As filed with the Securities and Exchange Commission on September 27, 1999
File Nos.333-
811-09417
=============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-2
|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No.
|_| Post-Effective Amendment No.
and
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|X| Amendment No. 4
THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST
(Exact name of Registrant as specified in charter)
c/o BlackRock Financial Management, Inc.
345 Park Avenue
New York, New York 10154
(Address of principal executive offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein
President
The BlackRock Pennsylvania Strategic Municipal Trust
345 Park Avenue
New York, New York 10154
(Name and address of Agent for Service)
with a copy to:
Thomas A. DeCapo
Skadden, Arps, Slate, Meagher & Flom LLP
One Beacon Street
Boston, Massachusetts 02108-3194
--------------------------------------
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the Registration Statement.
If any securities on this form are to be offered on a delayed or continuous
basis in reliance on Rule 415 under the Securities Act of 1933, other than
securities offered in connection with a dividend reinvestment plan, check
the following box . . .|_|
|_| This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration
statement for the same offering is 33-__________.
--------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
===========================================================================================================
Proposed Maximum Proposed Maximum Amount of
Amount Being Offering Price Aggregate Registration
Title of Securities Being Registered Registered Per Share Offering Price(1) Fee(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Shares, $.001 par value 400 $25,000 $10,000,000 $ 2,780
===========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
the Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such dates as the Commission, acting
pursuant to said Section 8(a), may determine.
THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST
CROSS REFERENCE SHEET
Part A - Prospectus
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover................. Cover Page
Item 2. Cover Pages; Other Offering
Information......................... Cover Page
Item 3. Fee Table and Synopsis.............. Prospectus Summary
Item 4. Financial Highlights................ Financial Highlights (Unaudited)
Item 5. Plan of Distribution................ Cover Page; Prospectus
Summary; Underwriting
Item 6. Selling Shareholders................ Not Applicable
Item 7. Use of Proceeds..................... The Fund's Investments
Item 8. General Description of the
Registrant.......................... The Fund; The Fund's
Investments; Risks; Description
of Preferred Shares;
Description of Common Shares;
Certain Provisions in the
Agreement and Declaration of
Fund
Item 9. Management.......................... Management of the Fund;
Custodian and Transfer and
Dividend Disbursing Agent
Item 10. Capital Stock, Long-Term Debt,
and Other Securities................ Description of Preferred
Shares; Description of Common
Shares; Certain Provisions in
the Agreement and Declaration
of Fund; Tax Matters
Item 11. Defaults and Arrears on Senior
Securities.......................... Not Applicable
Item 12. Legal Proceedings................... Legal Opinions
Item 13. Table of Contents of the Statement
of Additional Information........... Table of Contents for the
Statement of Additional
Information
Part B - Statement of Additional Information
Item 14. Cover Page.......................... Cover Page
Item 15. Table of Contents................... Cover Page
Item 16. General Information and History..... Not Applicable
Item 17. Investment Objective and
Policies............................ Investment Objectives and
Policies; Investment Policies
and Techniques; Other
Investment Policies and
Techniques; Portfolio
Transactions and Brokerage
Item 18. Management.......................... Management of the Fund;
Portfolio Transactions and
Brokerage
Item 19. Control Persons and Principal
Holders of Securities .............. Management of the Fund
Item 20. Investment Advisory and Other
Services............................ Management of the Fund; Experts
Item 21. Brokerage Allocation and Other
Practices........................... Portfolio Transactions and
Brokerage
Item 22. Tax Status.......................... Tax Matters
Item 23. Financial Statements................ Independent Auditors' Report;
Financial Highlights (Unaudited)
Part C - Other Information
Items 24-33 have been answered in Part C of this Registration Statement.
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1999
PROSPECTUS
[ ]
BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES ("PREFERRED SHARES)")
[ ] SHARES SERIES [ ]
LIQUIDATION PREFERENCE $25,000 PER SHARE
---------------------
BlackRock Pennsylvania Strategic Municipal Trust (the "Fund") is a
closed-end, diversified management investment company.
The Fund's investment objectives are:
o to provide current income exempt from regular Federal and
Pennsylvania income taxes; and
o to invest in municipal bonds that over time will perform better than
the broader Pennsylvania municipal bond market.
The Fund is designed to provide tax benefits to investors who are
residents of Pennsylvania.
Portfolio Contents. The Fund will invest primarily in municipal bonds
that pay interest that is exempt from regular Federal and Pennsylvania
income taxes. Under normal market conditions, the Fund expects to be fully
invested in tax-exempt securities. The Fund will invest at least 80% of its
total assets in investment grade quality securities.
Investing in the Preferred Shares involves certain risks. See "Risks"
beginning on page [ ].
Investment grade quality securities are those rated by national
rating agencies within the four highest grades (Baa or BBB or better), or
securities that are unrated but judged to be of comparable quality by the
Fund's investment adviser. The Fund may invest up to 20% of its total
assets in securities that are rated Ba/BB or B or that are unrated but
judged to be of comparable quality by the Fund's investment adviser. Bonds
that are 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. See "The Fund's Investments." The Fund cannot assure you
that it will achieve its investment objectives.
This prospectus contains important information about the Fund. You
should read the prospectus before deciding whether to invest and retain it
for future reference. A statement of additional information, dated [ ]
1999, containing additional information about the Fund, has been filed with
the Securities and Exchange Commission and is incorporated by reference in
its entirety into this prospectus. You can review the table of contents of
the statement of additional information on page [ ] of this prospectus. You
may request a free copy of the statement of additional information by
calling (888) 825-2257. You may also obtain the statement of additional
information and other information regarding the Fund on the Securities and
Exchange Commission web site (http://www.sec.gov).
The Preferred Shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution. The Preferred Shares are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has approved or disapproved these securities or
determined if this prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
PER SHARE TOTAL
----------------- ---=------------
Public Offering Price $ 25,000 $
----------------- ----------------
Sales Load $ $
----------------- ----------------
Proceeds to Fund (before expenses) $ $
================= ================
Offering expenses payable by the Fund are estimated to be $[ ]. The
Fund has 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.
------------
The Underwriters are offering the Preferred Shares subject to various
conditions. It is expected that the Preferred Shares will be delivered to
the Underwriters through the facilities of The Depository Trust Company on
or about [ ], 1999.
--------------
[TO COME]
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANYONE TO PROVIDE YOU
WITH DIFFERENT INFORMATION. THE FUND IS NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
[ ], 1999
The Fund is offering [ ] shares of Series [ ] Preferred Shares.
The shares are referred to in this prospectus as "Preferred Shares." The
Preferred Shares have a liquidation preference of $25,000 per share, plus
any accumulated, unpaid dividends. The Preferred Shares also have priority
over the Fund's common shares as to distribution of assets as described in
this Prospectus. The dividend rate for the initial dividend rate period
will be [ ]% for Preferred Shares Series [ ]. The initial rate period is
from the date of issuance through [ ], 1999. For subsequent rate periods,
Preferred Shares pay dividends based on a rate set at auction, usually held
weekly. Prospective purchasers should carefully review the auction
procedures described in the Prospectus and should note: (1) a buy order
(called a "bid order") or sell order is a commitment to buy or sell
Preferred Shares based on the results of an auction; (2) auctions will be
conducted by telephone; and (3) purchases and sales will be settled on the
next business day after the auction. Preferred Shares are not listed on an
exchange. You may only buy or sell Preferred Shares through an order placed
at an auction with or through a broker-dealer that has entered into an
agreement with the auction agent and the Fund, or in a secondary market
maintained by certain broker-dealers. These broker-dealers are not required
to maintain this market, and it may not provide you with liquidity.
Dividends on shares of Preferred Shares, to the extent payable from
tax-exempt income earned on the Fund's investments, will be exempt from
regular Federal income tax in the hands of owners of such shares. All or a
portion of the Fund's dividends may be subject to the Federal alternative
minimum tax. The Fund is required to allocate net capital gains and other
taxable income, if any, proportionately between common and preferred
shares, based on the percentage of total dividends distributed to each
class for that year. The Fund, in the case of the ordinary seven day rate
periods or special rate periods of no more than 28 days, [intends to] give
notice of the amount of any income taxable for federal income tax purposed
to be included in a dividend on a Preferred Share in advance of the related
auction and may give advance notice to Preferred Shareholders during longer
rate periods.
You should rely only on the information contained in this prospectus.
The Fund has not authorized anyone to provide you with different
information. The Fund is not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information provided by this prospectus is accurate as of any date on the
front of this prospectus.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................................................. 8
Financial Highlights............................................... 11
The Fund........................................................... 12
Use of Proceeds.................................................... 13
Capitalization..................................................... 13
The Fund's Investments............................................. 14
Risks.............................................................. 19
Management of the Fund............................................. 22
Description of Preferred Shares.................................... 25
The Auction........................................................ 35
Description of Common Shares....................................... 38
Certain Provisions in the Agreement and Declaration of Trust....... 39
Conversion to Open-End Fund........................................ 40
Repurchase of Shares............................................... 40
Tax Matters........................................................ 40
Underwriting....................................................... 41
Custodian and Transfer and Dividend Disbursing Agent............... 42
Legal Opinions..................................................... 43
Available Information.............................................. 43
Table of Contents for the Statement of Additional Information...... 43
Taxable Equivalent Yield Table..................................... A-1
PROSPECTUS SUMMARY
The following information is qualified in its entirety by reference
to the more detailed information included elsewhere in this Prospectus and
the Fund's Statement of Preferences of Municipal Auction Rate Cumulative
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 FUND
The BlackRock Pennsylvania Strategic Municipal Trust (the "Fund") is
a closed-end, diversified management investment company. See "The Fund."
The Fund's Common Shares are traded on the American Stock Exchange under
the symbol "BPS." See "Description of Common Shares." As of [ ], 1999,
the Fund had [ ] Common Shares outstanding and net assets of $[ ].
INVESTMENT OBJECTIVES
The Fund's investment objectives are to provide current income exempt
from regular Federal and Pennsylvania income taxes and to invest in
municipal bonds that over time will perform better than the broader
Pennsylvania municipal bond market. The Fund will invest primarily in
municipal bonds that pay interest that is exempt from regular Federal and
Pennsylvania income taxes. The Fund will invest in municipal bonds that, in
BlackRock Financial Management, Inc.'s opinion, are underrated or
undervalued. Underrated municipal bonds are those whose ratings do not, in
BlackRock Financial's opinion, reflect their true higher creditworthiness.
Undervalued municipal bonds are bonds that, in BlackRock Financial's
opinion, are worth more than the value assigned to them in the marketplace.
Under normal market conditions, the Fund expects to be fully invested in
securities that pay interest that is or make other distributions that are
exempt from regular Federal income tax. The Fund will invest at least 80%
of its total assets in securities that at the time of investment are
investment grade quality. Investment grade quality securities are
securities rated within the four highest grades (Baa or BBB or better by
Moody's Investor Service, Inc. ("Moody's"), Standard & Poor's Corporation
("S&P") or Fitch IBCA, Inc. ("Fitch")), or securities that are unrated but
judged to be of comparable quality by BlackRock Financial. The Fund may
invest up to 20% of its total assets in securities 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 BlackRock Financial.
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 Fund 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 Fund may not attain its
investment objectives. See "The Fund's Investments."
INVESTMENT ADVISER
BlackRock Advisors, Inc. will be the Fund's investment adviser, and
BlackRock Advisors' affiliate, BlackRock Financial, will act as the Fund's
sub-adviser and handle day-to-day investment management of the Fund.
BlackRock Advisors is an indirect subsidiary of PNC Bank, N.A. See
"Management of the Fund."
THE OFFERING
The Fund is offering [ ] shares of Series [ ] Preferred Shares each
at a purchase price of $25,000 per share. Preferred Shares are being
offered by the Underwriters listed under "Underwriting."
RISK FACTORS SUMMARY
Risk is inherent in all investing. Therefore, before investing you
should consider certain risks carefully when you invest in the Fund. The
primary risks of investing in Preferred Shares 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 Preferred Shares, 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 Preferred Shares, which
could affect liquidity;
- the Fund may be forced to redeem your shares to meet regulatory or
rating agency requirements or may voluntarily redeem your shares in
certain circumstances;
- in extraordinary circumstances the Fund may not earn
sufficient income from its investments to pay dividends;
- if long-term interest rates rise, the value of the Fund's
investment portfolio will decline, reducing the asset coverage for
the Preferred Shares; and
- if an issuer of a municipal bond in which the Fund invests
experiences financial difficulty or defaults, there may be a negative
impact on the income and asset value of the Fund's portfolio.
For additional general risks of investing in the Fund, see "Risks" below.
TRADING MARKET
Preferred Shares are not listed on an exchange. Instead, you may buy
or sell the Preferred Shares 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 Fund (a "Broker-Dealer"), or to a
broker-dealer that has entered into a separate agreement with a
Broker-Dealer. In addition to the auctions, Broker-Dealers and other
broker-dealers may maintain a secondary trading market in Preferred Shares
outside of auctions, but may discontinue this activity at any time. There
is no assurance that a secondary market will provide shareholders with
liquidity. You may transfer shares outside of auctions only to or through a
Broker-Dealer, or a broker-dealer that has entered into a separate
agreement with a Broker-Dealer.
The table below shows the first auction date for each Series of
Preferred Shares and the day on which each subsequent auction will normally
be held for each Series of Preferred Shares. The first auction date for
each Series of Preferred Shares will be the business day before the
dividend payment date for the initial rate period for each Series of
Preferred Shares. The start date for subsequent rate periods normally will
be the business day following the auction date unless the then-current rate
period is a special rate period, or the day that normally would be the
auction date or the first day of the subsequent rate period is not a
business day.
FIRST AUCTION SUBSEQUENT
DATE* AUCTION
------------- ----------
[TO COME]
*All dates are 1999
DIVIDENDS AND RATE PERIODS
The table below shows the dividend rate for the initial rate period
on each Series of Preferred Shares offered in this Prospectus. For
subsequent rate periods, Preferred Shares will pay dividends based on a
rate set at auctions, normally held weekly. In most instances dividends are
also paid weekly, on the day following the end of the rate period. The rate
set at auction will not exceed the Maximum Rate. See "Description of
Preferred Shares -- Dividends and Dividend Periods -- General."
The table below also shows for each Series of Preferred Shares the
date from which dividends on the Preferred Shares will accumulate at the
initial rate, the dividend payment date for the initial rate period and the
day on which dividends will normally be paid. If the day on which dividends
otherwise would be paid is not a business day, then your dividends will be
paid on the first business day that falls after that day.
Finally, the table below shows number of days of the initial rate
period for each Series of Preferred Shares. Subsequent rate periods
generally will be seven days. The dividend payment date for special rate
periods of more than 28 days will be set out in the notice designating a
special rate period. See "Description of Preferred Shares -- Dividends and
Dividend Periods -- Designation of Special Rate Periods."
DIVIDEND NUMBER
DATE OF PAYMENT SUBSEQUENT OF DAYS
ACCUMULATION DATE FOR DIVIDEND OF INITIAL
SERIES INITIAL AT INITIAL INITIAL RATE PAYMENT RATE
DIVIDEND RATE RATE* PERIOD* DAY PERIOD
[TO COME]
- -----------
*All dates are 1999.
TAXATION
Because under normal circumstances the Fund will invest substantially
all of its assets in municipal bonds that pay interest exempt from regular
Federal income tax, the income you receive will ordinarily be similarly
exempt. [Your income may be subject to state and local taxes]. All or a
portion of the income from these bonds will be subject to the Federal
alternative minimum tax, so Preferred shares may not be a suitable
investment if you are subject to this tax or would become subject to such
tax by investing in Preferred shares. Taxable income or gain earned by the
Fund will be allocated proportionately to holders of Preferred Shares and
Common Shares, based on the percentage of total dividends paid to each
class for that year. Accordingly, certain specified Preferred Share
dividends may be subject to income tax on income or gains attributed to the
Fund. The Fund presently intends to notify shareholders, before any
applicable auction for a rate period of 28 days or less, of the amount of
any taxable income and gain to be paid for the period relating to that
auction. For longer periods, the Fund may notify shareholders. In certain
circumstances, the Fund will make shareholders whole for taxes owing on
dividends paid to shareholders that include taxable income and gain. See
"Tax Matters."
RATINGS
Shares of each series of Preferred Shares will be issued with a
rating of "Aaa" from Moody's Investors Service, Inc. ("Moody's"). Because
the Fund is required to maintain this rating, it must own portfolio
securities of a sufficient value and with adequate credit quality to meet
the rating agency's guidelines. See "Description of Preferred Shares --
Rating Agency Guidelines."
REDEMPTION
Although the Fund does not ordinarily redeem Preferred Shares, it may
be required to redeem shares if, for example, the Fund does not meet an
asset coverage ratio required by law or to correct a failure to meet a
rating agency guideline in a timely manner. The Fund voluntarily may redeem
Preferred Shares in certain conditions. See "Description of Preferred
Shares -- Redemption" and "Description of Preferred Share -- Rating Agency
Guidelines."
LIQUIDATION PREFERENCE
The liquidation preference of each series of Preferred Shares will be
$25,000 per share plus accumulated but unpaid dividends, if any, thereon.
See "Description of Preferred Shares -- Liquidation."
VOTING RIGHTS
The holders of preferred shares, including Preferred Shares, voting
as a separate class, have the right to elect at least two trustees at all
times and to elect a majority of the trustees in the event 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 Preferred Shares, voting together as a single class. The holders
of preferred shares, including Preferred Shares, will vote as a separate
class or classes on certain other matters as required under the Declaration
of Trust, the Investment Company Act of 1940 (the "1940 Act") and Delaware
law. See "Description of Preferred Shares -- Voting Rights" and "Certain
Provisions in the Declaration of Trust."
FINANCIAL HIGHLIGHTS
(UNAUDITED)
Information contained in the table below under the headings "Per
Share Operating Performance" and "Ratios/Supplemental Data" shows the
unaudited operating performance of the Fund from the commencement of the
Fund's operations on [ ], 1999 until [ ], 1999. Since the Fund was
recently organized and commenced operations on [ ], 1999, the table
covers less than five weeks of operations, during which a substantial
portion of the Fund's portfolio was held in temporary investments pending
investment in municipal securities that meet the Fund's investment
objectives and policies. Accordingly, the information presented may not
provide a meaningful picture of the Fund's operating performances.
Per Share Operating Performance:
Net Asset Value, Beginning of Period................ $
-------------
Net Investment Income.........................
Net Gains or Losses on Securities (Both
Realized and Unrealized)....................
-------------
Total From Investment Operations...........
-------------
Organization and Offering Costs..................
-------------
Net Asset Value, End of Period................... $
=============
Per Share Market Value, End of Period............ $
Total Return on Net Asset Value..................
Total Investment Return on Market Value..........
Ratios/Supplemental Data:
Net Assets, End of Period (In Thousands)......... $
Ratio of Expenses to Average Net Assets
Before Reimbursement...........................
Ratio of Net Investment Income to Average
Net Assets Before Reimbursement................
Ratio of Expenses to Average Net Assets
After Reimbursement............................
Ratio of Net Investment Income to Average
Net Assets After Reimbursement.................
Portfolio Turnover Rate
- -------------------
*Annualized
THE FUND
BlackRock Pennsylvania Strategic Municipal Trust (the "Fund") is a
recently organized closed-end, diversified management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund was organized as a Delaware business trust on June 30, 1999
pursuant to an Agreement and Declaration of Trust governed by the laws of
the State of Delaware (the "Declaration"). On [ ], 1999, the Fund issued
an aggregate of [ ] common shares of beneficial interest, par value $.001
per share ("Common Shares"), pursuant to the initial public offering
thereof and commenced its operations. On [ ], 1999 the Fund issued an
additional [ ] Common Shares, respectively, in connection with the
[partial] exercise by the Underwriters of the over-allotment option. The
Fund's Common Shares are traded on the American Stock Exchange (the
"Exchange") under the symbol "BPS." The Fund's principal office is located
at 345 Park Avenue, New York, New York 10154, and its telephone number is
(888) 825-2257.
The following provides information about the Fund's outstanding
shares as of [ ], 1999:
AMOUNT HELD
AMOUNT BY THE FUND OR AMOUNT
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT OUTSTANDING
- -------------- ---------- --------------- ------------
Common................... Unlimited 0 [ ]
Preferred................ Unlimited 0 0
Series [ ]..... [ ] 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $[ ]
after payment of the sales load and estimated offering costs.
The net proceeds of the offering will be invested in accordance
with the Fund's investment objective and policies as stated below. It is
presently anticipated that the Fund will be able to invest substantially
all of the net proceeds in municipal securities that meet that objective
and these policies at or shortly (within six to eight weeks) after the
completion of the offering. To the extent that all of the proceeds cannot
be so invested, pending such investment, they will be invested in
short-term, high quality tax-exempt securities. If necessary to invest
fully the net proceeds of the offerings immediately, the Fund may also
purchase, as temporary investments, short-term taxable investments the
income on which is subject to regular Federal income tax.
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of the Fund as
of [ ], 1999, and as adjusted to give effect to the issuance of the
Preferred Shares offered hereby.
ACTUAL ADJUSTED
------ --------
Shareholders' Equity:
Preferred Shares, $25,000 stated value
per share, at liquidation value;
unlimited shares authorized (no shares
issued; [ ] shares issued, as
adjusted, respectively) $[ ] $[ ]
Common Shares, $.001 par value per share;
unlimited shares authorized [ ] shares
outstanding* [ ] [ ]
Paid-in surplus [ ] [ ]
Balance of undistributed net investment income [ ] [ ]
Accumulated net realized gain (loss) from
investment transactions [ ] [ ]
Net unrealized appreciation (depreciation) [ ] [ ]
of investments
------------------------
Net Assets $[ ] $[ ]
========================
* None of these outstanding shares are held by or for the account of the
Fund.
PORTFOLIO COMPOSITION
As of [ ], 1999, approximately [ ]% of the market value of the
Fund's portfolio was invested in long-term municipal securities and
approximately [ ]% of the market value of the Fund's portfolio was invested
in short-term municipal securities. The following table sets forth certain
information with respect to the composition of the Fund's investment
portfolio as of [ ], 1999.
CREDIT RATING VALUE PERCENT
Aaa/AAA* $[ ] [ ]%
Aa/AA [ ] [ ]
A/A [ ] [ ]
Baa/BBB [ ] [ ]
Unrated [ ] [ ]
Short-term [ ] [ ]
------- ------
TOTAL $[ ] [ ]%
======= =======
* 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.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's investment objectives are:
o to provide current income exempt from regular Federal and
Pennsylvania income taxes; and
o to invest in municipal bonds that over time will perform better than
the broader Pennsylvania municipal bond market.
The Fund will invest primarily (under normal market conditions, at
least 65% of its total assets) in municipal bonds that pay interest that is
exempt from regular Federal and Pennsylvania income taxes. Under normal
market conditions, the Fund expects to be fully invested (at least 95% of
its net assets) in securities that pay interest that is or make other
distributions that are exempt from regular Federal income tax. The Fund
will invest at least 80% of its total assets in investment grade quality
securities. Investment grade quality means that such securities 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 Financial. The Fund may invest up to 20% of
its total assets in securities 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 Financial. Bonds of below investment grade
quality (Ba/BB or below) are commonly referred to as junk bonds. Bonds of
below investment grade quality are regarded as having predominantly
speculative characteristics with respect to the issuer's capacity to pay
interest and repay principal. These credit quality policies apply only at
the time a security is purchased, and the Fund 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 Financial
may consider such factors as BlackRock Financial'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 Pennsylvania.
The Fund may also invest in securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the types
in which the Fund may invest directly and in tax-exempt preferred shares
that pay dividends that are exempt from regular Federal income tax. See
"--Other Investment Companies," "--Tax-Exempt Preferred Shares" and
"--Initial Portfolio Composition." Subject to the Fund's policy of
investing at least 65% of its total assets in municipal bonds that pay
interest that is exempt from Pennsylvania income tax, the Fund may invest
in securities that pay interest that is not or make other distributions
that are not exempt from Pennsylvania income tax when, in the judgment of
BlackRock Financial, the return to shareholders after payment of applicable
Pennsylvania income tax would be higher than the return available from
comparable securities that pay interest that is or make other distributions
that are exempt from Pennsylvania income tax.
The Fund will invest in municipal bonds that, in BlackRock
Financial's opinion, are underrated or undervalued. Underrated municipal
bonds are those whose ratings do not, in the opinion of BlackRock
Financial, reflect their true higher creditworthiness. Undervalued
municipal bonds are bonds that, in the opinion of BlackRock Financial, are
worth more than the value assigned to them in the marketplace. BlackRock
Financial may at times believe that bonds associated with a particular
municipal market sector (for example, electric utilities), or issued by a
particular municipal issuer, are undervalued. BlackRock Financial may
purchase those bonds for the Fund's portfolio because they represent a
market sector or issuer that BlackRock Financial considers undervalued,
even if the value of those particular bonds appears to be consistent with
the value of similar bonds. Municipal bonds of particular types (for
example, hospital bonds, industrial revenue bonds or bonds issued by a
particular municipal issuer) may be undervalued because there is a
temporary excess of supply in that market sector, or because of a general
decline in the market price of municipal bonds of the market sector for
reasons that do not apply to the particular municipal bonds that are
considered undervalued. The Fund's investment in underrated or undervalued
municipal bonds will be based on BlackRock Financial'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. The Fund attempts to invest in municipal bonds that over time will
perform better than the broader Pennsylvania municipal bond market by
prudent selection of municipal bonds regardless of the direction the market
may move. Any capital appreciation realized by the Fund will generally
result in capital gain distributions subject to capital gain taxes.
The Fund 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 Fund'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 Fund may purchase bonds with insurance
purchased by the issuer or other third parties 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 Fund's cash fully invested, the Fund may invest up to 100% of its net
assets in short-term investments, including high quality, short-term
securities that may be either tax-exempt or taxable. The Fund intends to
invest in taxable short-term investments only if suitable tax-exempt
short-term investments are not available at reasonable prices and yields.
If the Fund invests in taxable short-term investments, a portion of your
dividends would be subject to regular Federal and Pennsylvania income
taxes. See the Statement of Additional Information.
The Fund cannot change its investment objectives without the approval
of the holders of a majority of the outstanding Common Shares and, the
outstanding preferred shares, including the Preferred Shares, voting
together as a single class, and the holders of a majority of the
outstanding preferred shares 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 outstanding shares are present or
represented by proxy, or (2) more than 50% of the outstanding shares,
whichever is less. See "Description of -- Preferred Shares--Voting Rights"
and the Statement of Additional Information for additional information with
respect to the voting rights of holders of Preferred Shares.
Municipal Bonds
Municipal bonds are either general obligation or revenue bonds and
typically are issued to finance public projects, such as roads or public
buildings, to pay general operating expenses or to refinance outstanding
debt. Municipal bonds may also be issued for private activities, such as
housing, medical and educational facility construction or for privately
owned industrial development and pollution control projects. General
obligation bonds are backed by the full faith and credit, or taxing
authority, of the issuer and may be repaid from any revenue source. Revenue
bonds may be repaid only from the revenues of a specific facility or
source. The Fund also may purchase municipal bonds that represent lease
obligations. These carry special risks because the issuer of the bonds may
not be obligated to appropriate money annually to make payments under the
lease. In order to reduce this risk, the Fund will only purchase municipal
bonds representing lease obligations where BlackRock Financial believes the
issuer has a strong incentive to continue making appropriations until
maturity.
The municipal bonds in which the Trust will primarily invest pay
interest or make other distributions that, in the opinion of bond counsel
to the issuer, or on the basis of another authority believed by BlackRock
Financial to be reliable, is exempt from regular Federal and Pennsylvania
income taxes. BlackRock Financial will not conduct its own analysis of the
tax status of the interest paid by municipal bonds held by the Fund. The
Fund treats as municipal bonds investment company shares, tax-exempt
preferred shares and other securities that pay interest or make other
distributions that are exempt from regular Federal income tax and in which
the Fund may invest as discussed in this prospectus, regardless of the
security's form as bonds, notes, stocks, and shares or other interests and
regardless of whether the issuer is a government, governmental entity or
private entity.
The yields on municipal bonds depend on a variety of factors,
including prevailing interest rates and the condition of the general money
market and the municipal bond market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. The market
value of municipal bonds will vary with changes in interest rate levels and
as a result of changing evaluations of the ability of bond issuers to meet
interest and principal payments.
The Fund will primarily invest in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15 years or
more, but the weighted average maturity of obligations held by the Fund may
be shortened, depending on market conditions.
Risk Factors Relating to Pennsylvania Municipal Bonds. The following
information provides only a brief discussion of certain factors affecting
the issuers of municipal obligations in Pennsylvania (the "Commonwealth")
and is derived from sources that are generally available to investors and
is believed to be accurate. It is based in part on information obtained
from various state and local agencies in Pennsylvania. No independent
verification has been made of the following information.
The Commonwealth of Pennsylvania is one of the most populous states,
ranking fifth behind California, New York, Texas and Florida. Pennsylvania
is an established state with a diversified economy. It is the headquarters
for many major corporations. Pennsylvania has been historically identified
as a heavy industry state. That reputation has changed over the last thirty
years as the coal, steel and railroad industries declined and the
Commonwealth's business environment readjusted to reflect a more
diversified industrial base. This economic readjustment was a direct result
of a long-term shift in jobs, investment and workers away from the
northeast part of the nation. Currently, the major sources of growth in
Pennsylvania are the service sector, including trade, medical and health
services, education and financial institutions.
Pennsylvania's agricultural industries remain an important component
of the Commonwealth's economic structure, accounting for more than $3.6
billion in crop and livestock products annually. Agribusiness and
food-related industries support $39 billion in economic activity annually.
Over 51,000 farms form the backbone of the Commonwealth's agricultural
economy. Farmland in Pennsylvania includes over four million acres of
harvested cropland and four million acres of pasture and farm
woodlands--nearly one-third of the Commonwealth's total land area.
From 1990 to 1992, employment in the Commonwealth declined 2%. From
1992 to 1998, employment increased 8%. The growth in employment experienced
in the Commonwealth during such periods is slightly higher than the growth
in employment in the Middle Atlantic region of the United States.
Non-manufacturing employment in the Commonwealth has increased steadily in
recent years to its 1998 level of 82.8% of total Commonwealth employment.
Manufacturing, which contributed 17.2% of 1998 non-agricultural employment,
has fallen behind both the services sector and the trade sector as the
largest single source of employment within the Commonwealth. In 1998, the
services sector accounted for 32.3% of all non-agricultural employment in
the Commonwealth while the trade sector accounted for 22.4%. Economic
strengths and weaknesses vary in different parts of the Commonwealth. In
general, heavy industry and manufacturing have been facing increasing
competition from foreign producers. During 1998, the annual average
unemployment rate in the Commonwealth was 4.6%, compared to 4.5% for the
United States. As of April 1999, the seasonally adjusted unemployment rate
for the Commonwealth was 4.4% and for the United States was 4.3%.
A well-established standard in the computer industry governing
traditional programming practices is expected to result in many current
computer systems being unable to recognize dates beyond the year 1999. As a
result, computers worldwide may begin to malfunction by producing erroneous
data or failing completely as the year 2000 draws near. The Governor of
Pennsylvania has made fixing the year 2000 problem a top priority for
Pennsylvania state agencies. At the Governor's direction, Pennsylvania has
begun an aggressive program to make its computer systems year 2000-
compatible and to identify potential problems with entities outside state
government with which the Commonwealth does business or exchanges data.
An initial assessment of state agencies' computer resources was
completed in June 1996. This overview assessment was used to develop the
Governor's Year 2000 Action Plan, which tracks state agencies' computer
programs through a three-step process of correction, testing, and
implementation. Under this action plan, over 46,000 mission-critical and
non mission-critical computer programs used by state agencies are scheduled
for corrective measures to ensure they will be year 2000-compatible.
Mission-critical computer programs are those which impact the health,
safety and welfare of the Commonwealth and its citizens, and for which
failure to be year 2000 compliant could have a material and adverse impact
upon operations of the Commonwealth. As of January 31, 1999, over 99.9% of
the planned mission-critical work items and over 99.8% of the non-mission
critical work items were completed. Testing of remediated codes is expected
to be completed in mid-1999. The projected cost of the Commonwealth's year
2000 modification work is not believed to be a material amount and is being
paid from appropriations from current revenues.
For more information, see "Investment Policies and Techniques --
Factors Pertaining to Pennsylvania" in the statement of additional
information.
When-Issued and Forward Commitment Securities
The Fund 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 involves 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. A
separate account of the Fund will be established with its custodian
consisting of cash, or other liquid high grade debt securities having a
market value at all times, at least equal to the amount of the commitment.
Other Investment Companies
The Fund 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 Fund may invest directly. The
Fund generally expects to invest in other investment companies either
during periods when it has large amounts of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of
Preferred Shares, 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 Fund will bear its ratable share of that
investment company's expenses, and would remain subject to payment of the
Fund's advisory and other fees and expenses with respect to assets so
invested. Holders of common shares would therefore be subject to
duplicative expenses to the extent the Fund invests in other investment
companies. BlackRock Financial 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 be leveraged and will
therefore be subject to leverage risks. The net asset value and market
value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by
unleveraged shares. Investment companies may have investment policies that
differ from those of the Fund. In addition to the extent that the Fund
invests in other investment companies, the Fund will be dependent upon the
investment and research abilities of persons other than BlackRock
Financial. The Fund treats its investments in such open- or closed-end
investment companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
The Fund 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. Such funds in turn invest in municipal bonds
and other assets that pay interest or make distributions that are exempt
from regular Federal income tax, such as revenue bonds issued by state or
local agencies to fund the development of low-income, multi-family housing.
Investment in such tax-exempt preferred shares involves many of the same
issues as investing in other open- or closed-end investment companies as
discussed above. These investments also have additional risks, including
liquidity risk, the absence of regulation governing investment practices,
capital structure and leverage, affiliated transactions and other matters,
and concentration of investments in particular issuers or industries.
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 Fund will treat investments in tax-exempt preferred shares as
investments in municipal bonds.
Initial Portfolio Composition
If current market conditions persist, the Fund expects that
approximately 80% of its initial portfolio, after investment of the
proceeds of the offering of the Preferred Shares will consist of investment
grade quality municipal bonds, rated as such at the time of investment,
meaning that such bonds are rated by national rating agencies within the
four highest grades or are unrated but judged to be of comparable quality
by BlackRock Financial (approximately 35% in Aaa/AAA; 25% in A; and 20% in
Baa/BBB). BlackRock Financial generally expects to select obligations that
may not be redeemed at the option of the issuer for approximately seven to
nine years from the date of purchase by the Fund. Subject to market
availability, BlackRock Financial currently expects to invest approximately
20% of the Fund's initial portfolio in municipal bonds that are, at the
time of investment, either rated below investment grade or that are unrated
but judged to be of comparable quality by BlackRock Financial. See
"--Investment Objectives and Policies."
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 Preferred Shares.
INTEREST RATE RISK
The Fund issues Preferred Shares, which pay dividends based on
short-term interest rates, and uses the proceeds to buy municipal bonds,
which pay interest based on long-term yields. Both long-term and short-term
interest rates may fluctuate. If short-term interest rates rise, Preferred
Share rates may rise so that the amount of dividends paid to Preferred
Shareholders exceeds the income from the portfolio securities purchased
with the proceeds from the sale of Preferred Shares. Because income from
the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the Preferred Share offering) is
available to pay Preferred Share dividends, however, Preferred Share
dividend rates would need to greatly exceed the yield on the Fund's
portfolio before the Fund's ability to pay Preferred Share dividends would
be impaired. If long-term rates rise, the value of the Fund's investment
portfolio will decline, reducing the amount of assets serving as asset
coverage for the Preferred Shares.
AUCTION RISK
You may not be able to sell your Preferred Shares at an auction if
the auction fails; that is, if there are more Preferred Shares offered for
sale than there are buyers for those shares. The Fund believes this event
is unlikely. Also, if you place hold orders (orders to retain Preferred
Shares) at an auction only at a specified rate, and that bid rate exceeds
the rate set at the auction, you will not retain your Preferred Shares.
