocable portion of any net capital gain or other taxable income, the Trust
anticipates that all other dividends paid on its AMPS will constitute
exempt-interest dividends for U.S. federal income tax purposes. Distributions,
if any, in excess of the Trust's earnings and profits will first reduce the
adjusted tax basis of a shareholder's shares, and after the basis has been
reduced to zero, will constitute capital gains to the shareholder (assuming the
shares are held as a capital asset). As long as the Trust qualifies as a
regulated investment company under the Code, no part of its distributions to
shareholders will qualify for the dividends received deduction for corporations.
The interest on private activity bonds in most instances is not tax-exempt to a
person who is a "substantial user" of a facility financed by such bonds or a
"related person" of such "substantial user." As a result, the Trust may not be
an appropriate investment for shareholders who are considered either a
"substantial user" or a "related person" within the meaning of the Code. In
general, a "substantial user" includes a non-exempt person who regularly uses a
part of such facility in his trade or business. "Related persons" include
certain natural persons, affiliated corporations, a partnership and its partners
B-34
and an S corporation and its shareholders. The foregoing is not a complete
description of all of the provisions of the Code covering the definitions of
"substantial user" and "related person."
U.S. Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals. Interest on certain municipal obligations, such as
bonds issued to make loans for housing purposes or to private entities (but not
to certain tax-exempt organizations such as universities and non-profit
hospitals) is included as an item of tax preference in determining the amount of
a taxpayer's alternative minimum taxable income. To the extent that the Trust
receives income from municipal obligations subject to the U.S. federal
alternative minimum tax, a portion of the dividends paid by it, although
otherwise exempt from U.S. federal income tax, will be taxable to its
shareholders to the extent that their tax liability is determined under the
alternative minimum tax. The Trust will annually supply a report indicating the
percentage of the Trust's income attributable to municipal obligations subject
to the alternative minimum tax. In addition, for certain 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 obligations, and therefore all exempt-interest dividends received from
the Trust, are included in calculating a corporation's adjusted current
earnings. Certain small corporations are not subject to the alternative minimum
tax.
Tax-exempt income, including exempt-interest dividends paid by the Trust, is
taken into account in calculating the amount of Social Security and railroad
retirement benefits that may be subject to federal income tax.
The IRS requires that a regulated investment company that has two or more
classes of shares designate to each such class proportionate amounts of each
type of its income for each tax year based upon the percentage of total
dividends distributed to each class for such year. The Trust intends each year
to allocate, to the fullest extent practicable, net tax-exempt interest, net
capital gain and other taxable income, if any, between its common shares and
preferred shares, including the AMPS, in proportion to the total dividends paid
to each class with respect to such year. To the extent permitted under
applicable law, the Trust reserves the right to make special allocations of
income within a class, consistent with the objectives of the Trust. The Trust
may, at its election, notify the auction agent of the amount of any net capital
gain or other income taxable for federal income tax purposes to be included in
any dividend on shares of its AMPS prior to the Auction establishing the
Applicable Rate for such dividend. If the Trust allocates any net capital gain
or other taxable income for U.S. federal income tax purposes to its AMPS without
having given advance notice thereof as described above, the Trust generally will
be required to make payments to owners of its AMPS to which such allocation was
made in order to offset the U.S. federal income tax effect of the taxable income
so allocated as described under "Description of AMPS--Additional Dividends" in
the prospectus.
If at any time when the Trust's AMPS are outstanding, the Trust fails to
meet the Preferred Shares Basic Maintenance Amount or the Investment Company Act
Preferred Shares Asset Coverage, the Trust will be required to suspend
distributions to holders of its common shares until such maintenance amount or
asset coverage, as the case may be, is restored. See "Description of
AMPS--Dividend and Dividend Periods--Restrictions on Dividends and Other
Distributions" in the prospectus. This may prevent the Trust from distributing
at least an amount equal to the sum of 90% of its investment company taxable
income (determined without regard to the deduction for dividends paid) and 90%
of its net tax-exempt income, and may therefore jeopardize the Trust's
qualification for taxation as a regulated investment company or cause the Trust
to incur a tax liability or a non-deductible 4% excise tax on the undistributed
taxable income (including net capital gain), or both. Upon failure to meet the
Preferred Shares Basic Maintenance Amount or the Investment Company Act
Preferred Shares Asset Coverage, the Trust will be required to redeem AMPS in
order to maintain or restore such maintenance amount or asset coverage and avoid
the adverse consequences to the Trust and its shareholders
B-35
of failing to qualify as a regulated investment company. There can be no
assurance, however, that any such redemption would achieve such objectives.
The Trust may, at its option, redeem AMPS in whole or in part, and is
required to redeem AMPS to the extent required to maintain the Preferred Shares
Basic Maintenance Amount and the Investment Company Act Preferred Shares Asset
Coverage. Gain or loss, if any, resulting from a redemption of AMPS will be
taxed as gain or loss from the sale or exchange of AMPS under Section 302 of the
Code rather than as a dividend, but only if the redemption distribution (a) is
deemed not to be essentially equivalent to a dividend, (b) is in complete
redemption of an shareholder's interest in the Trust, (c) is substantially
disproportionate with respect to the shareholder, or (d) with respect to a
non-corporate shareholder, is in partial liquidation of the shareholder's
interest in the Trust. For purposes of (a), (b) and (c) above, the common shares
owned by a holder of AMPS will be taken into account.
The Code provides that interest on indebtedness incurred or continued to
purchase or carry the Trust's shares to which exempt-interest dividends are
allocated is not deductible. Under rules used by the IRS for determining when
borrowed funds are considered used for the purpose of purchasing or carrying
particular assets, the purchase or ownership of shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.
