As filed with the Securities and Exchange Commission on August 20, 2001
Securities Act Registration No. 333-
Investment Company Registration No. 811-10331
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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. 5 |X|
BlackRock California Municipal Income Trust
(Exact Name of Registrant as Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
BlackRock California Municipal Income Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
Copies to:
Michael K. Hoffman, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Simpson Thacher & Bartlett
Four Times Square 425 Lexington Avenue
New York, New York 10036 New York, New York 10017
Approximate Date of Proposed Public Offering: As soon as
practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Securities Being Offering Price Aggregate Offering Registration
Being Registered Registered per Unit Price(1) Fee
-------------------------------------------------------------------------------
Preferred Shares, 40 $25,000 1,000,000 $250
$.001 par value.
===============================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such dates as the Commission, acting
pursuant to said Section 8(a), may determine.
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
CROSS REFERENCE SHEET
Part A -- Prospectus
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover.......................... Cover page
Item 2. Inside Front and Outside Back Cover Page..... Cover page
Item 3. Fee Table and Synopsis....................... Prospectus Summary
Item 4. Financial Highlights......................... Financial Highlights
(unaudited)
Item 5. Plan of Distribution......................... Cover Page; Prospectus
Summary; Underwriting
Item 6. Selling Shareholders......................... Not Applicable
Item 7. Use of Proceeds.............................. Use of Proceeds; The
Trust's Investments
Item 8. General Description of the Registrant........ The Trust; The Trust's
Investments; Risks;
Description of Preferred
Shares; Certain
Provisions in the
Agreement and
Declaration of Trust
Item 9. Management................................... Management of the Trust;
Custodian and Transfer
Agent; Auction Agent
Item 10. Capital Stock, Long-Term Debt, and Other
Securities................................... Description of Preferred
Shares; Description of
Common Shares; Certain
Provisions in the
Agreement and
Declaration of Trust;
Tax Matters
Item 11. Defaults and Arrears on Senior Securities.... Not Applicable
Item 12. Legal Proceedings............................ Legal Opinions
Item 13. Table of Contents of the Statement of
Additional Information....................... Table of Contents for
the Statement of
Additional Information
Part B -- Statement of Additional Information
Item 14. Cover Page................................ Cover Page
Item 15. Table of Contents......................... Cover Page
Item 16. General Information and History........... Not Applicable
Item 17. Investment Objective and Policies......... Investment Objective
and Policies; Investment
Policies and Techniques;
other Investment
Policies and Techniques;
Portfolio Transactions
Item 18. Management................................ Management of the Trust;
Portfolio Transactions
and Brokerage
Item 19. Control Persons and Principal Holders of
Securities................................ Management of the Trust
Item 20. Investment Advisory and Other Services.... Management of the Trust;
Experts
Item 21. Brokerage Allocation and Other Practices.. Portfolio Transactions
and Brokerage
Item 22. Tax Status................................ Tax Matters
Item 23. Financial Statements...................... Report of Independent
Auditors; Financial
Highlights (unaudited)
Part C -- Other Information
Items 24-33 have been answered in Part C of this Registration Statement
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 20, 2001 PROSPECTUS LOGO
$
BlackRock California Municipal Income Trust
Municipal Auction Rate Cumulative Preferred Shares
("Preferred Shares")
Shares, Series
Shares, Series
Liquidation Preference $25,000 per share
------------------
Investment Objective. BlackRock California Municipal Income Trust
(the "Trust") is a recently organized, non- diversified, closed-end
management investment company. The Trust's investment objective is to
provide current income exempt from regular Federal income tax and
California income taxes.
Portfolio Contents. The Trust will invest primarily in municipal
bonds that pay interest that is exempt from regular Federal income tax and
California income taxes. The Trust will invest in municipal bonds that, in
the opinion of the Trust's investment advisor and sub-advisor, are
underrated or undervalued. Under normal market conditions, the Trust
expects to be fully invested in these tax-exempt municipal bonds. The Trust
will invest at least 80% of its total assets in municipal bonds that at the
time of investment are investment grade quality. Investment grade quality
bonds are bonds rated within the four highest grades (Baa or BBB or better
by Moody's Investors Service, Inc. ("Moody's"), Standard & Poors Ratings
Group ("S&P") or Fitch IBCA, Inc. ("Fitch")) or bonds that are unrated but
judged to be of comparable quality by the Trust's investment advisor and
sub-advisor. The Trust may invest up to 20% of its total assets in
municipal bonds that at the time of investment are rated Ba/BB or B by
Moody's, S&P or Fitch or bonds that are unrated but judged to be of
comparable quality by the Trust's investment advisor and sub- advisor.
Bonds of below investment grade quality are regarded as having
predominately speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal, and are commonly referred to
as "junk bonds." The Trust intends to invest primarily in long-term bonds
and expects bonds in its portfolio to have a dollar weighted average
maturity of 15 years or more under current market conditions. The Trust
cannot ensure that it will achieve its investment objective.