Finally, if you buy shares or elect to retain shares without specifying a
rate below which you would not wish to continue to hold those shares, and
the auction sets a below-market rate, you may receive a lower rate of
return on your shares than the market rate. See "Description of Preferred
Shares" and "The Auction -- Auction Procedures."
SECONDARY MARKET RISK
If you try to sell your Preferred Shares 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 Fund has designated a special rate period (a rate period
of more than 7 days), changes in interest rates could affect the price you
would receive if you sold your shares in the secondary market.
Broker-dealers that maintain a secondary trading market for Preferred
Shares are not required to maintain this market, and the Fund is not
required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. Preferred Shares are not
registered on a stock exchange or the NASDAQ stock market. If you sell your
Preferred Shares to a broker-dealer between auctions, you may receive less
than the price you paid for them, especially when market interest rates
have risen since the last auction.
RATINGS AND ASSET COVERAGE RISK
While Moody's assign ratings of [ ] to Preferred Shares, the rating
does not eliminate or necessarily mitigate the risks of investing in
Preferred Shares. Moody's could downgrade Preferred Shares, which may make
your shares less liquid at an auction or in the secondary market. If
Moody's downgrades Preferred Shares, the Fund may alter its portfolio or
redeem Preferred Shares 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 Fund may voluntarily redeem Preferred Shares
under certain circumstances. See "Description of Preferred Shares --Asset
Maintenance and Rating Agency Guidelines" for a description of the asset
maintenance tests the Fund must meet.
CREDIT RISK
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 Fund's net
asset value or dividends. The Fund may invest up to 20% of its total assets
in municipal bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or
that are unrated but judged to be of comparable quality by BlackRock
Financial. Bonds rated Ba/BB or B are regarded as having predominately
speculative characteristics with respect to the issuer's capacity to pay
interest and repay principal, and these bonds are commonly referred to as
junk bonds. These securities are subject to a greater risk of default. The
prices of these lower grade bonds are more sensitive to negative
developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher grade securities. Lower
grade securities tend to be less liquid than investment grade securities.
The market values of lower grade securities tend to be more volatile than
is the case for investment grade securities.
State Concentration Risk. Because the Fund primarily purchases
municipal bonds issued by the Commonwealth of Pennsylvania 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 Fund is susceptible to political, economic,
regulatory and other factors affecting issuers of Pennsylvania municipal
bonds. Pennsylvania is a large state with a stable but aging and largely
urban population. Pennsylvania is undergoing many of the changes common to
Northeastern states, including a shift from a heavy industrial economy to a
more diversified industrial and service economy. Agriculture remains an
important component of Pennsylvania's economy. Pennsylvania and issuers of
municipal bonds in Pennsylvania have experienced many of the economic and
other problems associated with Northeastern states, including large
indigent urban populations, aging infrastructure, loss of high paying
manufacturing jobs, growing healthcare and senior care costs and relatively
heavy tax burdens. In addition, intense competition and other factors
affecting the healthcare industry in Pennsylvania have resulted in severe
financial difficulties for many Pennsylvania healthcare providers.
Accordingly, the Fund may be adversely affected by economic, political,
regulatory and other factors affecting issuers of municipal bonds in
Pennsylvania, such as (for example) governmental policies affecting urban
areas and populations; federal funding of infrastructure replacement;
third-party reimbursement of healthcare costs; and weather conditions (such
as drought) affecting agriculture.
For a discussion of economic and other conditions in Pennsylvania,
see "The Trust's Investments--Municipal Bonds--Risk Factors Relating to
Pennsylvania Municipal Bonds."
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 Fund's portfolio is generally less than that for
corporate equities or bonds, and the investment performance of the Fund may
therefore be more dependent on the analytical abilities of BlackRock
Financial 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 Fund may invest, also tends to be less well-developed or
liquid than many other securities markets, which may adversely affect the
Fund'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 during general economic downturns and as
governmental cost burdens are reallocated among Federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes. Issuers of
municipal securities might seek protection under the bankruptcy laws. In
the event of bankruptcy of such an issuer, the Fund could experience delays
in collecting principal and interest and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession
of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses. Any income
derived from the Fund's ownership or operation of such assets may not be
tax-exempt.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's bond portfolio will decline if and when the Fund invests the
proceeds from matured, traded, prepaid or called bonds at lower interest
rates. A decline in income could affect the common shares' market price or
their overall returns.
Economic Sector Risk. The Fund may invest 25% or more of its total
assets in municipal obligations of issuers in the same economic sector,
including without limitation the following: lease rental obligations of
state and local authorities; obligations dependent on annual appropriations
by a state's legislature for payment; obligations of state and local
housing finance authorities, municipal utilities systems or public housing
authorities; obligations of hospitals or life care facilities; or
industrial development or pollution control bonds issued for electric
utility systems, steel companies, paper companies or other purposes. This
may make the Fund more susceptible to adverse economic, political, or
regulatory occurrences affecting a particular 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 asset value.
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 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.
"Year 2000" Risk. The Fund, like any business, could be affected if
the computer systems on which it relies do not properly process information
beginning on January 1, 2000. While Year 2000 issues could have a negative
effect on the Fund, BlackRock Advisors is currently working to avoid such
problems. BlackRock Advisors is also working with other systems providers
and vendors to determine their systems' ability to handle Year 2000
problems. There is no guarantee, however, that systems will work properly
on January 1, 2000. Year 2000 problems may also hurt issuers whose
securities the Fund holds or securities markets generally.
MANAGEMENT OF THE FUND
Trustees and Officers
The board of trustees is responsible for the overall management of
the Fund, including supervision of the duties performed by BlackRock
Advisors and BlackRock Financial. There are eight trustees of the Fund. Two
of the trustees are "interested persons" (as defined in the Investment
Company Act). The names and business addresses of the trustees and officers
of the Fund and their principal occupations and other affiliations during
the past five years are set forth under "Management of the Fund" in the
statement of additional information.
Investment Adviser
BlackRock Advisors will act as the Fund's investment adviser.
BlackRock Advisors, together with its investment advisory subsidiaries, is
a global asset management firm with assets of approximately $142 billion
under management as of June 30, 1999. BlackRock Advisors has its principal
office at 345 Park Avenue, New York, New York 10154. BlackRock Advisors and
its subsidiaries constitute the asset management arm of PNC Bank, N.A., and
together have over 630 employees. BlackRock Advisors has appointed
BlackRock Financial, one of its affiliates, to handle the day-to-day
investment management of the Fund. BlackRock Financial was founded in 1988
and provides fixed income, liquidity, equity, alternative investment, and
risk management products for clients worldwide. As of June 30, 1999,
BlackRock Financial managed approximately $80 billion in various fixed
income sectors, including $8 billion in municipal securities. BlackRock
Financial also manages approximately $44 billion in cash or other short
term, highly liquid investments, including $4.4 billion in short term
municipal securities. BlackRock Advisors has $63 billion in mutual fund
assets under management, including two open-end mutual fund families,
BlackRock FundsSM and Provident Institutional Funds, 21 publicly traded
closed-end funds and several short-term investment funds. Among these
products, BlackRock Financial manages 11closed-end, six open-end and six
money market municipal funds. In addition, BlackRock Financial manages
portfolios of municipal securities for large insurance companies and high
net worth individuals.
Investment Philosophy. BlackRock Financial'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 Financial uses a relative value strategy that evaluates the
trade-off between risk and return to seek to achieve the Fund's investment
objectives. This strategy is combined with disciplined risk control
techniques and applied in sector, sub-sector and individual security
selection decisions. BlackRock Financial's extensive personnel and
technology resources are the key drivers of the investment philosophy.
BlackRock Financial's Municipal Bond Team. BlackRock Financial uses a
team approach to managing municipal portfolios. BlackRock Financial
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 Financial's municipal bond team includes two portfolio
managers and six credit research analysts. The team is lead by Kevin M.
Klingert, a managing director and portfolio manager at BlackRock Financial.
Mr. Klingert is a senior portfolio manager and head of municipal bonds at
BlackRock Financial, a position he has held since joining BlackRock
Financial in 1991. Mr. Klingert has over 15 years of experience in the
municipal market. Prior to joining BlackRock Financial, Mr. Klingert was an
Assistant Vice President in the Unit Investment Trust Department at Merrill
Lynch, Pierce, Fenner & Smith which he joined in 1985. Mr. Klingert has
primary responsibility for managing client portfolios with a special
emphasis on municipal securities. The portfolio management team also
includes Craig Kasap. Mr. Kasap has been a portfolio manager at BlackRock
Financial for over two years and is a member of BlackRock Financial's
Investment Strategy Group. Prior to joining BlackRock Financial in 1997,
Mr. Kasap spent three years as a municipal bond trader with Keystone
Investments in Boston where he was involved in formulating the firm's
municipal bond investment strategies.
BlackRock Financial's municipal bond portfolio managers are
responsible for 25 municipal bond portfolios, valued as of June 30, 1999 at
approximately $5.5 billion, plus approximately an additional $2.5 billion
in municipal bonds held across portfolios with broader investment mandates.
The team is responsible for portfolios with a variety of investment
objectives and constraints, including national funds and state-specific
funds. As of June 30, 1999, the team managed 11 closed-end municipal funds
with over $3 billion in assets.
BlackRock Financial's Investment Process. BlackRock Financial has
in-depth expertise in the fixed income market. BlackRock Financial applies
the same risk-controlled, active sector rotation style (discussed below) to
the management process for all of its fixed income portfolios. BlackRock
Financial 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 Financial.
BlackRock Financial's portfolio management process emphasizes
research and analysis of specific sectors and securities, not interest rate
speculation. BlackRock Financial believes that market-timing strategies can
be highly volatile and potentially produce inconsistent results. Instead,
BlackRock Financial 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 (discussed below).
In the municipal market, BlackRock Financial believes one of the most
important determinants of value is supply and demand. BlackRock Financial's
ability to monitor investor flows and frequency and seasonality of issuance
is helpful in anticipating the impact of supply and demand on sectors.
BlackRock Financial believes that the breadth and expertise of its
municipal bond team allows it to anticipate issuance flows, forecast which
sectors are likely to have the most supply and plan its investment strategy
accordingly.
BlackRock Financial also believes that over the long-term, intense
credit analysis will add value and avoid significant relative performance
impairments. The municipal credit team is led by Susan Heide, Ph.D., who is
assisted by five municipal research analysts. Ms. Heide has been managing
director responsible for municipal credit research at BlackRock Financial
since December 15, 1998. Ms. Heide joined BlackRock Financial in 1993 as a
director. The municipal credit team has an average of ten years of
experience in municipal credit research.
BlackRock Financial's approach to credit risk incorporates a
combination of sector-based top-down macro-analysis of industry sectors to
determine relative weightings with an 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 issuer-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 Financial's analytic process
focuses on anticipating change in credit trends before market recognition.
Credit research is a critical element of BlackRock Financial's municipal
process. BlackRock Financial's yield curve management process involves an
evaluation of the risk/return trade off for bonds having different
durations, and selecting bonds believed to present an attractive yield
relative to the degree of interest rate risk involved.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock
Advisors and the Fund, the Fund has agreed to pay for the services and
facilities provided by BlackRock Advisors a fee, payable monthly in
arrears, at an annual rate equal to .60% of the average weekly value of the
Fund's Managed Assets (the "management fee"). The investment management
agreement covers both investment advisory and administration services. The
Fund will reimburse BlackRock Advisors for all out-of-pocket expenses
BlackRock Advisors incurs in connection with performing administrative
services for the Fund. 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 Fund
operations (other than the provision of services required under the
investment management agreement) of all personnel employed by BlackRock
Advisors or BlackRock Financial who devote substantial time to Fund
operations or the operations of other investment companies advised by the
Fund may be reimbursed to BlackRock Advisors or BlackRock Financial.
Managed Assets are the total assets of the Fund minus the sum of
accrued liabilities (other than indebtedness attributable to leverage).
This means that during periods in which the Fund is using leverage, the fee
paid to BlackRock Advisors will be higher than if the Fund did not use
leverage because the fee is calculated as a percentage of the Fund's
Managed Assets, including those purchased with leverage. From the
management fee, BlackRock Advisors will pay BlackRock Financial, for
serving as sub-adviser, a fee equal to an annual rate of .35% of the
average weekly value of the Fund's Managed Assets.
In addition to the fee of BlackRock Advisors, the Fund 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 expenses, legal fees, rating agency fees,
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.
For the first nine years of the Fund's operations, BlackRock Advisors
has undertaken to waive fees and expenses in the amounts, and for the time
periods, set forth below:
Year Ending Percentage Waived (as a percentage
December 31, of average weekly Managed Assets)
1999 .25%
2000 .25%
2001 .25%
2002 .25%
2003 .25%
2004 .25%
2005 .20%
2006 .15%
2007 .10%
2008 .05%
* From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the
Fund's fees and expenses beyond December 31, 2008 or after termination of
the investment management agreement.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred
Shares. This description does not purport to be complete and is subject to
and qualified in its entirety by reference to the more detailed description
of the Preferred Shares in the Fund's Statement of Preferences of Municipal
Auction Rate Cumulative Preferred Shares (the "Statement") attached as
Appendix A to the Statement of Additional Information.
GENERAL
The Fund's Declaration 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 Preferred Shares as follows: Series [ ] -- [ ]. All Preferred
Shares will have a liquidation preference of $25,000 per share plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared).
The Preferred Shares of each series will rank on parity with shares
of any other Preferred Shares, and with shares of any other series of
preferred shares of the Fund, as to the payment of dividends and the
distribution of assets upon liquidation. All Preferred Shares carry one
vote per share on all matters on which such shares are entitled to be
voted. Preferred Shares are, when issued, fully paid and non-assessable and
have no preemptive, conversion or cumulative voting rights.
DIVIDENDS AND DIVIDEND PERIODS
General. The initial Rate Period of Preferred Shares of a particular
series will be a period consisting of [ ] days in the case of Series [ ].
Any Subsequent Rate Period will be a Minimum Rate Period (7 Rate Period
Days), unless the Fund, subject to certain conditions, designates such
Subsequent Rate Period as a Special Rate Period. See " --Designation of
Special Rate Periods" below.
Dividends on shares of each series of Preferred Shares shall be
payable, when, as and if declared by the Board out of funds legally
available therefor in accordance with the Declaration, including the
Statement, and applicable law, on Preferred Shares, Series [ ], on [ ],
1999, and thereafter on each [ ]; provided, however, that (i) if the
Monday or the Tuesday on which dividends would otherwise be payable as set
forth above is not a Business Day, then such dividends shall be payable on
such shares on the first Business Day that falls after such Monday or
Tuesday, as the case may be; (ii) if the Wednesday, Thursday or Friday on
which dividends would otherwise be payable as set forth above is not a
Business Day, then such dividends shall be payable on such shares on the
first Business Day that falls prior to such Wednesday, Thursday or Friday,
as the case may be; and (iii) the Fund may specify different Dividend
Payment Dates in respect of any Special Rate Period of more than 28 Rate
Period Days.
The amount of dividends per share payable on shares of a series of
Preferred Shares on any date on which dividends shall be payable on shares
of such series shall be computed by multiplying the Applicable Rate for
shares of such series in effect for such Dividend Period or Dividend
Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such
Dividend Period or Dividend Periods or part thereof and the denominator of
which shall be 365 if such Dividend Period consists of 7 Rate Period Days
and 360 for all other Dividend Periods, and applying the rate obtained
against $25,000.
Dividends will be paid through the Securities Depository on each
Dividend Payment Date in accordance with its normal procedures, which
currently provide for it to distribute dividends in next- day funds to
Agent Members, who in turn are expected to distribute such dividend
payments to the persons for whom they are acting as agents. Each of the
current Broker-Dealers, however, has indicated to the Fund that such
Broker-Dealer or the Agent Member designated by such Broker-Dealer will
make such dividend payments available in same-day funds on each Dividend
Payment Date to customers that use such Broker-Dealer or its designee as
Agent Member.
Dividends on shares of each series of Preferred Shares will
accumulate from the Date of Original Issue thereof. The dividend rate for
Preferred Shares of a particular series for the initial Rate Period for
such shares shall be [ ]% per annum for Series [ ]. For each Subsequent
Rate Period of Preferred Shares of a particular series, the dividend rate
for such shares will be the Applicable Rate for such shares that the
Auction Agent advises the Fund results from an Auction, except as provided
below. The Applicable Rate that results from an Auction for shares of any
series of Preferred Shares will not be greater than the Maximum Rate for
shares of such series, which is:
(a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the next Rate
Period of shares of such series and (ii) the Rate Multiple on such Auction
Date, unless shares of such series have or had a Special Rate Period (other
than a Special Rate Period of 28 Rate Period Days or fewer) and an Auction
at which Sufficient Clearing Bids existed has not yet occurred for a
Minimum Rate Period of shares of such series after such Special Rate
Period, in which case the higher of:
(A) the dividend rate on shares of such series for the
then-ending Rate Period; and
(B) the product of (x) the higher of (I) the Reference Rate on
such Auction Date for a Rate Period equal in length to the
then-ending Rate Period of shares of such series, if such
then-ending Rate Period was 364 Rate Period Days or fewer, or
the Treasury Note Rate on such Auction Date for a Rate Period
equal in length to the then-ending Rate Period of shares of
such series, if such then-ending Rate Period was more than 364
Rate Period Days, and (II) the Reference Rate on such Auction
Date for a Rate Period equal in length to such Special Rate
Period of shares of such series, if such Special Rate Period
was 364 Rate Period Days or fewer, or the Treasury Note Rate on
such Auction Date for a Rate Period equal in length to such
Special Rate Period, if such Special Rate Period was more than
364 Rate Period Days and (y) the Rate Multiple on such Auction
Date; or
(b) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the highest 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, (y) 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 (z) the Reference Rate
on such Auction Date for Minimum Rate Periods and (ii) the Rate Multiple on
such Auction Date.
If an Auction for any Subsequent Rate Period of any series of
Preferred Shares is not held for any reason other than as described below,
the dividend rate on shares of 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.
If the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
any series of Preferred Shares during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which such a failure occurred that has not been cured), but, prior
to 12:00 Noon on the third Business Day next succeeding the date such
failure occurred, such failure shall have been cured and the Fund shall
have paid a late charge, as described more fully in the Statement, no
Auction will be held in respect of shares of such series for the first
Subsequent Rate Period thereof thereafter 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.
If the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
any series of Preferred Shares during any Rate Period thereof (other than
any Special Rate Period of more than 364 Rate Period Days or any Rate
Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which such a failure occurred that has not been cured), and, prior
to 12:00 Noon on the third Business Day next succeeding the date on which
such failure occurred, such failure shall not have been cured or the Fund
shall not have paid a late charge, as described more fully in the
Statement, 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 such
failure is so cured and such late charge so paid) (such late charge to be
paid only in the event Moody's is rating such shares at the time the Fund
cures such failure), and the dividend rate for shares of such series for
each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for 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").
If the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
any series of Preferred Shares during a Special Rate Period thereof of more
than 364 Rate Period Days, or during any Rate Period thereof succeeding any
Special Rate Period of more than 364 Rate Period Days during which such a
failure occurred that has not been cured, and such failure shall not have
been cured or the Fund shall not have paid a late charge, as described more
fully in the Statement, no Auction will be held in respect of shares of
such series for such Subsequent Rate Period thereof (or for any Rate Period
thereof thereafter to and including the Rate Period during which such
failure is so cured and such late charge so paid) (such late charge to be
paid only in the event Moody's is rating such shares at the time the Fund
cures such failure), and the dividend rate for shares of such series for
each such Subsequent Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction Date for each such
Subsequent Rate Period (but with the prevailing rating for shares of such
series, for purposes of determining such Maximum Rate, being deemed to be
"Below ba3").
A failure to pay dividends on or the redemption price of shares of
any series of Preferred Shares shall have been cured with respect to any
Rate Period thereof if, within the respective time periods described in the
Statement, the Fund shall have paid to the Auction Agent (a) all
accumulated and unpaid dividends on the shares of such series and (b)
without duplication, the redemption price for shares, if any, of such
series for which notice of redemption has been mailed by the Fund;
provided, however, that the foregoing clause (b) shall not apply to the
Fund's failure to pay the redemption price in respect of Preferred Shares
when the related notice of redemption provides that redemption of such
shares is subject to one or more conditions precedent and any such
condition precedent shall not have been satisfied at the time or times and
in the manner specified in such notice of redemption.
Gross-up Payments. Holders of Preferred Shares are entitled to
receive, when, as and if declared by the Board, out of funds legally
available therefor in accordance with the Declaration, including the
Statement, and applicable law, dividends in an amount equal to the
aggregate Gross-up Payments in accordance with the following:
If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Fund allocates any net capital gains
or other income taxable for Federal income tax purposes to a dividend paid
on Preferred Shares without having given advance notice thereof to the
Auction Agent as described below under "The Auction -- Auction Procedures"
(a "Taxable Allocation") [solely by reason of the fact that such allocation
is made retroactively as a result of the redemption of all or a portion of
the outstanding Preferred Shares or the liquidation of the Fund,] the Fund
will, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Fund's
dividend disbursing agent to send such notice with a Gross-up Payment to
each holder of shares (initially Cede & Co., as nominee of the Securities
Depository) that was entitled to such dividend payment during such calendar
year at such holder's address as the same appears or last appeared on the
stock books of the Fund.
If, in the case of any Special Rate Period of more than 28 Rate
Period Days, the Fund makes a Taxable Allocation to a dividend paid on
Preferred Shares, the Fund shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent
and direct the Fund's dividend disbursing agent to send such notice with a
Gross-up Payment to each holder of shares that was entitled to such
dividend payment during such calendar year at such holder's address as the
same appears or last appeared on the stock books of the Fund.
A "Gross-up Payment" means payment to a holder of Preferred Shares of
an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payment relates,
would cause such holder's dividends in dollars (after Federal income tax
consequences) from the aggregate of such Taxable Allocations and the
related Gross-up Payment to be equal to the dollar amount of the dividends
which would have been received by such holder if the amount of the
aggregate Taxable Allocations would have been excludable from the gross
income of such holder. Such Gross-up Payment shall be calculated: (a)
without consideration being given to the time value of money; (b) assuming
that no holder of Preferred Shares is subject to the Federal alternative
minimum tax with respect to dividends received from the Fund; and (c)
assuming that each Taxable Allocation and each Gross-up Payment (except to
the extent such Gross-up Payment is designated as an exempt-interest
dividend under Section 852(b)(5) of the Internal Revenue Code or successor
provisions) would be taxable in the hands of each holder of Preferred
Shares at the maximum marginal combined regular Federal, New York State and
New York City income tax rate applicable to ordinary income (taking into
account the Federal income tax deductibility of state and local taxes paid
or incurred) or net capital gains, as applicable, or the maximum marginal
regular Federal corporate income tax rate applicable to ordinary income or
net capital gains, as applicable, whichever is greater, in effect at the
time such Gross-up Payment is made.
Restrictions on Dividends and Other Distributions. Except as
otherwise described herein, for so long as any Preferred Shares are
outstanding, the Fund may not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid
in, or in options, warrants or rights to subscribe for or purchase, its
shares of Common Shares) in respect of its Common Shares or call for
redemption, redeem, purchase or otherwise acquire for consideration any of
Common Shares (except by conversion into or exchange for shares of the Fund
ranking junior to the Preferred Shares as to the payment of dividends and
the distribution of assets upon liquidation), unless (a) full cumulative
dividends on shares of each series of Preferred Shares through its most
recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the
Auction Agent; (b) the Fund shall have redeemed the full number of
Preferred Shares required to be redeemed by any provision for mandatory
redemption pertaining thereto; and (c) immediately after such transaction
the Discounted Value of the Fund's portfolio would at least equal the
Preferred Shares Basic Maintenance Amount in accordance with guidelines of
the rating agency or agencies then rating the Preferred Shares.
Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on the shares of any class or
series of Fund shares ranking, as to the payment of dividends, on a parity
with Preferred Shares for any period unless full cumulative dividends have
been or contemporaneously are declared and paid on the shares of each
series of Preferred Shares through its most recent Dividend Payment Date.
When dividends are not paid in full upon the shares of each series of
Preferred Shares through its most recent Dividend Payment Date or upon the
shares of any other class or series of shares ranking on a parity as to the
payment of dividends with Preferred Shares through their most recent
respective dividend payment dates, all dividends declared upon Preferred
Shares and any such other class or series of shares ranking on a parity as
to the payment of dividends with Preferred Shares shall be declared pro
rata so that the amount of dividends declared per share on Preferred Shares
and such other class or series of shares shall in all cases bear to each
other the same ratio that accumulated dividends per share on the Preferred
Shares and such other class or series of shares bear to each other.
Designation of Special Rate Periods. The Fund, at its option, may
designate any succeeding Subsequent Rate Period of shares of a series of
Preferred Shares as a Special Rate Period consisting of a specified number
of Rate Period Days evenly divisible by seven and not more than 1,820
(approximately 5 years), subject to certain adjustments. A designation of a
Special Rate Period shall be effective only if, among other things, (a) the
Fund shall have given certain notices to the Auction Agent, (b) an Auction
for shares of such series shall have been held on the Auction Date
immediately preceding the first day of such proposed Special Rate Period
and Sufficient Clearing Bids for shares of such series shall have existed
in such Auction and (c) if the Fund shall have mailed a notice of
redemption with respect to any shares of such series, the redemption price
with respect to such shares shall have been deposited with the Auction
Agent.
REDEMPTION
Mandatory Redemption. In the event the Fund does not timely cure a
failure to maintain (a) a Discounted Value of its portfolio equal to the
Preferred Shares Basic Maintenance Amount or (b) the 1940 Act Preferred
Shares Asset Coverage, in each case in accordance with the requirements of
the rating agency or agencies then rating the Preferred Shares, Preferred
Shares will be subject to mandatory redemption on a date specified by the
Board out of funds legally available therefor in accordance with the
Declaration, including the Statement, and applicable law, at the redemption
price of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be
limited to the number of Preferred Shares necessary to restore the required
Discounted Value or the 1940 Act Preferred Shares Asset Coverage, as the
case may be.
Optional Redemption. Preferred Shares of each series are redeemable,
at the option of the Fund:
(a) as a whole or from time to time in part, on the second Business
Day preceding any Dividend Payment Date for shares of such series, out of
funds legally available therefor in accordance with the Declaration,
including the Statement, and applicable law, at the redemption price of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared) to (but not including) the date
fixed for redemption; provided, however, that (i) shares of such series may
not be redeemed in part if after such partial redemption fewer than 500
shares of such series would remain outstanding; (ii) shares of a series of
Preferred Shares are redeemable by the Fund 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 (iii) the notice
establishing a Special Rate Period of shares of such series, as delivered
to the Auction Agent and filed with the Secretary of the Fund, 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 clause (b) below)
or shall be redeemable during the whole or any part of such Special Rate
Period only upon payment of such redemption premium or premiums as shall be
specified therein; and
(b) as a whole but not in part, out of funds legally available
therefor in accordance with the Declaration, including the Statement, and
applicable law, on the first day following any Dividend Period thereof
included in a Rate Period of more than 364 Rate Period Days if, on the date
of determination of the Applicable Rate for shares of such series for such
Rate Period, such Applicable Rate equaled or exceeded on such date of
determination the Treasury Note Rate for such Rate Period, at a redemption
price of $25,000 per share plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption.
Notwithstanding the foregoing, if any dividends on shares of a series
of Preferred Shares (whether or not earned or declared) are in arrears, no
shares of such series shall be redeemed unless all outstanding shares of
such series are simultaneously redeemed, and the Fund shall not purchase or
otherwise acquire any shares of such series; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of such series pursuant to the successful completion of an otherwise
lawful purchase or exchange offer made on the same terms to, and accepted
by, holders of all outstanding shares of such series.
LIQUIDATION
Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with Preferred Shares with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of
the Fund, whether voluntary or involuntary, the holders of Preferred Shares
then outstanding will be entitled to receive and to be paid out of the
assets of the Fund available for distribution to its shareholders, before
any payment or distribution shall be made on the Common Shares, an amount
equal to the liquidation preference with respect to such shares ($25,000
per share), plus an amount equal to all dividends thereon (whether or not
earned or declared) accumulated but unpaid to (but not including) the date
of final distribution in same-day funds, together with any applicable
Gross-up Payments in connection with the liquidation of the Fund. After the
payment to the holders of Preferred Shares of the full preferential amounts
provided for as described herein, the holders of Preferred Shares as such
shall have no right or claim to any of the remaining assets of the Fund.
Neither the sale of all or substantially all the property or business
of the Fund, nor the merger or consolidation of the Fund into or with any
other corporation nor the merger or consolidation of any other corporation
into or with the Fund, shall be a liquidation, whether voluntary or
involuntary, for the purposes of the foregoing paragraph.
RATING AGENCY GUIDELINES AND ASSET COVERAGE
The Fund is required under Moody's guidelines to maintain assets
having in the aggregate a Discounted Value at least equal to the Preferred
Shares Basic Maintenance Amount. To the extent any particular portfolio
holding does not satisfy Moody's guidelines, all or a portion of such
holding's value will not be included in the calculation of Discounted Value
(as defined by such rating agency). The Moody's guidelines do not impose
any limitations on the percentage of the Fund's assets that may be invested
in holdings not eligible for inclusion in the calculation of the Discounted
Value of the Fund's portfolio. The amount of such assets included in the
portfolio at any time may vary depending upon the rating, diversification
and other characteristics of the eligible assets included in the portfolio.
The Preferred Shares Basic Maintenance Amount includes the sum of (a) the
aggregate liquidation preference of Preferred Shares then outstanding and
(b) certain accrued and projected payment obligations of the Fund.
The Fund is also required under rating agency guidelines to maintain,
with respect to Preferred Shares, as of the last Business Day of each month
in which any such shares are outstanding, asset coverage of at least 200%
with respect to senior securities which are shares, including Preferred
Shares (or such other asset coverage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities
which are shares of a closed-end investment company as a condition of
declaring dividends on its common shares) ("1940 Act Preferred Shares Asset
Coverage"). Based on the composition of the portfolio of the Fund and
market conditions as of [ ] 1999, 1940 Act Preferred Shares Asset Coverage
with respect to Preferred Shares, assuming the issuance on the date thereof
of all Preferred Shares offered hereby and giving effect to the deduction
of sales load and offering costs related thereto estimated at $[ ],
would have been computed as follows:
Value of Fund assets less liabilities $[ ]
[ ]% not constituting senior securities = =
-------------------------------------- -------------------------
Senior securities representing $[ ]
indebtedness plus liquidation value
of the Preferred Shares.
In the event the Fund does not timely cure a failure to maintain (a)
a Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in
each case in accordance with the requirements of the rating agency or
agencies then rating the Preferred Shares, the Fund will be required to
redeem Preferred Shares as described under "Redemption -- Mandatory
Redemption" above.
The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's. Failure to adopt
any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the Preferred Shares may, at any time,
change or withdraw any such rating. The Board may, without shareholder
approval, amend, alter or repeal any or all of the definitions and related
provisions which have been adopted by the Fund pursuant to the rating
agency guidelines in the event the Fund receives written confirmation from
Moody's that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's to Preferred Shares.
As recently described by Moody's, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred
stock obligations. The ratings on the Preferred Shares are not
recommendations to purchase, hold or sell those shares, inasmuch as the
ratings do not comment as to market price or suitability for a particular
investor. The rating agency guidelines described above also do not address
the likelihood that an owner of Preferred Shares will be able to sell such
shares in an Auction or otherwise. The ratings are based on current
information furnished to Moody's by the Fund and the Adviser and
information obtained from other sources. The ratings may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information. The Common Shares have not been rated by a nationally
recognized statistical rating organization.
A rating agency's guidelines will apply to Preferred Shares only so
long as such rating agency is rating such shares. The Fund will pay certain
fees to Moody's, for rating the Preferred Shares.
VOTING RIGHTS
Except as otherwise provided in this Prospectus and in the Statement
of Additional Information or as otherwise required by law, holders of
Preferred Shares will have equal voting rights with holders of Common
Shares and any preferred shares (one vote per share) and will vote together
with holders of Common Shares and any other preferred shares as a single
class.
In connection with the election of the Fund's trustees, holders of
outstanding preferred shares, including Preferred Shares, voting as a
separate class, are entitled to elect two of the Fund's trustees, and the
remaining trustees are elected by holders of Common Shares and preferred
shares, including Preferred Shares, voting together as a single class. In
addition, if at any time dividends (whether or not earned or declared) on
outstanding preferred shares, including Preferred Shares, shall be due and
unpaid in an amount equal to two full years' dividends thereon, and
sufficient cash or specified securities shall not have been deposited with
the Auction Agent for the payment of such dividends, then, as the sole
remedy of holders of outstanding preferred shares, including Preferred
Shares, the number of trustees constituting the Board shall be
automatically increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of preferred shares, including
shares of Preferred Shares, as described above, would constitute a majority
of the Board as so increased by such smallest number, and at a special
meeting of shareholders which will be called and held as soon as
practicable, and at all subsequent meetings at which trustees are to be
elected, the holders of preferred shares, including shares of Preferred
Shares, voting as a separate class, will be entitled to elect the smallest
number of additional trustees that, together with the two trustees which
such holders will be in any event entitled to elect, constitutes a majority
of the total number of trustees of the Fund as so increased. The terms of
office of the persons who are trustees at the time of that election will
continue. If the Fund thereafter shall pay, or declare and set apart for
payment, in full, all dividends payable on all outstanding preferred
shares, including Preferred Shares, the voting rights stated in the second
preceding sentence shall cease, and the terms of office of all of the
additional trustees elected by the holders of preferred shares, including
Preferred Shares (but not of the trustees with respect to whose election
the holders of Common Shares were entitled to vote or the two trustees the
holders of preferred shares have the right to elect in any event), will
terminate automatically.
So long as any Preferred Shares are outstanding, the Fund will not,
without the affirmative vote or consent of the holders of at least a
majority of the Preferred Shares outstanding at the time (voting as a
separate class):
(a) authorize, create or issue any class or series of stock
ranking prior to or on a parity with Preferred Shares with
respect to the payment of dividends or the distribution of assets
upon liquidation, or authorize, create or issue additional shares
of any series of Preferred Shares (except that, notwithstanding
the foregoing, but subject to certain rating agency approvals,
the Board, without the vote or consent of the holders of
Preferred Shares, may from time to time authorize and create, and
the Fund may from time to time issue, additional shares of any
series of Preferred Shares or classes or series of preferred
shares ranking on a parity with Preferred Shares with respect to
the payment of dividends and the distribution of assets upon
liquidation; provided, however, that if Moody's is not then
rating the Preferred Shares, the aggregate liquidation preference
of all preferred shares of the Fund outstanding after any such
issuance, exclusive of accumulated and unpaid dividends, may not
exceed $[ ] or
(b) amend, alter or repeal the provisions of the
Declaration, including the Statement, whether by merger,
consolidation or otherwise, so as to affect any preference, right
or power of such shares of Preferred Shares or the holders
thereof; provided, however, that (i) none of the actions
permitted by the exception to (a) above will be deemed to affect
such preferences, rights or powers, (ii) a division of Preferred
Shares will be deemed to affect such preferences, rights or
powers only if the terms of such division adversely affect the
holders of Preferred Shares and (iii) the authorization, creation
and issuance of classes or series of shares ranking junior to
Preferred Shares with respect to the payment of dividends and the
distribution of assets upon liquidation will be deemed to affect
such preferences, rights or powers only if Moody's is then rating
Preferred Shares and such issuance would, at the time thereof,
cause the Fund not to satisfy the 1940 Act Preferred Shares Asset
Coverage or the Preferred Shares Basic Maintenance Amount. So
long as any Preferred Shares are outstanding, the Fund shall not,
without the affirmative vote or consent of the holders of at
least [66 %] of the Preferred Shares outstanding at the time,
voting as a separate class, file a voluntary application for
relief under Federal bankruptcy law or any similar application
under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.
