As filed with the Securities and Exchange Commission on July 9, 2004
Securities Act File No. 333-
Investment Company Act File No. 811-05611
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 9 [X]
(Check appropriate box or boxes)
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MUNIVEST FUND, INC.
(Exact Name of Registrant as Specified in Charter)
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800 Scudders Mill Road, Plainsboro, New Jersey 08536
(Address of Principal Executive Offices)
(Registrant's Telephone Number, Including Area Code) (609) 282-2800
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Terry K. Glenn
MuniVest Fund, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey 08536
Mailing Address: P.O. Box 9011, Princeton, New Jersey 08543-9011
(Name and Address of Agent for Service)
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Copies to:
Andrew J. Donohue, Esq. Frank P. Bruno, Esq.
FUND ASSET MANAGEMENT, L.P. SIDLEY AUSTIN BROWN & WOOD LLP
P.O. Box 9011 787 Seventh Avenue
Princeton, New Jersey 08543-9011 New York, New York 10019-6018
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Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended (the "Securities Act"), other than
securities offered only in connection with dividend or interest reinvestment
plans, check the following box. [_]
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount being Offering Price Per Aggregate Offering Registration Fee
Being Registered Registered (1) Unit (1) Price (1) (2)
-------------------------------------------- -------------------- ------------------------ -------------------- -------------------
Auction Market Preferred Stock........... 3,000 shares $25,000 $75,000,000 $9,503
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted prior to the filing date to the designated lockbox of the
Securities and Exchange Commission at Mellon Bank in Pittsburgh, PA.
The Registrant hereby amends this Registration Statement on such date
or dates as may become necessary to delay its effective date until the
Registrant shall file a further amendment, which specifically states that this
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 date as the Commission, acting pursuant to said
Section 8(a), may determine.
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 it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated July 9, 2004
PROSPECTUS
$75,000,000
MuniVest Fund, Inc.
Auction Market Preferred Stock ("AMPS")
3,000 Shares, Series F
Liquidation Preference $25,000 Per Share
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MuniVest Fund, Inc. is a non-diversified, closed-end fund. The
investment objective of the Fund is to provide shareholders with as high a
level of current income exempt from Federal income taxes as is consistent with
its investment policies and prudent investment management. The Fund seeks to
achieve its objective by investing, as a fundamental policy, at least 80% of
an aggregate of the Fund's net assets (including proceeds from the issuance of
any preferred stock) and the proceeds of any borrowings for investment
purposes, in a portfolio of municipal obligations the interest on which, in
the opinion of bond counsel to the issuer, is excludable from gross income for
Federal income tax purposes (except that the interest may be includable in
taxable income for purposes of the Federal alternative minimum tax). Under
normal market conditions, the Fund invests primarily in long term municipal
obligations that are rated investment grade or, if unrated, are considered by
the Fund's investment adviser to be of comparable quality. The Fund may invest
in certain tax exempt securities classified as "private activity bonds," as
discussed within, that may subject certain investors in the Fund to an
alternative minimum tax. There can be no assurance that the Fund's investment
objective will be realized.
This prospectus contains information you should know before
investing, including information about risks. Please read it before you invest
and keep it for future reference. The Fund's statement of additional
information, dated __, 2004, contains further information about the Fund and
is incorporated by reference (legally considered to be part of this
prospectus) and the table of contents of the statement of additional
information appears on page 46 of this prospectus. You may request a free copy
by writing or calling the Fund at (800) 543-6217.
Certain capitalized terms used herein not otherwise defined in this
prospectus have the meaning provided in the Glossary at the back of this
prospectus.
Investing in the AMPS involves certain risks that are described in
the "Risk Factors and Special Considerations" section beginning on page 7 of
this prospectus. The minimum purchase amount for the AMPS is $25,000.
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Per Share Total
Public offering price............................... $25,000 $75,000,000
Underwriting discount............................... $250 $750,000
Proceeds, before expenses, to the Fund (1).......... $24,750 $74,250,000
(1) The estimated offering expenses payable by the Fund are $165,000.
The public offering price per share will be increased by the amount
of accumulated dividends, if any, from the date the shares are first issued.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
One certificate for the AMPS will be ready for delivery to the
nominee of The Depository Trust Company on or about , 2004.
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Merrill Lynch & Co.
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The date of this prospectus is , 2004.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY......................................................3
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................3
FINANCIAL HIGHLIGHTS....................................................3
THE FUND................................................................3
USE OF PROCEEDS.........................................................3
CAPITALIZATION..........................................................3
PORTFOLIO COMPOSITION...................................................3
INVESTMENT OBJECTIVE AND POLICIES.......................................3
OTHER INVESTMENT POLICIES...............................................3
DESCRIPTION OF AMPS.....................................................3
THE AUCTION.............................................................3
RATING AGENCY GUIDELINES................................................3
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS.........................3
TAXES...................................................................3
DESCRIPTION OF CAPITAL STOCK............................................3
CUSTODIAN...............................................................3
UNDERWRITING............................................................3
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR.................3
ACCOUNTING SERVICES PROVIDER............................................3
LEGAL OPINIONS..........................................................3
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND EXPERTS...............3
ADDITIONAL INFORMATION..................................................3
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION................3
GLOSSARY................................................................3
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Information about the Fund can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Call 1-202-942-8090 for information
on the operation of the public reference room. This information is also
available on the SEC's Internet site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by writing to the Public Reference
Section of the SEC, Washington, D.C. 20549-0102.
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You should rely only on the information contained in this prospectus.
We have not, and the underwriters have not, authorized any other person to
provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date
on the front cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that date.
2
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the
detailed information included in this prospectus and the statement of
additional information.
The Fund MuniVest Fund, Inc. is a non-diversified, closed-
end management investment company.
The Offering The Fund is offering a total of 3,000 shares of
Auction Market Preferred Stock, Series F, at a
purchase price of $25,000 per share plus
accumulated dividends, if any, from the date the
shares are first issued. The shares of AMPS are
being offered by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), as
underwriter.
The Series F AMPS will be shares of preferred
stock of the Fund that entitle their holders to
receive cash dividends at an annual rate that
may vary for the successive dividend periods. In
general, except as described below, each
dividend period following the initial dividend
period will be seven days. The applicable
dividend for a particular dividend period will
be determined by an auction conducted on the
business day next preceding the start of that
dividend period.
Investors and potential investors in shares of
Series F AMPS may participate in auctions for
the AMPS through their broker-dealers.
Generally, AMPS investors will not receive
certificates representing ownership of their
shares. Ownership of AMPS will be maintained in
book-entry form by the securities depository
(The Depository Trust Company) or its nominee
for the account of the investor's agent member
(generally the investor's broker-dealer). The
investor's agent member, in turn, will maintain
records of such investor's beneficial ownership
of AMPS.
Investment Objective The investment objective of the Fund is to
and Policies provide shareholders with as high a level of
current income exempt from Federal income taxes
as is consistent with its investment policies
and prudent investment management. The Fund
seeks to achieve its objective by investing, as
a fundamental policy, at least 80% of an
aggregate of the Fund's net assets (including
proceeds from the issuance of any preferred
stock) and the proceeds of any borrowings for
investment purposes, in a portfolio of municipal
obligations issued by or on behalf of states,
territories and possessions of the United States
and their political subdivisions, agencies or
instrumentalities, each of which pays interest
that, in the opinion of bond counsel to the
issuer, is excludable from gross income for
Federal income tax purposes ("Municipal Bonds").
In general, the Fund does not intend for its
investments to earn a large amount of interest
income that is not exempt from Federal income
tax, except that the interest may be includable
in taxable income for purposes of the Federal
alternative minimum tax. There can be no
assurance that the Fund's investment objective
will be realized.
Investment Grade Municipal Bonds. Under normal
market conditions, the Fund invests primarily in
a portfolio of long term Municipal Bonds that
are rated investment grade by one or more
nationally recognized statistical rating
organizations ("NRSROs") or in unrated
bonds considered by Fund Asset Management, L.P.,
the Fund's investment adviser (the "Investment
Adviser"), to be of comparable quality.
Indexed and Inverse Floating Rate Securities.
The Fund may invest in securities whose
potential returns are directly related to
changes in an underlying index or interest rate,
known as indexed securities. The return on
indexed securities will rise when the underlying
index or interest rate rises and fall when the
index or interest rate falls. The Fund may also
invest in securities whose return is inversely
related to changes in an interest rate (inverse
floaters). In general, income on inverse
floaters will decrease when
3
short term interest rates increase and increase
when short term interest rates decrease.
Investments in inverse floaters may subject the
Fund to the risks of reduced or eliminated
interest payments and loss of principal. In
addition, certain indexed securities and inverse
floaters may increase or decrease in value at a
greater rate than the underlying interest rate,
which effectively leverages the Fund's
investment. As a result, the market value of
such securities will generally be more volatile
than that of fixed rate, tax exempt securities.
Both indexed securities and inverse floaters are
derivative securities and can be considered
speculative.
Hedging Transactions. The Fund may seek to hedge
its portfolio against changes in interest rates
using options and financial futures contracts or
swap transactions. The Fund's hedging
transactions are designed to reduce volatility,
but come at some cost. For example, the Fund may
try to limit its risk of loss from a decline in
price of a portfolio security by purchasing a
put option. However, the Fund must pay for the
option, and the price of the security may not in
fact drop. In large part, the success of the
Fund's hedging activities depends on its ability
to forecast movements in securities prices and
interest rates. The Fund is not required to
hedge its portfolio and may choose not to do so.
The Fund cannot guarantee that any hedging
strategies it uses will work.
Swap Agreements. The Fund is authorized to enter
into swap agreements, which are over-the-counter
contracts in which one party agrees to make
periodic payments based on the change in the
market value of a specific bond, basket of bonds
or index in return for periodic payments based
on a fixed or variable interest rate or the
change in market value of a different bond,
basket of bonds or index. Swap agreements may be
used to obtain exposure to a bond or market
without owning or taking physical custody of
securities. Tax Considerations. While
exempt-interest dividends are excluded from
gross income for Federal income tax purposes,
they may be subject to the Federal alternative
minimum tax in certain circumstances.
Distributions of any capital gain or other
taxable income will be taxable to stockholders.
The Fund may not be a suitable investment for
investors subject to the Federal alternative
minimum tax or who would become subject to such
tax by investing in the Fund. See "Taxes."
Investment Adviser The Investment Adviser provides investment
advisory and administrative services to the
Fund. For its services, the Fund pays the
Investment Adviser a monthly fee at the annual
rate of 0.50% of the Fund's average weekly net
assets (including any proceeds from the issuance
of preferred stock). Dividends and Dividend
Dividends on the Series F AMPS will be
cumulative from the date the shares are first
Periods issued and payable at the annualized
cash dividend rate for the initial dividend
period on the initial dividend payment date as
follows:
Initial Initial
Initial Dividend Dividend
Dividend Period Payment
AMPS Series Rate Ending Date
-------------------- --------------- --------------- ---------------
Series F............ % , 2004 , 2004
After the initial dividend period, each dividend
period for the Series F AMPS will generally
consist of seven days; provided however, that,
before any auction, the Fund may decide, subject
to certain limitations and only if it gives
notice to holders, to declare a special dividend
period of up to five years.
After the initial dividend period, in the case of
dividend periods that are not special dividend
periods, dividends generally will be payable on
each succeeding Wednesday in the case of the
Series F AMPS.
Dividends for the Series F AMPS will be paid
through the securities depository (The Depository
Trust Company) on each dividend payment date for
the AMPS.
For each subsequent dividend period, the auction
agent (The Bank of New York) will hold an
auction to determine the cash dividend rate on
the shares of Series F AMPS.
Determination of Maximum Generally, the applicable dividend rate for any
Dividend Rates dividend period for the Series F AMPS will not be
more than the maximum applicable rate
attributable to such shares. The maximum
applicable rate will be the higher of (A) the
applicable percentage of the reference rate on
the auction date or (B) the applicable spread
plus the reference rate on the auction date. The
reference rate is (A) the higher of the
applicable LIBOR Rate (as defined in the
Glossary) and the Taxable Equivalent of the
Short Term Municipal Bond Rate (as defined in
the Glossary) (for a dividend period or special
dividend period of 364 or fewer days), or (B)
the applicable Treasury Index Rate (as defined
in the Glossary) (for a special dividend period
of 365 days or more). The maximum applicable
rate for the Series F AMPS will depend on the
credit rating assigned to the shares, the length
of the dividend period and whether or not the
Fund has given notification prior to the auction
for the dividend period that any taxable income
will be included in the dividend on the AMPS for
that dividend period. The applicable percentage
and applicable spread are as follows:
Applicable Applicable Applicable Applicable
Credit Ratings Percentage Percentage Spread Over Spread Over
-------------------------------- of Reference of Reference Reference Reference
Rate--No Rate-- Rate--No Rate--
Moody's S&P Notification Notification Notification Notification
------------- ----------- ------------ ------------ ------------ ------------
Aaa AAA 110% 125% 1.10% 1.25%
Aa3 to Aa1 AA- to AA+ 125% 150% 1.25% 1.50%
A3 to A1 A- to A+ 150% 200% 1.50% 2.00%
Baa3 to Baa1 BBB- to BBB+ 175% 250% 1.75% 2.50%
Below Baa3 Below BBB- 200% 300% 2.00% 3.00%
The applicable percentage and the applicable
spread as so determined may be subject to upward
but not downward adjustment in the discretion of
the Board of Directors of the Fund after
consultation with the broker-dealers
participating in the auction for the AMPS.
There is no minimum applicable dividend rate for
any dividend period.
Other AMPS The Fund has outstanding 11,000 shares of five
other series of Auction Market Preferred Stock,
each with a liquidation preference of $25,000
per share, plus accumulated but unpaid
dividends, for an aggregate initial liquidation
preference of $275,000,000 (the "Other AMPS").
The Other AMPS are as follows: 2,000 shares of
Auction Market Preferred Stock, Series A; 2,000
shares of Auction Market Preferred Stock, Series
B; 2,000 shares of Auction Market Preferred
Stock, Series C; 2,000 shares of Auction Market
Preferred Stock, Series D; and 3,000 shares of
Auction Market Preferred Stock, Series E. The
Series F AMPS offered hereby rank on a parity
with the Other AMPS with respect to dividends
and liquidation preference.
5
Asset Maintenance Under the Fund's Articles Supplementary creating
the Series F AMPS (the "Articles
Supplementary"), the Fund must maintain:
o asset coverage of the AMPS and Other AMPS as
required by the rating agencies rating the
AMPS, and
o asset coverage of the AMPS and Other AMPS of
at least 200% as required by the Investment
Company Act of 1940 (the "1940 Act").
The Fund estimates that, based on the
composition of its portfolio at February 29,
2004, asset coverage of the AMPS and Other AMPS
as required by the 1940 Act would be
approximately 279% immediately after the Fund
issues the shares of AMPS offered by this
prospectus representing approximately 36% of the
Fund's capital, or approximately 56% of the
Fund's common stock equity, immediately after
the issuance of such AMPS.
Mandatory If the required asset coverage is not maintained
Redemption or, when necessary, restored, the Fund must
redeem shares of AMPS at the price of $25,000
per share plus accumulated but unpaid dividends
thereon (whether or not earned or declared). The
provisions of the 1940 Act may restrict the
Fund's ability to make such a mandatory
redemption.
Optional Redemption The Fund may, at its option, choose to redeem all
or a portion of the shares of AMPS on any
dividend payment date at the price of $25,000
per share, plus accumulated but unpaid dividends
thereon (whether or not earned or declared),
plus any applicable premium.
Liquidation The liquidation preference (that is, the amount
Preference the Fund must pay to holders of AMPS if the Fund
is liquidated) of each share of AMPS will be
$25,000, plus an amount equal to accumulated but
unpaid dividends (whether or not earned or
declared).
Ratings The AMPS will be issued with a rating of Aaa
from Moody's Investors Service, Inc. ("Moody's")
and AAA from Standard & Poor's ("S&P").
Voting Rights The 1940 Act requires that the holders of AMPS
and any other preferred stock, including the
Other AMPS, voting as a separate class, have the
right to elect at least two directors at all
times and to elect a majority of the directors
at any time when dividends on the AMPS or any
other preferred stock, including the Other AMPS,
are unpaid for two full years. The Fund's
Charter, the 1940 Act and the General
Corporation Laws of the State of Maryland
require holders of AMPS and any other preferred
stock, including the Other AMPS, to vote as a
separate class on certain other matters.
6
RISK FACTORS AND SPECIAL CONSIDERATIONS
An investment in the Fund's AMPS should not constitute a complete
investment program.
Investment Considerations. Investors in AMPS should consider the
following factors:
o The credit ratings of the AMPS could be reduced or terminated
while an investor holds the AMPS.
o Neither broker-dealers nor the Fund are obligated to purchase
shares of AMPS in an auction or otherwise, nor is the Fund
required to redeem shares of AMPS in the event of a failed
auction.
o If sufficient bids do not exist in an auction, the applicable
dividend rate will be the maximum applicable dividend rate, and
in such event, owners of AMPS wishing to sell will not be able
to sell all, and may not be able to sell any, AMPS in the
auction. As a result, investors may not have liquidity of
investment.
o Broker-dealers may submit orders in auctions for the AMPS for
their own account. If a broker-dealer submits an order for its
own account in any auction, it may have knowledge of orders
placed through it in that auction and therefore have an
advantage over other bidders, but such broker-dealer would not
have knowledge of orders submitted by other broker-dealers in
that auction.
Secondary Market. The broker-dealers intend to maintain a secondary
trading market in the AMPS outside of auctions; however, they have no
obligation to do so and there can be no assurance that a secondary market for
the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market. The AMPS will not be registered on any stock
exchange or on any automated quotation system. An increase in the level of
interest rates likely will have an adverse effect on the secondary market
price of the AMPS, and a selling stockholder may have to sell AMPS between
auctions at a price per share of less than $25,000.
Rating Agencies. The Fund will issue the AMPS only if the AMPS have
received a rating of Aaa from Moody's and AAA from S&P. As a result of such
ratings, the Fund will be subject to guidelines of Moody's, S&P or another
substitute NRSRO that may issue ratings for its preferred stock. These
guidelines may impose asset coverage or portfolio composition requirements
that are more stringent than those imposed by the 1940 Act and may prohibit or
limit the use by the Fund of certain portfolio management techniques or
investments. The Fund does not expect these guidelines to prevent the
Investment Adviser from managing the Fund's portfolio in accordance with the
Fund's investment objective and policies. Also, under certain circumstances,
the Fund may voluntarily terminate compliance with Moody's or S&P's
guidelines, or both, in which case the AMPS may no longer be rated by Moody's
or S&P, as applicable, but will be rated by at least one rating agency.
Interest Rate Risk and AMPS. The Fund issues shares of AMPS, which
generally pay dividends based on short term interest rates. The Fund generally
will purchase Municipal Bonds that pay interest at fixed or adjustable rates.
If short term interest rates rise, dividend rates on the shares of AMPS may
rise so that the amount of dividends paid to the holders of shares of AMPS
exceeds the income from the Fund's portfolio securities. Because income from
the Fund's entire investment portfolio (not just the portion of the portfolio
purchased with the proceeds of the AMPS offering) is available to pay
dividends on the shares of AMPS, dividend rates on the shares of AMPS would
need to greatly exceed the Fund's net portfolio income before the Fund's
ability to pay dividends on the shares of AMPS would be jeopardized. If market
interest rates rise, this could negatively impact the value of the Fund's
investment portfolio, reducing the amount of assets serving as asset coverage
for the AMPS.
Non-Diversification. The Fund is registered as a "non-diversified"
investment company. This means that the Fund may invest a greater percentage
of its assets in a single issuer than a diversified investment company. Since
the Fund may invest a relatively high percentage of its assets in a limited
number of issuers, the Fund may be more exposed to any single economic,
political or regulatory occurrence than a more widely-diversified fund. Even
as a non-diversified fund, the Fund must still meet the diversification
requirements applicable to regulated investment companies under the Federal
income tax laws.
7
Market Risk and Selection Risk. Market risk is the risk that the bond
market will go down in value, including the possibility that the market will
go down sharply and unpredictably. Selection risk is the risk that the
securities that Fund Management selects will underperform the bond
market, the relevant indices, or other funds with similar investment
objectives and investment strategies.
Tax Exempt Securities Market Risk. The amount of public information
available about 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 the
Investment Adviser than the performance of a stock fund or taxable bond fund.
Interest Rate and Credit Risk. The Fund invests in Municipal Bonds,
which are subject to interest rate and credit risk. Interest rate risk is the
risk that prices of Municipal Bonds generally increase when interest rates
decline and decrease when interest rates increase. Prices of longer term
securities generally change more in response to interest rate changes than
prices of shorter term securities. The Fund's use of leverage by the issuance
of preferred stock and its investment in inverse floating obligations, as
discussed below, may increase interest rate risk. Because market interest
rates are currently near their lowest levels in many years, there is a greater
risk that the Fund's portfolio will decline in value if interest rates
increase in the future. Credit risk is the risk that the issuer will be unable
to pay the interest or principal when due. Changes in an issuer's credit
rating or the market's perception of an issuer's creditworthiness may affect
the value of the Fund's investment in that issuer. The degree of credit risk
depends on both the financial condition of the issuer and the terms of the
obligation.
Call and Redemption Risk. A Municipal Bond's issuer may call the bond
for redemption before it matures. If this happens to a Municipal Bond that the
Fund holds, the Fund may lose income and may have to invest the proceeds in
Municipal Bonds with lower yields.
Rating Categories. The Fund intends to invest in Municipal Bonds that
are rated investment grade by S&P, Moody's or Fitch Ratings, or in unrated
Municipal Bonds that are considered by the Investment Adviser to possess
similar credit characteristics. Obligations rated in the lowest investment
grade category may have certain speculative characteristics. For example,
their prices are more volatile, economic downturns and financial setbacks may
affect their prices more negatively, and their trading market may be more
limited.
Reinvestment Risk. Reinvestment risk is the risk that income from the
Fund's Municipal Bond portfolio will decline if and when the Fund invests the
proceeds from matured, traded or called bonds at market interest rates that
are below the portfolio's current earnings rate. A decline in income could
negatively affect the Fund's yield, return or the market price of the common
stock.
Private Activity Bonds. The Fund may invest in certain tax exempt
securities classified as "private activity bonds." These bonds may subject
certain investors in the Fund to the Federal alternative minimum tax.
Liquidity of Investments. Certain Municipal Bonds in which the Fund
invests may lack an established secondary trading market or may be otherwise
considered illiquid. Liquidity of a security relates to the ability to easily
dispose of the security and the price to be obtained and does not generally
relate to the credit risk or likelihood of receipt of cash at maturity.
Illiquid securities may trade at a discount from comparable, more liquid
investments.
Portfolio Strategies. The Fund may engage in various portfolio
strategies both to seek to increase the return of the Fund and to seek to
hedge its portfolio against adverse effects from movements in interest rates
and in the securities markets. These portfolio strategies include the use of
derivatives, such as indexed securities, inverse floating rate securities,
options, futures, options on futures, interest rate swap transactions and
credit default swaps. Such strategies subject the Fund to the risk that, if
the Investment Adviser incorrectly forecasts market values, interest rates or
other applicable factors, the Fund's performance could suffer. Certain of
these strategies, such as investments in inverse floating rate securities and
credit default swaps, may provide investment leverage to the Fund's portfolio.
The Fund is not required to use derivatives or other portfolio strategies to
seek to increase return or to seek to hedge its portfolio and may choose not
to do so. There can be no assurance that the Fund's portfolio strategies will
be effective. Some of the derivative strategies that the Fund may use to seek
to increase its return are riskier than its hedging transactions and have
speculative characteristics. Such strategies do not attempt to limit the
Fund's risk of loss.
8
General Risks Related to Derivatives. Derivatives are financial
contracts or instruments whose value depends on, or is derived from, the value
of an underlying asset, reference rate or index (or relationship between two
indices). The Fund may invest in a variety of derivative instruments for
investment purposes, hedging purposes or to seek to increase its return, such
as options, futures contracts and swap agreements. The Fund may use
derivatives as a substitute for taking a position in an underlying security or
other asset and/or as part of a strategy designed to reduce exposure to other
risks, such as interest rate risk. The Fund also may use derivatives to add
leverage to the portfolio and/or to hedge against increases in the Fund's
costs associated with the dividend payments on the preferred stock, including
the AMPS. The Fund also may invest in certain derivative products that pay tax
exempt income interest via a trust or partnership through which the Fund holds
interests in one or more underlying long term municipal securities. The Fund's
use of derivative instruments involves risks different from, and possibly
greater than, the risks associated with investing directly in securities and
other traditional investments. Derivatives are subject to a number of risks
such as liquidity risk, interest rate risk, credit risk, leverage risk, the
risk of ambiguous documentation and management risk. They also involve the
risk of mispricing or improper valuation and correlation risk (i.e., the risk
that changes in the value of the derivative may not correlate perfectly with
the underlying asset, rate or index). If the Fund invests in a derivative
instrument it could lose more than the principal amount invested. Moreover,
derivatives raise certain tax, legal, regulatory and accounting issues that
may not be presented by investments in Municipal Bonds, and there is some risk
that certain issues could be resolved in a manner that could adversely impact
the performance of the Fund and/or the tax exempt nature of the dividends paid
by the Fund.
Also, suitable derivative transactions may not be available in all
circumstances and there can be no assurance that the Fund will engage in these
transactions to reduce exposure to other risks when that would be beneficial.
Swaps. Swap agreements are types of derivatives. In order to seek to
hedge the value of the Fund's portfolio, to hedge against increases in the
Fund's cost associated with the interest payments on its outstanding
borrowings or to seek to increase the Fund's return, the Fund may enter into
interest rate, credit default or total return swap transactions. In interest
rate swap transactions, there is a risk that yields will move in the direction
opposite of the direction anticipated by the Fund, which would cause the Fund
to make payments to its counterparty in the transaction that could adversely
affect Fund performance. In addition to the risks applicable to swaps
generally, credit default swap transactions involve special risks because they
are difficult to value, are highly susceptible to liquidity and credit risk,
and generally pay a return to the party that has paid the premium only in the
event of an actual default by the issuer of the underlying obligation (as
opposed to a credit downgrade or other indication of financial difficulty).
Total return swap transactions involve the risks that the counterparty will
default on its payment obligation to the Fund in the transaction and that the
Fund will not be able to meet its obligation to the counterparty in the
transaction. The Fund is not required to enter into interest rate, credit
default or total return swap transactions for hedging purposes or to enhance
its return and may choose not to do so.
Taxability Risk. The Fund intends to minimize the payment of taxable
income to stockholders by investing in Municipal Bonds and other tax exempt
securities in reliance on an opinion of bond counsel to the issuer that the
interest paid on those securities will be excludable from gross income for
Federal income tax purposes. Such securities, however, may be determined to
pay, or to have paid, taxable income subsequent to the Fund's acquisition of
the securities. In that event, the Internal Revenue Service may demand that
the Fund pay taxes on the affected interest income, and, if the Fund agrees to
do so, the Fund's yield on its common stock could be adversely affected. A
determination that interest on a security held by the Fund is includable in
gross income for Federal income tax purposes retroactively to its date of
issue may, likewise, cause a portion of prior distributions received by
stockholders, including holders of AMPS, to be taxable to those stockholders
in the year of receipt. The Fund will not pay an Additional Dividend (as
defined herein) to a holder of AMPS under these circumstances. If a security
acquired based on reliance on such an opinion of counsel is subsequently
determined to pay interest that is includable in gross income for Federal
income tax purposes, the Fund will dispose of that security as soon as
reasonably practicable.
Antitakeover Provisions. The Fund's Charter, By-laws and the General
Corporation Law of the State of Maryland include provisions that could limit
the ability of other entities or persons to acquire control of the Fund or to
change the composition of its Board of Directors. Such provisions could limit
the ability of stockholders to sell their shares at a premium over prevailing
market prices by discouraging a third party from seeking to obtain control of
the Fund.
9
Market Disruption. The terrorist attacks in the United States on
September 11, 2001 had a disruptive effect on the securities markets, some of
which were closed for a four-day period. The continued threat of similar
attacks, and related events, including U.S. military actions in Iraq and
continued unrest in the Middle East, have led to increased short term market
volatility and may have long term effects on U.S. and world economies and
markets. Similar disruptions of the financial markets could adversely affect
the market prices of the Fund's portfolio securities, interest rates,
auctions, secondary trading, ratings, credit risk, inflation and other factors
relating to the Fund's AMPS.
10
FINANCIAL HIGHLIGHTS
The following Financial Highlights table is intended to help you
understand the Fund's financial performance for the periods shown. Certain
information reflects financial results for a single share of common stock or
preferred stock of the Fund. The total returns in the table represent the rate
an investor would have earned or lost on an investment in shares of common
stock of the Fund (assuming reinvestment of all dividends). The information
with respect to the fiscal years ended August 31, 1994 to August 31, 2003 has
been audited by _________________, whose report for the fiscal year ended
August 31, 2003, along with the financial statements of the Fund, is included
in the Fund's 2003 Annual Report, which is incorporated by reference herein.
The information with respect to the six months ended February 29, 2004 is
unaudited and is included in the Fund's 2004 Semi-Annual Report, which is
incorporated by reference herein. You may obtain a copy of the 2003 Annual
Report and the 2004 Semi-Annual Report at no cost by calling (800) 543-6217
between 8:30 a.m. and 5:30 p.m. Eastern time on any business day.
The following per share data and ratios have been derived from
information provided in the financial statements.
For the
Six
Months
Ended
February
29, For the Year Ended August 31,
2004 ----- ------- --------- ------- --------- ------- --------
(unaudited) 2003 2002 2001++ 2000++ 1999++ 1998 1997
--------------------------------------------------------------------------------
Increase (Decrease) in Net
Asset Value: Per Share
Operating Performance
Net asset value, beginning $9.54 $9.76 $9.71 $9.07 $9.15 $10.20 $9.89 $9.45
of period --------------------------------------------------------------------------------
Investment income-- net .36+ .72+ .69 .69 .70 .73 .76 .77
Realized and unrealized
gain (loss) on .67 (.26) .02 .65 (.05) (1.02) .30 .45
investments-- net
Dividends to Preferred Stock
shareholders from:
investment income-- net (.02) (.05) (.07) (.16) (.18) (.15) -- --
--------------------------------------------------------------------------------
Total from investment 1.01 .41 .64 1.18 .47 (.44) 1.06 1.22
operations --------------------------------------------------------------------------------
Less dividends to Common
Stock shareholders from:
Investment income-- net (.32) (.63) (.59) (.54) (.55) (.58) (.59) (.62)
Realized gain on -- -- -- -- -- -- -- --
investments-- net
In excess of realized
gain on -- -- -- -- -- (.03) -- --
investments-- net --------------------------------------------------------------------------------
Total dividends and (.32) (.63) (.59) (.54) (.55) (.61) (.59) (.62)
distributions to
Common Stock shareholders --------------------------------------------------------------------------------
Effect of Preferred Stock
activity:
Dividends to Preferred
Stock shareholders from:
investment income--net -- -- -- -- -- -- (.16) (.16)
--------------------------------------------------------------------------------
Net asset value, end of 10.23 $9.54 $9.76 $9.71 $9.07 $9.15 $10.20 $9.89
period ================================================================================
Market price per share, end 9.73 $8.80 $9.11 $9.30 $8.25 $8.6875 $10.00 $9.50
of period ================================================================================
Total Investment Return**
Based on market price per 14.44%++ 3.56% 4.55% 19.92% 1.75% (7.44%) 11.78% 11.25%
share ================================================================================
Based on net asset value 10.99%++ 4.79% 7.28% 13.89% 6.21% (4.42%) 9.52% 11.84%
per share ================================================================================
Ratios Based on Average Net
Assets of Common Stock
Total expenses, net of .94%* .95% .95% .98% 1.01% .93% -- --
reimbursement*** ================================================================================
Total expenses*** .95%* .96% .95% .98% 1.01% .93% -- --
================================================================================
Total investment income-- 7.28%* 7.33% 7.33% 7.37% 7.95% 7.26% -- --
net*** ================================================================================
Amount of dividends to
Preferred .40%* .50% .75% 1.70% 2.01% 1.46% -- --
Stock shareholders ================================================================================
Investment income-- net, to
Common Stock shareholders 6.88% 6.83% 6.58% 5.67% 5.94% 5.80% -- --
================================================================================
1996 1995 1994
--------- ---------- ------
Increase (Decrease) in Net
Asset Value: Per Share
Operating Performance
Net asset value, beginning $9.51 $9.57 $10.65
of period -----------------------------
Investment income-- net .79 .81 .84
Realized and unrealized
gain (loss) on (.06) .10 (.78)
investments-- net
Dividends to Preferred Stock
shareholders from:
investment income-- net -- -- --
-----------------------------
Total from investment .73 .91 .06
operations -----------------------------
Less dividends to Common
Stock shareholders from:
Investment income-- net (.63) (.64) (.70)
Realized gain on -- (.12) (.32)
investments-- net
In excess of realized
gain on -- (.04) --
investments-- net -----------------------------
Total dividends and (.63) (.80) (1.02)
distributions to
Common Stock shareholders -----------------------------
Effect of Preferred Stock
activity:
Dividends to Preferred
Stock shareholders from:
investment income--net (.16) (.17) (.12)
-----------------------------
Net asset value, end of $9.45 $9.51 $9.57
period =============================
Market price per share, end $9.125 $8.563 $8.50
of period =============================
Total Investment Return**
Based on market price per 14.18% 10.88% (16.29%)
share =============================
Based on net asset value 6.46% 9.38% (.44%)
per share =============================
Ratios Based on Average Net
Assets of Common Stock
Total expenses, net of -- -- --
reimbursement*** =============================
Total expenses*** -- -- --
=============================
Total investment income-- -- -- --
net*** =============================
Amount of dividends to
Preferred -- -- --
Stock shareholders
=============================
Investment income-- net, to
Common -- -- --
Stock shareholders
=============================
(continued on following page)
11
(continued from prior page)
For the
Six
Months
Ended
February
29, For the Year Ended August 31,
2004 -------------------------------------------------------------------
(unaudited) 2003 2002 2001++ 2000++ 1999++ 1998 1997
----------- ------ ------ --------- -------- ---------- ------ ---------
Ratios Based on Average Net
Assets
of Common & Preferred
Stock***
Total expenses, net of .65%* .65% .65% .66% .67% .64% -- --
reimbursement ==============================================================================
Total expenses .65%* .66% .65% .66% .67% .64% .64% .64%
==============================================================================
Total investment income-- 5.01%* 5.03% 4.98% 4.98% 5.26% 5.01% 5.19% 5.40%
net ==============================================================================
Ratios Based on Average Net
Assets of Preferred Stock
Dividends to Preferred
Stock shareholders .88%* 1.11% 1.59% 3.53% 3.93% 3.25% -- --
==============================================================================
Supplemental Data
Net assets applicable to
Common Stock, end of
period (in thousands) $627,622 $585,022 $598,816 $595,908 $556,105 $561,373 $623,270 $604,515
Preferred Stock
outstanding, end $275,000 $275,000 $275,000 $275,000 $275,000 $275,000 $275,000 $275,000
of period (in thousands) ==============================================================================
Portfolio turnover 25.00% 44.30% 74.00% 74.80% 121.76% 101.35% 102.77% 78.02%
==============================================================================
Leverage: ==============================================================================
Asset coverage per $1,000 $3,282 $3,127 $3,178 $3,167 $3,022 $3,041 $3,266 $3,198
Dividends Per Share on ==============================================================================
Preferred
Stock Outstanding +++
Series A - Investment income $106 $266 $388 $909 $1,030 $839 $890 $872
--net ==============================================================================
Series B - Investment income $119 $278 $394 $923 $991 $815 $902 $871
--net ==============================================================================
Series C - Investment income $114 $269 $391 $906 $952 $820 $886 $860
--net ==============================================================================
Series D - Investment income $100 $306 $445 $877 $978 $802 $880 $868
--net ==============================================================================
Series E - Investment income $107 $269 $372 $851 $977 $793 $884 $868
--net ==============================================================================
1996 1995 1994
-------- -------- --------
Ratios Based on Average Net
Assets
of Common & Preferred
Stock***
Total expenses, net of -- -- --
reimbursement ==============================
Total expenses .64% .66% .64%
==============================
Total investment income-- 5.57% 5.91% 5.76%
net ==============================
Ratios Based on Average Net
Assets of Preferred Stock
Dividends to Preferred
Stock -- -- --
shareholders ==============================
Supplemental Data ==============================
Net assets applicable to
Common Stock, end of
period (in thousands) $577,540 $581,211 $584,680
Preferred Stock
outstanding, end $275,000 $275,000 $275,000
of period (in thousands) ==============================
Portfolio turnover 69.87% 71.95% 100.92%
==============================
Leverage: ==============================
Asset coverage per $1,000 $3,100 $3,113 $3,126
Dividends Per Share on ==============================
Preferred
Stock Outstanding +++
Series A - Investment income $895 $922 $633
--net ==============================
Series B - Investment income $903 $946 $637
--net ==============================
Series C - Investment income $900 $947 $644
--net ==============================
Series D - Investment income $901 $1,014 $633
--net ==============================
Series E - Investment income $895 $968 $626
--net ==============================
-----------------
* Annualized.
** Total investment returns based on market value, which can be
significantly greater or lesser than the net asset value, may result in
substantially different returns. Total investment returns exclude the
effects of sales charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Based on average shares outstanding.
++ Certain prior year amounts have been reclassified to conform to current
year presentation.
+++ Dividends per share have been adjusted to reflect a four-for-one stock
split on December 1, 1994.
+/+ Aggregate total investment return.
THE FUND
MuniVest Fund, Inc. (the "Fund") is a non-diversified, closed-end
fund. The Fund was incorporated under the laws of the State of Maryland on
July 7, 1988, and has registered under the Investment Company Act of 1940, as
amended ("1940 Act"). The Fund's principal office is located at 800 Scudders
Mill Road, Plainsboro, New Jersey 08536, and its telephone number is (609)
282-2800.
The Board of Directors of the Fund may at any time consider a merger,
consolidation or other form of reorganization of the Fund with one or more
other investment companies advised by the Investment Adviser that have similar
investment objectives and policies as the Fund. Any such merger, consolidation
or other form of reorganization would require the prior approval of the Board
of Directors and, if the Fund is the acquired fund, the stockholders of the
Fund. See "Description of Capital Stock--Certain Provisions of the Charter and
By-laws."
USE OF PROCEEDS
The net proceeds of this offering will be approximately $74,085,000
after payment of offering expenses (estimated to be approximately $165,000)
and the deduction of the underwriting discount.
The net proceeds of the offering will be invested in accordance with
the Fund's investment objective and policies within approximately three months
after completion of this offering, depending on market conditions and
12
the availability of appropriate securities. Pending such investment, it is
anticipated that the proceeds will be invested in short term, tax exempt
securities. See "Investment Objective and Policies."
CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Fund as of February 29, 2004 and as adjusted to give effect to the issuance of
the shares of AMPS offered hereby.
Actual As Adjusted
Preferred stock (10,000,000 shares authorized; 11,000 shares of Other AMPS ------------ ------------
authorized, issued and outstanding at $25,000 per share liquidation
preference, plus accumulated but unpaid dividends; 14,000 shares of AMPS
and Other AMPS authorized, issued and outstanding, as adjusted, at
$25,000 per share liquidation preference, plus accumulated but
unpaid dividends) ............................................ $275,044,840 $350,044,840
Common Stock, par value $.10 per share (150,000,000 shares authorized, ============ ============
61,346,288 shares issued and outstanding) $6,134,629 $6,134,629
Paid-in capital in excess of par value.......................... 565,202,625 564,287,625
Undistributed investment income--net............................ 10,112,493 10,112,493
Accumulated realized capital losses on investment - net......... (39,872,880) (39,872,880)
Unrealized appreciation on investments--net...................... 86,045,283 86,045,283
------------ ------------
Net assets applicable to outstanding common stock............... $627,622,150 $626,707,150
============ ============
PORTFOLIO COMPOSITION
As of February 29, 2004, approximately 97.02% of the market value of
the Fund's portfolio was invested in long term municipal obligations and
approximately 2.98% of the market value of the Fund's portfolio was invested
in short term tax exempt securities. The following table sets forth certain
information with respect to the composition of the Fund's long term municipal
obligation investment portfolio as of February 29, 2004.
Number of Value
Moody's* Fitch* S&P* Issues in thousands) Percent
-----------------------------------------------------------------------------------------------------------------
Aaa AAA AAA 59 $299,154 34.39%
Aa AA AA 25 187,177 21.52%
A A A 17 84,169 9.67%
Baa BBB BBB 55 272,759 31.35%
Ba BB BB 7 20,115 2.31%
NR NR NR 3 6,614 .76%
------------- ------------ ------------
Total................................................ 166 $869,988 100%
============= ============ ============
------------------
* Ratings: Using the higher of Moody's, S&P or Fitch Ratings ("Fitch")
ratings on the Fund's investments. See "Schedule of Investments."
Moody's rating categories may be modified further by a 1, 2 or 3 in
Aa, A, Baa, Ba, B and Caa ratings. S&P rating categories may be
modified further by a plus (+) or minus (-) in AA, A, BBB, BB, B and
CCC ratings. Fitch rating categories may be modified further by a
plus (+) or minus (-) in AA, A, BBB, BB, B and CCC.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is
consistent with its investment policies and prudent investment management. The
Fund seeks to achieve its objective by investing at least 80% of an aggregate
of the Fund's net assets (including proceeds from the issuance of any
preferred stock) and the proceeds of any borrowings for investment purposes,
in a portfolio of municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies or instrumentalities, each of which pays interest that,
in the opinion of bond counsel to the issuer, is excludable from gross income
for Federal income tax purposes (except that the interest may
13
be includable in taxable income for purposes of the Federal alternative
minimum tax) ("Municipal Bonds"). The Fund's investment objective and its
policy of investing at least 80% of an aggregate of the Fund's net assets
(including proceeds from the issuance of any preferred stock) and the proceeds
of any borrowings for investment purposes, in Municipal Bonds are fundamental
policies that may not be changed without the approval of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). There
can be no assurance that the Fund's investment objective will be realized.
The Fund may invest in certain tax exempt securities classified as
"private activity bonds" (or industrial development bonds, under pre-1986 law)
("PABs") (in general, bonds that benefit non-governmental entities) that may
subject certain investors in the Fund to an alternative minimum tax. See
"Taxes." The percentage of the Fund's total assets invested in PABs will vary
from time to time. The Fund also will not invest more than 25% of its total
assets (taken at market value at the time of each investment) in Municipal
Bonds whose issuers are located in the same state.