------------------
Investing in the Preferred Shares involves certain risks. See
"Risks" beginning on page . The minimum purchase amount of the Preferred
Shares is $25,000.
Neither the Securities and Exchange Commission ("SEC") nor any
state securities commission has approved or disapproved these securities or
determined if this prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
------------------
Per Share Total
--------- -----
Public Offering Price $ 25,000 $
Sales Load $ $
Proceeds to Fund (before expenses) $ $
The underwriters are offering the Preferred Shares subject to
various conditions. The underwriters expect to deliver the Preferred Shares
to purchasers, in book-entry form, through the facilities of The Depository
Trust Company on or about , 2001.
------------------
, 2001
You should read the prospectus, which contains important
information about the Trust, before deciding whether to invest and retain
it for future reference. A Statement of Additional Information, dated ,
2001, containing additional information about the Trust, has been filed
with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this prospectus. You may request a free copy
of the Statement of Additional Information, the table of contents of which
is on page of this prospectus, by calling (888) 825-2257 or by writing to
the Trust, or obtain a copy (and other information regarding the Trust)
from the Securities and Exchange Commission web site (http://www.sec.gov)
The Preferred Shares do not represent a deposit or obligation of,
and are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
The Trust is offering shares of Series Municipal Auction Rate
Cumulative Preferred Shares and shares of Series Municipal Auction Rate
Cumulative Preferred Shares. The shares are referred to in this prospectus
as "Preferred Shares." The Preferred Shares have a liquidation preference
of $25,000 per share, plus any accumulated, unpaid dividends. The Preferred
Shares also have priority over the Trust's common shares as to distribution
of assets as described in this prospectus. It is a condition of closing
this offering that the Preferred Shares be offered with a rating of "Aaa"
from Moody's and "AAA" from S&P.
The dividend rate for the initial dividend rate period will be %
for Series and % for Series . The initial rate period is from the date of
issuance through , 2001 for Series and , 2001 for Series . For subsequent
rate periods, Preferred Shares pay dividends based on a rate set at
auction, usually held weekly. Prospective purchasers should carefully
review the auction procedures described in this prospectus and should note:
(1) a buy order (called a "bid order") or sell order is a commitment to buy
or sell Preferred Shares based on the results of an auction; (2) auctions
will be conducted by telephone; and (3) purchases and sales will be settled
on the next business day after the auction.
Preferred Shares are not listed on an exchange. You may only buy
or sell Preferred Shares through an order placed at an auction with or
through a broker-dealer that has entered into an agreement with the auction
agent and the Trust or in a secondary market maintained by certain
broker-dealers. These broker-dealers are not required to maintain this
market, and it may not provide you with liquidity.
Dividends on Preferred Shares, to the extent payable from
tax-exempt income earned on the Trust's investments, will be exempt from
regular Federal income tax in the hands of owners of such shares. All or a
portion of the Trust's dividends may be subject to the Federal alternative
minimum tax. The Fund is required to allocate net capital gains and other
taxable income, if any, proportionately between common and preferred
shares, including the Preferred Shares, based on the percentage of total
dividends distributed to each class for that year. The Trust may at its
election give notice of the amount of any income subject to Federal income
tax to be included in a dividend on a Preferred Share in advance of the
related auction. If the Trust does not give such advance notice, it
generally will be required to pay additional amounts to holders of
Preferred Shares in order to adjust for their receipt of income subject to
Federal income tax.
You should rely only on the information contained or incorporated
by reference in this prospectus. The Trust has not authorized anyone to
provide you with different information. The Trust is not making an offer of
these securities in any state where the offer is not permitted. You should
not assume that the information provided by this prospectus is accurate as
of any date other than the date on the front of this prospectus.
--------------------
TABLE OF CONTENTS
age
PROSPECTUS SUMMARY...........................................................4
FINANCIAL HIGHLIGHTS (Unaudited).............................................8
THE TRUST....................................................................9
USE OF PROCEEDS..............................................................9
CAPITALIZATION (Unaudited)..................................................10
PORTFOLIO COMPOSITION.......................................................10
THE TRUST'S INVESTMENTS.....................................................11
RISKS ...................................................................13
MANAGEMENT OF THE TRUST.....................................................16
DESCRIPTION OF PREFERRED SHARES.............................................19
THE AUCTION.................................................................25
DESCRIPTION OF COMMON SHARES................................................29
CERTAIN PROVISIONS IN THE AGREEMENT AND DECLARATION OF TRUST................29
REPURCHASE OF COMMON SHARES.................................................30
TAX MATTERS.................................................................31
UNDERWRITING................................................................31
CUSTODIAN AND TRANSFER AGENT; AUCTION AGENT.................................32
LEGAL OPINIONS..............................................................32
AVAILABLE INFORMATION.......................................................33
TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION...............34
APPENDIX A - TAX EQUIVALENT YIELD TABLE....................................A-1
--------------------
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of its
shareholders and to safeguarding their non-public personal information. The
following information is provided to help you understand what personal
information the Trust collects, how the Trust protects that information and
why, in certain cases, the Trust may share information with select other
parties.