If any action set forth above would adversely affect the rights of
one or more series (the "Affected Series") of Preferred Shares in a manner
different from any other series of Preferred Shares, the Fund 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). The Board
may, without shareholder approval, amend, alter or repeal any or all of the
definitions and related provisions which have been adopted by the Fund
pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from Moody's that any such amendment, alteration or
repeal would not impair the ratings then assigned by Moody's to Preferred
Shares. Unless a higher percentage is provided for in the Declaration (see
"Certain Provisions in the Declaration of Trust"), (A) the affirmative vote
of the holders of at least a majority of the preferred shares, including
Preferred Shares, outstanding at the time, voting as a separate class,
shall be required to approve any conversion of the Fund from a closed-end
to an open-end investment company and (B) the affirmative vote of the
holders of a majority of the outstanding preferred shares, including
Preferred Shares, voting as a separate class, shall be required to approve
any plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares. The affirmative vote of the holders of a majority of
the outstanding preferred shares, including Preferred Shares, voting as a
separate class, shall be required to approve any action not described in
the preceding sentence requiring a vote of security holders of the Fund
under Section 13(a) of the 1940 Act.
The foregoing voting provisions will not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (i) redeemed or (ii) called for redemption and
sufficient funds shall have been deposited in trust to effect such
redemption.
THE AUCTION
GENERAL
The Statement provides that, except as otherwise described herein,
the Applicable Rate for the shares of each series of Preferred Shares, for
each Rate Period of shares of such series after the Initial Rate Period
thereof shall be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day preceding the first day of such Subsequent
Rate Period (an "Auction Date")from implementation of the auction
procedures (the "Auction Procedures") set forth in the Statement and
summarized below, in which persons determine to hold or offer to sell or,
based on dividend rates bid by them, offer to purchase or sell shares of
such series. Each periodic implementation of the Auction Procedures is
referred to herein as an "Auction." See the Statement for a more complete
description of the Auction process.
Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, Bankers Trust Company) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of
determining the Applicable Rate for shares of each series of Preferred
Shares so long as the Applicable Rate for shares of such series is to be
based on the results of an Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If
the Auction Agent should resign, the Fund will use its best efforts to
enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agency
Agreement. The Fund may remove the Auction Agent provided that prior to
such removal the Fund shall have entered into such an agreement with a
successor Auction Agent.
Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for shares of Preferred Shares.
The Auction Agent after each Auction for Preferred Shares will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at
the annual rate of [1/4 of 1%] in the case of any Auction immediately
preceding a Rate Period of less than one year, or a percentage agreed to by
the Fund and the Broker-Dealers in the case of any Auction immediately
preceding a Rate Period of one year or longer, of the purchase price of
Preferred Shares placed by such Broker-Dealer at such Auction. For the
purposes of the preceding sentence, Preferred Shares will be placed by a
Broker-Dealer if such shares were (a) the subject of Hold Orders deemed to
have been submitted to the Auction Agent by the Broker-Dealer and were
acquired by such Broker-Dealer for its own account or were acquired by such
Broker-Dealer for its customers who are Beneficial Owners or (b) the
subject of an Order submitted by such Broker-Dealer that is (i) a Submitted
Bid of an Existing Holder that resulted in such Existing Holder continuing
to hold such shares as a result of the Auction or (ii) a Submitted Bid of a
Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one
Broker-Dealer Agreement is in effect after such termination.
AUCTION PROCEDURES
Prior to the Submission Deadline on each Auction Date for shares of a
series of Preferred Shares, each customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the Auction Agent)
as a holder of shares of such series (a "Beneficial Owner") may submit
orders ("Orders") with respect to shares of such series to that
Broker-Dealer as follows:
- Hold Order -- indicating its desire to hold shares of such series
without regard to the Applicable Rate for shares of such series for the
next Rate Period thereof.
- Bid -- indicating its desire to sell shares of such series at
$25,000 per share if the Applicable Rate for shares of such series for the
next Rate Period thereof is less than the rate specified in such Bid (also
known as a hold-at-a-rate order).
- Sell Order -- indicating its desire to sell shares of such
series at $25,000 per share without regard to the Applicable Rate for
shares of such series for the next Rate Period thereof.
A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then
held by such Beneficial Owner. A Beneficial Owner of shares of such series
that submits a Bid with respect to shares of such series to its
Broker-Dealer having a rate higher than the Maximum Rate for shares of such
series on the Auction Date therefor will be treated as having submitted a
Sell Order with respect to such shares to its Broker-Dealer. A Beneficial
Owner of shares of such series that fails to submit an Order with respect
to such shares to its Broker-Dealer will be deemed to have submitted a Hold
Order with respect to such shares of such series to its Broker-Dealer;
provided however, that if a Beneficial Owner of shares of such series fails
to submit an Order with respect to shares of such series to its
Broker-Dealer for an Auction relating to a Rate Period of more than 28 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell
Order with respect to such shares to its Broker-Dealer. A Sell Order shall
constitute an irrevocable offer to sell the Preferred Shares subject
thereto. A Beneficial Owner that offers to become the Beneficial Owner of
additional Preferred Shares is, for purposes of such offer, a Potential
Beneficial Owner as discussed below.
A customer of a Broker-Dealer that is not a Beneficial Owner of
shares of a series of Preferred Shares but that wishes to purchase shares
of such series, or that is a Beneficial Owner of shares of such series that
wishes to purchase additional shares of such series (in each case, a
"Potential Beneficial Owner"), may submit Bids to its Broker-Dealer in
which it offers to purchase shares of such series at $25,000 per share if
the Applicable Rate for shares of such series for the next Rate Period
thereof is not less than the rate specified in such Bid. A Bid placed by a
Potential Beneficial Owner of shares of such series specifying a rate
higher than the Maximum Rate for shares of such series on the Auction Date
therefor will not be accepted.
The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the
Fund) as Existing Holders in respect of shares subject to Orders submitted
or deemed submitted to them by Beneficial Owners and as Potential Holders
in respect of shares subject to Orders submitted to them by Potential
Beneficial Owners. However, neither the Fund nor the Auction Agent will be
responsible for a Broker-Dealer's failure to comply with the foregoing. Any
Order placed with the Auction Agent by a Broker-Dealer as or on behalf of
an Existing Holder or a Potential Holder will be treated in the same manner
as an Order placed with a Broker-Dealer by a Beneficial Owner or Potential
Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit to
the Auction Agent an Order in respect of any Preferred Shares held by it or
customers who are Beneficial Owners will be treated in the same manner as a
Beneficial Owner's failure to submit to its Broker-Dealer an Order in
respect of Preferred Shares held by it. A Broker-Dealer may also submit
Orders to the Auction Agent for its own account as an Existing Holder or
Potential Holder, provided it is not an affiliate of the Fund.
If Sufficient Clearing Bids for shares of a series of Preferred
Shares exist (that is, the number of shares of such series subject to Bids
submitted or deemed submitted to the Auction Agent by Broker-Dealers as or
on behalf of Potential Holders with rates equal to or lower than the
Maximum Rate for shares of such series is at least equal to the number of
shares of such series subject to Sell Orders submitted or deemed submitted
to the Auction Agent by Broker-Dealers as or on behalf of Existing
Holders), the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof will be the lowest rate specified in the
Submitted Bids which, taking into account such rate and all lower rates bid
by Broker-Dealers as or on behalf of Existing Holders and Potential
Holders, would result in Existing Holders and Potential Holders owning the
shares of such series available for purchase in the Auction. If Sufficient
Clearing Bids for shares of a series of Preferred Shares do not exist, the
Applicable Rate for shares of such series for the next succeeding Rate
Period thereof will be the Maximum Rate for shares of such series on the
Auction Date therefor. In such event, Beneficial Owners of shares of such
series that have submitted or are deemed to have submitted Sell Orders may
not be able to sell in such Auction all shares of such series subject to
such Sell Orders. If Broker-Dealers submit or are deemed to have submitted
to the Auction Agent Hold Orders with respect to all Existing Holders of
shares of a series of Preferred Shares, the Applicable Rate for shares of
such series for the next succeeding Rate Period thereof will be the All
Hold Order Rate.
The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to
hold or selling, or a Potential Holder purchasing, a number of shares of a
series of Preferred Shares that is fewer than the number of shares of such
series specified in its Order. To the extent the allocation procedures have
that result, Broker-Dealers that have designated themselves as Existing
Holders or Potential Holders in respect of customer Orders will be required
to make appropriate pro rata allocations among their respective customers.
Settlement of purchases and sales will be made on the next Business
Day (also a Dividend Payment Date) after the Auction Date through the
Securities Depository. Purchasers will make payment through their Agent
Members in same-day funds to the Securities Depository against delivery to
their respective Agent Members. The Securities Depository will make payment
to the sellers' Agent Members in accordance with the Securities
Depository's normal procedures, which now provide for payment against
delivery by their Agent Members in same-day funds.
The Auctions for Preferred Shares, Series [ ] will normally be held
every [ ] and each Subsequent Rate Period of shares of such series will
normally begin on the following [ ].
Whenever the Fund intends to include any net capital gains or other
income taxable for Federal income tax purposes in any dividend on Preferred
Shares, the Fund [shall], in the case of Minimum Rate Periods or Special
Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any
other Special Rate Period, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Fund,
it will be required in turn to notify each Broker-Dealer, who, on or prior
to such Auction Date, in accordance with its Broker-Dealer Agreement, will
be required to notify its customers who are Beneficial Owners and Potential
Beneficial Owners believed by it to be interested in submitting an Order in
the Auction to be held on such Auction Date.
SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES
The Broker-Dealers are expected to maintain a secondary trading
market in Preferred Shares outside of Auctions, but are not obligated to do
so, and may discontinue such activity at any time. There can be no
assurance that such secondary trading market in Preferred Shares will
provide owners with liquidity of investment. The Preferred Shares are not
registered on any stock exchange or on the Nasdaq Stock Market. Investors
who purchase shares in an Auction for a Special Rate Period should note
that because the dividend rate on such shares will be fixed for the length
of such Rate Period, the value of the shares may fluctuate in response to
changes in interest rates, and may be more or less than their original cost
if sold on the open market in advance of the next Auction therefor,
depending upon market conditions.
A Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only (1)
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the Auction Procedures, (2) to a Broker-Dealer or (3) to such other
persons as may be permitted by the Fund; provided, however, that (a) a
sale, transfer or other disposition of Preferred Shares from a customer of
a Broker-Dealer who is listed on the records of that Broker-Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other
disposition for purposes of the foregoing if such Broker-Dealer remains the
Existing Holder of the shares so sold, transferred or disposed of
immediately after such sale, transfer or disposition and (b) in the case of
all transfers other than pursuant to Auctions, the Broker-Dealer (or other
person, if permitted by the Fund) to whom such transfer is made shall
advise the Auction Agent of such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the Preferred Shares, the Declaration authorizes the
issuance of an unlimited number of Common Shares, par value $.001 per
share. All Common Shares have equal rights to the payment of dividends and
the distribution of assets upon liquidation. Common Shares are fully paid
and non-assessable when issued and have no preemptive, conversion rights or
rights to cumulative voting. So long as any Preferred Shares are
outstanding, the Fund is not permitted to declare dividends on, make any
distributions with respect to, or purchase its Common Shares unless, at the
time of such declaration, distribution or purchase, as applicable (and
after giving effect thereto), all accumulated dividends on Preferred Shares
have been paid.
The net asset value of the common shares of the Fund will be computed
based upon the value of the Fund's portfolio securities and other assets.
Net asset value per common share will be determined as of the close of the
regular trading session on the New York Stock Exchange no less frequently
than the last Friday of each week. The Fund calculates net asset value per
common share by subtracting the Fund's liabilities (including accrued
expenses, dividends payable and any borrowings of the Fund) and the
liquidation value of any outstanding shares of preferred shares of the Fund
from the Fund's total assets (the value of the securities the Fund holds
plus cash or other assets, including interest accrued but not yet received)
and dividing the result by the total number of common shares of the Fund
outstanding.
The Fund values its fixed income securities by using market
quotations, prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established by the board of
trustees of the Fund. A substantial portion of the Fund's fixed income
investments will be valued utilizing one or more pricing services approved
by the board of trustees. Debt securities having a remaining maturity of 60
days or less when purchased and debt securities originally purchased with
maturities in excess of 60 days but which currently have maturities of 60
days or less are valued at cost adjusted for amortization of premiums and
accretion of discounts. Any securities or other assets for which current
market quotations are not readily available are valued at their fair value
as determined in good faith under procedures established by and under the
general supervision and responsibility of the Fund's board of trustees.
CERTAIN PROVISIONS IN THE AGREEMENT
AND DECLARATION OF TRUST
The Declaration includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its board of 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 Fund, which attempts could have the
effect of increasing the expenses of the Fund and disrupting the normal
operation of the Fund. 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 two-thirds of the remaining trustees
or by a vote of the holders of at least two-thirds of the shares.
In addition, the Declaration requires the favorable vote of the
holders of at least 75% of the outstanding shares of each class of the
Fund, voting as a class, then entitled to vote to approve, adopt or
authorize certain transactions with five percent-or-greater holders of a
class of shares and their associates, unless two-thirds of the board of
trustees by resolution has approved a memorandum of understanding with such
holders, in which case normal voting requirements would be in effect. For
purposes of these provisions, a five percent-or-greater holder of a class
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 of shares of beneficial interest of the Fund. The transactions
subject to these special approval requirements are:
o the merger or consolidation of the Fund or any subsidiary of the Fund
with or into any Principal Shareholder;
o the issuance of any securities of the Fund to any Principal
Shareholder for cash, except pursuant to the Dividend Reinvestment
Plan;
o the sale, lease or exchange of all or any substantial part of the
assets of the Fund to any Principal Shareholder, except assets having
an aggregate fair market value of less than $1 million, aggregating
for the purpose of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month
period; or
o the sale, lease or exchange to the Fund or any subsidiary of the
Fund, of any assets of any Principal Shareholder, except assets
having an aggregate fair market value of less than $1 million,
aggregating for purposes of such computation all assets sold, leased
or exchanged in any series of similar transactions within a
twelve-month period.
The board of trustees has determined that provisions with respect to
the board of trustees and the 75% voting requirements described above, and
the requirements relating to conversion to an open-end trust described
below, 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 Declaration on
file with the Securities and Exchange Commission for the full text of these
provisions.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any
time by an amendment to the Declaration. The Declaration provides that such
an amendment must be approved by the affirmative vote of a majority of
trustees then in office and by the holders of two-thirds of the Fund's
outstanding shares, including any Preferred Shares, entitled to vote on the
matter, voting as a single class (or a majority of such shares if the
amendment previously was approved, adopted or authorized by at least
two-thirds of the total number of trustees) and by the affirmative vote of
a majority of preferred shares, including the Preferred Shares, voting as a
separate class. Such a vote also would satisfy a separate requirement in
the Investment Company Act that the change be approved by the shareholders.
If approved in the foregoing manner, conversion of the Fund 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 Fund to an open-end investment company
would require the redemption of any outstanding preferred shares, including
the Preferred Shares. The board of trustees believes, however, that the
closed-end structure is desirable in light of the Fund's investment
objectives and policies. Therefore, you should not assume that it is likely
that the board of trustees would vote to convert the Fund to an open-end
fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount
to their net asset values, and the Fund's Common Shares may also trade at a
discount to their net asset value. The market price of the Fund's Common
Shares will be determined by such factors as relative demand for and supply
of such common shares in the market, the Fund's net asset value, general
market and economic conditions and other factors beyond the control of the
Fund. Although the Fund's Common Shareholders will not have the right to
redeem their Common Shares, the Fund 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.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The Fund intends to qualify 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 Fund will be
subject to any Federal income tax. Substantially all of the Fund's
dividends to the Common Shareholders and Preferred Shareholders will
qualify as "exempt-interest dividends." A shareholder treats an
exempt-interest dividend as interest on state and local bonds exempt from
regular Federal income tax. Some or all of an exempt-interest dividend,
however, may be subject to Federal alternative minimum tax imposed on the
shareholder. Different Federal alternative tax rules apply to individuals
and to corporations. In addition to exempt-interest dividends, the Fund
also may distribute to its shareholders amounts that are treated as
long-term capital gain or ordinary income. The Fund will allocate
distributions to shareholders that are treated as tax-exempt interest and
as long-term capital gain and ordinary income, if any, proportionately
among the Common Shares and Preferred Shares. The Fund intends to notify
Preferred Shareholders in advance if it will allocate to them income that
is not exempt from regular Federal income tax. In certain circumstances the
Fund will make payments to Preferred Shareholders to offset the tax effects
of the taxable distribution. See "Description of Preferred Shares --
Dividends and Dividend Periods -- Gross-Up Payments." The sale or other
disposition of Common Shares or Preferred Shares of the Fund will normally
result in capital gain or loss to shareholders. Present law taxes both
long-term and short-term capital gains of corporations at the rates
applicable to ordinary income. For non-corporate taxpayers, under current
law short-term capital gains and ordinary income will be taxed at a maximum
rate of 39.6% while long-term capital gains will generally be taxed at a
maximum rate of 20%. 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 Fund 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 long-term capital gain
received with respect to such shares. A shareholder's holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or
short sales. Any loss realized on a sale or exchange of shares of the Fund
will be disallowed to the extent those shares of the Fund are replaced by
other 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 Fund will be adjusted to
reflect the disallowed loss. The Statement of Additional Information
contains a more detailed summary of the Federal tax rules that apply to the
Fund and its shareholders. Legislative, judicial or administrative action
may change the tax rules that apply to the Fund or its shareholders and any
such change may be retroactive. You should consult with your tax adviser
about Federal income tax matters.
PENNSYLVANIA TAX MATTERS
The Fund is not subject to Pennsylvania corporate net income tax or
capital stock/franchise tax.
Distributions to shareholders from interest income derived from
Pennsylvania municipal obligations is not subject to Pennsylvania personal
income tax, corporate net income tax, or Philadelphia school district
investment income tax.
Distributions to shareholders from gain realized by the Fund from
disposition of Pennsylvania municipal obligations are likely to be subject
to the Pennsylvania personal income tax and corporate net income tax.
Distributions from gain realized on the disposition of Fund assets held for
more than six months are not subject to the Philadelphia school district
investment income tax.
Under current Pennsylvania law, shares of the Fund are not subject to
any state or local personal property taxes. Shares of the Fund may be
subject to Pennsylvania inheritance and estate taxes.
Shareholders otherwise subject to Pennsylvania capital
stock/franchise tax will be required to include the value of Fund shares
and income derived from their ownership in determining the "capital stock
value" of such shareholder.
See "Tax Matters--Pennsylvania Tax Matters" in the statement of
additional information for additional state tax information.
UNDERWRITING
[Subject to the terms and conditions of the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such underwriter, the number
of Preferred Shares set forth opposite the name of such underwriter.
NAME NUMBER OF SHARES
---- ----------------
Total........................
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject
to the approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all the Preferred
Shares if they purchase any shares [of such series].
The underwriters, for whom [ ] is acting as representative,
propose to offer some of the shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of
the shares to certain dealers at the public offering price less a
concession not in excess of $[ ] per share. The sales load the Fund
will pay of $[ ] per share is equal to [ ]% of the initial offering
price. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $[ ] per share on sales to certain other
dealers. After the initial public offering, the underwriters may change the
public offering price and the concession. Investors must pay for any
referred Shares purchased in the initial public offering on or before
[ ], 1999.
The Fund anticipates that the underwriters may from time to time act
as brokers or dealers in executing the Fund's portfolio transactions after
they have ceased to be underwriters. The underwriters are active
underwriters of, and dealers in, securities and act as market makes in a
number of such securities, and therefore can be expected to engage in
portfolio transactions with the Fund. [ ] may engage in these
transactions only in compliance with the 1940 Act.
The Fund anticipates that the underwriters or one of their respective
affiliates may, from time to time, act in auctions as Broker-Dealers as set
forth under "The Auction." [ ], one of the underwriters, is an
affiliate of BlackRock Advisors.
The Fund has agreed to indemnify the underwriters against certain
liabilities, including liabilities arising under the 1933 Act, or to
contribute payments to the underwriters may be required to make for any of
those liabilities.]
CUSTODIAN AND TRANSFER AND
DIVIDEND DISBURSING AGENT; AUCTION AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, will act as the Trust's Custodian, Transfer Agent and
Dividend Disbursing Agent.
Bankers Trust Company, 4 Albany Street, New York, New York 10006, a
banking corporation organized under the laws of New York, is the Auction
Agent with respect to shares of Preferred 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 Preferred Shares offered
hereby will be passed upon for the Fund by Skadden, Arps, Slate, Meagher &
Flom, LLP, Boston, Massachusetts, and for the Underwriters by [ ].
Skadden, Arps, Slate, Meagher & Flom LLP and [ ] may rely as to
certain matters of Pennsylvania law on the opinion of [ ],
Philadelphia, Pennsylvania].
AVAILABLE INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934, the 1940 Act and are 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 New York Regional Office, Seven World Trade Center, New York, New
York 10048 and Chicago Regional Office, Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Reports,
proxy statements, and other information about the Funds 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 Fund's
registration statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is
made to the copy of the contract 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 Fund and Preferred Shares can be
found in the Fund'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 Fund's Registration Statement, other
documents incorporated by reference, and other information the Fund has
filed electronically with the Commission, including proxy statements and
reports filed under the Securities Exchange Act of 1934.
TABLE OF CONTENTS FOR
THE STATEMENT OF ADDITIONAL INFORMATION
Page
----
Investment Objectives and Policies.......................................B-2
Investment Policies and Techniques.......................................B-4
Other Investment Policies and Techniques.................................B-15
Management of the Trust .................................................B-17
Portfolio Transaction and Brokerage......................................B-24
Additional Information Concerning Auctions for Preferred Shares..........B-25
Description of Shares....................................................B-27
Repurchase of Common Shares .............................................B-27
Tax Matters..............................................................B-28
Performance Related and Comparative Information..........................B-33
Experts..................................................................B-33
Additional Information...................................................B-33
Report of Independent Auditors...........................................B-34
Financial Statements.....................................................B-34
Statement of Preferences of Municipal Auction Rate Cumulative
Preferred Shares (App. A)..............................................AA-1
Ratings of Investments (App. B)..........................................BB-1
General Characteristics and Risks of Hedging Transactions (App. C).......CC-1
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 Federal tax-free
yield on a municipal investment. To assist you to more easily compare
municipal investments like the Fund with taxable alternative investments,
the table below presents the taxable equivalent yield for a range of
hypothetical Federal tax-free yields and tax rates:
TAXABLE EQUIVALENT OF TAX-FREE YIELDS
TAX FREE YIELD
TAX RATE 2.50% 3.00% 3.50% 4.00% 4.50%
28.0%....................
31.0%....................
36.0%....................
39.6%....................
* In the table above, the taxable equivalent yields are calculated assuming
that the Fund's income dividends are 100% federally tax-free. To the extent
the Fund were to invest in federally taxable investments, (which it does
not expect to do), its taxable equivalent yield would be lower.
THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
[ ] SHARES SERIES [ ]
--------------------
PROSPECTUS
--------------------
The information in this statement of additional information is not complete
and may be changed. No person may sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This statement of additional information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 1999
The BlackRock Pennsylvania Strategic Municipal Trust
STATEMENT OF ADDITIONAL INFORMATION
The BlackRock Pennsylvania Strategic Municipal Trust (the "Fund") is a
newly organized, closed-end, non-diversified management investment company.
This statement of additional information relating to Preferred Shares does
not constitute a prospectus, but should be read in conjunction with the
prospectus relating hereto dated [ ], 1999. This statement of additional
information does not include all information that a prospective investor
should consider before purchasing Preferred Shares, and investors should
obtain and read the prospectus prior to purchasing such shares. A copy of
the prospectus may be obtained without charge by calling (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.
TABLE OF CONTENTS
Page
----
Investment Objectives and Policies.......................................B-2
Investment Policies and Techniques.......................................B-4
Other Investment Policies and Techniques.................................B-15
Management of the Fund...................................................B-17
Portfolio Transactions and Brokerage.....................................B-24
Additional Information Concerning the Auctions for Preferred Shares......B-25
Description of Common Shares.............................................B-27
Repurchase of Common Shares..............................................B-27
Tax Matters..............................................................B-28
Experts..................................................................B-33
Additional Information...................................................B-33
Report of Independent Auditors...........................................B-34
Financial Statements.....................................................B-34
Statement of Preferences of Municipal Auction Rate Cumulative
Preferred Shares (App. A)..............................................AA-1
Ratings of Investments (App. B)..........................................BB-1
General Characteristics and Risks of Hedging Transactions (App. C).......CC-1
This statement of additional information is dated [ ], 1999.
INVESTMENT OBJECTIVES AND POLICIES
The Fund 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 Fund expects
that a substantial portion of the income it produces will be includable in
alternative minimum taxable income. Preferred Shares therefore would not
ordinarily be a suitable investment for investors who are subject to the
Federal alternative minimum tax or who would become subject to such tax by
purchasing Preferred Shares. The suitability of an investment in Preferred
Shares will depend upon a comparison of the after-tax yield likely to be
provided from the Fund 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 Fund, as a fundamental policy, may
not, without the approval of the holders of a majority of the outstanding
Common Shares and Preferred Shares voting together as a single class, and
of the holders of a majority of the outstanding Preferred Shares voting as
a separate class:
1. invest 25% or more of the value of its total assets in any one
industry provided that this limitation does not apply to municipal
bonds other than those municipal bonds backed only by assets and
revenues of non-governmental users;
2. issue senior securities or borrow money other than as permitted by
the Investment Company Act;
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 Fund's investment objectives 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 Fund 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 Fund may hold and sell any real estate acquired in
connection with its investment in portfolio securities; or
6. purchase or sell commodities or commodity contracts for any purposes
except as, and to the extent, permitted by applicable law without the
Fund becoming subject to registration with the Commodities Futures
Trading Commission as a commodity pool.
When used with respect to particular shares of the Fund, "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 outstanding shares are present or
represented by proxy, or (ii) more than 50% of the outstanding 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 users may for
this purpose be deemed to be issued by such non-governmental users. Thus,
the 25% limitation would apply to such obligations. It is nonetheless
possible that the Fund may invest more than 25% of its total assets in a
broader economic sector of the market for municipal obligations, such as
revenue obligations of hospitals and other health care facilities or
electrical utility revenue obligations. The Fund reserves the right to
invest more than 25% of its assets in industrial development bonds and
private activity securities.
For the purpose of applying the limitation set forth in subparagraph
(1) above, an 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 Fund's assets
that may be invested in municipal bonds insured by any given insurer.
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its total assets in the aggregate in shares of other investment
companies and only 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 Fund will bear
its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's advisory fees and other expenses with
respect to assets so invested. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to
leverage risks. The net asset value and market value of leveraged shares
will be more volatile and the yield to shareholders will tend to fluctuate
more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the
Fund is also subject to the following non-fundamental restrictions and
policies, which may be changed by the board of trustees. The Fund may not:
1. Make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, giving effect to
such sale, the market value of all securities sold short does not
exceed 25% of the value of the Fund's total assets and the Fund's
aggregate short sales of a particular class of securities does not
exceed 25% of the then outstanding securities of that class. The Fund
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
Fund 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.
3. Purchase securities of companies for the purpose of exercising
control.
4. Invest in inverse floating rate securities (which are securities that
pay interest at rates that vary inversely with changes in prevailing
short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond).
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 an acquisition of securities.
In addition, to comply with Federal tax requirements for
qualification as a "regulated investment company," the Fund's investments
will be limited in a manner such that at the close of each quarter of each
fiscal year, (a) no more than 25% of the Fund's total assets are invested
in the securities of a single issuer and (b) with regard to at least 50% of
the Fund's total assets, no more than 5% of its total assets are invested
in the securities 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.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies and techniques that are described in the
prospectus.
Investment in Municipal Bonds
Portfolio Investments
The Fund will invest primarily in municipal bonds that pay interest
that is exempt from regular Federal and Pennsylvania income taxes.
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 Fund may invest may have been so
rated on the basis of the existence of insurance guaranteeing the timely
payment, when due, of all principal and interest. 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 Fund may have greater
difficulty selling its portfolio securities. The Fund will be more
dependent on BlackRock Financial'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 Fund will primarily invest in municipal bonds with long-term
maturities in order to maintain a dollar weighted average maturity of 15-30
years, but the dollar average weighted maturity may be shortened from time
to time depending on market conditions. As a result, the Fund's portfolio
at any given time may include both long-term and intermediate-term
municipal bonds. Moreover, during temporary defensive periods (e.g., times
when, in BlackRock Financial'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 Fund 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 Fund may invest directly. The Fund
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 Fund 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. See Appendix B
for a general description of Moody's, S&P's and Fitch's ratings of
securities in such categories. Taxable temporary investments of the Fund
may include certificates of deposit issued by U.S. banks with assets of at
least $1 billion, or commercial paper or corporate notes, bonds or
debentures with a remaining maturity of one year or less, or repurchase
agreements. See "Other Investment Policies and Techniques--Repurchase
Agreements." To the extent the Fund invests in taxable investments, the
Fund will not at such times be in a position to achieve its investment
objective of tax-exempt income.
The foregoing policies as to ratings of portfolio investments will
apply only at the time of the purchase of a security, and the Fund 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 Fund's
ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition or
releasing of the property might prove difficult. In order to reduce this
risk, the Fund will only purchase Municipal Lease Obligations where
BlackRock Financial 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 Fund may invest in other securities that pay interest that
is or make other distributions that are exempt from regular Federal income
tax, regardless of the technical legal structure of the issuer or the
instrument. The Fund treats all of such tax-exempt securities as municipal
bonds.
Short-Term Investments
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully
invested, the Fund may invest up to 100% of its total assets in cash
equivalents and short-term taxable fixed-income securities, although the
Fund intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. 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 agency securities include
securities issued by (a) the Federal Housing Administration, Farmers
Home Administration, Export-Import Bank of the United States, Small
Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from
the U.S. Treasury; (c) the Federal National Mortgage Association,
whose securities are supported by the discretionary authority of the
U.S. government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S.
government-sponsored agencies or instrumentalities, no assurance can
be given that it always will do so since it is not so obligated by
law. The U.S. government, its agencies, and instrumentalities do not
guarantee the market value of their securities. Consequently, the
value of such securities may fluctuate.
2. Certificates of deposit issued against funds deposited in a bank or a
savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the certificate on
the date specified thereon. Certificates of deposit purchased by the
Fund may not be fully insured by the FDIC.
3. Repurchase agreements, which involve purchases of debt securities. At
the time the Fund 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 Fund 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 Fund to invest temporarily available cash. The Fund 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 Fund may invest.
Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the Fund 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 Fund 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 Fund could incur a loss of both
principal and interest. BlackRock Financial 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 Financial 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
Fund. If the seller were to be subject to a Federal bankruptcy
proceeding, the ability of the Fund 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 Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. BlackRock Financial 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 Fund's liquidity might be impaired if the corporation
were unable to pay principal and interest on demand. Investments in
commercial paper will be limited to commercial paper rated in the
highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate
of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that are
exempt from regular Federal income tax and mature within three years or
less from the date of issuance. Short-term tax-exempt fixed income
securities are defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations of
state and local governmental issuers which are sold to obtain interim
financing for projects that will eventually be funded through the sale of
long-term debt obligations or bonds. The ability of an issuer to meet its
obligations on its BANs is primarily dependent on the issuer's access to
the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments.
Repayment is generally to be derived from specific future tax revenues.
TANs are usually general obligations of the issuer. A weakness in an
issuer's capacity to raise taxes due to, among other things, a decline in
its tax base or a rise in delinquencies, could adversely affect the
issuer's ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing
for specific projects. Frequently, these notes are redeemed with funds
obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and agencies
as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These
notes may have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very
short-term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on
issues of municipal paper may be made from various sources, to the extent
the funds are available therefrom. 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 Fund may invest in such other types of
notes to the extent permitted under its investment objectives, policies and
limitations. Such notes may be issued for different purposes and may be
secured differently from those mentioned above.
Risk Factors Pertaining to Pennsylvania
The following information provides only a brief discussion of certain
factors affecting issuers of municipal obligations in Pennsylvania (the
"Commonwealth") and is derived from sources that are generally available to
investors and is believed to be accurate. It is based in part on
information obtained from various state and local agencies in Pennsylvania.
No independent verification has been made of the following information. It
should be noted that the creditworthiness of obligations issued by local
Pennsylvania issuers may be unrelated to the creditworthiness of
obligations issued by the Commonwealth of Pennsylvania, and there is no
obligation on the part of the Commonwealth to make payment on local
government obligations in the event of default or financial difficulty.
As described above, except during temporary defensive periods, the
Fund will invest substantially all of its net assets in Pennsylvania
municipal obligations. The Fund is therefore susceptible to political,
economic or regulatory factors affecting issuers of Pennsylvania municipal
obligations or, in the case of conduit obligations, affecting the
underlying credit party to the transaction. There can be no assurance that
the Commonwealth will not experience a decline in economic conditions or
that Pennsylvania municipal obligations purchased by the Trust will not be
affected by such a decline.
General. The Commonwealth of Pennsylvania is one of the most populous
states, ranking fifth behind California, New York, Texas and Florida.
Pennsylvania has a diversified economy and is the headquarters for many
major corporations. Pennsylvania had been historically identified as a
heavy industry state. That reputation has changed over the last thirty
years as the coal, steel and railroad industries declined and the
Commonwealth's business environment readjusted to reflect a more
diversified industrial and service industry base. This economic
readjustment was a direct result of a long-term shift in heavy industrial
jobs, investment and workers from the northeast part of the nation.
Currently, the major sources of growth in Pennsylvania are in the service
sector, including trade, medical and health services, education and
financial institutions.
Pennsylvania's agricultural industries remain an important component
of the Commonwealth's economic structure, accounting for more than $3.6
billion in crop and livestock products annually. Agribusiness and
food-related industries support $39 billion in economic activity annually.
Over 51,000 farms form the backbone of the Commonwealth's agricultural
economy. Farmland in Pennsylvania includes over four million acres of
harvested cropland and four million acres of pasture and farm woodlands -
nearly one-third of the Commonwealth's total land area. Agricultural
diversity in the Commonwealth is demonstrated by the fact that Pennsylvania
ranks among the top ten states in the production of a number of
agricultural products.
From 1990 to 1992, non-agricultural employment in the Commonwealth
declined 2%. From 1992 to 1998, non-agricultural employment increased 8%.
The growth in employment experienced in the Commonwealth during such period
is slightly higher than the growth in employment in the Middle Atlantic
region of the United States. Non-manufacturing employment in the
Commonwealth has increased steadily in recent years to its 1998 level of
82.8% of total non-agricultural Commonwealth employment. Manufacturing,
which contributed 17.2% of 1998 non-agricultural employment, has fallen
behind both the services sector and the trade sector as the largest single
source of employment within the Commonwealth. In 1998, the services sector
accounted for 32.3% of all nonagricultural employment in the Commonwealth
while the trade sector accounted for 22.4%.
Economic strengths and weaknesses vary in different parts of the
Commonwealth. In general, heavy industry and manufacturing have been facing
increasing competition from foreign producers. During 1998, the annual
average unemployment rate in the Commonwealth was 4.6%, compared to 4.5%
for the United States. As of April 1999, the seasonally adjusted
unemployment rate for the Commonwealth was 4.4% and for the United States
was 4.3%.
The population of Pennsylvania experienced a slight increase to
approximately 12 million in the period 1989 through 1998, and has a high
proportion of persons 65 or older. The Commonwealth is highly urbanized,
with almost 79% of the 1990 census population residing in metropolitan
statistical areas. The two largest metropolitan statistical areas, those
containing the Cities of Philadelphia and Pittsburgh, together comprise
almost 44% of the Commonwealth's total population.
Commonwealth Government Financial Results. The Commonwealth utilizes
the fund method of accounting and over 150 funds have been established for
purposes of recording receipts and disbursements of the Commonwealth, of
which the General Fund is the largest. Most of the Commonwealth's operating
and administrative expenses are payable from the General Fund. The major
tax sources for the General Fund are the sales tax, the personal income tax
and the corporate net income tax. Major expenditures of the Commonwealth
include funding for education, public health and welfare and
transportation. A relatively high proportion of persons 65 and older in the
Commonwealth, court ordered increases in healthcare reimbursement rates and
higher correctional program costs place increased pressures on the tax
resources of the Commonwealth and its municipalities. The Commonwealth's
debt burden remains moderate.