Nonresident alien individuals and certain foreign corporations and other
entities ("foreign investors") generally are subject to U.S. withholding tax at
the rate of 30% (or possibly a lower rate provided by an applicable tax treaty)
on distributions of investment company taxable income (determined without regard
to the deduction for dividends paid). To the extent received or deemed received
by foreign investors, exempt-interest dividends, distributions of net capital
gain and gain from the sale or other disposition of AMPS generally are exempt
from federal income taxation. Different tax consequences may result if the
shareholder is engaged in a trade or business in the United States or, in the
case of an individual, is present in the United States for 183 or more days
during a taxable year and certain other conditions are met.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders 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 shareholders) on December 31 of the year declared.
The sale or other disposition of common shares or AMPS of the Trust will
result in capital gain or loss to shareholders who hold their shares as capital
assets. Generally, a shareholder gain or loss will be long-term gain or loss if
the shares have been held for more than one year. 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, short-term capital
gains and ordinary income will currently be taxed at a maximum rate of 38.6%
while long-term capital gains generally will be 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).*
-------------------
*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.
B-36
However, because of the 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 distribution of 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 distribution
of net capital gain received (or amounts credited as undistributed capital gain)
with respect to such shares. 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 substantially identical shares within a period of 61 days
beginning 30 days before and ending 30 days after the date 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.
The Trust is required in certain circumstances to backup withholding on
taxable dividends and certain other payments paid to non-corporate holders of
the Trust's shares who do not furnish the Trust with their correct taxpayer
identification number (in the case of individuals, their Social Security number)
and certain certifications, or who are otherwise subject to backup withholding.
Backup withholding is not an additional tax. Any amounts withheld from payments
made to a shareholder may be refunded or credited against such shareholder's
U.S. federal income tax liability, if any, provided that the required
information is furnished to the IRS.
The foregoing is a general summary of the provisions of the Code and the
Treasury Regulations in effect as they directly govern the taxation of the Trust
and its shareholders. These provisions are subject to change by legislative or
administrative action, and any such change may be retroactive. Moreover, the
foregoing does not address many of the factors that may be determinative of
whether an investor will be liable for the alternative minimum tax. Shareholders
are advised to consult their own tax advisers for more detailed information
concerning the U.S. federal, state, local, foreign and other income tax
consequences to them of purchasing, holding and disposing of Trust shares.
EXPERTS
The Statement of Assets and Liabilities of the Trust as of July 16, 2002 and
statement of operations for the period then ended appearing in this Statement of
Additional Information has been audited by 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 Steet, Boston
Massachussets 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-37
PAGE INTENTIONALLY LEFT BLANK.
C-1
PAGE INTENTIONALLY LEFT BLANK.
D-1
PAGE INTENTIONALLY LEFT BLANK.
E-1
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder of
BlackRock New York Municipal Income Trust II
We have audited the accompanying statement of assets and liabilities of
BlackRock New York Municipal Income Trust II (the "Trust") as of July 16, 2002
and the related statements of operations and changes in net assets for the
period from June 21, 2002 (date of inception) to July 16, 2002. 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 July 16, 2002 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
July 17, 2002
F-1
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF ASSETS AND LIABILITIES
JULY 16, 2002
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, July 16, 2002............... $ 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
============
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 21, 2002 (DATE OF INCEPTION) TO JULY 16, 2002
Investment Income....................... $ --
Expenses
Organization expenses................. 15,000
------------
Net investment loss..................... $ (15,000)
============
F-2
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD JUNE 21, 2002 (DATE OF INCEPTION) TO JULY 16, 2002
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 period................ --
------------
End of period...................... $ 100,001
============
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
BlackRock New York Municipal Income Trust II (the "Trust") was organized as
a Delaware business trust on June 21, 2002, and is registered as a
non-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 0.55% of the average weekly
value of the Trust's Managed Assets. BlackRock Advisors, Inc. has voluntarily
agreed to waive receipt of a portion of its management fee in the amount of
0.15% of the average weekly value of the Trust's managed assets for the first
five years of the Trust's operations (through July 31, 2007), and for a
declining amount for an additional five years (through July 31, 2012).
NOTE 3. ORGANIZATION EXPENSES AND OFFERING COSTS
Organization expenses of $15,000 have been expensed. Offering costs,
estimated to be approximately $170,000 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-3
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 23, 2002 (UNAUDITED)
ASSETS
Investments, at value (cost $68,827,211) (Note 1)........... $ 69,129,010
Cash........................................................ 369,897
Interest receivable......................................... 405,159
-------------
69,904,066
-------------
LIABILITIES
Payable for investments purchased........................... 4,900,900
Investment advisory fee payable (Note 2).................... 16,292
Other accrued expenses...................................... 155,492
-------------
5,072,684
-------------
NET ASSETS.................................................. $ 64,831,382
=============
Net assets were comprised of:
Common shares of beneficial interest:
Par value (Note 4)...................................... $4,508
Paid in capital in excess of par........................ 64,452,993
-------------
64,457,501
-------------
Undistributed net investment income (Note 1)................ 72,082
Net unrealized appreciation (Note 1)........................ 301,799
-------------
Net assets, August 23, 2002................................. $ 64,831,382
=============
Net asset value per common share of beneficial interest:
($64,381,382/4,508,028) common shares of beneficial
interest issued and outstanding)........................ $14.38
=============
See Notes to Financial Statements
F-4
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 30, 2002 TO AUGUST 23, 2002 (UNAUDITED)
NET INVESTMENT INCOME
Income
Interest (Note 1)............................................... $ 125,279
----------
Expenses
Investment advisory............................................. 24,344
Organiztion Cost................................................ 15,000
Independent accountants......................................... 8,211
Reports to shareholders......................................... 5,377
Registration.................................................... 1,541
Transfer agent.................................................. 1,473
Trustees........................................................ 842
Legal........................................................... 685
Custodian....................................................... 206
Miscellaneous................................................... 2,157
----------
Total expenses................................................ 59,836
Less fees waived by Advisor (Note 2).............................. (6,639)
----------
Net expenses...................................................... 53,197
----------
Net investment income............................................. 72,082
----------
Net Change in Unrealized Appreciation on Investments.............. 301,799
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $ 373,881
==========
-------------------
* Commencement of investment operations (Note 1).