Generally, the Trust does not receive any non-public personal
information relating to its shareholders, although certain non-public
personal information of its shareholders may become available to the Trust.
The Trust does not disclose any non-public personal information about its
shareholders or former shareholders to anyone, except as permitted by law
or as is necessary in order to service shareholder accounts (for example,
to a transfer agent or third party administrator).
The Trust restricts access to non-public personal information
about its shareholders to employees of the Trust's investment advisor and
its affiliates with a legitimate business need for the information. The
Trust maintains physical, electronic and procedural safeguards designed to
protect the non-public personal information of its shareholders.
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in our Preferred
Shares. You should read the more detailed information contained in this
prospectus, the Statement of Additional Information and the Fund's
Statement of Preferences of Municipal Auction Rate Cumulative Preferred
Shares (the "Statement") attached as Appendix A to the Statement of
Additional Information. Capitalized terms used but not defined in this
prospectus shall have the meanings given to such terms in the Statement.
The Trust.............................. BlackRock California Municipal
Income Trust is a recently
organized, diversified, closed-end,
management investment company.
Throughout the prospectus, we refer
to BlackRock California Municipal
Income Trust simply as the "Trust"
or as "we," "us" or "our." The
Trust is designed to provide tax
benefits to investors who are
residents of California. See "The
Trust." The Trust's common shares
are traded on the New York Stock
Exchange under the symbol "BFZ".
See "Description of Common Shares."
As of , 2001, the Trust had common
shares outstanding and net assets
of $ .
Investment Objective................... The Trust's investment objective is
to provide current income exempt
from regular Federal income tax and
California income taxes.
Investment Policies.................... The Trust will invest primarily in
municipal bonds that pay interest
that is exempt from regular Federal
income tax and California income
taxes. The Trust will invest in
municipal bonds that, in the
opinion of BlackRock Advisors, Inc.
("BlackRock Advisors" or the
"Advisor") and BlackRock Financial
Management, Inc. ("BlackRock
Financial Management" or the "Sub-
Advisor") are underrated or
undervalued. Underrated municipal
bonds are those whose ratings do
not, in the Advisor's or
Sub-Advisor's opinion, reflect
their true creditworthiness.
Undervalued municipal bonds are
bonds that, in the Advisor's or
Sub-Advisor's opinion, are worth
more than the value assigned to
them in the marketplace. Under
normal market conditions, the Trust
expects to be fully invested in
these tax-exempt municipal bonds.
The Trust will invest at least 80%
of its total assets in municipal
bonds that at the time of
investment are investment grade
quality. Investment grade quality
bonds are bonds rated within the
four highest grades (Baa or BBB or
better by Moody's, S&P or Fitch) or
bonds that are unrated but judged
to be of comparable quality by the
Advisor and the Sub-Advisor. The
Trust may invest up to 20% of its
total assets in municipal bonds
that at the time of investment are
rated Ba/BB or B by Moody's, S&P or
Fitch or bonds that are unrated but
judged to be of comparable quality
by the Advisor and the Sub-Advisor.
Bonds of below investment grade
quality are regarded as having
predominately speculative
characteristics with respect to the
issuer's capacity to pay interest
and repay principal, and are
commonly referred to as "junk
bonds." The Trust intends to invest
primarily in long-term bonds and
expects bonds in its portfolio to
have a dollar weighted average
maturity of 15 years or more under
current market conditions. The
Trust cannot ensure that it will
achieve its investment objective.
See "The Trust's Investments."
Investment Advisor..................... BlackRock Advisors will be the
Trust's investment advisor and
BlackRock Advisors' affiliate,
BlackRock Financial Management,
will provide certain day-to-day
investment management services to
the Trust. Throughout the
prospectus, we sometimes refer to
BlackRock Advisors and BlackRock
Financial Management collectively
as "BlackRock."
The Offering........................... The Trust is offering shares of
Series Preferred Shares and shares
of Series Preferred Shares, each at
a purchase price of $25,000 per
share. Preferred Shares are being
offered by the underwriters listed
under "Underwriting."
Risk Factors Summary................... Risk is inherent in all investing.
Therefore, before investing in the
Preferred Shares you should
consider certain risks carefully.