The Constitution of the Commonwealth provides that operating budget
appropriations of the Commonwealth may not exceed the estimated revenues
and available surplus in the fiscal year for which funds are appropriated.
Annual budgets are enacted for the General Fund and for certain special
revenue funds which together represent the majority of expenditures of the
Commonwealth. Although a negative balance was experienced applying
generally accepted accounting principles ("GAAP") in the General Fund for
fiscal year 1990 and 1991, tax increases and spending decreases have
resulted in surpluses in subsequent years; and as of June 30, 1998, the
General Fund had a surplus of $1.96 billion. The deficit in the
Commonwealth's unreserved/undesignated funds also had been eliminated at
that date.
Commonwealth Debt Limits and Outstanding Obligations. The
Pennsylvania Constitution permits the issuance by the Commonwealth of the
following types of debt: (i) debt to suppress insurrection or rehabilitate
areas affected by disaster; (ii) electorate approved debt; (iii) debt for
capital projects subject to an aggregate outstanding debt limit of 1.75
times the annual average tax revenues of the preceding five fiscal years;
and (iv) tax anticipation notes payable in the fiscal years of issuance. As
of June 30, 1998, the Commonwealth had $4.72 billion of long term general
obligation bonds outstanding. All outstanding general obligation bonds of
the Commonwealth are currently rated "AA" by S&P and "Aa3" by Moody's.
Other obligations of the Commonwealth include long-term agreements
with public authorities to make lease payments that are in some cases
pledged as security for those authorities' revenue bonds, and two pension
plans covering state public school and other employees. These pension plans
had no unfunded actuarial accrued liability for their fiscal years ended in
1998.
Commonwealth Litigation. The Commonwealth is a party to numerous
lawsuits in which an adverse final decision could materially affect the
Commonwealth's governmental operations and consequently its ability to pay
debt service on its obligations. The Commonwealth also faces tort claims
made possible by the statutory limited waiver of sovereign immunity in
Pennsylvania.
Commonwealth Year 2000 Planning. A well-established standard in the
computer industry governing traditional programming practices is expected
to result in many current computer systems being unable to recognize dates
beyond the year 1999. As a result, computers worldwide may begin to
malfunction by producing erroneous data or failing completely as the year
2000 draws near. The Governor of Pennsylvania has made fixing the year 2000
problem a top priority for Pennsylvania state agencies. At the Governor's
direction, Pennsylvania has begun an aggressive program to make its
computer systems year 2000-compatible and to identify potential problems
with entities outside state government with which the Commonwealth does
business or exchanges data.
An initial assessment of state agencies' computer resources was
completed in June 1996. This overview assessment was used to develop the
Governor's Year 2000 Action Plan, which tracks state agencies' computer
programs through a three-step process of correction, testing, and
implementation. Under this action plan, over 46,000 mission-critical and
non mission-critical computer programs used by state agencies are scheduled
for corrective measures to ensure they will be year 2000-compatible.
Mission-critical computer programs are those which impact the health,
safety and welfare of the Commonwealth and its citizens, and for which
failure to be year 2000 compliant could have a material and adverse impact
upon operations of the Commonwealth. As of January 31, 1999, over 99.9% of
the planned mission-critical work items and over 99.8% of the non-mission
critical work items were completed. Testing of remediated codes is expected
to be completed in mid-1999. The projected cost of the Commonwealth's year
2000 modification work is not believed to be a material amount and is being
paid from appropriations from current revenues.
Pennsylvania Agencies. Certain Pennsylvania-created agencies have
statutory authorization to incur debt for which legislation providing for
state appropriations to pay debt service thereon is not required. The debt
of these agencies is supported solely by assets of, or revenues derived
from, the various projects financed and is not an obligation of the
Commonwealth. Some of these agencies, however, are indirectly dependent on
Commonwealth funds through various state-assisted programs. There can be no
assurance that assistance of the Commonwealth will be available to these
agencies which consist of the following entities: The Delaware River Joint
Toll Bridge Commission, Delaware River Port Authority, Pennsylvania Energy
Development Authority, Pennsylvania Higher Education Assistance Agency,
Pennsylvania Higher Educational Facilities Authority, Pennsylvania
Industrial Development Authority, Pennsylvania Infrastructure Investment
Authority, the Pennsylvania State Public School Building Authority, the
Pennsylvania Turnpike Commission, the Pennsylvania Economic Development
Financing Authority and the Philadelphia Regional Port Authority.
Debt of Political Subdivisions and their Authorities. The ability of
Pennsylvania's political subdivisions, such as counties, cities, townships
and school districts, to engage in general obligation borrowing without
electorate approval is generally limited by their recent revenue collection
experience although generally such subdivisions can levy real property
taxes unlimited as to rate or amount to repay general obligation
borrowings. Recent legislation authorizes these subdivisions to engage in
general obligation borrowings without limit as to principal amount to fund
unfunded accrued pension liabilities.
Political subdivisions can issue revenue obligations, such as water
or sewer revenue bonds, which will not affect their general obligation
borrowing capacity, but only if such revenue obligations are either limited
as to repayment from a certain type of revenue other than tax revenues or
projected to be repaid solely from project revenues.
Industrial development and municipal authorities, although created by
political subdivisions, only can issue obligations payable solely from the
revenues derived from the financed project. These authorities may issue
bonds to finance a wide variety of projects, including airports, prisons,
hospitals, housing, solid waste disposal facilities and water, sewer and
gas facilities. If the user of the project is a political subdivision, that
subdivision's full faith and credit may back the repayment of the
obligations of the industrial development or municipal authority. Often the
user of the project is a nongovernmental entity, such as a not-for-profit
hospital or university, a public utility or an industrial corporation. If
the user of the project is a non-profit or business enterprise, the
obligation of the industrial development or municipal authority will
typically be paid only by the non-profit or business user, without recourse
to the industrial development or municipal authority. Various factors may
affect the operations and financial results of the projects financed with
revenue bonds, and there can be no assurance that the pledge, if any, of
revenues or property financed with such bonds will be adequate. Factors
affecting the business of the user of the project, such as managed care,
increased competition and governmental efforts to control health care costs
(in the case of hospitals), declining enrollment and reductions in
governmental financial assistance (in the case of universities), increasing
capital and operating costs, competition and deregulation (in the case of
public utilities) and labor problems, rising costs and economic slowdowns
(in the case of industrial corporations) may adversely affect the ability
of the project user to pay the debt service on revenue bonds issued on its
behalf.
Many factors affect the financial condition of the Commonwealth and
its counties, cities, school districts and other political subdivisions,
such as social, environmental and economic conditions, many of which are
not within the control of such entities. As is the case with many states
and cities, many of the programs of the Commonwealth and its political
subdivisions, particularly human services programs, depend in part upon
federal reimbursements which have been steadily declining. From time to
time, the Commonwealth and various of its political subdivisions (including
particularly the Cities of Philadelphia, Pittsburgh and Scranton) have
encountered financial difficulty due to slowdowns in the pace of economic
activity in the Commonwealth and to other factors. In addition,
nongovernmental entities such as Pennsylvania not-for-profit health care
providers which rely on municipal bonds as a source of capital have
encountered financial difficulties from time to time. In recent years
hospitals in the Philadelphia and Pittsburgh metropolitan areas and
elsewhere in Pennsylvania have encountered severe financial difficulties
resulting in some cases in bankruptcies and defaults on municipal bonds
issued for the benefit of such hospitals. The Fund is unable to predict
what effect, if any, such factors could have on the Fund's investments.
City of Philadelphia. The City of Philadelphia (the "City" or
"Philadelphia") is the largest city in the Commonwealth with an estimated
population of nearly 1.6 million according to the 1990 census. Philadelphia
experienced a series of general fund deficits for fiscal years 1988 through
1992 which culminated in serious financial difficulties for the City. In
June 1991, the Pennsylvania legislature established the Pennsylvania
Intergovernmental Cooperation Authority ("PICA"), a five-member board to
assist Philadelphia in remedying fiscal emergencies. PICA is designed to
provide assistance through the issuance of funding debt and to make factual
findings and recommendations to Philadelphia concerning its budgetary and
fiscal affairs. The legislation empowered PICA to issue notes and bonds on
behalf of Philadelphia, and also authorized Philadelphia to levy a
one-percent sales tax the proceeds of which would be used to pay off the
bonds. In return for PICA's fiscal assistance, Philadelphia is required,
among other things, to establish five-year financial plans that include
balanced annual budgets. Under the legislation that created PICA, if
Philadelphia does not comply with such requirements, PICA may withhold bond
revenues and certain state funding. As of April 15, 1999, PICA had
outstanding approximately $1.05 billion of its Special Tax Revenue Bonds.
The financial assistance that PICA has provided has included the refunding
of certain city general obligation bonds, funding of capital projects and
the liquidation of the City's cumulative General Fund balance deficit as of
June 30, 1992 of $224.9 million. No further PICA bonds are to be issued by
PICA for the purpose of financing a capital project or deficit as the
authority for such bond sales expired on December 31, 1994. PICA's
authority to issue debt for the purpose of financing a cash flow deficit
expired on December 31, 1996. Its ability to refund existing outstanding
debt is unrestricted.
The audited General Fund balance of the City as of June 30, 1996,
1997 and 1998 showed a surplus of approximately $118.5 million, $128.8
million and $169.2 million, respectively. S&P's rating of Philadelphia's
general obligation bonds is currently "BBB." Moody's rating is currently
"Baa2."
Duration Management and Other Management Techniques
The Fund may use a variety of other investment management techniques
and instruments. The Fund 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 to
attempt to protect against possible changes in the market value of the
Fund's portfolio resulting from trends in the debt securities markets and
changes in interest rates, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to establish a position in the
securities markets as a temporary substitute for purchasing particular
securities and to enhance income or gain. There is no particular strategy
that requires use of one technique rather than another as the decision to
use any particular strategy or instrument is a function of market
conditions and the composition of the portfolio. The Additional Investment
Management Techniques are described below. The ability of the Fund to use
them successfully will depend on BlackRock Financial'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
Fund that arise from the use of Additional Investment Management Techniques
will be covered by segregated liquid high grade assets or offsetting
transactions, the Fund and BlackRock Financial 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 Commodity Futures Trading Commission (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 Fund may enter into interest rate
swaps and the purchase or sale of interest rate caps and floors. The Fund
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 Fund anticipates purchasing at a later date. The Fund 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 Fund will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments 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 Fund 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 Fund receiving or paying, as the case may be, only the
net amount of the two payments on the payment dates. The Fund will accrue
the net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap on a daily basis and
will segregate with a custodian an amount of cash or liquid high grade
securities having an aggregate net asset value at all times at least equal
to the accrued excess. The Fund 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 Fund will have
contractual remedies pursuant to the agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Fund 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 Fund will ordinarily engage in such
transactions only for bona fide hedging, risk management (including
duration management) and other portfolio management purposes. However, the
Fund 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 Fund's net assets
would be posted as initial margin and premiums with respect to such
non-hedging transactions.
Calls on Securities Indices and Futures Contracts. The Fund may sell
or purchase call options ("calls") on municipal bonds and indices based
upon the prices of future 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 Fund must be "covered" as long as the
call is outstanding (i.e., the Fund must own the securities or futures
contract subject to the call or other securities acceptable for applicable
escrow requirements). A call sold by the Fund exposes the Fund 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 Fund to hold a security of futures contract which it
might otherwise have sold. The purchase of a call gives the Fund 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 Fund's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Fund 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 Fund may also sell puts on municipal bonds, indices or
futures contracts on such securities if the Fund'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 Fund will not sell puts if, as a result, more than 50% of the Fund's
assets would be required to cover its potential obligations under its
hedging and other investment transactions. In selling puts, there is a risk
that the Fund may be required to buy the underlying security at a price
higher than the current market price.
Appendix C contains further information about the characteristics,
risks and possible benefits of Additional Investment Management Techniques
and the Fund'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 Fund's portfolio; (b) possible lack of a liquid
secondary market for closing out a position in such instruments; (c) losses
resulting from interest rate or other market movements not anticipated by
the adviser; and (d) the obligation to meet additional variation margin or
other payment requirements, all of which could result in the Fund being in
a worse position than if such techniques had not been used.
Certain provisions of the Internal Revenue Code of 1986 may restrict
or affect the ability of the Fund to engage in Additional Investment
Management Techniques. See "Tax Matters."
Short Sales
The Fund may make short sales of municipal bonds. A short sale is a
transaction in which the Fund sells a security it does not own in
anticipation that the market price of that security will decline. The Fund
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 Fund 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 Fund 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 Fund's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other high grade liquid securities. The Fund will
also be required to segregate similar collateral with its custodian to the
extent, if any, necessary so that the aggregate collateral value is at all
times at least equal to the current market value of the security sold
short. Depending on arrangements made with the broker-dealer from which it
borrowed the security regarding payment over of any payments received by
the Fund on such security, the Fund 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 Fund replaces the borrowed security, the
Fund will incur a loss; conversely, if the price declines, the Fund will
realize a gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the Fund's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the
value of its total assets or the Fund's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding securities of
that class. The Fund 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 Fund 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 Fund's investments may be illiquid. Illiquid
securities are subject to legal or contractual restrictions on disposition
or lack an established secondary trading market. The sale of restricted and
illiquid securities often requires more time and results in higher
brokerage charges or dealer discounts and other selling expenses than does
the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may
sell at a price lower than similar securities that are not subject to
restrictions on resale.
When-Issued and Forward Commitment Securities
The Fund may purchase municipal bonds on a "when-issued" basis and
may purchase or sell municipal bonds on a "forward commitment" basis. When
such transactions are negotiated, the price, which is generally expressed
in yield terms, is fixed at the time the commitment is made, but delivery
and payment for the securities take place at a later date. When-issued
securities and forward commitments may be sold prior to the settlement
date, but the Fund 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 Fund disposes of the right to acquire a when-issued
security prior to its acquisition or disposes of its right to deliver or
receive against a forward commitment, it can incur a gain or loss. At the
time the Fund entered into a transaction on a when-issued or forward
commitment basis, it will segregate with its custodian cash or other liquid
high grade debt securities with a value not less than 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 Fund. There
is always a risk that the securities may not be delivered and that the Fund
may incur a loss. Settlements in the ordinary course, which typically occur
monthly for mortgage-related securities, are not treated by the Fund 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 Fund reserves
the right to borrow funds to the extent permitted as described under the
caption "Investment Objectives and Policies--Investment Limitations." The
proceeds of borrowings may be used for any valid purpose including, without
limitation, liquidity, investing and repurchases of shares of the Fund.
Borrowing is a form of leverage and, in that respect, entails risks,
including volatility in net assets, market value and income available for
distribution.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements with respect to
its portfolio investments subject to the investment restrictions set forth
herein and in the prospectus. Reverse repurchase agreements involve the
sale of securities held by the Fund with an agreement by the Fund to
repurchase the securities at an agreed upon price, date and interest
payment. At the time the Fund enters into a reverse repurchase agreement,
it may establish and maintain a segregated account with its custodian
containing liquid instruments having a value not less than the repurchase
price (including accrued interest). If the Fund establishes and maintains
such a segregated account, a reverse repurchase agreement will not be
considered a borrowing by the Fund; however, under circumstances in which
the Fund does not establish and maintain such a segregated account, such
reverse repurchase agreement will be considered a borrowing for the purpose
of the Fund's limitation on borrowings. The use by the Fund 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 Fund
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 Fund 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 Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds
of the reverse repurchase agreement may effectively be restricted pending
such decision. Also, the Fund would 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 Fund 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 Fund'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
Preferred Shares. The Fund will only enter into repurchase agreements with
registered securities dealers or domestic banks that, in the opinion of
BlackRock Financial, present minimal credit risk. The risk to the Fund 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 Fund 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 Fund may be
delayed or limited. BlackRock Financial 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 Advisors 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 Fund 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 Fund
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 Fund may lend its portfolio securities to brokers, dealers and
other financial institutions that meet certain creditworthiness standards.
By lending its portfolio securities, the Fund 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 Fund. The Fund 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 Fund
collateral consisting of cash, a letter of credit issued by a domestic 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 Fund at any time and (d) the Fund receive reasonable interest on the
loan (which may include the Fund'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 Fund will not lend
portfolio securities if, as a result, the aggregate value of such loans
exceeds 33 1/3% of the value of the Fund's total assets (including such
loans). Loan arrangements made by the Fund will comply with all other
applicable regulatory requirements, including the rules of the American
Stock Exchange. All relevant facts and circumstances, including the
creditworthiness of the Qualified Institution, will be monitored by the
Adviser, and will be considered in making decisions with respect to lending
of securities, subject to review by the Fund's board of trustees.
The Fund 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 Fund'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.
MANAGEMENT OF THE FUND
Investment Advisory Agreement
Although BlackRock Advisors intends to devote such time and effort to
the business of the Fund as is reasonably necessary to perform its duties
to the Fund, 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 Fund
or any of the Fund'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 Fund or the Fund's shareholders
and provides for indemnification by the Fund of BlackRock Advisors, its
directors, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Fund, subject to
certain limitations and conditions.
The investment management agreement was approved by the Fund's board
of trustees, on August 19, 1999, including a majority of the trustees who
are not parties to the agreement or interested persons of any such party
(as such term is defined in the Investment Company Act). The investment
management agreement was approved by the sole common shareholder of the
Fund on August 23, 1999. 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 Fund's board of
trustees or the vote of a majority of the outstanding voting securities of
the Fund (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 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 advisory agreement may be terminated as a
whole at any time by the Fund, without the payment of any penalty, upon the
vote of a majority of the Fund's board of trustees or a majority of the
outstanding voting securities of the Fund or by BlackRock Advisors, on 60
days' written notice by either party to the other. The advisory agreement
will terminate automatically in the event of its assignment (as such term
is defined in the Investment Company Act and the rules thereunder).
The Fund's management has agreed to reduce expenses over the first
nine years by waiving certain fees. This may enable the Fund to pay higher
share dividends, even though the Fund will have a lower net asset value
than a no-load fund. The Fund expects that, for the first five years of
operation, its expenses will be lower than those of many comparable funds,
allowing investors to receive a larger portion of the Fund's income.
Sub-Investment Advisory Agreement
BlackRock Financial is a wholly-owned subsidiary of BlackRock
Advisors. Pursuant to the sub-investment advisory agreement, BlackRock
Advisors has appointed BlackRock Financial, one of its affiliates, to
handle the day-to-day investment management of the Fund. BlackRock
Financial will receive a portion of the advisory fee paid by the Fund to
BlackRock Advisors. From the management fee, BlackRock Advisors will pay
BlackRock Financial, for serving as sub-adviser, a fee equal to an annual
rate of .35% of the average weekly value of the Fund's Managed Assets.
The sub-investment advisory agreement also provides that in the
absence of willful misfeasance, bad faith, gross negligence or disregard of
its obligations thereunder, BlackRock Financial is not liable to the Fund
or any of the Fund's shareholders for any act or omission by BlackRock
Financial in the supervision or management of its respective investment
activities or for any loss sustained by the Fund or the Fund's shareholders
and provides indemnification by the Fund of BlackRock Financial, its
directors, officers, employees, agents and control persons for liabilities
incurred by them in connection with their services to the Fund, subject to
certain limitations and conditions.
Although BlackRock Financial intends to devote such time and effort
to the business of the Fund as is reasonably necessary to perform its
duties to the Fund, the services of BlackRock Financial are not exclusive
and BlackRock Financial 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 Fund's
board of trustees on August 19, 1999, including a majority of the trustees
who are not parties to the agreement or interested persons of any such
party (as such term is defined in the Investment Company Act). The
sub-investment advisory agreement was approved by the sole common
shareholder of the Fund on August 23, 1999. The sub-investment advisory
agreement will continue in effect for a period of two years from its
effective date, and if not sooner terminated, will continue in effect for
successive periods of 12 months thereafter, provided that each continuance
is specifically approved at least annually by both (1) the vote of a
majority of the Fund's board of trustees or the vote of a majority of the
outstanding voting securities of the Fund (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 such Agreement for interested persons (as such term
is defined in the Investment Company Act) of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The
sub-investment advisory agreement may be terminated as a whole at any time
by the Fund, without the payment of any penalty, upon the vote of a
majority of the Fund's board of trustees or a majority of the outstanding
voting securities of the Fund or by BlackRock Advisors or by BlackRock
Financial, on 60 days' written notice by either party to the other. The
sub-investment advisory agreement will terminate automatically upon any
termination of the investment advisory agreement between the Fund and
BlackRock Advisors. The sub-investment advisory agreement will terminate
automatically upon any termination of the investment advisory agreement
between the Fund and BlackRock Advisors. The sub-investment advisory
agreement will also terminate automatically in the event of its assignment
(as such term is defined in the Investment Company Act and the rules
thereunder).
Trustees and Officers
The officers of the Fund manage its day to day operations. The
officers are directly responsible to the Fund's board of trustees which
sets broad policies for the Fund and chooses its officers. The following is
a list of the trustees and officers of the Fund and a brief statement of
their present positions and principal occupations during the past five
years. Trustees who are interested persons of the Fund (as defined in the
Investment Company Act) are denoted by an asterisk (*). The business
address of the Fund, BlackRock Advisors, BlackRock Financial and their
board members and officers is 345 Park Avenue, New York, New York 10154,
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 adviser.
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
---------------- ----- --------------------------------------
Andrew F. Brimmer Trustee President of Brimmer & Company, Inc.,
4400 MacArthur Blvd., N.W. a Washington, D.C.-based economic and
Suite 302 financial consulting firm. Director of
Washington, DC 20007 AirBorne Express, CarrAmerica Realty
Age: 72 Corporation and Borg-Warner
Automotive. Formerly member of the
Board of Governors of the Federal
Reserve System. Formerly Director of
BankAmerica Corporation (Bank of
America), BellSouth Corporation,
College Retirement Equities Fund
(Trustee), Commodity Exchange, Inc.
(Public Governor), Connecticut Mutual
Life Insurance Company, E.I. du Pont
de Nemours & Company, Electronic
Realty Associates, Equitable Life
Assurance Society of the United
States, Gannett Company (publishing),
MNC Financial Corporation (American
Security Bank), NMC Capital
Management, Navistar International
Corporation (truck manufacturing) and
UAL Corporation (United Airlines).
Richard E. Cavanagh Trustee President and Chief Executive Officer
845 Third Avenue of The Conference Board, Inc., a
New York, NY 10022 leading global business membership
Age: 52 organization from 1995-present. Former
Executive Dean of the John F. Kennedy
School of Government at Harvard
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).
Trustee, Wesleyan University, Drucker
Foundation and Educational Testing
Services (ETS). Director, Arch
Chemicals (chemicals), Fremont Group
(investments) and The Guardian Life
Insurance Company of America
(insurance).
Kent Dixon Trustee Consultant/Investor. Former President
9495 Blind Pass Road and Chief Executive Officer of Empire
Unit #602 Federal Savings Bank of America and
St. Petersburg, FL 33706 Banc PLUS Savings Association, former
Age: 61 Chairman of the Board, President and
Chief Executive Officer of Northeast
Savings. Former Director of ISFA (the
owner of INVEST, a national securities
brokerage service designed for banks
and thrift institutions)
Frank J. Fabozz Trustee Consultant. Editor of THE JOURNAL OF
858 Tower View Circle PORTFOLIO MANAGEMENT and Adjunct
New Hope, PA 18938 Professor of Finance at the School of
Age: 50 Management at Yale University.
Director, Guardian Mutual Trusts
Group. 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 .
Laurence D. Fink* Trustee Chairman and Chief Executive Officer
Age: 45 of BlackRock Financial Management,
Inc. since March 1998. Formerly a
Managing Director of The First Boston
Corporation, member of its Management
Committee, co-head of its Taxable
Fixed Income Division and head of its
Mortgage and Real Estate Products
Group (December 1980-March 1988).
Currently, Chairman of the Board and
Director of each of BlackRock
Financial's Trusts and Anthracite
Capital, Inc. and as Director of
BlackRock Trust Investors I, BlackRock
Trust Investors II, BlackRock Trust
Investors III, BlackRock Asset
Investors and BlackRock MQE Investors
Trustee of New York University Medical
Center, Dwight Englewood School,
National Outdoor Leadership School and
Phoenix House. A Director of VIMRx
Pharmaceuticals, Inc. and Innovir
Laboratories, Inc.
James Clayburn LaForce, Jr. Trustee Dean Emeritus of The John E. Anderson
P.O. Box 1595 Graduate School of Management,
Pauma Valley, CA 92061 University of California since July 1,
Age: 69 1993. Director, Imperial Credit
Industries (mortgage banking), Jacobs
Engineering Group, Inc., Rockwell
International Corporation, Payden &
Rygel Investment Trust (mutual trust),
Provident Investment Counsel Trusts
(investment companies), Timken Company
(roller bearing and steel) and Motor
Cargo Industries (transportation).
Acting Dean of The School of Business,
Hong Kong University of Science and
Technology 1990-1993. From 1978 to
September 1993, Dean of The John E.
Anderson Graduate School of
Management, University of California.
Walter F. Mondale Trustee Partner, Dorsey & Whitney, a law firm
220 South Sixth Street (December 1996-present, September
Minneapolis, MN 55402 1987-August 1993). Formerly U.S.
Age: 70 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.
Ralph L. Schlosstein* Trustee President of BlackRock Financial since
Age: 47 and and March 1988. Formerly a Managing
President President Director of Lehman Brothers,
Inc. and co-head of its Mortgage and
Savings Institutional Group. Currently
President of each of the closed-end
funds in which BlackRock Financial
acts as investment adviser. Trustee of
Denison University and New Visions for
Public Education in New York City. A
Director of the Pulte Corporation and
a member of the Visiting Board of
Overseers of the John F. Kennedy
School of Government at Harvard
University.
Keith T. Anderson Vice Managing Director of BlackRock
Age: 39 President Financial since April 1988. From
February 1987 to April 1988, Vice
President at The First Boston
Corporation in the Fixed Income
Research Department. Previously Vice
President and Senior Portfolio Manager
at Criterion Investment Management
Company (now Nicholas-Applegate).
Henry Gabbay Treasurer Managing Director and Chief Operating
Age: 51 Officer of BlackRock Financial since
February 1989. From September 1984 to
February 1989, Vice President at The
First Boston Corporation.
Robert S. Kapito Vice Managing Director and Vice Chairman of
Age: 41 President BlackRock Financial since March 1988.
Formerly Vice President at The First
Boston Corporation in the Mortgage
Products Group (from December 1985 to
March 1988).
James Kong Assistant Managing Director of BlackRock
Age: 38 Treasurer Financial since January 1991. From
April 1987 to April 1989, Assistant
Vice President at The First Boston
Corporation in the CMO/ABO
Administration Department. Previously
affiliated with Deloitte Haskins &
Sells (now Deloitte & Touche LLP).
Karen H. Sabath Secretary Managing Director of BlackRock
Age: 34 Financial since August 1988. From June
1986 to July 1988, Associate at The
First Boston Corporation in the
Mortgage Finance Department. From
August 1988 to December 1992,
Associate Vice President of BlackRock
Advisors.
Michael C. Huebsch Vice Managing Director of the Adviser since
Age: 40 President January 1989. From July 1985 to
January 1989, Vice President at The
First Boston Corporation in the Fixed
Income Research Department.
Kevin Klingert Vice Managing Director of the Adviser since
Age: 36 President October 1991. From March 1985 to
October 1991, Assistant Vice President
at Merrill Lynch, Pierce, Fenner &
Smith in the Unit Investment Trust
Department.
Richard Shea, Esq. Vice Director of BlackRock Financial since:
Age: 39 President February 1993. From December 1988 to
/Tax Tax February 1993, Associate Vice
President and Tax Counsel at
Prudential Securities Incorporated.
From August 1984 to December 1988,
Senior Tax Specialist at Laventhol &
Horwath.
As of [ ], 1999, no person is known to the Fund to own of record
or beneficially 5% or more of the outstanding Common Shares or Preferred
Shares, except Cede & Co., Bowling Green Station, P.O. Box 20, New York, NY
10274-0020, which owned [ ]% of the outstanding Common Shares.
Laurence D. Fink and Ralph L. Schlosstein serve as members of the
Executive Committee of the Board of Trustees. The Executive Committee,
which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees except as
otherwise set forth in the Declaration.
The Fund has an Audit Committee consisting of those Trustees who are not
interested persons of BlackRock Advisors or BlackRock Financial.
At the next annual meeting, holders of preferred shares, voting as a
separate class, will elect two trustees and the remaining trustees shall be
elected by Common Shareholders and holders of Preferred Shares, voting
together as a single class.
No officer or employee of the Fund receives any compensation from the
Fund for serving as an officer or trustee of the Fund. The Fund pays each
trustee who is not an "interested person" of the Fund (as defined in the
Investment Company Act) $6,000 per year plus $1,500 per board meeting
attended in person or by telephone for travel and out-of-pocket expenses.
The aggregate estimated compensation received by each current trustee of
the Fund for the fiscal year ending December 31, 1999 and the aggregate
estimated compensation to be received by each current trustee of the
BlackRock family of funds for the fiscal year ending December 31, 1999 as a
whole are estimated as follows:
Estimated Total
1999 Estimated Compensation from the
Aggregate Compensation Fund and Fund Complex
Name of Board Member From Fund Paid to Board Member*
- -------------------- ---------------------- ---------------------
Andrew R. Brimmer $ 6,000 $ 160,000
Richard E. Cavanagh $ 6,000 $ 160,000
Kent Dixon $ 6,000 $ 160,000
Frank J. Fabozzi $ 6,000 $ 160,000
Laurence D. Fink $ 0 $ 0
James Clayburn LaForce, Jr. $ 6,000 $ 160,000
Ralph L. Schlosstein $ 0 $ 0
Walter F. Mondale $ 6,000 $ 160,000
o The BlackRock family of funds consists of 21 closed-end funds. Total
compensation from the Fund and fund complex paid to each board member
is capped at $160,000; Trustee fees paid by the Fund are reduced
based on the Fund's relative net asset value in the event that the
cap is applicable.
PORTFOLIO TRANSACTIONS AND BROKERAGE
BlackRock Financial is responsible for decisions to buy and sell
securities for the Fund, the selection of brokers and dealers to effect the
transactions and the negotiation of prices and any brokerage commissions.
The securities in which the Fund 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 price of the
security 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 Fund 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.
BlackRock Financial is responsible for effecting securities
transactions of the Fund and will do so in a manner deemed fair and
reasonable to shareholders of the Fund and not according to any formula.
BlackRock Financial's primary considerations in selecting the manner of
executing securities transactions for the Fund 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 size of the difficulty in executing the order, and the best
net price. There are many instances when, in the judgment of BlackRock
Financial, 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 Fund. However,
it is not the policy of BlackRock Financial, absent special circumstances,
to pay higher commissions to a firm because it has supplied such research
or other services.
BlackRock Financial is able to fulfill its obligations to furnish a
continuous investment program to the Fund without receiving such
information from brokers; however, it 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 BlackRock Financial, and does not reduce
BlackRock Financial's normal research activities in rendering investment
advice. It is possible that BlackRock Financial'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
BlackRock Financial manages may own from time to time some of the same
investments as the Fund. Investment decisions for the Fund 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 BlackRock Financial in its 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 Fund. In other cases, however, the ability of the Fund
to participate in volume transactions may produce better execution for the
Fund. It is the opinion of the Fund's board of trustees that this
advantage, when combined with the other benefits available due to BlackRock
Financial's organization, outweighs any disadvantages that may be said to
exist from exposure to simultaneous transactions.
Although the investment management agreement contains no restrictions
on portfolio turnover, it is not the Fund'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 Fund 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 Fund expenses, 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
AUCTION AGENCY AGREEMENT. The Fund [has entered into] an Auction
Agency Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, Bankers Trust Company) which provides, among other things, that
the Auction Agent will follow the Auction Procedures for purposes of
determining the Applicable Rate for shares of each series of Preferred
Shares so long as the Applicable Rate for shares of such series is to be
based on the results of an Auction.
BROKER-DEALER AGREEMENTS. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-Dealers
selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for Preferred Shares. See "Broker-Dealers"
below.
SECURITIES DEPOSITORY. The Depository Trust Company ("DTC") will act
as the Securities Depository for the Agent Members with respect to shares
of each series of Preferred Shares. One certificate for all of the shares
of each series of Preferred Shares will be registered in the name of Cede,
as nominee of the Securities Depository. Such certificate will bear a
legend to the effect that such certificate is issued subject to the
provisions restricting transfers of shares of Preferred Shares contained in
the Statement. The Fund will also issue stop-transfer instructions to the
transfer agent for shares of each series of Preferred Shares. Prior to the
commencement of the right of holders of preferred shares to elect a
majority of the Fund's trustees, as described under "Description of
Preferred Shares--Voting Rights" in the Prospectus, Cede will be the holder
of record of all shares of each series of Preferred Shares and owners of
such shares will not be entitled to receive certificates representing their
ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its
participants and will maintain the positions (ownership interests) held by
each such participant (the "Agent Member") in shares of Preferred Shares,
whether for its own account or as a nominee for another person.
CONCERNING THE AUCTION AGENT
The Auction Agent is acting as agent for the Fund in connection with
Auctions. In the absence of 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 and will not be liable 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
Existing Holders of Preferred Shares, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any
Broker-Dealer (or other Person, if permitted by the Fund) with respect to
transfers described under "The Auction--Secondary Market Trading and
Transfer of Preferred Shares" in the Prospectus and notices from the Fund.
The Auction Agent is not required to accept any such notice for an Auction
unless it is received by the Auction Agent by 3:00 p.m., New York City
time, on the Business Day preceding such Auction.
The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If
the Auction Agent should resign, the Fund will use its best efforts to
enter into an agreement with a successor Auction Agent containing
substantially the same terms and conditions as the Auction Agency
Agreement. The Fund may remove the Auction Agent provided that prior to
such removal the Fund shall have entered into such an agreement with a
successor Auction Agent.
BROKER-DEALERS
The Auction Agent after each Auction for shares of Preferred Shares
will pay to each Broker-Dealer, from funds provided by the Fund, a service
charge at the annual rate of [1/4 of 1%] in the case of any Auction
immediately preceding a Rate Period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealers in the case of any Auction
immediately preceding a Rate Period of one year or longer, of the purchase
price of shares of Preferred Shares placed by such Broker-Dealer at such
Auction. For the purposes of the preceding sentence, shares of Preferred
Shares will be placed by a Broker-Dealer if such shares were (a) the
subject of Hold Orders deemed to have been submitted to the Auction Agent
by the Broker-Dealer and were acquired by such Broker-Dealer for its own
account or were acquired by such Broker-Dealer for its customers who are
Beneficial Owners or (b) the subject of an Order submitted by such
Broker-Dealer that is (i) a Submitted Bid of an Existing Holder that
resulted in such Existing Holder continuing to hold such shares as a result
of the Auction or (ii) a Submitted Bid of a Potential Holder that resulted
in such Potential Holder purchasing such shares as a result of the Auction
or (iii) a valid Hold Order.
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one
Broker-Dealer Agreement is in effect after such termination.
The Broker-Dealer Agreement provides that a Broker-Dealer (other than
an affiliate of the Fund) may submit Orders in Auctions for its own
account, unless the Fund notifies all Broker-Dealers that they may no
longer do so, in which case Broker-Dealers may continue to submit Hold
Orders and Sell Orders for their own accounts. Any Broker-Dealer that is an
affiliate of the Fund may submit Orders in Auctions, but only if such
Orders are not for its own account. If a Broker-Dealer submits an Order for
its own account in any Auction, it might have an advantage over other
Bidders because it would have knowledge of all Orders submitted by it in
that Auction; such Broker-Dealer, however, would not have knowledge of
Orders submitted by other Broker-Dealers in that Auction.
DESCRIPTION OF COMMON SHARES
A description of the Common Shares is contained in the Prospectus.
The Fund intends to hold annual meetings of shareholders so long as the
common shares are listed on a national securities exchange and such
meetings are required as a condition to such
listing.