Under normal market conditions, the Fund expects to invest primarily
in a portfolio of long term Municipal Bonds that are commonly referred to as
"investment grade" securities, which are obligations rated at the time of
purchase within the four highest quality ratings as determined by either
Moody's Investors Service, Inc. ("Moody's") (currently Aaa, Aa, A and Baa),
Standard & Poor's ("S&P") (currently AAA, AA, A and BBB) or Fitch Ratings
("Fitch") (currently AAA, AA, A and BBB). In the case of short term notes, the
investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1
through MIG-3 for Moody's and F-1+ through F-3 for Fitch. In the case of tax
exempt commercial paper, the investment grade rating categories are A-1+
through A-3 for S&P, Prime-1 through Prime-3 for Moody's and F-1+ through F-3
for Fitch. Obligations ranked in the lowest investment grade rating category
(BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moody's and BBB and F-3
for Fitch), while considered "investment grade," may have certain speculative
characteristics. There may be sub-categories or gradations indicating relative
standing within the rating categories set forth above. In assessing the
quality of Municipal Bonds with respect to the foregoing requirements, the
Investment Adviser takes into account the nature of any letters of credit or
similar credit enhancement to which particular Municipal Bonds are entitled
and the creditworthiness of the financial institution which provided such
credit enhancement. See Appendix A--"Description of Municipal Bond Ratings" to
the statement of additional information. If unrated, such securities will
possess creditworthiness comparable, in the opinion of the Investment Adviser,
to other obligations in which the Fund may invest.
All percentage and ratings limitations on securities in which the
Fund may invest apply at the time of making an investment and shall not be
considered violated if an investment rating is subsequently downgraded to a
rating that would have precluded the Fund's initial investment in such
security. In the event that the Fund disposes of a portfolio security
subsequent to its being downgraded, the Fund may experience a greater risk of
loss than if such security had been sold prior to such downgrade.
The average maturity of the Fund's portfolio securities will vary
based upon the Investment Adviser's assessment of economic and market
conditions. The net asset value of the shares of common stock of a closed-end
investment company, such as the Fund, which invests primarily in fixed income
securities, changes as the general levels of interest rates fluctuate. When
interest rates decline, the value of a fixed income portfolio can be expected
to rise. Conversely, when interest rates rise, the value of a fixed income
portfolio can be expected to decline. Prices of longer term securities
generally fluctuate more in response to interest rate changes than do shorter
term securities. These changes in net asset value are likely to be greater in
the case of a fund having a leveraged capital structure, such as the Fund.
For temporary periods or to provide liquidity, the Fund has the
authority to invest as much as 20% of its total assets in tax exempt and
taxable money market obligations with a maturity of one year or less (such
short term obligations being referred to herein as "Temporary Investments").
In addition, the Fund reserves the right as a defensive measure to invest
temporarily a greater portion of its assets in Temporary Investments, when, in
the opinion of the Investment Adviser, prevailing market or financial
conditions warrant. Taxable money market obligations will yield taxable
income. The Fund also may invest in variable rate demand obligations ("VRDOs")
and VRDOs in the form of participation interests ("Participating VRDOs") in
variable rate tax exempt obligations held by a financial institution. See
"Other Investment Policies -- Temporary Investments." The Fund's hedging
strategies, which are described in more detail under "Hedging Transactions --
Financial Futures Transactions and
14
Options," are not fundamental policies and may be modified by the Board of
Directors of the Fund without the approval of the Fund's stockholders. The
Fund is also authorized to invest in indexed and inverse floating rate
obligations for hedging purposes and to seek to enhance return.
The Fund may invest in securities not issued by or on behalf of a
state or territory or by an agency or instrumentality thereof, if the Fund
receives an opinion of counsel to the issuer that such securities pay interest
that is excludable from gross income for Federal income tax purposes
("Non-Municipal Tax Exempt Securities"). Non-Municipal Tax Exempt Securities
could include trust certificates, partnership interests or other instruments
evidencing interest in one or more long term municipal securities.
Non-Municipal Tax Exempt Securities also may include securities issued by
other investment companies that invest in Municipal Bonds, to the extent such
investments are permitted by the Fund's investment restrictions and applicable
law. Non-Municipal Tax Exempt Securities are subject to the same risks
associated with an investment in Municipal Bonds as well as many of the risks
associated with investments in derivatives. While the Fund receives opinions
of legal counsel to the effect that the income from the Non-Municipal Tax
Exempt Securities in which the Fund invests is excludable from gross income
for Federal income tax purposes to the same extent as the underlying municipal
securities, the Internal Revenue Service ("IRS") has not issued a ruling on
this subject. Were the IRS to issue an adverse ruling or take an adverse
position with respect to the taxation of these types of securities, there is a
risk that the interest paid on such securities would be deemed taxable at the
Federal level.
The Fund ordinarily does not intend to realize significant investment
income not exempt from Federal income tax. From time to time, the Fund may
realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds
the interest on which qualifies for a Federal income tax exemption. As a
result, this legislation and legislation that may be enacted in the future may
affect the availability of Municipal Bonds for investment by the Fund.
Risk Factors and Special Considerations Relating to Municipal Bonds
The risks and special considerations involved in investment in
Municipal Bonds vary with the types of instruments being acquired. Investments
in Non-Municipal Tax Exempt Securities may present similar risks, depending on
the particular product. Certain instruments in which the Fund may invest may
be characterized as derivative instruments. See "-- Description of Municipal
Bonds" and "-- Hedging Transactions -- Financial Futures Transactions and
Options."
The value of Municipal Bonds generally may be affected by
uncertainties in the municipal markets as a result of legislation or
litigation, including legislation or litigation that changes the taxation of
Municipal Bonds or the rights of Municipal Bond holders in the event of a
bankruptcy. Municipal bankruptcies are rare, and certain provisions of the
U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the
application of state law to Municipal Bond issuers could produce varying
results among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal
Bonds in which the Fund invests.
Description of Municipal Bonds
Set forth below is a detailed description of the Municipal Bonds and
Temporary Investments in which the Fund may invest. Information with respect
to ratings assigned to tax exempt obligations that the Fund may purchase is
set forth in Appendix A--"Description of Municipal Bond Ratings" to the
statement of additional information. Obligations are included within the term
Municipal Bonds if the interest paid thereon is excluded from gross income for
Federal income tax purposes in the opinion of bond counsel to the issuer.
Municipal Bonds include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for
general operating expenses and loans to other public institutions and
facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities,
including certain facilities for the local furnishing of electric energy or
gas, sewage facilities, solid waste disposal facilities and other
15
specialized facilities. Other types of PABs, the proceeds of which are used
for the construction, equipment or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Bonds, although
the current Federal tax laws place substantial limitations on the size of such
issues. The interest on Municipal Bonds may bear a fixed rate or be payable at
a variable or floating rate. The two principal classifications of Municipal
Bonds are "general obligation" and "revenue" bonds, which latter category
includes PABs.
The Fund has not established any limit on the percentage of its
portfolio that may be invested PABs. The Fund may not be a suitable investment
for investors who are already subject to the Federal alternative minimum tax
or who would become subject to the Federal alternative minimum tax as a result
of an investment in the Fund's common stock. See "Taxes."
General Obligation Bonds. General obligation bonds are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. The taxing power of any governmental entity may be
limited, however, by provisions of its state constitution or laws, and an
entity's creditworthiness will depend on many factors, including potential
erosion of its tax base due to population declines, natural disasters,
declines in the state's industrial base or inability to attract new
industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem
real property taxes and the extent to which the entity relies on Federal or
state aid, access to capital markets or other factors beyond the state's or
entity's control. Accordingly, the capacity of the issuer of a general
obligation bond as to the timely payment of interest and the repayment of
principal when due is affected by the issuer's maintenance of its tax base.
Revenue Bonds. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue sources
such as payments from the user of the facility being financed. Accordingly,
the timely payment of interest and the repayment of principal in accordance
with the terms of the revenue or special obligation bond is a function of the
economic viability of such facility or such revenue source.
PABs. The Fund may purchase PABs. PABs are, in most cases, tax exempt
securities issued by states, municipalities or public authorities to provide
funds, usually through a loan or lease arrangement, to a private entity for
the purpose of financing construction or improvement of a facility to be used
by the entity. Such bonds are secured primarily by revenues derived from loan
repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. PABs generally are not
secured by a pledge of the taxing power of the issuer of such bonds.
Therefore, an investor should be aware that repayment of such bonds generally
depends on the revenues of a private entity and be aware of the risks that
such an investment may entail. Continued ability of an entity to generate
sufficient revenues for the payment of principal and interest on such bonds
will be affected by many factors including the size of the entity, capital
structure, demand for its products or services, competition, general economic
conditions, government regulation and the entity's dependence on revenues for
the operation of the particular facility being financed.
Moral Obligation Bonds. The Fund also may invest in "moral
obligation" bonds, which are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Municipal Lease Obligations. Also included within the general
category of Municipal Bonds are certificates of participation ("COPs") issued
by government authorities or entities to finance the acquisition or
construction of equipment, land and/or facilities. COPs represent
participations in a lease, an installment purchase contract or a conditional
sales contract (hereinafter collectively called "lease obligations") relating
to such equipment, land or facilities. Although lease obligations do not
constitute general obligations of the issuer for which the issuer's unlimited
taxing power is pledged, a lease obligation is frequently backed by the
issuer's covenant to budget for, appropriate and make the payments due under
the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although "non-appropriation"
lease obligations are secured by the leased property, disposition of the
property in the event of foreclosure might prove difficult and the value of
the property may be insufficient to issue lease obligations. Certain
investments in lease obligations may be illiquid.
16
Indexed and Inverse Floating Rate Securities. The Fund may invest in
Municipal Bonds (and Non- Municipal Tax Exempt Securities) that yield a return
based on a particular index of value or interest rates. For example, the Fund
may invest in Municipal Bonds that pay interest based on an index of Municipal
Bond interest rates. The principal amount payable upon maturity of certain
Municipal Bonds also may be based on the value of the index. To the extent the
Fund invests in these types of Municipal Bonds, the Fund's return on such
Municipal Bonds will be subject to risk with respect to the value of the
particular index. Interest and principal payable on the Municipal Bonds may
also be based on relative changes among particular indices. Also, the Fund may
invest in so-called "inverse floating obligations" or "residual interest
bonds" on which the interest rates vary inversely with a short term floating
rate (which may be reset periodically by a dutch auction, a remarketing agent,
or by reference to a short term tax exempt interest rate index). The Fund may
purchase synthetically created inverse floating rate bonds evidenced by
custodial or trust receipts. Generally, income on inverse floating rate bonds
will decrease when short term interest rates increase, and will increase when
short term interest rates decrease. Such securities have the effect of
providing a degree of investment leverage, since they may increase or decrease
in value in response to changes, as an illustration, in market interest rates
at a rate which is a multiple (typically two) of the rate at which fixed rate
long term tax exempt securities increase or decrease in response to such
changes. As a result, the market values of such securities will generally be
more volatile than the market values of fixed rate tax exempt securities. To
seek to limit the volatility of these securities, the Fund may purchase
inverse floating obligations with shorter-term maturities or which contain
limitations on the extent to which the interest rate may vary. Certain
investments in such obligations may be illiquid.
When Issued Securities, Delayed Delivery Securities and Forward
Commitments. The Fund may purchase or sell securities that it is entitled to
receive on a when issued basis. The Fund may also purchase or sell securities
on a delayed delivery basis. The Fund may also purchase or sell securities
through a forward commitment. These transactions involve the purchase or sale
of securities by the Fund at an established price with payment and delivery
taking place in the future. The purchase will be recorded on the date the Fund
enters into the commitment and the value of the securities will thereafter be
reflected in the Fund's net asset value. The Fund enters into these
transactions to obtain what is considered an advantageous price to the Fund at
the time of entering into the transaction. The Fund has not established any
limit on the percentage of its assets that may be committed in connection with
these transactions. When the Fund purchases securities in these transactions,
the Fund segregates liquid securities in an amount equal to the amount of its
purchase commitments.
There can be no assurance that a security purchased on a when issued
basis will be issued or that a security purchased or sold through a forward
commitment will be delivered. A default by a counterparty may result in the
Fund missing the opportunity of obtaining a price considered to be
advantageous. The value of securities in these transactions on the delivery
date may be more or less than the Fund's purchase price. The Fund may bear the
risk of a decline in the value of the security in these transactions and may
not benefit from an appreciation in the value of the security during the
commitment period.
Call Rights. The Fund may purchase a Municipal Bond issuer's right to
call all or a portion of such Municipal Bond for mandatory tender for purchase
(a "Call Right"). A holder of a Call Right may exercise such right to require
a mandatory tender for the purchase of related Municipal Bonds, subject to
certain conditions. A Call Right that is not exercised prior to maturity of
the related Municipal Bond will expire without value. The economic effect of
holding both the Call Right and the related Municipal Bond is identical to
holding a Municipal Bond as a non-callable security. Certain investments in
such obligations may be illiquid.
Yields. Yields on Municipal Bonds are dependent on a variety of
factors, including the general condition of the money market and of the
municipal bond market, the size of a particular offering, the financial
condition of the issuer, the maturity of the obligation and the rating of the
issue. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the securities in which
the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and between
classifications, depending on numerous factors. Furthermore, the rights of
owners of Municipal Bonds and the obligations of the issuer of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally and to general
equitable principles, which may limit the enforcement of certain remedies.
17
Hedging Transactions
The Fund may hedge all or a portion of its portfolio investments
against fluctuations in interest rates through the use of options and certain
financial futures contracts and options thereon. While the Fund's use of
hedging strategies is intended to reduce the volatility of the net asset value
of the Fund's shares of common stock, the net asset value of the Fund's shares
of common stock will fluctuate. No assurance can be given that the Fund's
hedging transactions will be effective. The Fund only may engage in hedging
activities from time to time and may not necessarily be engaging in hedging
activities when movements in interest rates occur. The Fund has no obligation
to enter into hedging transactions and may choose not to do so. Furthermore,
for so long as the AMPS are rated by Moody's and S&P, the Fund's use of
options and certain financial futures and options thereon will be subject to
the limitations described under "Rating Agency Guidelines."
Financial Futures Transactions and Options. The Fund is authorized to
purchase and sell certain exchange traded financial futures contracts
("financial futures contracts") in order to hedge its investments in Municipal
Bonds against declines in value, and to hedge against increases in the cost of
securities it intends to purchase or to seek to enhance the Fund's return.
However, any transactions involving financial futures or options (including
puts and calls associated therewith) will be in accordance with the Fund's
investment policies and limitations. A financial futures contract obligates
the seller of a contract to deliver and the purchaser of a contract to take
delivery of the type of financial instrument covered by the contract, or in
the case of index-based futures contracts to make and accept a cash
settlement, at a specific future time for a specified price. To hedge its
portfolio, the Fund may take an investment position in a futures contract
which will move in the opposite direction from the portfolio position being
hedged. A sale of financial futures contracts may provide a hedge against a
decline in the value of portfolio securities because such depreciation may be
offset, in whole or in part, by an increase in the value of the position in
the financial futures contracts. A purchase of financial futures contracts may
provide a hedge against an increase in the cost of securities intended to be
purchased because such appreciation may be offset, in whole or in part, by an
increase in the value of the position in the futures contracts.
Distributions, if any, of net long term capital gains from certain
transactions in futures or options are taxable at long term capital gains
rates for Federal income tax purposes. See "Taxes."
Futures Contracts. A futures contract is an agreement between two
parties to buy and sell a security or, in the case of an index-based futures
contract, to make and accept a cash settlement for a set price on a future
date. A majority of transactions in futures contracts, however, do not result
in the actual delivery of the underlying instrument or cash settlement, but
are settled through liquidation, i.e., by entering into an offsetting
transaction. Futures contracts have been designed by boards of trade which
have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC").
The purchase or sale of a futures contract differs from the purchase
or sale of a security in that no price or premium is paid or received.
Instead, an amount of cash or securities acceptable to the broker and the
relevant contract market, which varies, but is generally about 5% of the
contract amount, must be deposited with the broker. This amount is known as
"initial margin" and represents a "good faith" deposit assuring the
performance of both the purchaser and seller under the futures contract.
Subsequent payments to and from the broker, called "variation margin," are
required to be made on a daily basis as the price of the futures contract
fluctuates making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." At any time prior
to the settlement date of the futures contract, the position may be closed out
by taking an opposite position that will operate to terminate the position in
the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid
on each completed sale transaction.
The Fund deals in financial futures contracts based on a long term
municipal bond index developed by the Chicago Board of Trade ("CBT") and The
Bond Buyer (the "Municipal Bond Index"). The Municipal Bond Index is comprised
of 40 tax exempt municipal revenue and general obligation bonds. Each bond
included in the Municipal Bond Index must be rated A or higher by Moody's or
S&P and must have a remaining maturity of 19 years or more. Twice a month new
issues satisfying the eligibility requirements are added to, and an equal
number of old issues are deleted from, the Municipal Bond Index. The value of
the Municipal Bond Index is computed daily according to a formula based on the
price of each bond in the Municipal Bond Index, as evaluated by six
dealer-to-dealer brokers.
18
The Municipal Bond Index futures contract is traded only on the CBT.
Like other contract markets, the CBT assures performance under futures
contracts through a clearing corporation, a nonprofit organization managed by
the exchange membership which is also responsible for handling daily
accounting of deposits or withdrawals of margin.
The Fund may also purchase and sell financial futures contracts on
U.S. Government securities as a hedge against adverse changes in interest
rates as described below. With respect to U.S. Government securities,
currently there are financial futures contracts based on long term U.S.
Treasury bonds, U.S. Treasury notes, Government National Mortgage Association
("GNMA") Certificates and three-month U.S. Treasury bills. The Fund may
purchase and write call and put options on futures contracts on U.S.
Government securities and purchase and sell Municipal Bond Index futures
contracts in connection with its hedging strategies.
The Fund also may engage in other futures contracts transactions such
as futures contracts on other municipal bond indices that may become available
if the Investment Adviser should determine that there is normally a sufficient
correlation between the prices of such futures contracts and the Municipal
Bonds in which the Fund invests to make such hedging appropriate.
Futures Strategies. The Fund may sell a financial futures contract
(i.e., assume a short position) in anticipation of a decline in the value of
its investments in Municipal Bonds resulting from an increase in interest
rates or otherwise. The risk of decline could be reduced without employing
futures as a hedge by selling such Municipal Bonds and either reinvesting the
proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs in the form of
dealer spreads and typically would reduce the average yield of the Fund's
portfolio securities as a result of the shortening of maturities. The sale of
futures contracts provides an alternative means of hedging against declines in
the value of its investments in Municipal Bonds. As such values decline, the
value of the Fund's positions in the futures contracts will tend to increase,
thus offsetting all or a portion of the depreciation in the market value of
the Fund's Municipal Bond investments that are being hedged. While the Fund
will incur commission expenses in selling and closing out futures positions,
commissions on futures transactions are lower than transaction costs incurred
in the purchase and sale of Municipal Bonds. In addition, the ability of the
Fund to trade in the standardized contracts available in the futures markets
may offer a more effective defensive position than a program to reduce the
average maturity of the portfolio securities due to the unique and varied
credit and technical characteristics of the municipal debt instruments
available to the Fund. Employing futures as a hedge also may permit the Fund
to assume a defensive posture without reducing the yield on its investments
beyond any amounts required to engage in futures trading.
When the Fund intends to purchase Municipal Bonds, the Fund may
purchase futures contracts as a hedge against any increase in the cost of such
Municipal Bonds resulting from a decrease in interest rates or otherwise, that
may occur before such purchases can be effected. Subject to the degree of
correlation between the Municipal Bonds and the futures contracts, subsequent
increases in the cost of Municipal Bonds should be reflected in the value of
the futures held by the Fund. As such purchases are made, an equivalent amount
of futures contracts will be closed out. Due to changing market conditions and
interest rate forecasts, however, a futures position may be terminated without
a corresponding purchase of portfolio securities.
Call Options on Futures Contracts. The Fund may also purchase and
sell exchange traded call and put options on financial futures contracts. The
purchase of a call option on a futures contract is analogous to the purchase
of a call option on an individual security. Depending on the pricing of the
option compared to either the futures contract upon which it is based or the
price of the underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities. Like the
purchase of a futures contract, the Fund will purchase a call option on a
futures contract to hedge against a market advance when the Fund is not fully
invested.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the securities which are deliverable
upon exercise of the futures contract. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings.
19
Put Options on Futures Contracts. The purchase of a put option on a
futures contract is analogous to the purchase of a protective put option on
portfolio securities. The Fund will purchase a put option on a futures
contract to hedge the Fund's portfolio against the risk of rising interest
rates.
The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities which are
deliverable upon exercise of the futures contract. If the futures price at
expiration is higher than the exercise price, the Fund will retain the full
amount of the option premium which provides a partial hedge against any
increase in the price of Municipal Bonds which the Fund intends to purchase.
The writer of an option on a futures contract is required to deposit
initial and variation margin pursuant to requirements similar to those
applicable to futures contracts. Premiums received from the writing of an
option will be included in initial margin. The writing of an option on a
futures contract involves risks similar to those relating to futures
contracts.
Under regulations of the CFTC, the futures trading activity described
herein will not result in the Fund being deemed a "commodity pool" and the
Fund need not be operated by a person registered with the CFTC as a "commodity
pool operator."
When the Fund purchases a futures contract, or writes a put option or
purchases a call option thereon, an amount of cash, cash equivalents (e.g.,
high grade commercial paper and daily tender adjustable notes) or liquid
securities will be segregated so that the amount so segregated, plus the
amount of initial and variation margin held in the account of its broker,
equals the market value of the futures contracts, thereby ensuring that the
use of such futures contract is unleveraged. It is not anticipated that
transactions in futures contracts will have the effect of increasing portfolio
turnover.
Risk Factors in Futures Transactions and Options. Investment in
futures contracts involves the risk of imperfect correlation between movements
in the price of the futures contract and the price of the security being
hedged. The hedge will not be fully effective when there is imperfect
correlation between the movements in the prices of two financial instruments.
For example, if the price of the futures contract moves more or less than the
price of the hedged security, the Fund will experience either a loss or gain
on the futures contract which is not completely offset by movements in the
price of the hedged securities. To compensate for imperfect correlations, the
Fund may purchase or sell futures contracts in a greater dollar amount than
the hedged securities if the volatility of the hedged securities is
historically greater than the volatility of the futures contracts. Conversely,
the Fund may purchase or sell fewer futures contracts if the volatility of the
price of the hedged securities is historically less than that of the futures
contracts.
The particular municipal bonds comprising the index underlying the
Municipal Bond Index financial futures contract may vary from the bonds held
by the Fund. As a result, the Fund's ability to hedge effectively all or a
portion of the value of its Municipal Bonds through the use of such financial
futures contracts will depend in part on the degree to which price movements
in the index underlying the financial futures contract correlate with the
price movements of the Municipal Bonds held by the Fund. The correlation may
be affected by disparities in the average maturity, ratings, geographical mix
or structure of the Fund's investments as compared to those comprising the
Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may
be subject to change over time as additions to and deletions from the
Municipal Bond Index alter its structure. The correlation between futures
contracts on U.S. Government securities and the Municipal Bonds held by the
Fund may be adversely affected by similar factors and the risk of imperfect
correlation between movements in the prices of such futures contracts and the
prices of Municipal Bonds held by the Fund may be greater. Municipal Bond
Index futures contracts were approved for trading in 1986. Trading in such
futures contracts may tend to be less liquid than trading in other futures
contracts. The trading of futures contracts also is subject to certain market
risks, such as inadequate trading activity, which could at times make it
difficult or impossible to liquidate existing positions.
The Fund expects to liquidate a majority of the futures contracts it
enters into through offsetting transactions on the applicable contract market.
There can be no assurance, however, that a liquid secondary market
20
will exist for any particular futures contract at any specific time. Thus, it
may not be possible to close out a futures position. In the event of adverse
price movements, the Fund would continue to be required to make daily cash
payments of variation margin. In such situations, if the Fund has insufficient
cash, it may be required to sell portfolio securities to meet daily variation
margin requirements at a time when it may be disadvantageous to do so. The
inability to close out futures positions also could have an adverse impact on
the Fund's ability to hedge effectively its investments in Municipal Bonds.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by commodity
exchanges which limit the amount of fluctuation in a futures contract price
during a single trading day. Once the daily limit has been reached in the
contract, no trades may be entered into at a price beyond the limit, thus
preventing the liquidation of open futures positions. Prices have in the past
moved beyond the daily limit on a number of consecutive trading days. The Fund
will enter into a futures position only if, in the judgment of the Investment
Adviser, there appears to be an actively traded secondary market for such
futures contracts.
The successful use of transactions in futures and related options
also depends on the ability of the Investment Adviser to forecast correctly
the direction and extent of interest rate movements within a given time frame.
To the extent interest rates remain stable during the period in which a
futures contract or option is held by the Fund or such rates move in a
direction opposite to that anticipated, the Fund may realize a loss on the
hedging transaction which is not fully or partially offset by an increase in
the value of portfolio securities. As a result, the Fund's total return for
such period may be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a
futures position, futures transactions involve substantial leverage. As a
result, relatively small movements in the price of the futures contracts can
result in substantial unrealized gains or losses. There is also the risk of
loss by the Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a financial futures contract.
Because the Fund will engage in the purchase and sale of futures contracts for
hedging purposes or to seek to enhance the Fund's return, any losses incurred
in connection therewith should, if the hedging strategy is successful, be
offset in whole or in part by increases in the value of securities held by the
Fund or decreases in the price of securities the Fund intends to acquire.
The amount of risk the Fund assumes when it purchases an option on a
futures contract is the premium paid for the option plus related transaction
costs. In addition to the correlation risks discussed above, the purchase of
an option on a futures contract also entails the risk that changes in the
value of the underlying futures contract will not be fully reflected in the
value of the option purchased.
OTHER INVESTMENT POLICIES
The Fund has adopted certain other policies as set forth below.
Temporary Investments
The Fund may invest in short term tax exempt and taxable securities
subject to the limitations set forth above. The tax exempt money market
securities may include municipal notes, municipal commercial paper, municipal
bonds with a remaining maturity of less than one year, variable rate demand
notes and participations therein. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes and grant
anticipation notes. Anticipation notes are sold as interim financing in
anticipation of tax collection, bond sales, government grants or revenue
receipts. Municipal commercial paper refers to short term unsecured promissory
notes generally issued to finance short term credit needs. The taxable money
market securities in which the Fund may invest as Temporary Investments
consist of U.S. Government securities, U.S. Government agency securities,
domestic bank or savings institution certificates of deposit and bankers'
acceptances, short term corporate debt securities such as commercial paper and
repurchase agreements. These Temporary Investments must have a stated maturity
not in excess of one year from the date of purchase. The Fund may not invest
in any security issued by a commercial bank or a savings institution unless
the bank or institution is organized and operating in the United States, has
total assets of at least one billion dollars and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), except that up to 10% of total assets
may be invested in certificates of deposit of smaller institutions if such
certificates are fully insured by the FDIC.
21
Interest Rate Swap Transactions
In order to seek to hedge the value of the Fund against interest rate
fluctuations, to hedge against increases in the Fund's costs associated with
the dividend payments on any preferred stock, including the AMPS, or to seek
to increase the Fund's return, the Fund may enter into interest rate swap
transactions such as Municipal Market Data AAA Cash Curve swaps ("MMD Swaps")
or Bond Market Association Municipal Swap Index swaps ("BMA Swaps"). To the
extent that the Fund enters into these transactions, the Fund expects to do so
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 may enter into these transactions primarily as a hedge or for
duration or risk management rather than as a speculative investment. However,
the Fund also may invest in MMD Swaps and BMA Swaps to seek to enhance return
or gain or to increase the Fund's yield, for example, during periods of steep
interest rate yield curves (i.e., wide differences between short term and long
term interest rates).
The Fund may purchase and sell BMA Swaps in the BMA swap market. In a
BMA Swap, the Fund exchanges with another party their respective commitments
to pay or receive interest (e.g., an exchange of fixed rate payments for
floating rate payments linked to the Bond Market Association Municipal Swap
Index). Because the underlying index is a tax exempt index, BMA Swaps may
reduce cross-market risks incurred by the Fund and increase the Fund's ability
to hedge effectively. BMA Swaps are typically quoted for the entire yield
curve, beginning with a seven day floating rate index out to 30 years. The
duration of a BMA Swap is approximately equal to the duration of a fixed rate
Municipal Bond with the same attributes as the swap (e.g., coupon, maturity,
call feature).
The Fund also may purchase and sell MMD Swaps, also known as MMD rate
locks. An MMD Swap permits the Fund to lock in a specified municipal interest
rate for a portion of its portfolio to preserve a return on a particular
investment or a portion of its portfolio as a duration management technique or
to protect against any increase in the price of securities to be purchased at
a later date. By using an MMD Swap, the Fund can create a synthetic long or
short position, allowing the Fund to select the most attractive part of the
yield curve. An MMD Swap is a contract between the Fund and an MMD Swap
provider pursuant to which the parties agree to make payments to each other on
a notional amount, contingent upon whether the Municipal Market Data AAA
General Obligation Scale is above or below a specified level on the expiration
date of the contract. For example, if the Fund buys an MMD Swap and the
Municipal Market Data AAA General Obligation Scale is below the specified
level on the expiration date, the counterparty to the contract will make a
payment to the Fund equal to the specified level minus the actual level,
multiplied by the notional amount of the contract. If the Municipal Market
Data AAA General Obligation Scale is above the specified level on the
expiration date, the Fund will make a payment to the counterparty equal to the
actual level minus the specified level, multiplied by the notional amount of
the contract.
In connection with investments in BMA and MMD Swaps, there is a risk
that municipal yields will move in the opposite direction than anticipated by
the Fund, which would cause the Fund to make payments to its counterparty in
the transaction that could adversely affect the Fund's performance.
The Fund has no obligation to enter into BMA or MMD Swaps and may not
do so. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis, and the Fund will segregate liquid securities having an aggregate
net asset value at least equal to the accrued excess.
Credit Default Swap Agreements
The Fund may enter into credit default swap agreements for hedging
purposes or to seek to increase its return. The credit default swap agreement
may have as reference obligations one or more securities that are not
currently held by the Fund. The protection "buyer" in a credit default
contract may be obligated to pay the protection "seller" an upfront or a
periodic stream of payments over the term of the contract provided that no
credit event on a reference obligation has occurred. If a credit event occurs,
the seller generally must pay the buyer the "par value" (full notional value)
of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity described in the swap, or the seller may be required to
deliver the related net cash amount, if the swap is cash settled. The Fund may
be either the buyer or seller in the transaction. If the Fund is a buyer and
no credit event
22
occurs, the Fund may recover nothing if the swap is held
through its termination date. However, if a credit event occurs, the buyer
generally may elect to receive the full notional value of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity
whose value may have significantly decreased. As a seller, the Fund generally
receives an upfront payment or a fixed rate of income throughout the term of
the swap, which typically is between six months and three years, provided that
there is no credit event. If a credit event occurs, generally the seller must
pay the buyer the full notional value of the swap in exchange for an equal
face amount of deliverable obligations of the reference entity whose value may
have significantly decreased. As the seller, the Fund would effectively add
leverage to its portfolio because, in addition to its total net assets, the
Fund would be subject to investment exposure on the notional amount of the
swap.
Credit default swap agreements involve greater risks than if the Fund
had invested in the reference obligation directly since, in addition to
general market risks, credit default swaps are subject to illiquidity risk,
counterparty risk and credit risks. The Fund will enter into credit default
swap agreements only with counterparties who are rated investment grade
quality by at least one nationally recognized statistical rating organization
at the time of entering into such transaction or whose creditworthiness is
believed by the Investment Adviser to be equivalent to such rating. A buyer
generally also will lose its investment and recover nothing should no credit
event occur and the swap is held to its termination date. If a credit event
were to occur, the value of any deliverable obligation received by the seller,
coupled with the upfront or periodic payments previously received, may be less
than the full notional value it pays to the buyer, resulting in a loss of
value to the seller. The Fund's obligations under a credit default swap
agreement will be accrued daily (offset against any amounts owing to the
Fund). The Fund will at all times segregate with its custodian in connection
with each such transaction liquid securities or cash with a value at least
equal to the Fund's exposure (any accrued but unpaid net amounts owed by the
Fund to any counterparty), on a marked-to-market basis (as calculated pursuant
to requirements of the Commission). Such segregation will ensure that the Fund
has assets available to satisfy its obligations with respect to the
transaction and will avoid any potential leveraging of the Fund's portfolio.
Such segregation will not limit the Fund's exposure to loss.
VRDOs and Participating VRDOs
VRDOs are tax exempt obligations that contain a floating or variable
interest rate adjustment formula and right of demand on the part of the holder
thereof to receive payment of the unpaid principal balance plus accrued
interest upon a short notice period not to exceed seven days. There is,
however, the possibility that because of default or insolvency the demand
feature of VRDOs and Participating VRDOs may not be honored. The interest
rates are adjustable at intervals (ranging from daily to up to one year) to
some prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDOs, at approximately
the par value of the VRDOs on the adjustment date. The adjustments typically
are based upon the Public Securities Association Index or some other
appropriate interest rate adjustment index. The Fund may invest in all types
of tax exempt instruments currently outstanding or to be issued in the future
which satisfy its short term maturity and quality standards.
Participating VRDOs provide the Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDOs from the financial institution upon a specified number of
days' notice, not to exceed seven days. In addition, the Participating VRDO is
backed by an irrevocable letter of credit or guaranty of the financial
institution. The Fund would have an undivided interest in the underlying
obligation and thus participate on the same basis as the financial institution
in such obligation except that the financial institution typically retains
fees out of the interest paid on the obligation for servicing the obligation,
providing the letter of credit and issuing the repurchase commitment. The Fund
has been advised by its counsel that the Fund should be entitled to treat the
income received on Participating VRDOs as interest from tax exempt obligations
as long as the Fund does not invest more than 20% of its total assets in such
investments and certain other conditions are met. It is contemplated that the
Fund will not invest more than 20% of its assets in Participating VRDOs.
VRDOs that contain an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest on a notice
period exceeding seven days may be deemed to be illiquid securities. The
Directors may adopt guidelines and delegate to the Investment Adviser the
daily function of determining and monitoring liquidity of such VRDOs. The
Directors, however, will retain sufficient oversight and will be ultimately
responsible for such determinations.
23
The Temporary Investments, VRDOs and Participating VRDOs in which the
Fund may invest will be in the following rating categories at the time of
purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1
through Prime-3 for commercial paper (as determined by Moody's), SP-1 through
SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as
determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper
(as determined by Fitch). Temporary Investments, if not rated, must be of
comparable quality in the opinion of the Investment Adviser. In addition, the
Fund reserves the right to invest temporarily a greater portion of its assets
in Temporary Investments for defensive purposes, when, in the judgment of the
Investment Adviser, market conditions warrant.
Repurchase Agreements
The Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the
Federal Reserve System or a primary dealer or an affiliate thereof, in U.S.
Government securities. Under such agreements, the bank or primary dealer or an
affiliate thereof agrees, upon entering into the contract, to repurchase the
security at a mutually agreed upon time and price, thereby determining the
yield during the term of the agreement. This results in a fixed rate of return
insulated from market fluctuations during such period. In repurchase
agreements, the prices at which the trades are conducted do not reflect
accrued interest on the underlying obligations. Such agreements usually cover
short periods, such as under one week. Repurchase agreements may be construed
to be collateralized loans by the purchaser to the seller secured by the
securities transferred to the purchaser. In a repurchase agreement, the Fund
will require the seller to provide additional collateral if the market value
of the securities falls below the repurchase price at any time during the term
of the repurchase agreement. In the event of default by the seller under a
repurchase agreement construed to be a collateralized loan, the underlying
securities are not owned by the Fund but only constitute collateral for the
seller's obligation to pay the repurchase price. Therefore, the Fund may
suffer time delays and incur costs or possible losses in connection with the
disposition of the collateral. In the event of a default under such a
repurchase agreement, instead of the contractual fixed rate of return, the
rate of return to the Fund shall be dependent upon intervening fluctuations of
the market value of such security and the accrued interest on the security. In
such event, the Fund would have rights against the seller for breach of
contract with respect to any losses arising from market fluctuations following
the failure of the seller to perform.
In general, for Federal income tax purposes, repurchase agreements
are treated as collateralized loans secured by the securities "sold."
Therefore, amounts earned under such agreements will not be considered tax
exempt interest. The treatment of purchase and sales contracts is less
certain.
Borrowings
The Fund is authorized to borrow money in amounts of up to 5% of the
value of its total assets at the time of such borrowings. Borrowings by the
Fund (commonly known, as with the issuance of preferred stock, as
"leveraging") create an opportunity for greater total return since, for
example, the Fund will not be required to sell portfolio securities to
repurchase or redeem shares but, at the same time, increase exposure to
capital risk. In addition, borrowed funds are subject to interest costs that
may offset or exceed the return earned on the borrowed funds.
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein not otherwise defined in
this prospectus have the meaning provided in the Glossary at the back of this
prospectus.
General
The Series F AMPS will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods. After the Initial Dividend
Period, each Subsequent Dividend Period for the Series F AMPS generally will
be a 7-Day Dividend Period; provided however, that, prior to any Auction, the
Fund may elect, subject to certain limitations described herein, upon giving
notice to holders thereof, a Special Dividend
24
Period. The Applicable Rate for a particular Dividend Period will be
determined by an Auction conducted on the Business Day before the start of
such Dividend Period. Beneficial Owners and Potential Beneficial Owners of
shares of AMPS may participate in Auctions therefor, although, except in the
case of a Special Dividend Period of more than 28 days, Beneficial Owners
desiring to continue to hold all of their shares of AMPS regardless of the
Applicable Rate resulting from Auctions need not participate. For an
explanation of Auctions and the method of determining the Applicable Rate, see
"The Auction" herein and in the statement of additional information.
The Fund has outstanding 11,000 shares of five other series of
Auction Market Preferred Stock, each with a liquidation preference of $25,000
per share, plus accumulated but unpaid dividends, for an aggregate initial
liquidation preference of $275,000,000 (the "Other AMPS"). The Other AMPS are
as follows: 2,000 shares of Auction Market Preferred Stock, Series A; 2,000
shares of Auction Market Preferred Stock, Series B; 2,000 shares of Auction
Market Preferred Stock, Series C; 2,000 shares of Auction Market Preferred
Stock, Series D; and 3,000 shares of Auction Market Preferred Stock, Series E.
The Series F AMPS offered hereby rank on a parity with the Other AMPS with
respect to dividends and liquidation preference. The terms of the shares of
Other AMPS are substantially the same as the terms of the shares of AMPS
described below.
The following is a brief description of the terms of the shares of
AMPS. This description does not purport to be complete and is subject to and
qualified in its entirety by reference to the Fund's Charter and Articles
Supplementary of the AMPS, including the provisions thereof establishing the
AMPS. The Fund's Charter and the form of Articles Supplementary of the AMPS
establishing the terms of the AMPS have been filed as exhibits to the
Registration Statement of which this prospectus is a part.
Dividends
General. The holders of shares of AMPS will be entitled to receive,
when, as and if declared by the Board of Directors of the Fund, out of funds
legally available therefor, cumulative cash dividends on their shares, at the
Applicable Rate determined as set forth below under "Determination of Dividend
Rate," payable on the respective dates set forth below. Dividends on the
shares of AMPS so declared and payable shall be paid (i) in preference to and
in priority over any dividends so declared and payable on the Fund's common
stock, and (ii) to the extent permitted under the Code, and to the extent
available, out of net tax exempt income earned on the Fund's investments.
Generally, dividends on shares of AMPS, to the extent that they are derived
from interest paid on Municipal Bonds, will be exempt from Federal income
taxes, subject to possible application of the alternative minimum tax. See
"Taxes."
Dividends on the shares of AMPS will accumulate from the date on
which the Fund originally issues the shares of AMPS (the "Date of Original
Issue") and will be payable on the dates described below. Dividends on shares
of AMPS with respect to the Initial Dividend Period shall be payable on the
Initial Dividend Payment Date. Following the Initial Dividend Payment Date for
the AMPS, dividends on the AMPS will be payable, at the option of the Fund,
either (i) with respect to any 7-Day Dividend Period and any Short Term
Dividend Period of 35 or fewer days, on the day next succeeding the last day
thereof or (ii) with respect to any Short Term Dividend Period of more than 35
days and with respect to any Long Term Dividend Period, monthly on the first
Business Day of each calendar month during such Short Term Dividend Period or
Long Term Dividend Period and on the day next succeeding the last day thereof
(each such date referred to in clause (i) or (ii) being referred to herein as
a "Normal Dividend Payment Date"), except that if such Normal Dividend Payment
Date is not a Business Day, the Dividend Payment Date shall be the first
Business Day next succeeding such Normal Dividend Payment Date. Thus,
following the Initial Dividend Payment Date for AMPS, dividends generally will
be payable (in the case of Dividend Periods which are not Special Dividend
Periods) on each succeeding Wednesday in the case of the Series F AMPS.
Although any particular Dividend Payment Date may not occur on the originally
scheduled date because of the exceptions discussed above, the next succeeding
Dividend Payment Date, subject to such exceptions, will occur on the next
following originally scheduled date. If for any reason a Dividend Payment Date
cannot be fixed as described above, then the Board of Directors shall fix the
Dividend Payment Date. The Board of Directors by resolution prior to
authorization of a dividend by the Board of Directors may change a Dividend
Payment Date if such change does not adversely affect the contract rights of
the holders of shares of AMPS set forth in the Charter. The Initial Dividend
Period, 7-Day Dividend Periods and Special Dividend Periods are hereinafter
sometimes referred to as "Dividend Periods." Each dividend payment date
determined as provided above is hereinafter referred to as a "Dividend Payment
Date."
25
Prior to each Dividend Payment Date, the Fund is required to deposit
with the Auction Agent sufficient funds for the payment of declared dividends.
The Fund does not intend to establish any reserves for the payment of
dividends.
Each dividend will be paid to the record holder of the AMPS, which
holder is expected to be the nominee of the Securities Depository. See "The
Auction--Securities Depository." The Securities Depository will credit the
accounts of the Agent Members of the Existing Holders in accordance with the
Securities Depository's normal procedures which provide for payment in
same-day funds. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments on the applicable Dividend Payment Date to
such Existing Holder in accordance with the instructions of such Existing
Holder. Dividends in arrears for any past Dividend Period may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to
the nominee of the Securities Depository. Any dividend payment made on shares
of AMPS first shall be credited against the earliest declared but unpaid
dividends accumulated with respect to such shares.
Holders of shares of AMPS will not be entitled to any dividends,
whether payable in cash, property or stock, in excess of full cumulative
dividends except as described below under "--Additional Dividends" in this
prospectus and under "Description of AMPS--Dividends--Non-Payment Period; Late
Charge" in the statement of additional information. No interest will be
payable in respect of any dividend payment or payments on the shares of AMPS
which may be in arrears.
The amount of cash dividends per share of the AMPS payable (if
declared) on the Initial Dividend Payment Date, and on each Dividend
Payment Date of each 7-Day Dividend Period and each Short Term Dividend
Period, shall be computed by multiplying the Applicable Rate for such Dividend
Period by a fraction, the numerator of which will be the number of days in
such Dividend Period or part thereof that such share was outstanding and for
which dividends are payable on such Dividend Payment Date and the denominator
of which will be 365, multiplying the amount so obtained by $25,000, and
rounding the amount so obtained to the nearest cent. During any Long Term
Dividend Period, the amount of cash dividends per share of AMPS payable (if
declared) on any Dividend Payment Date shall be computed by multiplying the
Applicable Rate for such Dividend Period by a fraction, the numerator of which
will be such number of days in such part of such Dividend Period that such
share was outstanding and for which dividends are payable on such Dividend
Payment Date and the denominator of which will be 360, multiplying the amount
so obtained by $25,000, and rounding the amount so obtained to the nearest
cent.