The primary risks of investing in
the Preferred Shares are:
o if an auction fails you
may not be able to sell
some or all of your
shares;
o because of the nature of
the market for Preferred
Shares, you may receive
less than the price you
paid for your shares if
you sell them outside of
the auction, especially
when market interest rates
are rising;
o a rating agency could
downgrade the rating
assigned to the Preferred
Shares, which could affect
liquidity;
o the Trust may be forced to
redeem your shares to meet
regulatory or rating
agency requirements or may
voluntarily redeem your
shares in certain
circumstances;
o in extraordinary
circumstances, the Trust
may not earn sufficient
income from its
investments to pay
dividends;
o if interest rates rise,
the value of the Trust's
investment portfolio will
decline, reducing the
asset coverage for the
Preferred Shares;
o if an issuer of a
municipal bond in which
the Trust invests
experiences financial
difficulty or defaults,
there may be a negative
impact on the income and
net asset value of the
Trust's portfolio; and
o the Trust may invest up to
20% of its total assets in
securities that are below
investment grade quality
which are regarded as
having predominately
speculative
characteristics with
respect to the issuer's
capacity to pay interest
and principal.
For additional risks of investing
in the Trust, see "Risks" below.
Trading Market......................... Preferred Shares are not listed on
an exchange. Instead, you may buy
or sell the Preferred Shares at an
auction that normally is held
weekly, by submitting orders to a
broker-dealer that has entered into
an agreement with the auction agent
and the Trust (a "Broker-Dealer"),
or to a broker-dealer that has
entered into a separate agreement
with a Broker-Dealer. In addition
to the auctions, Broker-Dealers and
other broker-dealers may maintain a
secondary trading market in
Preferred Shares outside of
auctions, but may discontinue this
activity at any time. There is no
assurance that a secondary market
will provide shareholders with
liquidity. You may transfer shares
outside of auctions only to or
through a Broker-Dealer or a
broker-dealer that has entered into
a separate agreement with a
Broker-dealer.
The table below shows the first
auction date for each series of
Preferred Shares and the day on
which each subsequent auction will
normally be held for each series of
Preferred Shares. The first auction
date for each series of Preferred
Shares will be the business day
before the dividend payment date
for the initial rate period for
each series of Preferred Shares.
The start date for subsequent rate
periods will normally be the
business day following auction date
unless the then-current rate period
is a special rate period or the
first day of the subsequent rate
period is not a business day.
Series First Auction Date* Subsequent
------ ------------------ ----------
______ ______ ______
______ ______ ______
____________________
* All Dates are 2001.
Dividends and Rate Periods............. The table below shows the dividend
rate for the initial rate period on
the Preferred Shares offered in
this prospectus. For subsequent
rate periods, Preferred Shares will
pay dividends based on a rate set
at auctions, normally held weekly.
In most instances, dividends are
also paid weekly, on the day
following the end of the rate
period. The rate set at auction
will not exceed the Maximum Rate.
See "Description of Preferred
Shares-- Dividends and Dividend
Periods." The table below also
shows the date from which dividends
on the Preferred Shares will
accumulate at the initial rate, the
dividend payment date for the
initial rate period and the day on
which dividends will normally be
paid. If the day on which dividends
otherwise would be paid is not a
business day, then your dividends
will be paid on the first business
day that falls after that day.
Finally, the table below shows the
number of days of the initial rate
period for the Preferred Shares.
Subsequent rate periods generally
will be seven days. The dividend
payment date for special rate
periods of more than seven days
will be set out in the notice
designating a special rate period.
See "Description of Preferred
Shares -- Dividends and Dividend
Periods -- Designation of Special
Rate Periods."
Dividend
Date of Payment Subsequent Number of
Initial Accumulation Date for Dividend Days of
Dividend at Initial Initial Rate Payment Initial Rate
Rate Rate* Period* Day Period
---- ---- ------ --- ------
____ ... ____ ____ ____ ____ ____
____ ... ____ ____ ____ ____ ____
* All Dates are 2001.
Special Tax Considerations............. Because under normal circumstances
the Trust will invest substantially
all of its assets in municipal
bonds that pay interest that is
exempt from regular Federal income
tax California income taxes, the
income you receive will ordinarily
be exempt from Federal income tax
California income taxes. Your
income may be subject to certain
other local taxes. All or a portion
of the income from these bonds will
be subject to the Federal
alternative minimum tax, so
Preferred Shares may not be a
suitable investment if you are
subject to this tax or would become
subject to such tax by investing in
Preferred Shares. Taxable income or
gain earned by the Trust will be
allocated proportionately to
holders of Preferred Shares and
common shares, based on the
percentage of total dividends paid
to each class for that year.
Accordingly, certain specified
Preferred Shares dividends may be
subject to income tax on income or
gains attributed to the Trust. The
Trust may at its election give
notice before any applicable
auction of the amount of any
taxable income and gain to be
distributed for the period relating
to that auction. If the Trust does
not provide such notice, the Trust
generally will make shareholders
whole for taxes owing on dividends
paid to shareholders that include
taxable income and gain. See "Tax
Matters" and "Description of
Preferred Shares-- Dividends and
Dividend Periods -- Gross-up
Payments."