REPURCHASE OF COMMON SHARES
The Fund is a closed-end investment company and as such its common
shareholders will not have the right to cause the Fund to redeem their
shares. Instead, the Fund's common shares will trade in the open market at
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, price, 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 Fund'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 at net asset
value, or the conversion of the Fund to an open-end investment company. The
board of trustees may not decide 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 Fund's Preferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise
acquire any of its common shares unless (1) all accrued Preferred Shares
dividends have been paid and (2) at the time of such purchase, redemption
or acquisition, the net asset value of the Fund's portfolio (determined
after deducting the acquisition price of the common shares) is at least
200% of the liquidation value of the outstanding Preferred Shares (expected
to equal the original purchase price per share plus any accrued and unpaid
dividends thereon). The staff of the Securities and Exchange Commission
currently requires that any tender offer made by a closed-end investment
company for its shares must be at a price equal to the net asset value of
such shares on the close of business on the last day of the tender offer.
Any service fees incurred in connection with any tender offer made by the
Fund will be borne by the Fund and will not reduce the stated consideration
to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the purchase of shares or to make a tender offer. Interest on any
borrowings to finance share repurchase transactions or the accumulation of
cash by the Fund in anticipation of share repurchases or tenders will
reduce the Fund's net income. Any share repurchase, tender offer or
borrowing that might be approved by the Fund's board of trustees would have
to comply with the Securities Exchange Act of 1934 and the Investment
Company Act and the rules and regulations under each of those Acts.
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 Fund's status as a regulated
investment company under the Internal Revenue Code of 1986 (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at
the corporate level in addition to the taxation of shareholders who receive
dividends from the Fund) or as a registered closed-end investment company
under the Investment Company Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or
(3) there is, in the board's judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Fund, (b) general suspension
of or limitation on prices for trading securities on any national
securities exchange, (c) declaration of a banking moratorium by Federal or
state authorities or any suspension of payment by United States or
Pennsylvania banks in which the Fund invests, (d) material limitation
affecting the Fund 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 Fund 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 Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares
that remain outstanding. However, there can be no assurance that share
repurchases or tenders at or below net asset value will result in the
Fund's shares trading at a price equal to their net asset value.
Nevertheless, the fact that the Fund's shares may be the subject of
repurchase or tender offers at net asset value from time to time, or that
the Fund may be converted to an open-end company, may reduce any spread
between market price and net asset value that might otherwise exist.
In addition, a purchase by the Fund of its common shares will
decrease the Fund's total assets which would likely have the effect of
increasing the Fund's expense ratio. Any purchase by the Fund of its common
shares at a time when Preferred Shares are outstanding will increase the
leverage applicable to the outstanding common shares then remaining and
decrease the asset coverage of the Preferred Shares.
Before deciding whether to take any action if the common shares trade
below net asset value, the Fund's board of trustees would likely consider
all relevant factors, including the extent and duration of the discount,
the liquidity of the Fund's portfolio, the impact of any action that might
be taken on the Fund or its shareholders and market considerations. Based
on these considerations, even if the Fund's shares should trade at a
discount, the board of trustees may determine that, in the interest of the
Fund and its shareholders, no action should be taken.
TAX MATTERS
Federal Income Tax Matters
The Fund intends to qualify under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), as a regulated investment
company and to satisfy conditions which enable dividends on Common Shares
or Preferred Shares which are attributable to interest on tax-exempt
municipal securities to be exempt from Federal income tax in the hands of
owners of such shares, subject to the possible application of the
alternative minimum tax.
To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) distribute to
its shareholders at least 90% of the sum of (i) its investment company
taxable income (as that term is defined in the Code determined without
regard to the deduction for dividends paid) and (ii) its net tax-exempt
income and (b) diversify its holdings so that, at the end of each fiscal
quarter of the Fund (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, U.S. government securities and
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 Fund's total assets, and to not
more than 10% of the outstanding voting securities of such issue, and (ii)
not more than 25% of the market value of the Fund's assets is invested in
the securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies). In meeting these
requirements of Subchapter M of the Code, the Fund may be restricted in the
utilization of certain of the investment techniques described above and in
the prospectus. If in any year the Fund should fail to qualify under
Subchapter M for tax treatment as a regulated investment company, the Fund
would incur a regular Federal corporate income tax upon its taxable 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 Fund. A regulated investment company that fails to distribute, by
the close of each calendar year, an amount equal to the sum of 98% of its
ordinary taxable income for such year and 98% of its capital gain net
income for the one year period ending October 31 in such year, plus any
shortfalls from the prior year's required distribution, is liable for a 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 Fund generally makes the required
distributions of its ordinary taxable income, if any, and its capital gain
net income, to the extent possible, by the close of each calendar year.
The Fund intends to qualify to pay "exempt-interest" dividends on its
Common Shares and shares of Preferred Shares as defined under the Code.
Under the Code, at the close of each quarter of its taxable year, if at
least 50% of the value of its total assets consists of municipal bonds, the
Fund 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 Fund which are
attributable to interest on municipal bonds and are so designated by the
Fund. Exempt-interest dividends will be exempt from Federal income tax,
subject to the possible application of the Federal alternative minimum tax.
Insurance proceeds received by the Fund under any insurance policies in
respect of scheduled interest payments on defaulted municipal bonds, as
described herein, will generally be excludable from Federal gross income
under Section 103(a) of the Code. In the case of non-appropriation by a
political subdivision, however, there can be no assurance that payments
made by the issuer representing interest on such "non-appropriation"
municipal lease obligations will be excludable from gross income for
Federal income tax purposes. See "Investment Policies and Techniques"
above. Gains of the Fund that are attributable to market discount on
certain municipal obligations acquired after April 30, 1993 are treated as
ordinary income. Distributions to shareholders by the Fund of net income
received, if any, from taxable temporary investments and net short-term
capital gains, if any, realized by the Fund will be taxable to its
shareholders as ordinary income. Distributions by the Fund of net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital loss), if any, are taxable as long-term capital gain, regardless of
the length of time the shareholder has owned Common Shares or Preferred
Shares of the Fund. The amount of taxable income allocable to the Fund's
Preferred Shares will depend upon the amount of such income realized by the
Fund, but is not generally expected to be significant. Except for dividends
paid on Preferred Shares which include an allocable portion of any net
capital gains or other taxable income, the Fund anticipates that all other
dividends paid on shares of its Preferred Shares will constitute
exempt-interest dividends for Federal income tax purposes. Distributions,
if any, in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a shareholder's shares and, after that basis has been
reduced to zero, will constitute capital gains to the shareholder (assuming
the shares are held as a capital asset). As long as the Fund 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 Internal Revenue Service (the "IRS") requires that a regulated
investment company that has two or more classes of shares must 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 Fund intends each year to allocate, to the fullest
extent practicable, net tax-exempt interest, net capital gains and other
taxable income, if any, between its Common Shares and Preferred Shares in
proportion to the total dividends paid to each class with respect to such
year. To the extent permitted under applicable law, the Fund reserves the
right to make special allocations of income within a class, consistent with
the objectives of the Fund. The Fund [will,] in the case of a Minimum Rate
Period or a Special Rate Period of 28 Rate Period Days, and may, in the
case of any other Special Rate Period, notify the Auction Agent of the
amount of any net capital gains or other income taxable for Federal income
tax purposes to be included in any dividend on shares of its Preferred
Shares prior to the Auction establishing the Applicable Rate for such
dividend. If, (a) in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, the Fund allocates any net
capital gains or other income taxable for Federal income tax purposes to a
dividend paid on shares of Preferred Shares without having given advance
notice thereof to the Auction Agent [as required by the Statement solely by
reason of the fact that such allocation is made retroactively as a result
of the redemption of all or a portion of the outstanding shares of its
Preferred Shares or the liquidation of the Fund] or (b) in the case of any
Special Rate Period of more than 28 Rate Period days, the Fund allocates
any net capital gains or other taxable income for Federal income tax
purposes to its Preferred Shares without having given advance notice
thereof as described above, the Fund will make certain payments to owners
of its Preferred Shares to which such allocation was made to offset the
Federal income tax effect thereof as described under "Description of
Preferred Shares--Dividends and Dividend Periods--Gross-up Payments" in the
Prospectus.
In order for any distributions to owners of the Fund's Preferred
Shares to be eligible to be treated as exempt-interest dividends, such
Preferred Shares must be treated as stock for Federal income tax purposes.
If at any time when the Fund's Preferred Shares are outstanding the
Fund fails to meet the Preferred Shares Basic Maintenance Amount or the
1940 Act Preferred Shares Asset Coverage, the Fund 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 Preferred Shares--Dividends and Dividend
Periods--Restrictions on Dividends and Other Distributions" in the
Prospectus. This may prevent the Fund from distributing at least 90% of its
investment company taxable income and net tax-exempt income, and may
therefore jeopardize the Fund's qualification for taxation as a regulated
investment company or cause the Fund to incur a tax liability or a
non-deductible 4% excise tax on the undistributed taxable income (including
gain), or both. Upon failure to meet the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage, the Fund will be
required to redeem its shares of Preferred Shares in order to maintain or
restore such maintenance amount or asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a
regulated investment company. There can be no assurance, however, that any
such redemption would achieve such objectives.
The Code provides that interest on indebtedness incurred or continued
to purchase or carry the Fund'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.
The interest on private activity bonds in most instances is not
Federally 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 Fund 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" of a facility
includes a "non-exempt person who regularly uses a part of such facility in
his trade or business." "Related persons" are in general defined to include
persons among whom there exists a relationship, either by family or
business, which would result in a disallowance of losses in transactions
among them under various provisions of the Code (or if they are members of
the same controlled group of corporations under the Code), including a
partnership and each of its partners (and certain members of their
families), an S corporation and each of its shareholders (and certain
members of their families) and various combinations of these and other
relationships. The foregoing is not a complete description of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person." The Fund may, at its option, redeem its Preferred Shares
in whole or in part, and is required to redeem Preferred Shares to the
extent required to maintain the Preferred Shares Basic Maintenance Amount
and the 1940 Act Preferred Shares Asset Coverage. Gain or loss, if any,
resulting from a redemption of Preferred Shares will be taxed as gain or
loss from the sale or exchange of Preferred Shares 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 owner's interest in the Fund, (c) is
substantially disproportionate with respect to the owner, or (d) with
respect to non-corporate owners, is in partial liquidation of the Fund. For
purposes of (a), (b) and (c) above, an owner's common shares ownership of
the Fund will be taken into account.
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 taxable net investment income
and net short-term capital gains. To the extent received by foreign
investors, exempt-interest dividends, distributions of net long-term
capital gains and gain from the sale or other disposition of the shares of
Preferred Shares generally are exempt from U.S. taxation. Different tax
consequences may result if the owner 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 more than 182 days during a taxable year.
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 Fund (and received by the shareholders) on December 31 of the year
declared.
Certain of the Fund'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 Fund and affect the holding period of
securities held by the Fund and the character of the gains or losses
realized by the Fund. These provisions may also require the Fund to
recognize income or gain without receiving cash with which to make
distributions in the amounts necessary to satisfy the requirements for
maintaining regulated investment company status and for avoiding income and
excise taxes. The Fund will monitor its transactions and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
The sale or other disposition of Common Shares or Preferred Shares of
the Fund will normally result in capital gain or loss to shareholders.
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, under current law short-term capital gains and ordinary
income will be taxed at a maximum rate of 39.6% while long-term gains
generally will be taxed at a maximum rate of 20%. 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 Fund 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 long-term capital gain received with respect to such shares. A
shareholder's holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property, or through
certain options or short sales. Any loss realized on a sale or exchange of
shares of the Fund will be disallowed to the extent those shares of the
Fund are replaced by other 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
Fund will be adjusted to reflect the disallowed loss.
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 Fund receives income from municipal
obligations subject to the Federal alternative minimum tax, a portion of
the dividends paid by it, although otherwise exempt from Federal income
tax, will be taxable to its shareholders to the extent that their tax
liability is determined under the alternative minimum tax. The Fund will
annually supply a report indicating the percentage of the Fund's income
attributable to municipal obligations subject to the Federal 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 all
municipal obligations, and therefore all distributions by the Fund that
would otherwise be tax-exempt, is 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
Fund, is taken into account in calculating the amount of social security
and railroad retirement benefits that may be subject to Federal income tax.
The Fund is required in certain circumstances to withhold 31% of
taxable dividends and certain other payments paid to non-corporate holders
of the Fund's shares who do not furnish to the Fund 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.
The Code provides that every shareholder required to file a tax
return must include for information purposes on such return the amount of
tax-exempt interest received during the taxable year, including any
exempt-interest dividends received from the Fund.
The foregoing is a general summary of the provisions of the Code and
regulations thereunder presently in effect as they directly govern the
taxation of the Fund 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 Federal income tax
consequences of purchasing, building and dispersing of Fund shares.
Pennsylvania Tax Matters
[The following is based upon the advice of .]
[Due to the pendency of litigation involving the constitutionality of
personal property taxes heretofore in effect, none are currently imposed in
Pennsylvania. In the event enforcement of the personal property tax is
resumed under current law shares of the Fund are not subject to any of the
personal property taxes to the extent of that proportion of the Fund
represented by Pennsylvania municipal obligations. The taxes referred to
above include the county personal property tax, and the additional personal
property taxes imposed on Pittsburgh residents by the School District of
Pittsburgh and by the City of Pittsburgh. Shares of the Fund may be taxable
under the Pennsylvania inheritance and estate taxes.]
[The proportion of interest income representing interest income from
Pennsylvania municipal obligations distributable to shareholders of the
Fund is not taxable under the Pennsylvania personal income tax or under the
corporate net income tax, nor will such interest be taxable under the
Philadelphia school district investment income tax imposed on Philadelphia
resident individuals.]
[Distributions to shareholders from gain realized by the Fund from
the disposition (whether by sale, exchange, redemption or payment at
maturity) of a Pennsylvania municipal obligation issued on or after
February 1, 1994 are taxable under the Pennsylvania personal income tax and
corporate net income tax. With respect to obligations issued before
February 1, 1994, gains distributed to shareholders are arguably exempt
from the above referenced taxes, but the law does not so clearly provide.
Any distribution to shareholders from gain realized on the disposition of
Fund assets held for more than six months are not subject to the
Philadelphia school district investment income tax.]
[If a shareholder is a business subject to the Pennsylvania capital
stock/franchise tax, the value of shares of shares of the Fund by such
shareholder and income derived from their ownership may be taken into
account in determining the "capital stock value" of such shareholder.]
[The foregoing is a general, abbreviated summary of certain of the
provisions of Pennsylvania statutes and administrative interpretations
presently in effect governing the taxation of shareholders of the Fund.
These provisions are subject to change by legislative or administrative
action, and any such change may be retroactive with respect to Fund
transactions. Shareholders are advised to consult with their own tax
advisers for more detailed information concerning Pennsylvania tax
matters.]
EXPERTS
The Statement of Assets and Liabilities of the Trust as of August 19,
1999 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. [ ],
located at [ ], Boston, Massachusetts, provides 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
Fund 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.
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of The BlackRock Pennsylvania
Strategic Municipal Trust.
We have audited the accompanying statement of assets and liabilities
of The BlackRock Pennsylvania Strategic Municipal Trust (the Fund) as of
August 19, 1999, and the related statement of operations for the period
then ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 BlackRock Pennsylvania
Strategic Municipal Trust as of August 19, 1999, and the results of its
operations for the period then ended in conformity with generally accepted
accounting principles.
[ ]
Boston, Massachusetts
August 20, 1999
THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST STATEMENT OF
ASSETS AND LIABILITIES
AUGUST 19, 1999
ASSETS:
Cash $100,003
Receivable from Investment Adviser (Note 3) 25,000
-------
Total Assets 125,003
=======
LIABILITIES:
Organization costs payable (25,000)
--------
Net Assets $100,003
========
Net assets per share, equivalent to 6,981 shares
of beneficial interest issued and outstanding,
par value $0.001, unlimited shares authorized $14.33
======
STATEMENT OF OPERATIONS
For the period June 30, 1999 (inception) to
August 19, 1999
Investment Income -
Expenses
Organization expenses 25,000
Total expenses before reimbursement
Reimbursement from BlackRock Advisors, Inc. (Note 3) 25,000
Total expenses after reimbursement -
Net investment income -
Net change in net assets resulting from operations -
======
Note 1. Organization
The BlackRock Pennsylvania Strategic Municipal Trust (the "Fund") was
organized as a Delaware business Fund on June 30, 1999 and is registered as
a non-diversified, closed-end management investment company under the
Investment Company Act of 1940. The Fund has had no operations other than
the sale to BlackRock Advisors, Inc. of 6,981 shares of beneficial interest
for $100,003.
Note 2. Agreements
The Fund has entered into an Investment Advisory Agreement with BlackRock
Advisors, Inc. The Fund will pay BlackRock Advisors, Inc. a monthly fee
(the "Investment Advisory Fee") at an annual rate of 0.60% of the average
weekly value of the Fund's Managed Assets. From such Investment Advisory
Fee, BlackRock Advisors, Inc. will pay BlackRock for serving as
sub-adviser, a fee equal to an annual rate of 0.35% of the average weekly
value of the Fund's Managed Assets.
BlackRock Advisors, Inc. has undertaken to waive receipt of a portion of
fees or other payments from the Fund to which it is entitled in the
amounts, and for the time periods, set forth below:
Percentage waived (as a percentage
Year Ending December 31, of average weekly Managed Assets)
1999* 25%
2000 25%
2001 25%
2002 25%
2003 25%
2004 25%
2005 20%
2006 15%
2007 10%
2008 5%
* From the commencement of operations.
BlackRock Advisors, Inc. has not undertaken to waive any amount
after December 31, 2008.
Note 3. Organization and Offering Costs
Organization Expenses of $25,000 will be reimbursed by BlackRock Advisors,
Inc. Offering Costs, limited to $0.03 per share, will be charged to capital
upon the sale of shares of beneficial interest. Offering costs in excess of
$0.03 per share will be reimbursed by BlackRock Advisors, Inc.
STATEMENT OF NET ASSETS (UNAUDITED)
[ ], 1999
ASSETS
Investments in municipal securities, at market value $ [ ]
Temporary investments in short-term municipal securities,
at amortized cost, which approximates market value [ ]
Receivables:
Fund Manager
Interest [ ]
Investments Sold [ ]
Other Assets [ ]
Total assets [ ]
LIABILITIES
Payable for investments purchased [ ]
Other expenses [ ]
Total liabilities [ ]
Net assets [ ]
Common Shares outstanding [ ]
Net asset value per common share outstanding (net assets
divided by shares outstanding) [ ]
STATEMENT OF OPERATIONS (UNAUDITED)
For the Period [ ], 1999 (commencement
of operations) through [ ], 1999
INVESTMENT INCOME
EXPENSES
Management fees
Shareholders' servicing agent fees and expenses
Custodian's fees and expenses
Trustees' fees and expenses
Professional fees
Shareholders' reports - printing and mailing expenses
Stock exchange listing fees
Investor relations expense
Other expenses
Total expenses before expense reimbursement
INVESTMENT INCOME
Expense reimbursement
Net expenses
Net Investment Income
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain (loss) from investment transactions
Net change in unrealized appreciation or depreciation
of investments
Net gain (loss) from investments
Net increase (decrease) in net assets from operations
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
For the Period [ ] , 1999 (commencement of
operations) through [ ] , 1999
OPERATIONS
Net investment income
Net realized gain (loss) from investment transactions
Net change in unrealized appreciation or depreciation
of investments
Net increase (decrease) in net assets from operations
CAPITAL SHARE TRANSACTIONS
Net proceeds from sale of Common shares
Net increase in net assets
Net assets at beginning of period
Net assets at end of period
Balance of undistributed net investment income at end
of period
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
[TO COME]
FINANCIAL HIGHLIGHTS
(UNAUDITED)
PORTFOLIO OF INVESTMENTS (UNAUDITED)
[ ] , 1999
Principal Option Call Market
Amount Description Provisions* Ratings** Value
$ $
* Optional Call Provisions: Dates (month and year) and prices of the
earliest optional call or redemption. There may be other call
provisions at varying prices at later dates.
** Ratings: Using the higher of Standard & Poor's or Moody's rating.
APPENDIX A
FORM OF
THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST
STATEMENT OF PREFERENCES OF
MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
("PREFERRED SHARES")
TABLE OF CONTENTS
Definitions................................................................3
Part I....................................................................15
1. Number of Authorized Shares.........................................15
2. Dividends...........................................................15
3. Gross-up Payments...................................................18
4. Designation of Special Rate Periods.................................20
5. Voting Rights.......................................................21
6. 1940 Act Preferred Shares Asset Coverage............................25
7. Preferred Shares Basic Maintenance Amount...........................26
8. [Reserved]..........................................................27
9. Restrictions on Dividends and Other Distributions...................27
10. Rating Agency Restrictions..........................................28
11. Redemption..........................................................29
12. Liquidation Rights..................................................32
13. Miscellaneous.......................................................33
Part II...................................................................35
1. Orders..............................................................35
2. Submission of Orders by Broker-dealers to Auction Agent.............36
3. Determination of Sufficient Clearing Bids, Winning Bid
Rate and Applicable Rate..........................................38
4. Acceptance and Rejection of Submitted Bids and Submitted
Sell Orders and Allocation of Shares..............................39
5. Notification of Allocations.........................................42
6. Auction Agent.......................................................42
7. Transfer of Preferred Shares........................................42
8. Global Certificate..................................................43
Appendix A.............................................................AAA-1
The BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST, a Delaware
business trust (the "Trust"), certifies that:
First: Pursuant to authority expressly vested in the Board of
Trustees of the Trust by Article VI of the Trust's Agreement and
Declaration of Trust (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 Preferred Shares liquidation preference [$ ] 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 Preferred Shares described in
Section 1 of Appendix A hereto are as follows (each such series being
referred to herein as a series of Preferred Shares, and shares of all such
series being referred to herein individually as a Preferred Share and
collectively as Preferred Shares).
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:
(a) "AA" COMPOSITE COMMERCIAL PAPER RATE," on any date for any Rate
Period of shares of a series of Preferred Shares, shall mean (i) (A) in the
case of any Minimum Rate Period or any Special Rate Period of fewer than 49
Rate Period Days, the interest equivalent of the 30-day rate; provided,
however, that if such Rate Period is a Minimum Rate Period and the "AA"
Composite Commercial Paper Rate is being used to determine the Applicable
Rate for shares of such series when all of the Outstanding shares of such
series are subject to Submitted Hold Orders, then the interest equivalent
of the seven-day rate, and (B) in the case of any Special Rate Period of
(1) 49 or more but fewer than 70 Rate Period Days, the interest equivalent
of the 60-day rate; (2) 70 or more but fewer than 85 Rate Period Days, the
arithmetic average of the interest equivalent of the 60-day and 90-day
rates; (3) 85 or more but fewer than 99 Rate Period Days, the interest
equivalent of the 90-day rate; (4) 99 or more but fewer than 120 Rate
Period Days, the arithmetic average of the interest equivalent of the
90-day and 120-day rates; (5) 120 or more but fewer than 141 Rate Period
Days, the interest equivalent of the 120-day rate; (6) 141 or more but
fewer than 162 Rate Period Days, the arithmetic average of the 120-day and
180-day rates; and (7) 162 or more but fewer than 183 Rate Period Days, the
interest equivalent of the 180-day rate, in each case on commercial paper
placed on behalf of issuers whose corporate bonds are rated "AA" by S&P or
the equivalent of such rating by S&P or another rating agency, as made
available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day next preceding such date; or (ii) in the
event that the Federal Reserve Bank of New York does not make available any
such rate, then the arithmetic average of such rates, as quoted on a
discount basis or otherwise, by the Commercial Paper Dealers to the Auction
Agent for the close of business on the Business Day next preceding such
date. If any Commercial Paper Dealer does not quote a rate required to
determine the "AA" Composite Commercial Paper Rate, the "AA" Composite
Commercial Paper Rate shall be determined on the basis of the quotation or
quotations furnished by the remaining Commercial Paper Dealer or Commercial
Paper Dealers and any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Trust to provide such rate or
rates not being supplied by any Commercial Paper Dealer or Commercial Paper
Dealers, as the case may be, or, if the Trust does not select any such
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers,
by the remaining Commercial Paper Dealer or Commercial Paper Dealers. For
purposes of this definition, the "interest equivalent" of a rate stated on
a discount basis (a "discount rate") for commercial paper of a given days'
maturity shall be equal to the quotient (rounded upwards to the next higher
one-thousandth (.001) of 1%) of (A) the discount rate divided by (B) the
difference between (x) 1.00 and (y) a fraction, the numerator of which
shall be the product of the discount rate times the number of days in which
such commercial paper matures and the denominator of which shall be 360.
(b) "ACCOUNTANT'S CONFIRMATION" shall have the meaning specified in
paragraph (c) of Section 7 of Part I of this Statement.
(c) "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.
(d) "AGENT MEMBER" shall mean a member of or participant in the
Securities Depository that will act on behalf of a Bidder.
(e) "ANTICIPATION NOTES" shall mean Tax Anticipation Notes (TANs),
Revenue Anticipation Notes (RAN's), 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.
(f) "APPLICABLE RATE" shall have the meaning specified in
subparagraph (e)(i) of Section 2 of Part I of this Statement.
(g) "AUCTION" shall mean each periodic implementation of the Auction
Procedures.
(h) "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 Preferred Shares
so long as the Applicable Rate for shares of such series is to be based on
the results of an Auction.
(i) "AUCTION AGENT" shall mean the entity appointed as such by a
resolution of the Board of Trustees in accordance with Section 6 of Part II
of this Statement.
(j) "AUCTION DATE," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period.
(k) "AUCTION PROCEDURES" shall mean the procedures for conducting
Auctions set forth in Part II of this Statement.
(l) "AVAILABLE PREFERRED SHARES" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(m) "BENCHMARK RATE" shall have the meaning specified in Section 12
of Appendix A hereto.
(n) "BENEFICIAL OWNER," with respect to shares of a series of
Preferred Shares, means a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer (or, if applicable, the Auction Agent) as a
holder of shares of such series.
(o) "BID" and "BIDS" shall have the respective meanings specified in
paragraph (a) of Section 1 of Part II of this Statement.
(p) "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.
(q) "BOARD OF TRUSTEES" shall mean the Board of Trustees of the Trust
or any duly authorized committee thereof.
(r) "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.
(s) "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.
(t) "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.
(u) "CODE" means the Internal Revenue Code of 1986, as amended.
(v) "COMMERCIAL PAPER DEALERS" shall mean [ ] , [ ]
and [ ] or, in lieu of any thereof, their respective affiliates or
successors, if such entity is a commercial paper dealer.
(w) "COMMON SHARES" shall mean the common shares of beneficial
interest, par value $.001 per share, of the Trust.
(x) "CURE DATE" shall mean the Preferred Shares Basic Maintenance
Cure Date or the 1940 Act Cure Date, as the case may be.
(y) "DATE OF ORIGINAL ISSUE," with respect to shares of a series of
Preferred Shares, shall mean the date on which the Trust initially issued
such shares.
(z) "DECLARATION" shall have the meaning specified on the first page
of this Statement.
(aa) "DEPOSIT SECURITIES" shall mean cash and Municipal Obligations
rated at least A-l+ or SP-l+ by S&P, except that, for purposes of
subparagraph (a) (v) of Section 11 of Part I of this Statement, such
Municipal Obligations shall be considered "Deposit Securities" only if they
are also rated P-1, MIG-1 or VMIG-1 by Moody's.
(bb) "DISCOUNTED VALUE," as of any Valuation Date, shall mean, (i)
with respect to an S&P Eligible Asset, the quotient of the Market Value
thereof divided by the applicable S&P Discount Factor and (ii)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of
such Valuation Date at the option of the issuer thereof, the quotient of
the Market Value thereof divided by the applicable Moody's Discount Factor,
or (b) with respect to a Moody's Eligible Asset that is currently callable
as of such Valuation Date at the option of the issuer thereof, the quotient
of (1) the lesser of the Market Value or call price thereof, including any
call premium, divided by (2) the applicable Moody's Discount Factor.
(cc) [RESERVED]
(dd) [RESERVED]
(ee) "DIVIDEND PAYMENT DATE," with respect to shares of a series of
Preferred Shares, shall mean any date on which dividends are payable on
shares of such series pursuant to the provisions of paragraph (d) of
Section 2 of Part I of this Statement.
(ff) "DIVIDEND PERIOD," with respect to shares of a series of
Preferred Shares, shall mean the period from and including the Date of
Original Issue of shares of such series to but excluding the initial
Dividend Payment Date for shares of such series and any period thereafter
from and including one Dividend Payment Date for shares of such series to
but excluding the next succeeding Dividend Payment Date for shares of such
series.
(gg) "EXISTING HOLDER," with respect to shares of a series of
Preferred Shares, 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.
(hh) "FAILURE TO DEPOSIT," with respect to shares of a series of
Preferred Shares, shall mean a failure by the Trust to pay to the Auction
Agent, not later than 12:00 noon, New York City time, (A) on the Business
Day next preceding any Dividend Payment Date for shares of such series, in
funds available on such Dividend Payment Date in The City of New York, New
York, the full amount of any dividend (whether or not earned or declared)
to be paid on such Dividend Payment Date on any share of such series or (B)
on the Business Day next preceding any redemption date in funds available
on such redemption date for shares of such series in The City of New York,
New York, the Redemption Price to be paid on such redemption date for any
share of such series after notice of redemption is mailed pursuant to
paragraph (c) of Section 11 of Part I of this Statement; provided, however,
that the foregoing clause (B) shall not apply to the Trust's failure to pay
the Redemption Price in respect of Preferred Shares when the related Notice
of Redemption provides that redemption of such shares is subject to one or
more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such
Notice of Redemption.
(ii) "FEDERAL TAX RATE INCREASE" shall have the meaning specified in
the definition of "Moody's Volatility Factor."
(jj) "GROSS-UP PAYMENT" shall have the meaning specified in Section 4
of Appendix A hereto.
(kk) "HOLDER," with respect to shares of a series of Preferred
Shares, shall mean the registered holder of such shares as the same appears
on the record books of the Trust.
(ll) "HOLD ORDER" and "HOLD ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this
Statement.
(mm) "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.
(nn) "INITIAL RATE PERIOD," with respect to shares of a series of
Preferred Shares, shall have the meaning specified with respect to shares
of such series in Section 5 of Appendix A hereto.
(oo) "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.
(pp) "ISSUE TYPE CATEGORY," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(qq) "KENNY INDEX" shall have the meaning specified in the definition
of "Taxable Equivalent of the Short-Term Municipal Bond Rate."
(rr) "LATE CHARGE" shall have the meaning specified in subparagraph
(e) (1) (B) of Section 2 of Part I of this Statement.
(ss) "LIQUIDATION PREFERENCE," with respect to a given number of
Preferred Shares, means [$ ] times that number.
(tt) "MARKET VALUE" of any asset of the Trust shall mean the market
value thereof determined by one or more independent pricing services (the
"Service") approved by the Board of Trustees. Securities valued by the
Service for which quoted bid prices in the judgment of the Service are
readily available and are representative of the bid side of the market are
valued at the mean between the quoted bid prices (as obtained by the
Service from dealers in such securities) and asked prices (as calculated by
the Service based upon its evaluation of the market for such securities).
Other investments valued by the Service are carried at fair value as
determined by the Service, based on methods which include consideration of:
yields or prices of securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market conditions.
Short-term investments are not valued by the Service and are valued at the
mean price or yield equivalent for such securities or for securities of
comparable maturity, quality and type as obtained from market makers;
provided that short-term investments having a remaining maturity of 60 days
or less are valued at amortized cost. Restricted securities, as well as
securities or other assets for which recent market quotations are not
readily available, or are not valued by the Service, are valued at fair
value as determined in good faith by the Board of Trustees.
(uu) "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.
(vv) "MAXIMUM RATE," for shares of a series of Preferred Shares on
any Auction Date for shares of such series, shall mean:
(i) 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:
(A) the dividend rate on shares of such series for
the then-ending Rate Period; and
(B) 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
(ii) 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.
(ww) [RESERVED]
(xx) "MINIMUM RATE PERIOD" shall mean any Rate Period consisting of
[7] Rate Period Days.
(yy) "MOODY'S" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
(zz) "MOODY'S DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(aaa) "MOODY'S ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(bbb) "MOODY'S EXPOSURE PERIOD" shall mean the period commencing on a
given Valuation Date and ending 56 days thereafter.
(ccc) "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:
FEDERAL TAX RATE INCREASE VOLATILITY FACTOR
------------------------- -----------------
5% 295%
10% 317%
15% 341%
20% 369%
25% 400%
30% 436%
35% 477%
40% 525%
(ddd) "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- ), ("Registration Statement"), as the same may
be amended from time to time.
(eee) "1940 ACT" shall mean the Investment Company Act of 1940, as
amended from time to time.
(fff) "1940 ACT CURE DATE," with respect to the failure by the Trust
to maintain the 1940 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.
(ggg) "1940 ACT PREFERRED SHARES ASSET COVERAGE" shall mean asset
coverage, as defined in Section 18(h) of the 1940 Act, of at least 200%
with respect to all outstanding senior securities of the Trust which are
shares of beneficial interest including all outstanding Preferred Shares
(or such other asset coverage as may in the future be specified in or under
the 1940 Act as the minimum asset coverage for senior securities which are
shares or stock of a closed-end investment company as a condition of
declaring dividends on its common shares or stock).
(hhh) "NOTICE OF REDEMPTION" shall mean any notice with respect to
the redemption of Preferred Shares pursuant to paragraph (c) of Section 11
of Part I of this Statement.
(iii) "NOTICE OF SPECIAL RATE PERIOD" shall mean any notice with
respect to a Special Rate Period of Preferred Shares pursuant to
subparagraph (d)(i) of Section 4 of Part I of this Statement.
(jjj) "ORDER" and "ORDERS" shall have the respective meanings
specified in paragraph (a) of Section 1 of Part II of this Statement.
(kkk) "ORIGINAL ISSUE INSURANCE," if defined in Section 4 of Appendix
A hereto, shall have the meaning specified in that section.
(lll) "OTHER ISSUES," if defined in Section 4 of Appendix A hereto,
shall have the meaning specified in that section.
(mmm) "OUTSTANDING" shall mean, as of any Auction Date with respect
to shares of a series of Preferred Shares, 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.
(nnn) "PERMANENT INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(ooo) "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.
(ppp) "PORTFOLIO INSURANCE," if defined in Section 4 of Appendix A
hereto, shall have the meaning specified in that section.
(qqq) "POTENTIAL BENEFICIAL OWNER," with respect to shares of a
series of Preferred Shares, shall mean a customer of a Broker-Dealer that
is not a Beneficial Owner of shares of such series but that wishes to
purchase shares of such series, or that is a Beneficial Owner of shares of
such series that wishes to purchase additional shares of such series.
(rrr) "POTENTIAL HOLDER," with respect to shares of a series of
Preferred Shares, 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.
(sss) "PREFERRED SHARES" shall have the meaning set forth on the
first page of this Statement.
(ttt) "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 Preferred Shares outstanding on such date
multiplied by $[the liquidation preference] (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 Preferred Shares (or other preferred
shares) then subject to redemption; (B) the aggregate amount of dividends
that will have accumulated at the respective Applicable Rates (whether or
not earned or declared) to (but not including) the first respective
Dividend Payment Dates for the Preferred Shares outstanding that follow
such Valuation Date (plus the aggregate amount of dividends, whether or not
earned or declared, that will have accumulated in respect of other
outstanding preferred shares to, but not including, the first respective
dividend payment dates for such other shares that follow such Valuation
Date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of the Preferred Shares outstanding from such first
respective Dividend Payment Date therefor through the 56th day after such
Valuation Date, at the Maximum Rate (calculated as if such Valuation Date
were the Auction Date for the Rate Period commencing on such Dividend
Payment Date) for a Minimum Rate Period of shares of such series to
commence on such Dividend Payment Date, assuming, solely for purposes of
the foregoing, that if on such Valuation Date the 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 Preferred Shares, a failure similar to a Failure to Deposit)
has occurred that has not been cured, the dividend for purposes of
calculation would accumulate at the current dividend rate then applicable
to the shares in respect of which such failure has occurred and (2) for
those days during the period described in this subparagraph (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 Preferred Shares, in respect of which the dividend rate or
rates in effect immediately prior to such respective dividend payment dates
will remain in effect), the dividend for purposes of calculation would
accumulate at such Applicable Rate (or other rate or rates, as the case may
be) in 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
Preferred Shares (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; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of
(i)(A) through (i)(E) (including, without limitation, 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)(F) 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 rated SP-1 or A-1 or Municipal Obligations rated A, provided in
each case that such securities mature on or prior to the date upon which
any of the (i)(A) through (i)(F) become payable, otherwise S&P's Discounted
Value) of any of the Trust's assets irrevocably deposited by the Trust for
the payment of any of (i)(A) through (i)(F).