Notification of Dividend Period. With respect to each Dividend Period
that is a Special Dividend Period, the Fund, at its sole option and to the
extent permitted by law, by telephonic and written notice (a "Request for
Special Dividend Period") to the Auction Agent and to each Broker-Dealer, may
request that the next succeeding Dividend Period for the AMPS will be a number
of days (other than seven), evenly divisible by seven, and not fewer than
seven nor more than 364 in the case of a Short Term Dividend Period or one
whole year or more but not greater than five years in the case of a Long Term
Dividend Period, specified in such notice, provided that the Fund may not give
a Request for Special Dividend Period (and any such request shall be null and
void) unless, for any Auction occurring after the initial Auction, Sufficient
Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends and any amounts due with respect to redemptions, and any
Additional Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more
than seven Business Days prior to an Auction Date for the AMPS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second
Business Day but not more than 28 days prior to an Auction Date for the AMPS.
Upon receiving such Request for Special Dividend Period, the Broker-Dealers
jointly shall determine whether, given the factors set forth below, it is
advisable that the Fund issue a Notice of Special Dividend Period for the AMPS
as contemplated by such Request for Special Dividend Period and the Optional
Redemption Price of the AMPS during such Special Dividend Period and the
Specific Redemption Provisions and shall give the Fund written notice (a
"Response") of such determination by no later than the second Business Day
prior to such Auction Date. In the event the Response indicates that it is
advisable that the Fund give a notice of a Special Dividend Period for the
AMPS, the Fund, by no later than the second Business Day prior to such Auction
Date may give a notice (a "Notice of Special Dividend Period") to the Auction
Agent, the Securities Depository and each Broker-Dealer. See "Description of
AMPS--Dividends--Notification of Dividend Period" in the statement of
additional information for a detailed description of these procedures.
26
Determination of Dividend Rate. The dividend rate on shares of the
AMPS during the period from and including the Date of Original Issue for the
Series F AMPS to but excluding the Initial Dividend Payment Date (the "Initial
Dividend Period") with respect to the Series F AMPS will be the rate per annum
set forth above under "Prospectus Summary--Dividends and Dividend Periods."
Commencing on the Initial Dividend Payment Date for the Series F AMPS, the
Applicable Rate on the Series F AMPS for each Subsequent Dividend Period,
which Subsequent Dividend Period shall be a period commencing on and including
a Dividend Payment Date and ending on and including the calendar day prior to
the next Dividend Payment Date (or calendar day prior to the last Dividend
Payment Date in a Dividend Period if there is more than one Dividend Payment
Date), shall be equal to the rate per annum that results from the Auction with
respect to such Subsequent Dividend Period. The Initial Dividend Period and
Subsequent Dividend Period for the AMPS is referred to herein as a "Dividend
Period." Cash dividends shall be calculated as set forth above under
"Dividends--General."
Restrictions on Dividends and Other Payments. Under the 1940 Act, the
Fund may not declare dividends or make other distributions on shares of common
stock or purchase any such shares if, at the time of the declaration,
distribution or purchase, as applicable (and after giving effect thereto),
asset coverage (as defined in the 1940 Act) with respect to the outstanding
shares of AMPS (and Other AMPS) would be less than 200% (or such other
percentage as in the future may be required by law). The Fund estimates that,
based on the composition of its portfolio at February 29, 2004, asset coverage
with respect to shares of AMPS would be approximately 279% representing
approximately 36% of the Fund's capital and 56% of the Fund's common stock
equity immediately after the issuance of the shares of AMPS offered hereby.
Under the Code, the Fund, among other things, must distribute at least 90% of
its investment company taxable income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The
foregoing limitations on dividends, distributions and purchases under certain
circumstances may impair the Fund's ability to maintain such qualification.
See "Taxes" in the statement of additional information.
Upon any failure to pay dividends on shares of AMPS for two years or
more, the holders of the shares of AMPS will acquire certain additional voting
rights. See "Voting Rights" below. Such rights shall be the exclusive remedy
of the holders of shares of AMPS upon any failure to pay dividends on shares
of the Fund.
Additional Dividends. If the Fund retroactively allocates any net
capital gain or other income subject to regular Federal income taxes to shares
of AMPS without having given advance notice thereof to the Auction Agent as
described under "The Auction--Auction Procedures--Auction Date; Advance Notice
of Allocation of Taxable Income; Inclusion of Taxable Income in Dividends"
below, which may only happen when such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of AMPS or the
liquidation of the Fund (the amount of such allocation referred to herein as a
"Retroactive Taxable Allocation"), the Fund, within 90 days (and generally
within 60 days) after the end of the Fund's fiscal year for which a
Retroactive Taxable Allocation is made, will provide notice thereof to the
Auction Agent and to each holder of shares (initially Cede as nominee of the
Securities Depository) during such fiscal year at such holder's address as the
same appears or last appeared on the stock books of the Fund. The Fund, within
30 days after such notice is given to the Auction Agent, will pay to the
Auction Agent (who then will distribute to such holders of shares of AMPS),
out of funds legally available therefor, an amount equal to the aggregate
Additional Dividend (as defined below) with respect to all Retroactive Taxable
Allocations made to such holders during the fiscal year in question.
An "Additional Dividend" means payment to a present or former holder
of shares of AMPS of an amount which, when taken together with the aggregate
amount of Retroactive Taxable Allocations made to such holder with respect to
the fiscal year in question, would cause such holder's dividends in dollars
(after Federal income tax consequences) from the aggregate of both the
Retroactive Taxable Allocations and the Additional Dividend to be equal to the
dollar amount of the dividends which would have been received by such holder
if the amount of the aggregate Retroactive Taxable Allocations had been
excludable from the gross income of such holder. Such Additional Dividend
shall be calculated (i) without consideration being given to the time value of
money; (ii) assuming that no holder of shares of AMPS is subject to the
Federal alternative minimum tax with respect to dividends received from the
Fund; and (iii) assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of shares of AMPS at the greater of: (a)
the maximum marginal regular Federal individual income tax rate applicable to
ordinary income or capital gains depending on the taxable character of the
distribution (including any surtax); or (b) the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income or capital
gains depending on the taxable character of the distribution (disregarding in
both (a)
27
and (b) the effect of any state or local taxes and the phase out of,
or provision limiting, personal exemptions, itemized deductions, or the
benefit of lower tax brackets). Although the Fund generally intends to
designate any Additional Dividend as an exempt-interest dividend to the extent
permitted by applicable law, it is possible that all or a portion of any
Additional Dividend will be taxable to the recipient thereof. See "Taxes" in
the statement of additional information. The Fund will not pay a further
Additional Dividend with respect to any taxable portion of an Additional
Dividend.
If the Fund does not give advance notice of the amount of taxable
income to be included in a dividend on shares of AMPS in the related Auction,
the Fund may include such taxable income in a dividend on shares of AMPS if it
increases the dividend by an additional amount calculated as if such income
were a Retroactive Taxable Allocation and the additional amount were an
Additional Dividend and notifies the Auction Agent of such inclusion at least
five Business Days prior to the applicable Dividend Payment Date. See "The
Auction--Auction Procedures--Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends" below.
Asset Maintenance
The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities that are
stock, including the shares of AMPS and Other AMPS (or such other asset
coverage as in the future may be specified in or under the 1940 Act as the
minimum asset coverage for senior securities that are stock of a closed-end
investment company as a condition of paying dividends on its common stock)
("1940 Act AMPS Asset Coverage"). If the Fund fails to maintain 1940 Act AMPS
Asset Coverage and such failure is not cured as of the last Business Day of
the following month (the "1940 Act Cure Date"), the Fund will be required
under certain circumstances to redeem certain of the shares of AMPS. See
"Redemption" below.
Based upon the composition of the Fund's portfolio at February 29,
2004, the 1940 Act AMPS Asset Coverage immediately following the issuance of
AMPS offered hereby (after giving effect to the deduction of the underwriting
discount and offering expenses for the shares of AMPS) will be computed as
follows:
Value of Fund assets less
liabilities not constituting
senior securities = $976,751,990 = 279%
-------------------------------- ------------
Senior securities $350,044,840
representing indebtedness
plus liquidation value of the
shares of AMPS
AMPS Basic Maintenance Amount. So long as shares of AMPS are
outstanding, the Fund will be required under the Articles Supplementary to
maintain as of the last Business Day of each week (a "Valuation Date") Moody's
Eligible Assets and S&P Eligible Assets each having in the aggregate a
Discounted Value at least equal to the AMPS Basic Maintenance Amount. The AMPS
Basic Maintenance Amount includes the sum of (i) the aggregate liquidation
value of AMPS and Other AMPS then outstanding and (ii) certain accrued and
projected payment obligations of the Fund. See "Description of AMPS--Asset
Maintenance--AMPS Basic Maintenance Amount" in the statement of additional
information. If the Fund fails to meet such requirement as of any Valuation
Date and such failure is not cured on or before the sixth Business Day after
such Valuation Date (the "AMPS Basic Maintenance Cure Date"), the Fund will be
required under certain circumstances to redeem certain of the shares of AMPS.
Upon any failure to maintain the required Discounted Value, the Fund will use
its best efforts to alter the composition of its portfolio to reattain a
Discounted Value at least equal to the AMPS Basic Maintenance Amount on or
prior to the AMPS Basic Maintenance Cure Date. See "Redemption" herein and in
the statement of additional information.
28
Redemption
Optional Redemption. To the extent permitted under the 1940 Act and
under Maryland law, upon giving a Notice of Redemption, as provided in the
statement of additional information, the Fund, at its option, may redeem
shares of AMPS, in whole or in part, out of funds legally available therefor,
at the Optional Redemption Price per share on any Dividend Payment Date;
provided that no share of AMPS may be redeemed at the option of the Fund
during (a) the Initial Dividend Period with respect to such share or (b) a
Non-Call Period to which such share is subject. "Optional Redemption Price"
means $25,000 per share of AMPS plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for redemption
plus any applicable redemption premium, if any, attributable to the
designation of a Premium Call Period. In addition, holders of AMPS may be
entitled to receive Additional Dividends in the event of redemption of such
AMPS to the extent provided herein. See "Dividends--Additional Dividends." The
Fund has the authority to redeem the AMPS for any reason and may redeem all or
part of the outstanding shares of AMPS if it anticipates that the Fund's
leveraged capital structure will result in a lower rate of return to holders
of common stock for any significant period of time than that obtainable if the
common stock were unleveraged.
Mandatory Redemption. The Fund will be required to redeem, out of
funds legally available therefor, at the Mandatory Redemption Price per share,
shares of AMPS to the extent permitted under the 1940 Act and Maryland law, on
a date fixed by the Board of Directors, if the Fund fails to maintain Moody's
Eligible Assets and S&P Eligible Assets each with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount or to satisfy
the 1940 Act AMPS Asset Coverage and such failure is not cured on or before
the AMPS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. "Mandatory
Redemption Price" means $25,000 per share of AMPS plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the
date fixed for redemption. In addition, holders of AMPS may be entitled to
receive Additional Dividends in the event of redemption of such AMPS to the
extent provided herein. See "Dividends--Additional Dividends."
For a discussion of the allocation procedures to be used if fewer
than all of the outstanding shares of AMPS are to be redeemed and for a
discussion of other redemption procedures, see "Description of
AMPS--Redemption" in the statement of additional information.
Liquidation Rights
Upon any liquidation, dissolution or winding up of the Fund, whether
voluntary or involuntary, the holders of shares of AMPS will be entitled to
receive, out of the assets of the Fund available for distribution to
stockholders, before any distribution or payment is made upon any shares of
common stock or any other capital stock of the Fund ranking junior in right of
payment upon liquidation of AMPS, $25,000 per share together with the amount
of any dividends accumulated but unpaid (whether or not earned or declared)
thereon to the date of distribution, and after such payment the holders of
AMPS will be entitled to no other payments except for Additional Dividends. If
such assets of the Fund shall be insufficient to make the full liquidation
payment on the outstanding shares of AMPS and liquidation payments on any
other outstanding class or series of preferred stock of the Fund ranking on a
parity with the AMPS as to payment upon liquidation, including the Other AMPS,
then such assets will be distributed among the holders of such shares of AMPS
and the holders of shares of such other class or series, including the Other
AMPS, ratably in proportion to the respective preferential amounts to which
they are entitled. After payment of the full amount of liquidation
distribution to which they are entitled, the holders of AMPS will not be
entitled to any further participation in any distribution of assets by the
Fund. A consolidation, merger or share exchange of the Fund with or into any
other entity or entities or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the
assets of the Fund shall not be deemed or construed to be a liquidation,
dissolution or winding up of the Fund.
Voting Rights
Except as otherwise indicated in this prospectus and the statement of
additional information and except as otherwise required by applicable law,
holders of shares of AMPS will be entitled to one vote per share on each
matter submitted to a vote of stockholders of the Fund and will vote together
with holders of shares of Other AMPS and holders of shares of common stock as
a single class.
29
The 1940 Act and the Articles Supplementary require that the holders
of preferred stock, including the AMPS and Other AMPS, voting as a separate
class, have the rights to elect two of the Fund's Directors at all times and
to elect a majority of the Directors at any time that two full years'
dividends on the AMPS (and Other AMPS) are unpaid. The remaining Directors are
elected by holders of shares of common stock, voting as a separate class. The
holders of AMPS (and Other AMPS) will vote as a separate class or classes on
certain other matters as required under the Articles Supplementary, the 1940
Act and Maryland law. In addition, the Series F AMPS (and Other AMPS) may vote
as a separate series under certain circumstances. See "Description of
AMPS--Voting Rights" in the statement of additional information.
THE AUCTION
Certain of the capitalized terms used herein not otherwise defined in
this prospectus have the meaning provided in the Glossary at the back of this
prospectus.
General
Holders of the shares of the Series F AMPS will be entitled to
receive cumulative cash dividends on their shares when, as and if declared by
the Board of Directors of the Fund, out of funds legally available therefor,
on the Initial Dividend Payment Date with respect to the Initial Dividend
Period and, thereafter, on each Dividend Payment Date with respect to a
Subsequent Dividend Period (generally a period of seven days, subject to
certain exceptions set forth under "Description of AMPS--Dividends--General")
at the rate per annum equal to the Applicable Rate for each such Dividend
Period.
The provisions of the Articles Supplementary establishing the terms
of the Series F AMPS offered hereby will provide that the Applicable Rate for
the shares of AMPS for each Dividend Period after the Initial Dividend Period
therefor will be equal to the rate per annum that the Auction Agent advises
has resulted on the Business Day preceding the first day of such Dividend
Period due to implementation of the auction procedures set forth in the
Articles Supplementary (the "Auction Procedures") in which persons determine
to hold or offer to purchase or sell shares of AMPS. The Auction Procedures
are attached as Appendix C to the statement of additional information.
Each periodic operation of such procedures with respect to the shares
of AMPS is referred to hereinafter as an "Auction." If, however, the Fund
should fail to pay or duly provide for the full amount of any dividend on
shares of AMPS or the redemption price of shares of AMPS called for
redemption, the Applicable Rate for shares of AMPS will be determined as set
forth under "Description of AMPS--Dividends--Non-Payment Period; Late Charge"
in the statement of additional information.
Auction Agent Agreement. The Fund has entered into an agreement with
The Bank of New York (together with any successor bank or trust company or
other entity entering into a similar agreement with this Fund, the "Auction
Agent") (the "Auction Agent Agreement"), which provides, among other things,
that the Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate for the AMPS. The Fund will pay the Auction
Agent compensation for its services under the Auction Agent Agreement.
Broker-Dealer Agreements. The Auction Agent has entered into
agreements with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and more than twenty other broker-dealers and may enter into similar
agreements (collectively, the "Broker-Dealer Agreements") with one or more
other broker-dealers (collectively, the "Broker-Dealers") selected by the
Fund, which provide for the participation of such Broker-Dealers in Auctions.
Merrill Lynch is an affiliate of the Investment Adviser in that they share a
common parent, Merrill Lynch & Co., Inc.
Securities Depository. The Depository Trust Company initially will
act as the Securities Depository for the Agent Members with respect to the
shares of Series F AMPS. One or more registered certificates for all of the
shares of the Series F AMPS initially will be registered in the name of Cede,
as nominee of the Securities Depository. The certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of AMPS to which it relates contained in the
Articles Supplementary. Cede initially will be the holder of record of all
shares of AMPS, and Beneficial Owners will not be entitled to receive
certificates representing their
30
ownership interest in such shares. The Securities Depository will maintain
lists of its participants and will maintain the positions (ownership
interests) of shares of AMPS held by each Agent Member, whether as the
Beneficial Owner thereof for its own account or as nominee for the Beneficial
Owner thereof. Payments made by the Fund to holders of AMPS will be duly made
by making payments to the nominee of the Securities Depository.
Auction Procedures
The following is a brief discussion of the procedures to be used in
conducting Auctions. This summary is qualified by reference to the Auction
Procedures set forth in Appendix C to the statement of additional information.
The Settlement Procedures to be used with respect to Auctions are set forth in
Appendix B to the statement of additional information.
Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends. An Auction to determine the
Applicable Rate for the shares of the Series F AMPS offered hereby for each
Dividend Period (other than the Initial Dividend Period therefor) will be held
on the first Business Day (as hereinafter defined) preceding the first day of
such Dividend Period, which first day is also a Dividend Payment Date for the
preceding Dividend Period (the date of each Auction being referred to herein
as an "Auction Date"). "Business Day" means a day on which the New York Stock
Exchange (the "NYSE") is open for trading and which is not a Saturday, Sunday
or other day on which banks in the City of New York are authorized or
obligated by law to close. Auctions for shares of the Series F AMPS for
Dividend Periods after the Initial Dividend Period normally will be held every
Tuesday after the preceding Dividend Payment Date, and each subsequent
Dividend Period normally will begin on the following Wednesday (also a
Dividend Payment Date). The Auction Date and the first day of the related
Dividend Period (both of which must be Business Days) need not be consecutive
calendar days. For example, in most cases, if the Tuesday that normally would
be an Auction Date for the Series F AMPS is not a Business Day, then such
Auction Date will be the preceding Monday and the first day of the related
Dividend Period will continue to be the following Wednesday. See "Description
of AMPS -- Dividends" for information concerning the circumstances under which
a Dividend Payment Date may fall on a date other than the days specified
above, which may affect the Auction Date.
Except as noted below, whenever the Fund intends to include any net
capital gain or other income subject to regular Federal income taxes in any
dividend on shares of AMPS, the Fund will notify the Auction Agent of the
amount to be so included at least five Business Days prior to the Auction Date
on which the Applicable Rate for such dividend is to be established. Whenever
the Auction Agent receives such notice from the Fund, in turn it will notify
each Broker-Dealer, who, on or prior to such Auction Date, in accordance with
its Broker-Dealer Agreement, will notify its customers who are Beneficial
Owners and Potential Beneficial Owners believed to be interested in submitting
an Order in the Auction to be held on such Auction Date. The Fund also may
include such income in a dividend on shares of AMPS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were an Additional Dividend; provided that the Fund will notify the
Auction Agent of the additional amounts to be included in such dividend at
least five Business Days prior to the applicable Dividend Payment Date. See
"Description of AMPS--Dividends--Additional Dividends" above.
Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders. On or prior to each Auction Date:
(a) each Beneficial Owner may submit to its Broker-Dealer
by telephone a:
(i) Hold Order -- indicating the number of
outstanding shares, if any, of AMPS that such Beneficial
Owner desires to continue to hold without regard to the
Applicable Rate for the next Dividend Period for such
shares;
(ii) Bid -- indicating the number of outstanding
shares, if any, of AMPS that such Beneficial Owner desires
to continue to hold, provided that the Applicable Rate for
the next Dividend Period for such shares is not less than
the rate per annum then specified by such Beneficial Owner;
and/or
31
(iii) Sell Order -- indicating the number of
outstanding shares, if any, of AMPS that such Beneficial
Owner offers to sell without regard to the Applicable Rate
for the next Dividend Period for such shares; and
(b) Broker-Dealers will contact customers who are Potential
Beneficial Owners of shares of AMPS to determine whether such
Potential Beneficial Owners desire to submit Bids indicating the
number of shares of AMPS which they offer to purchase provided that
the Applicable Rate for the next Dividend Period for such shares is
not less than the rates per annum specified in such Bids.
The communication by a Beneficial Owner or Potential Beneficial Owner
to a Broker-Dealer and the communication by a Broker-Dealer, whether or not
acting for its own account, to the Auction Agent of the foregoing information
is hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." Any Order submitted
by a Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or
by a Broker-Dealer to the Auction Agent, prior to the Submission Deadline on
any Auction Date shall be irrevocable.
In an Auction, a Beneficial Owner may submit different types of
Orders with respect to shares of AMPS then held by such Beneficial Owner, as
well as Bids for additional shares of AMPS. For information concerning the
priority given to different types of Orders placed by Beneficial Owners, see
"Submission of Orders by Broker-Dealers to Auction Agent" below.
The Maximum Applicable Rate for shares of AMPS will be the higher of
(A) the Applicable Percentage of the Reference Rate or (B) the Applicable
Spread plus the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent.
The Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.
The Maximum Applicable Rate for shares of AMPS will depend on the
credit rating or ratings assigned to such shares. The Applicable Percentage
and the Applicable Spread will be determined based on (i) the lower of the
credit rating or ratings assigned on such date to such shares by Moody's and
S&P (or if Moody's or S&P or both shall not make such rating available, the
equivalent of either or both of such ratings by a Substitute Rating Agency or
two Substitute Rating Agencies or, in the event that only one such rating
shall be available, such rating) and (ii) whether the Fund has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gain or other taxable income
will be included in such dividend on shares of AMPS as follows:
Applicable Applicable Applicable
Percentage Applicable Spread Over Spread Over
Credit Ratings of Reference Percentage Reference Reference
--------------------------------- Rate--No of Reference Rate--No Rate--
Moody's S&P Notification Rate--Notification Notification Notification
----------- ------------- ------------ ------------------ ------------ ------------
Aaa AAA 110% 125% 1.10% 1.25%
Aa3 to Aa1 AA- to AA+ 125% 150% 1.25% 1.50%
A3 to A1 A- to A+ 150% 200% 1.50% 2.00%
Baa3 to Baa1 BBB- to BBB+ 175% 250% 1.75% 2.50%
Below Baa3 Below BBB- 200% 300% 2.00% 3.00%
There is no minimum Applicable Rate in respect of any Dividend Period.
The Applicable Percentage and the Applicable Spread as so determined
may be further subject to upward but not downward adjustment in the discretion
of the Board of Directors of the Fund after consultation with the
Broker-Dealers, provided that immediately following any such increase, the
Fund would be in compliance with the AMPS Basic Maintenance Amount. The Fund
will take all reasonable action necessary to enable either S&P or Moody's, or
both to provide a rating for the AMPS, subject to the Fund's ability to
terminate compliance with the
32
rating agency guidelines as discussed under "Rating Agency Guidelines." If
either S&P or Moody's, or both, shall not make such a rating available, and
subject to the Fund's ability to terminate compliance with the rating agency
guidelines discussed under "Rating Agency Guidelines," Merrill Lynch or its
affiliates and successors, after obtaining the Fund's approval, will select
another NRSRO (a "Substitute Rating Agency") or two other NRSROs ("Substitute
Rating Agencies") to act as a Substitute Rating Agency or Substitute Rating
Agencies, as the case may be.
Any Bid by a Beneficial Owner specifying a rate per annum higher than
the Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. See "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and "Acceptance and
Rejection of Submitted Bids and Submitted Sell Orders and Allocation of
Shares."
Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing.
A Broker-Dealer also may hold AMPS in its own account as a Beneficial
Owner. A Broker-Dealer thus may submit Orders to the Auction Agent as a
Beneficial Owner or a Potential Beneficial Owner and therefore participate in
an Auction as an Existing Holder or Potential Holder on behalf of both itself
and its customers. Any Order placed with the Auction Agent by a Broker-Dealer
as or on behalf of a Beneficial Owner or a Potential Beneficial Owner will be
treated in the same manner as an Order placed with a Broker-Dealer by a
Beneficial Owner or a Potential Beneficial Owner. Similarly, any failure by a
Broker-Dealer to submit to the Auction Agent an Order in respect of any AMPS
held by it or its customers who are Beneficial Owners will be treated in the
same manner as a Beneficial Owner's failure to submit to its Broker-Dealer an
Order in respect of AMPS held by it, as described in the next paragraph.
Inasmuch as a Broker-Dealer participates in an Auction as an Existing Holder
or a Potential Holder only to represent the interests of a Beneficial Owner or
Potential Beneficial Owner, whether it be its customers or itself, all
discussion herein relating to the consequences of an Auction for Existing
Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented thereby. For information concerning the
priority given to different types of Orders placed by Existing Holders, see
"Submission of Orders by Broker-Dealers to Auction Agent." Each purchase or
sale in an Auction will be settled on the Business Day next succeeding the
Auction Date at a price per share equal to $25,000. See "Notification of
Results; Settlement" below.
If one or more Orders covering in the aggregate all of the
outstanding shares of AMPS held by a Beneficial Owner are not submitted to the
Auction Agent prior to the Submission Deadline, either because a Broker-Dealer
failed to contact such Beneficial Owner or otherwise, the Auction Agent shall
deem a Hold Order (in the case of an Auction relating to a Dividend Period
which is not a Special Dividend Period of more than 28 days) and a Sell Order
(in the case of an Auction relating to a Special Dividend Period of more than
28 days) to have been submitted on behalf of such Beneficial Owner covering
the number of outstanding shares of AMPS held by such Beneficial Owner and not
subject to Orders submitted to the Auction Agent.
If all of the outstanding shares of AMPS are subject to Submitted
Hold Orders, the Dividend Period next succeeding the Auction automatically
shall be the same length as the immediately preceding Dividend Period, and the
Applicable Rate for the next Dividend Period for all shares of AMPS will be
60% of the Reference Rate on the date of the applicable Auction (or 90% of
such rate if the Fund has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend that net capital
gain or other taxable income will be included in such dividend on shares of
AMPS).
For the purposes of an Auction, shares of AMPS for which the Fund
shall have given notice of redemption and deposited moneys therefor with the
Auction Agent in trust or segregated in an account at the Fund's custodian
bank for the benefit of holders of AMPS to be redeemed and for
payment to the Auction Agent, as set forth under "Description of AMPS --
Redemption" in the statement of additional information, will not be considered
as outstanding and will not be included in such Auction. Pursuant to the
Articles Supplementary of the Fund, the Fund will be prohibited from reissuing
and its affiliates (other than Merrill Lynch) will be prohibited from
transferring (other than to the Fund) any shares of AMPS they may acquire.
Neither the Fund nor any affiliate of the Fund may submit an Order in any
Auction, except that an affiliate of the Fund that is a Broker-Dealer (i.e.,
Merrill Lynch) may submit an Order.
33
Submission of Orders by Broker-Dealers to Auction Agent. Prior to
1:00 p.m., Eastern time, on each Auction Date, or such other time on the
Auction Date as may be specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing or
through a mutually acceptable electronic means all Orders obtained by it for
the Auction to be conducted on such Auction Date, designating itself (unless
otherwise permitted by the Fund) as the Existing Holder or Potential Holder in
respect of the shares of AMPS subject to such Orders. Any Order submitted by a
Beneficial Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.
If the rate per annum specified in any Bid contains more than three
figures to the right of the decimal point, the Auction Agent will round such
rate per annum up to the next highest one-thousandth (.001) of 1%.
If one or more Orders of an Existing Holder are submitted to the
Auction Agent and such Orders cover in the aggregate more than the number of
outstanding shares of AMPS held by such Existing Holder, such Orders will be
considered valid in the following order of priority:
(a) any Hold Order will be considered valid up to and
including the number of outstanding shares of AMPS held by such
Existing Holder, provided that if more than one Hold Order is
submitted by such Existing Holder and the number of shares of AMPS
subject to such Hold Orders exceeds the number of outstanding shares
of AMPS held by such Existing Holder, the number of shares of AMPS
subject to each of such Hold Orders will be reduced pro rata so that
such Hold Orders, in the aggregate, will cover exactly the number of
outstanding shares of AMPS held by such Existing Holder;
(b) any Bids will be considered valid, in the ascending
order of their respective rates per annum if more than one Bid is
submitted by such Existing Holder, up to and including the excess of
the number of outstanding shares of AMPS held by such Existing Holder
over the number of outstanding shares of AMPS subject to any Hold
Order referred to in clause (a) above (and if more than one Bid
submitted by such Existing Holder specifies the same rate per annum
and together they cover more than the remaining number of shares that
can be the subject of valid Bids after application of clause (a)
above and of the foregoing portion of this clause (b) to any Bid or
Bids specifying a lower rate or rates per annum, the number of shares
subject to each of such Bids will be reduced pro rata so that such
Bids, in the aggregate, cover exactly such remaining number of
outstanding shares); and the number of outstanding shares, if any,
subject to Bids not valid under this clause (b) shall be treated as
the subject of a Bid by a Potential Holder; and
(c) any Sell Order will be considered valid up to and
including the excess of the number of outstanding shares of AMPS held
by such Existing Holder over the sum of the number of shares of AMPS
subject to Hold Orders referred to in clause (a) above and the number
of shares of AMPS subject to valid Bids by such Existing Holder
referred to in clause (b) above; provided that, if more than one Sell
Order is submitted by any Existing Holder and the number of shares of
AMPS subject to such Sell Orders is greater than such excess, the
number of shares of AMPS subject to each of such Sell Orders will be
reduced pro rata so that such Sell Orders, in the aggregate, will
cover exactly the number of shares of AMPS equal to such excess.
If more than one Bid of any Potential Holder is submitted in any
Auction, each Bid submitted in such Auction will be considered a separate Bid
with the rate per annum and number of shares of AMPS therein specified.
Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate. Not earlier than the Submission Deadline for each Auction,
the Auction Agent will assemble all Orders submitted or deemed submitted to it
by the Broker-Dealers (each such "Hold Order," "Bid" or "Sell Order" as
submitted or deemed submitted by a Broker-Dealer hereinafter being referred to
as a "Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as
the case may be, or as a "Submitted Order") and will determine the excess of
the number of outstanding shares of AMPS over the number of outstanding shares
of AMPS subject to Submitted Hold Orders (such excess being referred to as the
"Available AMPS") and whether Sufficient Clearing Bids have been made in such
Auction. Sufficient Clearing Bids will have been made if the number of
outstanding shares of AMPS that are the subject of Submitted Bids of Potential
Holders with rates per annum not higher than the Maximum Applicable Rate
equals or
34
exceeds the number of outstanding shares that are the subject of Submitted
Sell Orders (including the number of shares subject to Bids of Existing
Holders specifying rates per annum higher than the Maximum Applicable Rate).
If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate per annum specified in the Submitted Bids (the
"Winning Bid Rate") which would result in the number of shares subject to
Submitted Bids specifying such rate per annum or a lower rate per annum being
at least equal to the Available AMPS. If Sufficient Clearing Bids have been
made, the Winning Bid Rate will be the Applicable Rate for the next Dividend
Period for all shares of AMPS then outstanding.
If Sufficient Clearing Bids have not been made (other than because
all outstanding shares of AMPS are the subject of Submitted Hold Orders), the
Dividend Period next following the Auction automatically will be a 7-Day
Dividend Period in the case of the Series F AMPS, and the Applicable Rate for
such Dividend Period will be equal to the Maximum Applicable Rate.
If Sufficient Clearing Bids have not been made, Beneficial Owners
that have Submitted Sell Orders will not be able to sell in the Auction all,
and may not be able to sell any, shares of AMPS subject to such Submitted Sell
Orders. See "Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares." Thus, under some circumstances, Beneficial
Owners may not have liquidity of investment.
Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Based on the determinations described under
"Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable
Rate" and subject to the discretion of the Auction Agent to round as described
below, Submitted Bids and Submitted Sell Orders will be accepted or rejected
in the order of priority set forth in the Auction Procedures with the result
that Existing Holders and Potential Holders of AMPS will sell, continue to
hold and/or purchase shares of AMPS as set forth below. Existing Holders that
submit or are deemed to have submitted Hold Orders will continue to hold the
shares of AMPS subject to such Hold Orders.
If Sufficient Clearing Bids have been made:
(a) each Existing Holder that placed a Submitted Bid
specifying a rate per annum higher than the Winning Bid Rate or a
Submitted Sell Order will sell the outstanding shares of AMPS subject
to such Submitted Bid or Submitted Sell Order;
(b) each Existing Holder that placed a Submitted Bid
specifying a rate per annum lower than the Winning Bid Rate will
continue to hold the outstanding shares of AMPS subject to such
Submitted Bid;
(c) each Potential Holder that placed a Submitted Bid
specifying a rate per annum lower than the Winning Bid Rate will
purchase the number of shares of AMPS subject to such Submitted Bid;
(d) each Existing Holder that placed a Submitted Bid
specifying a rate per annum equal to the Winning Bid Rate will
continue to hold the outstanding shares of AMPS subject to such
Submitted Bids, unless the number of outstanding shares of AMPS
subject to all such Submitted Bids of Existing Holders is greater
than the excess of the Available AMPS over the number of shares of
AMPS accounted for in clauses (b) and (c) above, in which event each
Existing Holder with such a Submitted Bid will sell a number of
outstanding shares of AMPS determined on a pro rata basis based on
the number of outstanding shares of AMPS subject to all such
Submitted Bids of such Existing Holders; and
(e) each Potential Holder that placed a Submitted Bid
specifying a rate per annum equal to the Winning Bid Rate will
purchase any Available AMPS not accounted for in clause (b), (c) or
(d) above on a pro rata basis based on the shares of AMPS subject to
all such Submitted Bids of Potential Holders.
If Sufficient Clearing Bids have not been made (other than because
all outstanding shares of AMPS are the subject of Submitted Hold Orders):
35
(a) each Existing Holder that placed a Submitted Bid
specifying a rate per annum equal to or lower than the Maximum
Applicable Rate will continue to hold the outstanding shares of AMPS
subject to such Submitted Bid;
(b) each Potential Holder that placed a Submitted Bid
specifying a rate per annum equal to or lower than the Maximum
Applicable Rate will purchase the number of shares of AMPS subject to
such Submitted Bid; and
(c) each Existing Holder that placed a Submitted Bid
specifying a rate per annum higher than the Maximum Applicable Rate
or a Submitted Sell Order will sell a number of outstanding shares of
AMPS determined on a pro rata basis based on the outstanding shares
of AMPS subject to all such Submitted Bids and Submitted Sell Orders.
If as a result of the Auction Procedures described above any Existing
Holder would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of a share of AMPS, the Auction
Agent, in such manner as, in its sole discretion, it shall determine, will
round up or down the number of shares of AMPS being sold or purchased on such
Auction Date so that each share sold or purchased by each Existing Holder or
Potential Holder will be a whole share of AMPS. If any Potential Holder would
be entitled or required to purchase less than a whole share of AMPS, the
Auction Agent, in such manner as, in its sole discretion, it shall determine,
will allocate shares of AMPS for purchase among Potential Holders so that only
whole shares of AMPS are purchased by any such Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS.
Notification of Results; Settlement. The Auction Agent will advise
each Broker-Dealer who submitted a Bid or Sell Order in an Auction whether
such Bid or Sell Order was accepted or rejected in whole or in part and of the
Applicable Rate for the next Dividend Period for the related shares of AMPS by
telephone at approximately 3:00 P.M., Eastern time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order
was accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling shares of AMPS as a result of the Auction and will
advise each customer purchasing or selling shares of AMPS to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery of such shares or to deliver such shares against payment
therefor as appropriate. If a customer selling shares of AMPS as a result of
an Auction shall fail to instruct its Agent Member to deliver such shares, the
Broker-Dealer that submitted such customer's Bid or Sell Order will instruct
such Agent Member to deliver such shares against payment therefor. Each
Broker-Dealer that submitted a Hold Order in an Auction on behalf of a
customer also will advise such customer of the Applicable Rate for the next
Dividend Period for the AMPS. The Auction Agent will record each transfer of
shares of AMPS on the record book of Existing Holders to be maintained by the
Auction Agent. In accordance with the Securities Depository's normal
procedures, on the day after each Auction Date, the transactions described
above will be executed through the Securities Depository, and the accounts of
the respective Agent Members at the Securities Depository will be debited and
credited as necessary to effect the purchases and sales of shares of AMPS as
determined in such Auction. Purchasers will make payment through their Agent
Members in same-day funds to the Securities Depository against delivery
through their Agent Members; the Securities Depository will make payment in
accordance with its normal procedures, which now provide for payment in
same-day funds. If the procedures of the Securities Depository applicable to
AMPS shall be changed to provide for payment in next-day funds, then
purchasers may be required to make payment in next day funds. If any Existing
Holder selling shares of AMPS in an Auction fails to deliver such shares, the
Broker-Dealer of any person that was to have purchased shares of AMPS in such
Auction may deliver to such person a number of whole shares of AMPS that is
less than the number of shares that otherwise was to be purchased by such
person. In such event, the number of shares of AMPS to be so delivered will be
determined by such Broker-Dealer. Delivery of such lesser number of shares
will constitute good delivery. Each Broker-Dealer Agreement also will provide
that neither the Fund nor the Auction Agent will have responsibility or
liability with respect to the failure of a Potential Beneficial Owner,
Beneficial Owner or their respective Agent Members to deliver shares of AMPS
or to pay for shares of AMPS purchased or sold pursuant to an Auction or
otherwise.
36
Broker-Dealers
General. The Broker-Dealer Agreements provide that a Broker-Dealer
may submit Orders in Auctions for its own account, unless the Fund notifies
all Broker-Dealers that they no longer may do so; provided that Broker-Dealers
may continue to submit Hold Orders and Sell Orders. If a Broker-Dealer submits
an Order for its own account in any Auction of the AMPS, it may have knowledge
of Orders placed through it in that Auction and therefore have an advantage
over other Bidders, but such Broker-Dealer would not have knowledge of Orders
submitted by other Broker-Dealers in that Auction.
Merrill Lynch has advised the Fund that they and certain
Broker-Dealers and other participants in the auction rate securities markets,
including both taxable and tax exempt markets, have received a letter from the
Commission requesting that each of them voluntarily conduct an investigation
regarding their respective practices and procedures in those markets. Merrill
Lynch is cooperating fully with the Commission in this process. No assurance
can be given as to whether the results of this process will affect the market
for the AMPS or the Auctions.
Fees. The Auction Agent after each Auction will pay a service charge
from funds provided by the Fund to each Broker-Dealer on the basis of the
purchase price of shares of AMPS placed by such Broker-Dealer at such Auction.
The service charge (i) for any 7-Day Dividend Period shall be payable at the
annual rate of 0.25% of the purchase price of the shares of AMPS placed by
such Broker-Dealer in any such Auction and (ii) for any Special Dividend
Period shall be determined by mutual consent of the Fund and any such
Broker-Dealer or Broker-Dealers and shall be based upon a selling concession
that would be applicable to an underwriting of fixed or variable rate
preferred shares with a similar final maturity or variable rate dividend
period, respectively, at the commencement of the Dividend Period with respect
to such Auction. For the purposes of the preceding sentence, shares of AMPS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by
such Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold
such shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.
Secondary Trading Market. The Broker-Dealers intend to maintain a
secondary trading market in the AMPS outside of Auctions; however, they have
no obligation to do so and there can be no assurance that a secondary market
for the AMPS will develop or, if it does develop, that it will provide holders
with a liquid trading market (i.e., trading will depend on the presence of
willing buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The AMPS will not
be registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long Term
Dividend Period, likely will have an adverse effect on the secondary market
price of the AMPS, and a selling stockholder may sell AMPS between Auctions at
a price per share of less than $25,000.
RATING AGENCY GUIDELINES
Certain of the capitalized terms used herein not otherwise defined in
this prospectus have the meaning provided in the Glossary at the back of this
prospectus.
The Fund currently intends that, so long as shares of AMPS are
outstanding and the AMPS are rated by Moody's and S&P, the composition of its
portfolio will reflect guidelines established by Moody's and S&P in connection
with the Fund's receipt of a rating for such shares on or prior to their Date
of Original Issue of at least Aaa from Moody's and AAA from S&P. Moody's and
S&P, which are NRSROs, issue ratings for various securities reflecting the
perceived creditworthiness of such securities. The Board of Directors of the
Fund, however, may determine that it is not in the best interest of the Fund
to continue to comply with the guidelines of Moody's or S&P (described below).
If the Fund voluntarily terminates compliance with Moody's or S&P guidelines,
the Fund will no longer be required to maintain a Moody's Discounted Value or
a S&P Discounted Value, as applicable, at least equal to the AMPS Basic
Maintenance Amount. If the Fund voluntarily terminates compliance with Moody's
or S&P guidelines, or both, at the time of termination, it must continue to be
rated by at least one NRSRO.
The guidelines described below have been developed by Moody's and S&P
in connection with issuances of asset-backed and similar securities, including
debt obligations and variable rate preferred stock, generally on a
case-by-case basis through discussions with the issuers of these securities.
The guidelines are designed to ensure that assets underlying outstanding debt
or preferred stock will be varied sufficiently and will be of sufficient
quality and amount to justify investment-grade ratings. The guidelines do not
have the force of law but have been adopted by the Fund in order to satisfy
current requirements necessary for Moody's and S&P to issue the
above-described ratings for shares of AMPS, which ratings generally are relied
upon by institutional investors in purchasing such
37
securities. The guidelines provide a set of tests for portfolio composition
and asset coverage that supplement (and in some cases are more restrictive
than) the applicable requirements under the 1940 Act. See "Description of AMPS
-- Asset Maintenance" herein and in the statement of additional information.
The Fund intends to maintain a Discounted Value for its portfolio at
least equal to the AMPS Basic Maintenance Amount. Moody's and S&P each has
established separate guidelines for determining Discounted Value. To the
extent any particular portfolio holding does not satisfy the applicable rating
agency'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 and S&P guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
Upon any failure to maintain the required Discounted Value, the Fund
will seek to alter the composition of its portfolio to reattain a Discounted
Value at least equal to the AMPS Basic Maintenance Amount on or prior to the
AMPS Basic Maintenance Cure Date, thereby incurring additional transaction
costs and possible losses and/or gains on dispositions of portfolio
securities. To the extent any such failure is not cured in a timely manner,
shares of AMPS will be subject to redemption. See "Description of AMPS --
Asset Maintenance" and "Description of AMPS -- Redemption" herein and in the
statement of additional information.
The Fund may, but is not required to, adopt any modifications to
these guidelines that hereafter may be established by Moody's or S&P. Failure
to adopt any such modifications, however, may result in a change in the
ratings described above or a withdrawal of ratings altogether. In addition,
any rating agency providing a rating for the shares of AMPS, at any time, may
change or withdraw any such rating. As set forth in the Articles
Supplementary, the Board of Directors, without stockholder approval, may
modify certain definitions or restrictions that have been adopted by the Fund
pursuant to the rating agency guidelines, provided the Board of Directors has
obtained written confirmation from Moody's and S&P that any such change would
not impair the ratings then assigned by Moody's and S&P to the AMPS.
As described by Moody's and S&P, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on the AMPS are not recommendations to purchase, hold
or sell shares of AMPS, inasmuch as the ratings do not comment as to market
price or suitability for a particular investor, nor do the rating agency
guidelines described above address the likelihood that a holder of shares of
AMPS will be able to sell such shares in an Auction. The ratings are based on
current information furnished to Moody's and S&P by the Fund and the
Investment 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 stock has not been rated by a
nationally recognized statistical rating organization.