Ratings................................ Shares of each series of Preferred
Shares will be issued with a rating
of "Aaa" from Moody's and "AAA"
from S&P. In order to maintain this
rating, the Trust must own
portfolio securities of a
sufficient value and with adequate
credit quality to meet the rating
agencies' guidelines. See
"Description of Preferred Shares--
Rating Agency Guidelines and Asset
Coverage."
Redemption............................. Although the Trust does not
ordinarily redeem Preferred Shares,
it may be required to redeem shares
if, for example, the Trust does not
meet an asset coverage ratio
required by law or to correct a
failure to meet a rating agency
guideline in a timely manner. The
Trust voluntarily may redeem
Preferred Shares under certain
conditions. See "Description of
Preferred Shares-- Redemption" and
"Description of Preferred Shares--
Rating Agency Guidelines and Asset
Coverage."
Liquidation Preference................. The liquidation preference for
shares of each series of Preferred
Shares will be $25,000 per share
plus accumulated but unpaid
dividends. See "Description of
Preferred Shares -- Liquidation."
Voting Rights.......................... The holders of preferred shares,
including Preferred Shares, voting
as a separate class, have the right
to elect at least two trustees of
the Trust at all times. Such
holders also have the right to
elect a majority of the trustees in
the event that two years' dividends
on the preferred shares are unpaid.
In each case, the remaining
trustees will be elected by holders
of common shares and preferred
shares, including Preferred Shares,
voting together as a single class.
The holders of preferred shares,
including Preferred Shares, will
vote as a separate class or classes
on certain other matters as
required under the Trust's
Agreement and Declaration of Trust,
as amended and restated, the
Investment Company Act of 1940 (the
"Investment Company Act") and
Delaware law. See "Description of
Preferred Shares-- Voting Rights,"
"Certain Provisions in the
Agreement and Declaration of Trust"
and "Conversion to Open-End Fund."
FINANCIAL HIGHLIGHTS
(Unaudited)
Information contained in the table below under the headings "Per
Share Operating Performance," "Ratios to Average Net Assets of Common
Shareholders" and "Supplemental Data" shows the unaudited operating
performance of the Trust from the commencement of the Trust's investment
operations on July 31, 2001 through , 2001. Since the Trust was recently
organized and commenced investment operations on July 31, 2001, the table
covers less than
weeks of operations, during which a substantial portion of the
Trust's portfolio was held in temporary investments pending investment in
municipal securities that meet the Trust's investment objectives and
policies. Accordingly, the information presented may not provide a
meaningful picture of the Trust's future operating performance.
Per Share Operating Performance:
Net asset value, beginning of period........................
----------
Net investment income.......................................$
----------
Net realized and unrealized gain/loss on investments........
Net increase/decrease from investment operations............
----------
Dividends and distributions.................................
Capital charge with respect to issuance of common shares.............
Net asset value, end of period*......................................$
==========
Per share market value, end of period*...............................$
Total Investment Return+............................................. %
==========
Ratios to Average Net Assets of Common Shareholders: ++
Operating Expenses #........................................ %+++
Net investment income....................................... %+++
Supplemental Data:
Average net assets of common shareholders (in thousands)....$
Portfolio turnover.......................................... %
-----------
* Net asset value and market value are published in Barron's each
Saturday, The New York Times and The Wall Street Journal each
Monday.
+ Total investment return is calculated assuming a purchase of
common shares at the current market price on the first day and a
sale at the current market price on the last day of the period
reported. Dividends and distributions, if any, are assumed for
purposes of this calculation, to be reinvested at prices obtained
under the Trust's dividend reinvestment plan. Total investment
return does not reflect brokerage commissions. Total investment
returns for periods of less than one year are not annualized.
++ Ratios are calculated on the basis of income and expenses to
average net assets.
+++ Annualized.
# The ratio of operating expenses, without giving effect to
"advisory fee waiver," to average net assets was 0. %+++ for the
period indicated above.
The information above represents the unaudited operating
performance of a common share outstanding, total investment return, ratios
to average net assets and other supplemental data for the period indicated.
This information has been determined based upon financial information
provided in the Trust's unaudited financial statements for the period July
31, 2001 through , 2001 included in the statement of additional information
and market value data for the Trust's shares.
THE TRUST
The Trust is a recently organized, non-diversified, closed-end,
management investment company registered under the Investment Company Act.
The Trust was organized as a Delaware business trust on March 30, 2001
pursuant to an Agreement and Declaration of Trust, as later amended and
restated, governed by the laws of the Stare of Delaware. On July 31, 2001,
the Trust issued an aggregate of 13,000,000 common shares of beneficial
interest, par value $.001 per share, pursuant to the initial public
offering and commenced its investment operations. The Trust's common shares
are traded on the New York Stock Exchange (the "Exchange") under the symbol
"BFZ". The Trust's principal office is located at 100 Bellevue Parkway,
Wilmington, Delaware 19809, and its telephone number is (888) 825-2257. The
Trust is designed to provide tax benefits to investors who are residents of
California for tax purposes.