(uuu) "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.
(vvv) "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.
(www) "QUARTERLY VALUATION DATE" shall mean the last Business Day of
each February, May, August and November of each year, commencing on the
date set forth in Section 6 of Appendix A hereto.
(xxx) "RATE MULTIPLE" shall have the meaning specified in Section 4
of Appendix A hereto.
(yyy) "RATE PERIOD," with respect to shares of a series of Preferred
Shares, shall mean the Initial Rate Period, and any Transitional Rate
Period, of shares of such series and any Subsequent Rate Period, including
any Special Rate Period, of shares of such series.
(zzz) "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.
(aaaa) "RECEIVABLES FOR MUNICIPAL OBLIGATIONS SOLD" shall mean (A)
for purposes of calculation of Moody's Eligible Assets as of any Valuation
Date, no more than the aggregate of the following: (i) the book value of
receivables for Municipal Obligations sold as of or prior to such Valuation
Date if such receivables are due within five business days of such
Valuation Date, and if the trades which generated such receivables are (x)
settled through clearing house firms with respect to which the Trust has
received prior written authorization from Moody's or (y) with
counterparties having a Moody's long-term debt rating of at least Baa3; and
(ii) the Moody's Discounted Value of Municipal Obligations sold as of or
prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do
not comply with either of the conditions specified in (i) above, and (B)
for purposes of calculation of S&P Eligible Assets as of any Valuation
Date, the book value of receivables for Municipal Obligations sold as of or
prior to such Valuation Date if such receivables are due within five
business days of such Valuation Date.
(bbbb) "REDEMPTION PRICE" shall mean the applicable redemption price
specified in paragraph (a) or (b) of Section 11 of Part I of this
Statement.
(cccc) "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.
(dddd) "REGISTRATION STATEMENT" has the meaning specified in the
definition of "Municipal Obligations."
(eeee) "S&P" shall mean Standard & Poor's Corporation, a New York
corporation, and its successors.
(ffff) "S&P DISCOUNT FACTOR" shall have the meaning specified in
Section 4 of Appendix A hereto.
(gggg) "S&P ELIGIBLE ASSET" shall have the meaning specified in
Section 4 of Appendix A hereto.
(hhhh) "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 Preferred Shares Basic Maintenance
Amount (as described in paragraph (a) of Section 7 of Part I of this
Statement).
(iiii) "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.
(jjjj) "SECONDARY MARKET INSURANCE," if defined in Section 4 of
Appendix A hereto, shall have the meaning specified in that section.
(kkkk) "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 Preferred
Shares.
(llll) "SELL ORDER" and "SELL ORDERS" shall have the respective
meanings specified in paragraph (a) of Section 1 of Part II of this
Statement.
(mmmm) "SPECIAL RATE PERIOD," with respect to shares of a series of
Preferred Shares, shall have the meaning specified in paragraph (a) of
Section 4 of Part I of this Statement.
(nnnn) "SPECIAL REDEMPTION PROVISIONS" shall have the meaning
specified in subparagraph (a)(i) of Section 11 of Part I of this Statement.
(oooo) "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.
(pppp) "SUBMITTED BID" and "SUBMITTED BIDS" shall have the respective
meanings specified in paragraph (a) of Section 3 of Part II of this
Statement.
(qqqq) "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.
(rrrr) "SUBMITTED ORDER" and "SUBMITTED ORDERS" shall have the
respective meanings specified in paragraph (a) of Section 3 of Part II of
this Statement.
(ssss) "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.
(tttt) "SUBSEQUENT RATE PERIOD," with respect to shares of a series
of Preferred Shares, shall mean the period from and including the first day
following the Initial Rate Period of shares of such series to but excluding
the next Dividend Payment Date for shares of such series and any period
thereafter from and including one Dividend Payment Date for shares of such
series to but excluding the next succeeding Dividend Payment Date for
shares of such series; provided, however, that if any Subsequent Rate
Period is also a Special Rate Period, such term shall mean the period
commencing on the first day of such Special Rate Period and ending on the
last day of the last Dividend Period thereof.
(uuuu) "SUBSTITUTE COMMERCIAL PAPER DEALER" shall mean [ ] or [ ] or
their respective affiliates or successors, if such entity is a commercial
paper dealer; provided, however, that none of such entities shall be a
Commercial Paper Dealer.
(vvvv) "SUBSTITUTE U.S. GOVERNMENT SECURITIES DEALER" shall mean
[ ] or [ ] their respective affiliates or successors, if such
entity is a U.S. Government securities dealer; provided, however, that
none of such entities shall be a U.S. Government Securities Dealer.
(wwww) "SUFFICIENT CLEARING BIDS" shall have the meaning specified in
paragraph (a) of Section 3 of Part II of this Statement.
(xxxx) "TAXABLE ALLOCATION" shall have the meaning specified in
Section 3 of Part I of this Statement.
(yyyy) "TAXABLE INCOME" shall have the meaning specified in Section
12 of Appendix A hereto.
(zzzz) "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 Preferred Shares) and S&P (if S&P is then rating
the Preferred Shares)), made available for the Business Day immediately
preceding such date but in any event not later than 8:30 A.M., New York
City time, on such date by Kenny S&P Evaluation Services or any successor
thereto, based upon 30-day yield evaluations at par of short-term bonds the
interest on which is excludable for regular Federal income tax purposes
under the Code of "high grade" component issuers selected by Kenny S&P
Evaluation Services or any such successor from time to time in its
discretion, which component issuers shall include, without limitation,
issuers of general obligation bonds, but shall exclude any bonds the
interest on which constitutes an item of tax preference under Section 57
(a)(5) of the Code, or successor provisions, for purposes of the
"alternative minimum tax," divided by (B) 1.00 minus the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or
the maximum marginal regular Federal corporate income tax rate applicable
to ordinary income (in each case expressed as a decimal), whichever is
greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Kenny S&P
Evaluation Services or any successor, the Taxable Equivalent of the
Short-Term Municipal Bond Rate shall mean the quotient of (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.
(aaaaa) "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.
(bbbbb) "TREASURY BILL RATE," on any date for any Rate Period, shall
mean (i) the bond equivalent yield, calculated in accordance with
prevailing industry convention, of the rate on the most recently auctioned
Treasury Bill with a remaining maturity closest to the length of such Rate
Period, as quoted in The Wall Street Journal on such date for the Business
Day next preceding such date; or (ii) in the event that any such rate is
not published in The Wall Street Journal, then the bond equivalent yield,
calculated in accordance with prevailing industry convention, as calculated
by reference to the arithmetic average of the bid price quotations of the
most recently auctioned Treasury Bill with a remaining maturity closest to
the length of such Rate Period, as determined by bid price quotations as of
the close of business on the Business Day immediately preceding such date
obtained from the U.S. Government Securities Dealers to the Auction Agent.
(ccccc) "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.
(ddddd) "TREASURY NOTE RATE," on any date for any Rate Period, shall
mean (i) the yield on the most recently auctioned Treasury Note with a
remaining maturity closest to the length of such Rate Period, as quoted in
The Wall Street Journal on such date for the Business Day next preceding
such date; or (ii) in the event that any such rate is not published in The
Wall Street Journal, then the yield as calculated by reference to the
arithmetic average of the bid price quotations of the most recently
auctioned Treasury Note with a remaining maturity closest to the length of
such Rate Period, as determined by bid price quotations as of the close of
business on the Business Day immediately preceding such date obtained from
the U.S. Government Securities Dealers to the Auction Agent. If any U.S.
Government Securities Dealer does not quote a rate required to determine
the Treasury Bill Rate or the Treasury Note Rate, the Treasury Bill Rate or
the Treasury Note Rate shall be determined on the basis of the quotation or
quotations furnished by the remaining U.S. Government Securities Dealer or
U.S. Government Securities Dealers and any Substitute U.S. Government
Securities Dealers selected by the Trust to provide such rate or rates not
being supplied by any U.S. 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.
(eeeee) "TRUST" shall mean the entity named on the first page of this
Statement, which is the issuer of the Preferred Shares.
(fffff) "U.S. GOVERNMENT SECURITIES DEALER" shall mean [Lehman
Government Securities Incorporated, Goldman, Sachs & Co., Salomon Brothers
Inc and Morgan Guaranty Trust Company of New York] or their respective
affiliates or successors, if such entity is a U.S. Government securities
dealer.
(ggggg) "VALUATION DATE" shall mean, for purposes of determining
whether the Trust is maintaining the Preferred Shares Basic Maintenance
Amount, each Business Day.
(hhhhh) "VOLATILITY FACTOR" shall mean, as of any Valuation Date, the
greater of the Moody's Volatility Factor and the S&P Volatility Factor.
(iiiii) "VOTING PERIOD" shall have the meaning specified in paragraph
(b) of Section 5 of Part I of this Statement.
(jjjjj) "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 Preferred
Shares 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 Preferred Shares shall
rank on a parity with each other, with shares of any other series of the
Preferred Shares 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 Preferred
Shares shall be entitled to receive, when, as and if declared by the Board
of Trustees, out of funds legally available therefor in accordance with the
Declaration and applicable law, cumulative cash dividends at the Applicable
Rate for shares of such series, determined as set forth in paragraph (e) of
this Section 2, and no more (except to the extent set forth in Section 3 of
this Part I), payable on the Dividend Payment Dates with respect to shares
of such series determined pursuant to paragraph (d) of this Section 2.
Holders of Preferred Shares shall not be entitled to any dividend, whether
payable in cash, property or shares, in excess of full cumulative
dividends, as herein provided, on Preferred Shares. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend
payment or payments on Preferred Shares which may be in arrears, and,
except to the extent set forth in subparagraph (e)(i) of this Section 2, no
additional sum of money shall be payable in respect of any such arrearage.
(c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on
any series of Preferred Shares shall accumulate at the Applicable Rate for
shares of such series from the Date of Original Issue thereof.
(d) DIVIDEND PAYMENT DATES AND ADJUSTMENT THEREOF. The Dividend
Payment Dates with respect to shares of a series of Preferred Shares shall
be as set forth with respect to shares of such series in Section 9 of
Appendix A hereto; provided, however, that:
(i) (A) in the case of a series of Preferred Shares
designated as "Series [ ] Preferred Shares" or "Series [ ]
Preferred Shares" in Section 1 of Appendix A hereto, if the
[Monday] or [Tuesday], as the case may be, 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 [Monday]
or [Tuesday], as the case may be, and (B) in the case of a
series of Preferred Shares designated as "Series [ ] Preferred
Shares," "Series [ ] Preferred Shares" or "Series [ ] Preferred
Shares" in Section 1 of Appendix A hereto, if the [Wednesday],
[Thursday] or [Friday], as the case may be, 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 prior to such
[Wednesday], [Thursday] or [Friday], as the case may be; 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
Preferred Shares consisting of more than 28 Rate Period Days;
provided, however, that such dates shall be set forth in the
Notice of Special Rate Period relating to such Special Rate
Period, as delivered to the Auction Agent, which Notice of
Special Rate Period shall be filed with the Secretary of the
Trust; and further provided that (1) any such Dividend Payment
Date shall be a Business Day and Date in respect of such
Special Rate Period shall be the Business Day immediately
following the last day thereof, as such last day is determined
in accordance with paragraph (b) of Section 4 of this Part I.
(e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.
(i) DIVIDEND RATES. The dividend rate on Preferred Shares of any
series during the period from and after the Date of Original
Issue of shares of such series to and including the last day of
the Initial Rate Period of shares of such series shall be equal
to the rate per annum set forth with respect to shares of such
series under "Designation" in Section 1 of 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 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"/BB2"); or
(D) any Failure to Deposit shall have occurred with
respect to shares of such series during a Special Rate
Period thereof consisting of more than 364 Rate Period
Days, or during any Rate Period thereof succeeding any
Special Rate Period consisting of more than 364 Rate
Period Days during which a Failure to Deposit occurred
that has not been cured, and, prior to 12:00 Noon, New
York City time, on the fourth Business Day preceding the
Auction Date for the Rate Period subsequent to such Rate
Period, such Failure to Deposit shall not have been cured
in accordance with paragraph (f) of this Section 2 or, in
the event Moody's is then rating such shares, the Trust
shall not have paid the applicable Late Charge to the
Auction Agent (such Late Charge, for purposes of this
subparagraph (D), to be calculated by using, as the
Reference Rate, the Reference Rate applicable to a Rate
Period (x) consisting of more than 182 Rate Period Days
but fewer than 365 Rate Period Days and (y) commencing on
the date on which the Rate Period during which Failure to
Deposit occurs commenced), no Auction will be held in
respect of shares of such series for such Subsequent Rate
Period (or for any Rate Period thereof thereafter to and
including the Rate Period during which (1) such Failure
to Deposit is cured in accordance with paragraph (f) of
this Section 2 and (2) the Trust pays the applicable Late
Charge to the Auction Agent (the condition set forth in
this clause (2) to apply only in the event Moody's is
rating such shares at the time the Trust cures such
Failure to Deposit), in each case no later than 12:00
Noon, New York City time, on the fourth Business Day
prior to the end of such Rate Period), and the dividend
rate for shares of such series for each such Subsequent
Rate Period shall be a rate per annum equal to the
Maximum Rate for shares of such series on the Auction
Date for such Subsequent Rate Period (but with the
prevailing rating for shares of such series, for purposes
of determining such Maximum Rate, being deemed to be
"Below "ba3"/BB2") (the rate per annum at which dividends
are payable on shares of a series of Preferred Shares 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 Preferred Shares on any date
on which dividends shall be payable on shares of such series
shall be computed by multiplying the Applicable Rate for shares
of such series in effect for such Dividend Period or Dividend
Periods or part thereof for which dividends have not been paid
by a fraction, the numerator of which shall be the number of
days in such Dividend Period or Dividend Periods or part
thereof and the denominator of which shall be 365 if such
Dividend Period consists of 7 Rate Period Days and 360 for all
other Dividend Periods, and applying the rate obtained against
$[the liquidation preference].
(f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
shares of a series of Preferred Shares 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
Preferred Shares when the related Redemption Notice provides that
redemption of such shares is subject to one or more conditions precedent
and any such condition precedent shall not have been satisfied at the time
or times and in the manner specified in such Notice of Redemption.
(g) DIVIDEND PAYMENTS BY TRUST TO AUCTION AGENT. The Trust shall pay
to the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a
series of Preferred Shares, an aggregate amount of funds available on the
next Business Day in The City of New York, New York, equal to the dividends
to be paid to all Holders of shares of such series on such Dividend Payment
Date.
(h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY TRUST. All
moneys paid to the Auction Agent for the payment of dividends (or for the
payment of any Late Charge) shall be held in trust for the payment of such
dividends (and any such Late Charge) by the Auction Agent for the benefit
of the Holders specified in paragraph (i) of this Section 2. Any moneys
paid to the Auction Agent in accordance with the foregoing but not applied
by the Auction Agent to the payment of dividends (and any such Late Charge)
will, to the extent permitted by law, be repaid to the Trust at the end of
90 days from the date on which such moneys were so to have been applied.
(i) DIVIDENDS PAID TO HOLDERS. Each dividend on Preferred Shares
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 Preferred Shares shall first be
credited against the earliest accumulated but unpaid dividends due with
respect to such shares. Dividends in arrears for any past Dividend Period
may be declared and paid at any time, without reference to any regular
Dividend Payment Date, to the Holders 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
Preferred Shares 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 Preferred Shares 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) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD
DAYS OR FEWER. If, in the case of any Minimum Rate Period or any Special
Rate Period of 28 Rate Period Days or fewer, the Trust allocates any net
capital gains or other income taxable for Federal income tax purposes to a
dividend paid on Preferred Shares without having given advance notice
thereof to the Auction Agent as provided in Section 5 of Part II of this
Statement (such allocation being referred to herein as a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding Preferred Shares or the liquidation of the Trust, the Trust
shall, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to
each Holder of such shares that was entitled to such dividend payment
during such calendar year at such Holder's address as the same appears or
last appeared on the record books of the Trust.
(b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If, in the
case of any Special Rate Period of more than 28 Rate Period Days, the Trust
makes a Taxable Allocation to a dividend paid on Preferred Shares, the
Trust shall, prior to the end of the calendar year in which such dividend
was paid, provide notice thereof to the Auction Agent and direct the
Trust's dividend disbursing agent to send such notice with a Gross-up
Payment to each Holder of shares that was entitled to such dividend payment
during such calendar year at such Holder's address as the same appears or
last appeared on the record books of the Trust.
(c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The Trust
shall not be required to make Gross-up Payments with respect to any net
capital gains or other taxable income determined by the Internal Revenue
Service to be allocable in a manner different from that allocated by the
Trust.
4. DESIGNATION OF SPECIAL RATE PERIODS.
(a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Trust,
at its option, may designate any succeeding Subsequent Rate Period of
shares of a series of Preferred Shares as a Special Rate Period consisting
of a specified number of Rate Period Days evenly divisible by seven and not
more than 1,820, subject to adjustment as provided in paragraph (b) of this
Section 4. A designation of a Special Rate Period shall be effective only
if (A) notice thereof shall have been given in accordance with paragraph
(c) and subparagraph (d)(i) of this Section 4, (B) an Auction for shares of
such series shall have been held on the Auction Date immediately preceding
the first day of such proposed Special Rate Period and Sufficient Clearing
Bids for shares of such series shall have existed in such Auction, and (C)
if any Notice of Redemption shall have been mailed by the Trust pursuant to
paragraph (c) of Section 11 of this Part I with respect to any shares of
such series, the Redemption Price with respect to such shares shall have
been deposited with the Auction Agent. In the event the Trust wishes to
designate any succeeding Subsequent Rate Period for shares of a series of
Preferred Shares as a Special Rate Period consisting of more than 28 Rate
Period Days, the Trust shall notify S&P (if S&P is then rating such series)
and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Trust wishes to
designate such Subsequent Rate Period as a Special Rate Period and shall
provide S&P (if S&P is then rating such series) and Moody's (if Moody's is
then rating such series) with such documents as either may request.
(b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the
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) a [Tuesday] that is a Business Day in the
case of a series of Preferred Shares designated as "Series [ ] Preferred
Shares" in Section 1 of Appendix A hereto, (b) a [Wednesday] that is a
Business Day in the case of a series of Preferred Shares designated as
"Series [ ] Preferred Shares" in Section 1 of Appendix A hereto, (c) a
[Thursday] that is a Business Day in the case of a series of Preferred
Shares designated as "Series [ ] Preferred Shares" in Section 1 of Appendix
A hereto, (d) a [Friday] that is a Business Day in the case of a series of
Preferred Shares designated as "Series [ ] Preferred Shares" in Section 1
of Appendix A hereto, or (e) a [Monday] that is a Business Day in the case
of a series of Preferred Shares designated as "Series [ ] Preferred Shares"
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 (a) on the first [Monday] that is followed by a
[Tuesday] that is a Business Day preceding what would otherwise be such
last day, in the case of Series [ ] Preferred Shares, (b) on the first
[Tuesday] that is followed by a [Wednesday] that is a Business Day
preceding what would otherwise be such last day, in the case of Series [ ]
Preferred Shares, (c) on the first [Wednesday] that is followed by a
[Thursday] that is a Business Day preceding what would otherwise be such
last day, in the case of Series [ ] Preferred Shares, (d) on the first
[Thursday] that is followed by a [Friday] that is a Business Day preceding
what would otherwise be such last day, in the case of Series [ ] Preferred
Shares, and (e) on the first [Sunday] that is followed by a [Monday] that
is a Business Day preceding what would otherwise be such last day, in the
case of Series [ ] Preferred Shares.
(c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Preferred Shares 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 Preferred Shares as
to which notice has been given as set forth in paragraph (c) of this
Section 4 (or such later time or date, or both, as may be agreed to by the
Auction Agent), the Trust shall deliver to the Auction Agent either:
(i) a notice ("Notice of Special Rate Period") stating (A) that the
Trust has determined to designate the next succeeding Rate
Period of shares of such series as a Special Rate Period,
specifying the same and the first day thereof, (B) the Auction
Date immediately prior to the first day of such Special Rate
Period, (C) that such Special Rate Period shall not commence if
(1) an Auction for shares of such series shall not be held on
such Auction Date for any reason or (2) an Auction for shares
of such series shall be held on such Auction Date but
Sufficient Clearing Bids for shares of such series shall not
exist in such Auction, (D) the scheduled Dividend Payment Dates
for shares of such series during such Special Rate Period and
(E) the Special Redemption Provisions, if any, applicable to
shares of such series in respect of such Special Rate Period,
such notice to be accompanied by a Preferred Shares Basic
Maintenance Report showing that, as of the third Business Day
next preceding such proposed Special Rate Period, Moody's
Eligible Assets (if Moody's is then rating such series) and S&P
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 PREFERRED SHARES. Except as otherwise
provided in the Declaration or as otherwise required by law, (i) each
Holder of Preferred Shares shall be entitled to one vote for each share of
Preferred Shares 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 Preferred Shares, 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, 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 Preferred
Share entitling the holder thereof to one vote. Subject to paragraph (b) of
this Section 5, the holders of outstanding Common Shares and Preferred
Shares voting together as a single class, shall elect the balance of the
trustees.
(b) VOTING FOR ADDITIONAL TRUSTEES.
(i) VOTING PERIOD. During any period in which any one or more of
the conditions described in subparagraphs (A) or (B) of this
subparagraph (b)(i) shall exist (such period being referred to
herein as a "Voting Period"), the number of trustees
constituting the Board of Trustees shall be automatically
increased by the smallest number that, when added to the two
trustees elected exclusively by the holders of Preferred Shares
would constitute a majority of the Board of Trustees as so
increased by such smallest number, and the holders of Preferred
Shares 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 Preferred Shares, equal
to at least two full years' dividends shall be due and
unpaid and sufficient cash or specified securities shall
not have been deposited with the Auction Agent for the
payment of such accumulated dividends; or
(B) if at any time holders of Preferred Shares are
entitled under the 1940 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 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 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 Preferred Shares, 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
Preferred Shares 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.
(c) HOLDERS OF PREFERRED SHARES TO VOTE ON CERTAIN OTHER MATTERS.
(i) INCREASES IN CAPITALIZATION. So long as any Preferred Shares
are outstanding, the Trust shall not, without the affirmative
vote or consent of the Holders of at least a majority of the
Preferred Shares 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 Preferred
Shares with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Trust, or authorize, create or issue
additional shares of any series of Preferred Shares (except
that, notwithstanding the foregoing, but subject to the
provisions of paragraph (c) of Section 10 of this Part I, the
Board of Trustees, without the vote or consent of the Holders
of Preferred Shares, may from time to time authorize and
create, and the Trust may from time to time issue, additional
shares of any series of Preferred Shares or classes or series
of other preferred shares ranking on a parity with Preferred
Shares with respect to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Trust; provided, however, that if
Moody's or S&P is not then rating the preferred shares, the
aggregate liquidation preference of all preferred shares of the
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 affect
any preference, right or power of such Preferred Shares or the
Holders thereof; provided, however, that (i) none of the
actions permitted by the exception to (a) above will be deemed
to affect such preferences, rights or powers, (ii) a division
of Preferred Shares will be deemed to affect such preferences,
rights or powers only if the terms of such division adversely
affect the Holders of Preferred Shares and (iii) the
authorization, creation and issuance of classes or series of
shares ranking junior to the Preferred Shares with respect to
the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the
Trust, will be deemed to affect such preferences, rights or
powers only if Moody's or S&P is then rating the Preferred
Shares and such issuance would, at the time thereof, cause the
Trust not to satisfy the 1940 Act Preferred Shares Asset
Coverage or the Preferred Shares Basic Maintenance Amount. So
long as any shares of the Preferred Shares are outstanding, the
Trust shall not, without the affirmative vote or consent of the
Holders of at least 66 2/3% of the Preferred Shares 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 Preferred Shares in a
manner different from any other series of Preferred Shares, 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) 1940 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 Preferred Shares 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 Preferred Shares," voting as
a separate class, shall be required to approve any plan of
reorganization (as such term is used in the 1940 Act) adversely
affecting such shares. The affirmative vote of the holders of a
"majority of the outstanding Preferred Shares," 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 1940 Act. For purposes of the foregoing, "majority
of the outstanding Preferred Shares" 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 Preferred Shares is required pursuant to the
provisions of Section 13(a) of the 1940 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 Preferred Shares) and S&P (if S&P is then rating the
Preferred Shares) that such vote is to be taken and the nature
of the action with respect to which such vote is to be taken.
The 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 Preferred Shares) 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 the Preferred Shares or the Holders
thereof; provided, however, that the Board of Trustees receives written
confirmation from Moody's (such confirmation being required to be obtained
only in the event Moody's is rating the Preferred Shares and in no event
being required to be obtained in the case of the definitions of (x) Deposit
Securities, Discounted Value, Receivables for Municipal Obligations Sold,
Issue Type Category and Other Issues as such terms apply to S&P Eligible
Assets and (y) S&P Discount Factor, S&P Eligible Asset, S&P Exposure Period
and S&P Volatility Factor) and S&P (such confirmation being required to be
obtained only in the event S&P is rating the Preferred Shares and in no
event being required to be obtained in the case of the definitions of (x)
Discounted Value, Receivables for Municipal Obligations Sold, Issue Type
Category and Other Issues 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 Preferred Shares.
(e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS. Unless
otherwise required by law, the Holders of Preferred Shares 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
Preferred Shares 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
Preferred Shares, 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
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. 1940 ACT PREFERRED SHARES ASSET COVERAGE.
The Trust shall maintain, as of the last Business Day of each month
in which any Preferred Shares are outstanding, the 1940 Act Preferred
Shares Asset Coverage.
7. PREFERRED SHARES BASIC MAINTENANCE AMOUNT.
(a) So long as Preferred Shares 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) S&P Eligible Assets having an
aggregate Discounted Value equal to or greater than the Preferred Shares
Basic Maintenance Amount (if S&P is then rating the Preferred Shares) and
(ii) Moody's Eligible Assets having an aggregate Discounted Value equal to
or greater than the Preferred Shares Basic Maintenance Amount (if Moody's
is then rating the Preferred Shares).
(b) On or before 5:00 P.M., New York City time, on the third Business
Day after a Valuation Date on which the 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 S&P (if S&P is then
rating the Preferred Shares), Moody's (if Moody's is then rating the
Preferred Shares) and the Auction Agent (if either S&P or Moody's is then
rating the Preferred Shares) a Preferred Shares Basic Maintenance Report as
of the date of such failure or such Preferred Shares Basic Maintenance Cure
Date, as the case may be, which will be deemed to have been delivered to
the Auction Agent if the Auction Agent receives a copy or telecopy, telex
or other electronic transcription thereof and on the same day the Trust
mails to the Auction Agent for delivery on the next Business Day the full
Preferred Shares Basic Maintenance Report. The Trust shall also deliver a
Preferred Shares Basic Maintenance Report to (i) the Auction Agent (if
either Moody's or S&P is then rating the Preferred Shares) as of (A) the
fifteenth day of each month (or, if such day is not a Business Day, the
next succeeding Business Day) and (B) the last Business Day of each month,
(ii) Moody's (if Moody's is then rating the Preferred Shares) and S&P (if
S&P is then rating the Preferred Shares) as of any Quarterly Valuation
Date, in each case on or before the third Business Day after such day, and
(iii) S&P, if and when requested for any Valuation Date, on or before the
third Business Day after such request. A failure by the Trust to deliver a
Preferred Shares Basic Maintenance Report pursuant to the preceding
sentence shall be deemed to be delivery of a Preferred Shares Basic
Maintenance Report indicating the Discounted Value for all assets of the
Trust is less than the Preferred Shares Basic Maintenance Amount, as of the
relevant Valuation Date.
(c) Within ten Business Days after the date of delivery of a
Preferred Shares Basic Maintenance Report in accordance with paragraph (b)
of this Section 7 relating to a Quarterly Valuation Date, the Trust shall
cause the Independent Accountant to confirm in writing to S&P (if S&P is
then rating the Preferred Shares), Moody's (if Moody's is then rating the
Preferred Shares) and the Auction Agent (if either S&P or Moody's is then
rating the Preferred Shares) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Preferred Shares
Basic Maintenance Report, randomly selected by the Independent Accountant,
that was delivered by the 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), S&P Eligible Assets (if S&P is
then rating the Preferred Shares) of an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount and Moody's Eligible
Assets (if Moody's is then rating the Preferred Shares) of an aggregate
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount (such confirmation being herein called the "Accountant's
Confirmation"), (iii) that, in such Report (and in such randomly selected
Report), the Trust determined whether the Trust had, at such Quarterly
Valuation Date (and at the Valuation Date addressed in such randomly
selected Report) in accordance with this Statement, S&P Eligible Assets of
an aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount and Moody's Eligible Assets of an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount, (iv)
with respect to the S&P ratings on Municipal Obligations, the issuer name,
issue size and coupon rate listed in such Report, that the Independent
Accountant has requested that S&P verify such information and the
Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the Moody's ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such
Report, that the such information has been verified by Moody's (in the
event such information is not verified by Moody's, the Independent
Accountant will inquire of Moody's what such information is, and provide a
listing in its letter of any differences), (vi) with respect to the bid or
mean price (or such alternative permissible factor used in calculating the
Market Value) provided by the custodian of the Trust's assets to the Trust
for purposes of valuing securities in the Trust's portfolio, the
Independent Accountant has traced the price used in such Report to the bid
or mean price listed in such Report as provided to the Trust and verified
that such information agrees (in the event such information does not agree,
the Independent Accountant will provide a listing in its letter of such
differences) and (vii) with respect to such confirmation to Moody's and
S&P, that the Trust has satisfied the requirements of Section 13 of this
Statement (such information is herein called the "Independent Accountant's
Confirmation").
(d) Within ten Business Days after the date of Delivery of a
Preferred Shares Basic Maintenance Report in accordance with paragraph (b)
of this Section 7 relating to any Valuation Date on which the Trust failed
to satisfy the Preferred Shares Basic Maintenance Amount, and relating to
the Preferred Shares Basic Maintenance Cure Date with respect to such
failure to satisfy the Preferred Shares Basic Maintenance Amount, the Trust
shall cause the Independent Accountant to provide to S&P (if S&P is then
rating the Preferred Shares), Moody's (if Moody's is then rating the
Preferred Shares) and the Auction Agent (if either S&P or Moody's is then
rating the Preferred Shares) an Accountant's Confirmation as to such
Preferred Shares Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered pursuant to paragraph
(c) or (d) of this Section 7 shows that an error was made in the Preferred
Shares Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that
a lower aggregate Discounted Value for the aggregate of all S&P Eligible
Assets (if S&P is then rating the Preferred Shares) or Moody's Eligible
Assets (if Moody's is then rating the Preferred Shares), as the case may
be, of the Trust was determined by the Independent Accountant, the
calculation or determination made by such Independent Accountant shall be
final and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the Preferred Shares Basic Maintenance Report
to S&P (if S&P is then rating the Preferred Shares), Moody's (if Moody's is
then rating the Preferred Shares) and the Auction Agent (if either S&P or
Moody's is then rating the Preferred Shares) promptly following receipt by
the 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 Preferred Shares, the Trust
shall complete and deliver to S&P (if S&P is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred Shares) a
Preferred Shares Basic Maintenance Report as of the close of business on
such Date of Original Issue. Within five Business Days of such Date of
Original Issue, the Trust shall cause the Independent Accountant to confirm
in writing to S&P (if S&P is then rating the Preferred Shares) (i) the
mathematical accuracy of the calculations reflected in such Report and (ii)
that the Discounted Value of S&P Eligible Assets reflected thereon equals
or exceeds the Preferred Shares Basic Maintenance Amount reflected thereon.
(g) On or before 5:00 p.m., New York City time, on the third Business
Day after either (i) the Trust shall have redeemed Common Shares or (ii)
the ratio of the Discounted Value of S&P Eligible Assets or the Discounted
Value of Moody's Eligible Assets to the Preferred Shares Basic Maintenance
Amount is less than or equal to 105%, the Trust shall complete and deliver
to S&P (if S&P is then rating the Preferred Shares) or Moody's (if Moody's
is then rating the Preferred Shares), as the case may be, a Preferred
Shares Basic Maintenance Report as of the date of either such event or
(iii) whenever requested by Moody's and S&P.
8. [RESERVED]
9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.
(a) DIVIDENDS ON SHARES OTHER THAN THE PREFERRED SHARES. Except as
set forth in the next sentence, no dividends shall be declared or paid or
set apart for payment on the shares of any class or series of shares of
beneficial interest of the Trust ranking, as to the payment of dividends,
on a parity with the Preferred Shares for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the
shares of each series of the Preferred Shares through its most recent
Dividend Payment Date. When dividends are not paid in full upon the shares
of each series of the Preferred Shares 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 Preferred Shares through their most recent respective
dividend payment dates, all dividends declared upon the Preferred Shares
and any other such class or series of shares of beneficial interest ranking
on a parity as to the payment of dividends with Preferred Shares shall be
declared pro rata so that the amount of dividends declared per share on
Preferred Shares and such other class or series of shares of beneficial
interest shall in all cases bear to each other the same ratio that
accumulated dividends per share on the Trust and such other class or series
of shares of beneficial interest bear to each other (for purposes of this
sentence, the amount of dividends declared per share of Preferred Shares
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 1940 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 Preferred Shares have, at the time of any such
declaration or purchase, an asset coverage (as defined in and determined
pursuant to the 1940 Act) of at least 200% (or such other asset coverage as
may in the future be specified in or under the 1940 Act as the minimum
asset coverage for senior securities which are shares or stock of a
closed-end investment company as a condition of declaring dividends on its
common shares or stock) after deducting the amount of such dividend,
distribution or purchase price, as the case may be.
(c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so
long as any Preferred Shares 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
Preferred Shares 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 Preferred Shares as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Trust ranking junior to the Preferred Shares as
to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), or any such parity shares (except
by conversion into or exchange for shares of the Trust ranking junior to or
on a parity with Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), unless
(i) full cumulative dividends on shares of each series of Preferred Shares
through its most recently ended Dividend Period shall have been paid or
shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent and (ii) the Trust has redeemed the full
number of Preferred Shares required to be redeemed by any provision for
mandatory redemption pertaining thereto, and (B) the Trust shall not
declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in shares of, or in options,
warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to Preferred Shares as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Trust
ranking junior to Preferred Shares as to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Trust ranking junior to Preferred Shares as to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless immediately after such transaction the
Discounted Value of Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and S&P Eligible Assets (if S&P is then rating the
Preferred Shares) would each at least equal the Preferred Shares Basic
Maintenance Amount.
10. RATING AGENCY RESTRICTIONS.
For so long as any Preferred Shares are outstanding and Moody's or
S&P, or both, are rating such shares, the Trust will not, unless it has
received written confirmation from Moody's or S&P, or both, as appropriate,
that any such action would not impair the ratings then assigned by such
rating agency to such shares, engage in any one or more of the following
transactions:
(a) buy or sell futures or write put or call options;
(b) borrow money, except that the Trust may, without obtaining the
written confirmation described above, borrow money for the purpose of
clearing securities transactions if (i) the Preferred Shares Basic
Maintenance Amount would continue to be satisfied after giving effect to
such borrowing and (ii) such borrowing (A) is privately arranged with a
bank or other person and is evidenced by a promissory note or other
evidence of indebtedness that is not intended to be publicly distributed or
(B) is for "temporary purposes," is evidenced by a promissory note or other
evidence of indebtedness and is in an amount not exceeding 5 per centum of
the value of the total assets of the Trust at the time of the borrowing;
for purposes of the foregoing, "temporary purpose" means that the borrowing
is to be repaid within sixty days and is not to be extended or renewed;
(c) issue additional shares of any series of Preferred Shares or any
class or series of shares ranking prior to or on a parity with Preferred
Shares with respect to the payment of dividends or the distribution of
assets upon dissolution, liquidation or winding up of the Trust, or reissue
any Preferred Shares previously purchased or redeemed by the Trust;
(d) engage in any short sales of securities;
(e) lend securities;
(f) merge or consolidate into or with any other corporation;
(g) change the pricing service (currently Muller Data Corporation)
referred to in the definition of Market Value; or
(h) enter into reverse repurchase agreements.