For additional information concerning the Moody's and S&P ratings
guidelines, see "Rating Agency Guidelines" in the statement of additional
information.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by Merrill
Lynch & Co. Inc. ("ML & Co."), a financial services holding company and the
parent of Merrill Lynch, provides the Fund with investment advisory and
administrative services. The Investment Adviser acts as the investment adviser
to more than 100 registered investment companies and offers investment
advisory services to individuals and institutional accounts. As of May 2004,
the Investment Adviser and its affiliates, including Merrill Lynch Investment
Managers, L.P. ("MLIM"), had a total of approximately $491 billion in
investment company and other portfolio assets under management, including
approximately $253 billion in fixed income assets. This amount includes assets
managed by certain affiliates of the Investment Adviser. The Investment
Adviser is a limited partnership, the partners of which are ML & Co. and
Princeton Services. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the
direction of the Fund's Board of Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
38
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of
Directors.
The portfolio manager primarily responsible for the Fund's day-to-day
management is Fred K. Steube. Fred K. Steube has been a Director (Municipal
Tax-Exempt Fund Management) of MLIM since 2000 and has 24 years of experience
investing in Municipal Bonds. The Fund's portfolio manager will consider
analyses from various sources, make the necessary investment decisions, and
place orders for transactions accordingly.
For its services, the Fund pays the Investment Adviser a monthly fee
at the annual rate of 0.50% of the Fund's average weekly net assets ("average
weekly net assets" means the average weekly value of the total assets of the
Fund, including the proceeds from the issuance of preferred stock, minus the
sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid
interest on outstanding borrowings and (iii) accumulated dividends on shares
of preferred stock). For purposes of this calculation, average weekly net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last business day of
a week with the net assets at the last business day of the prior week. The
liquidation preference of any outstanding preferred stock (other than
accumulated dividends) is not considered a liability in determining the Fund's
average daily net assets.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, Commission fees, fees and expenses of
non-interested Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.
TAXES
To the extent derived from Municipal Bond interest income, dividends
on the AMPS will be excludable from gross income for Federal income tax
purposes in the hands of holders of such AMPS, subject to the possible
application of the Federal alternative minimum tax and any state or local
income taxes. Interest income from other investments may produce taxable
dividends. The Fund is required to allocate net capital gain and other taxable
income, if any, proportionately among the common stock and the AMPS and Other
AMPS in accordance with the current position of the IRS described under the
heading "Taxes" in the statement of additional information. The Fund may
notify the Auction Agent of the amount of any net capital gain or other
anticipated taxable income to be included in any dividend on the AMPS prior to
the Auction establishing the Applicable Dividend Rate for such dividend. The
Auction Agent will in turn notify holders of the AMPS and prospective
purchasers. The Fund also may include such income in a dividend on shares of
AMPS without giving advance notice thereof if it increases the dividend by an
additional amount calculated as if such income were a Retroactive Taxable
Allocation and the additional amount were an Additional Dividend. See "The
Auction -- Auction Procedures -- Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends." The amount of
taxable income allocable to the AMPS will depend upon the amount of such
income realized by the Fund and cannot be determined with certainty prior to
the end of the Fund's fiscal year, but it is not generally expected to be
significant.
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS - Dividends - Additional
Dividends." The Federal income tax consequences of Additional Dividends under
existing law are uncertain. The
39
Fund intends to treat a holder as receiving a dividend distribution in the
amount of any Additional Dividend only as and when such Additional Dividend is
paid. An Additional Dividend generally will be designated by the Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Dividend is a
taxable dividend either in the taxable year for which the Retroactive Taxable
Allocation is made or in the taxable year in which the Additional Dividend is
paid.
Generally within 60 days after the end of the Fund's taxable year,
the Fund will tell you the amount of exempt-interest dividends and capital
gain dividends you received during that year. Capital gain dividends are
taxable as long-term capital gains to you regardless of how long you have held
your shares.
The Fund will only purchase a Municipal Bond or Non-Municipal Tax
Exempt Security if it is accompanied by an opinion of counsel to the issuer,
which is delivered on the date of issuance of the security, that the interest
paid on such security is excludable from gross income for Federal income tax
purposes (i.e., "tax exempt"). To the extent that the dividends distributed by
the Fund are from interest income that is excludable from gross income for
Federal income tax purposes, they are exempt from Federal income tax. There is
a possibility that events occurring after the date of issuance of a security,
or after a Fund's acquisition of a security, may result in a determination
that the interest on that security is, in fact, includable in gross income for
Federal income tax purposes retroactively to its date of issue. Such a
determination may cause a portion of prior distributions received by
stockholders, including holders of AMPS, to be taxable to those stockholders
in the year of receipt. The Fund will not pay an Additional Dividend to a
holder of AMPS under these circumstances.
Because the Fund may from time to time invest a substantial portion
of its portfolio in Municipal Bonds bearing income which could increase an
AMPS holder's tax liability under the Federal alternative minimum tax, the
Fund would not ordinarily be a suitable investment for investors who are
subject to the alternative minimum tax.
If at any time when AMPS are outstanding the Fund does not meet the
asset coverage requirements of the 1940 Act, the Fund will be required to
suspend distributions to holders of common stock until the asset coverage is
restored. See "Description of AMPS -- Dividends -- Restrictions on Dividends
and Other Payments" herein and in the statement of additional information.
This may prevent the Fund from meeting certain distribution requirements for
qualification as a RIC. Upon any failure to meet the asset coverage
requirements of the 1940 Act, the Fund, in its sole discretion, may, and under
certain circumstances will be required to, redeem AMPS in order to maintain or
restore the requisite asset coverage and avoid the adverse consequences to the
Fund and its stockholders of failing to qualify as a RIC. See "Description of
AMPS -- Redemption" herein and in the statement of additional information.
There can be no assurance, however, that any such action would achieve such
objectives.
By law, your dividends and redemption proceeds will be subject to a
withholding tax if you have not provided a tax identification number or social
security number or if the number you have provided is incorrect.
This section summarizes some of the consequences of an investment in
the Fund under current Federal income tax laws. It is not a substitute for
personal tax advice. Stockholders are urged to consult their tax advisers
regarding the applicability of any state or local taxes and with specific
questions regarding Federal taxes.
DESCRIPTION OF CAPITAL STOCK
The Fund is authorized to issue 160,000,000 shares of capital stock,
divided into two classes, of 150,000,000 shares of common stock, par value
$.10 per share, and of 10,000,000 shares of preferred stock. Subject to the
Fund's Charter, the Board of Directors is authorized to issue one or more
series of preferred stock, and to fix the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications or terms or conditions of redemption of such series of stock
and to increase or decrease the number of authorized shares of any existing
series. See "Description of AMPS" herein and in the statement of additional
information.
The following table shows the amount of (i) capital stock authorized,
(ii) capital stock held by the Fund for its own account and (iii) capital
stock outstanding for each class of authorized securities of the Fund as of
July 7, 2004.
40
Amount
Outstanding
(Exclusive Of
Amount Held Amount Held
By Fund For By Fund For
Amount Its Own Its Own
Title of Class Authorized Account) Account)
Common Stock..................... 150,000,000 - 0 - 61,346,288
Preferred Stock.................. 10,000,000 -0- 11,000
Series A AMPS................. 2,000 - 0 - 2,000
Series B AMPS................. 2,000 - 0 - 2,000
Series C AMPS................. 2,000 - 0 - 2,000
Series D AMPS................. 2,000 - 0 - 2,000
Series E AMPS................. 3,000 - 0 - 3,000
The Fund will send unaudited reports at least semi-annually and
audited annual financial statements to all of its stockholders.
Common Stock
Holders of common stock are entitled to share equally in dividends
declared by the Board of Directors payable to holders of common stock and in
the net assets of the Fund available for distribution to holders of common
stock after payment of the preferential amounts payable to holders of any
outstanding preferred stock. Neither holders of common stock nor holders of
preferred stock have pre-emptive or conversion rights and shares of common
stock are not redeemable. The outstanding shares of common stock are fully
paid and non-assessable.
Holders of common stock are entitled to one vote for each share held
and will vote with the holders of any outstanding shares of AMPS or other
preferred stock, including the Other AMPS, on each matter submitted to a vote
of holders of common stock, except as described under "Description of AMPS --
Voting Rights" herein and in the statement of additional information.
The shares of common stock do not have cumulative voting rights,
which means that the holders of more than 50% of the shares of common stock
voting for the election of Directors can elect all of the Directors standing
for election by holders of common stock, and in such event, the holders of
the remaining shares of common stock will not be able to elect any of such
Directors.
So long as any shares of the Fund's preferred stock are outstanding,
including the AMPS and Other AMPS, holders of common stock will not be
entitled to receive any net income of or other distributions from the Fund
unless all accumulated dividends on preferred stock have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to preferred stock
would be at least 200% after giving effect to such distributions. See
"Description of AMPS -- Dividends -- Restrictions on Dividends and Other
Payments" herein and in the statement of additional information."
Preferred Stock
The Fund has issued the issued an aggregate of 11,000 shares of
Other AMPS. Under the Articles Supplementary for the AMPS, the Fund is
authorized to issue an aggregate of 3,000 shares of AMPS. The terms of the
shares of Other AMPS are substantially the same as the terms of the shares of
AMPS. See "Description of AMPS." Under the 1940 Act, the Fund is permitted to
have outstanding more than one series of preferred stock as long as no single
series has priority over another series as to the distribution of assets of
the Fund or the payment of dividends. Neither holders of common stock nor
holders of preferred stock have pre-emptive rights to purchase any shares of
AMPS, Other AMPS or any other preferred stock that might be issued. It is
anticipated that the net asset value per share of the AMPS will equal its
original purchase price per share plus accumulated dividends per share.
The shares of AMPS, Other AMPS and any other preferred stock do not
have cumulative voting rights, which means that the holders of more than 50%
of the shares of preferred stock, including AMPS and Other AMPS,
41
voting for the election of Directors can elect all of the Directors standing
for election by holders of preferred stock, and in such event, the holders of
the remaining shares of preferred stock will not be able to elect any of such
Directors.
Certain Provisions of the Charter and By-laws
The Fund's Charter includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have the
effect of depriving common stockholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by the holders of
common stock or by the holders of preferred stock may be removed from office
only for cause by vote of the holders of at least 75% of the outstanding
shares of common stock or preferred stock, as the case may be, entitled to
vote in an election to fill that directorship.
In addition, the Charter requires the favorable vote of the holders
of at least 75% of the Fund's outstanding shares of common stock, voting
separately by class, and the favorable vote of the holders of at least 75% of
the Fund's outstanding shares of preferred stock, voting separately by class,
to approve, adopt or authorize the following:
o a merger or consolidation or statutory share exchange of the
Fund with any other corporation;
o a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's investment
activities); or
o a liquidation or dissolution of the Fund;
unless such action has been previously approved, adopted or authorized by the
affirmative vote of at least two-thirds of the total number of Directors fixed
in accordance with the By-laws, in which case the affirmative vote of a
majority of the Fund's shares of common stock and preferred stock (including
the AMPS and Other AMPS), voting separately by class, is required.
In addition, conversion of the Fund to an open-end investment company
would require an amendment to the Fund's Charter. The amendment would have to
be declared advisable by the Board of Directors prior to its submission to
stockholders. Such an amendment would require the favorable vote of the
holders of at least 75% of the Fund's outstanding shares of common stock and
preferred stock (including the AMPS, Other AMPS) entitled to be voted on the
matter, voting separately by class (or a majority of shares of each such class
if the amendment was previously approved, adopted or authorized by two-thirds
of the total number of Directors fixed in accordance with the By-laws). Such a
vote also would satisfy a separate requirement in the 1940 Act that the change
be approved by the stockholders. Stockholders of an open-end investment
company may require the company to redeem their shares of common stock at any
time (except in certain circumstances as authorized by or under the 1940 Act)
at their net asset value, less such redemption charge, if any, as might be in
effect at the time of a redemption. If the Fund is converted to an open-end
investment company, it could be required to liquidate portfolio securities to
meet requests for redemption, and the common stock would no longer be listed
on a stock exchange. Conversion to an open-end investment company would also
require redemption of all outstanding shares of preferred stock (including the
AMPS and Other AMPS) and would require changes in certain of the Fund's
investment policies and restrictions, such as those relating to the issuance
of senior securities, the borrowing of money and the purchase of illiquid
securities.
The Charter and By-laws provide that a majority of the entire Board
of Directors has the power to make, alter or repeal any of the By-laws (except
for any By-law specified not to be amended or repealed by the Board), subject
to the requirements of the 1940 Act. Neither this provision of the Charter,
nor any of the foregoing provisions of the Charter requiring the affirmative
vote of 75% of shares of common stock and preferred stock of the Fund, voting
separately by class, can be amended or repealed except by the vote of such
required number of shares.
42
The Board of Directors has determined that the 75% voting
requirements described above, which are greater than the minimum requirements
under Maryland law or the 1940 Act, are in the best interests of stockholders
generally. Reference should be made to the Charter on file with the Commission
for the full text of these provisions.
CUSTODIAN
The Fund's securities and cash are held under a custodian agreement
with The Bank of New York, 101 Barclay Street, New York, New York 10286.
43
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Underwriter") has agreed, subject to the terms and conditions contained in a
purchase agreement with the Fund and the Investment Adviser, to purchase from
the Fund all of the shares of AMPS offered hereby. The Underwriter has agreed
to purchase all such shares if any are purchased.
The Fund and the Investment Adviser have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriter may be required to make in respect of those liabilities.
The Underwriter is offering the shares, subject to prior sale, when,
as and if issued to and accepted by them, subject to approval of legal matters
by its counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the Underwriter of
officer's certificates and legal opinions. The Underwriter reserves the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
Commissions and Discounts
The Underwriter has advised the Fund that it proposes initially to
offer the shares of AMPS to the public at the initial public offering price on
the cover page of this prospectus and to dealers at that price less a
concession not in excess of $137.50 per share. There is a sales charge or
underwriting discount of $250 per share, which is equal to 1% of the initial
public offering price per share. After the initial public offering, the public
offering price and concession may be changed. Investors must pay for any AMPS
purchased in the offering on or before , 2004.
The expenses of the offering, excluding underwriting discount, are
estimated at $165,000 and are payable by the Fund.
Other Relationships
Merrill Lynch acts in Auctions as a Broker-Dealer as set forth under
"The Auction -- General -- Broker-Dealer Agreements" and will be entitled to
fees for services as a Broker-Dealer as set forth under "The Auction --
Broker-Dealers." Merrill Lynch also may provide information to be used in
ascertaining the Reference Rate.
The Fund also anticipates that Merrill Lynch may from time to time
act as a broker in connection with the execution of its portfolio
transactions. See "Portfolio Transactions" in the statement of additional
information. Merrill Lynch is an affiliate of the Investment Adviser. See
"Investment Restrictions" and "Portfolio Transactions" in the statement of
additional information.
The address of the Underwriter is 4 World Financial Center, New York,
New York 10080.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND REGISTRAR
The transfer agent, dividend disbursing agent and registrar for the
Fund's shares of AMPS, Other AMPS and common stock is The Bank of New York,
101 Barclay Street, New York, New York 10286.
ACCOUNTING SERVICES PROVIDER
State Street Bank and Trust Company, 500 College Road East,
Princeton, New Jersey 08540, provides certain accounting services for the
Fund.
44
LEGAL OPINIONS
Certain legal matters in connection with the AMPS offered hereby are
passed on for the Fund and the Underwriter by Sidley Austin Brown & Wood LLP,
New York, New York 10019.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND EXPERTS
____________________ is the Fund's independent registered public
accounting firm. The audited financial statements of the Fund and certain of
the information appearing under the caption "Financial Highlights" included in
this prospectus have been audited by for the periods indicated in its report
with respect thereto, and are included in reliance upon such report and upon
the authority of such firm as experts in accounting and auditing. has an
office at .
ADDITIONAL INFORMATION
The Fund is subject to the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act and in accordance therewith
is required to file reports, proxy statements and other information with the
Commission. Any such reports and other information, including the Fund's Code
of Ethics, can be inspected and copied at the public reference facilities of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of such public reference
facilities may be obtained by calling the Commission at 1-202-942-8090. Copies
of such materials can be obtained from the public reference section of the
Commission by writing at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates, or by electronic request at publicinfo@sec.gov. The
Commission maintains a Web site at http://www.sec.gov containing reports and
information statements and other information regarding registrants, including
the Fund, that file electronically with the Commission. Reports, proxy
statements and other information concerning the Fund can also be inspected at
the offices of the New York Stock Exchange.
Additional information regarding the Fund is contained in the
Registration Statement on Form N-2, including amendments, exhibits and
schedules thereto, relating to such shares filed by the Fund with the
Commission in Washington, D.C. This prospectus does not contain all of the
information set forth in the Registration Statement, including any amendments,
exhibits and schedules thereto. For further information with respect to the
Fund and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement may be inspected without charge at the 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.
45
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
Investment Objective and Policies...........................................3
Investment Restrictions.....................................................3
Description of AMPS.........................................................5
The Auction................................................................12
Rating Agency Guidelines...................................................13
Directors and Officers.....................................................20
Investment Advisory and Management Arrangements............................25
Portfolio Transactions.....................................................30
Taxes......................................................................32
Net Asset Value............................................................36
Financial Statements.......................................................37
APPENDIX A Description of Municipal Bond Ratings.........................A-1
APPENDIX B Settlement Procedures.........................................B-1
APPENDIX C Auction Procedures............................................C-1
46
GLOSSARY
"Additional Dividend" has the meaning set forth on page [26] of this
prospectus.
"Agent Member" means the member of the Securities Depository that
will act on behalf of a Beneficial Owner of one or more shares of AMPS or on
behalf of a Potential Beneficial Owner.
"AMPS" means the Auction Market Preferred Stock, Series F, with a par
value of $.10 per share and a liquidation preference of $25,000 per share plus
an amount equal to accumulated but unpaid dividends thereon (whether or not
earned or declared) of the Fund.
"AMPS Basic Maintenance Amount" has the meaning set forth on page
[27] of this prospectus.
"AMPS Basic Maintenance Cure Date" has the meaning set forth on page
[27] of this prospectus.
"AMPS Basic Maintenance Report" has the meaning set forth on page
[10] of the statement of additional information.
"Anticipation Notes" shall mean the following Municipal Bonds:
revenue anticipation notes, tax anticipation notes, tax and revenue
anticipation notes, grant anticipation notes and bond anticipation notes.
"Applicable Percentage" has the meaning set forth on page [31] of
this prospectus.
"Applicable Rate" means the rate per annum at which cash dividends
are payable on shares of AMPS for any Dividend Period.
"Applicable Spread" has the meaning set forth on page [31] of this
prospectus.
"Articles Supplementary" means the Articles Supplementary of the Fund
specifying the powers, preferences and rights of the shares of the AMPS.
"Auction" means a periodic operation of the Auction Procedures.
"Auction Agent" means The Bank of New York unless and until another
commercial bank, trust company or other financial institution appointed by a
resolution of the Board of Directors of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the AMPS.
"Auction Agent Agreement" means the agreement entered into between
the Fund and the Auction Agent which provides, among other things, that the
Auction Agent will follow the Auction Procedures for the purpose of
determining the Applicable Rate.
"Auction Date" has the meaning set forth on page [30] of this
prospectus.
"Auction Procedures" means the procedures for conducting Auctions set
forth in Appendix C to the statement of additional information.
"Available AMPS" has the meaning set forth on page [33] of this
prospectus.
"Beneficial Owner" means a customer of a Broker-Dealer who is listed
on the records of that Broker- Dealer (or if applicable, the Auction Agent) as
a holder of shares of AMPS or a Broker-Dealer that holds AMPS for its own
account.
"Bid" has the meaning set forth on page [33] of this prospectus.
47
"Bidder" has the meaning set forth on page [31] of this prospectus.
"Board of Directors" or "Board" means the Board of Directors of the
Fund.
"Broker-Dealer" means any broker-dealer, or other entity permitted by
law to perform the functions required of a Broker-Dealer in the Auction
Procedures, that has been selected by the Fund and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.
"Broker-Dealer Agreement" means an agreement entered into between the
Auction Agent and a Broker- Dealer, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated, pursuant to which such Broker-Dealer agrees to follow the
Auction Procedures.
"Business Day" means a day on which the New York Stock Exchange is
open for trading and which is not a Saturday, Sunday or other day on which
banks in The City of New York are authorized or obligated by law to close.
"Cede" means Cede & Co., the nominee of DTC, and in whose name the
shares of AMPS initially will be registered.
"Charter" means the Articles of Incorporation, as amended and
supplemented (including the Articles Supplementary and the Other AMPS Articles
Supplementary), of the Fund.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common stock" means the common stock, par value $.10 per share, of
the Fund.
"Date of Original Issue" means, with respect to each share of AMPS,
the date on which such share first is issued by the Fund.
"Deposit Securities" means cash and Municipal Bonds rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P or A (having a remaining maturity of 12 months or less) or F-1+ by
Fitch.
"Discount Factor" means a Moody's Discount Factor or an S&P Discount
Factor, as the case may be.
"Discounted Value" means (i) with respect to an S&P Eligible Asset,
the quotient of the fair market value thereof divided by the applicable S&P
Discount Factor and (ii) with respect to a Moody's Eligible Asset, the lower
of par and the quotient of the fair market value thereof divided by the
applicable Moody's Discount Factor.
"Dividend Payment Date" has the meaning set forth on page [25] of
this prospectus.
"Dividend Period" has the meaning set forth on page [25] of this
prospectus.
"DTC" means The Depository Trust Company.
"Eligible Assets" means Moody's Eligible Assets or S&P Eligible
Assets, as the case may be.
"Existing Holder" means a Broker-Dealer or any such other person as
may be permitted by the Fund that is listed as the holder of record of shares
of AMPS in the records of the Auction Agent.
"Fitch" means Fitch Ratings or its successors.
"Forward Commitment" has the meaning set forth on page [20] of the
statement of additional information.
"Fund" means MuniVest Fund, Inc., a Maryland corporation that is the
issuer of the AMPS.
48
"High Yield Municipal Bonds" means (a) with respect to Moody's (1)
Municipal Bonds rated Ba1 to B3 by Moody's, (2) Municipal Bonds not rated by
Moody's, but rated BB+ to B- by S&P or Fitch, and (3) Municipal Bonds not
explicitly rated by Moody's, S&P or Fitch, but rated at least the equivalent
of B3 internally by the Investment Adviser, provided that Moody's reviews and
achieves sufficient comfort with the Investment Adviser's internal credit
rating processes, and (b) with respect to S&P (1) Municipal Bonds not rated by
S&P but rated equivalent to BBB+ or lower by another NRSRO and (2) Municipal
Bonds rated BB+ or lower by S&P.
"Hold Order" has the meaning set forth on page [30] of this
prospectus.
"Initial Dividend Payment Date" means the first Dividend Payment Date
for the Series F AMPS.
"Initial Dividend Period" means the period from and including the
Date of Original Issue to but excluding the Initial Dividend Payment Date for
the Series F AMPS.
"Initial Margin" means the amount of cash or securities deposited
with a broker as a margin payment at the time of purchase or sale of a
financial futures contract.
"Inverse Floaters" means trust certificates or other instruments
evidencing interests in one or more Municipal Bonds that qualify as (i) 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 rate instrument has only one reset
remaining until maturity or (ii) Moody's 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 (a) such Inverse Floaters are rated by Moody's with the Investment
Adviser having the capability to collapse (or relink) within seven days as a
liquidity enhancement measure, and (b) the issuer of such Inverse Floaters
employs a leverage factor (i.e., the ratio of underlying capital appreciation
bonds or other instruments to residual long-term derivative instruments) of
not more than 2:1.
"Investment Adviser" means Fund Asset Management, L.P.
"IRS" means the United States Internal Revenue Service.
"LIBOR Dealer" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated and such other dealer or dealers as the Fund from time to time
may appoint or, in lieu thereof, their respective affiliates and successors.
"LIBOR Rate," on any Auction Date, means (i) the rate for deposits in
U.S. dollars for the designated Dividend Period, which appears on display page
3750 of Moneyline's Telerate Service ("Telerate Page 3750") (or such other
page as may replace that page on that service, or such other service as may be
selected by the LIBOR Dealer or its successors that are LIBOR Dealers) as of
11:00 a.m., London time, on the day that is the London Business Day preceding
the Auction Date (the "LIBOR Determination Date"), or (ii) if such rate does
not appear on Telerate Page 3750 or such other page as may replace such
Telerate Page 3750, (A) the LIBOR Dealer shall determine the arithmetic mean
of the offered quotations of the Reference Banks to leading banks in the
London interbank market for deposits in U.S. dollars for the designated
Dividend Period in an amount determined by such LIBOR Dealer by reference to
requests for quotations as of approximately 11:00 a.m. (London time) on such
date made by such LIBOR Dealer to the Reference Banks, (B) if at least two of
the Reference Banks provide such quotations, LIBOR Rate shall equal such
arithmetic mean of such quotations, (C) if only one or none of the Reference
Banks provide such quotations, LIBOR Rate shall be deemed to be the arithmetic
mean of the offered quotations that leading banks in The City of New York
selected by the LIBOR Dealer (after obtaining the Fund's approval) are quoting
on the relevant LIBOR Determination Date for deposits in U.S. dollars for the
designated Dividend Period in an amount determined by the LIBOR Dealer (after
obtaining the Fund's approval) that is representative of a single transaction
in such market at such time by reference to the principal London offices of
leading banks in the London interbank market; provided, however, that if one
of the LIBOR Dealers does not quote a rate required to determine the LIBOR
Rate, the LIBOR Rate will be determined on the basis of the quotation or
49
quotations furnished by any Substitute LIBOR Dealer or Substitute LIBOR
Dealers selected by the Fund to provide such rate or rates not being supplied
by the LIBOR Dealer; provided further, that if the LIBOR Dealer and Substitute
LIBOR Dealers are required but unable to determine a rate in accordance with
at least one of the procedures provided above, the LIBOR Rate shall be the
LIBOR Rate as determined on the previous Auction Date. If the number of
Dividend Period days shall be (i) 7 or more but fewer than 21 days, such rate
shall be the seven-day LIBOR rate; (ii) more than 21 but fewer than 49 days,
such rate shall be the one-month LIBOR rate; (iii) 49 or more but fewer than
77 days, such rate shall be the two-month LIBOR rate; (iv) 77 or more but
fewer than 112 days, such rate shall be the three-month LIBOR rate; (v) 112 or
more but fewer than 140 days, such rate shall be the four-month LIBOR rate;
(vi) 140 or more but fewer than 168 days, such rate shall be the five-month
LIBOR rate; (vii) 168 or more but fewer than 189 days, such rate shall be the
six-month LIBOR rate; (viii) 189 or more but fewer than 217 days, such rate
shall be the seven-month LIBOR rate; (ix) 217 or more but fewer than 252 days,
such rate shall be the eight-month LIBOR rate; (x) 252 or more but fewer than
287 days, such rate shall be the nine-month LIBOR rate; (xi) 287 or more but
fewer than 315 days, such rate shall be the ten-month LIBOR rate; (xii) 315 or
more but fewer than 343 days, such rate shall be the eleven-month LIBOR rate;
and (xiii) 343 or more but fewer than 365 days, such rate shall be the
twelve-month LIBOR rate.
"London Business Day" means any day on which commercial banks are
generally open for business in London.
"Long Term Dividend Period" means a Special Dividend Period
consisting of a specified period of one whole year or more but not greater
than five years.
"Mandatory Redemption Price" has the meaning set forth on page [28]
of this prospectus.
"Marginal Tax Rate" means the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate, whichever is greater.
"Maximum Applicable Rate" has the meaning set forth on page [31] of
this prospectus.
"Moody's" means Moody's Investors Service, Inc. or its successors.
"Moody's Discount Factor" has the meaning set forth on pages [16 to
17] of the statement of additional information.
"Moody's Eligible Assets" has the meaning set forth on pages [17 to
18] of the statement of additional information.
"Moody's Hedging Transactions" has the meaning set forth on page [18]
of the statement of additional information.
"Moody's Volatility Factor" means 272% as long as there has been no
increase enacted to the Marginal Tax Rate. If such an increase is enacted but
not yet implemented, the Moody's Volatility Factor shall be as follows:
% Change in Moody's Volatility
Marginal Tax Rate Factor
<=5%.......................................... 292%
>5% but <=10%................................. 313%
>10% but <=15%................................ 338%
>15% but <=20%................................ 364%
>20% but <=25%................................ 396%
>25% but <=30%................................ 432%
>30% but <=35%................................ 472%
>35% but <=40%................................ 520%
Notwithstanding the foregoing, the Moody's Volatility Factor may mean
such other potential dividend rate increase factor as Moody's advises the Fund
in writing is applicable.
50
"Municipal Bonds" has the meaning set forth on page [12] of this
prospectus.
"Municipal Index" has the meaning set forth on page [15] of the
statement of additional information.
"1940 Act" means the Investment Company Act of 1940, as amended from
time to time.
"1940 Act AMPS Asset Coverage" has the meaning set forth on page [27]
of this prospectus.
"1940 Act Cure Date" has the meaning set forth on page [27] of this
prospectus.
"Non-Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
"Non-Payment Period" has the meaning set forth on page [8] of the
statement of additional information.
"Non-Payment Period Rate" has the meaning set forth on page [8] of
the statement of additional information.
"Normal Dividend Payment Date" has the meaning set forth on page [24]
of this prospectus.
"Notice of Revocation" has the meaning set forth on page [7] of the
statement of additional information.
"Notice of Special Dividend Period" has the meaning set forth on page
[26] of this prospectus.
"NRSRO" means any nationally recognized statistical rating
organization, as that term is used in Rule 15a3-1 under the Securities and
Exchange Act of 1934, as amended, or any successor provisions.
"Optional Redemption Price" has the meaning set forth on page [28] of
this prospectus.
"Order" has the meaning set forth on page [31] of this prospectus.
"Other AMPS" means the Auction Market Preferred Stock, Series A; the
Auction Market Preferred Stock, Series B; the Auction Market Preferred Stock,
Series C; the Auction Market Preferred Stock, Series D; and the Auction Market
Preferred Stock, Series E, each with a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared) of the Fund.
"Other AMPS Articles Supplementary" means the Articles Supplementary,
as amended and supplemented, of the Fund specifying the powers, preferences
and rights of the shares of the Other AMPS.
"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of shares of AMPS but that wishes
to purchase such shares, or that is a Beneficial Owner that wishes to purchase
additional shares of AMPS.
"Potential Holder" means any Broker-Dealer or any such other person
as may be permitted by the Fund, including any Existing Holder, who may be
interested in acquiring shares of AMPS (or, in the case of an Existing Holder,
additional shares of AMPS).
"Preferred stock" means preferred stock of the Fund and includes the
AMPS.
"Premium Call Period" has the meaning set forth under "Specific
Redemption Provisions" below.
"Receivables for Municipal Bonds Sold" for Moody's has the meaning
set forth under the definition of Moody's Discount Factor, and for S&P has the
meaning set forth under the definition of S&P Discount Factor.
51
"Reference Banks" means four major banks in the London interbank
market selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated or its
affiliates or successors or such other party as the Fund may from time to time
appoint.
"Reference Rate" means: (i) with respect to a Dividend Period having
364 or fewer days, the higher of the applicable LIBOR Rate and the Taxable
Equivalent of the Short Term Municipal Bond Rate, or (ii) with respect to any
Dividend Period having 365 or more days, the applicable Treasury Index Rate.
"Request for Special Dividend Period" has the meaning set forth on
page [25] of this prospectus.
"Response" has the meaning set forth on page [26] of this prospectus.
"Retroactive Taxable Allocation" has the meaning set forth on page
[26] of this prospectus.
"Rule 2a-7 Money Market Funds" means investment companies registered
under the 1940 Act that comply with the requirements of Rule 2a-7 thereunder.
"Series F AMPS" means the Auction Market Preferred Stock, Series F,
with a par value of $.10 per share and a liquidation preference of $25,000 per
share plus an amount equal to accumulated but unpaid dividends thereon
(whether or not earned or declared), of the Fund.
"S&P" means Standard & Poor's or its successors.
"S&P Discount Factor" has the meaning set forth on pages [14 to 15]of
the statement of additional information.
"S&P Eligible Assets" has the meaning set forth on pages [15 to 16]
of the statement of additional information.
"S&P Hedging Transactions" has the meaning set forth on page [15] of
the statement of additional information.
"S&P Volatility Factor" means 277% or such other potential dividend
rate increase factor as S&P advises the Fund in writing is applicable.
"Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with shares of AMPS.
"Sell Order" has the meaning specified in Subsection 10(b)(i) of the
Auction Procedures.
"7-Day Dividend Period" means a Dividend Period consisting of seven
days.
"Short Term Dividend Period" means a Special Dividend Period
consisting of a specified number of days (other than seven) evenly divisible
by seven, and not fewer than seven days nor more than 364 days.
"Special Dividend Period" has the meaning set forth on page [24] of
this prospectus.
"Specific Redemption Provisions" means, with respect to a Special
Dividend Period, either, or any combination of, (i) a period (a "Non-Call
Period") determined by the Board of Directors of the Fund, after consultation
with the Auction Agent and the Broker-Dealers, during which the shares of AMPS
subject to such Dividend Period shall not be subject to redemption at the
option of the Fund and (ii) a period (a "Premium Call Period"), consisting of
a number of whole years and determined by the Board of Directors of the Fund,
after consultation with the Auction Agent and the Broker-Dealers, during each
year of which the shares of AMPS subject to such Dividend Period shall be
redeemable at the Fund's option at a price per share equal to $25,000 plus
52
accumulated but unpaid dividends plus a premium expressed as a percentage of
$25,000, as determined by the Board of Directors of the Fund after
consultation with the Auction Agent and the Broker-Dealers.
"Submission Deadline" has the meaning set forth on page [32] of this
prospectus.
"Submitted Bid" has the meaning set forth on page [33] of this
prospectus.
"Submitted Hold Order" has the meaning set forth on page [33] of this
prospectus.
"Submitted Order" has the meaning set forth on page [33] of this
prospectus.
"Submitted Sell Order" has the meaning set forth on page [33] of this
prospectus.
"Subsequent Dividend Period" means each Dividend Period after the
Initial Dividend Period.
"Substitute Rating Agency" and "Substitute Rating Agencies" shall
mean an NRSRO or two NRSROs, respectively, selected by Merrill Lynch, Pierce,
Fenner & Smith Incorporated, or its respective affiliates and successors,
after obtaining the Fund's approval, to act as a substitute rating agency or
substitute rating agencies, as the case may be, to determine the credit
ratings of the AMPS.
"Sufficient Clearing Bids" has the meaning set forth on page [33] of
this prospectus.
"Taxable Equivalent of the Short Term Municipal Bond Rate" on any
date means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30-day High Grade Index (the
"Kenny Index") or any successor index, made available for the Business Day
immediately preceding such date but in any event not later than 8:30 A.M.,
Eastern time, on such date by Kenny Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of bonds the interest on
which is excludable for regular Federal income tax purposes under the Code of
"high grade" component issuers selected by Kenny Information Systems Inc. or
any such successor from time to time in its discretion, which component
issuers shall include, without limitation, issuers of general obligation bonds
but shall exclude any bonds the interest on which constitutes 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
Marginal Tax Rate (expressed as a decimal); provided, however, that if the
Kenny Index is not made so available by 8:30 A.M., Eastern time, on such date
by Kenny Information Systems Inc. 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 Marginal Tax Rate (expressed as a decimal). The Fund may not
utilize a successor index to the Kenny Index unless Moody's and S&P provide
the Fund with written confirmation that the use of such successor index will
not adversely affect the then-current respective Moody's and S&P ratings of
the AMPS.
"Treasury Bonds" means U.S. Treasury Bonds or Notes.
"Treasury Index Rate" means the average yield to maturity for
actively traded marketable fixed interest rate U.S. Treasury Securities having
the same number of 30-day periods to maturity as the length of the applicable
Dividend Period, determined, to the extent necessary, by linear interpolation
based upon the yield for such securities having the next shorter and next
longer number of 30-day periods to maturity treating all Dividend Periods with
a length greater than the longest maturity for such securities as having a
length equal to such longest maturity, in all cases based upon data set forth
in the most recent weekly statistical release published by the Board of
Governors of the Federal Reserve System (currently in H.15(519)); provided,
however, if the most recent such statistical release shall not have been
published during the 15 days preceding the date of computation, the foregoing
computations shall be based upon the average of comparable data as quoted to
the Fund by at least three recognized dealers in U.S. Government Securities
selected by the Fund.
"U.S. Treasury Securities" means direct obligations of the United
States Treasury that are entitled to the full faith and credit of the United
States government.
53
"Valuation Date" has the meaning set forth on page [27] of this
prospectus.
"Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Fund, the amount of cash or securities paid to
or received from a broker (subsequent to the Initial Margin payment) from time
to time as the price of such futures contract fluctuates.
"Winning Bid Rate" has the meaning set forth on page [33] of this
prospectus.
54
==========================================================================
$75,000,000
MuniVest Fund, Inc.
Auction Market Preferred Stock ("AMPS")
3,000 Shares, Series F
Liquidation Preference $25,000 Per Share
--------------------------
PROSPECTUS
--------------------------
Merrill Lynch & Co.
, 2004 CODE # -0804
==========================================================================
The information in this statement of additional information 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
statement of additional information is not a prospectus.
Subject to Completion
Preliminary Statement of Additional Information Dated July 9, 2004
STATEMENT OF ADDITIONAL INFORMATION
$75,000,000
MuniVest Fund, Inc.
Auction Market Preferred Stock ("AMPS")
3,000 Shares, Series F
Liquidation Preference $25,000 Per Share
---------------------------------
MuniVest Fund, Inc. (the "Fund") is a non-diversified, closed-end
fund. The investment objective of the Fund is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is
consistent with its investment policies and prudent investment management. The
Fund seeks to achieve its objective by investing, as a fundamental policy, at
least 80% of an aggregate of the Fund's net assets (including proceeds from
the issuance of any preferred stock), and the proceeds of any borrowings for
investment purposes, in a portfolio of municipal obligations the interest on
which, in the opinion of bond counsel to the issuer, is excludable from gross
income for Federal income purposes (except that the interest may be includable
in taxable income for purposes of the Federal alternative minimum tax). Under
normal market conditions, the Fund invests primarily in long term municipal
obligations that are rated investment grade or, if unrated, are considered by
the Fund's investment adviser to be of comparable quality. The Fund may invest
in certain tax exempt securities classified as "private activity bonds," as
discussed within, that may subject certain investors in the Fund to an
alternative minimum tax. There can be no assurance that the Fund's investment
objective will be realized.
Certain capitalized terms not otherwise defined in this statement of
additional information have the meaning provided in the Glossary included as
part of the prospectus.
This statement of additional information is not a prospectus, but
should be read in conjunction with the prospectus of the Fund, which has been
filed with the Securities and Exchange Commission (the "Commission") and can
be obtained, without charge, by calling (800) 543-6217. The prospectus is
incorporated by reference into this statement of additional information, and
this statement of additional information is incorporated by reference into the
prospectus.
-------------------------
Merrill Lynch & Co.
-------------------------
The date of this statement of additional information is , 2004.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
Page
Investment Objective and Policies...........................................3
Investment Restrictions.....................................................3
Description of AMPS.........................................................5
The Auction................................................................12
Rating Agency Guidelines...................................................13
Directors and Officers.....................................................20
Investment Advisory and Management Arrangements............................25
Portfolio Transactions.....................................................30
Taxes......................................................................32
Net Asset Value............................................................36
Financial Statements.......................................................37
APPENDIX A Description of Municipal Bond Ratings.........................A-1
APPENDIX B Settlement Procedures.........................................B-1
APPENDIX C Auction Procedures............................................C-1
2
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide shareholders with as
high a level of current income exempt from Federal income taxes as is
consistent with its investment policies and prudent investment management. The
Fund seeks to achieve its objective by investing at least 80% of an aggregate
of the Fund's net assets (including proceeds from the issuance of any
preferred stock) and the proceeds of any borrowings for investment purposes,
in a portfolio of municipal obligations issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies or instrumentalities, each of which pays interest that,
in the opinion of bond counsel to the issuer, is excludable from gross income
for Federal income tax purposes (except that the interest may be includable in
taxable income for purposes of the Federal alternative minimum tax)
("Municipal Bonds"). The Fund's investment objective and its policy of
investing at least 80% of an aggregate of the Fund's net assets (including
proceeds from the issuance of any preferred stock) and the proceeds of any
borrowings for investment purposes, in Municipal Bonds are fundamental
policies that may not be changed without the approval of a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). There
can be no assurance that the Fund's investment objective will be realized.
Reference is made to "Investment Objective and Policies" and "Other
Investment Policies" in the prospectus for information regarding other types
of securities that the Fund may invest in to achieve its objective.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and
may not be changed without the approval of the holders of a majority of the
Fund's outstanding shares of common stock and outstanding shares of AMPS,
Other AMPS and any other preferred stock, voting together as a single class,
and the majority of the outstanding shares of AMPS, Other AMPS and any other
preferred stock, voting as a separate class (which for this purpose and under
the 1940 Act means the lesser of (i) 67% of the shares of each class of
capital stock represented at a meeting at which more than 50% of the
outstanding shares of each class of capital stock are represented or (ii) more
than 50% of the outstanding shares of each class of capital stock). The Fund
may not:
1. Make investments for the purpose of exercising control or
management.
2. Purchase securities of other investment companies, except
in connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of
closed end investment companies where no underwriter's or dealer's
commission or profit, other than customary broker's commission, is
involved and only if immediately thereafter no more than 10% of the
Fund's total assets would be invested in such securities.
3. Purchase or sell real estate; provided that the Fund may
invest in securities secured by real estate or interests therein or
issued by companies that invest in real estate or interests therein.
4. Issue senior securities other than preferred stock or
borrow in excess of 5% of its total assets taken at market value at
the time of such issuance or borrowing.
5. Underwrite securities of other issuers except insofar as
the Fund may be deemed an underwriter under the Securities Act of
1933, as amended, in selling portfolio securities.
6. Invest more than 25% of its total assets (taken at market
value at the time of each investment) in the Municipal Bonds of any
one state.
7. Make loans to other persons, except that the Fund may
purchase Municipal Bonds and other debt securities and enter into
repurchase agreements in accordance with its investment objective,
policies and limitation.
3
8. Invest more than 25% of its total assets (taken at market
value at the time of each investment) in securities of issuers in a
single industry; provided that, for purposes of this restriction,
states, municipalities and their political subdivisions are not
considered to be part of any industry.
For purposes of fundamental investment restriction (8), the exception
for states, municipalities and their political subdivisions applies only to
tax exempt securities issued by such entities.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors without stockholder approval, provide that
the Fund may not:
a. Purchase any securities on margin, except that the Fund
may obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities (the deposit
or payment by the Fund of initial or variation margin in connection
with financial futures contracts and options thereon is not
considered the purchase of a security on margin).
b. Make short sales of securities or maintain a short
position or invest in put, call, straddle or spread options, except
that the Fund may write, purchase and sell options and futures on
Municipal Bonds, U.S. Government obligations and related indices.
c. Mortgage, pledge, hypothecate or in any manner transfer,
as security for indebtedness, any securities owned or held by the
Fund except as may be necessary in connection with borrowings
mentioned in investment restriction (4) above or except as may be
necessary in connection with transactions in financial futures
contracts and options thereon.