See Notes to Financial Statements
F-5
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
FOR THE PERIOD
JULY 30, 2002*
THROUGH
AUGUST 23, 2002
------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income........................... $ 72,082
Net change in unrealized appreciation on
investments................................... 301,799
-----------
Net increase in net assets resulting from
operations.................................. 373,881
-----------
CAPITAL SHARE TRANSACTIONS:
Net proceeds from the issuance of common
shares........................................ 64,457,501
-----------
Total increase................................ 64,831,382
-----------
NET ASSETS
Beginning of period............................... --
-----------
End of period (including undistributed net
investment income of $72,082)................... $64,831,382
===========
-------------------
* Commencement of investment operations (Note 1).
See Notes to Financial Statements
F-6
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
FINANCIAL HIGHLIGHTS
(UNAUDITED)
FOR THE PERIOD
JULY 30, 2002(1)
THROUGH
AUGUST 23, 2002
------------------
PER COMMON SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period(2)........... $ 14.33
-------
Investment operations:
Net investment income(3)........................ 0.02
Net realized and unrealized gain on
investments(3)................................ 0.06
-------
Net increase from investment operations........... 0.08
-------
Capital charges with respect to issuance of:
Common shares................................... (0.03)
-------
Net asset value, end of period(2)................. $ 14.38
=======
-------
Market value, end of period(2).................... $ 15.35
=======
TOTAL INVESTMENT RETURN(3)........................ 2.33%
=======
RATIOS TO AVERAGE NET ASSETS OF COMMON
SHAREHOLDERS:(4)
Expenses after fee waiver......................... 0.08%
Expenses before fee waiver........................ 0.09%
Net investment income after fee waiver............ 0.11%
SUPPLEMENTAL DATA:
Average net assets of common shareholders (000)... $64,622
Portfolio turnover................................ 0%
Net assets of common shareholders, end of period
(000)........................................... $64,831
-------------------
(1) Commencement of investment operations. This information includes the intial
investment by BlackRock Advisors, Inc. (Note 1) Net assets value
immediately after the closing of the public offering was $14.30.
(2) Net asset value and market value are published in Barron's on Saturday and
The Wall Street Journal on Monday.
(3) 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. Dividends and
distributions, if any, are assumed for purposes of this calculation to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
Total invesment return does not reflect brokerage commissions. The total
investment return, which is for less than a full year, is not annualized.
Past performance is not a guarantee of future results.
(4) Not Annualized.
The information above represents the unaudited operating 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.
See Notes to Financial Statements
F-7
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. ORGANIZATION & ACCOUNTING POLICIES
The BlackRock New York Municipal Income Trust II (the "Trust") was organized
as a Delaware business trust on June 21, 2002, 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 July 30, 2002. The
Trust's investment objective is to provide current income exempt from regular
Federal income tax and New York State and New York City personal income taxes.
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 selected under the supervision of the
Trust's 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. Short-term investments
may be 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 Trust's Board of Trustees.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on 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 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 carryforwards 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.
F-8
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
DEFERRED COMPENSATION PLAN: Under a deferred compensation plan approved by the
Board of Trustees on July 12, 2002, 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 Trusts selected by the Trustees.
This has the same economic effect for the Trustees as if the Trustees had
invested the deferred amounts in such other BlackRock Trusts.
The deferred compensation plan is not funded and obligations thereunder
represent general unsecured claims against the general assets of the Trust. The
Trust may, however, elect to invest in common shares of those Trusts selected by
the Trustees in order to match its deferred compensation obligations.
NEW ACCOUNTING POLICIES: Since inception, the Trust has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies, as revised,
and began amortizing market discount on debt securities. The Trust amortizes
premiums and original issue discount on debt securities. The cumulative effect
of this accounting policy had no impact on the total net assets of the Trust.
The impact of this accounting policy is anticipated to have an immaterial effect
on the financial statements statements and will result in an increase to cost of
securities and a corresponding decrease in net unrealized appreciation, based on
securities held as of May 17, 2002.
NOTE 2. AGREEMENTS
The Trust has an Investment Advisory Agreement with BlackRock Advisors, Inc.
(the "Advisor"), a wholly owned subsidiary of BlackRock, Inc. BlackRock
Financial Management, Inc., a wholly owned subsidiary of BlackRock Inc., serves
as sub-advisor to the Trust. BlackRock, Inc. 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 0.55% of the Trust's average weekly managed
assets. "Managed assets" means the total assets of the Trust (including any
assets attributable to any preferred shares that may be outstanding) minus the
sum of accrued liabilites (other than debt representing financial leverage). The
Advisor has voluntarily agreed to waive receipt of a portion of the investment
advisory fee or other expenses of the Trust in the amount of 0.15% of average
weekly managed assets for the first 5 years of the Trust's operations, 0.10% in
year 6, 0.10% in year 7, 0.05% in year 8, 0.05% in year 9 and 0.05% in year 10.