The following provides information about the Trust's outstanding
shares as of , 2001:
Amount held by
Amount the Trust or for Amount
Title of Class Authorized its Account Outstanding
-------------- ---------- ----------- -----------
Common.......................... Unlimited 0 13,000,000
Preferred....................... Unlimited 0 0
Series ....................... 0 0
Series ....................... 0 0
USE OF PROCEEDS
The net proceeds of this offering will be approximately $ after
payment of the sales load and estimated offering costs. The Trust will
invest the net proceeds of the offering in accordance with the Trust's
investment objective and policies as stated below. We currently anticipate
that the Trust will be able to invest substantially all of the net proceeds
in municipal bonds that meet the Trust's objective and policies at or
shortly (within six to eight weeks) after the completion of the offering.
Pending such investment, it is anticipated that the proceeds will be
invested in short- term, tax-exempt or taxable investment grade securities.
CAPITALIZATION
(Unaudited)
The following table sets forth the capitalization of the Trust as
of , 2001, and as adjusted to give effect to the issuance of the Preferred
Shares offered hereby.
Actual As Adjusted
----------- ------------
Shareholder's Equity:
Preferred Shares, $.001 par value, $25,000 stated value per share,
at liquidation value; unlimited shares authorized (no shares
issued;
shares issued, as adjusted)......................... $ -- $
Common shares, $.001 par value per share; unlimited shares
authorized, 13,000,000 shares outstanding*......................
Paid-in surplus.......................................................
Balance of undistributed net investment income........................
Accumulated net realized gain/loss from investment transactions..... ( ) ( )
Net unrealized appreciation/depreciation of investments............. ( ) ( )
----------- ------------
Net assets..........................................................
=========== ============
----------
* None of these outstanding shares are held by or for the account of the
Trust.
PORTFOLIO COMPOSITION
As of , 2001, approximately % of the market value of the Trust's
portfolio was invested in long-term municipal securities and approximately
% of the market value of the Trust's portfolio was invested in short-term
municipal securities. The following table sets forth certain information
with respect to the composition of the Trust's investment portfolio as of ,
2001, based on the highest rating assigned.
Credit Rating Value Percent
-------------
-------------- --------------
AAA/Aaa*...........................$ %
AA/Aa.............................. %
A/A................................ %
BBB/Baa............................ %
BB/Ba.............................. %
Unrated+........................... %
Short-Term......................... %
-------------- --------------
TOTAL..................... 100.0%
============== ==============
----------
* Includes securities that are backed by an escrow or trust containing
sufficient U.S. Government Securities to ensure the timely payment of
principal and interest.
+ Refers to securities that have not been rated by Moody's, S&P or
Fitch, but that have been assessed by BlackRock Financial Management
as being of comparable credit quality to rated securities in which
the Trust may invest. See "The Trust's Investments-- Investment
Objective and Policies."
THE TRUST'S INVESTMENTS
Investment Objective and Policies
The Trust's investment objective is to provide current income
exempt from regular Federal income tax and California income taxes.
The Trust will invest primarily in municipal bonds that pay
interest that is exempt from regular Federal income tax and California
income taxes. Under normal market conditions, the Trust expects to be fully
invested (at least 95% of its net assets) in such tax-exempt municipal
bonds, in which the Trust generally will invest at least 80% of its total
assets. Under normal market conditions, the Trust will invest at least 80%
of its total assets in investment grade quality municipal bonds. Investment
grade quality means that such bonds are rated, at the time of investment,
within the four highest grades (Baa or BBB or better by Moody's, S&P or
Fitch) or are unrated but judged to be of comparable quality by BlackRock.
Municipal bonds rated Baa by Moody's are investment grade, but Moody's
considers municipal bonds rated Baa to have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity for municipal bonds that are rated BBB or Baa
(or that have equivalent ratings) to make principal and interest payments
than is the case for higher grade municipal bonds. The Trust may invest up
to 20% of its total assets in municipal bonds that are rated, at the time
of investment, Ba/BB or B by Moody's, S&P or Fitch or that are unrated but
judged to be of comparable quality by BlackRock. Bonds of below investment
grade quality (Ba/BB or below) are commonly referred to as "junk bonds."
Bonds of below investment grade quality are regarded as having
predominantly speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal. These credit quality policies
apply only at the time a security is purchased, and the Trust is not
required to dispose of a security if a rating agency downgrades its
assessment of the credit characteristics of a particular issue. In
determining whether to retain or sell a security that a rating agency has
downgraded, BlackRock may consider such factors as BlackRock's assessment
of the credit quality of the issuer of the security, the price at which the
security could be sold and the rating, if any, assigned to the security by
other rating agencies. Appendix B to the Statement of Additional
Information contains a general description of Moody's, S&P's and Fitch's
ratings of municipal bonds. See "Risks" below for a general description of
the economic and credit characteristics of municipal issuers in California.