If a percentage restriction on investment policies or the investment
or use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.
The Fund is classified as non-diversified within the meaning of the
1940 Act, which means that the Fund is not limited by the 1940 Act in the
proportion of its assets that it may invest in securities of a single issuer.
As a non-diversified fund, the Fund's investments are limited, however, in
order to allow the Fund to continue to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"). See
"Taxes." To qualify, the Fund complies with certain requirements, including
limiting its investments so that at the close of each quarter of the taxable
year (i) not more than 25% of the market value of the Fund's total assets will
be invested in the securities of a single issuer and (ii) with respect to 50%
of the market value of its total assets, not more than 5% of the market value
of its total assets will be invested in the securities of a single issuer and
the Fund will not own more than 10% of the outstanding voting securities of a
single issuer. For purposes of this restriction, the Fund will regard each
state and each political subdivision, agency or instrumentality of such state
and each multi-state agency of which such state is a member and each public
authority which issues securities on behalf of a private entity as a separate
issuer, except that if the security is backed only by the assets and revenues
of a non-government entity then the entity with the ultimate responsibility
for the payment of interest and principal may be regarded as the sole issuer.
These tax-related limitations may be changed by the Board of Directors of the
Fund to the extent necessary to comply with changes in the Federal tax
requirements. A fund that elects to be classified as "diversified" under the
1940 Act must satisfy the foregoing 5% and 10% requirements with respect to
75% of its total assets.
The Investment Adviser of the Fund and Merrill Lynch, Pierce, Fenner
& Smith Incorporated ("Merrill Lynch") are owned and controlled by Merrill
Lynch & Co., Inc. ("ML & Co."). Because of the affiliation of Merrill Lynch
with the Investment Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive order or
otherwise in compliance with the provisions of the 1940 Act and the rules and
regulations thereunder. Included among such restricted transactions will be
purchases from or sales to Merrill Lynch of securities in transactions in
which it acts as principal. See "Portfolio Transactions."
4
DESCRIPTION OF AMPS
Certain of the capitalized terms used herein not otherwise defined in
this statement of additional information have the meaning provided in the
Glossary at the back of the prospectus.
The Series F AMPS will be shares of preferred stock that entitle
their holders to receive dividends when, as and if declared by the Board of
Directors, out of funds legally available therefor, at a rate per annum that
may vary for the successive Dividend Periods. After the Initial Dividend
Period, each Subsequent Dividend Period for the Series F AMPS generally will
be a 7-Day Dividend Period; provided however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein, upon giving
notice to holders thereof, a Special Dividend Period. The Applicable Rate for
a particular Dividend Period will be determined by an Auction conducted on the
Business Day before the start of such Dividend Period. Beneficial Owners and
Potential Beneficial Owners of shares of AMPS may participate in Auctions
therefor, although, except in the case of a Special Dividend Period of more
than 28 days, Beneficial Owners desiring to continue to hold all of their
shares of AMPS regardless of the Applicable Rate resulting from Auctions need
not participate. For an explanation of Auctions and the method of determining
the Applicable Rate, see Appendix C "Auction Procedures."
Except as otherwise required by law or unless there is no Securities
Depository, all outstanding shares of the AMPS will be represented by one or
more certificates registered in the name of the nominee of the Securities
Depository (initially expected to be Cede), and no person acquiring shares of
AMPS will be entitled to receive a certificate representing such shares. See
Appendix C "Auction Procedures." As a result, the nominee of the Securities
Depository is expected to be the sole holder of record of the shares of AMPS.
Accordingly, each purchaser of AMPS must rely on (i) the procedures of the
Securities Depository and, if such purchaser is not a member of the Securities
Depository, such purchaser's Agent Member, to receive dividends, distributions
and notices and to exercise voting rights (if and when applicable) and (ii)
the records of the Securities Depository and, if such purchaser is not a
member of the Securities Depository, such purchaser's Agent Member, to
evidence its beneficial ownership of shares of AMPS.
When issued and sold, the shares of AMPS will have a liquidation
preference of $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether or not earned or declared) and will be fully paid and
non-assessable. See "Description of AMPS -- Liquidation Rights" in the
prospectus. The shares of AMPS will not be convertible into shares of common
stock or other capital stock of the Fund, and the holders thereof will have no
preemptive rights. The AMPS will not be subject to any sinking fund but will
be subject to redemption at the option of the Fund at the Optional Redemption
Price on any Dividend Payment Date (except during the Initial Dividend Period
and during a Non-Call Period) and, under certain circumstances, will be
subject to mandatory redemption by the Fund at the Mandatory Redemption Price
stated in the prospectus. See "Description of AMPS -- Redemption" in the
prospectus.
The Fund also has outstanding five series of shares of Other AMPS
with terms that are substantially the same as the terms of the shares of AMPS
described herein and in the prospectus. Cede, the nominee of the Securities
Depository, 55 Water Street, New York, New York 10041-0099, is the sole holder
of record of the shares of Other AMPS. The Series F AMPS offered hereby rank
on a parity with the Other AMPS with respect to dividends and liquidation
preference.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described in the prospectus, The Bank of New York also
serves as the transfer agent, registrar, dividend disbursing agent and
redemption agent for the shares of AMPS. The Auction Agent, however, will
serve merely as the agent of the Fund, acting in accordance with the Fund's
instructions, and will not be responsible for any evaluation or verification
of any matters certified to it.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any shares of
AMPS so long as the Fund is current in the payment of dividends on AMPS and on
any other capital stock of the Fund ranking on a parity with the AMPS,
including the Other AMPS, with respect to the payment of dividends or upon
liquidation.
5
The following supplements the description of the terms of the shares
of AMPS set forth in the prospectus. This description does not purport to be
complete and is subject to and qualified in its entirety by reference to the
Fund's Charter and Articles Supplementary, including the provisions thereof
establishing the AMPS. The Fund's Charter and the form of Articles
Supplementary establishing the terms of the AMPS have been filed as exhibits
to the Registration Statement of which this statement of additional
information is a part.
Dividends
General. The holders of shares of the Series F AMPS will be entitled
to receive, when, as and if declared by the Board of Directors of the Fund,
out of funds legally available therefor, cumulative cash dividends on their
shares, at the Applicable Rate. Dividends on the shares of AMPS so declared
and payable shall be paid (i) in preference to and in priority over any
dividends so declared and payable on the common stock, and (ii) to the extent
permitted under the Code and to the extent available, out of net tax exempt
income earned on the Fund's investments. Generally, dividends on shares of
AMPS, to the extent that they are derived from interest paid on Municipal
Bonds, will be exempt from Federal income taxes, subject to possible
application of the alternative minimum tax. See "Taxes."
Notification of Dividend Period. In determining whether the Fund
should issue a Notice of Special Dividend for AMPS, the Broker-Dealers will
consider (i) existing short term and long term market rates and indices of
such short term and long term rates, (ii) existing market supply and demand
for short term and long term securities, (iii) existing yield curves for short
term and long term securities comparable to the AMPS, (iv) industry and
financial conditions that may affect the AMPS, (v) the investment objective of
the Fund, and (vi) the Dividend Periods and dividend rates at which current
and potential beneficial holders of the AMPS would remain or become beneficial
holders. If the Broker-Dealers shall not give the Fund a Response by such
second Business Day or if the Response states that given the factors set forth
above it is not advisable that the Fund give a Notice of Special Dividend
Period for the AMPS, the Fund may not give a Notice of Special Dividend Period
in respect of such Request for Special Dividend Period. In the event the
Response indicates that it is advisable that the Fund give a Notice of Special
Dividend Period for the AMPS, the Fund, by no later than the second Business
Day prior to such Auction Date, may give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer, which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price as specified in the
related Response, and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The Fund also shall provide a copy of such
Notice of Special Dividend Period to Moody's and S&P. The Fund shall not give
a Notice of Special Dividend Period, and, if such Notice of Special Dividend
Period shall have been given already, shall give telephonic and written notice
of its revocation (a "Notice of Revocation") to the Auction Agent, each
Broker-Dealer, and the Securities Depository on or prior to the Business Day
prior to the relevant Auction Date if (x) either the 1940 Act AMPS Asset
Coverage is not satisfied or the Fund shall fail to maintain S&P Eligible
Assets and Moody's Eligible Assets each with an aggregate Discounted Value at
least equal to the AMPS Basic Maintenance Amount, in each case on the
Valuation Date immediately preceding the Business Day prior to the relevant
Auction Date on an actual basis and on a pro forma basis giving effect to the
proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Fund is an approximately equal rate for
securities similar to the AMPS with an equal dividend period), (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been segregated in an account at the Fund's
custodian bank or on the books of the Fund by the close of business on the
third Business Day preceding the related Auction Date or (z) the
Broker-Dealers jointly advise the Fund that, after consideration of the
factors listed above, they have concluded that it is advisable to give a
Notice of Revocation. The Fund also shall provide a copy of such Notice of
Revocation to Moody's and S&P. If the Fund is prohibited from giving a Notice
of Special Dividend Period as a result of the factors enumerated in clause
(x), (y) or (z) above or if the Fund gives a Notice of Revocation with respect
to a Notice of Special Dividend Period, the next succeeding Dividend Period
will be a 7-Day Dividend Period. In addition, in the event Sufficient Clearing
Bids are not made in any Auction or an Auction is not held for any reason, the
next succeeding Dividend Period will be a 7-Day Dividend Period, and the Fund
may not again give a Notice of Special Dividend Period (and any such attempted
notice shall be null and void) until Sufficient Clearing Bids have been made
in an Auction with respect to a 7-Day Dividend Period.
6
Non-Payment Period; Late Charge. A Non-Payment Period will commence
if the Fund fails to (i) declare, prior to the close of business on the second
Business Day preceding any Dividend Payment Date, for payment on or (to the
extent permitted as described below) within three Business Days after such
Dividend Payment Date to the persons who held such shares as of 12:00 noon,
Eastern time, on the Business Day preceding such Dividend Payment Date, the
full amount of any dividend on shares of AMPS payable on such Dividend Payment
Date or (ii) deposit, irrevocably in trust, in same-day funds, with the
Auction Agent by 12:00 noon, Eastern time, (A) on such Dividend Payment Date
the full amount of any cash dividend on such shares (if declared) payable on
such Dividend Payment Date or (B) on any redemption date for shares of AMPS
called for redemption, the Mandatory Redemption Price per share of such AMPS
or, in the case of an optional redemption, the Optional Redemption Price per
share. Such Non-Payment Period will consist of the period commencing on and
including the aforementioned Dividend Payment Date or redemption date, as the
case may be, and ending on and including the Business Day on which, by 12:00
noon, Eastern time, all unpaid cash dividends and unpaid redemption prices
shall have been so deposited or otherwise shall have been made available to
the applicable holders in same-day funds, provided that a Non-Payment Period
for AMPS will not end unless the Fund shall have given at least five days' but
no more than 30 days' written notice of such deposit or availability to the
Auction Agent, the Securities Depository and all holders of shares of AMPS.
Notwithstanding the foregoing, the failure by the Fund to deposit funds as
provided for by clause (ii) (A) or (ii) (B) above within three Business Days
after any Dividend Payment Date or redemption date, as the case may be, in
each case to the extent contemplated below, shall not constitute a
"Non-Payment Period."
The Applicable Rate for each Dividend Period for shares of AMPS,
commencing during a Non-Payment Period, will be equal to the Non-Payment
Period Rate; and each Dividend Period commencing after the first day of, and
during, a Non-Payment Period shall be a 7-Day Dividend Period. Any dividend on
shares of AMPS due on any Dividend Payment Date for such shares (if, prior to
the close of business on the second Business Day preceding such Dividend
Payment Date, the Fund has declared such dividend payable on such Dividend
Payment Date to the persons who held such shares as of 12:00 noon, Eastern
time, on the Business Day preceding such Dividend Payment Date) or redemption
price with respect to such shares not paid to such persons when due may be
paid to such persons in the same form of funds by 12:00 noon, Eastern time, on
any of the first three Business Days after such Dividend Payment Date or due
date, as the case may be, provided that such amount is accompanied by a late
charge calculated for such period of non-payment at the Non-Payment Period
Rate applied to the amount of such non-payment based on the actual number of
days comprising such period divided by 365. In the case of a willful failure
of the Fund to pay a dividend on a Dividend Payment Date or to redeem any
shares of AMPS on the date set for such redemption, the preceding sentence
shall not apply and the Applicable Rate for the Dividend Period commencing
during the Non-Payment Period resulting from such failure shall be the
Non-Payment Period Rate. For the purposes of the foregoing, payment to a
person in same-day funds on any Business Day at any time will be considered
equivalent to payment to that person in New York Clearing House (next-day)
funds at the same time on the preceding Business Day, and any payment made
after 12:00 noon, Eastern time, on any Business Day shall be considered to
have been made instead in the same form of funds and to the same person before
12:00 noon, Eastern time, on the next Business Day.
The Non-Payment Period Rate initially will be 200% of the applicable
Reference Rate (or 300% of such rate if the Fund has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for
any dividend that net capital gain or other taxable income will be included in
such dividend on shares of AMPS), provided that the Board of Directors of the
Fund shall have the authority to adjust, modify, alter or change from time to
time by resolution or otherwise the initial Non-Payment Period Rate if the
Board of Directors of the Fund determines and Moody's and S&P (and any
Substitute Rating Agency or Substitute Rating Agencies, as the case may be, in
lieu of Moody's or S&P, or both, in the event either or both of such parties
shall not rate the AMPS) advise the Fund in writing that such adjustment,
modification, alteration or change will not adversely affect their then
current ratings on the AMPS.
Restrictions on Dividends and Other Payments. For so long as any
shares of AMPS are outstanding, the Fund will not declare, pay or set apart
for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe
for or purchase, common stock or other stock, if any, ranking junior to shares
of AMPS as to dividends or upon liquidation) in respect of common stock or any
other stock of the Fund ranking junior to or on a parity with shares of AMPS
as to dividends or upon liquidation, or call for redemption, redeem, purchase
or otherwise acquire for consideration any shares of common stock or any
7
other such junior stock (except by conversion into or exchange for stock of
the Fund ranking junior to AMPS as to dividends and upon liquidation) or any
such parity stock (except by conversion into or exchange for stock of the Fund
ranking junior to or on a parity with AMPS as to dividends and upon
liquidation), unless (A) immediately after such transaction, the Fund would
have S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount,
and the 1940 Act AMPS Asset Coverage (see "Asset Maintenance" and "Redemption"
below) would be satisfied, (B) full cumulative dividends on shares of AMPS and
shares of the Other AMPS due on or prior to the date of the transaction have
been declared and paid or shall have been declared and sufficient funds for
the payment thereof deposited with the Auction Agent, (C) any Additional
Dividend required to be paid on or before the date of such declaration or
payment has been paid, and (D) the Fund has redeemed the full number of shares
of AMPS required to be redeemed by any provision for mandatory redemption
contained in the Articles Supplementary.
Asset Maintenance
1940 Act AMPS Asset Coverage. The Fund will be required under the
Articles Supplementary to maintain, with respect to shares of AMPS, as of the
last Business Day of each month in which any shares of AMPS are outstanding,
asset coverage of at least 200% with respect to senior securities that are
stock, including the shares of AMPS and Other AMPS (or such other asset
coverage as in the future may be specified in or under the 1940 Act as the
minimum asset coverage for senior securities that are stock of a closed-end
investment company as a condition of paying dividends on its common stock)
("1940 Act AMPS Asset Coverage"). If the Fund fails to maintain 1940 Act AMPS
Asset Coverage and such failure is not cured as of the last Business Day of
the following month (the "1940 Act Cure Date"), the Fund will be required
under certain circumstances to redeem certain of the shares of AMPS. See
"Description of AMPS -- Redemption" in the prospectus and "-- Redemption"
below.
AMPS Basic Maintenance Amount. So long as shares of AMPS are
outstanding, the Fund will be required under the Articles Supplementary as of
the last Business Day of each week (a "Valuation Date") to maintain S&P
Eligible Assets and Moody's Eligible Assets each having in the aggregate a
Discounted Value at least equal to the AMPS Basic Maintenance Amount. If the
Fund fails to meet such requirement as of any Valuation Date and such failure
is not cured on or before the sixth Business Day after such Valuation Date
(the "AMPS Basic Maintenance Cure Date"), the Fund will be required under
certain circumstances to redeem certain of the shares of AMPS. See
"Description of AMPS -- Redemption" in the prospectus and "-- Redemption"
below. Upon any failure to maintain the required Discounted Value, the Fund
will use its best efforts to alter the composition of its portfolio to
reattain a Discounted Value at least equal to the AMPS Basic Maintenance
Amount on or prior to the AMPS Basic Maintenance Cure Date.
The AMPS Basic Maintenance Amount as of any Valuation Date, means the
dollar amount equal to (i) the sum of (A) the product of the number of shares
of AMPS and Other AMPS outstanding on such Valuation Date multiplied by the
sum of $25,000 and any applicable redemption premium attributable to the
designation of a Premium Call Period; (B) the aggregate amount of cash
dividends (whether or not earned or declared) that will have accumulated for
the AMPS and Other AMPS outstanding to (but not including) the end
of the current Dividend Period for the AMPS that follows such Valuation Date
in the event the then current Dividend Period will end within 49
calendar days of such Valuation Date or through the 49th day after such
Valuation Date in the event the then current Dividend Period will not end
within 49 calendar days of such Valuation Date; (C) in the event the then
current Dividend Period will end within 49 calendar days of such Valuation
Date, the aggregate amount of cash dividends that would accumulate at the
Maximum Applicable Rate applicable to a Dividend Period of 28 or fewer days on
any shares of AMPS and Other AMPS outstanding from the end of such Dividend
Period through the 49th day after such Valuation Date, multiplied by the
larger of the Moody's Volatility Factor and the S&P Volatility Factor,
determined from time to time by Moody's and S&P, respectively (except that if
such Valuation Date occurs during a Non-Payment Period, the cash dividend for
purposes of calculation would accumulate at the then current Non-Payment
Period Rate); (D) the amount of anticipated expenses of the Fund for the 90
days subsequent to such Valuation Date; (E) the amount of current outstanding
balances of any indebtedness that is senior to the AMPS plus interest actually
accrued together with 30 days additional interest on the current outstanding
balances calculated at the current rate; (F) the amount of the Fund's maximum
potential Additional Dividend liability as of such Valuation Date; and (G) any
current liabilities as of such Valuation Date to the extent not reflected in
any of (i)(A) through (i)(F) (including, without limitation, and immediately
upon determination, any amounts due and payable by the Fund for portfolio
securities purchased as of such Valuation Date and any liabilities
8
incurred for the purpose of clearing securities transactions) less (ii) either
(A) the Discounted Value of any of the Fund's assets, or (B) the face value of
any of the Fund's assets if such assets mature prior to or on the date of
redemption of AMPS or payment of a liability and are either securities issued
or guaranteed by the United States Government or Deposit Securities, in both
cases irrevocably deposited by the Fund for the payment of the amount needed
to redeem shares of AMPS subject to redemption or to satisfy any of (i)(B)
through (i)(G).
The Discount Factors and guidelines for determining the market value
of the Fund's portfolio holdings have been based on criteria established in
connection with rating the AMPS. These factors include, but are not limited
to, the sensitivity of the market value of the relevant asset to changes in
interest rates, the liquidity and depth of the market for the relevant asset,
the credit quality of the relevant asset (for example, the lower the rating of
a debt obligation, the higher the related discount factor) and the frequency
with which the relevant asset is marked to market. In no event shall the
Discounted Value of any asset of the Fund exceed its unpaid principal balance
or face amount as of the date of calculation. The Discount Factor relating to
any asset of the Fund and the AMPS Basic Maintenance Amount, the assets
eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund, without stockholder
approval, but only in the event the Fund receives written confirmation from
S&P, Moody's and any Substitute Rating Agency that any such changes would not
impair the rating then assigned to the shares of AMPS by S&P or Moody's or any
Substitute Rating Agency.
On or before the seventh Business Day in the case of Moody's and the
third Business Day in the case of S&P after a Valuation Date on which the Fund
fails to maintain S&P Eligible Assets and Moody's Eligible Assets each with an
aggregate Discounted Value equal to or greater than the AMPS Basic Maintenance
Amount, the Fund is required to (i) deliver to Moody's a report with respect
to the calculation of the AMPS Basic Maintenance Amount, the value of its
portfolio holdings and the net asset value and market price of the Fund's
common stock as of the date of such failure (an "AMPS Basic Maintenance
Report") and (ii) send S&P an electronic notification of such failure. The
Fund also will deliver an AMPS Basic Maintenance Report as of the last
Business Day of each month on or before the seventh Business Day after such
day. Within ten Business Days after delivery of such report relating to the
month in which the Fund's fiscal year ends, the Fund will deliver a letter
prepared by the Fund's independent accountants regarding the accuracy of the
calculations made by the Fund in such AMPS Basic Maintenance Report. If any
such letter prepared by the Fund's independent accountants shows that an error
was made in the AMPS Basic Maintenance Report, the calculation or
determination made by the Fund's independent accountants will be conclusive
and binding on the Fund. The Fund will also (i) provide Moody's with an AMPS
Basic Maintenance Report and (ii) send S&P an electronic notification, as of
each Valuation Date on or before the seventh Business Day in the case of
Moody's and the third Business Day in the case of S&P after such date when the
Discounted Value of Moody's Eligible Assets or S&P Eligible Assets, as the
case may be, fails to exceed the AMPS Basic Maintenance Amount by 10% or more
in the case of S&P and 25% or more in the case of Moody's. Also, on or before
5:00 p.m., Eastern time, on the first Business Day after shares of common
stock are repurchased by the Fund, the Fund will complete and deliver to S&P
and Moody's an AMPS Basic Maintenance Report as of the close of business on
such date that common stock is repurchased.
Redemption
Mandatory Redemption. The number of shares of AMPS to be redeemed
will be equal to the lesser of (a) the minimum number of shares of AMPS the
redemption of which, if deemed to have occurred immediately prior to the
opening of business on the Cure Date, together with all other shares of the
preferred stock subject to redemption or retirement, would result in the Fund
having S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, on such
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all shares of AMPS then
outstanding will be redeemed), and (b) the maximum number of shares of AMPS,
together with all other shares of preferred stock subject to redemption or
retirement, that can be redeemed out of funds expected to be legally available
therefor on such redemption date. In determining the number of shares of AMPS
required to be redeemed in accordance with the foregoing, the Fund shall
allocate the number required to be redeemed which would result in the Fund
having S&P Eligible Assets and Moody's Eligible Assets each with an aggregate
Discounted Value equal to or greater than the AMPS Basic Maintenance Amount or
satisfaction of the 1940 Act AMPS Asset Coverage, as the case may be, pro rata
among shares of AMPS, Other AMPS and other preferred stock subject to
redemption pursuant to provisions similar to those set forth below; provided
that, shares of AMPS which may not be redeemed at the option of the Fund due
to the designation of a Non-Call Period applicable to such shares (A) will be
subject to mandatory
9
redemption only to the extent that other shares are not available to satisfy
the number of shares required to be redeemed and (B) will be selected for
redemption in an ascending order of outstanding number of days in the Non-Call
Period (with shares with the lowest number of days to be redeemed first) and
by lot in the event of shares having an equal number of days in such Non-Call
Period. The Fund is required to effect such a mandatory redemption on a
Business Day which is not later than 30 days after such Cure Date, except that
if the Fund does not have funds legally available for the redemption of all of
the required number of shares of AMPS and shares of other preferred stock
which are subject to mandatory redemption or the Fund otherwise is unable to
effect such redemption on or prior to 30 days after such Cure Date, the Fund
will redeem those shares of AMPS that it was unable to redeem on the earliest
practicable date on which it is able to effect such redemption out of funds
legally available therefor.
Notice of Redemption. If shares of AMPS are to be redeemed, a notice
of redemption will be mailed to each record holder of such shares of AMPS
(initially Cede as nominee of the Securities Depository) and to the Auction
Agent not less than 17 nor more than 60 days prior to the date fixed for the
redemption thereof. Each notice of redemption will include a statement setting
forth: (i) the redemption date, (ii) the redemption price, (iii) the aggregate
number of shares of AMPS to be redeemed, (iv) the place or places where shares
of AMPS are to be surrendered for payment of the redemption price, (v) a
statement that dividends on the shares to be redeemed will cease to accumulate
on such redemption date (except that holders may be entitled to Additional
Dividends) and (vi) the provision of the Articles Supplementary pursuant to
which such shares are being redeemed. The notice also will be published in the
eastern and national editions of The Wall Street Journal. No defect in the
notice of redemption or in the mailing or publication thereof will affect the
validity of the redemption proceedings, except as required by applicable law.
In the event that less than all of the outstanding shares of AMPS are
to be redeemed, the shares to be redeemed will be selected by lot or such
other method as the Fund shall deem fair and equitable, and the results
thereof will be communicated to the Auction Agent. The Auction Agent will give
notice to the Securities Depository, whose nominee will be the record holder
of all shares of AMPS, and the Securities Depository will determine the number
of shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares of AMPS,
the particular shares to be redeemed shall be selected by the Fund by lot or
by such other method as the Fund shall deem fair and equitable.
If the Fund gives notice of redemption, and concurrently or
thereafter deposits in trust with the Auction Agent, or segregates in an
account at the Fund's custodian bank for the benefit of the holders of the
AMPS to be redeemed and for payment to the Auction Agent, Deposit Securities
(with a right of substitution) having an aggregate Discounted Value equal to
the redemption payment for the shares of AMPS as to which notice of redemption
has been given, with irrevocable instructions and authority to pay the
redemption price to the record holders thereof, then upon the date of such
deposit or, if no such deposit is made, upon such date fixed for redemption
(unless the Fund shall default in making payment of the redemption price), all
rights of the holders of such shares called for redemption will cease and
terminate, except the right of such holders to receive the redemption price in
respect thereof and any Additional Dividends, but without interest, and such
shares no longer will be deemed to be outstanding. The Fund will be entitled
to receive, from time to time, the interest, if any, earned on such Deposit
Securities deposited with the Auction Agent, and the holders of any shares so
redeemed will have no claim to any such interest. Any funds so deposited which
are unclaimed at the end of one year from such redemption date will be repaid,
upon demand, to the Fund, after which the holders of the shares of AMPS so
called for redemption may look only to the Fund for payment thereof.
So long as any shares of AMPS are held of record by the nominee of
the Securities Depository (initially Cede), the redemption price for such
shares will be paid on the redemption date to the nominee of the Securities
Depository. The Securities Depository's normal procedures now provide for it
to distribute the amount of the redemption price to Agent Members who, in
turn, are expected to distribute such funds to the persons for whom they are
acting as agent. Notwithstanding the provisions for redemption described
above, no shares of AMPS shall be subject to optional redemption (i) unless
all dividends in arrears on the outstanding shares of AMPS, and all capital
10
stock of the Fund ranking on a parity with the AMPS with respect to the
payment of dividends or upon liquidation, including the Other AMPS, have been
or are being contemporaneously paid or declared and set aside for payment and
(ii) if redemption thereof would result in the Fund's failure to maintain
Moody's Eligible Assets or S&P Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount.
Voting Rights
In connection with the election of the Fund's directors, holders of
shares of AMPS, Other AMPS and any other preferred stock, voting separately as
a single class, shall be entitled at all times to elect two of the Fund's
directors, and the remaining directors will be elected by holders of shares of
common stock, voting separately as a single class. In addition, if at any time
dividends on outstanding shares of AMPS shall be unpaid in an amount equal to
at least two full years' dividends thereon or if at any time holders of any
shares of preferred stock, including Other AMPS, are entitled, together with
the holders of AMPS, to elect a majority of the directors of the Fund under
the 1940 Act, then the number of directors constituting the Board of Directors
automatically shall be increased by the smallest number that, when added to
the two directors elected exclusively by the holders of shares of AMPS, Other
AMPS and any other preferred stock as described above, would constitute a
majority of the Board of Directors as so increased by such smallest number,
and at a special meeting of stockholders which will be called and held as soon
as practicable, and at all subsequent meetings at which directors are to be
elected, the holders of shares of AMPS, Other AMPS and any other preferred
stock, voting as a separate class, will be entitled to elect the smallest
number of additional directors that, together with the two directors that such
holders in any event will be entitled to elect, constitutes a majority of the
total number of directors of the Fund as so increased. The terms of office of
the persons who are directors at the time of that election will continue. If
the Fund thereafter shall pay, or declare and set apart for payment in full,
all dividends payable on all outstanding shares of AMPS and any other
preferred stock, including Other AMPS, for all past Dividend Periods, the
additional voting rights of the holders of shares of AMPS and any other
preferred stock, including Other AMPS, as described above shall cease, and the
terms of office of all of the additional directors elected by the holders of
shares of AMPS, Other AMPS and any other preferred stock (but not of the
directors with respect to whose election the holders of common stock were
entitled to vote or the two directors the holders of shares of AMPS, Other
AMPS and any other preferred stock have the right to elect in any event) will
terminate automatically.
The affirmative vote of a majority of the votes entitled to be cast
by holders of outstanding shares of AMPS and any other preferred stock,
including Other AMPS, voting as a separate class, will be required to (i)
authorize, create or issue any class or series of stock ranking prior to the
AMPS or any other series of preferred stock with respect to the payment of
dividends or the distribution of assets on dissolution, liquidation or winding
up the affairs of the Fund, or (ii) amend, alter or repeal the provisions of
the Charter, whether by merger, consolidation or otherwise, so as to adversely
affect any of the contract rights expressly set forth in the Charter of
holders of shares of AMPS or any other preferred stock. To the extent
permitted under the 1940 Act, in the event shares of more than one series of
preferred stock are outstanding, the Fund shall not approve any of the actions
set forth in clause (i) or (ii) which adversely affects the contract rights
expressly set forth in the Charter of a holder of shares of AMPS differently
than those of a holder of shares of any other series of preferred stock
without the affirmative vote of at least a majority of votes entitled to be
cast by holders of the shares of AMPS adversely affected and outstanding at
such time (voting separately as a class). The Board of Directors, however,
without stockholder approval, may amend, alter or repeal any or all of the
various rating agency guidelines described herein in the event the Fund
receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to shares of
AMPS. Furthermore, the Board of Directors, without stockholder approval, may
terminate compliance with the Moody's or S&P guidelines as discussed under
"Rating Agency Guidelines" in the prospectus. Unless a higher percentage is
provided for under "Description of Capital Stock -- Certain Provisions of the
Charter and By-laws" in the prospectus, the affirmative vote of the holders of
a majority of the outstanding shares of preferred stock (as defined under
"Investment Restrictions"), including AMPS and Other AMPS, entitled to be
cast, voting as a separate class, will be required to approve any plan of
reorganization (including bankruptcy proceedings) adversely affecting such
shares or any action requiring a vote of security holders under Section 13(a)
of the 1940 Act including, among other things, changes in the Fund's
investment objective or changes in the investment policies and restrictions
described as fundamental policies in the prospectus and under "Investment
Restrictions." So long as any shares of AMPS are outstanding, the affirmative
vote of the holders of a majority of the outstanding shares of preferred stock
(as defined under "Investment Restrictions"), including AMPS and Other AMPS,
voting together as a single class, will be required to approve any voluntary
application by the Fund for relief
11
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. The class
vote of holders of shares of AMPS, Other AMPS and any other preferred stock
described above in each case will be in addition to a separate vote of the
requisite percentage of shares of common stock and shares of AMPS, Other AMPS
and any other preferred stock, voting together as a single class or voting as
separate classes, necessary to authorize the action in question. An increase
in the number of authorized shares of preferred stock pursuant to the Charter
or the issuance of additional shares of any series of preferred stock
(including AMPS and Other AMPS) pursuant to the Charter shall not in and of
itself be considered to adversely affect the contract rights of the holders of
the AMPS.
Notwithstanding the foregoing, and except as otherwise required by
the 1940 Act, (i) holders of outstanding shares of the AMPS will be entitled
as a series, to the exclusion of the holders of all other securities,
including other preferred stock, common stock and other classes of capital
stock of the Fund, to vote on matters affecting the AMPS that do not
materially adversely affect any of the contract rights of holders of such
other securities, including other preferred stock, common stock and other
classes of capital stock, as expressly set forth in the Charter, and (ii)
holders of outstanding shares of AMPS will not be entitled to vote on matters
affecting any other preferred stock that do not materially adversely affect
any of the contract rights of holders of the AMPS, as expressly set forth in
the Charter.
The foregoing voting provisions will not apply to any shares of AMPS
if, at or prior to the time when the act with respect to which such vote
otherwise would be required shall be effected, 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
Auction Agent Agreement
The Auction Agent will act as agent for the Fund in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered or omitted, or for any
error of judgment made, by it in the performance of its duties under the
Auction Agent Agreement, and will not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining, or failing to ascertain, the pertinent facts. Pursuant to the
Auction Agent Agreement, the Fund is required to indemnify the Auction Agent
for certain losses and liabilities incurred by the Auction Agent without
negligence or bad faith on its part in connection with the performance of its
duties under such agreement.
The Auction Agent may terminate the Auction Agent Agreement upon
notice to the Fund, which termination may be no earlier than 60 days following
delivery of such notice. If the Auction Agent resigns, the Fund will use its
best efforts to enter into an agreement with a successor Auction Agent
containing substantially the same terms and conditions as the Auction Agent
Agreement. The Fund may terminate the Auction Agent Agreement at any time,
provided that prior to such termination the Fund shall have entered into such
an agreement with respect thereto with a successor Auction Agent.
Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers.
A Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that the
Broker-Dealer Agreement with Merrill Lynch may not be terminated without the
prior written consent of the Fund, which consent may not be unreasonably
withheld.
For the six months ended February 29, 2004 and the fiscal years ended
August 31, 2003, 2002 and 2001, Merrill Lynch, an affiliate of the Investment
Adviser, earned $115,634, $240,542, $278,259 and $299,644, respectively,
pursuant to its Broker-Dealer Agreement with the Fund.
12
Auction Procedures
The Auction Procedures are set forth in Appendix C. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix B.
RATING AGENCY GUIDELINES
S&P AAA Rating Guidelines
The Discounted Value of the Fund's S&P Eligible Assets is calculated
on each Valuation Date. See "Description of AMPS -- Asset Maintenance -- AMPS
Basic Maintenance Amount." S&P Eligible Assets include cash, Receivables for
Municipal Bonds Sold (as defined below), Rule 2a-7 Money Market Funds and
Municipal Bonds eligible for consideration under S&P's current guidelines. For
purposes of calculating the Discounted Value of the Fund's portfolio under
current S&P guidelines, the fair market value of Municipal Bonds eligible for
consideration under such guidelines must be discounted by the applicable S&P
Discount Factor set forth in the table below. The Discounted Value of a
Municipal Bond eligible for consideration under S&P guidelines is the fair
market value thereof divided by the S&P Discount Factor. The S&P Discount
Factor used to discount a particular Municipal Bond will be determined by
reference to the rating by S&P, Moody's or Fitch on such Municipal Bond;
provided, however, for purposes of determining the S&P Discount Factor
applicable to Municipal Bonds not rated by S&P, the Municipal Bonds will carry
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 Bond is
placed by a NRSRO, in accordance with the table set forth below:
S&P's Rating Category(1)
-----------------------------------------------------------------------------
AAA*(2) AA* A* BBB* BB* B* CCC* NR**
------- --- -- ---- --- -- ---- ----
144.75% 147.75% 150.75% 153.75% 175.11% 195.11% 215.11% 220.00%
_____________
* S&P rating.
** Not Rated.
(1) For Municipal Bonds of any one issuer rated at least BBB- by S&P, or
if not rated by S&P, rated at least A- by another NRSRO, 2% is added
to the applicable S&P Discount Factor for every 1% by which the fair
market value of such Municipal Bonds exceeds 5% of the aggregate fair
market value of the S&P Eligible Assets, but in no event greater than
10%; or for any percentage over 5% add 10 percentage points to the
applicable S&P Discount Factor.
(2) For zero coupon Municipal Bonds, the S&P Discount Factor is 441.80%.
Notwithstanding the foregoing, (i) the S&P Discount Factor for
short-term Municipal Bonds will be 115%, so long as such Municipal Bonds are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable in
30 days or less, or 120% so long as such Municipal Bonds 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 Bonds are not rated by S&P but are rated VMIG-1, P-1 or
MIG-1 by Moody's or F-1+ by Fitch; provided, however, such short-term
Municipal Bonds rated by Moody's or Fitch but not rated by S&P having a demand
feature exercisable in 30 days or less must be backed by a letter of credit,
liquidity facility or guarantee from a bank or other financial institution
having a short-term rating of at least A-1+ from S&P; and further provided
that such short-term Municipal Bonds rated by Moody's or Fitch but not rated
by S&P may comprise no more than 50% of short-term Municipal Bonds that
qualify as S&P Eligible Assets, (ii) the S&P Discount Factor for Rule 2a-7
Money Market Funds will be 110%, (iii) the S&P Discount Factor for Receivables
for Municipal Bonds 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 Bonds sold and (iv) no S&P Discount Factor will be applied to cash
or to Receivables for Municipal Bonds Sold if such receivables are due within
five Business Days of such Valuation Date. "Receivables for Municipal Bonds
Sold," for purposes of calculating S&P Eligible Assets as of any Valuation
Date, means the book value of receivables for Municipal Bonds sold as of or
prior to such Valuation Date. For purposes of the foregoing, Anticipation
Notes rated SP-1 or, if not rated by S&P, rated VMIG-1 by Moody's or F-1+ by
Fitch, which do not mature or have a demand feature exercisable in 30 days and
which do not have a long-term rating, shall be considered to be short-term
Municipal Bonds.
13
The S&P guidelines require certain minimum issue size and impose
other requirements for purposes of determining S&P Eligible Assets. In order
to be considered S&P Eligible Assets, Municipal Bonds must:
(i) be issued by any of the 50 states of the United States,
its territories and their subdivisions, counties, cities, towns,
villages, and school districts, agencies, such as authorities and
special districts created by the states, and certain federally
sponsored agencies such as local housing authorities (payments made
on these bonds are exempt from regular federal income taxes and are
generally exempt from state and local taxes in the state of
issuance);
(ii) except for zero coupon Municipal Bonds rated AAA by S&P
that mature in 30 years or less, be interest bearing and pay interest
at least semi-annually;
(iii) be payable with respect to principal and interest in
U.S. dollars;
(iv) not be subject to a covered call or covered put option
written by the Fund;
(v) except for Inverse Floaters, not be part of a private
placement; and
(vi) except for Inverse Floaters and legally defeased bonds
that are secured by securities issued or guaranteed by the United
States Government, be part of an issue with an original issue size of
at least $10 million or, if of an issue with an original issue size
below $10 million, is rated at least AA or higher by S&P.
Notwithstanding the foregoing:
(i) Municipal Bonds issued by issuers in any one state or
territory will be considered S&P Eligible Assets only to the extent
the fair market value of such Municipal Bonds does not exceed 25% of
the aggregate fair market value of S&P Eligible Assets;
(ii) Municipal Bonds which are escrow bonds or defeased
bonds may compose up to 100% of the aggregate fair market value of
S&P Eligible Assets if such Bonds initially are assigned a rating by
S&P in accordance with S&P's legal defeasance criteria or rerated by
S&P as economic defeased escrow bonds and assigned an AAA rating.
Municipal Bonds may be rated as escrow bonds by another NRSRO or
rerated as an escrow bond and assigned the equivalent of an S&P AAA
rating, provided that such equivalent rated Bonds are limited to 50%
of the aggregate fair market value of S&P Eligible Assets and are
deemed to have an AA S&P rating for purposes of determining the S&P
Discount Factor applicable to such Municipal Bonds. The limitations
on Municipal Bonds in clause (i) above and clauses (iii) and (iv)
below are not applicable to escrow bonds;
(iii) Municipal Bonds which are not rated by any NRSRO may
comprise no more than 10% of S&P Eligible Assets;
(iv) Municipal Bonds rated at least BBB- by S&P, or if not
rated by S&P, rated at least A- by another NRSRO, of any one issuer
or guarantor (excluding bond insurers) will be considered S&P
Eligible Assets only to the extent the fair market value of such
Municipal Bonds does not exceed 10% of the aggregate fair market
value of the S&P Eligible Assets, High Yield Municipal Bonds of any
issuer may comprise no more than 5% of S&P Eligible Assets, and
Municipal Bonds of any one issuer which are not rated by any NRSRO
will be considered S&P Eligible Assets only to the extent the fair
market value of such Municipal Bonds does not exceed 5% of the
aggregate fair market value of the S&P Eligible Assets. In the
aggregate, the maximum issuer exposure is limited to 10% of the S&P
Eligible Assets; and
(v) Municipal Bonds not rated by S&P but rated by another
NRSRO will be included in S&P Eligible Assets only to the extent the
fair market value of such Municipal Bonds does not exceed 50% of the
aggregate fair market value of the S&P Eligible Assets.
14
As discussed in the prospectus, the Fund may engage in options or
futures transactions. For so long as any shares of AMPS are rated by S&P, the
Fund will not purchase or sell financial futures contracts, write, purchase or
sell options on financial futures contracts or write put options (except
covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from S&P that
engaging in such transactions will not impair the ratings then assigned to the
shares of AMPS by S&P, except that the Fund may purchase or sell financial
futures contracts based on the Bond Buyer Municipal Bond Index (the "Municipal
Index") or Treasury Bonds and write, purchase or sell put and call options on
such contracts (collectively "S&P Hedging Transactions"), subject to the
following limitations:
(i) the Fund will not engage in any S&P Hedging Transaction
based on the Municipal Index (other than transactions that terminate
a financial futures contract or option held by the Fund by the Fund's
taking an opposite position thereto ("Closing Transactions")), that
would cause the Fund at the time of such transaction to own or have
sold the least of (A) more than 1,000 outstanding financial futures
contracts based on the Municipal Index, (B) outstanding financial
futures contracts based on the Municipal Index exceeding in number
25% of the quotient of the fair market value of the Fund's total
assets divided by $1,000 or (C) outstanding financial futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded financial futures contracts based on
the Municipal Index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal;
(ii) the Fund will not engage in any S&P Hedging Transaction
based on Treasury Bonds (other than Closing Transactions) that would
cause the Fund at the time of such transaction to own or have sold
the lesser of (A) outstanding financial futures contracts based on
Treasury Bonds exceeding in number 50% of the quotient of the fair
market value of the Fund's total assets divided by $100,000 ($200,000
in the case of the two-year United States Treasury Note) or (B)
outstanding financial futures contracts based on Treasury Bonds
exceeding in number 10% of the average number of daily traded
financial futures contracts based on Treasury Bonds in the 30 days
preceding the time of effecting such transaction as reported by The
Wall Street Journal;
(iii) the Fund will engage in Closing Transactions to close
out any outstanding financial futures contract that the Fund owns or
has sold or any outstanding option thereon owned by the Fund in the
event (A) the Fund does not have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the AMPS Basic
Maintenance Amount on two consecutive Valuation Dates and (B) the
Fund is required to pay Variation Margin on the second such Valuation
Date;
(iv) the Fund will engage in a Closing Transaction to close
out any outstanding financial futures contract or option thereon in
the month prior to the delivery month under the terms of such
financial futures contract or option thereon unless the Fund holds
the securities deliverable under such terms; and
(v) when the Fund writes a financial futures contract or an
option thereon, it will either maintain an amount of cash, cash
equivalents or liquid assets in a segregated account with the Fund'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 Fund's broker with respect to such financial futures
contract or option equals the fair market value of the financial
futures contract or option, or, in the event the Fund writes a
financial futures contract or option thereon that requires delivery
of an underlying security, it shall hold such underlying security in
its portfolio.