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, occupancy and certain clerical and accounting
costs. The Trust bears all other costs and expenses, which include
reimbursements to the Advisor for certain operational support services provided
to the Trust.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments, for the period ended August 23, 2002, aggregated $60,327,211 and
$0, respectively.
F-9
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The Federal income tax basis of the Trust's investments at August 23, 2002,
was $68,827,211 and accordingly, net unrealized appreciation was $301,799 (gross
unrealized appreciation -- $377,820 gross unrealized depreciation -- $76,021).
NOTE 4. CAPITAL
There are an unlimited number of $.001 par value common shares of beneficial
interest authorized. Of the 4,508,028 common shares outstanding at August 23,
2002, the Advisor owned 8,028 shares.
Transactions in common shares of beneficial interest for the period
July 30, 2002 (commencement of investment operations) to August 23, 2002, were
as follows:
Shares issued in connection with initial public
offering........................................ 4,508,028
---------
Net increase in shares outstanding................ 4,508,028
=========
Offering costs of $120,000 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.
F-10
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS
AUGUST 23, 2002 (UNAUDITED)
PRINCIPLE OPTION CALL
RATING* AMOUNT PROVISION + VALUE
(UNAUDITED) (000) DESCRIPTION (UNAUDITED) (NOTE 1)
-----------------------------------------------------------------------------------
LONG-TERM INVESTMENTS -- 93.5%
NEW YORK -- 87.3%
Met. Transp. Auth., Ser. A,
AA- $5,000 Dedicated Tax Fnd. Rev.,
5.00%, 11/15/30............. 11/12 @ 100 $ 4,911,650
AA- 5,000 Svc. Contract Rev., 5.125%,
1/01/29..................... 07/12 @ 100 4,982,650
AAA 5,000 Met. Transp. Auth. Rev., Ser.
A, 5.25%, 11/15/31, FGIC.... 11/12 @ 100 5,080,400
AA 5,000 New York City Mun. Wtr. Fin.
Auth., Wtr. & Swr. Sys.
Rev., Ser. A, 5.125%,
6/15/34..................... 06/12 @ 100 4,973,900
AAA 5,000 New York City Trans. Auth.
Met. Transp. Auth.,
Triborough Bridge & Tunl.
Auth., COP, Ser. A, 5.25%,
1/01/29, AMBAC.............. 01/10 @ 101 5,064,200
AA+ 5,000 New York City Trans. Fin.
Auth. Rev., Future Tax
Secured, Ser. B, 5.00%,
11/01/27.................... 11/12 @ 100 4,936,900
AA- 5,000 New York St. Dorm. Auth. Lease
Rev., St. Univ. Dorm. Facs.,
5.00%, 7/01/32.............. 07/12 @ 100 4,917,200
New York St. Dorm. Auth. Rev.,
AAA 2,425 New Sch. Univ., 5.00%,
7/01/31, MBIA............... 07/11 @ 100 2,403,490
AAA 3,000 New York Univ., Ser. 2, 5.00%,
7/01/41, AMBAC.............. 07/11 @ 100 2,945,550
AAA 2,000 Winthrop Univ. Hosp. Assoc.,
Ser. A, 5.25%, 7/01/31,
AMBAC....................... 07/11 @ 101 2,018,800
B3 3,500 Port Auth. New York & New
Jersey Spec. Oblig. Rev.,
Contl/ Eastern Proj.
Laguardia, 9.125%,
12/01/15.................... 09/02 @ 101 3,508,085
AA- 2,500 Triborough Bridge & Tunl.
Auth. Rev., Ser. A, 5.00%,
1/01/32..................... 01/12 @ 100 2,473,900
Aa2 8,500 Tsasc Inc., Tobacco Settlement
Rev., Ser. 1, 5.75%,
7/15/32..................... 07/12 @ 100 8,404,885
-----------
56,621,610
-----------
PUERTO RICO -- 6.2%
A- 4,000 Puerto Rico Comnwlth. Pub.
Impvt., GO, Ser. A, 5.125%,
7/01/31..................... 07/11 @ 100 4,007,400
-----------
TOTAL LONG-TERM INVESTMENTS (COST
$60,327,211)................................ 60,629,010
-----------
SHORT-TERM INVESTMENTS** -- 13.1%
GEORGIA -- 3.1%
A1+ 2,000 Mun. Elec. Auth. Rev., Proj.
One, Ser. C, 1.20%, 8/28/02,
MBIA, FRWD.................. N/A 2,000,000
-----------
MICHIGAN -- 1.5%
A1+ 1,000 Michigan St. Univ. Rev., Ser.
A-2, 1.25%, 8/28/02, FRWD... N/A 1,000,000
-----------
NEW YORK -- 5.4%
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys. Rev.,
A1+ 2,000 Ser. F-1, 1.35%, 8/26/02,
FRDD........................ N/A 2,000,000
A1+ 1,500 Ser. G, 1.35%, 8/26/02,
FGIC........................ N/A 1,500,000
-----------
3,500,000
-----------
F-11
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
PORTFOLIO OF INVESTMENTS
AUGUST 23, 2002 (UNAUDITED) (CONTINUED)
PRINCIPLE OPTION CALL
RATING* AMOUNT PROVISION + VALUE
(UNAUDITED) (000) DESCRIPTION (UNAUDITED) (NOTE 1)
-----------------------------------------------------------------------------------
TENNESSEE -- 3.1%
VMIG1 2,000 Montgomery Cnty. Pub. Bldg.