The Trust may also invest in securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the types
in which the Trust may invest directly and in tax-exempt preferred shares
that pay dividends exempt from regular Federal income tax. Subject to the
Trust's policy of investing at least 80% of its total assets in municipal
bonds exempt from California income tax, the Trust may invests in
securities that pay interest that is not exempt from California y income
tax when, in the judgement of BlackRock, the return to the shareholders
after payment of applicable California income taxes would be higher than
the return available from comparable securities that pay interest that is,
or make other distributions that are, exempt from California income tax.
See "-- Other Investment Companies," and "-- Tax-Exempt Preferred Shares."
The Trust will invest in municipal bonds that, in BlackRock's
opinion, are underrated or undervalued. Underrated municipal bonds are
those whose ratings do not, in BlackRock's opinion, reflect their true
creditworthiness. Undervalued municipal bonds are bonds that, in the
opinion of BlackRock, are worth more than the value assigned to them in the
marketplace. BlackRock may at times believe that bonds associated with a
particular municipal market sector (for example, electrical utilities), or
issued by a particular municipal issuer, are undervalued. BlackRock may
purchase those bonds for the Trust's portfolio because they represent a
market sector or issuer that BlackRock considers undervalued, even if the
value of those particular bonds appears to be consistent with the value of
similar bonds. Municipal bonds of particular types (for example, hospital
bonds, industrial revenue bonds or bonds issued by a particular municipal
issuer) may be undervalued because there is a temporary excess of supply in
that market sector, or because of a general decline in the market price of
municipal bonds of the market sector for reasons that do not apply to the
particular municipal bonds that are considered undervalued. The Trust's
investment in underrated or undervalued municipal bonds will be based on
BlackRock's belief that their yield is higher than that available on bonds
bearing equivalent levels of interest rate risk, credit risk and other
forms of risk, and that their prices will ultimately rise, relative to the
market, to reflect their true value. Any capital appreciation realized by
the Trust will generally result in capital gains distributions subject to
Federal capital gains tax.
The Trust may purchase municipal bonds that are additionally
secured by insurance, bank credit agreements or escrow accounts. The credit
quality of companies which provide these credit enhancements will affect
the value of those securities. Although the insurance feature reduces
certain financial risks, the premiums for insurance and the higher market
price paid for insured obligations may reduce the Trust's income. Insurance
generally will be obtained from insurers with a claims-paying ability rated
Aaa by Moody's or AAA by S&P or Fitch. The insurance feature does not
guarantee the market value of the insured obligations or the net asset
value of the common shares. The Trust may purchase insured bonds and may
purchase insurance for bonds in its portfolio.
During temporary defensive periods, including the period during
which the net proceeds of this offering are being invested, and in order to
keep the Trust's cash fully invested, the Trust may invest up to 100% of
its net assets in liquid, short-term investments, including high quality,
short-term securities that may be either tax-exempt or taxable. The Trust
may not achieve its investment objective under these circumstances. The
Trust intends to invest in taxable short-term investments only if suitable
tax-exempt short-term investments are not available at reasonable prices
and yields.
The Trust cannot change its investment objective without the
approval of the holders of a majority of the outstanding common shares and,
once the Preferred Shares are issued, the Preferred Shares voting together
as a single class, and of the holders of a majority of the outstanding
Preferred Shares voting as a separate class. A "majority of the
outstanding" means (1) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the shares are present or represented by
proxy, or (2) more than 50% of the shares, whichever is less. See
"Description of Preferred Shares -- Voting Rights" for additional
information with respect to the voting rights of holders of Preferred
Shares.
Municipal Bonds
General. Municipal bonds are either general obligation or revenue
bonds and typically are issued to finance public projects, such as roads or
public buildings, to pay general operating expenses or to refinance
outstanding debt. Municipal bonds may also be issued for private
activities, such as housing, medical and educational facility construction
or for privately owned industrial development and pollution control
projects. General obligation bonds are backed by the full faith and credit,
or taxing authority, of the issuer and may be repaid from any revenue
source. Revenue bonds may be repaid only from the revenues of a specific
facility or source. The Trust also may purchase municipal bonds that
represent lease obligations. These carry special risks because the issuer
of the bonds may not be obligated to appropriate money annually to make
payments under the lease. In order to reduce this risk, the Trust will only
purchase municipal bonds representing lease obligations where BlackRock
believes the issuer has a strong incentive to continue making
appropriations until maturity.