For purposes of determining whether the Fund has S&P Eligible Assets
with a Discounted Value that equals or exceeds the AMPS Basic Maintenance
Amount, the Discounted Value of cash or securities held for the payment of
Initial Margin or Variation Margin shall be zero and the aggregate Discounted
Value of S&P Eligible Assets shall be reduced by an amount equal to (i) 30% of
the aggregate settlement value, as marked to market, of any outstanding
financial futures contracts based on the Municipal Index that are owned by the
Fund plus (ii) 25% of the aggregate settlement value, as marked to market, of
any outstanding financial futures contracts based on Treasury Bonds which
contracts are owned by the Fund.
15
Moody's Aaa Rating Guidelines
The Discounted Value of the Fund's Moody's Eligible Assets is
calculated on each Valuation Date. See "Description of AMPS -- Asset
Maintenance -- AMPS Basic Maintenance Amount." Moody's Eligible Assets include
cash, Receivables for Municipal Bonds Sold (as defined below), Rule 2a-7 Money
Market Funds and Municipal Bonds eligible for consideration under Moody's
guidelines. For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of Municipal
Bonds eligible for consideration under such guidelines must be discounted by
the applicable Moody's Discount Factor set forth in the table below. The
Discounted Value of a Municipal Bond eligible for consideration under Moody's
guidelines is the lower of par and the quotient of the fair market value
thereof divided by the Moody's Discount Factor. The Moody's Discount Factor
used to discount a particular Municipal Bond will be determined by reference
to the rating by Moody's, S&P or Fitch on such Municipal Bond, in accordance
with the tables set forth below:
Moody's Rating Category(1)
------------------------------------------------------------------------------
Aaa Aa A Baa Other (2)
--- -- - --- ---------
151% 159% 160% 173% 225%
(1) Ratings assigned by S&P or Fitch are generally accepted by Moody's at
face value. However, adjustments to face value may be made to
particular categories of credits for which the S&P and/or Fitch
rating does not seem to approximate a Moody's rating equivalent.
Split rated securities assigned by S&P and Fitch will be accepted at
the lower of the two ratings.
(2) Municipal Bonds rated Ba1 to B3 by Moody's or, if not rated by
Moody's, rated BB+ to B- by S&P or Fitch. In addition, Municipal
Bonds not explicitly rated by Moody's, S&P or Fitch, but rated at
least the equivalent of B3 internally by the Investment Adviser,
provided that Moody's reviews and achieves sufficient comfort with
the Investment Adviser's internal credit rating processes, will be
included under "Other" in the table. Unless conclusions regarding
liquidity risk as well as estimates of both the probability and
severity of default for the Fund's assets can be derived from other
sources as well as combined with a number of sources as presented by
the Fund to Moody's, unrated Municipal Bonds which are rated at least
the equivalent of B3 by the Investment Adviser internally are limited
to 10% of Moody's Eligible Assets.
Moody's Rating Category
--------------------------------------------------------------
MIG-1, VMIG-1, P-1(1) MIG-1, VMIG-1, P-1(2)
----------------------------- -----------------------------
100% 136%
---------------------
(1) Moody's rated Municipal Bonds that have a maturity less than or equal
to 49 days and Municipal Bonds not rated by Moody's but rated the
equivalent to MIG-1, VMIG-1, or P-1 by S&P or Fitch that have a
maturity less than or equal to 49 days.
(2) Moody's rated Municipal Bonds that have a maturity greater than 49
days and Municipal Bonds not rated by Moody's but rated the
equivalent to MIG-1, VMIG-1, or P-1 by S&P or Fitch that have a
maturity greater than 49 days.
Notwithstanding the foregoing, no Moody's Discount Factor will be
applied to cash or to Receivables for Municipal Bonds Sold that are due within
five Business Days of such Valuation Date. The Moody's Discount Factor for
Receivables for Municipal Bonds Sold that are due within six and 30 Business
Days of such Valuation Date will be the Moody's Discount Factor applicable to
the Municipal Bonds sold. "Receivables for Municipal Bonds Sold," for purposes
of calculating Moody's Eligible Assets as of any Valuation Date, means the
book value of receivables for Municipal Bonds sold as of or prior to such
Valuation Date if such receivables are due within 30 Business Days of such
Valuation Date.
The Moody's Discount Factor for Inverse Floaters shall be the product
of (x) the percentage determined by reference to the rating on the security
underlying such Inverse Floaters multiplied by (y) 1.25.
The Moody's Discount Factor for Rule 2a-7 Money Market Funds shall be
110%.
16
The Moody's guidelines impose certain requirements as to minimum
issue size, issuer diversification and geographical concentration, as well as
other requirements for purposes of determining whether Municipal Bonds
constitute Moody's Eligible Assets, as set forth in the table below:
Minimum Maximum Maximum
Issue Size Underlying Obligor State Allowed
Rating ($ Millions) (%)(1) (%)(1)(3)
Aaa * 100 100
Aa 10 20 60
A 10 10 40
Baa 10 6 20
Ba 10 4 12
B 10 3 12
Other (2) 10 2 12
------------------
* Not applicable.
(1) The referenced percentages represent maximum cumulative totals for
the related rating category and each lower rating category.
(2) Municipal Bonds not rated by Moody's, S&P or Fitch, but rated at
least the equivalent of B3 internally by the Investment Adviser.
(3) Territorial bonds (other than those issued by Puerto Rico and counted
collectively) are each limited to 10% of Moody's Eligible Assets. For
diversification purposes, Puerto Rico will be treated as a state.
For purposes of the maximum underlying obligor requirement described
above, any Municipal Bond backed by the guaranty, letter of credit or
insurance issued by a third party will 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 Bond.
Current Moody's guidelines also require that Municipal Bonds
constituting Moody's Eligible Assets pay interest in cash, are publicly rated
B3 or higher by Moody's or, if not rated by Moody's, but rated by S&P or
Fitch, are publicly rated at least B- by S&P or Fitch, or if not explicitly
rated by Moody's, S&P or Fitch, be rated at least the equivalent of B3
internally by the Investment Adviser, provided that Moody's reviews and
achieves sufficient comfort with the Investment Adviser's internal credit
rating processes, not have suspended ratings by Moody's, if an Inverse
Floater, be explicitly rated by Moody's, and be part of an issue of Municipal
Bonds of at least $10,000,000 (except for issues rated Aaa by Moody's, as
provided in the chart above).
When the Fund sells a Municipal Bond and agrees to repurchase it at a
future date, the Discounted Value of such Municipal Bond will constitute a
Moody's Eligible Asset and the amount the Fund is required to pay upon
repurchase of such Bond will count as a liability for purposes of calculating
the AMPS Basic Maintenance Amount. For so long as the AMPS are rated by
Moody's, the Fund will not enter into any such reverse repurchase agreements
unless it has received written confirmation from Moody's that such
transactions would not impair the rating then assigned the AMPS by Moody's.
When the Fund purchases a Municipal Bond and agrees to sell it at a future
date to another party, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less;
otherwise the Discounted Value of such Bond will constitute a Moody's Eligible
Asset.
High Yield Municipal Bonds may comprise no more than 20% of Moody's
Eligible Assets. Unless conclusions regarding liquidity risk as well as
estimates of both the probability and severity of default for the Fund's
assets can be derived from other sources as well as combined with a number of
sources as presented by the Fund to Moody's, unrated High Yield Municipal
Bonds which are rated at least the equivalent of B3 by the Investment Adviser
internally are limited to 10% of Moody's Eligible Assets.
Inverse Floaters, including primary market and secondary market
residual interest bonds, may constitute no more than 10% of Moody's Eligible
Assets.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset if it is (i) held in a margin account, (ii) subject to
any material lien, mortgage, pledge, security interest or security agreement
of any
17
kind, (iii) held for the purchase of a security pursuant to a Forward
Commitment or (iv) irrevocably deposited by the Fund for the payment of
dividends or redemption.
For so long as shares of AMPS are rated by Moody's, in managing the
Fund's portfolio, the Investment Adviser will not alter the composition of the
Fund's portfolio if, in the reasonable belief of the Investment Adviser, the
effect of any such alteration would be to cause the Fund to have Moody's
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the AMPS Basic Maintenance Amount as of
such Valuation Date; provided, however, that in the event that, as of the
immediately preceding Valuation Date, the aggregate Discounted Value of
Moody's Eligible Assets exceeded the AMPS Basic Maintenance Amount by 5% or
less, the Investment Adviser will not alter the composition of the Fund's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of Moody's Eligible Assets unless the Fund shall have confirmed that,
after giving effect to such alteration, the aggregate Discounted Value of
Moody's Eligible Assets would exceed the AMPS Basic Maintenance Amount.
For so long as any shares of AMPS are rated by Moody's, the Fund will
not engage in Bond Market Association Municipal Swap Index swap transactions
("BMA swap transactions"), buy or sell financial futures contracts, write,
purchase or sell call options on financial futures contracts or purchase put
options on financial 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 shares of AMPS by Moody's, except that the Fund may
engage in BMA swap transactions, purchase or sell exchange-traded financial
futures contracts based on any index approved by Moody's or Treasury Bonds,
and purchase, write or sell exchange-traded put options on such financial
futures contracts, and purchase, write or sell exchange-traded call options on
such financial futures contracts (collectively, "Moody's Hedging
Transactions"), subject to the following limitations:
(i) the Fund will not engage in any Moody's Hedging
Transaction based on the Municipal Index (other than Closing
Transactions) that would cause the Fund at the time of such
transaction to own or have sold (A) outstanding financial futures
contracts based on the Municipal Index exceeding in number 10% of the
average number of daily traded financial futures contracts based on
the Municipal Index in the 30 days preceding the time of effecting
such transaction as reported by The Wall Street Journal or (B)
outstanding financial futures contracts based on the Municipal Index
having a fair market value exceeding 50% of the fair market value of
all Municipal Bonds constituting Moody's Eligible Assets owned by the
Fund (other than Moody's Eligible Assets already subject to a Moody's
Hedging Transaction);
(ii) the Fund will not engage in any Moody's Hedging
Transaction based on Treasury Bonds (other than Closing Transactions)
that would cause the Fund at the time of such transaction to own or
have sold (A) outstanding financial futures contracts based on
Treasury Bonds having an aggregate fair market value exceeding 40% of
the aggregate fair market value of Moody's Eligible Assets owned by
the Fund 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 financial futures
contracts based on Treasury Bonds having an aggregate fair market
value exceeding 80% of the aggregate fair market value of all
Municipal Bonds constituting Moody's Eligible Assets owned by the
Fund (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 purposes of
the foregoing clauses (i) and (ii), the Fund shall be deemed to own
the number of financial futures contracts that underlie any
outstanding options written by the Fund);
(iii) the Fund will engage in Closing Transactions to close
out any outstanding financial 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 Fund will engage in a Closing Transaction to close
out any outstanding financial futures contract by no later than the
fifth Business Day of the month in which such contract expires and
will engage in a Closing Transaction to close out any outstanding
option on a financial futures contract by no later than the first
Business Day of the month in which such option expires;
18
(v) the Fund will engage in Moody's Hedging Transactions
only with respect to financial futures contracts or options thereon
having the next settlement date or the settlement date immediately
thereafter;
(vi) the Fund (A) will not engage in options and futures
transactions for leveraging or speculative purposes, except that the
Fund may engage in an option or futures transaction so long as the
combination of the Fund's non-derivative positions, together with the
relevant option or futures transaction, produces a synthetic
investment position, or the same economic result, that could be
achieved by an investment, consistent with the Fund's investment
objective and policies, in a security that is not an option or
futures transaction, subject to the Investment Adviser periodically
demonstrating to Moody's that said economic results are achieved, and
(B) will not write any call options or sell any financial futures
contracts for the purpose of hedging the anticipated purchase of an
asset prior to completion of such purchase;
(vii) the Fund will not enter into an option or futures
transaction unless, after giving effect thereto, the Fund would
continue to have Moody's Eligible Assets with an aggregate Discounted
Value equal to or greater than the AMPS Basic Maintenance Amount; and
(viii) the Fund will not engage in BMA swap transactions
with respect to more than 20% of the Fund's net assets; provided that
the Fund's use of futures will proportionately decrease as the Fund's
use of BMA swap transactions increases, and vice-versa.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of Moody's Eligible Assets that
the Fund 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 Fund that are either exchange-traded and "readily reversible"
or that 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 Fund; (ii) assets subject to
call options written by the Fund not meeting the requirements of clause (i) of
this sentence shall have no value; (iii) assets subject to put options written
by the Fund 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 Fund is the
seller the contract may be valued at the settlement price and where the Fund
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 Fund with any security
of a class of securities, the Fund shall assume that it will take delivery of
the security with the lowest Discounted Value.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund:
(i) 10% of the exercise price of a written call option; (ii) the exercise
price of any written put option; (iii) where the Fund is the seller under a
financial futures contract, 10% of the settlement price of the financial
futures contract; (iv) where the Fund is the purchaser under a financial
futures contract, the settlement price of assets purchased under such
financial futures contract; (v) the settlement price of the underlying
financial futures contract if the Fund writes put options on a financial
futures contract; and (vi) 105% of the fair market value of the underlying
financial futures contracts if the Fund writes call options on a financial
futures contract and does not own the underlying contract.
For so long as any shares of AMPS are rated by Moody's, the Fund 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), except that the Fund may enter into
such contracts to purchase newly-issued securities on the date such securities
are issued ("Forward Commitments"), subject to the following limitations:
(i) the Fund will maintain in a segregated account with its
custodian cash, cash equivalents or short-term, fixed-income
securities rated P-1, MIG-1 or VMIG-1 by Moody's and maturing prior
to the date of the Forward Commitment with a fair market value that
equals or exceeds the amount of the Fund's obligations under any
Forward Commitments to which it is from time to time a party or
long-term, fixed
19
income securities with a Discounted Value that equals or exceeds the
amount of the Fund's obligations under any Forward Commitment to
which it is from time to time a party, and
(ii) the Fund will not enter into a Forward Commitment
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to
or greater than the AMPS Basic Maintenance Amount.
For purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the AMPS
Basic Maintenance Amount, the Discounted Value of all Forward Commitments to
which the Fund is a party and of all securities deliverable to the Fund
pursuant to such Forward Commitments shall be zero.
-----------------
For so long as shares of AMPS are rated by S&P or Moody's, the Fund,
unless it has received written confirmation from S&P and/or Moody's, as the
case may be, that such action would not impair the ratings then assigned to
the AMPS by S&P and/or Moody's, as the case may be, will not (i) borrow money
except for the purpose of clearing transactions in portfolio securities (which
borrowings under any circumstances shall be limited to the lesser of $10
million and an amount equal to 5% of the fair market value of the Fund's
assets at the time of such borrowings and which borrowings shall be repaid
within 60 days and not be extended or renewed and shall not cause the
aggregate Discounted Value of Moody's Eligible Assets and S&P Eligible Assets
to be less than the AMPS Basic Maintenance Amount), (ii) engage in short sales
of securities, (iii) lend any securities, (iv) issue any class or series of
stock ranking prior to or on a parity with the AMPS with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, (v) reissue any AMPS previously
purchased or redeemed by the Fund, (vi) merge or consolidate into or with any
other corporation or entity, (vii) change the Fund's pricing service or (viii)
engage in reverse repurchase agreements.
For as long as the AMPS are rated by S&P, the Fund will not, unless
it has received written confirmation from S&P that such action would not
impair the rating then assigned to the shares of AMPS by S&P, engage in
interest rate swaps, caps and floors, except that the Fund may, without
obtaining the written consent described above, engage in swaps, caps and
floors if: (i) the counterparty to the swap transaction has a short-term
rating of A-1 or, if the counterparty does not have a short-term rating, the
counterparty's senior unsecured long-term debt rating is A- or higher, (ii)
the original aggregate notional amount of the interest rate swap transaction
or transactions is not to be greater than the liquidation preference of the
AMPS, (iii) the interest rate swap transaction will be marked-to-market weekly
by the swap counterparty, (iv) if the Fund fails to maintain an aggregate
discounted value at least equal to the AMPS Basic Maintenance Amount on two
consecutive Valuation Dates then the agreement shall terminate immediately,
(v) for the purpose of calculating the Discounted Value of S&P Eligible
Assets, 90% of any positive mark-to-market valuation of the Fund's rights will
be S&P Eligible Assets, 100% of any negative mark-to-market valuation of the
Fund's rights will be included in the calculation of the AMPS Basic
Maintenance Amount, and (vi) the Fund must maintain liquid assets with a value
at least equal to the net amount of the excess, if any, of the Fund's
obligations over its entitlement with respect to each swap. For caps/floors,
the Fund must maintain liquid assets with a value at least equal to the Fund's
obligations with respect to such caps or floors.
DIRECTORS AND OFFICERS
The Directors of the Fund consist of seven individuals, six of whom
are not "interested persons" of the Fund as defined in the 1940 Act (the
"non-interested Directors"). The Directors are responsible for the overall
supervision of the operations of the Fund and perform the various duties
imposed on the directors of investment companies by the 1940 Act.
Each non-interested Director is a member of the Fund's Audit and
Oversight Committee (the "Audit Committee"). The principal responsibilities of
the Audit Committee are the appointment, compensation and oversight of the
Fund's independent accountants, including the resolution of disagreements
regarding financial reporting between Fund management and such independent
accountants. The Audit Committee's responsibilities include, without
limitation, to (i) review with the independent accountants the arrangements
for and scope of annual and special audits and any other services provided by
the independent accountants to the Fund; (ii) discuss with the
20
independent accountants certain matters relating to the Fund's financial
statements, including any adjustment to such financial statements recommended
by such independent accountants or any other results of any audit; (iii)
ensure that the independent accountants submit on a periodic basis a formal
written statement with respect to their independence, discuss with the
independent accountants any relationships or services disclosed in the
statement that may impact the objectivity and independence of the Fund's
independent accountants and recommend that the Board of Directors take
appropriate action in response thereto to satisfy itself of the independent
accountants' independence; and (iv) consider the comments of the independent
accountants with respect to the quality and adequacy of the Fund's accounting
and financial reporting policies and practices and internal controls and Fund
management's responses thereto. The Board of Directors of the Fund has adopted
a written charter for the Audit Committee. The Committee has retained
independent legal counsel to assist it in connection with these duties. The
Audit Committee met five times during the Fund's fiscal year ended August 31,
2003.
Each non-interested Director is also a member of the Fund's
Nominating Committee (the "Nominating Committee"). The principal
responsibilities of the Nominating Committee are to identify individuals
qualified to serve as non-interested Directors of the Fund and to recommend
its nominees for consideration by the full Board. While the Nominating
Committee is solely responsible for the selection and nomination of the Fund's
non-interested Directors, the Nominating Committee may consider nominations
for the office of the Director made by Fund stockholders as it deems
appropriate. Fund stockholders who wish to recommend a nominee should send
nominations to the Secretary of the Fund that include biographical information
and set forth the qualifications of the proposed nominee. The Nominating
Committee is newly formed and did not meet during the Fund's fiscal year ended
August 31, 2003.
Biographical Information
Certain biographical and other information relating to the
non-interested Directors of the Fund is set forth below, including their ages,
their principal occupations for at least the last five years, the length of
time served, the total number of portfolios overseen in the complex of funds
advised by the Investment Adviser, Merrill Lynch Investment Managers, L.P.
("MLIM") or their affiliates ("MLIM/FAM-advised funds") and other public
directorships.
Number of
Term of MLIM/FAM-Advised
Position(s) Office** and Funds and
Name, Address* Held with the Length of Time Principal Occupation(s) Portfolios Public
and Age Fund Served During Past Five Years Overseen Directorships
------------- ------------ ---------------- --------------------------- -------------- ------------------------
Ronald W. Director Director Professor Emeritus of 49 None
Forbes (63) since 1988 Finance, School of registered
Business, State University investment
of New York at Albany companies
since 2000 and professor consisting of
thereof from 1989 to 2000; 49 portfolios
International Consultant,
Urban Institute,
Washington, D.C. from 1995
to 1999.
Cynthia A. Director Director since Professor, Harvard 49 NewellRubbermaid
Montgomery 1993 Business School since registered Inc. (manufacturing)
(51) 1989; Associate Professor, investment
J.L. Kellogg Graduate companies
School of Management, consisting of
Northwestern University 49 portfolios
from 1985 to 1989;
Associate Professor,
Graduate School of
Business Administration,
University of Michigan
from 1979 to 1985.
Kevin A. Ryan Director Director Founder and currently 49 None
(71) since 1992 Director Emeritus of the registered
Boston University Center investment
for the Advancement of companies
Ethics and Character and consisting of
Director thereof from 1989 49
to 1999; Professor portfolios
(continued on next page)
21
Number of
Term of MLIM/FAM-Advised
Position(s) Office** and Funds and
Name, Address* Held with the Length of Time Principal Occupation(s) Portfolios Public
and Age Fund Served During Past Five Years Overseen Directorships
------------- ------------ ---------------- --------------------------- -------------- ------------------------
from 1982 to 1999 and
currently Professor Emeritus
of Education of Boston
University; formerly
taught on the faculties of
The University of Chicago,
Stanford University and
Ohio State University.
Roscoe S. Director Director since President, Middle East 49 None
Suddarth (68) 2000 Institute, from 1995 to registered
2001; Foreign Service investment
Officer, United States companies
Foreign Service, from 1961 consisting of
to 1995; Career Minister, 49 portfolios
from 1989 to 1995; Deputy
Inspector General, U.S.
Department of State, from
1991 to 1994; U.S.
Ambassador to the
Hashemite Kingdom of
Jordan, from 1987 to 1990.
Richard R. Director Director since Professor of Finance since 49 Bowne & Co., Inc.
West (66) 1988 1984, Dean from 1984 to registered (financial
1993 and currently Dean investment printers); Vornado
Emeritus of New York companies Realty Trust, Inc.
University Leonard N. consisting of (real estate
Stern School of Business 49 portfolios holding company);
Administration. Vornado Operating
Company (real
estate company);
Alexander's Inc.
(real estate
company)
Edward D. Director Director since Self-employed financial 49 None
Zinbarg (69) 2000 consultant since 1994; registered
Executive Vice President investment
of the Prudential companies
Insurance Company of consisting of
America from 1988 to 1994; 49 portfolios
Former Director of
Prudential Reinsurance
Company and former Trustee
of the Prudential
Foundation.
------------------
* The address of each non-interested Director is P.O. Box 9095,
Princeton, New Jersey 08543-9095.
** Each Director serves until his or her successor is elected and
qualified, until December 31 of the year in which he or she turns 72,
or until his or her death, resignation, or removal as provided in the
Fund's By-laws, Charter or by statute.
Certain biographical and other information relating to the Director
who is an "interested person" of the Fund as defined in the 1940 Act (the
"interested Director") and the other officers of the Fund is set forth below,
including their ages, their principal occupations for at least the last five
years, the length of time served, the total number of portfolios overseen in
MLIM/FAM-advised funds and public directorships held.
Number of
Term of MLIM/FAM-Advised
Position(s) Office and Funds and
Name, Address* Held with the Length of Time Principal Occupation(s) Portfolios Public
and Age Fund Served** During Past Five Years Overseen Directorships
------------- ------------ ---------------- --------------------------- -------------- ------------------------
Terry K. Glenn President President since President of the 125 registered None
(63)*** and Director 1999 and MLIM/FAM-advised funds investment
Director**** since since 1999; Chairman companies
1988 (Americas Region) of consisting of
MLIM from 2000 to 2002; 160 portfolios
Executive Vice President
of
(continued on next page)
22
Number of
Term of MLIM/FAM-Advised
Position(s) Office and Funds and
Name, Address* Held with the Length of Time Principal Occupation(s) Portfolios Public
and Age Fund Served** During Past Five Years Overseen Directorships
------------- ------------ ---------------- --------------------------- -------------- ------------------------
MLIM and the Investment
Adviser (which terms
as used herein
include their corporate
predecessors) from 1983
to 2002; President of FAM
Distributors, Inc.
("FAMD" or the
"Distributor") from 1986
to 2002 and Director
thereof from 1991 to
2002; Executive Vice
President and Director of
Princeton Services, Inc.
("Princeton Services")
from 1993 to 2002;
President of Princeton
Administrators, L.P. from
1988 to 2002; Director of
Financial Data Services,
Inc. from 1985 to 2002.
Donald C. Vice Vice President First Vice President of 124 registered None
Burke (43) President since 1993 and MLIM and the Investment investment
and Treasurer Treasurer since Adviser since 1997 and companies
1999 Treasurer thereof since consisting of
1999; Senior Vice 159 portfolios
President and Treasurer
of Princeton Services
since 1999; Vice
President of FAMD since
1999; Vice President of
MLIM and the Investment
Adviser from 1990 to
1997; Director of
Taxation of MLIM since
1990.
Kenneth A. Senior Vice Senior Vice Managing Director of 39 registered None
Jacob (53) President President since MLIM since 2000; First investment
2002 Vice President of MLIM companies
from 1997 to 2000; Vice consisting of
President of MLIM from 51 portfolios
1984 to 1997.
John M. Senior Vice Senior Vice Managing Director of 39 registered None
Loffredo (40) President President since MLIM since 2000; First investment
2002 Vice President of MLIM companies
from 1997 to 2000; Vice consisting of
President of MLIM from 51 portfolios
1991 to 1997; Portfolio
Manager of the
Investment Adviser and
MLIM since 1997.
Fred K. Steube Vice Vice President Director (Municipal 4 None
(53) President since 1990 Tax-Exempt Fund registered
Management) since 2000; investment
Vice President companies
of MLIM from consisting
1994 to 2000. of 4
portfolios
(continued on next page)
23
Number of
Term of MLIM/FAM-Advised
Position(s) Office and Funds and
Name, Address* Held with the Length of Time Principal Occupation(s) Portfolios Public
and Age Fund Served** During Past Five Years Overseen Directorships
------------- ------------ ---------------- --------------------------- -------------- ------------------------
Phillip S. Secretary Secretary since First Vice President of 124 registered
Gillespie (40) 2004 MLIM since 2001; investment
Director of MLIM from companies
2000 to 2001; Vice consisting of
President of MLIM from 159 portfolios
1999 to 2000.
_______________________
* The address of each officer listed is P.O. Box 9011, Princeton, New
Jersey 08543-9011.
** Elected by and serves at the pleasure of the Board of Directors of
the Fund.
*** Mr. Glenn is an "interested person," as defined in the 1940 Act, of
the Fund based on his former positions with the Investment Adviser,
MLIM, FAMD, Princeton Services, and Princeton Administrators, L.P.
**** As a Director, Mr. Glenn serves until his successor is elected and
qualified or until December 31 of the year in which he turns 72, or
until his death, resignation, or removal as provided in the Fund's
by-laws, charter or by statute.
In connection with the election of the Fund's Directors, holders of
shares of AMPS, Other AMPS and other preferred stock, voting as a separate
class, are entitled to elect two of the Fund's Directors, and the remaining
Directors are elected by all holders of capital stock, voting as a single
class. Mr. Forbes and Mr. West are the Directors elected by holders of
preferred stock. See "Description of AMPS-Voting Rights."
Share Ownership
Information relating to each Director's share ownership in the Fund
and in all registered funds in the Merrill Lynch family of funds that are
overseen by the respective Director ("Supervised Merrill Lynch Funds") as of
December 31, 2003 is set forth in the chart below.
Aggregate Dollar Range
of Securities in
Aggregate Dollar Range Supervised Merrill
Name of Equity in the Fund Lynch Funds
---- --------------------- -----------
Interested Director:
Terry K. Glenn............ over $100,000 Over $100,000
Non-interested Directors:
Ronald W. Forbes.......... $10,001-$50,000 Over $100,000
Cynthia A. Montgomery..... None Over $100,000
Kevin A. Ryan............. None Over $100,000
Roscoe S. Suddarth........ None Over $100,000
Richard R. West........... None Over $100,000
Edward D. Zinbarg......... None Over $100,000
As of the date of this statement of additional information, none of
the Directors and officers of the Fund owned any outstanding shares of common
stock or Other AMPS of the Fund. As of the date of this statement of
additional information, none of the non-interested Directors of the Fund or
their immediate family members owned beneficially or of record any securities
in ML & Co.
Compensation of Directors
The Fund pays each non-interested Director a combined fee of $3,800
per year plus a fee of $150 for each in-person Board meeting attended and $150
for each in-person Audit Committee and Nominating Committee meeting attended,
together with such Director's out-of-pocket expenses relating to attendance at
such meetings. The Chairman of the Fund's Audit Committee receives an
additional annual fee of $1,000.
24
The following table shows the compensation earned by the
non-interested Directors for the Fund's fiscal year ended August 31, 2003 and
the aggregate compensation paid to them from all MLIM/FAM-advised funds for
the calendar year ended December 31, 2003.
Pension Aggregate
Retirement Compensation
Benefits From Fund and
Accrued as other
Compensation Part of Fund FAM/MLIM-
Name of Director from Fund Expense Advised Funds**
-------------------------------- ----------- -------------- ---------------
Ronald W. Forbes*...................$6,000 None $272,592
Cynthia A. Montgomery...............$5,000 None $251,925
Kevin A. Ryan.......................$5,000 None $251,925
Roscoe S. Suddarth..................$5,000 None $251,925
Richard R. West.....................$5,000 None $251,925
Edward D. Zinbarg...................$5,000 None $251,925
---------------
* Chairman of the Audit Committee.
** For the number of MLIM/FAM-advised funds from which each Director
received compensation see table above under "--Biographical Information."
Pursuant to its investment advisory agreement with the Fund (the
"Investment Advisory Agreement"), the Investment Adviser pays all compensation
to all officers of the Fund and all Directors of the Fund who are affiliated
with ML & Co. or its subsidiaries.
INVESTMENT ADVISORY AND MANAGEMENT ARRANGEMENTS
The Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch, provides
the Fund with investment advisory and administrative services. The Investment
Adviser acts as the investment adviser to more than 100 registered investment
companies and offers investment advisory services to individuals and
institutional accounts. As of May 2004, the Investment Adviser and its
affiliates, including MLIM, had a total of approximately $491 billion in
investment company and other portfolio assets under management, including
approximately $253 billion in fixed income assets. This amount includes assets
managed by certain affiliates of the Investment Adviser. The Investment
Adviser is a limited partnership, the partners of which are ML & Co. and
Princeton Services. The principal business address of the Investment Adviser
is 800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment Advisory Agreement provides that, subject to the
supervision of the Fund's Board of Directors, the Investment Adviser is
responsible for the actual management of the Fund's portfolio. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser, subject to review by the Board of
Directors.
The portfolio manager primarily responsible for the Fund's day to day
management is Fred K. Steube. Fred K. Steube has been a Director (Municipal
Tax-Exempt Fund Management) of MLIM since 2000 and has 24 years of experience
investing in Municipal Bonds. The Fund's portfolio manager will consider
analyses from various sources, make the necessary investment decisions, and
place orders for transactions accordingly.
For its services, the Fund pays the Investment Adviser a monthly fee
at the annual rate of 0.50% of the Fund's average weekly net assets ("average
weekly net assets" means the average weekly value of the total assets of the
Fund, including the proceeds from the issuance of preferred stock, minus the
sum of (i) accrued liabilities of the Fund, (ii) any accrued and unpaid
interest on outstanding borrowings and (iii) accumulated dividends on shares
of preferred stock). For purposes of this calculation, average weekly net
assets is determined at the end of each month on the basis of the average net
assets of the Fund for each week during the month. The assets for each weekly
period are determined by averaging the net assets at the last
25
business day of a week with the net assets at the last business day of the
prior week. The liquidation preference of any outstanding preferred stock
(other than accumulated dividends) is not considered a liability in
determining the Fund's average daily net assets.
For the six months ended February 29, 2004 and the fiscal years ended
August 31, 2003, 2002 and 2001, the fees paid by the Fund to the Investment
Adviser pursuant to the Investment Advisory Agreement were $2,187,658,
$4,371,765, $4,281,952 and $4,269,279, respectively.
For the six months ended February 29, 2004, and the fiscal years
ended August 31, 2003, 2002 and 2001, the Investment Adviser reimbursed the
Fund $25,727, $33,163, $1,705, and $0, respectively.
The Investment Advisory Agreement obligates the Investment Adviser to
provide investment advisory services and to pay all compensation of and
furnish office space for officers and employees of the Fund connected with
investment and economic research, trading and investment management of the
Fund, as well as the compensation of all Directors of the Fund who are
affiliated persons of the Investment Adviser or any of its affiliates. The
Fund pays all other expenses incurred in the operation of the Fund, including,
among other things, expenses for legal and auditing services, taxes, costs of
preparing, printing and mailing proxies, listing fees, stock certificates and
stockholder reports, charges of the custodian and the transfer agent, dividend
disbursing agent and registrar, Commission fees, fees and expenses of
non-interested Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring expenses,
mailing and other expenses properly payable by the Fund. Certain accounting
services are provided to the Fund by State Street Bank and Trust Company
("State Street") pursuant to an agreement between State Street and the Fund.
The Fund will pay the costs of these services. In addition, the Fund will
reimburse the Investment Adviser for certain additional accounting services.
The table below shows the amounts paid by the Fund to State Street
and to the Investment Adviser for accounting services for the periods
indicated:
Paid by the Fund Paid by the Fund to the
Period to State Street Investment Adviser
Six months ended February 29, 2004... $117,126 $8,884
Fiscal year ended 2003............... $237,622 $19,189
Fiscal year ended 2002............... $233,869 $27,918
Fiscal year ended 2001............... $154,896 $105,628
Unless earlier terminated as described below, the Investment Advisory
Agreement will remain in effect from year to year if approved annually (a) by
the Board of Directors of the Fund or by a majority of the outstanding shares
of the Fund and (b) by a majority of the Directors who are not parties to such
contract or interested persons (as defined in the 1940 Act) of any such party.
Such contract is not assignable and may be terminated without penalty on 60
days' written notice at the option of either party thereto or by the vote of
the stockholders of the Fund.
In connection with the Board of Directors' consideration of the
Investment Advisory Agreement, the Board compared the Fund's fee rate for
advisory and administrative services and the Fund's historical performance to
certain comparable funds and reviewed information derived from a number of
sources and covering a range of issues. The Board of Directors considered the
compensation paid to the Investment Adviser and the services provided to the
Fund by the Investment Adviser under the Investment Advisory Agreement, as
well as other services provided by the Investment Adviser and its affiliates
under other agreements, and the personnel who will provide these services. In
addition to the investment advisory services provided to the Fund, the
Investment Adviser and its affiliates provide administrative services,
stockholder services, oversight of fund accounting, marketing services,
assistance in meeting legal and regulatory requirements, and other services
necessary for the operation of the Fund. The Fund's Board of Directors also
considered the direct and indirect benefits to the Investment Adviser from its
26
relationship with the Fund. Based on their experience as Directors of the Fund
and as directors of other MLIM/FAM-advised funds, the Board of Directors
concluded that the services provided in all areas were of a high quality and
that the Fund benefits and would continue to benefit from those services.
In reviewing the Investment Advisory Agreement, the Board focused on
the experience, resources and strengths of the Investment Adviser and its
affiliates in managing investment companies that invest in Municipal Bonds,
including a number of other MLIM/FAM-advised leveraged closed end funds that
have investment objectives and strategies substantially similar to those of
the Fund. The Board also considered the Investment Adviser's experience in
managing funds that use leverage through the issuance of preferred stock. The
Board concluded that the Investment Adviser has a high level of expertise in
managing the types of investments used by the Fund and in managing leverage,
and concluded that the Fund benefits from that expertise. The Directors, based
on their experience as directors of other investment companies managed by the
Investment Adviser and its affiliates as well as of the Fund, also focused on
the quality of the Investment Adviser's compliance and administrative staff.
The Board noted that, in addition to the analysts and compliance personnel
dedicated to the tax-exempt fixed income management group, the Investment
Adviser has a separate administrative, legal and compliance staff to ensure a
high level of quality in the compliance and administrative services provided
to the Fund.
In connection with its consideration of the Investment Advisory
Agreement, the Board of Directors also reviewed the compliance and
administrative services provided to the Fund by the Investment Adviser,
including its oversight of the Fund's day to day operations and its oversight
of Fund accounting. The Investment Adviser and its affiliates provide
compliance and administrative services to the Fund and all the
MLIM/FAM-advised funds, as well as to a number of third party fund groups. The
Board of Directors concluded, based on their experience as Directors, that,
historically, the compliance and administrative services provided by the
Investment Adviser and its affiliates were of a high quality and that the Fund
has benefited from these services.
In reviewing the Investment Advisory Agreement, the Board of
Directors placed significant emphasis on the Fund's fee rate for advisory and
administrative services and the Fund's historical performance as compared to
those of comparable leveraged, closed end funds that are managed by other
investment advisers that invest primarily in municipal obligations as provided
by Lipper Inc. In particular, the Board of Directors noted that the Fund had
the second lowest contractual advisory fee rate at a common asset level (below
the median of the group) among ten comparable funds. The Board of Directors
also found that the Fund had the fourth lowest fee rate for advisory and
administrative services as a percentage of total assets at a common asset
level and the fourth lowest fee rate for advisory and administrative services
as a percentage of assets attributable to common stock at a common asset level
including leverage (below the median of the group). The Board also compared
the Fund's total expenses, both including and excluding assets attributable to
leverage, and concluded that, in each case the Fund's expenses were fifth
lowest in its category and below the median of the group. The Board also noted
that the Fund's historical performance was comparable to that of other
similarly managed closed end leveraged municipal debt funds. The Board of
Directors concluded that the advisory fee rate was reasonable in relation to
the services provided by the Investment Adviser to the Fund as well as the
costs incurred and benefits to be gained by the Investment Adviser and its
affiliates in providing such services.
The Board considered whether there should be changes in the advisory
fee rate or structure in order to enable the Fund to participate in any
economies of scale that the Investment Adviser may experience as a result of
growth in the Fund's assets. The Board of Directors determined that the
current management fee structure was reasonable and that no changes are
currently necessary. The non-interested Directors were represented by
independent counsel who assisted them in their deliberations.
Code of Ethics
The Fund's Board of Directors approved a Code of Ethics under Rule
17j-1 of the 1940 Act that covers the Fund and the Investment Adviser. The
Code of Ethics establishes procedures for personal investing and restricts
certain transactions. Employees subject to the Code of Ethics may invest in
securities for their personal investment accounts, including securities that
may be purchased or held by the Fund.
27
Proxy Voting Policies and Procedures
The Fund's Board of Directors has delegated to the Investment Adviser
authority to vote all proxies relating to the Fund's portfolio securities. The
Investment Adviser has adopted policies and procedures ("Proxy Voting
Procedures") with respect to the voting of proxies related to the portfolio
securities held in the account of one or more of its clients, including the
Fund. Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting decisions solely
in the best interests of the Fund and its stockholders, and to act in a manner
that the Investment Adviser believes is most likely to enhance the economic
value of the securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that the Investment Adviser considers the interests of its
clients, including the Fund, and not the interests of the Investment Adviser,
when voting proxies and that real (or perceived) material conflicts that may
arise between the Investment Adviser's interest and those of the Investment
Adviser's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The Committee
is comprised of the Investment Adviser's Chief Investment Officer (the "CIO"),
one or more other senior investment professionals appointed by the CIO,
portfolio managers and investment analysts appointed by the CIO and any other
personnel the CIO deems appropriate. The Committee will also include two
non-voting representatives from the Investment Adviser's Legal department
appointed by the Investment Adviser's General Counsel. The Committee's
membership shall be limited to full-time employees of the Investment Adviser.
No person with any investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a member
of the Committee or participate in its decision making (except to the extent
such person is asked by the Committee to present information to the Committee,
on the same basis as other interested knowledgeable parties not affiliated
with the Investment Adviser might be asked to do so). The Committee determines
how to vote the proxies of all clients, including the Fund, that have
delegated proxy voting authority to the Investment Adviser and seeks to ensure
that all votes are consistent with the best interests of those clients and are
free from unwarranted and inappropriate influences. The Committee establishes
general proxy voting policies for the Investment Adviser and is responsible
for determining how those policies are applied to specific proxy votes, in
light of each issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated consequences of
alternate actions. In so doing, the Committee may determine to vote a
particular proxy in a manner contrary to its generally stated policies. In
addition, the Committee will be responsible for ensuring that all reporting
and recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not to
adopt a specific voting policy applicable to that issue. The Investment
Adviser believes that certain proxy voting issues require investment analysis
-- such as approval of mergers and other significant corporate transactions --
akin to investment decisions, and are, therefore, not suitable for general
guidelines. The Committee may elect to adopt a common position for the
Investment Adviser on certain proxy votes that are akin to investment
decisions, or determine to permit the portfolio manager to make individual
decisions on how best to maximize economic value for the Fund (similar to
normal buy/sell investment decisions made by such portfolio managers). While
it is expected that the Investment Adviser will generally seek to vote proxies
over which the Investment Adviser exercises voting authority in a uniform
manner for all the Investment Adviser's clients, the Committee, in conjunction
with the Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level
proxy-related services to institutional investment managers, plan sponsors,
custodians, consultants, and other institutional investors. The services
provided to the Investment Adviser by ISS include in-depth research, voting
recommendations (although the Investment Adviser is not obligated to follow
such recommendations), vote execution, and recordkeeping. ISS will also assist
the Fund in fulfilling its reporting and recordkeeping obligations under the
1940 Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For instance,
under the Proxy Voting Procedures, the Investment Adviser generally
28
will not seek to vote proxies related to portfolio securities that are on
loan, although it may do so under certain circumstances. In addition, the
Investment Adviser will vote proxies related to securities of foreign issuers
only on a best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated with voting
generally outweigh the benefits. The Committee may at any time override these
general policies if it determines that such action is in the best interests of
the Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment Adviser
(each, an "Affiliate"), or a money management or other client of the
Investment Adviser (each, a "Client") is involved. The Proxy Voting Procedures
and the Investment Adviser's adherence to those procedures are designed to
address such conflicts of interest. The Committee intends to strictly adhere
to the Proxy Voting Procedures in all proxy matters, including matters
involving Affiliates and Clients. If, however, an issue representing a
non-routine matter that is material to an Affiliate or a widely known Client
is involved such that the Committee does not reasonably believe it is able to
follow its guidelines (or if the particular proxy matter is not addressed by
the guidelines) and vote impartially, the Committee may, in its discretion for
the purposes of ensuring that an independent determination is reached, retain
an independent fiduciary to advise the Committee on how to vote or to cast
votes on behalf of the Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee, appointed
by the CIO (with advice from the Secretary of the Committee), consisting
solely of Committee members selected by the CIO. The CIO shall appoint to the
subcommittee, where appropriate, only persons whose job responsibilities do
not include contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client (or failure
to retain such relationship). The subcommittee shall determine whether and how
to vote all proxies on behalf of the Investment Adviser's clients or, if the
proxy matter is, in their judgment, akin to an investment decision, to defer
to the applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines or, on
matters where the Investment Adviser's policy is case-by-case, does not follow
the voting recommendation of any proxy voting service or other independent
fiduciary that may be retained to provide research or advice to the Investment
Adviser on that matter, no proxies relating to the Client may be voted unless
the Secretary, or in the Secretary's absence, the Assistant Secretary of the
Committee concurs that the subcommittee's determination is consistent with the
Investment Adviser's fiduciary duties.