Auth., Pooled Fin. Rev.,
1.40%, 8/26/02, BOA......... N/A 2,000,000
-----------
TOTAL SHORT-TERM INVESTMENTS (COST
$8,500,000)................................. 8,500,000
-----------
TOTAL INVESTMENTS -- 106.6% (COST
$68,827,211)................................ $69,129,010
Liabilities in excess of other assets --
(6.6%)........................................ (4,297,628)
-----------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS -- 100%.......................... $64,831,382
===========
---------------------
* 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.
+ Date (month/year) and prices of the earliest optional call or redemption.
There may be other call provisions at varying prices at later dates.
F-12
APPENDIX A
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
STATEMENT OF PREFERENCES OF
AUCTION MARKET PREFERRED SHARES
("AMPS")
TABLE OF CONTENTS
PAGE
----
DEFINITIONS............................................... A-2
PART I.................................................... A-14
1. Number of Authorized Shares....................... A-14
2. Dividends......................................... A-14
3. Gross-Up Payments................................. A-18
4. Designation of Special Rate Periods............... A-18
5. Voting Rights..................................... A-20
6. Investment Company Act Preferred Shares Asset
Coverage.......................................... A-24
7. Preferred Shares Basic Maintenance Amount......... A-24
8. Reserved.......................................... A-26
9. Restrictions on Dividends and Other
Distributions..................................... A-26
10. Rating Agency Restrictions........................ A-27
11. Redemption........................................ A-28
12. Liquidation Rights................................ A-32
13. Miscellaneous..................................... A-32
PART II................................................... A-34
1. Orders............................................ A-34
2. Submission of Orders by Broker-Dealers to Auction
Agent............................................. A-35
3. Determination of Sufficient Clearing Bids, Winning
Bids Rate and Applicable Rate..................... A-37
4. Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares.... A-39
5. Notification of Allocations....................... A-41
6. Auction Agent..................................... A-41
7. Transfer of AMPS.................................. A-41
8. Global Certificate................................ A-42
9. Force Majeure..................................... A-42
APPENDIX A................................................ AA-1
A-1
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II, 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,
(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 Appendix A hereto and
such number of shares per such series as is set forth in Section 2 of Appendix 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 Appendix 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 individually as a
AMP and collectively as AMPS).
DEFINITIONS
Except as otherwise specifically provided in Section 3 of Appendix 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:
(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.
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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 the
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.
(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
Appendix A hereto.
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(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.
(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 in paragraph First 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.
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(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 lesser of the Market
Value or the par 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 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
Appendix 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.
(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.
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(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 Appendix 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) (i) (B) of Section 2 of Part I of this Statement.
(46) "LIQUIDATION PREFERENCE," with respect to a given number of Preferred
shares, means $25,000 times that number.
(47) "MARKET VALUE" of any asset of the Trust shall be the market value
thereof determined by FT Interactive 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
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shall be valued at fair value on a consistent basis using methods determined in
good faith by the Board of Trustees.
(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.
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(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 Appendix A hereto.
(53) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix 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
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
(333-97605), ("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.
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(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.
(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 Date for
the AMPS outstanding that follows 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 date for such other shares that follows 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
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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.
(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 Appendix A hereto.
(68) "RATE MULTIPLE" shall have the meaning specified in Section 4 of
Appendix 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
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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
Appendix A hereto.
(77) "S&P ELIGIBLE ASSET" shall have the meaning specified in Section 4 of
Appendix A hereto.
(78) "S&P EXPOSURE PERIOD" shall mean the maximum period of time following
a Valuation Date that the Trust 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 AMPS Basic Maintenance Amount (as described in paragraph
(a) of Section 7 of Part I of this Statement).
(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.
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(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
Appendix A hereto.
(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
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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, if the length of the Rate Period exceeds the remaining maturity of any
recently auctioned Treasury Bill, the weighted average rate of the most recently
auctioned Treasury Bill and Treasury Note with maturities closest to the length
of the Rate Period; or (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. If any U.S. Government
Securities Dealer does not quote a rate required to determine the Treasury Bill
Rate, the Treasury Bill 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. Government 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.
(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
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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 Note Rate, 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.
(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 (if Moody's is then rating the
AMPS) and S&P (if S&P is then rating the AMPS) 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 Appendix 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 Appendix 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
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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 Appendix 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
(ii) notwithstanding Section 9 of Appendix 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 as to Series" in Section 1 of Appendix 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
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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 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
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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 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 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.
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(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.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION.
Notwithstanding paragraph (a) above, 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,
subject to adjustment as provided in paragraph (b) of this Section 4 (a
"Special Rate Period"); provided, however that such Special Rate Period may
consist of a number of Rate Period Days not evenly divisible by seven. 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
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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. 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 Appendix 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.
(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
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
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third Business Day next preceding such proposed Special Rate Period, Moody's
Eligible Assets (if Moody's is then rating such series) and S&P Eligible
Assets (if S&P is then rating such series) each have an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount as of
such Business Day (assuming for purposes of the foregoing calculation that
(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 the 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 AMPS
entitling the holder thereof to one vote. Subject to 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 AMPS, including the AMPS,
would constitute a majority of the Board of Trustees as so
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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 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.
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(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 Appendix 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 AMPS Asset Coverage or the AMPS 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
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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 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 Trust, 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 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) 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 Moody's (such confirmation being required
to be obtained only in the event Moody's 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 Preferred Share and no Preferred Share 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
A-23
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 Preferred Share 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.
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 AMPS Basic Maintenance Report as of
the date of such failure or such AMPS 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 AMPS Basic Maintenance Report.