11. REDEMPTION.
(a) OPTIONAL REDEMPTION.
(i) Subject to the provisions of subparagraph (v) of this paragraph
(a), Preferred Shares of any series may be redeemed, at the
option of the Trust, as a whole or from time to time in part,
on the second Business Day preceding any Dividend Payment Date
for shares of such series, out of funds legally available
therefor, at a redemption price per share equal to the sum of
[$25,000] plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption; provided,
however, that (1) shares of a series of Preferred Shares may
not be redeemed in part if after such partial redemption fewer
than 500 shares of such series remain outstanding; (2) unless
otherwise provided in Section 11 of Appendix A hereto, shares
of a series of Preferred Shares 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
Preferred Shares, 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 Preferred Shares 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.
(iii) If fewer than all of the outstanding shares of a series of
Preferred Shares are to be redeemed pursuant to subparagraph
(i) of this paragraph (a), the number of shares of such series
to be redeemed shall be determined by the Board of 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 Preferred Shares may be redeemed,
at the option of the Trust, as a whole but not in part, out of
funds legally available therefor, on the first day following
any Dividend Period thereof included in a Rate Period
consisting of more than 364 Rate Period Days if, on the date of
determination of the Applicable Rate for shares of such series
for such Rate Period, such Applicable Rate equaled or exceeded
on such date of determination the Treasury Note Rate for such
Rate Period, at a redemption price per share equal to the sum
of [$25,000] plus an amount equal to accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but
not including) the date fixed for redemption.
(v) The Trust may not on any date mail a Notice of Redemption
pursuant to paragraph (c) of this Section 11 in respect of a
redemption contemplated to be effected pursuant to this
paragraph (a) unless on such date (a) the Trust has available
Deposit Securities with maturity or tender dates not later than
the day preceding the applicable redemption date and having a
value not less than the amount (including any applicable
premium) due to Holders of Preferred Shares by reason of the
redemption of such shares on such redemption date and (b) the
Discounted Value of Moody's Eligible Assets (if Moody's is then
rating the Preferred Shares) and the Discounted Value of S&P
Eligible Assets (if S&P is then rating the Preferred Shares)
each at least equal the Preferred Shares Basic Maintenance
Amount, and would at least equal the Preferred Shares Basic
Maintenance Amount immediately subsequent to such redemption if
such redemption were to occur on such date. For purposes of
determining in clause (b) of the preceding sentence whether the
Discounted Value of Moody's Eligible Assets at least equals the
Preferred Shares Basic Maintenance Amount, the Moody's Discount
Factors applicable to Moody's Eligible Assets shall be
determined by reference to the first Exposure Period longer
than the Exposure Period then applicable to the Trust, as
described in the definition of Moody's Discount Factor herein.
(b) MANDATORY REDEMPTION. The Trust shall redeem, at a redemption
price equal to $[the liquidation preference] 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 Preferred Shares, if the Trust fails to have either Moody's Eligible
Assets with a Discounted Value or S&P Eligible Assets with a Discounted
Value greater than or equal to the Preferred Shares Basic Maintenance
Amount or fails to maintain the 1940 Act Preferred Shares Asset Coverage,
in accordance with the requirements of the rating agency or agencies then
rating the Preferred Shares, and such failure is not cured on or before the
Preferred Shares Basic Maintenance Cure Date or the 1940 Act Cure Date, as
the case may be. The number of Preferred Shares to be redeemed shall be
equal to the lesser of (i) the minimum number of Preferred Shares, together
with all other preferred shares subject to redemption or retirement, the
redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, would have resulted in the Trust's
having both Moody's Eligible Assets with a Discounted Value and S&P
Eligible Assets with a Discounted Value greater than or equal to the
Preferred Shares Basic Maintenance Amount or maintaining the 1940 Act
Preferred Shares Asset Coverage, as the case may be, on such Cure Date
(provided, however, that if there is no such minimum number of Preferred
Shares and other preferred shares the redemption or retirement of which
would have had such result, all Preferred Shares and other Preferred Shares
then outstanding shall be redeemed), and (ii) the maximum number of
Preferred Shares, together with all other Preferred Shares subject to
redemption or retirement, that can be redeemed out of funds expected to be
legally available therefor in accordance with the Declaration and
applicable law. In determining the Preferred Shares required to be redeemed
in accordance with the foregoing, the Trust shall allocate the number
required to be redeemed to satisfy the Preferred Shares Basic Maintenance
Amount or the 1940 Act Preferred Shares Asset Coverage, as the case may be,
pro rata among Preferred Shares and other preferred shares (and, then, pro
rata among each series of Preferred Shares) 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
Preferred Shares 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
Preferred Shares 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
Preferred Shares are to be redeemed pursuant to this paragraph (b), the
number of shares of such series to be redeemed shall be redeemed pro rata
from the Holders of shares of such series in proportion to the number of
shares of such series held by such Holders.
(c) NOTICE OF REDEMPTION. If the Trust shall determine or be required
to redeem shares of a series of Preferred Shares pursuant to paragraph (a)
or (b) of this Section 11, it shall mail a Notice of Redemption with
respect to such redemption by first class mail, postage prepaid, to each
Holder of the shares of such series to be redeemed, at such Holder's
address as the same appears on the record books of the Trust on the record
date established by the Board of Trustees. Such Notice of Redemption shall
be so mailed not less than 20 nor more than 45 days prior to the date fixed
for redemption. Each such Notice of Redemption shall state: (i) the
redemption date; (ii) the number of Preferred Shares to be redeemed and the
series thereof; (iii) the CUSIP number for shares of such series; (iv) the
Redemption Price; (v) the place or places where the certificate(s) for such
shares (properly endorsed or assigned for transfer, if the Board of
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) the provisions of this Section 11 under which such
redemption is made. If fewer than all shares of a series of Preferred
Shares held by any Holder are to be redeemed, the Notice of Redemption
mailed to such Holder shall also specify the number of shares of such
series to be redeemed from such Holder. The 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 Preferred Shares (whether or not earned or declared)
are in arrears, no shares of such series shall be redeemed unless all
outstanding shares of such series are simultaneously redeemed, and the
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 Preferred Shares shall be deemed to exist at any time after the date
specified for redemption in a Notice of Redemption when the Trust shall
have failed, for any reason whatsoever, to deposit in trust with the
Auction Agent the Redemption Price with respect to any shares for which
such Notice of Redemption has been mailed; provided, however, that the
foregoing shall not apply in the case of the Trust's failure to deposit in
trust with the Auction Agent the Redemption Price with respect to any
shares where (1) the Notice of Redemption relating to such redemption
provided that such redemption was subject to one or more conditions
precedent and (2) any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice
of Redemption. Notwithstanding the fact that the Trust may not have
redeemed Preferred Shares for which a Notice of Redemption has been mailed,
dividends may be declared and paid on Preferred Shares and shall include
those Preferred Shares for which a Notice of Redemption has been mailed.
(f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY TRUST. All
moneys paid to the Auction Agent for payment of the Redemption Price of
Preferred Shares called for redemption shall be held in trust by the
Auction Agent for the benefit of Holders of shares so to be redeemed.
(g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO
LONGER OUTSTANDING. Provided a Notice of Redemption has been mailed
pursuant to paragraph (c) of this Section 11, upon the deposit with the
Auction Agent (on the Business Day next preceding the 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 Preferred Shares
that are the subject of such notice, dividends on such shares shall cease
to accumulate and such shares shall no longer be deemed to be outstanding
for any purpose, and all rights of the Holders of the shares so called for
redemption shall cease and terminate, except the right of such Holders to
receive the Redemption Price, but without any interest or other additional
amount, except as provided in subparagraph (e)(i) of Section 2 of this Part
I and in Section 3 of this Part I. Upon surrender in accordance with the
Notice of Redemption of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of 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 Preferred Shares
subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall
be issued, representing the unredeemed shares, without cost to the Holder
thereof. The 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
Preferred Shares called for redemption on such date and (ii) all other
amounts to which Holders of Preferred Shares called for redemption may be
entitled. Any funds so deposited that are unclaimed at the end of 90 days
from such redemption date shall, to the extent permitted by law, be repaid
to the Trust, after which time the Holders of Preferred Shares 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. The Trust shall
be entitled to receive, from time to time after the date fixed for
redemption, any interest on the funds so deposited.
(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 1940 Act and any applicable Delaware law, but shall effect no
redemption except in accordance with the 1940 Act and any applicable
Delaware law.
(i) ONLY WHOLE PREFERRED SHARES MAY BE REDEEMED. In the case of any
redemption pursuant to this Section 11, only whole Preferred Shares shall
be redeemed, and in the event that any provision of the Declaration would
require redemption of a fractional share, the Auction Agent shall be
authorized to round up so that only whole shares are redeemed.
12. LIQUIDATION RIGHTS.
(a) RANKING. The shares of a series of Preferred Shares shall rank on
a parity with each other, with shares of any other series of preferred
shares and with shares of any other series of Preferred Shares 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 Preferred Shares 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 Preferred Shares upon dissolution, liquidation
or winding up, an amount equal to the Liquidation Preference with respect
to such shares plus an amount equal to all dividends thereon (whether or
not earned or declared) accumulated but unpaid to (but not including) the
date of final distribution in same day funds, together with any payments
required to be made pursuant to Section 3 of this Part I in connection with
the liquidation of the Trust. After the payment to the Holders of the
Preferred Shares of the full preferential amounts provided for in this
paragraph (b), the Holders of Preferred Shares 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 Preferred Shares 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 Preferred Shares with respect to the distribution of assets upon
such dissolution, liquidation or winding up unless proportionate
distributive amounts shall be paid on account of the Preferred Shares,
ratably, in proportion to the full distributable amounts for which holders
of all such parity shares are respectively entitled upon such dissolution,
liquidation or winding up.
(d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with
the Preferred Shares with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, after
payment shall have been made in full to the Holders of the Preferred Shares
as provided in paragraph (b) of this Section 12, but not prior thereto, any
other series or class or classes of shares ranking junior to the Preferred
Shares with respect to the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the 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 Preferred Shares 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 Delaware business
trust or corporation nor the merger or consolidation of any Delaware
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
Preferred Shares or additional shares of a series of Preferred Shares (and
terms relating thereto) to the series and Preferred Shares theretofore
described thereon. Each such additional series and all such additional
shares shall be governed by the terms of this Statement.
(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 Preferred Shares
shall be issued.
(d) STATUS OF PREFERRED SHARES REDEEMED, EXCHANGED OR OTHERWISE
ACQUIRED BY THE TRUST. Preferred Shares 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 Preferred Shares 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.
PART II.
1. ORDERS.
(a) Prior to the Submission Deadline on each Auction Date for shares
of a series of Preferred Shares:
(i) each Beneficial Owner of shares of such series may submit to its
Broker-Dealer by telephone or
otherwise information as to:
(A) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner which such
Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for shares of such series
for the next succeeding Rate Period of such shares;
(B) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner which such
Beneficial Owner offers to sell if the Applicable Rate
for shares of such series for the next succeeding Rate
Period of shares of such series shall be less than the
rate per annum specified by such Beneficial Owner; and/or
(C) the number of Outstanding shares, if any, of
such series held by such Beneficial Owner which such
Beneficial Owner offers to sell without regard to the
Applicable Rate for shares of such series for the next
succeeding Rate Period of shares of such series;
and
(ii) one or more Broker-Dealers, using lists of Potential Beneficial
Owners, shall in good faith for the purpose of conducting a
competitive Auction in a commercially reasonable manner,
contact Potential Beneficial Owners (by telephone or
otherwise), including Persons that are not Beneficial Owners,
on such lists to determine the number of shares, if any, of
such series which each such Potential Beneficial Owner offers
to purchase if the Applicable Rate for shares of such series
for the next succeeding Rate Period of shares of such series
shall not be less than the rate per annum specified by such
Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the
Auction Agent, of information referred to in clause (i) (A), (i), (B), (i),
(C) or (ii) of this paragraph (a) is hereinafter referred to as an "Order"
and collectively as "Orders" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order with a Broker-Dealer, and such
Broker-Dealer placing an Order with the Auction Agent, is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order
containing the information referred to in clause (i)(A) of this paragraph
(a) is hereinafter referred to as a "Hold Order" and collectively as "Hold
Orders"; an Order containing the information referred to in clause (i)(B)
or (ii) of this paragraph (a) is hereinafter referred to as a "Bid" and
collectively as "Bids"; and an Order containing the information referred to
in clause (i)(C) of this paragraph (a) is hereinafter referred to as a
"Sell Order" and collectively as "Sell Orders."
(b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares
of a series of Preferred Shares subject to an Auction on any Auction Date
shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares
of such series determined on such Auction Date shall be
less than the rate specified therein;
(B) such number or a lesser number of Outstanding
shares of such series to be determined as set forth in
clause (iv) of paragraph (a) of Section 4 of this Part II
if the Applicable Rate for shares of such series
determined on such Auction Date shall be equal to the
rate specified therein; or
(C) the number of Outstanding shares of such series
specified in such Bid if the rate specified therein shall
be higher than the Maximum Rate for shares of such
series, or such number or a lesser number of Outstanding
shares of such series to be determined as set forth in
clause (iii) of paragraph (b) of Section 4 of this Part
II if the rate specified therein shall be higher than the
Maximum Rate for shares of such series and Sufficient
Clearing Bids for shares of such series do not exist.
(ii) A Sell Order by a Beneficial Owner or an Existing Holder of
shares of a series of Preferred Shares subject to an Auction on
any Auction Date shall constitute an irrevocable offer to sell:
(A) the number of Outstanding shares of such series
specified in such Sell Order; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in clause (iii) of
paragraph (b) of Section 4 of this Part II if Sufficient
Clearing Bids for shares of such series do not exist;
provided, however, that a Broker-Dealer that is an
Existing Holder with respect to shares of a series of
Preferred Shares shall not be liable to any Person for
failing to sell such 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 Preferred Shares subject to an Auction on
any Auction Date shall constitute an irrevocable offer to
purchase:
(A) the number of Outstanding shares of such series
specified in such Bid if the Applicable Rate for shares
of such series determined on such Auction Date shall be
higher than the rate specified therein; or
(B) such number or a lesser number of Outstanding
shares of such series as set forth in clause (v) of
paragraph (a) of Section 4 of this Part II if the
Applicable Rate for shares of such series determined on
such Auction Date shall be equal to the rate specified
therein.
(c) No Order for any number of Preferred Shares other than whole
shares shall be valid.
2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for
Preferred Shares of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise
permitted by the Trust) as an Existing Holder in respect of shares subject
to Orders submitted or deemed submitted to it by Beneficial Owners and as a
Potential Holder in respect of shares subject to Orders submitted to it by
Potential Beneficial Owners, and shall specify with respect to each Order
for such shares:
(i) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);
(ii) the aggregate number of shares of such series that are the
subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder of shares
of such series:
(A) the number of shares, if any, of such series
subject to any Hold Order of such Existing Holder;
(B) the number of shares, if any, of such series
subject to any Bid of such Existing Holder and the rate
specified in such Bid; and
(C) the number of shares, if any, of such series
subject to any Sell Order of such Existing Holder; and
(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 Preferred
Shares 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
Preferred Shares of a series subject to an Auction held by such Existing
Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for shares of such series shall be considered
valid, but only up to and including in the aggregate the number
of Outstanding shares of such series held by such Existing
Holder, and if the number of shares of such series subject to
such Hold Orders exceeds the number of Outstanding shares of
such series held by such Existing Holder, the number of shares
subject to each such Hold Order shall be reduced pro rata to
cover the number of Outstanding shares of such series held by
such Existing Holder;
(ii) (A) any Bid for shares of such series shall be considered
valid up to and including the excess of the number of Outstanding
shares of such series held by such Existing Holder over the
number of shares of such series subject to any Hold Orders
referred to in clause (i) above;
(B) subject to subclause (A), if more than one Bid
of an Existing Holder for shares of such series is
submitted to the Auction Agent with the same rate and the
number of Outstanding shares of such series subject to
such Bids is greater than such excess, such Bids shall be
considered valid up to and including the amount of such
excess, and the number of shares of such series subject
to each Bid with the same rate shall be reduced pro rata
to cover the number of shares of such series equal to
such excess;
(C) subject to subclauses (A) and (B), if more than
one Bid of an Existing Holder for shares of such series
is submitted to the Auction Agent with different rates,
such Bids shall be considered valid in the ascending
order of their respective rates up to and including the
amount of such excess; and
(D) in any such event, the number, if any, of such
Outstanding shares of such series subject to any portion
of Bids considered not valid in whole or in part under
this clause (ii) shall be treated as the subject of a Bid
for shares of such series by or on behalf of a Potential
Holder at the rate therein specified; and
(iii) all Sell Orders for shares of such series shall be considered
valid up to and including the excess of the number of
Outstanding shares of such series held by such Existing Holder
over the sum of shares of such series subject to valid Hold
Orders referred to in clause (i) above and valid Bids referred
to in clause (ii) above.
(e) If more than one Bid for one or more shares of a series of
Preferred Shares is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the
rate and number of shares therein specified.
(f) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date, shall be
irrevocable.
3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.
(a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Preferred Shares, the Auction Agent shall assemble
all valid Orders submitted or deemed submitted to it by the Broker-Dealers
in respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as
a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order" and collectively as "Submitted
Hold Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may
be, or as "Submitted Orders") and shall determine for such series:
(i) the excess of the number of Outstanding shares of such series
over the number of Outstanding shares of such series subject to
Submitted Hold Orders (such excess being hereinafter referred
to as the "Available Preferred Shares" of such series);
(ii) from the Submitted Orders for shares of such series whether:
(A) the number of Outstanding shares of such series
subject to Submitted Bids of Potential Holders specifying
one or more rates equal to or lower than the Maximum
Rate for shares of such series;
exceeds or is equal to the sum of:
(B) the number of Outstanding shares of such series
subject to Submitted Bids of Existing Holders specifying
one or more rates higher than the Maximum Rate for shares
of such series; and
(C) the number of Outstanding shares of such series
subject to Submitted Sell Orders
(in the event such excess or such equality exists (other than
because the number of shares of such series in subclauses (B)
and (C) above is zero because all of the Outstanding shares of
such series are subject to Submitted Hold Orders), such
Submitted Bids in subclause (A) above being hereinafter
referred to collectively as "Sufficient Clearing Bids" for
shares of such series); and
(iii) if Sufficient Clearing Bids for shares of such series exist,
the lowest rate specified in such Submitted Bids (the "Winning
Bid Rate" for shares of such series) which if:
(A) (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 Preferred Shares of such series.
(b) Promptly after the Auction Agent has made the determinations
pursuant to paragraph (a) of this Section 3, the Auction Agent shall advise
the Trust of the Maximum Rate for shares of the series of Preferred Shares
for which an Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for shares of such series exist,
that the Applicable Rate for all shares of such series for the
next succeeding Rate Period thereof shall be equal to the
Winning Bid Rate for shares of such series so determined;
(ii) if Sufficient Clearing Bids for shares of such series do not
exist (other than because all of the Outstanding shares of such
series are subject to Submitted Hold Orders), that the
Applicable Rate for all shares of such series for the next
succeeding Rate Period thereof shall be equal to the Maximum
Rate for shares of such series; or
(iii) if all of the Outstanding shares of such series are subject to
Submitted Hold Orders, that the Applicable Rate for all shares
of such series for the next succeeding Rate Period thereof
shall be as set forth in Section 12 of Appendix A hereto.
4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES.
Existing Holders shall continue to hold the Preferred Shares that are
subject to Submitted Hold Orders, and, based on the determinations made
pursuant to paragraph (a) of Section 3 of this Part II, the Submitted Bids
and Submitted Sell Orders shall be accepted or rejected by the Auction
Agent and the Auction Agent shall take such other action as set forth
below:
(a) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have been made, all Submitted Sell Orders with respect to shares of
such series shall be accepted and, subject to the provisions of paragraphs
(d) and (e) of this Section 4, Submitted Bids with respect to shares of
such series shall be accepted or rejected as follows in the following order
of priority and all other Submitted Bids with respect to shares of such
series shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is higher than the Winning Bid Rate
for shares of such series shall be accepted, thus requiring
each such Existing Holder to sell the Preferred Shares subject
to such Submitted Bids;
(ii) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be rejected, thus entitling each
such Existing Holder to continue to hold the Preferred Shares
subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is lower than the Winning Bid Rate for
shares of such series shall be accepted;
(iv) each Existing Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be rejected, thus entitling such
Existing Holder to continue to hold the Preferred Shares
subject to such Submitted Bid, unless the number of Outstanding
Preferred Shares subject to all such Submitted Bids shall be
greater than the number of Preferred Shares ("remaining
shares") in the excess of the Available Preferred Shares of
such series over the number of Preferred Shares subject to
Submitted Bids described in clauses (ii) and (iii) of this
paragraph (a), in which event such Submitted Bid of such
Existing Holder shall be rejected in part, and such Existing
Holder shall be entitled to continue to hold Preferred Shares
subject to such Submitted Bid, but only in an amount equal to
the number of Preferred Shares of such series obtained by
multiplying the number of remaining shares by a fraction, the
numerator of which shall be the number of Outstanding Preferred
Shares held by such Existing Holder subject to such Submitted
Bid and the denominator of which shall be the aggregate number
of Outstanding Preferred Shares subject to such Submitted Bids
made by all such Existing Holders that specified a rate equal
to the Winning Bid Rate for shares of such series; and
(v) each Potential Holder's Submitted Bid for shares of such series
specifying a rate that is equal to the Winning Bid Rate for
shares of such series shall be accepted but only in an amount
equal to the number of shares of such series obtained by
multiplying the number of shares in the excess of the Available
Preferred Shares of such series over the number of Preferred
Shares subject to Submitted Bids described in clauses (ii)
through (iv) of this paragraph (a) by a fraction, the numerator
of which shall be the number of Outstanding Preferred Shares
subject to such Submitted Bid and the denominator of which
shall be the aggregate number of Outstanding Preferred Shares
subject to such Submitted Bids made by all such Potential
Holders that specified a rate equal to the Winning Bid Rate for
shares of such series.
(b) If Sufficient Clearing Bids for shares of a series of Preferred
Shares have not been made (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), subject to the
provisions of paragraph (d) of this Section 4, Submitted Orders for shares
of such series shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids for shares of such series
shall be rejected:
(i) Existing Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum
Rate for shares of such series shall be rejected, thus
entitling such Existing Holders to continue to hold the
Preferred Shares subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids for shares of such series
specifying any rate that is equal to or lower than the Maximum
Rate for shares of such series shall be accepted; and
(iii) Each Existing Holder's Submitted Bid for shares of such series
specifying any rate that is higher than the Maximum Rate for
shares of such series and the Submitted Sell Orders for shares
of such series of each Existing Holder shall be accepted, thus
entitling each Existing Holder that submitted or on whose
behalf was submitted any such Submitted Bid or Submitted Sell
Order to sell the shares of such series subject to such
Submitted Bid or Submitted Sell Order, but in both cases only
in an amount equal to the number of shares of such series
obtained by multiplying the number of shares of such series
subject to Submitted Bids described in clause (ii) of this
paragraph (b) by a fraction, the numerator of which shall be
the number of Outstanding shares of such series held by such
Existing Holder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which shall be the aggregate
number of Outstanding shares of such series subject to all such
Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding shares of a series of Preferred Shares
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.
(d) If, as a result of the procedures described in clause (iv) or (v)
of paragraph (a) or clause (iii) of paragraph (b) of this Section 4, any
Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of
a series of Preferred Shares on any Auction Date, the Auction Agent shall,
in such manner as it shall determine in its sole discretion, round up or
down the number of Preferred Shares 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 Preferred Shares.
(e) If, as a result of the procedures described in clause (v) of
paragraph (a) of this Section 4, any Potential Holder would be entitled or
required to purchase less than a whole share of a series of Preferred
Shares on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, allocate Preferred Shares of such
series for purchase among Potential Holders so that only whole shares of
Preferred Shares of such series are purchased on such Auction Date as a
result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing Preferred Shares of
such series on such Auction Date.
(f) Based on the results of each Auction for shares of a series of
Preferred Shares, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that
such aggregate number of shares to be purchased and such aggregate number
of shares to be sold differ, determine to which other Potential Holder(s)
or Existing Holder(s) they shall deliver, or from which other Potential
Holder(s) or Existing Holder(s) they shall receive, as the case may be,
Preferred Shares of such series. Notwithstanding any provision of the
Auction Procedures or the Settlement Procedures to the contrary, in the
event an Existing Holder or Beneficial Owner of a series of Preferred
Shares with respect to whom a Broker-Dealer submitted a Bid to the Auction
Agent for such shares that was accepted in whole or in part, or submitted
or is deemed to have submitted a Sell Order for such shares that was
accepted in whole or in part, fails to instruct its Agent Member to deliver
such shares against payment therefor, partial deliveries of Preferred
Shares that have been made in respect of Potential Holders' or Potential
Beneficial Owners' Submitted Bids for shares of such series that have been
accepted in whole or in part shall constitute good delivery to such
Potential Holders and Potential Beneficial Owners.
(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
Preferred Shares of any series or to pay for Preferred Shares 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 Preferred
Shares, the Trust shall, in the case of a Minimum Rate Period or a Special
Rate Period of 28 Rate Period Days or fewer, and may, in the case of any
other Special Rate Period, notify the Auction Agent of the amount to be so
included not later than the Dividend Payment Date next preceding the
Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the
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 Preferred Shares believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.
6. AUCTION AGENT.
For so long as any Preferred Shares are outstanding, the Auction
Agent, duly appointed by the 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
Preferred Shares 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 Preferred
Shares shall be conclusive and binding on the Broker-Dealers. A
Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on the
Business Day preceding an Auction for a series of Preferred Shares 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 PREFERRED SHARES.
Unless otherwise permitted by the Trust, a Beneficial Owner or an
Existing Holder may sell, transfer or otherwise dispose of Preferred Shares
only in whole shares and only pursuant to a Bid or Sell Order placed with
the Auction Agent in accordance with the procedures described in this Part
II or to a Broker-Dealer; provided, however, that (a) a sale, transfer or
other disposition of Preferred Shares from a customer of a Broker-Dealer
who is listed on the records of that Broker-Dealer as the holder of such
shares to that Broker-Dealer or another customer of that Broker-Dealer
shall not be deemed to be a sale, transfer or other disposition for
purposes of this Section 7 if such Broker-Dealer remains the Existing
Holder of the shares so sold, transferred or disposed of immediately after
such sale, transfer or disposition and (b) in the case of all transfers
other than pursuant to Auctions, the Broker-Dealer (or other Person, if
permitted by the 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 Preferred Shares outstanding from time to time shall be
represented by one global certificate registered in the name of the
Securities Depository or its nominee and (ii) no registration of transfer
of shares of a series of Preferred Shares shall be made on the books of the
Trust to any Person other than the Securities Depository or its nominee.
IN WITNESS WHEREOF, THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL
TRUST, has caused these presents to be signed on , 1999 in its name and on
its behalf by its [Vice President] and attested by its [Assistant
Secretary]. The Trust's Agreement and Declaration of Trust is on file with
the Secretary of State of the State of Delaware, and the 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.
THE BLACKROCK PENNSYLVANIA STRATEGIC
MUNICIPAL TRUST
By: ________________________________
Name:
Title:
ATTEST:
_____________________________
Name:
Title:
[ ], 1999
THE BLACKROCK PENNSYLVANIA STRATEGIC MUNICIPAL TRUST
APPENDIX A
SECTION 1. DESIGNATION AS TO SERIES.
SERIES [ ]: A series of [ ] Preferred Shares, par value
[$ ] per share, liquidation preference [ ] per share, is hereby
designated "Municipal Auction Rate Cumulative Preferred Shares, Series [ ]."
Each of the [ ] shares of Series [ ] Preferred Shares issued on [ ],
1999 shall, for purposes hereof, be deemed to have a Date of Original Issue
of [ ], 1999; have an Applicable Rate for its Initial Rate Period equal
to [ ]% per annum; have an initial Dividend Payment Date of [ ], 1999;
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 applicable to Preferred Shares of the Trust, as
set forth in Part I and Part II of this Statement. Any shares of Series [ ]
Preferred Shares issued thereafter shall be issued on the first day of a
Rate Period of the then outstanding shares of Series [ ] Preferred Shares,
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 Preferred Shares of the Trust, as
set forth in Part I and Part II of this Statement. The Series [ ] Preferred
Shares shall constitute a separate series of Preferred Shares of the Trust,
and each share of Series [ ] Preferred Shares shall be identical except as
provided in Section 11 of Part I of this Statement.
SERIES [ ]: A series of [ ] Preferred Shares, par value [$ ]
per share, liquidation preference [$ ] per share, is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series [ ]." Each of
the [ ] shares of Series [ ] Preferred Shares issued on [ ], 1999 shall,
for purposes hereof, be deemed to have a Date of Original Issue of [ ],
1999; have an Applicable Rate for its Initial Rate Period equal to [ ]% per
annum; have an initial Dividend Payment Date of [ ], 1999; 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 applicable to Preferred Shares of the Trust, as set
forth in Part I and Part II of this Statement. Any shares of Series [ ]
Preferred Shares issued thereafter shall be issued on the first day of a
Rate Period of the then outstanding shares of Series [ ] Preferred Shares;
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 Preferred Shares of the Trust, as
set forth in Part I and Part II of this Statement. The Series [ ] Preferred
Shares shall constitute a separate series of Preferred Shares of the Trust,
and each share of Series [ ] Preferred Shares shall be identical except as
provided in Section 11 of Part I of this Statement.
SERIES [ ]: A series of [ ] Preferred Shares, par value [$ ]
per share, liquidation preference [$ ] per share, is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series [ ]." Each of
the [ ] shares of Series [ ] Preferred Shares issued on [ ], 1999 shall,
for purposes hereof, be deemed to have a Date of Original Issue of [ ],
1999; have an Applicable Rate for its Initial Rate Period equal to [ ]% per
annum; have an initial Dividend Payment Date of [ ], 1999; 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 applicable to Preferred Shares of the Trust, as set
forth in Part I and Part II of this Statement. Any shares of Series [ ]
Preferred Shares issued thereafter shall be issued on the first day of a
Rate Period of the then outstanding shares of Series [ ] Preferred Shares;
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 Preferred Shares of the Trust, as
set forth in Part I and Part II of this Statement. The Series [ ] Preferred
Shares shall constitute a separate series of Preferred Shares of the Trust,
and each share of Series [ ] Preferred Shares 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 [ ]
Preferred Shares is [ ]; Series [ ] Preferred Shares is [ ]; and
Series [ ] Preferred Shares is [ ].
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.
"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.
"GROSS-UP PAYMENT" means payment to a Holder of Preferred
Shares of an amount which, when taken together with the aggregate
amount of Taxable Allocations made to such Holder to which such
Gross-up Payment relates, would cause such Holder's dividends in
dollars (after Federal income tax consequences) from the aggregate of
such Taxable Allocations and the related Gross-up Payment to be equal
to the dollar amount of the dividends which would have been received
by such Holder if the amount of such aggregate Taxable Allocations
would have been excludable from the gross income of such Holder. Such
Gross-up Payment shall be calculated (i) without consideration being
given to the time value of money; (ii) assuming that no Holder of
Preferred Shares is subject to the Federal alternative minimum tax
with respect to dividends received from the 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 Preferred Shares at
the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or net capital gains, as applicable, or
the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income or net capital gains, as applicable,
whichever is greater, in effect at the time such Gross-up Payment is
made.
"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:
<TABLE>
<CAPTION>
RATING CATEGORY
Exposure Period AAA AA* A* BAA* Other** (V)MIG-1*** SP-1+**** UNRATED*****
- ---------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
7 weeks........................ 151% 159% 166% 173% 187% 136% 148% 225%
8 weeks or less but greater
then 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
</TABLE>
- ---------------------
* Moody's rating.
** Municipal Obligations not rated by Moody's but rated BBB by S&P. below
Baa 3.
*** 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.
Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-l or P-1 by Moody's and mature
or have a demand feature at par exercisable in 30 days or less or 125% as
long as such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA
by S&P and mature or have a demand feature at par exercisable in 30 days or
less and (ii) no Moody's Discount Factor will be applied to cash or to
Receivables for Municipal Obligations Sold.
"MOODY'S ELIGIBLE ASSET" shall mean cash, Receivables for
Municipal Obligations Sold or a Municipal Obligation that (i) pays
interest in cash, (ii) does not have its Moody's rating, as
applicable, suspended by Moody's, and (iii) is part of an issue of
Municipal Obligations of at least $10,000,000. Municipal Obligations
issued by any one issuer and rated BBB or lower by S&P, Ba or B by
Moody's or not rated by S&P and Moody's ("Other Securities") may
comprise no more than 4% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations issued by
the same issuer and rated Baa by Moody's or A by S&P, may comprise no
more than 6% of total Moody's Eligible Assets; such Other Securities,
Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations issued by the same issuer and rated A by
Moody's or AA by S&P, may comprise no more than 10% of total Moody's
Eligible Assets; and such Baa, A and AA-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by the same
issuer and rated Aa by Moody's or AAA by S&P, may comprise no more
than 20% of total Moody's Eligible Assets. For purposes of the
foregoing sentence, any Municipal Obligation backed by the guaranty,
letter of credit or insurance issued by a third party shall be deemed
to be issued by such third party if the issuance of such third party
credit is the sole determinant of the rating on such Municipal
Obligation. Other Securities issued by issuers located within a
single state or territory may comprise no more than 12% of total
Moody's Eligible Assets; such Other Securities, if any, together with
any Municipal Obligations issued by issuers located within the same
state or territory and rated Baa by Moody's or A by S&P, may comprise
no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together
with any Municipal Obligations issued by issuers located within the
same state or territory and rated A by Moody's or AA by S&P, may
comprise no more than 40% of total Moody's Eligible Assets; and such
Other Securities, Baa, A and AA-rated Municipal Obligations, if any,
together with any Municipal Obligations issued by issuers located
within the same state or territory and rated Aa by Moody's or AAA by
S&P, may comprise no more than 60% of total Moody's Eligible Assets.
For purposes of applying the foregoing requirements, a Municipal
Obligation shall be deemed to be rated BBB by S&P if rated BBB-, BBB
or BBB+ by S&P, Moody's Eligible Assets shall be calculated without
including cash, and Municipal Obligations rated MIG-1, VMIG-1 or P-1
or, if not rated by Moody's, rated A-1+/AA or SP-1+/AA by S&P, shall
be considered to have a long-term rating of A. When the Trust sells a
Municipal Obligation and agrees to repurchase such Municipal
Obligation at a future date, such Municipal Obligation shall be
valued at its Discounted Value for purposes of determining Moody's
Eligible Assets, and the amount of the repurchase price of such
Municipal Obligation shall be included as a liability for purposes of
calculating the Preferred Basic Maintenance Amount. When the Trust
purchases a Moody's Eligible Asset and agrees to sell it at a future
date, such Eligible Asset shall be valued at the amount of cash to be
received by the Trust upon such future date, provided that the
counterparty to the transaction has a long-term debt rating of at
least A2 from Moody's and the transaction has a term of no more than
30 days, otherwise such Eligible Asset shall be valued at the
Discounted Value of such Eligible Asset.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent it is (i) subject to any material
lien, mortgage, pledge, security interest or security agreement of any kind
(collectively, "Liens"), except for (a) Liens which are being contested in
good faith by appropriate proceedings and which Moody's has indicated to
the Trust will not affect the status of such asset as a Moody's Eligible
Asset, (b) Liens for taxes that are not then due and payable or that can be
paid thereafter without penalty, (c) Liens to secure payment for services
rendered or cash advanced to the Trust by BlackRock Advisors, Inc., State
Street Bank and Trust or the Auction Agent and (d) Liens by virtue of any
repurchase agreement; or (iii) deposited irrevocably for the payment of any
liabilities for purposes of determining the Preferred Shares Basic
Maintenance Amount.