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring proxy
issues that are not expected to involve unusual circumstances. These policies
are guidelines only, and the Investment Adviser may elect to vote differently
from the recommendation set forth in a voting guideline if the Committee
determines that it is in the Fund's best interest to do so. In addition, the
guidelines may be reviewed at any time upon the request of a Committee member
and may be amended or deleted upon the vote of a majority of Committee members
present at a Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors
of issuers other than investment companies. As a general
matter, the Committee believes that a company's Board of
Directors (rather than stockholders) is most likely to have
access to important, nonpublic information regarding a
company's business and prospects, and is therefore
best-positioned to set corporate policy and oversee management.
The Committee, therefore, believes that the foundation of good
corporate governance is the election of qualified, independent
corporate directors who are likely to diligently represent the
interests of stockholders and oversee management of the
corporation in a manner that will seek to maximize stockholder
value over time. In individual cases, the Committee may look at
a nominee's history of representing stockholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
o Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the
interests of stockholders and provide an independent view on
the propriety of financial reporting decisions
29
of corporate management. While the Committee will generally
defer to a corporation's choice of auditor, in individual
cases, the Committee may look at an auditors' history of
representing stockholder interests as auditor of other
companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure
of an issuer's compensation and benefit policies and opposes
excessive compensation, but believes that compensation matters
are normally best determined by an issuer's board of directors,
rather than stockholders. Proposals to "micro-manage" an
issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore,
generally not be supported.
o Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support
requests that enhance the rights of common stockholders and
oppose requests that appear to be unreasonably dilutive.
o Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
o Routine proposals related to requests regarding the formalities
of corporate meetings.
o Proposals related to proxy issues associated solely with
holdings of investment company shares. As with other types of
companies, the Committee believes that a fund's Board of
Directors (rather than its stockholders) is best-positioned to
set fund policy and oversee management. However, the Committee
opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that
the Investment Company Act envisions will be approved directly
by stockholders.
o Proposals related to limiting corporate conduct in some manner
that relates to the stockholder's environmental or social
concerns. The Committee generally believes that annual
stockholder meetings are inappropriate forums for discussion of
larger social issues, and opposes stockholder resolutions
"micro-managing" corporate conduct or requesting release of
information that would not help a stockholder evaluate an
investment in the corporation as an economic matter. While the
Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and material
to the economic interests of stockholders, the Committee is
generally not supportive of proposals to require disclosure of
corporate matters for other purposes.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors, the
Investment Adviser is primarily responsible for the execution of the Fund's
portfolio transactions and the allocation of brokerage. The Fund has no
obligation to deal with any dealer or group of dealers in the execution of
transactions in portfolio securities of the Fund. Where possible, the Fund
deals directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. It is the policy of the Fund to obtain the best results in
conducting portfolio transactions for the Fund, taking into account such
factors as price (including the applicable dealer spread or commission), the
size, type and difficulty of the transaction involved, the firm's general
execution and operations facilities and the firm's risk in positioning the
securities involved. The cost of portfolio securities transactions of the Fund
primarily consists of dealer or underwriter spreads and brokerage commissions.
While reasonable competitive spreads or commissions are sought, the Fund will
not necessarily be paying the lowest spread or commission available on any
particular transaction.
Subject to obtaining the best net results, dealers who provide
supplemental investment research (such as quantitative and modeling
information assessments and statistical data and provide other similar
services) to the Investment Adviser may receive orders for transactions by the
Fund. Information so received will be in addition to and not in lieu of the
services required to be performed by the Investment Adviser under the
Investment Advisory
30
Agreement and the expense of the Investment Adviser will not necessarily be
reduced as a result of the receipt of such supplemental information.
Supplemental investment research obtained from such dealers might be used by
the Investment Adviser in servicing all of its accounts and such research
might not be used by the Investment Adviser in connection with the Fund.
The Fund invests in securities traded in the over-the-counter
markets, and the Fund intends to deal directly with dealers who make markets
in the securities involved, except in those circumstances where better
execution is available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch,
are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principals for their own accounts,
the Fund does not deal with Merrill Lynch and its affiliates in connection
with such principal transactions except that, pursuant to exemptive orders
obtained by the Investment Adviser, the Fund may engage in principal
transactions with Merrill Lynch in high quality, short term, tax exempt
securities. See "Investment Restrictions." However, affiliated persons of the
Fund, including Merrill Lynch, may serve as its brokers in certain
over-the-counter transactions conducted on an agency basis. In addition, the
Fund has received an exemptive order, under which it may purchase investment
grade Municipal Bonds through group orders from an underwriting syndicate of
which Merrill Lynch is a member subject to conditions set forth in such order
(the "Group Order Exemptive Order"). A group order is an order for securities
held in an underwriting syndicate for the account of all members of the
syndicate, and in proportion to their respective participation in the
syndicate.
The Fund also may purchase tax exempt debt instruments in
individually negotiated transactions with the issuers. Because an active
trading market may not exist for such securities, the prices that the Fund may
pay for these securities or receive on their resale may be lower than that for
similar securities with a more liquid market.
Certain court decisions have raised questions as to the extent to
which investment companies should seek exemptions under the 1940 Act in order
to seek to recapture underwriting and dealer spreads from affiliated entities.
The Fund's Board of Directors has considered all factors deemed relevant and
has made a determination not to seek such recapture at this time. The Fund's
Board of Directors will reconsider this matter from time to time.
The Fund has received an exemptive order from the Commission
permitting it to lend portfolio securities to Merrill Lynch or its affiliates.
Pursuant to that order, the Fund also has retained an affiliated entity of the
Investment Adviser as the securities lending agent for a fee, including a fee
based on a share of the returns on investment of cash collateral. That entity
may, on behalf of the Fund, invest cash collateral received by the Fund for
such loans, among other things, in a private investment company managed by
that entity or in registered money market funds advised by the Investment
Adviser or its affiliates.
Securities held by the Fund may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
investment objectives or other factors, a particular security may be bought
for an advisory client when other clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for other advisory
clients arise for consideration at or about the same time, transactions in
such securities will be made, insofar as feasible, for the respective funds
and clients in a manner deemed equitable to all. Transactions effected by the
Investment Adviser (or its affiliates) on behalf of more than one of its
clients during the same period may increase the demand for securities being
purchased or the supply of securities being sold, causing an adverse effect on
price.
Section 11(a) of the Securities Exchange Act of 1934 generally
prohibits members of the U.S. national securities exchanges from executing
exchange transactions for their affiliates and institutional accounts that
they manage unless the member (i) has obtained prior express authorization
from the account to effect such transactions, (ii) at least annually furnishes
the account with a statement setting forth the aggregate compensation received
by the member in effecting such transactions, and (iii) complies with any
rules the Commission has prescribed with respect to the requirements of
clauses (i) and (ii). To the extent Section 11(a) would apply to Merrill Lynch
acting as a broker for the Fund in any of its portfolio transactions executed
on any such securities exchange of which it is a member, appropriate consents
have been obtained from the Fund and annual statements as to aggregate
compensation will be provided to the Fund.
31
Portfolio Turnover
Generally, the Fund does not purchase securities for short term
trading profits. However, the Fund may dispose of securities without regard to
the time they have been held when such actions, for defensive or other
reasons, appear advisable to the Investment Adviser. While it is not possible
to predict turnover rates with any certainty, at present it is anticipated
that the Fund's annual portfolio turnover rate, under normal circumstances,
should be less than 100%. (The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the
particular fiscal year by the monthly average of the value of the portfolio
securities owned by the Fund during the particular fiscal year. For purposes
of determining this rate, all securities whose maturities at the time of
acquisition are one year or less are excluded.) A high portfolio turnover rate
results in greater transaction costs, which are borne directly by the Fund and
may have certain tax consequences for stockholders.
For the six months ended February 29, 2004 and the fiscal years ended
August 31, 2003 and 2002, the Fund's portfolio turnover rates were
25.00%, 44.30% and 74.00%, respectively.
TAXES
The Fund has elected to qualify for the special tax treatment
afforded regulated investment companies ("RICs") under the Internal Revenue
Code of 1986, as amended (the "Code"). As long as it so qualifies, in any
taxable year in which it distributes at least 90% of its taxable net income
and 90% of its tax exempt net income (see below), the Fund (but not its
stockholders) will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The Fund
intends to distribute substantially all of such income. If, in any taxable
year, the Fund fails to qualify as a RIC under the Code, it would be taxed in
the same manner as an ordinary corporation and all distributions from earnings
and profits (as determined under U.S. Federal income tax principles) to its
stockholders would be taxable as ordinary dividend income eligible for the
maximum 15% tax rate for non-corporate shareholders and the dividends-received
deduction for corporate shareholders. However , the Fund's distributions
derived from income on tax exempt obligations, as defined herein, would no
longer qualify for treatment as exempt interest.
The Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute, during each calendar year, 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gains, determined, in general, on an October 31 year-end, plus certain
undistributed amounts from previous years. The required distributions,
however, are based only on the taxable income of a RIC. The excise tax,
therefore, generally will not apply to the tax exempt income of a RIC, such as
the Fund, that pays exempt-interest dividends.
The Internal Revenue Service (the "IRS"), in a revenue ruling, held
that certain auction rate preferred stock would be treated as stock for
Federal income tax purposes. The terms of the AMPS are substantially similar,
but not identical, to the auction rate preferred stock discussed in the
revenue ruling, and in the opinion of Sidley Austin Brown & Wood LLP, counsel
to the Fund, the shares of AMPS will constitute stock of the Fund and
distributions with respect to shares of AMPS (other than distributions in
redemption of shares of AMPS subject to Section 302(b) of the Code) will
constitute dividends to the extent of the Fund's current and accumulated
earnings and profits as calculated for Federal income tax purposes.
Nevertheless, it is possible that the IRS might take a contrary position,
asserting, for example, that the shares of AMPS constitute debt of the Fund.
If this position were upheld, the discussion of the treatment of distributions
below would not apply. Instead, distributions by the Fund to holders of shares
of AMPS would constitute taxable interest income, whether or not they exceeded
the earnings and profits of the Fund, would be included in full in the income
of the recipient and would be taxed as ordinary income. Counsel believes that
such a position, if asserted by the IRS, would be unlikely to prevail.
The Fund will only purchase a Municipal Bond or Non-Municipal
Tax-Exempt Security if it is accompanied by an opinion of counsel to the
issuer, which is delivered on the date of issuance of the security, that the
interest paid on such security is excludable from gross income for Federal
income tax purposes (i.e., "tax-exempt"). The Fund intends to qualify to pay
"exempt-interest dividends" as defined in Section 852(b)(5) of the Code. Under
such section if, at the close of each quarter of its taxable year, at least
50% of the value of its total assets consists of obligations that pay interest
which is excludable from gross income for Federal income tax purposes ("tax
exempt obligations") under Section 103(a) of the Code (relating generally to
obligations of a state or local governmental unit), the Fund shall be
qualified to pay exempt-interest dividends to its stockholders.
Exempt-
32
interest dividends are dividends or any part thereof paid by the Fund that are
attributable to interest on tax exempt obligations and designated by the Fund
as exempt-interest dividends in a written notice mailed to the Fund's
stockholders within 60 days after the close of its taxable year. To the extent
that the dividends distributed to the Fund's stockholders are derived from
interest income exempt from tax under Code Section 103(a) and are properly
designated as exempt-interest dividends, they will be excludable from a
stockholder's gross income for Federal tax purposes. Exempt-interest dividends
are included, however, in determining the portion, if any, of a person's
social security and railroad retirement benefits subject to Federal income
taxes. Each stockholder is advised to consult a tax adviser with respect to
whether exempt-interest dividends retain the exclusion under Code Section
103(a) if such stockholder would be treated as a "substantial user" or
"related person" under Code Section 147(a) with respect to property financed
with the proceeds of an issue of PABs, if any, held by the Fund.
To the extent that the Fund's distributions are derived from interest
on its taxable investments or from an excess of net short-term capital gains
over net long-term capital losses ("ordinary income dividends"), such
distributions are considered ordinary income for Federal income tax purposes.
Distributions by the Fund, whether from exempt-interest income, ordinary
income or capital gains, are not eligible for the dividends received deduction
allowed to corporations under the Code or the reduced tax rates available to
non-corporate shareholders pursuant to recent legislation. Distributions, if
any, from an excess of net long-term capital gains over net short-term capital
losses derived from the sale of securities or from certain transactions in
futures or options ("capital gain dividends") are taxable as long-term capital
gains for Federal income tax purposes, regardless of the length of time the
stockholder has owned Fund shares. Generally not later than 60 days after the
close of its taxable year, the Fund will provide its stockholders with a
written notice designating the amounts of any exempt-interest dividends and
capital gain dividends. If the Fund pays a dividend in January which was
declared in the previous October, November or December to stockholders of
record on a specified date in one of such months, then such dividend will be
treated for tax purposes as being paid by the Fund and received by its
stockholders on December 31 of the year in which such dividend was declared.
All or a portion of the Fund's gain from the sale or redemption of
tax exempt obligations purchased at a market discount will be treated for
Federal income tax purposes as ordinary income rather than capital gain. This
rule may increase the amount of ordinary income dividends received by
stockholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming the shares are held as a capital asset). The sale or exchange
of AMPS could result in capital gain or loss to holders of AMPS who hold their
shares as capital assets. Generally, a stockholder's gain or loss will be
long-term capital gain or loss if the shares have been held for more than one
year. Any loss upon the sale or exchange of Fund shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
received by the stockholder. In addition, any such loss that is not disallowed
under the rule stated above will be treated as long-term capital loss to the
extent of any capital gain dividends received by the stockholder.
If you borrow money to buy the Fund's AMPS, you may not be permitted
to deduct the interest on that loan. Under Federal income tax rules, the
Fund's AMPS may be treated as having been bought with borrowed money even if
the purchase cannot be traced directly to borrowed money. Stockholders should
consult their own tax advisers regarding the impact of an investment in AMPS
upon the deductibility of interest payable by the stockholder.
The IRS has taken the position in a revenue ruling that if a RIC has
two or more classes of shares, it may designate distributions made to each
class in any year as consisting of no more than such class's proportionate
share of particular types of income, including exempt-interest income and net
long-term capital gains. A class's proportionate share of a particular type of
income is determined according to the percentage of total dividends paid by
the RIC during such year that was paid to such class. Thus, the Fund is
required to allocate a portion of its net capital gain and other taxable
income to the shares of AMPS and Other AMPS of each series. Accordingly, the
Fund intends to designate dividends paid to the Series F AMPS and Other AMPS
as tax exempt interest, capital gains or other taxable income, as applicable,
in proportion to each series' share of total dividends paid during the year.
The Fund may notify the Auction Agent of the amount of any net capital gain
and other taxable income to be included in any dividend on shares of AMPS
prior to the Auction establishing the Applicable Rate for such dividend. The
Fund also may include such income in a dividend on shares of AMPS without
giving advance notice thereof if it increases the dividend by an additional
amount calculated as if such income were a Retroactive Taxable
33
Allocation and the additional amount were an Additional Dividend, provided
that the Fund will notify the Auction Agent of the additional amounts to be
included in such dividend prior to the applicable Dividend Payment Date. See
"The Auction -- Auction Procedures -- Auction Date; Advance Notice of
Allocation of Taxable Income; Inclusion of Taxable Income in Dividends" in the
prospectus. Except for the portion of any dividend that it informs the Auction
Agent will be treated as capital gains or other taxable income, the Fund
anticipates that the dividends paid on the shares of AMPS will constitute
exempt-interest dividends. The amount of net capital gain and ordinary income
allocable to shares of AMPS (the "taxable distribution") will depend upon the
amount of such gains and income realized by the Fund and the total dividends
paid by the Fund on shares of common stock and shares of the series of AMPS
during a taxable year, but the taxable distribution generally is not expected
to be significant.
If the Fund makes a Retroactive Taxable Allocation, it will pay
Additional Dividends to holders of AMPS who are subject to the Retroactive
Taxable Allocation. See "Description of AMPS -- Dividends -- Additional
Dividends" in the prospectus. The Federal income tax consequences of
Additional Dividends under existing law are uncertain. The Fund intends to
treat a holder as receiving a dividend distribution in the amount of any
Additional Dividend only as and when such Additional Dividend is paid. An
Additional Dividend generally will be designated by the Fund as an
exempt-interest dividend except as otherwise required by applicable law.
However, the IRS may assert that all or part of an Additional Dividend is a
taxable dividend either in the taxable year for which the Retroactive Taxable
Allocation is made or in the taxable year in which the Additional Dividend is
paid.
In the opinion of Sidley Austin Brown & Wood LLP, counsel to the
Fund, under current law the manner in which the Fund intends to allocate items
of tax exempt income, net capital gain and other taxable income among shares
of common stock and shares of the series of AMPS will be respected for Federal
income tax purposes. However, the tax treatment of Additional Dividends may
affect the Fund's calculation of each class's allocable share of capital gains
and other taxable income. In addition, there is currently no direct guidance
from the IRS or other sources specifically addressing whether the Fund's
method for allocating tax exempt income, net capital gain and other taxable
income, if any, among shares of common stock and shares of the AMPS will be
respected for Federal income tax purposes, and it is possible that the IRS
could disagree with counsel's opinion and attempt to reallocate the Fund's net
capital gain or other taxable income. In the event of a reallocation, some of
the dividends identified by the Fund as exempt-interest dividends to holders
of shares of AMPS may be recharacterized as additional capital gains or other
taxable income. In the event of such recharacterization, the Fund would not be
required to make payments to such stockholders to offset the tax effect of
such reallocation. In addition, a reallocation may cause the Fund to be liable
for income tax and excise tax on any reallocated taxable income. Sidley Austin
Brown & Wood LLP has advised the Fund that, in its opinion, if the IRS were to
challenge in court the Fund's allocations of income and gain, the IRS would be
unlikely to prevail. A holder should be aware, however, that the opinion of
Sidley Austin Brown & Wood LLP represents only its best legal judgment and is
not binding on the IRS or the courts.
The Code subjects interest received on certain otherwise tax exempt
securities to a Federal alternative minimum tax. The Federal alternative
minimum tax applies to interest received on PABs issued after August 7, 1986.
PABs are bonds that, although tax exempt, are used for purposes other than
those performed by governmental units and that benefit non-governmental
entities (e.g., bonds used for industrial development or housing purposes).
Income received on such bonds is classified as an item of "tax preference,"
which could subject certain investors in such bonds, including stockholders of
the Fund, to an increased Federal alternative minimum tax. The Fund intends to
purchase such PABs and will report to stockholders at the close of the
calendar year-end the portion of its dividends declared during the year which
constitutes an item of tax preference for Federal alternative minimum tax
purposes. The Code further provides that corporations are subject to a Federal
alternative minimum tax based, in part, on certain differences between taxable
income as adjusted for other tax preferences and the corporation's "adjusted
current earnings," which more closely reflect a corporation's economic income.
Because an exempt-interest dividend paid by the Fund will be included in
adjusted current earnings, a corporate stockholder may be required to pay a
Federal alternative minimum tax on exempt-interest dividends paid by the Fund.
The Fund may invest in instruments the return on which includes
nontraditional features such as indexed principal or interest payments
("nontraditional instruments"). These instruments may be subject to special
tax rules under which the Fund may be required to accrue and distribute income
before amounts due under the obligations are paid. In addition, it is possible
that all or a portion of the interest payments on such nontraditional
instruments could be recharacterized as taxable ordinary income.
34
The Fund may engage in interest rate swaps. The Federal income tax
rules governing the taxation of interest rate swaps are not entirely clear and
may require the Fund to treat payments received under such arrangements as
ordinary income and to amortize payments under certain circumstances. Because
payments received by the Fund in connection with swap transactions will be
taxable rather than tax exempt, they may result in increased taxable
distributions to stockholders.
Certain transactions entered into by the Fund are subject to complex
Federal income tax provisions that may, among other things, (a) affect the
character of gains and losses realized, (b) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, and (c) accelerate the
recognition of income. Operation of these tax rules could, therefore, affect
the character, amount and timing of distributions and result in increased
taxable distributions to stockholders. Special tax rules also will require the
Fund to mark-to-market certain types of positions in its portfolio (i.e.,
treat them as sold on the last day of the taxable year), and may result in the
recognition of income without a corresponding receipt of cash. The Fund
intends to monitor its transactions, make appropriate tax elections and make
appropriate entries in its books and records to lessen the effect of these tax
rules and avoid any possible disqualification for the special treatment
afforded RICs under the Code.
The Fund's ability to distribute dividends exempt from Federal income
tax depends on the exclusion from gross income of the interest income that it
receives on the securities in which it invests. The Fund will only purchase
Municipal Bonds if they are accompanied by an opinion of counsel to the
issuer, which is delivered on the date of issuance of that security, that
interest on such securities is excludable from gross income for Federal income
tax purposes (the "tax exemption opinion").
Events occurring after the date of issuance of the Municipal Bonds
and Non-Municipal Tax Exempt Securities in which the Fund invests, however,
may cause the interest on such securities to be includable in gross income for
Federal income tax purposes. For example, the Code establishes certain
requirements, such as restrictions as to the investment of the proceeds of the
issue, limitations as to the use of proceeds of such issue and the property
financed by such proceeds, and the payment of certain excess earnings to the
Federal government, that must be met after the issuance of securities for
interest on such securities to remain excludable from gross income for Federal
income tax purposes. The issuers and the conduit borrowers of the Municipal
Bonds or Non-Municipal Tax Exempt Securities generally covenant to comply with
such requirements, and the tax exemption opinion generally assumes continuing
compliance with such requirements. Failure to comply with these continuing
requirements, however, may cause the interest on such securities to be
includable in gross income for Federal income tax purposes retroactive to
their date of issue.
In addition, the IRS has an ongoing enforcement program that involves
the audit of tax exempt bonds to determine whether an issue of bonds satisfies
all of the requirements that must be met for interest on such bonds to be
excludable from gross income for Federal income tax purposes. From time to
time, some of the securities held by the Fund may be the subject of such an
audit by the IRS, and the IRS may determine that the interest on such
securities is includable in gross income for Federal income tax purposes,
either because the IRS has taken a legal position adverse to the conclusion
reached by counsel to the issuer in the tax exemption opinion or as a result
of an action taken or not taken after the date of issue of such obligation. If
a Municipal Bond or Non-Municipal Tax Exempt Security in which the Fund
invests is determined to pay taxable interest subsequent to the Fund's
acquisition of such security, the IRS may demand that the Fund pay taxes on
the affected interest income. If the Fund agrees to do so, the Fund's yield on
its common stock could be adversely affected. A determination that interest on
a security held by the Fund is includable in gross income for Federal income
tax purposes retroactively to its date of issue may, likewise, cause a portion
of prior distributions received by stockholders, including holders of AMPS, to
be taxable to those stockholders in the year of receipt. The Fund will not pay
an Additional Dividend to a holder of AMPS under these circumstances.
If at any time when shares of AMPS are outstanding the Fund does not
meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of common stock until the asset
coverage is restored. See "Description of AMPS -- Dividends -- Restrictions on
Dividends and Other Payments" and in the prospectus. This may prevent the Fund
from distributing at least 90% of its net income, and may, therefore,
jeopardize the Fund's qualification for taxation as a RIC. If the Fund were to
fail to qualify as a RIC, some or all of the distributions paid by the Fund
would be fully taxable for Federal income tax purposes. Upon any failure to
meet the asset coverage requirements of the 1940 Act, the Fund, in its sole
discretion, may, and under
35
certain circumstances will be required to, redeem shares of AMPS in order to
maintain or restore the requisite asset coverage and avoid the adverse
consequences to the Fund and its stockholders of failing to qualify as a RIC.
See "Description of AMPS -- Redemption" herein and in the prospectus. There
can be no assurance, however, that any such action would achieve such
objectives.
As noted above, the Fund must distribute annually at least 90% of its
net taxable and tax exempt interest income. A distribution will only be
counted for this purpose if it qualifies for the dividends paid deduction
under the Code. Additional preferred stock that the Fund has authority to
issue may raise an issue as to whether distributions on such preferred stock
are "preferential" under the Code and therefore not eligible for the dividends
paid deduction. The Fund intends to issue preferred stock that counsel advises
will not result in the payment of a preferential dividend. If the Fund
ultimately relies on a legal opinion with regard to such preferred stock,
there is no assurance that the IRS would agree that dividends on the preferred
stock are not preferential. If the IRS successfully disallowed the dividends
paid deduction for dividends on the preferred stock, the Fund could lose the
benefit of the special treatment afforded RICs under the Code. In this case,
dividends paid by the Fund would not be exempt from Federal income taxes.
Additionally, the Fund would be subject to Federal income tax, including the
alternative minimum tax.
Under certain Code provisions, some stockholders may be subject to a
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ("backup withholding"). Backup withholding may also be
required on distributions paid by the Fund, unless it reasonably estimates
that at least 95% of its distributions during the taxable year are comprised
of exempt-interest dividends. Generally, stockholders subject to backup
withholding will be those for whom no certified taxpayer identification number
is on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding. Backup withholding is not an
additional tax. Any amount withheld generally may be allowed as a refund or a
credit against a shareholder's Federal income tax liability; provided that the
required information is timely provided to the IRS.
The Fund is generally not an appropriate investment for retirement
plans, other entities that are not subject to tax and foreign stockholders.
State and Local Taxes
The exemption from Federal income tax for exempt-interest dividends
does not necessarily result in an exemption for such dividends under the
income or other tax laws of any state or local taxing authority. Stockholders
are advised to consult their own tax advisers concerning state and local
matters.
In some states, the portion of any exempt-interest dividend that is
derived from interest received by a RIC on its holdings of that state's
securities and its political subdivisions and instrumentalities is exempt from
that state's income tax. Therefore, the Fund will report annually to its
stockholders the percentage of interest income earned by the Fund during the
preceding year on tax exempt obligations indicating, on a state-by-state basis
the source of such income.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial or administrative
action either prospectively or retroactively.
Stockholders are urged to consult their tax advisers regarding
specific questions as to Federal, state, local or foreign taxes.
NET ASSET VALUE
Net asset value per share of common stock is determined Monday
through Friday as of the close of business on the NYSE (generally, the NYSE
closes at 4:00 p.m., Eastern time), on each business day during which
36
the NYSE is open for trading. For purposes of determining the net asset value
of a share of common stock, the value of the securities held by the Fund plus
any cash or other assets (including interest accrued but not yet received)
minus all liabilities (including accrued expenses) and the aggregate
liquidation value of any outstanding shares of preferred stock is divided by
the total number of shares of common stock outstanding at such time. Expenses,
including the fees payable to the Investment Adviser, are accrued daily.
The Municipal Bonds and other portfolio securities in which the Fund
invests are traded primarily in over-the-counter ("OTC") municipal bond and
money markets and are valued at the last available bid price for long
positions and at the last available ask price for short positions in the OTC
market or on the basis of yield equivalents as obtained from one or more
dealers or pricing services approved by the Directors. One bond is the "yield
equivalent" of another bond when, taking into account market price, maturity,
coupon rate, credit rating and ultimate return of principal, both bonds will
theoretically produce an equivalent return to the bondholder. Financial
futures contracts and options thereon, which are traded on exchanges, are
valued at their settlement prices as of the close of such exchanges.
Short-term investments with a remaining maturity of 60 days or less are valued
on an amortized cost basis, which approximates market value, unless the
Investment Adviser believes that this method no longer produces fair
valuations. Repurchase agreements will be valued at cost plus accrued
interest. The value of swaps, including interest rate swaps, caps and floors,
will be determined by obtaining dealer quotations. Repurchase agreements will
be valued at cost plus accrued interest. Securities and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Directors, including
valuations furnished by a pricing service retained by the Fund, which may use
a matrix system for valuations. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
supervision of the Directors.
The Fund makes available for publication the net asset value of its
shares of common stock determined as of the last business day each week.
Currently, the net asset values of shares of publicly traded closed-end
investment companies investing in debt securities are published in Barron's,
the Monday edition of The Wall Street Journal and the Monday and Saturday
editions of The New York Times.
FINANCIAL STATEMENTS
The Fund's audited financial statements for the fiscal year ended
August 31, 2003, together with the report of __________________ thereon, are
incorporated in this statement of additional information by reference to its
2003 Annual Report. The Fund's unaudited financial statements for the six
months ended February 29, 2004 are incorporated in this statement of
additional information by reference to its 2004 Semi-Annual Report. You may
request a copy of the Annual Report and the Semi-Annual Report at no charge by
calling (800) 543-6217 between 8:30 a.m. and 5:30 p.m. Eastern time on any
business day.
37
APPENDIX A
DESCRIPTION OF MUNICIPAL BOND RATINGS
Description of Municipal Bond Ratings
Aaa Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of
investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and
principal is secure. While the various protective
elements are likely to change, such changes as can be
visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group
they comprise what 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.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
A-1
Description of Moody's U.S. Short-Term Ratings
MIG 1/VMIG 1 This designation denotes superior credit quality.
Excellent protection is afforded by established cash
flows, highly reliable liquidity support, or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes acceptable credit quality.
Liquidity and cash-flow protection may be narrow, and
market access for refinancing is likely to be less
well-established.
SG This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient
margins of protection.
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of short term promissory obligations. Prime-1 repayment
ability will often be evidenced by many of 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 earning coverage
of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability 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, may 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 supporting institutions) have an acceptable
ability for repayment of short term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes to the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's, a Division of The McGraw-Hill Companies,
Inc. ("Standard & Poor's"), Debt Ratings
A Standard & Poor'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 program.
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or
hold a financial obligation, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The issue credit ratings are based on current information furnished
by the obligors or obtained by Standard & Poor's from other sources Standard &
Poor's considers reliable. Standard & Poor's does not perform an audit in
connection with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be
A-2
changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
The issue credit ratings are based, in varying degrees, on the
following considerations:
I. Likelihood of payment-capacity and willingness of the
obligor as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, 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.
Long Term Issue Credit Ratings
AAA An obligation rated "AAA" has the highest rating
assigned by Standard & Poor's. Capacity to meet its
financial commitment on the obligation is extremely
strong.
AA An obligation rated "AA" differs from the highest
rated issues 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 debt in higher-rated
categories. However, the obligor's capacity to meet
its financial commitment on the obligation is still
strong.
BBB An obligation rated "BBB" exhibits adequate
protection parameters. However, adverse economic
conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet
its financial commitment on the obligation.
BB An obligation rated "BB," "B," "CCC," "CC" and
B "C" are regarded as having significant
CCC speculative characteristics. "BB" indicates the
CC least degree of speculation and "C" the highest
C degree of speculation. While such debt will likely
have some quality and protective
characteristics, these may be outweighed by large
uncertainties or major risk exposures to adverse
conditions.
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
Standard & Poor's 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 similar action if
payments on an obligation are jeopardized.
c The 'c' subscript is used to provide additional
information to investors that the bank may terminate
its obligation to purchase tendered bonds if the long
term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are
deemed taxable.
p The letter 'p' indicates that the rating is
provisional. A provisional rating assumes the
successful completion of the project financed by
the debt being rated and indicates that payment of
debt service requirements is largely or entirely
dependent upon the successful, timely completion of
the project. This rating, however, while addressing
credit quality subsequent to the completion of the
project, makes no comment on the likelihood of or
the risk of default upon failure of such
completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* Continuance of the ratings is contingent upon
Standard & Poor's receipt of an executed copy
A-3
of the escrow agreement or closing documentation
confirming investments and cash flows.
r This symbol is attached to the ratings of instruments
with significant noncredit risks. It highlights risks
to principal or volatility of expected returns which
are not addressed in the credit rating.
N.R. This indicates that no rating has been requested,
that there is insufficient information on which to
base a rating, or that Standard & Poor's does not
rate a particular obligation as a matter of policy.
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.
Description of Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into several categories, ranging from
"A-1" for the highest-quality obligations to "D" for the lowest. These
categories are as follows:
A-1 A short-term obligation rated "A-1" is rated in the
highest category by Standard & Poor's. The obligor's
capacity to meet its financial commitment on the
obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its
financial commitment on these obligations is
extremely strong.
A-2 A short-term obligation rated "A-2" is somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than
obligations in higher rating categories. However, the
obligor's capacity to meet its financial commitment
on the obligation is satisfactory.
A-3 A short-term obligation rated "A-3" 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.
B A short-term obligation rated "B" is regarded as
having significant speculative characteristics. The
obligor currently has the capacity to meet its
financial commitment on the obligation; however, it
faces major ongoing uncertainties which could lead to
the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated "C" is currently
vulnerable to nonpayment and is dependent upon
favorable business, financial and economic conditions
for the obligor to meet its financial commitment on
the obligation.
D A short-term obligation 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 Standard & Poor's believes
that such payments will be made during such grace
period. The "D" rating will also be used upon the
filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are
jeopardized.
c The "c" subscript is used to provide additional
information to investors that the bank may terminate
its obligation to purchase tendered bonds if the long
term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are
deemed taxable.
p The letter "p" indicates that the rating is
provisional. A provisional rating assumes the
successful completion of the project financed by
the debt being rated and indicates that
A-4
payment of debt service requirements is largely or
entirely dependent upon the successful, timely
completion of the project. This rating, however,
while addressing credit quality subsequent to
completion of the project, makes no comment on the
likelihood of or the risk of default upon failure
of such completion. The investor should exercise
his own judgment with respect to such likelihood
and risk.
* Continuance of the ratings is contingent upon
Standard & Poor's receipt of an executed copy of
the escrow agreement or closing
r The "r" highlights derivative, hybrid, and certain
other obligations that Standard & Poor's believes
may experience high volatility or high variability
in expected returns as a result of noncredit risks.
Examples of such obligations are securities with
principal or interest return indexed to equities,
commodities, or currencies; certain swaps and
options, and interest-only and principal-only
mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an
obligation will exhibit no volatility or
variability in total return.
A commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard
& Poor's by the issuer or obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
A Standard & Poor's 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.
Description of Fitch Ratings' ("Fitch") Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The rating
represents Fitch's assessment of the issuer's ability to meet the obligations
of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue,
its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment that might
affect the issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guarantees unless otherwise
indicated.
A-5
Bonds carrying the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax exempt
nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the
highest credit quality. The obligor has an
exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA Bonds considered to be investment grade and of very
high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future
developments, short term debt of these issuers is
generally rated "F-1+."
A Bonds considered to be investment grade and of high
credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but
may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher
ratings.
BBB Bonds considered to be investment grade and of
satisfactory-credit quality. The obligor's ability to
pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have
adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the rating
category. Plus and minus signs, however, are not used in the "AAA" category.
Description of Fitch's Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
("BB" to "C") represent Fitch's assessment of the likelihood of timely payment
of principal and interest in accordance with the terms of obligation for bond
issues not in default. For defaulted bonds, the rating ("DDD" to "D") is an
assessment of the ultimate recovery value through reorganization or
liquidation. The rating takes into consideration special features of the
issue, its relationship to other obligations of the issuer, the current and
prospective financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment that might
affect the issuer's future financial strength.
Bonds that have the rating are of similar but not necessarily
identical credit quality since rating categories cannot fully reflect the
differences in degrees of credit risk.
BB Bonds are considered speculative. The obligor's
ability to pay interest and repay principal may be
affected over time by adverse economic changes.
However, business and financial alternatives can be
identified which could assist the obligor in
satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds
in this class are currently meeting debt service
requirements, the probability of continued timely
payment of principal and interest
A-6
reflects the obligor's limited margin of safety and
the need for reasonable business and economic
activity throughout the life of the issue.
CCC Bonds have certain identifiable characteristics
which, if not remedied, may lead to default. The
ability to meet obligations requires an advantageous
business and economic environment.
CC Bonds are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds are in imminent default in payment of interest
or principal.
D Bonds are in default on interest and/or principal
DD payments. Such bonds are extremely speculative and
DDD should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of
the obligor. "DDD" represents the highest potential
for recovery on these bonds, and "D" represents the
lowest potential for recovery.
Plus (+) or Minus (-): Plus and minus signs are used
with a rating symbol to indicate the relative
position of a credit within the rating category. Plus
and minus signs, however, are not used in the "DDD,"
"DD," or "D" categories.
Description of Fitch's Short term Ratings
Fitch's short term ratings apply to debt obligations that are payable
on demand or have original maturities of up to three years, including
commercial paper, certificates of deposit, medium-term notes, and investment
notes.
The short term rating places greater emphasis than a long term rating
on the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch short term ratings are as follows:
F-1+ Exceptionally Strong Credit Quality. Issues
assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this
rating reflect an assurance of timely payment only
slightly less in degree than issues rated "F-1+."
F-2 Good Credit Quality. Issues assigned this rating have
a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as
for issues assigned "F-1+" and "F-1" ratings.
F-3 Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of
assurance for timely payment is adequate; however,
near-term adverse changes could cause these
securities to be rated below investment grade.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of
assurance for timely payment and are vulnerable to
near-term adverse changes in financial and economic
conditions.
D Default. Issues assigned this rating are in actual
or imminent payment default.
LOC The symbol "LOC" indicates that the rating is based
on a letter of credit issued by a commercial bank.
A-7
NR Indicates that Fitch does not rate the specific issue.
Conditional A conditional rating is premised on the successful
completion of a project or the occurrence of a
specific event.
Suspended A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate
for rating purposes.
Withdrawn A rating will be withdrawn when an issue matures or is
called or refinanced and, at Fitch's discretion, when an
issuer fails to furnish proper and timely information.
FitchAlert Ratings are placed on FitchAlert to notify investors of
an occurrence that is likely to result in a rating
change and the likely direction of such change. These
are designated as "Positive," indicating a potential
upgrade, "Negative," for potential downgrade, or
"Evolving," where ratings may be raised or lowered.
FitchAlert is relatively short term, and should be
resolved within 12 months.
Ratings Outlook: An outlook is used to describe the most likely direction of
any rating change over the intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable outlook.
A-8
APPENDIX B
SETTLEMENT PROCEDURES
The following summary of Settlement Procedures sets forth the
procedures expected to be followed in connection with the settlement of each
Auction and will be incorporated by reference in the Auction Agent Agreement
and each Broker-Dealer Agreement. Nothing contained in this Appendix B
constitutes a representation by the Fund that in each Auction each party
referred to herein actually will perform the procedures described herein to be
performed by such party. Capitalized terms used herein shall have the
respective meanings specified in the Glossary in the prospectus or this
Appendix B hereto, as the case may be.
(a) On each Auction Date, the Auction Agent shall notify by telephone
or through the Auction Agent's Processing System the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner of:
(i) the Applicable Rate fixed for the next succeeding
Dividend Period;
(ii) whether Sufficient Clearing Bids existed for the
determination of the Applicable Rate;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted a Bid or a Sell Order on behalf of a Beneficial Owner, the
number of shares, if any, of AMPS to be sold by such Beneficial
Owner;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Beneficial Owner, the number
of shares, if any, of AMPS to be purchased by such Potential
Beneficial Owner;
(v) if the aggregate number of shares of AMPS to be sold by
all Beneficial Owners on whose behalf such Broker-Dealer submitted a
Bid or a Sell Order exceeds the aggregate number of shares of AMPS to
be purchased by all Potential Beneficial Owners on whose behalf such
Broker-Dealer submitted a Bid, the name or names of one or more
Buyer's Broker-Dealers (and the name of the Agent Member, if any, of
each such Buyer's Broker-Dealer) acting for one or more purchasers of
such excess number of shares of AMPS and the number of such shares to
be purchased from one or more Beneficial Owners on whose behalf such
Broker-Dealer acted by one or more Potential Beneficial Owners on
whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the aggregate number of shares of AMPS to be
purchased by all Potential Beneficial Owners on whose behalf such
Broker-Dealer submitted a Bid exceeds the aggregate number of shares
of AMPS to be sold by all Beneficial Owners on whose behalf such
Broker-Dealer submitted a Bid or a Sell Order, the name or names of
one or more Seller's Broker-Dealers (and the name of the Agent
Member, if any, of each such Seller's Broker-Dealer) acting for one
or more sellers of such excess number of shares of AMPS and the
number of such shares to be sold to one or more Potential Beneficial
Owners on whose behalf such Broker-Dealer acted by one or more
Beneficial Owners on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the Auction Date of the next succeeding Auction with
respect to the AMPS.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Beneficial Owner or Potential Beneficial Owner shall:
(i) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, instruct each Potential Beneficial Owner on whose
behalf such Broker-Dealer submitted a Bid that was accepted, in whole
or in part, to instruct such Potential Beneficial Owner's Agent
Member to pay to such Broker-Dealer (or its Agent Member) through the
Securities Depository the amount necessary to purchase the number of
shares of AMPS to be purchased pursuant to such Bid against receipt
of such shares and advise such Potential Beneficial Owner of the
Applicable Rate for the next succeeding Dividend Period;
B-1
(ii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted, in whole or
in part, or a Bid that was accepted, in whole or in part, to instruct
such Beneficial Owner's Agent Member to deliver to such Broker-Dealer
(or its Agent Member) through the Securities Depository the number of
shares of AMPS to be sold pursuant to such Order against payment
therefor and advise any such Beneficial Owner that will continue to
hold shares of AMPS of the Applicable Rate for the next succeeding
Dividend Period;
(iii) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted a Hold Order of the Applicable Rate for the
next succeeding Dividend Period;
(iv) advise each Beneficial Owner on whose behalf such
Broker-Dealer submitted an Order of the Auction Date for the next
succeeding Auction; and
(v) advise each Potential Beneficial Owner on whose behalf
such Broker-Dealer submitted a Bid that was accepted, in whole or in
part, of the Auction Date for the next succeeding Auction.
(c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any shares of AMPS received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Beneficial Owner and Beneficial Owner
shall instruct its Agent Member as provided in (b)(i) or (ii) above,
as the case may be;
(ii) each Seller's Broker-Dealer which is not an Agent
Member of the Securities Depository shall instruct its Agent Member
to (A) pay through the Securities Depository to the Agent Member of
the Beneficial Owner delivering shares to such Broker-Dealer pursuant
to (b)(ii) above the amount necessary to purchase such shares against
receipt of such shares, and (B) deliver such shares through the
Securities Depository to a Buyer's Broker-Dealer (or its Agent
Member) identified to such Seller's Broker-Dealer pursuant to (a)(v)
above against payment therefor; and
(iii) each Buyer's Broker-Dealer which is not an Agent
Member of the Securities Depository shall instruct its Agent Member
to (A) pay through the Securities Depository to a Seller's
Broker-Dealer (or its Agent Member) identified pursuant to (a)(vi)
above the amount necessary to purchase the shares to be purchased
pursuant to (b)(i) above against receipt of such shares, and (B)
deliver such shares through the Securities Depository to the Agent
Member of the purchaser thereof against payment therefor.