The Trust shall also deliver a AMPS 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 then 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 AMPS Basic Maintenance Report pursuant to the preceding sentence shall
be deemed to be delivery of a AMPS Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the AMPS Basic
Maintenance Amount, as of the relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a AMPS 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 AMPS 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
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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) 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, (iv) 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 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, (v) 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 (vi) with respect to such confirmation to Moody's and S&P, that the Trust
has satisfied the requirements of Section 13 of Appendix 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 AMPS 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 AMPS Maintenance
Amount, and relating to the AMPS Basic Maintenance Cure Date with respect to
such failure to satisfy the AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS 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 AMPS Basic Maintenance Amount is less than or equal to 105%, or
(iii) whenever requested by Moody's (if Moody's is then rating the AMPS) or S&P
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(if S&P is then rating the AMPS), 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 AMPS 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 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 AMPS 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,
(ii) the Trust has redeemed the full number of AMPS required to be redeemed by
any
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provision for mandatory redemption pertaining thereto and (iii) any Gross-Up
Payment required to be paid on or before the date of such transaction has been
paid, 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.
Except as expressly permitted in Section 13 of Appendix A hereto, or as
otherwise permitted by the then current guidelines of S&P (if S&P is then rating
the AMPS) and Moody's (if Moody's is then rating the AMPS), 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) 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 AMPS 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 FT Interactive Data
Corporation) referred to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
A-27
(i) engage in interest rate swaps, caps and floors, except that the
Trust may, without obtaining the written consent described above, engage in
swaps, caps and floors if: (i) the unsecured senior debt or claims paying
ability of the counterparty to the swap, cap or floor is rated A or A-1 or
better by S&P and Aaa3 or better by Moody's; (ii) the swap, collar or floor
is marked-to-market daily by the counterparty; (iii) a swap, collar or floor
that is "in the money" is valued at 95% of the accrued net excess of the
Trust's entitlements under such instruments over its obligations under such
instrument for purposes of calculating the Discounted Value of S&P Eligible
Assets (if S&P is then rating the AMPS) and the Discounted Value of the
Moody's Eligible Assets (if Moody's is then rating the AMPS); (iv) for
swaps, caps and floors that are "out of the money", 100% of any accrued net
excess of the Trust's obligations under such instrument over its
entitlements under such instrument, which excess is included as a liability
of the Trust for the purposes of calculating the Discounted Value of S&P
Eligible Assets (if S&P is then rating the AMPS) and the Discounted Value of
Moody's Eligible Assets (if Moody's is then rating the AMPS); (v) the swap,
cap or floor will be terminated if the Trust fails to maintain 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)
and 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) on any two consecutive Valuation Dates; and (vi) the
Trust provides S&P (if S&P is then rating the AMPS) and Moody's (if Moody's
is then rating the AMPS) subsequent notice of entering into the swap, cap or
floor.
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 Appendix A
hereto, shares of a series of AMPS are redeemable by the Trust during the
Initial Rate Period thereof only on the second Business Day next preceding
the last 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.
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(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 the Trust
has available liquid securities having a value not less than the amount
(including any applicable premium) due to Holders of AMPS by reason of
redemption of such shares or 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 AMPS Basic Maintenance Amount, and would at least equal the AMPS 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 AMPS 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 AMPS Basic Maintenance Amount or fails to
maintain the Investment Company Act AMPS 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 AMPS 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 AMPS Basic Maintenance Amount or maintaining the Investment
Company Act AMPS 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 AMPS then outstanding shall be redeemed), and
(ii) the maximum number of AMPS, together with all other AMPS 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 AMPS Basic Maintenance Amount or the Investment Company Act AMPS
Asset Coverage, as the case may be, pro rata among
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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 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 (i) 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 (ii) to S&P (if S&P is then rating the AMPS) and to Moody's (if
Moody's is then rating the AMPS). 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; and (vii) that the Holders of any shares of a series of AMPS
being so redeemed shall not participate in the Auction, if any, immediately
preceding 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
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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.
(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.
A-31
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.
(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 APPENDIX 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
Appendix 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.
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(b) APPENDIX A INCORPORATED BY REFERENCE. Appendix 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
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Rate for shares of such series determined on such Auction Date shall be
equal to the rate specified therein; or
(C) the number of Outstanding shares of such series specified in
such Bid if the rate specified therein shall be higher than the Maximum
Rate for shares of such series, or such number or a lesser number of
Outstanding shares of such series to be determined as set forth in clause
(iii) of paragraph (b) of Section 4 of this Part II if the rate specified
therein shall be higher than the Maximum Rate for shares of such series
and Sufficient Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of shares
of a series of 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.
(d) A Bid by a Potential Beneficial Holder or a Potential Holder specifying
a rate higher than the Maximum Rate for AMPS on the Auction Date will not be
accepted.
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
A-35
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
(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;
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(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.
(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);
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(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;
(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 Appendix A hereto.
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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.
(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
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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
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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.
(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
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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 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 Dividend Rate for the next Dividend Period shall be the Dividend 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.
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IN WITNESS WHEREOF, BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II, has caused
these presents to be signed as of September 17, 2002 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 NEW YORK
MUNICIPAL INCOME TRUST II
By: /s/ Kevin Klingert
--------------------------
Name: Kevin Klingert
Title: Vice President
ATTEST: /s/ Anne F. Ackerley
------------------------
Name: Anne F. Ackerley
Title: Secretary
September 17, 2002
A-43
BLACKROCK NEW YORK MUNICIPAL INCOME TRUST II
APPENDIX A
SECTION 1
DESIGNATION AS TO SERIES.