"RATE MULTIPLE," for shares of a series of Preferred Shares on
any Auction Date for shares of such series, shall mean the percentage,
determined as set forth below, based on the prevailing rating of shares of
such series in effect at the close of business on the Business Day next
preceding such Auction Date:
PREVAILING RATING PERCENTAGE
- ----------------- ----------
"aa3"/AA-- or higher............................. 110%
"a3"/A-- ........................................ 125%
"baa3"/BBB--..................................... 150%
"ba3"/BB--....................................... 200%
Below "ba3"/BB--................................. 250%
provided, however, that in the event the 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, the applicable percentage in the
foregoing table shall be divided by the quantity 1 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater.
For purposes of this definition, the "prevailing rating" of shares
of a series of Preferred Shares shall be (i) "aa3"/AA-- or higher if such
shares have a rating of "aa3" or better by Moody's and AA-- or better by
S&P or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected as provided below,
(ii) if not "aa3"/AA-- or higher, then "a3"/A-- if such shares have a
rating of "a3" or better by Moody's and A-- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (iii) if not
"aa3"/AA-- or higher or "a3"/A--, then "baa3"/BBB-- if such shares have a
rating of "baa3" or better by Moody's and BBB-- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (iv) if not
"aa3"/AA- - or higher, "a3"/A-- or "baa3"/BBB--, then "ba3"/BB-- if such
shares have a rating of "ba3" or better by Moody's and BB-- or better by
S&P or the equivalent of such ratings by such agencies or a substitute
rating agency or substitute rating agencies selected as provided below, and
(v) if not "aa3"/AA-- or higher, "a3"/A--, "baa3"/BBB--, or "ba3"/BB--,
then Below "ba3"/BB--; provided, however, that if such shares are rated by
only one rating agency, the prevailing rating will be determined without
reference to the rating of any other rating agency. The Trust shall take
all reasonable action necessary to enable either S&P or Moody's to provide
a rating for the Preferred Shares. If neither S&P nor Moody's shall make
such a rating available, the party set forth in Section 7 of Appendix A or
its successor shall select at least one nationally recognized statistical
rating organization (as that term is used in the rules and regulations of
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended from time to time) to act as a substitute rating agency in
respect of shares of the series of Preferred Shares set forth opposite such
party's name in Section 7 of 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
- --------------- ---- ---- ---- ---- ----------
40 Business Days.................... 190% 195% 210% 250% 240%
22 Business Days.................... 170 175 190 230 240
10 Business Days.................... 155 160 175 215 240
7 Business Days..................... 150 155 170 210 240
3 Business Days..................... 130 135 150 190 240
- --------------
*S&P rating.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by S&P and mature or have a demand
feature exercisable within 30 days or less, or 120% so long as such
Municipal Obligations are rated A-1 or SP-1 by S&P and mature or have a
demand feature exercisable in 30 days or less, or 125% if such Municipal
Obligations are not rated by S&P but are rated equivalent to A-1+ or SP-1+
by another nationally recognized statistical rating organization, on a case
by case basis; provided, however, that any such non-S&P-rated short-term
Municipal Obligations which have demand features exercisable within 30 days
or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution with a short-term
rating of at least A-1+ from S&P; and further provided that such
non-S&P-rated short-term Municipal Obligations may comprise no more than
50% of short-term Municipal Obligations that qualify as S&P Eligible
Assets; PROVIDED, HOWEVER, that Municipal Obligations not rated by S&P but
rated equivalent to BBB or lower by another nationally recognized
statistical rating organization rated BB by S&P or non-rated (such
Municipal Obligations are hereinafter referred to as "High Yield
Securities") may compromise no more than 20% of the short-term Municipal
Obligations that qualify as S&P Eligible Assets (ii) the S&P Discount
Factor for Receivables for Municipal Obligations Sold that are due in more
than five Business Days from such Valuation Date will be the S&P Discount
Factor applicable to the Municipal Obligations sold, (iii) no S&P Discount
Factor will be applied to cash or to Receivables for Municipal Obligations
Sold if such receivables are due within five Business Days of such
Valuation Date, and (iv) except as set forth in clause (i) above, in the
case of any Municipal Obligation that is not rated by S&P but qualifies as
an S&P Eligible Asset pursuant to clause (iii) of that definition, such
Municipal Obligation will be deemed to have an S&P rating one full rating
category lower than the S&P rating category that is the equivalent of the
rating category in which such Municipal Obligation is placed by a
nationally recognized statistical rating organization. "Receivables for
Municipal Obligations Sold," for purposes of calculating S&P Eligible
Assets as of any Valuation Date, means the book value of receivables for
Municipal Obligations sold as of or prior to such Valuation Date. The Trust
may adopt S&P Discount Factors for Municipal Obligations other than
Municipal Obligations provided that S&P advises the Trust in writing that
such action will not adversely affect its then current rating on the
Preferred Shares. For purposes of the foregoing, Anticipation Notes rated
SP- 1+ or, if not rated by S&P, equivalent to A-1+ or SP-1+ by another
nationally recognized rating agency, on a case by case basis, which do not
mature or have a demand feature at par exercisable in 30 days and which do
not have a long-term rating, shall be considered to be short-term Municipal
Obligations.
"S&P ELIGIBLE ASSET" shall mean cash (excluding any cash
irrevocably deposited by the Trust for the payment of any liabilities
within the meaning of Preferred Shares Basic Maintenance Amount),
Receivables for Municipal Obligations Sold or a Municipal Obligation owned
by the Trust that (i) is interest bearing and pays interest at least
semi-annually; (ii) is payable with respect to principal and interest in
U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or, if not rated
by S&P but rated equivalent or higher to an A by another nationally
recognized rating agency, on a case by case basis;(iv) is not subject to a
covered call or covered 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 $20 million
or, if of an issue with an original issue size below $20 million (but in no
event below $10 million), is issued by an issuer with a total of at least
$50 million of securities outstanding. Notwithstanding the foregoing
limitations: (1) Municipal Obligations (excluding Escrowed Bonds and High
Yield Securities) of any one issuer or guarantor (excluding bond insurers)
shall be considered S&P Eligible Assets only to the extent the Market Value
of such Municipal Obligations 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; and (3) Long-Term Municipal Obligations (excluding
Escrowed Bonds)issued by issuers in any one state or territory 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.
SECTION 5. INITIAL RATE PERIODS.
The Initial Rate Period for shares of Series [ ] Preferred
Shares shall be the period from and including the Date of Original Issue
thereof to but excluding [ ], 1999.
The Initial Rate Period for shares of Series [ ] Preferred
Shares shall be the period from and including the Date of Original Issue
thereof to but excluding [ ], 1999.
The Initial Rate Period for shares of Series [ ] Preferred Shares
shall be the period from and including the Date of Original Issue thereof
to but excluding [ ], 1999.
SECTION 6. DATE FOR PURPOSES OF THE DEFINITION OF QUARTERLY VALUATION DATE
CONTAINED UNDER THE HEADING "DEFINITIONS" IN THIS STATEMENT.
[ ], 1999
SECTION 7. PARTY NAMED FOR PURPOSES OF THE DEFINITION OF "RATE MULTIPLE" IN
THIS STATEMENT.
PARTY: SERIES OF PREFERRED SHARES
[ ] Series [ ]
[ ] Series [ ]
[ ] Series [ ]
SECTION 8. ADDITIONAL DEFINITIONS.
Not applicable.
SECTION 9. DIVIDEND PAYMENT DATES.
Except as otherwise provided in paragraph (d) of Section 2 of
Part I of this Statement, dividends shall be payable on shares of: Series
[ ] Preferred Shares, for the Initial Rate Period on [ ], [ ], 1999,
and on each [ ] thereafter; Series [ ] Preferred Shares, for the Initial
Rate Period on [ ], [ ], 1999, and on each [ ] thereafter; Series
[ ] Preferred Shares, for the Initial Rate Period on [ ], [ ], 1999,
and on each [ ] thereafter; and
SECTION 10. AMOUNT FOR PURPOSES OF SUBPARAGRAPH (c)(i) OF SECTION 5 OF PART I
OF THIS STATEMENT.
[$ ].
SECTION 11. REDEMPTION PROVISIONS APPLICABLE TO INITIAL RATE PERIODS.
Not applicable.
SECTION 12. APPLICABLE RATE FOR PURPOSES OF SUBPARAGRAPH (b)(iii) OF SECTION
3 OF PART II OF THIS STATEMENT.
For purposes of subparagraph (b)(iii) of Section 3 of Part II
of this Statement, the Applicable Rate for shares of such series for the
next succeeding Rate Period of shares of such series shall be equal to the
lesser of the Kenny Index (if such Rate Period consists of fewer than 183
Rate Period Days) or the product of (A) (I) the "AA" Composite Commercial
Paper Rate on such Auction Date for such Rate Period, if such Rate Period
consists of fewer than 183 Rate Period Days; (II) the Treasury Bill Rate on
such Auction Date for such Rate Period, if such Rate Period consists of
more than 182 but fewer than 365 Rate Period Days; or (III) the Treasury
Note Rate on such Auction Date for such Rate Period, if such Rate Period is
more than 364 Rate Period Days (the rate described in the foregoing clause
(A)(I), (II) or (III), as applicable, being referred to herein as the
"Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income, whichever is greater; provided, however, that if the Trust has
notified the Auction Agent of its intent to allocate to shares of such
series in such Rate Period any net capital gains or other income taxable
for Federal income tax purposes ("Taxable Income"), the Applicable Rate for
shares of such series for such Rate Period will be (i) if the Taxable Yield
Rate (as defined below) is greater than the 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 Preferred Shares 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 $[the liquidation preference].
SECTION 13. CERTAIN OTHER RESTRICTIONS AND REQUIREMENTS
(a) For so long as any Preferred Shares 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 pull
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") and
write, purchase or sell put and call options on such contracts
(collectively, "S&P Hedging Transactions"), subject to the following
limitations:
(i) the Trust will not engage in any S&P Hedging Transaction based
on the Municipal Index (other than transactions which terminate
a futures contract or option held by the Trust by the Trust's
taking an opposite position thereto ("Closing Transactions")),
which would cause the Trust at the time of such transaction to
own or have sold 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 of has sold
or any outstanding option thereon owned by the Trust in the
event (A) the Trust does not have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount on two consecutive
Valuation Dates and (B) the Trust is required to pay Variation
Margin on the second such Valuation Date;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract or option thereon in the month
prior to the delivery month under the terms of such futures
contract or option thereon unless the Trust holds the
securities deliverable under such terms; and
(v) when the Trust writes a futures contract or option thereon, it
will either maintain an amount of cash, cash equivalents or
high grade (rated A or better by S&P), fixed-income securities
in a segregated account with the Trust's custodian, so that the
amount so segregated plus the amount of Initial Margin and
Variation Margin held in the account of or on behalf of the
Trust's broker with respect to such futures contract or option
equals the Market Value of the futures contract or option, or,
in the event the Trust writes a futures contract or option
thereon which requires delivery of an underlying security, it
shall hold such underlying security in its portfolio.
For purposes of determining whether the Trust has S&P Eligible
Assets with a Discounted Value that equals or exceeds the Preferred Shares
Basic Maintenance Amount, the Discounted Value of cash or securities held
for the payment of Initial Margin or Variation Margin shall be zero and the
aggregate Discounted Value of S&P Eligible Assets shall be reduced by an
amount equal to (i) 30% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on the Municipal Index
which are owned by the Trust plus (ii) 25% of the aggregate settlement
value, as marked to market, of any outstanding futures contracts based on
Treasury Bonds which contracts are owned by the Trust.
(b) For so long as any Preferred Shares 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 Preferred
Shares by Moody's, except that the Trust may purchase or sell
exchange-traded futures contracts based on the Municipal Index or Treasury
Bonds and purchase, write or sell exchange-traded put options on such
futures contracts and purchase, write or sell exchange-traded call options
on such futures contracts (collectively, "Moody's Hedging Transactions"),
subject to the following limitations:
(i) the Trust will not engage in any Moody's Hedging Transaction
based on the Municipal Index (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 the
Municipal Index exceeding in number 10% of the average number
of daily traded futures contracts based on the Municipal Index
in the 30 days preceding the time of effecting such transaction
as reported by the Wall Street Journal or (B) outstanding
futures contracts based on the Municipal Index having a Market
Value exceeding 50% of the Market Value of all Municipal Bonds
constituting Moody's Eligible Assets owned by the Trust (other
than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction);
(ii) the Trust will not engage in any Moody's Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) which
would cause the Trust at the time of such transaction to own or
have sold (A) outstanding futures contracts based on Treasury
Bonds having an aggregate Market Value exceeding 20% of the
aggregate Market Value of Moody's Eligible Assets owned by the
Trust and rated Aa by Moody's (or, if not rated by Moody's but
rated by S&P, rated AAA by S&P) or (B) outstanding futures
contracts based on Treasury Bonds having an aggregate Market
Value exceeding 40% of the aggregate Market Value of all
Municipal Bonds constituting Moody's Eligible Assets owned by
the Trust (other than Moody's Eligible Assets already subject
to a Moody's Hedging Transaction) and rated Baa or A by Moody's
(or, if not rated by Moody's but rated by S&P, rated A or AA by
S&P (for purpose of the foregoing clauses (i) and (ii), the
Trust shall be deemed to own the number of futures contracts
that underlie any outstanding options written by the Trust);
(iii) the Trust will engage in Closing Transactions to close out any
outstanding futures contract based on the Municipal Index if
the amount of open interest in the Municipal Index as reported
by The Wall Street Journal is less than 5,000;
(iv) the Trust will engage in a Closing Transaction to close out any
outstanding futures contract by no later than the fifth
Business Day of the month in which such contracts expires and
will engage in a Closing Transaction to close out any
outstanding option on a futures contract by no later than the
first Business Day of the month in which such option expires;
(v) the Trust will engage in Moody's Hedging Transaction only with
respect to futures contracts or options thereon having the next
settlement date of the settlement date immediately thereafter;
(vi) the Trust will not engage in options and futures transactions
for leveraging or speculative purposes and will not write any
call options or sell any futures contracts for the purpose of
hedging the anticipated purchase of an asset prior to
completion of such purchase; and
(vii) the Trust will not enter into an option of futures transaction
unless, after giving effect thereto, the Trust would continue
to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the Preferred Shares Basic
Maintenance Amount.
For purposes of determining whether the Trust has Moody's
Eligible Assets with an aggregate Discounted Value that equals or exceeds
the Preferred Shares Basic Maintenance Amount, the Discounted Value of
Moody's Eligible Assets which the Trust is obligated to deliver or receive
pursuant to an outstanding futures contract or option shall be as follows:
(i) assets subject to call options written by the Trust which are either
exchange-traded and "readily reversible" or which expire within 49 days
after the date as of which such valuation is made shall be valued at the
lesser of (a) Discounted Value and (b) the exercise price of the call
option written by the Trust; (ii) assets subject to call options written by
the Trust not meeting the requirements of clause (i) of this sentence shall
have no value; (iii) assets subject to put options written by the Trust
shall be valued at the lesser of (A) the exercise price and (B) the
Discounted Value of the subject security; (iv) futures contracts shall be
valued at the lesser of (A) settlement price and (B) the Discounted Value
of the subject security, provided that, if a contract matures within 49
days after the date as of which such valuation is made, where the Trust is
the seller the contract may be valued at the settlement price and where the
Trust is the buyer the contract may be valued at the Discounted Value of
the subject securities; and (v) where delivery may be made to the Trust
with any security of a class of securities, the Trust shall assume that it
will take delivery of the security with the lowest Discounted Value.
For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the
Preferred Shares Basic Maintenance Amount, the following amounts shall be
subtracted from the aggregate Discounted Value of the Moody's Eligible
Assets held by the Trust: (i) 10% of the exercise price of a written call
option; (ii) the exercise price of any written put option; (iii) where the
Trust is the seller under a futures contract, 10% of the settlement price
of the futures contract; (iv) where the Trust is the purchaser under a
futures contract, the settlement price of assets purchased under such
futures contract; (v) the settlement price of the underlying futures
contract if the Trust writes put options on a futures contract; and (vi)
105% of the Market Value of the underlying futures contracts if the Trust
writes call options on a futures contract and does not own the underlying
contract.
(c) For so long as any Preferred Shares are rated by Moody's, the
Trust will not enter into any contract to purchase securities for a fixed
price at a future date beyond customary settlement time (other than such
contracts that constitute Moody's Hedging Transactions that are permitted
under Section 13(b) of this Statement), except that the Trust may enter
into such contracts to purchase newly-issued securities on the date such
securities are issued ("Forward Commitments"), subject to the following
limitation:
(i) the Trust will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income securities
rated P-1, MTG-1 or VMIG-1 by Moody's and maturing prior to the date of the
Forward Commitment with a Market Value that equals or exceeds the amount of
the 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.
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:
A S&P's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial
obligation, a specific class of financial obligations, or a specific
financial program. This assessment may take into consideration obligors
such as guarantors, insurers, or other forms of credit enhancement on the
obligation and takes into account the currency in which the obligation is
denominated.
The debt rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of,
such information, or based on other circumstances.
Long-Term Issue Credit Ratings
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an
obligation in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
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 An obligation "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation
is extremely strong.
AA An obligation "AA" differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
A An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
BBB An obligation "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
Speculative Grade Rating
Obligations rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair capacity or
willingness to meet its financial commitment on the obligation.
CCC An obligation rated "CCC" is a currently vulnerable to nonpayment,
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation. In the event of adverse business, financial, or economic
conditions, it is not likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated "CC" is currently highly vulnerability to
nonpayment.
C A subordinated debt or preferred stock obligation rated "C" is
currently highly vulnerable to nonpayment. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed or
similar action taken, but payments on this obligation are being
continued. A "C" also will be assigned to a preferred stock issue in
arrears on dividends or sinking fund payments, but that is currently
paying.
D An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace
period. The "D" rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments 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.
The "c subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if
the long-term credit rating of the issuer is reduced below an investment
grade level and/or the issuer's bonds are deemed taxable.
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.
* 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 factors and market access risks
unique to notes. Notes due in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment:
-- 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 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus
(+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
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 opinion of the likelihood of
timely payment of debt having an original maturity of no more than 365
days.
Ratings are graded into several categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as vulnerable and having only
speculative capacity for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments 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:
Corporate Long-Term Ratings
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." 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.
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.
Con(...) 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 Caa in the corporate 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 best quality. There is strong
protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. Liquidity
and cash flow protection may be narrow and market access for
refinancing is likely to be less well-established.
S.G. This designation denotes speculative quality. Debt instruments
in this category 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 ability will normally be evidenced by the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA,
Inc. ("Fitch") ratings symbols and meanings (as published by Fitch)
follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. 'AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions than
is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to
allow financial commitments to be met. Securities rated in
this category are not investment grade.
B Highly speculative. 'B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A
'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the
obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision,
the following serve as general guidelines. 'DDD'
obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued
interest. 'DD' indicates potential recoveries in the range
of 50%-90%, and 'D' the lowest recovery potential, i.e.,
below 50%.
Entities rated in this category have defaulted on some or
all of their obligations. Entities rated 'DDD' have the
highest prospect for resumption of performance or
continued operation with or without a formal
reorganization process. Entities rated 'DD' and 'D' are
generally undergoing a formal reorganization or
liquidation process; those rated 'DD' are likely to
satisfy a higher portion of their outstanding obligations,
while entities rated 'D' have a poor prospect for repaying
all obligations.
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 best 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 IBCA does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate
for rating purposes, or when an obligation matures, is called, or refinanced.
RatingAlert: Ratings are placed on RatingAlert 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. RatingAlert is typically
resolved over a relatively short period.
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio, including
management, 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 Adviser'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 options gives the holder the right to receive cash upon exercise of
the option if the level of the bond index upon which the option is based is
greater, in the case of a call, or less, in the case of a put, than the
exercise price of the option. The purchase of a put option on a debt
security could protect the Trust's holdings in a security or a number of
securities against a substantial decline in the market value. A call option
gives the purchaser of the option the right to buy and the seller the
obligation to sell the underlying security or index at the exercise price
during the option period or for a specified period prior to a fixed date.
The purchase of a call option on a security could protect the Trust against
an increase in the price of a security that it intended to purchase in the
future. In the case of either put or call options that it has purchased, if
the option expires without being sold or exercised, the Trust will
experience a loss in the amount of the option premium plus any related
commissions. When the Trust sells put and call options, it receives a
premium as the seller of the option. The premium that the Trust receives
for selling the option will serve as a partial hedge, in the amount of the
option premium, against changes in the value of the securities in its
portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of
the underlying security increases, but has retained the risk of loss should
the price of the underlying security decline. Conversely, a secured put
seller retains the risk of loss should the market value of the underlying
security decline below the exercise price of the option, less the premium
received on the sale of the option. The Trust is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC Options")
which are privately negotiated with the counterparty. Listed options are
issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the
existence of a liquid secondary market on option exchanges. Among the
possible reasons for the absence of a liquid secondary market on an
exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities; (iv) interruption of
the normal operations on an exchange; (v) inadequacy of the facilities of
an exchange or OCC to handle current trading volume; or (vi) a decision by
one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market
on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been listed
by the OCC as a result of trades on that exchange would generally continue
to be exercisable in accordance with their terms. OTC options are purchased
from or sold to dealers, financial institutions or other counterparties
which have entered into direct agreements with the Trust. With OTC Options,
such variables as expiration date, exercise price and premium will be
agreed upon between the Trust and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails
to make or take delivery of the securities underlying an option it has
written, or otherwise settle the transaction in accordance with the terms
of that option as written, the Trust would lose the premium paid for the
option as well as any anticipated benefit of the transaction. As the Trust
must rely on the credit quality of the counterparty rather than the
guarantee of the OCC, it will only enter into OTC options with
counterparties with the highest long-term credit ratings, and with primary
United States government securities dealers recognized by the Federal
Reserve Bank of New York.
The hours of trading for options on debt securities may not conform
to the hours during which the underlying securities are traded. To the
extent that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or
purchase put and call options on such futures as a hedge against
anticipated interest rate changes or other market movements. The sale of a
futures contract creates an obligation by the Trust, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specified future time for a specified price. Options on futures contracts
are similar to options on securities except that an option on a futures
contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased or
sold, the Trust must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Trust
will pay may range from approximately 1% to approximately 5% of the value
of the securities or commodities underlying the contract. In certain
circumstances, however, such as periods of high volatility, the Trust may
be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in case of "variation margin" may
be required, a process known as "marking to the market." Transactions in
listed options and futures are usually settled by entering into an
offsetting transaction, and are subject to the risk that the position may
not be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's use
of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and
regulations of the CFTC. Under such regulations the Trust currently may
enter into such transactions without limit for bona fide hedging purposes,
including risk management and duration management and other portfolio
strategies. The Trust may also engage in transactions in futures contracts
or related options for non-hedging purposes to enhance income or gain
provided that the Trust will not enter into a futures contract or related
option (except for closing transactions) for purposes other than bona fide
hedging, or risk management including duration management if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on
open contracts and options would exceed 5% of the Trust's liquidation
value, i.e., net assets (taken at current value); provided, however, that
in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, when required, a segregated account of cash equivalents will be
maintained and marked to market on a daily basis in an amount equal to the
market value of the contract. The Trust reserves the right to comply with
such different standard as may be established from time to time by CFTC
rules and regulations with respect to the purchase or sale of futures
contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate
swaps, caps, floors and collars, short sales, reverse repurchase agreements
and dollar rolls, and listed or OTC options on securities, indices and
futures contracts sold by the Trust are generally subject to segregation
and coverage requirements of either the CFTC or the SEC, with the result
that, if the Trust does not hold the security or futures contract
underlying the instrument, the Trust will be required to segregate on an
ongoing basis with its custodian, cash, U.S. government securities, or
other liquid high grade debt obligations in an amount at least equal to the
Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation
requirement can result in the Trust maintaining securities positions it
would otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks.
With respect to hedging and risk management, the variable degree of
correlation between price movements of hedging instruments and price
movements in the position being hedged creates 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 Adviser'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.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
Part A - None.
Part B - Report of Independent Accountants.
Statement of Assets and Liabilities (Audited).
Statement of Operations (Audited).
[To Come] (Unaudited)
(2) Exhibits:
(a) Agreement and Declaration of Trust.1
(b) By-Laws.1
(c) Inapplicable.
(d) Inapplicable.
(e) Form of Automatic Dividend Reinvestment Plan.3
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement.3
(g)(2) Form of Sub-Advisory Agreement.3
(h) Form of Underwriting Agreement.*
(i) Inapplicable
(j) Form of Custodian Agreement.3
(k)(1) Form of Registrar, Transfer Agency and Service Agreement.3
(k)(2) Form of Auction Agency Agreement.*
(k)(3) Form of Broker-Dealer Agreement.*
(k)(4) Form of DTC Agreement.*
(l) Opinion and Consent of Counsel to the Trust.*
(m) Inapplicable.
(n) Consent of Independent Public Accountants.*
(o) Inapplicable.
(p) Initial Subscription Agreement.2
(q) Inapplicable.
(r) Inapplicable.
(s) Power of Attorney.
- -------------
1 Incorporated by reference to the Trust's Registration Statement on Form
N-2 (File Nos. 333-82093 and 811-09417), filed on July 1, 1999.
2 Incorporated by reference to Pre-Effective Amendment No. 1 to the Trust's
Registration Statement on Form N-2 (File Nos. 333-82093 and 811-09417),
filed on July 29, 1999.
3 Incorporated by reference to Pre-Effective Amendment No. 2 to the Trust's
Registration Statement on Form N-2 (File Nos. 333-82093 and 811-09417),
filed on August 19, 1999.
* To be Filed by Amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the
Trust's Preferred Shares to be filed by amendment to this registration
statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this registration statement:
Registration fees................................. $ *
Printing (other than certificates)................ *
Engraving and printing certificate................ *
Fees and expenses of qualification under state
securities laws (excluding fees of counsel)..... *
Accounting fees and expenses...................... *
Legal fees and expenses........................... *
Miscellaneous..................................... *
Total....................................... $ *
* To be provided by Amendment.
Item 27. Persons Controlled by or under Common Control with the Registrant
Not Applicable
Item 28. Number of Holders of Shares
Number of
Title of class Record Holders
- -------------- --------------
Common Shares, $.001 [ ]
Preferred Shares, $.001 0
Item 29. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust provides
as follows:
Section 5.1. No Shareholder of the Trust shall be subject in such
capacity to any personal liability whatsoever to any Person in connection
with Trust property or the acts, obligations or affairs of the Trust.
Shareholders shall have the same limitation of personal liability as is
extended to stockholders of private corporation for profit incorporated
under the general corporation law of the State of Delaware. No Trustee or
officer of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the
Trust, save only liability to the Trust or its Shareholders arising from
bad faith, willful misfeasance, gross negligence (negligence in the case of
those Trustees or officers who are directors, officers or employees of the
Trust's investment advisor ("Affiliated Indemnitees")) or reckless
disregard for his duty to such person; and, subject to the foregoing
exception, all such persons shall look solely to the Trust property for
satisfaction of claims of any nature arising in connection with the affairs
of the Trust. If any shareholder, trustee or officer, as such, of the
Trust, is made a party to any suit or proceeding to enforce any such
liability, subject to the foregoing exception, he shall not, on account
thereof, be held to any personal liability.
Section 5.2. a. The Trust hereby agrees to indemnify the Trustees and
officers of the Trust (each such person being an "indemnitee") against any
liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable counsel
fees reasonably incurred by such indemnitee in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which
he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, while acting in any capacity set
forth above in this Section 5.2 by reason of his having acted in any such
capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the
best interest of the Trust or, in the case of any criminal proceeding, as
to which he shall have had reasonable cause to believe that the conduct was
unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence (negligence in the case of Affiliated Indemnitees),
or (iv) reckless disregard of the duties involved in the conduct of his
position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"). Notwithstanding the
foregoing, with respect to any action, suit or other proceeding voluntarily
prosecuted by any indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding
by such indemnitee was authorized by a majority of the Trustees.
b. Notwithstanding the foregoing, no indemnification
shall be made hereunder unless there has been a determination (i) by a
final decision on the merits by a court or other body of competent
jurisdiction before whom the issue of entitlement to indemnification
hereunder was brought that such indemnitee is entitled to indemnification
hereunder or, (ii) in the absence of such a decision, by (1) a majority
vote of a quorum of those trustees who are neither "interested persons" (as
defined in Section 2(a)(19) of the Investment Company Act of 1940 Act) nor
parties to the proceeding ("Disinterested Non-Party Trustees"), that the
indemnitee is entitled to indemnification hereunder, or (2) if such quorum
is not obtainable or even if obtainable, if such majority so directs,
independent legal counsel in a written opinion conclude that the indemnitee
should be entitled to indemnification hereunder. All determinations to make
advance payments in connection with the expense of defending any proceeding
shall be authorized and made in accordance with the immediately succeeding
paragraph (c) below.
c. The Trust shall make advance payments in connection
with the expenses of defending any action with respect to which
indemnification might be sought hereunder if the Trust receives a written
affirmation by the indemnitee of the indemnitee's good faith belief that
the standards of conduct necessary for indemnification have been met and a
written undertaking to reimburse the Trust unless it is subsequently
determined that he is entitled to such indemnification and if a majority of
the Trustees determine that the applicable standards of conduct necessary
for indemnification appear to have been met. In addition, at least one of
the following conditions must be met: (i)the indemnitee shall provide
adequate security for his undertaking, (ii) the Trust shall be insured
against losses arising by reason of any lawful advances, or (iii) a
majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a
written opinion, shall conclude, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that there is substantial
reason to believe that the indemnitee ultimately will be found entitled to
indemnification.
d. The rights accruing to any indemnitee under these
provisions shall not exclude any other right to which he may be lawfully
entitled.
e. Subject to any limitations provided by the Investment
Company Act of 1940 Act and this Declaration, the Trust shall have the
power and authority to indemnify other Persons providing services to the
Trust to the full extent provided by law as if the Trust were a corporation
organized under the Delaware General Corporation Law provided that such
indemnification has been approved by a majority of the Trustees.
Insofar as indemnification for liabilities arising under the Act, may
be permitted to Trustees, officers and controlling persons of the Trust,
pursuant to the foregoing provisions or otherwise, the Trust has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue. Reference is made to of the
underwriting agreement to be attached as Exhibit (h).
Item 30. Business and Other Connections of Investment Adviser
Reference is made to the current Form ADV filed under the Investment
Advisors Act of 1940 incorporated herein by reference for each of BlackRock
Advisors, Inc. and BlackRock Financial Management, Inc.
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently
located at the offices of the Registrant, co BlackRock Advisors, Inc., 345
Park Avenue, New York, New York 10154 and at the offices of State Street
Bank and Trust Company, the Registrant's Custodian, Transfer Agent and
Dividend Disbursing Agent, 225 Franklin Street, Boston, Massachusetts
02110.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of its
units until it amends its prospectus if (a) subsequent to the effective
date of its registration statement, the net asset value declines more than
10 percent from its net asset value as of the effective date of the
Registration Statement or (b) the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
(2) Not Applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted form the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule 497
(h) under the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two business days
of receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York,
on the 24th day of September 1999.
/s/ Ralph L. Schlosstein
------------------------
Ralph L. Schlosstein
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities on the 24th day of September 1999.
Name Title
- ---- -----
/s/ Andrew F. Brimmer Trustee
- ----------------------------------
Andrew F. Brimmer
/s/ Richard E. Cavanagh Trustee
- ----------------------------------
Richard E. Cavanagh
/s/ Kent Dixon Trustee
- ----------------------------------
Kent Dixon
/s/ Frank J. Fabozzi Trustee
- ----------------------------------
Frank J. Fabozzi
/s/ Laurence D. Fink Trustee
- ----------------------------------
Laurence D. Fink
/s/ James Clayburn LaForce, Jr. Trustee
- ----------------------------------
James Clayburn LaForce, Jr.
/s/ Walter F. Mondale Trustee
- ----------------------------------
Walter F. Mondale
/s/ Ralph L. Schlosstein Trustee and President
- ---------------------------------- (Principal Executive Officer)
Ralph L. Schlosstein
/s/ Henry Gabbay Treasurer (Principal
- ---------------------------------- Financial and Accounting Officer)
Henry Gabbay
By: ______________________________
Karen H. Sabath
Attorney-in-fact
INDEX TO EXHIBITS
(a) Agreement and Declaration of Trust.1
(b) By-Laws.1
(c) Inapplicable.
(d) Inapplicable.
(e) Form of Automatic Dividend Reinvestment Plan.1
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement.1
(g)(2) Form of Sub-Advisory Agreement.1
(h) Form of Underwriting Agreement.*
(i) Inapplicable.
(j) Form of Custodian Agreement.1
(k)(1) Form of Registrar, Transfer Agency and Service Agreement.1
(k)(2) Form of Auction Agency Agreement.*
(k)(3) Form of Broker-Dealer Agreement.*
(k)(4) Form of DTC Agreement.*
(l) Opinion and Consent of Counsel to the Trust.*
(m) Inapplicable.
(n) Consent of Independent Public Accountants.*
(o) Inapplicable.
(p) Initial Subscription Agreement.1
(q) Inapplicable.
(r) Inapplicable.
(s) Power of Attorney.
- -----------
1 Previously Filed.
* To be Filed by Amendment.
EXHIBIT S
POWER OF ATTORNEY
That each of the undersigned officers and trustees of The BlackRock
Pennsylvania Strategic Municipal Trust, a business trust formed under the
laws of the State of Delaware (the "Trust"), do constitute and appoint
Ralph S. Schlosstein, Laurence D. Fink and Karen H. Sabath , and each of
them, his true and lawful attorneys and agents, each with full power and
authority (acting alone and without the other) to execute in the name and
on behalf of each of the undersigned as such officer or trustee, a
Registration Statement on Form N-2, including any pre-effective amendments
and/or any post-effective amendments thereto and any subsequent
Registration Statement of the Trust pursuant to Rule 462(b) of the
Securities Act of 1933, as amended (the "1933 Act") and any other filings
in connection therewith, and to file the same under the 1933 Act or the
Investment Company Act of 1940, as amended, or otherwise, with respect to
the registration of the Trust or the registration or offering of any series
of the Trust's Auction Rate Municipal Preferred Shares, par value $.001 per
share; granting to such attorneys and agents and each of them, full power
of substitution and revocation in the premises; and ratifying and
confirming all that such attorneys and agents, or any of them, may do or
cause to be done by virtue of these presents.
This Power of Attorney may be executed in multiple counterparts,
each of which shall be deemed an original, but which taken together shall
constitute one instrument.
IN WITNESS WHEREOF, each of the undersigned has executed this Power
of Attorney this 19th day of August, 1999.
/s/ Dr. Andrew F. Brimmer
--------------------------------
Dr. Andrew F. Brimmer
Trustee
/s/ Richard E. Cavanagh
--------------------------------
Richard E. Cavanagh
Trustee
/s/ Kent Dixon
--------------------------------
Kent Dixon
Trustee
/s/ Frank J. Fabozzi
--------------------------------
Frank J. Fabozzi
Trustee
/s/ James Clayburn LaForce, Jr.
--------------------------------
James Clayburn LaForce, Jr.
Trustee
/s/ Walter F. Mondale
--------------------------------
Walter F. Mondale
Trustee
/s/ Ralph S. Schlosstein
--------------------------------
Ralph S. Schlosstein
Trustee and President
/s/ Laurence D. Fink
--------------------------------
Laurence D. Fink
Trustee
/s/ Henry Gabbay
--------------------------------
Henry Gabbay
Treasurer