(e) On the day after the Auction Date:
(i) each Bidder's Agent Member referred to in (d)(i) above
shall instruct the Securities Depository to execute the transactions
described in (b)(i) or (ii) above, and the Securities Depository
shall execute such transactions;
(ii) each Seller's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions
described in (d)(ii) above, and the Securities Depository shall
execute such transactions; and
B-2
(iii) each Buyer's Broker-Dealer or its Agent Member shall
instruct the Securities Depository to execute the transactions
described in (d)(iii) above, and the Securities Depository shall
execute such transactions.
(f) If a Beneficial Owner selling shares of AMPS in an Auction fails
to deliver such shares (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Beneficial Owner on behalf of which it submitted a Bid that
was accepted a number of whole shares of AMPS that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner.
In such event, the number of shares of AMPS to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall
represent any departure from the results of an Auction, as determined by the
Auction Agent, shall be of no effect unless and until the Auction Agent shall
have been notified of such delivery or non-delivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
B-3
APPENDIX C
AUCTION PROCEDURES
The following procedures will be set forth in provisions of the
Articles Supplementary relating to the AMPS, and will be incorporated by
reference in the Auction Agent Agreement and each Broker-Dealer Agreement. The
terms not defined below are defined in the prospectus or in the Glossary in
the prospectus. Nothing contained in this Appendix C constitutes a
representation by the Fund that in each Auction each party referred to herein
actually will perform the procedures described herein to be performed by such
party.
Paragraph 10(a) Certain Definitions.
As used in this Paragraph 10, the following terms shall have the
following meanings, unless the context otherwise requires:
(i) "AMPS" shall mean the shares of AMPS being auctioned
pursuant to this Paragraph 10.
(ii) "Auction Date" shall mean the first Business Day
preceding the first day of a Dividend Period.
(iii) "Available AMPS" shall have the meaning specified in
Paragraph 10(d)(i) below.
(iv) "Bid" shall have the meaning specified in Paragraph
10(b)(i) below.
(v) "Bidder" shall have the meaning specified in Paragraph
10(b)(i) below.
(vi) "Hold Order" shall have the meaning specified in
Paragraph 10(b)(i) below.
(vii) "Maximum Applicable Rate" for any Dividend Period will
be the higher of the Applicable Percentage of the Reference Rate or
the Applicable Spread plus the Reference Rate. The Applicable
Percentage and the Applicable Spread will be determined based on the
lower of the credit rating or ratings assigned on such date to such
shares by Moody's and S&P (or if Moody's or S&P or both shall not
make such rating available, the equivalent of either or both of such
ratings by a Substitute Rating Agency or two Substitute Rating
Agencies or, in the event that only one such rating shall be
available, such rating) as follows:
Applicable Applicable Applicable Applicable
Percentage Percentage Spread Over Spread Over
Credit Ratings of Reference of Reference Reference Reference
------------------------------------------------ Rate--No Rate-- Rate--No Rate--
Moody's S&P Notification Notification Notification Notification
----------------------- ------------------------ ---------------- ---------------- ------------- ----------------
Aaa AAA 110% 125% 1.10% 1.25%
Aa3 to Aa1 AA- to AA+ 125% 150% 1.25% 1.50%
A3 to A1 A- to A+ 150% 200% 1.50% 2.00%
Baa3 to Baa1 BBB- to BBB+ 175% 250% 1.75% 2.50%
Below Baa3 Below BBB- 200% 300% 2.00% 3.00%
The Applicable Percentage and the Applicable Spread as so determined
may be further subject to upward but not downward adjustment in the discretion
of the Board of Directors of the Fund after consultation with the
Broker-Dealers, provided that immediately following any such increase the Fund
would be in compliance with the AMPS Basic Maintenance Amount. Subject to the
provisions of paragraph 12 of the Articles Supplementary entitled "Termination
of Rating Agency Provisions," the Fund shall take all reasonable action
necessary to enable S&P and Moody's to provide a rating for the AMPS. If
either S&P or Moody's shall not make such a rating available or if neither S&P
nor Moody's shall make such a rating available, subject to the provisions of
paragraph 12 of the Articles Supplementary entitled "Termination of Rating
Agency Provisions," Merrill Lynch, Pierce, Fenner & Smith
C-1
Incorporated or its affiliates and successors, after obtaining the Fund's
approval, shall select a NRSRO or two NRSROs to act as a Substitute Rating
Agency or Substitute Rating Agencies, as the case may be.
(viii) "Order" shall have the meaning specified in Paragraph
10(b)(i) below.
(ix) "Sell Order" shall have the meaning specified in
Paragraph 10(b)(i) below.
(x) "Submission Deadline" shall mean 1:00 p.m., Eastern
time, on any Auction Date or such other time on any Auction Date as
may be specified by the Auction Agent from time to time as the time
by which each Broker-Dealer must submit to the Auction Agent in
writing all Orders obtained by it for the Auction to be conducted on
such Auction Date.
(xi) "Submitted Bid" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xii) "Submitted Hold Order" shall have the meaning
specified in Paragraph 10(d)(i) below.
(xiii) "Submitted Order" shall have the meaning specified in
Paragraph 10(d)(i) below.
(xiv) "Submitted Sell Order" shall have the meaning
specified in Paragraph 10(d)(i) below.
(xv) "Sufficient Clearing Bids" shall have the meaning
specified in Paragraph 10(d)(i) below.
(xvi) "Winning Bid Rate" shall have the meaning specified in
Paragraph 10(d)(i) below.
Paragraph 10(b) Orders by Beneficial Owners, Potential Beneficial Owners,
Existing Holders And Potential Holders.
(i) Unless otherwise permitted by the Fund, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves as Existing Holders in respect of shares
subject to Orders submitted or deemed submitted to them by Beneficial Owners
and as Potential Holders in respect of shares subject to Orders submitted to
them by Potential Beneficial Owners. A Broker-Dealer may also hold shares of
AMPS in its own account as a Beneficial Owner. A Broker-Dealer may thus submit
Orders to the Auction Agent as a Beneficial Owner or a Potential Beneficial
Owner and therefore participate in an Auction as an Existing Holder or
Potential Holder on behalf of both itself and its customers. On or prior to
the Submission Deadline on each Auction Date:
(A) each Beneficial Owner may submit to its Broker-Dealer
information as to:
(1) the number of outstanding shares, if any, of
AMPS held by such Beneficial Owner which such Beneficial
Owner desires to continue to hold without regard to the
Applicable Rate for the next succeeding Dividend Period;
(2) the number of outstanding shares, if any, of
AMPS held by such Beneficial Owner which such Beneficial
Owner desires to continue to hold, provided that the
Applicable Rate for the next succeeding Dividend Period
shall not be less than the rate per annum specified by such
Beneficial Owner; and/or
(3) the number of outstanding shares, if any, of
AMPS held by such Beneficial Owner which such Beneficial
Owner offers to sell without regard to the Applicable Rate
for the next succeeding Dividend Period; and
(B) each Broker-Dealer, using a list of Potential Beneficial
Owners that shall be maintained in good faith for the purpose of
conducting a competitive Auction, shall contact Potential Beneficial
Owners, including Persons that are not Beneficial Owners, on such
list to determine the number of
C-2
outstanding shares, if any, of AMPS which each such Potential
Beneficial Owner offers to purchase, provided that the Applicable
Rate for the next succeeding Dividend Period shall not be less than
the rate per annum specified by such Potential Beneficial Owner.
For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Paragraph 10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an
Order containing the information referred to in clause (A)(1) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Hold Order"; an Order
containing the information referred to in clause (A)(2) or (B) of this
Paragraph 10(b)(i) is hereinafter referred to as a "Bid"; and an Order
containing the information referred to in clause (A)(3) of this Paragraph
10(b)(i) is hereinafter referred to as a "Sell Order." Inasmuch as a
Broker-Dealer participates in an Auction as an Existing Holder or a Potential
Holder only to represent the interests of a Beneficial Owner or Potential
Beneficial Owner, whether it be its customers or itself, all discussion herein
relating to the consequences of an Auction for Existing Holders and Potential
Holders also applies to the underlying beneficial ownership interests
represented.
(ii) (A) A Bid by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of AMPS
specified in such Bid if the Applicable Rate determined on
such Auction Date shall be less than the rate per annum
specified in such Bid; or
(2) such number or a lesser number of outstanding
shares of AMPS to be determined as set forth in Paragraph
10(e)(i)(D) if the Applicable Rate determined on such
Auction Date shall be equal to the rate per annum specified
therein; or
(3) a lesser number of outstanding shares of AMPS
to be determined as set forth in Paragraph 10(e)(ii)(C) if
such specified rate per annum shall be higher than the
Maximum Applicable Rate and Sufficient Clearing Bids do not
exist.
(B) A Sell Order by an Existing Holder shall constitute an
irrevocable offer to sell:
(1) the number of outstanding shares of AMPS
specified in such Sell Order, or
(2) such number or a lesser number of outstanding
shares of AMPS to be determined as set forth in Paragraph
10(e)(ii)(C) if Sufficient Clearing Bids do not exist.
(C) A Bid by a Potential Holder shall constitute an
irrevocable offer to purchase:
(1) the number of outstanding shares of AMPS
specified in such Bid if the Applicable Rate determined on
such Auction Date shall be higher than the rate per annum
specified in such Bid; or
(2) such number or a lesser number of outstanding
shares of AMPS to be determined as set forth in Paragraph
10(e)(i)(E) if the Applicable Rate determined on such
Auction Date shall be equal to the rate per annum specified
therein.
Paragraph 10(c) Submission of Orders by Broker-Dealers to Auction Agent.
(i) Each Broker-Dealer shall submit in writing or through a mutually
acceptable electronic means to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders obtained by such Broker-Dealer,
designating itself (unless otherwise permitted by the Fund) as an Existing
Holder in respect of shares subject to Orders submitted or deemed submitted to
it by Beneficial Owners and as a Potential Holder in respect of shares subject
to Orders submitted to it by Potential Beneficial Owners, and specifying with
respect to each Order:
C-3
(A) the name of the Bidder placing such Order (which shall
be the Broker-Dealer unless otherwise permitted by the Fund);
(B) the aggregate number of outstanding shares of AMPS that
are the subject of such Order;
(C) to the extent that such Bidder is an Existing Holder
(1) the number of outstanding shares, if any, of
AMPS subject to any Hold Order placed by such Existing
Holder;
(2) the number of outstanding shares, if any, of
AMPS subject to any Bid placed by such Existing Holder and
the rate per annum specified in such Bid; and
(3) the number of outstanding shares, if any, of
AMPS subject to any Sell Order placed by such Existing
Holder; and
(D) to the extent such Bidder is a Potential Holder, the
rate per annum specified in such Potential Holder's Bid.
(ii) If any rate per annum specified in any Bid contains more than
three figures to the right of the decimal point, the Auction Agent shall round
such rate up to the next highest one-thousandth (.001) of 1%.
(iii) If an Order or Orders covering all of the outstanding shares of
AMPS held by an Existing Holder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent shall deem a Hold Order (in the
case of an Auction relating to a Dividend Period which is not a Special
Dividend Period of more than 28 days) and a Sell Order (in the case of an
Auction relating to a Special Dividend Period of more than 28 days) to have
been submitted on behalf of such Existing Holder covering the number of
outstanding shares of AMPS held by such Existing Holder and not subject to
Orders submitted to the Auction Agent.
(iv) If one or more Orders on behalf of an Existing Holder covering
in the aggregate more than the number of outstanding shares of AMPS held by
such Existing Holder are submitted to the Auction Agent, such Orders shall be
considered valid as follows and in the following order of priority:
(A) any Hold Order submitted on behalf of such Existing
Holder shall be considered valid up to and including the number of
outstanding shares of AMPS held by such Existing Holder; provided
that if more than one Hold Order is submitted on behalf of such
Existing Holder and the number of shares of AMPS subject to such Hold
Orders exceeds the number of outstanding shares of AMPS held by such
Existing Holder, the number of shares of AMPS subject to each of such
Hold Orders shall be reduced pro rata so that such Hold Orders, in
the aggregate, cover exactly the number of outstanding shares of AMPS
held by such Existing Holder;
(B) any Bids submitted on behalf of such Existing Holder
shall be considered valid, in the ascending order of their respective
rates per annum if more than one Bid is submitted on behalf of such
Existing Holder, up to and including the excess of the number of
outstanding shares of AMPS held by such Existing Holder over the
number of shares of AMPS subject to any Hold Order referred to in
Paragraph 10(c)(iv)(A) above (and if more than one Bid submitted on
behalf of such Existing Holder specifies the same rate per annum and
together they cover more than the remaining number of shares that can
be the subject of valid Bids after application of Paragraph
10(c)(iv)(A) above and of the foregoing portion of this Paragraph
10(c)(iv)(B) to any Bid or Bids specifying a lower rate or rates per
annum, the number of shares subject to each of such Bids shall be
reduced pro rata so that such Bids, in the aggregate, cover exactly
such remaining number of shares); and the number of shares, if any,
subject to Bids not valid under this Paragraph 10(c)(iv)(B) shall be
treated as the subject of a Bid by a Potential Holder; and
(C) any Sell Order shall be considered valid up to and
including the excess of the number of outstanding shares of AMPS held
by such Existing Holder over the number of shares of AMPS subject to
C-4
Hold Orders referred to in Paragraph 10(c)(iv)(A) and Bids referred
to in Paragraph 10(c)(iv)(B); provided that if more than one Sell
Order is submitted on behalf of any Existing Holder and the number of
shares of AMPS subject to such Sell Orders is greater than such
excess, the number of shares of AMPS subject to each of such Sell
Orders shall be reduced pro rata so that such Sell Orders, in the
aggregate, cover exactly the number of shares of AMPS equal to such
excess.
(v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum and
number of shares of AMPS therein specified.
(vi) Any Order submitted by a Beneficial Owner or a Potential
Beneficial Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, prior to the Submission Deadline on any Auction Date shall be
irrevocable.
Paragraph 10(d) Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate.
(i) Not earlier than the Submission Deadline on each Auction Date,
the Auction Agent shall assemble all Orders submitted or deemed submitted to
it by the Broker-Dealers (each such Order as submitted or deemed submitted by
a Broker-Dealer being hereinafter referred to individually as a "Submitted
Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may
be, or as a "Submitted Order") and shall determine:
(A) the excess of the total number of outstanding shares of
AMPS over the number of outstanding shares of AMPS that are the
subject of Submitted Hold Orders (such excess being hereinafter
referred to as the "Available AMPS");
(B) from the Submitted Orders whether the number of
outstanding shares of AMPS that are the subject of Submitted Bids by
Potential Holders specifying one or more rates per annum equal to or
lower than the Maximum Applicable Rate exceeds or is equal to the sum
of:
(1) the number of outstanding shares of AMPS that
are the subject of Submitted Bids by Existing Holders
specifying one or more rates per annum higher than the
Maximum Applicable Rate, and
(2) the number of outstanding shares of AMPS that
are subject to Submitted Sell Orders (if such excess or such
equality exists (other than because the number of
outstanding shares of AMPS in clauses (1) and (2) above are
each zero because all of the outstanding shares of AMPS are
the subject of Submitted Hold Orders), such Submitted Bids
by Potential Holders hereinafter being referred to
collectively as "Sufficient Clearing Bids"); and
(C) if Sufficient Clearing Bids exist, the lowest rate per
annum specified in the Submitted Bids (the "Winning Bid Rate") that
if:
(1) each Submitted Bid from Existing Holders
specifying the Winning Bid Rate and all other submitted Bids
from Existing Holders specifying lower rates per annum were
rejected, thus entitling such Existing Holders to continue
to hold the shares of AMPS that are the subject of such
Submitted Bids, and
(2) each Submitted Bid from Potential Holders
specifying the Winning Bid Rate and all other Submitted Bids
from Potential Holders specifying lower rates per annum were
accepted, thus entitling the Potential Holders to purchase
the shares of AMPS that are the subject of such Submitted
Bids, would result in the number of shares subject to all
Submitted Bids specifying the Winning Bid Rate or a lower
rate per annum being at least equal to the Available AMPS.
C-5
(ii) Promptly after the Auction Agent has made the determinations
pursuant to Paragraph 10(d)(i), the Auction Agent shall advise the Fund of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:
(A) if Sufficient Clearing Bids exist, that the Applicable
Rate for the next succeeding Dividend Period shall be equal to the
Winning Bid Rate;
(B) if Sufficient Clearing Bids do not exist (other than
because all of the outstanding shares of AMPS are the subject of
Submitted Hold Orders), that the Applicable Rate for the next
succeeding Dividend Period shall be equal to the Maximum Applicable
Rate; or
(C) if all of the outstanding shares of AMPS are the subject
of Submitted Hold Orders, the Dividend Period next succeeding the
Auction automatically shall be the same length as the immediately
preceding Dividend Period and the Applicable Rate for the next
succeeding Dividend Period shall be equal to 60% of the Reference
Rate (or 90% of such rate if the Fund has provided notification to
the Auction Agent prior to establishing the Applicable Rate for any
dividend that net capital gain or other taxable income will be
included in such dividend on shares of AMPS) on the date of the
Auction.
Paragraph 10(e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares.
Based on the determinations made pursuant to Paragraph 10(d)(i), the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(i) If Sufficient Clearing Bids have been made, subject to the
provisions of Paragraph 10(e)(iii) and Paragraph 10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:
(A) the Submitted Sell Orders of Existing Holders shall be
accepted and the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is higher than the Winning Bid
Rate shall be accepted, thus requiring each such Existing Holder to
sell the outstanding shares of AMPS that are the subject of such
Submitted Sell Order or Submitted Bid;
(B) the Submitted Bid of each of the Existing Holders
specifying any rate per annum that is lower than the Winning Bid Rate
shall be rejected, thus entitling each such Existing Holder to
continue to hold the outstanding shares of AMPS that are the subject
of such Submitted Bid;
(C) the Submitted Bid of each of the Potential Holders
specifying any rate per annum that is lower than the Winning Bid Rate
shall be accepted;
(D) the Submitted Bid of each of the Existing Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be rejected, thus entitling each such Existing Holder to
continue to hold the outstanding shares of AMPS that are the subject
of such Submitted Bid, unless the number of outstanding shares of
AMPS subject to all such Submitted Bids shall be greater than the
number of outstanding shares of AMPS ("Remaining Shares") equal to
the excess of the Available AMPS over the number of outstanding
shares of AMPS subject to Submitted Bids described in Paragraph
10(e)(i)(B) and Paragraph 10(e)(i)(C), in which event the Submitted
Bids of each such Existing Holder shall be accepted, and each such
Existing Holder shall be required to sell outstanding shares of AMPS,
but only in an amount equal to the difference between (1) the number
of outstanding shares of AMPS then held by such Existing Holder
subject to such Submitted Bid and (2) the number of shares of AMPS
obtained by multiplying (x) the number of Remaining Shares by (y) a
fraction the numerator of which shall be the number of outstanding
shares of AMPS held by such Existing Holder subject to such Submitted
Bid and the denominator of which shall be the sum of the numbers of
outstanding shares of AMPS subject to such Submitted Bids made by all
such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and
C-6
(E) the Submitted Bid of each of the Potential Holders
specifying a rate per annum that is equal to the Winning Bid Rate
shall be accepted but only in an amount equal to the number of
outstanding shares of AMPS obtained by multiplying (x) the difference
between the Available AMPS and the number of outstanding shares of
AMPS subject to Submitted Bids described in Paragraph 10(e)(i)(B),
Paragraph 10(e)(i)(C) and Paragraph 10(e)(i)(D) by (y) a fraction the
numerator of which shall be the number of outstanding shares of AMPS
subject to such Submitted Bid and the denominator of which shall be
the sum of the number of outstanding shares of AMPS subject to such
Submitted Bids made by all such Potential Holders that specified
rates per annum equal to the Winning Bid Rate.
(ii) If Sufficient Clearing Bids have not been made (other than
because all of the outstanding shares of AMPS are subject to Submitted Hold
Orders), subject to the provisions of Paragraph 10(e)(iii), Submitted Orders
shall be accepted or rejected as follows in the following order of priority
and all other Submitted Bids shall be rejected:
(A) the Submitted Bid of each Existing Holder specifying any
rate per annum that is equal to or lower than the Maximum Applicable
Rate shall be rejected, thus entitling such Existing Holder to
continue to hold the outstanding shares of AMPS that are the subject
of such Submitted Bid;
(B) the Submitted Bid of each Potential Holder specifying
any rate per annum that is equal to or lower than the Maximum
Applicable Rate shall be accepted, thus requiring such Potential
Holder to purchase the outstanding shares of AMPS that are the
subject of such Submitted Bid; and
(C) the Submitted Bids of each Existing Holder specifying
any rate per annum that is higher than the Maximum Applicable Rate
shall be accepted and the Submitted Sell Orders of each Existing
Holder shall be accepted, in both cases only in an amount equal to
the difference between (1) the number of outstanding shares of AMPS
then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of shares of AMPS obtained by
multiplying (x) the difference between the Available AMPS and the
aggregate number of outstanding shares of AMPS subject to Submitted
Bids described in Paragraph 10(e)(ii)(A) and Paragraph 10(e)(ii)(B)
by (y) a fraction the numerator of which shall be the number of
outstanding shares of AMPS held by such Existing Holder subject to
such Submitted Bid or Submitted Sell Order and the denominator of
which shall be the number of outstanding shares of AMPS subject to
all such Submitted Bids and Submitted Sell Orders.
(iii) If, as a result of the procedures described in Paragraph
10(e)(i) or Paragraph 10(e)(ii), any Existing Holder would be entitled or
required to sell, or any Potential Holder would be entitled or required to
purchase, a fraction of a share of AMPS on any Auction Date, the Auction Agent
shall, in such manner as in its sole discretion it shall determine, round up
or down the number of shares of AMPS to be purchased or sold by any Existing
Holder or Potential Holder on such Auction Date so that each outstanding share
of AMPS purchased or sold by each Existing Holder or Potential Holder on such
Auction Date shall be a whole share of AMPS.
(iv) If, as a result of the procedures described in Paragraph
10(e)(i), any Potential Holder would be entitled or required to purchase less
than a whole share of AMPS on any Auction Date, the Auction Agent, in such
manner as in its sole discretion it shall determine, shall allocate shares of
AMPS for purchase among Potential Holders so that only whole shares of AMPS
are purchased on such Auction Date by any Potential Holder, even if such
allocation results in one or more of such Potential Holders not purchasing any
shares of AMPS on such Auction Date.
(v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell
Orders on behalf of Existing Holders or Potential Holders, the aggregate
number of the outstanding shares of AMPS to be purchased and the aggregate
number of outstanding shares of AMPS to be sold by such Potential Holders and
Existing Holders and, to the extent that such aggregate number of outstanding
shares to be purchased and such aggregate number of outstanding shares to be
sold differ, the Auction Agent shall determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or
more sellers such Broker-Dealer shall receive, as the case may be, outstanding
shares of AMPS.
C-7
Paragraph 10(f) Miscellaneous.
The Fund may interpret the provisions of this Paragraph 10 to resolve
any inconsistency or ambiguity, remedy any formal defect or make any other
change or modification that does not substantially adversely affect the rights
of Beneficial Owners of AMPS. A Beneficial Owner or an Existing Holder (A) may
sell, transfer or otherwise dispose of shares of AMPS only pursuant to a Bid
or Sell Order in accordance with the procedures described in this Paragraph 10
or to or through a Broker-Dealer, provided that in the case of all transfers
other than pursuant to Auctions such Beneficial Owner or Existing Holder, its
Broker-Dealer, if applicable, or its Agent Member advises the Auction Agent of
such transfer and (B) except as otherwise required by law, shall have the
ownership of the shares of AMPS held by it maintained in book entry form by
the Securities Depository in the account of its Agent Member, which in turn
will maintain records of such Beneficial Owner's beneficial ownership. Neither
the Fund nor any affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall submit an Order in any Auction. Any Beneficial Owner that
is an affiliate (other than Merrill Lynch, Pierce, Fenner & Smith
Incorporated) shall not sell, transfer or otherwise dispose of shares of AMPS
to any person other than the Fund. All of the outstanding shares of AMPS of a
series shall be represented by a single certificate registered in the name of
the nominee of the Securities Depository unless otherwise required by law or
unless there is no Securities Depository. If there is no Securities
Depository, at the Fund's option and upon its receipt of such documents as it
deems appropriate, any shares of AMPS may be registered in the Stock Register
in the name of the Beneficial Owner thereof and such Beneficial Owner
thereupon will be entitled to receive certificates therefor and required to
deliver certificates thereof or upon transfer or exchange thereof.
C-8
PART C. OTHER INFORMATION
Item 24. Financial Statements And Exhibits.
(1) Financial Statements
Part A:
Financial Highlights for the six months ended February 29, 2004
and each of the fiscal years in the ten-year period ended August
31, 2003.
Part B:
Schedule of Investments of the Fund as of August 31, 2003.*
Statement of Net Assets of the Fund as of August 31, 2003.*
Statement of Operations of the Fund for the fiscal year ended
August 31, 2003.*
Statements of Changes in Net Assets of the Fund for the fiscal
years ended August 31, 2002 and 2003.* Financial Highlights of
the Fund for each of the fiscal years in the five-year period
ended August 31, 2003.*
Report of Independent Auditors.*
Schedule of Investments of the Fund as of February 29, 2004.**
Statement of Net Assets of the Fund as of February 29, 2004.**
Statement of Operations of the Fund for the six months ended
February 29, 2004.**
Statements of Changes in Net Assets of the Fund for the six
months ended February 29, 2004.**
Financial Highlights of the Fund for the six months ended
February 29, 2004 and each of the fiscal years in the
five-year period ended August 31, 2003.**
* Incorporated by reference to the Registrant's Annual Report to
Shareholders for the fiscal year ended August 31, 2003 filed with the
Securities and Exchange Commission ("Commission") on November 3, 2003
pursuant to Rule 30b2-1 under the Investment Company Act of 1940, as
amended ("1940 Act").
** Incorporated by reference to the Registrant's Semi-Annual Report to
Shareholders for the six month period ended February 29, 2004 filed with
the Commission on April 29, 2004 pursuant to Rule 30b2-1 under the 1940
Act.
Exhibits Description
--------- -----------
(a)(1) Articles of Incorporation of the Registrant.
(a)(2) Articles of Amendment to the Articles of Incorporation of
the Registrant, dated August 10, 1988.
(a)(3) Articles Supplementary creating the Series A, Series B,
Series C, Series D and Series E of Auction Market Preferred
Stock ("AMPS") of the Registrant.
(a)(4) Certificate of Correction, dated April 18, 1989
(a)(5) Articles of Amendment to the Articles Supplementary, dated
November 30, 1994.
(a)(6) Articles of Amendment to the Articles Supplementary, dated
November 30, 1994.
(a)(7) Articles of Amendment to the Articles Supplementary, dated
October 11, 1999.
(a)(8) Certificate of Correction, dated July 8, 2004.
(a)(9) Form of Articles Supplementary creating one series of AMPS.
(b) By-laws of the Registrant.
(c) Not applicable.
(d)(1) Portions of the Articles of Incorporation, By-laws and
Articles Supplementary of the Registrant defining the rights
of holders of shares of the Registrant.(a)
(d)(2) Form of specimen certificate for the AMPS of the Registrant.
(e) Form of Automatic Dividend Reinvestment Plan.
(f) Not applicable.
(g) Form of Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P. ("FAM" or the "Investment
Adviser").
(h)(1) Form of Purchase Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") relating to the AMPS.
(h)(2) Form of Merrill Lynch Standard Dealer Agreement.(b)
(i) Not applicable.
(j) Form of Custodian Agreement between the Registrant and The
Bank of New York ("BONY").(c)
(k)(l) Form of Registrar, Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement between the
Registrant and BONY.
C-1
(k)(2) Form of Agreement of Resignation, Appointment and Acceptance
among the Registrant, IBJ Whitehall Bank & Trust Company and
BONY.(e)
(k)(3) Form of Administrative Services Agreement between the
Registrant and State Street Bank and Trust Company.(d)
(k)(4) Form of Auction Agent Agreement between the Registrant and
BONY.
(k)(5) Form of Broker-Dealer Agreement.(f)
(k)(6) Form of Letter of Representations.
(l) Opinion and Consent of Sidley Austin Brown & Wood LLP.*
(m) Not applicable.
(n) Consent of , independent auditors
for the Registrant.*
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) Code of Ethics.(g)
-------------- --
(a) Reference is made to Article V, Article VI (sections 2, 3, 4, 5 and 6),
Article VII, Article VIII, Article X, Article XI, Article XII and
Article XIII of the Registrant's Articles of Incorporation, filed as
Exhibit (a)(1) hereto; to Article II, Article III (sections 1, 2, 3, 5
and 17), Article VI, Article VII, Article XII, Article XIII and Article
XIV of the Registrant's By-Laws filed as Exhibit (b)(1) hereto; and to
the Articles Supplementary and Articles of Amendment filed as Exhibit
(a)(3), (a)(5), (a)(6), (a)(7) and (a)(8).
(b) Incorporated by reference to Exhibit (h)(2) to Pre-Effective Amendment
No. 3 to the Registration Statement on Form N-2 of Preferred Income
Strategies, Inc. (File No. 333-102712), filed on March 25, 2003.
(c) Incorporated by reference to Exhibit 7 to Post-Effective No. 13 to the
Registration Statement on Form N-1A of The Asset Program, Inc. (File
No. 33-53887), filed on March 21, 2002.
(d) Incorporated by reference to Exhibit 8(d) to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A of Merrill Lynch Focus
Twenty Fund, Inc. (File No. 333-89775) filed on March 20, 2001.
(e) Incorporated by reference to an exhibit to the Registration Statement
on Form N-14 of MuniYield Fund, Inc. (File No. 333-65242), filed on
September 14, 2001.
(f) Incorporated by reference to Exhibit (k)(5) to the Registration
Statement on Form N-2 of MuniYield Insured Fund, Inc. (File No.
333-116604), filed on June 18, 2004.
(g) Incorporated by reference to Exhibit 15 to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1A of Merrill Lynch Inflation
Protected Fund (File No. 333-110936), filed on January 22, 2004.
* To be provided by amendment.
Item 25. Marketing Arrangements.
See Exhibits (h)(1) and (2).
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 $ 9,503
Printing (other than stock certificates) $ 21,250
Legal fees and expenses $ 65,000
Accounting fees and expenses $ 6,000
Rating Agency Fees $ 60,000
Miscellaneous $ 3,247
---------------
Total $165,000
Item 27. Persons Controlled by or Under Common Control with Registrant.
The Registrant is not controlled by, or under common control with,
any person.
C-2
Item 28. Number of Holders of Securities.
Number of Record Holders At
Title of Class , 2004
--------------------------- -------------------------------
Common Stock, $.10 par value
Preferred Stock 1
Item 29. Indemnification.
Reference is made to Section 2-418 of the General Corporation Law of
the State of Maryland, Article V of the Registrant's Articles of
Incorporation, Article VI of the Registrant's By-laws and Section 6 of the
Purchase Agreement, which provide for indemnification.
Article VI of the By-laws provides that each officer and director of
the Registrant shall be indemnified by the Registrant to the full extent
permitted under the Maryland General Corporation Law, except that such
indemnity shall not protect any such person against any liability to the
Registrant or any stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Absent a court determination that an officer or director seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in
the conduct of his or her office, the decision by the Registrant to indemnify
such person must be based upon the reasonable determination of independent
legal counsel or the vote of a majority of a quorum of non-party independent
directors, after review of the facts, that such officer or director is not
guilty of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Each officer and director of the Registrant claiming indemnification
within the scope of Article VI of the By-laws shall be entitled to advances
from the Registrant for payment of the reasonable expenses incurred by him or
her in connection with proceedings to which he or she is a party in the manner
and to the full extent permitted under the Maryland General Corporation Law;
provided, however, that the person seeking indemnification shall provide to
the Registrant a written affirmation of his or her good faith belief that the
standard of conduct necessary for indemnification by the Registrant has been
met and a written undertaking to repay any such advance, if it ultimately
should be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (i) the person seeking indemnification shall provide a security in form
and amount acceptable to the Registrant for his or her undertaking; (ii) the
Registrant is insured against losses arising by reason of the advance; or
(iii) a majority of a quorum of non-party independent directors, or
independent legal counsel in a written opinion shall determine, based on a
review of facts readily available to the Registrant at the time the advance is
proposed to be made, that there is reason to believe that the person seeking
indemnification will ultimately be found to be entitled to indemnification.
The Registrant may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under the
Maryland General Corporation Law from liability arising from his or her
activities as officer or director of the Registrant. The Registrant, however,
may not purchase insurance on behalf of any officer or director of the
Registrant that protects or purports to protect such person from liability to
the Registrant or to its stockholders to which such officer or director would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
In Section 7 of the Purchase Agreement relating to the securities
being offered hereby, the Registrant agrees to indemnify Merrill Lynch and
each person, if any, who controls Merrill Lynch within the meaning of the
Securities Act of 1933 (the "1933 Act") against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act
may be provided to directors, officers and controlling persons of the
Registrant and Merrill Lynch, pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the 1933 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
C-3
director, officer or controlling person of the Registrant in connection with
any successful defense of any action, suit or proceeding) is asserted by such
director, 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 1933 Act and will be governed by the
final adjudication of such issue.
Item 30. Business and Other Connections of The Investment Adviser.
FAM acts as the investment adviser for a number of affiliated
open-end and closed-end registered investment companies.
Merrill Lynch Investment Managers, L.P. ("MLIM"), acts as the
investment adviser for a number of affiliated open-end and closed-end
registered investment companies, and also acts as sub-adviser to certain other
portfolios.
The address of each of these registered investment companies is P.O.
Box 9011, Princeton, New Jersey 08543-9011, except that the address of Merrill
Lynch Funds for Institutions Series is One Financial Center, 23rd Floor,
Boston, Massachusetts 02111-2665.
The address of the Investment Adviser, MLIM, Princeton Services, Inc.
("Princeton Services") and Princeton Administrators, L.P. ("Princeton
Administrators") is also P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of Merrill Lynch and Merrill Lynch & Co., Inc. ("ML & Co.") is World
Financial Center, North Tower, 250 Vesey Street, New York, New York 10080. The
address of the Fund's transfer agent, The Bank of New York (the "Transfer
Agent"), is 101 Barclay Street, New York, New York 10286.
Set forth below is a list of each executive officer and partner of
the Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person or entity has
been engaged for the past two years for his, her or its own account or in the
capacity of director, officer, employee, partner or Director. Mr. Burke is
Vice President and Treasurer of all or substantially all of the investment
companies advised by FAM or its affiliates, and Mr. Doll is an officer of one
or more of such companies.
Other Substantial Business,
Profession, Vocation
Name Position(s) with Investment Adviser Or Employment
------------------------------------- ------------------------------------- -------------------------------------
ML & Co. Limited Partner Financial Services Holding Company;
Limited Partner of MLIM
Princeton Services General Partner General Partner of MLIM
Robert C. Doll, Jr. President President of MLIM; Director of
Princeton Services; Chief Investment
Officer of OppenheimerFunds, Inc. in
1999 and Executive Vice President
thereof from 1991 to 1999
Donald C. Burke First Vice President and Treasurer; First Vice President, Treasurer and
Director of Taxation of MLIM Director of Taxation of MLIM; Senior
Vice President and Treasurer of
Princeton Services; Vice President
of FAMD
Andrew J. Donohue General Counsel Senior Vice President and General
Counsel of MLIM; Senior Vice
C-4
Other Substantial Business,
Profession, Vocation
Name Position(s) with Investment Adviser Or Employment
------------------------------------- ------------------------------------- -------------------------------------
President, Director and General
Counsel of Princeton Services
Item 31. Location of Account and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act, and the Rules promulgated thereunder are
maintained at the offices of the Registrant (800 Scudders Mill Road,
Plainsboro, New Jersey 08536), its Investment Adviser (800 Scudders Mill Road,
Plainsboro, New Jersey 08536), its custodian and transfer agent, The Bank of
New York (101 Barclay Street, New York, New York 10286), and its accounting
services provider, State Street (500 College Road East, Princeton,
New Jersey 08540).
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(1) The Registrant undertakes to suspend the offering of the shares
of preferred stock covered hereby until it amends its prospectus contained
herein if (1) subsequent to the effective date of this Registration Statement,
its net asset value per share of preferred stock declines more than 10% from
its net asset value per share of preferred stock as of the effective date of
this Registration Statement, or (2) its net asset value per share of preferred
stock increases to an amount greater than its net proceeds as stated in the
prospectus contained herein.
(2) Not applicable.
(3) Not applicable.
(4) Not applicable.
(5) The Registrant undertakes that:
(a) For purposes of determining any liability under the 1933
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the registrant pursuant
to Rule 497(h) under the 1933 Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
1933 Act, 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 such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) 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.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Township of Plainsboro, and State of New
Jersey, on the 9th day of July, 2004.
MUNIVEST FUND, INC.
(Registrant)
By: /s/ Donald C. Burke
-------------------
(Donald C. Burke, Vice President
and Treasurer)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in the
capacities and on the dates indicated.
Signature Title Date
Terry K. Glenn* President (Principal Executive
----------------------------------------- Officer) and Director
(TERRY K. GLENN)
Donald C. Burke* Vice President and Treasurer
----------------------------------------- (Principal Financial and
(DONALD C. BURKE) Accounting Officer)
Ronald W. Forbes* Director
-----------------------------------------
(RONALD W. FORBES)
Cynthia A. Montgomery* Director
-----------------------------------------
(CYNTHIA A. MONTGOMERY)
Kevin A. Ryan* Director
-----------------------------------------
(KEVIN A. RYAN)
Roscoe S. Suddarth* Director
-----------------------------------------
(ROSCOE S. SUDDARTH)
Richard R. West* Director
-----------------------------------------
(RICHARD R. WEST)
Edward D. Zinbarg* Director
-----------------------------------------
(EDWARD D. ZINBARG)
*By: /s/ Donald C. Burke July 9, 2004
--------------------
(Donald C. Burke, Attorney-in-Fact)
C-6
POWER OF ATTORNEY
The undersigned, Terry K. Glenn, Donald C. Burke, Ronald W. Forbes,
Cynthia A. Montgomery, Kevin A. Ryan, Roscoe S. Suddarth, Richard R. West and
Edward D. Zinbarg, the Directors/Trustees and the Officers of each of the
registered investment companies listed below, or of the master trust in which
such registered investment company invests, hereby authorize Terry K. Glenn,
Andrew J. Donohue, Donald C. Burke, Robert C. Doll, Jr. and Phillip S.
Gillespie or any of them, as attorney-in-fact, to sign on his or her behalf in
the capacities indicated any Registration Statement or amendment thereto
(including post-effective amendments) for each of the following registered
investment companies and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission: CBA Money Fund; CMA Government Securities
Fund; CMA Money Fund; CMA Multi-State Municipal Series Trust; CMA Tax-Exempt
Fund; CMA Treasury Fund; Debt Strategies Fund, Inc.; Floating Rate Income
Strategies Fund; Floating Rate Income Strategies Fund II; Global Financial
Services Master Trust; Master Bond Trust; Master Government Securities Trust;
Master Money Trust; Master Senior Floating Rate Trust; Master Tax-Exempt
Trust; Master Treasury Trust;. Master U.S. High Yield Trust; Merrill Lynch
Balanced Capital Fund, Inc.; Merrill Lynch Bond Fund, Inc.; Merrill Lynch
Developing Capital Markets Fund, Inc.; Merrill Lynch Dragon Fund, Inc.;
Merrill Lynch Equity Dividend Fund; Merrill Lynch EuroFund; Merrill Lynch
Global Allocation Fund, Inc.; Merrill Lynch Global Financial Services Fund,
Inc.; Merrill Lynch Global SmallCap Fund, Inc.; Merrill Lynch Global
Technology Fund, Inc.; Merrill Lynch Global Value Fund, Inc.; Merrill Lynch
Healthcare Fund, Inc.; Merrill Lynch International Equity Fund; Merrill Lynch
Latin America Fund, Inc.; Merrill Lynch Municipal Bond Fund, Inc.; Merrill
Lynch Municipal Series Trust; Merrill Lynch Pacific Fund, Inc.; Merrill Lynch
Senior Floating Rate Fund, Inc.; Merrill Lynch Senior Floating Rate Fund II,
Inc.; Merrill Lynch U.S. High Yield Fund, Inc.; Merrill Lynch Utilities and
Telecommunications Fund, Inc.; MuniHoldings Florida Insured Fund; MuniHoldings
Fund, Inc.; MuniHoldings Fund II, Inc.; MuniHoldings Insured Fund, Inc.;
MuniHoldings New Jersey Insured Fund, Inc.; MuniHoldings New York Insured
Fund, Inc.; MuniVest Fund, Inc.; MuniVest Fund II, Inc.; Senior High Income
Portfolio, Inc.; The Municipal Fund Accumulation Program, Inc.; WCMA
Government Securities Fund; WCMA Money Fund; WCMA Tax-Exempt Fund; and WCMA
Treasury Fund.
Dated: February 10, 2004
/s/ Terry K. Glenn /s/ Donald C. Burke
------------------------------------ --------------------------------------
Terry K. Glenn Donald C. Burke
(President/Principal Executive (Vice President/Treasurer/Principal
Officer/Director/Trustee) Financial and Accounting Officer)
/s/ Ronald W. Forbes /s/ Cynthia A. Montgomery
------------------------------------ --------------------------------------
Ronald W. Forbes Cynthia A. Montgomery
(Director/Trustee) (Director/Trustee)
/s/ Kevin A. Ryan /s/ Roscoe S. Suddarth
------------------------------------ --------------------------------------
Kevin A. Ryan Roscoe S. Suddarth
(Director/Trustee) (Director/Trustee)
/s/ Richard R. West /s/ Edward D. Zinbarg
------------------------------------ --------------------------------------
Richard R. West Edward D. Zinbarg
(Director/Trustee) (Director/Trustee)
Exhibit Index
(a)(1) Articles of Incorporation of the Registrant.
(a)(2) Articles of Amendment to the Articles of Incorporation of the
Registrant, dated August 10, 1988.
(a)(3) Articles Supplementary creating the Series A, Series B,
Series C, Series D and Series E of Auction Market Preferred
Stock ("AMPS") of the Registrant.
(a)(4) Certificate of Correction, dated April 18, 1989.
(a)(5) Articles of Amendment to the Articles Supplementary, dated
November 30, 1994.
(a)(6) Articles of Amendment to the Articles Supplementary, dated
November 30, 1994.
(a)(7) Articles of Amendment to the Articles Supplementary, dated
October 11, 1999.
(a)(8) Certificate of Correction, dated July 8, 2004.
(a)(9) Form of Articles Supplementary creating one series of AMPS.
(b) By-laws of the Registrant.
(d)(2) Form of specimen certificate for the AMPS of the Registrant.
(e) Form of Automatic Dividend Reinvestment Plan.
(g) Form of Investment Advisory Agreement between the Registrant
and Fund Asset Management, L.P.
(h)(1) Form of Purchase Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated relating
to the AMPS.
(k)(1) Form of Registrar, Transfer Agency, Dividend Disbursing
Agency and Shareholder Servicing Agency Agreement between
the Registrant and The Bank of New York ("BONY").
(k)(4) Form of Auction Agent Agreement between the Registrant and
BONY.
(k)(6) Form of Letter of Representations.