SERIES W7: A series of 2,885 AMPS, liquidation preference $25,000 per share,
is hereby designated "Auction Market Preferred Shares, Series W7." Each of the
1,786 shares of Series W7 AMPS issued on September 19, 2002 shall, for purposes
hereof, be deemed to have a Date of Original Issue of September 19, 2002; have
an Applicable Rate for its Initial Rate Period equal to 1.35% per annum; have an
initial Dividend Payment Date of October 3, 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 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.
SECTION 2
NUMBER OF AUTHORIZED SHARES PER SERIES.
The number of authorized shares constituting Series W7 AMPS is 2,885.
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.
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.
AA-1
"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 combined regular
Federal individual, New York State and New York City personal income tax rate
applicable to ordinary income (taking into account the Federal income tax
deductibility of state and local taxes paid or incurred) or net capital gain, as
applicable, or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income or net capital gain, as applicable, whichever is
greater, in effect at the time such Gross-up Payment is made.
"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.
"ISSUE TYPE CATEGORY" shall mean, with respect to a Municipal Obligation
acquired by the Trust, (A) for purposes of calculating Moody's Eligible Assets
as of any Valuation Date, one of the following categories into which such
Municipal Obligation falls based upon a good faith determination by the Fund:
health care issues (including issues related to teaching and non-teaching
hospitals, public or private); housing issues (including issues related to
single- and multi-family housing projects); educational facilities issues
(including issues related to public and private schools); student loan issues;
resource recovery issues; transportation issues (including issues related to
mass transit, airports and highways); industrial development bond issues
(including issues related to pollution control facilities); utility issues
(including issues related to the provision of gas, water, sewers and
electricity); general obligation issues; lease obligations (including
certificates of participation); escrowed bonds; and other issues ("Other
Issues") not falling within one of the aforementioned categories. The general
obligations issue category includes any issue that is directly or indirectly
guaranteed by the State of New York or its political subdivisions. Utility
issues are included in the general obligation issue category if the issue is
directly or indirectly guaranteed by the State of New York or its political
subdivisions. Municipal Obligations in the utility issue category will be
classified within one of the three following sub-categories: (i) electric, gas
and combination issues (if the combination issue includes an electric issue);
(ii) water and sewer utilities and combination issues (if the combination issues
does not include an electric issue); and (iii) irrigation, resource recovery,
solid waste and other utilities. Municipal Obligations in the transportation
issue category will be classified within on of the two following sub-categories:
(i) streets and highways, toll roads, bridges and tunnels, airports and
multi-purpose port authorities (multiple revenue streams generated by toll
roads, airports, real estate, bridges); (ii) mass transit, parking seaports and
others, and (B) for purposes of calculating S&P Eligible Assets as of any
Valuation Date, one of the following categories into which each Municipal
Obligation falls based upon a good faith determination by the Trust: health care
issues (including issues related to teaching and non-teaching hospitals, public
or private); housing issues (including issues related to single- and
multi-family housing projects; educational facilities issues (including issues
related to public and private schools);
AA-2
student loan issues; transportation issues (including issues related to mass
transit, airports and highways); industrial development bond issues (including
issues related to pollution control facilities); public power utilities issues
(including issues related to the provision of electricity, either singly or in
combination with the provision of other utilities, and issues related only to
the provision of gas); water and sewer utilities issues (including issues
related to the provision of water and sewers as well as combination utilities
not falling within the public power utilities category); special utilities
issues (including issues related to resource recovery, solid waste and
irrigation as well as other utility issues not falling within the public power
and water and sewer utilities categories); general obligation issues; lease
obligations (including certificates of participation); Escrowed Bonds; and other
issues ("Other Issues") not falling within one of the aforementioned categories.
The general obligation issue category includes any issue that is directly or
indirectly guaranteed by the State of New York or its political subdivisions.
Utility issues are included in the general obligation issue category if the
issue is directly or indirectly guaranteed by the State of Virginia or its
political subdivisions. Municipal Obligations in the utility issue category will
be classified within one of the three following sub-categories: (i) electric,
gas and combination issues (if the combination issue includes an electric
issue); (ii) water and sewer utilities and combination issues (if the
combination issue does not include an electric issue); and (iii) irrigation,
resource recovery, solid waste and other utilities, provided that Municipal
Obligations included in this sub-category (iii) must be rated by S&P in order to
be included in S&P Eligible Assets. Municipal Obligations in the transportation
issue category will be classified within one of the two following sub-
categories: (i) streets and highways, toll roads, bridges and tunnels, airports
and multi-purpose port authorities (multiple revenue streams generated by toll
roads, airports, real estate, bridges); (ii) mass transit, parking seaports and
others.
"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.
**** 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.
UNRATED securities may comprise no more than 10% of total Moody's Eligible
Assets.
If the Moody's Discount Factor used to discount a particular Municipal
Obligation is determined by reference to the insurance claims-paying ability
rating of the insurer of such Municipal Obligation, such Moody's Discount Factor
will be increased by an amount equal to 50% of the difference between (i) the
percentage set forth in the above table under the applicable rating category,
and (ii) the
AA-3
percentage set forth in the above table under the rating category that is one
rating category below the applicable rating category.
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. No discount factors will be applied to Moody's rated
money market Funds governed by the Rule 2a-7 under the Investment Company Act of
1940, as amended ("Rule 2a-7").
"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 ratings, as applicable, suspended by Moody's, and
(iii) is part of an issue of Municipal Obligations of at least $10,000,000.
Except for general obligation bonds, 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
Other Securities, 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 falling within a particular Issue Type Category may comprise no more
than 12% of total Moody's Eligible Assets; such Other Securities, if any,
together with any Municipal Obligations falling within a particular Issue Type
Category 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 falling within a
particular Issue Type Category 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 falling within a particular Issue Type Category and rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of total Moody's Eligible
Assets. For purposes of this definition, a Municipal Obligation shall be deemed
to be rated BBB by S&P if rated BBB or BBB+ by S&P. Notwithstanding any other
provision of this definition, in no event may (i) student loan Municipal
Obligations comprise more than 10% of Moody's Eligible Assets; (ii) resource
recovery Municipal Obligations comprise more than 10% of Moody's Eligible
Assets; and (iii) Other Issues comprise more than 10% of Moody's Eligible
Assets. For purposes of applying the foregoing requirements, a Municipal
Obligation rated BBB- by S&P shall not be considered to be rated 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 Fund sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future date, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets, and
the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the Preferred Shares Basic
Maintenance Amount. When the Fund 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 Fund upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at least A2
AA-4
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. Moody's rated Rule 2a-7 eligible money market funds are also included as
Moody's Eligible Assets.
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 virtue of any
repurchase agreement; or (ii) deposited irrevocably for the payment of any
liabilities for purposes of determining the Preferred Shares Basic Maintenance
Amount.
"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 APPLICABLE
PERCENTAGE 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 this Appendix 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
AA-5
opposite such party's name in Section 7 of this Appendix 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......... 210% 215% 230% 270% 240%
25 Business Days......... 190 195 210 250 240
10 Business Days......... 175 180 195 235 240
7 Business Days.......... 170 175 190 230 240
3 Business Days.......... 150 155 170 210 240
-------------------
* S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for shares of
Rule 2a-7 eligible money market funds affiliated with the Trust used as "sweep"
vehicles will be 111%, for shares of Rule 2a-7 eligible money market funds rated
AAAm by S&P with effective next day maturities will be 106%, and 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 Rule 2a-7 eligible money market funds rated AAAm by S&P
with effective next day maturities 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
AA-6
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 shares of a Rule 2a-7-eligible money market fund affiliated
with the Trust used as a "sweep account", shares of a Rule 2a-7-eligible money
market fund rated AAAm by S&P, 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 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;
(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; and
(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
AA-7
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
October 2, 2002.
SECTION 6
DATE FOR PURPOSES OF THE DEFINITION OF "QUARTERLY VALUATION DATE" CONTAINED
UNDER THE HEADING "DEFINITIONS" IN THIS STATEMENT.
October 31, 2002
SECTION 7
PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE MULTIPLE" IN THIS STATEMENT.
PARTY: SERIES OF PREFERRED SHARES
------ ---------------------------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... Series W7
SECTION 8
ADDITIONAL DEFINITIONS.
"Out of State Bonds" means bonds that are exempt from regular federal income
tax but not from the Trust's particular state income tax.
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 W7 AMPS, for the
Initial Rate Period on October 3, 2002, and on each Thursday thereafter.
SECTION 10
AMOUNT FOR PURPOSES OF SUBPARAGRAPH (c) (i) OF SECTION 5 OF PART I OF THIS
STATEMENT.
$44,650,000
AA-8
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 combined maximum marginal regular
Federal individual and New York State and New York City personal income tax rate
applicable to ordinary income (taking into account the Federal income tax
deductibility of state and local taxes paid or incurred) or 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 Benchmark 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" 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
AA-9
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 contract expires and will engage in a Closing
Transaction to close out any outstanding option on a futures contract by no
later than the first Business Day of the month in which such option expires;
(v) the 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;
(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
AA-10
(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(a) of this
Annex A to 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 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.
(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 Preferred Shares by S&P, except that the Trust 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"), write, purchase or sell put and call options on such contracts
(collectively, "S&P
AA-11
Hedging Transactions"), or engage in interest rate swaps, caps & floors 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), 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 AMPS 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 AMPS 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 Trust.
AA-12
APPENDIX B
RATINGS OF INVESTMENTS
STANDARD & POOR'S CORPORATION--A brief description of the applicable
Standard & Poor's Corporation ("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
B-1
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.
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.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
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
B-2
closing of the insured institution or, in the event that the deposit is
assumed by a successor insured institution, upon maturity.
* 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.
B-3
C This rating is assigned to short-term debt obligations with currently high
vulnerability for nonpayment.
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.
Bonds for which the security depends upon the completion of some act or
the fulfillment of some condition are rated conditionally. These are bonds
secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of condition.
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.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is
specific risk.
S.G. This designation denotes speculative quality. Debt instruments
in this category 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
B-5
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:
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 exception ally strong
capacity for timely payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
AA VERY HIGH CREDIT QUALITY. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A HIGH CREDIT QUALITY. 'A' ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher
ratings.
BBB GOOD CREDIT QUALITY. 'BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances
and in economic conditions are more likely to impair this capacity. This
is the lowest investment-grade category.
Speculative Grade
BB SPECULATIVE. 'BB' ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available
to allow financial commitments to be met. Securities rated in this
category are not investment grade.
B HIGHLY SPECULATIVE. 'B' ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is
contingent upon a sustained, favorable business and economic
environment.
CCC,
CC, C HIGH DEFAULT RISK. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable
business or economic developments. A 'CC' rating indicates that default
of some kind appears probable. 'C' ratings signal imminent default.
B-6
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.
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 alert: Ratings are placed on Rating alert 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 alert is typically resolved over a relatively
short period.
B-7
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
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 be low 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,
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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 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, an account of cash equivalents designated on the books and
records will be maintained and marked to market on a daily basis in an amount
equal
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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 futures contracts
sold by the Trust are generally subject to earmarking 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 designate on its books and records an ongoing basis, 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 earmarking
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 ongoing
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.
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