The municipal bonds in which the Trust will invest are generally
issued by the State of California, political subdivisions of the State, and
authorities or other intermediaries of the State and such political
subdivisions and pay interest that, in the opinion of bond counsel to the
issuer, or on the basis of another authority believed by BlackRock to be
reliable, is exempt from regular Federal income tax and California income
taxes. BlackRock will not conduct its own analysis of the tax status of the
interest paid by municipal bonds held by the Trust. The Trust may also
invest in municipal bonds issued by United States Territories (such as
Puerto Rico or Guam) that are exempt from regular Federal income tax and
California income taxes. In addition to the types of municipal bonds
described in the prospectus, the Trust may invest in other securities that
pay interest that is, or make other distributions that are, exempt from
regular Federal income tax and/or state and local personal taxes,
regardless of the technical structure of the issuer of the instrument. The
Trust treats all of such tax-exempt securities as municipal bonds.
The yields on municipal bonds are dependent on a variety of
factors, including prevailing interest rates and the condition of the
general money market and the municipal bond market, the size of a
particular offering, the maturity of the obligation and the rating of the
issue. The market value of municipal bonds will vary with changes in
interest rate levels and as a result of changing evaluations of the ability
of bond issuers to meet interest and principal payments.
The Trust will invest primarily in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15 or more
years, but the weighted average maturity of obligations held by the Trust
may be shortened, depending on market conditions.
Risks Relating to California Municipal Bonds. Because the Trust
invests primarily in a portfolio of California municipal bonds, the Trust
is more susceptible to political, economic, regulatory or other factors
affecting issuers of California municipal bonds than a fund which does not
limit its investments to such issuers. These risks include possible
legislative, State constitutional or regulatory amendments that may affect
the ability of State and local governments or regional governmental
authorities to raise money to pay principal and interest on their municipal
bonds. Economic, fiscal and budgetary conditions throughout the State may
also influence the Trust's performance.
The following information is a summary of a more detailed
description of certain factors affecting California municipal securities
which is contained in the Trust's Statement of Additional Information.
Investors should obtain a copy of the Statement of Additional Information
for a more detailed discussion of such factors. Such information is derived
from certain official statements of the State of California published in
connection with the issuance of specific California municipal securities,
as well as from other publicly available documents. Such information has
not been independently verified by the Trust and may not apply to all
California municipal securities acquired by the Trust. The Trust assumes no
responsibility for the completeness or accuracy of such information.
California State and local government obligations may be adversely
affected by political and economic conditions and developments within the
State of California and the nation as a whole. With respect to an
investment in the Trust, through popular initiative and legislative
activity, the ability of the State of California and its local governments
to raise money through property taxes and to increase spending has been the
subject of considerable debate and change in recent years. Various State
Constitutional amendments, for example, have been adopted which have the
effect of limiting property tax and spending increases, while legislation
has sometimes added to these limitations and has at other times sought to
reduce their impact. To date, these Constitutional, legislative and budget
developments do not appear to have severely decreased the ability of the
State and local governments to pay principal and interest on their
obligations. It can be expected that similar types of State legislation or
Constitutional proposals will continue to be introduced. The impact of
future developments in these areas is unclear.
During the past year, California has experienced difficulties with
the prices of natural gas and electricity in much of the State. These
difficulties are likely to continue for several years. Because of capacity
constraints in electric generation and transmission, California utilities
have been forced to purchase wholesale power at high prices. While the
government of California and the Federal Energy Regulatory Commission are
considering further actions to deal with the shortcomings of California's
energy market, it is not possible to predict what the long-term impact of
these developments will be on California's economy. Such fuel and energy
issues could have severe adverse effects on the State's economy. In turn,
these recent developments regarding energy in California may adversely
influence the Trust's performance. For more information regarding these
developments, see "Investment Policies and Techniques--Factors Pertaining
to California--Recent Developments Regarding Energy" in the Trust's
Statement of Additional Information.
Although revenue obligations of the State of California or its
political subdivisions may be payable from a specific project or source,
including lease rentals, there can be no assurance that future economic
difficulties and the resulting impact on State and local government
finances will not adversely affect the market value of the portfolio of the
Trust or the ability of the respective obligors to make timely payments of
principal and interest on such obligations.
The value of California municipal instruments may also be affected
by general conditions in the money markets or the municipal bond markets,
the levels of Federal income tax rates, the supply of tax-exempt bonds, the
credit quality and rating of the issues and perceptions with respect to the
level of interest rates.
There can be no assurance that there will not be a decline in
economic condition or that particular California municipal securities in
the portfolio of the Trust will not be adversely affected by any changes.
For more information, see "Investment Policies and
Techniques--Factors Pertaining to California" in the Statement of
Additional Information.
When-Issued and Forward Commitment Securities
The Trust may buy and sell municipal bonds on a when-issued basis
and may purchase or sell municipal bonds on a "forward commitment" basis.
When such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities takes place at a later date. This
type of transaction may involve an element of risk because no interest
accrues on the bonds prior to settlement and, because bonds are subject to
market fluctuations, the value of the bonds at the time of delivery may be
less or more than cost. A separate account of the Trust will be established
with its custodian consisting of cash, or other liquid high grade debt
securities having a market value at all times, at least equal to the amount
of the commitment.
Other Investment Companies
The Trust may invest up to 10% of its total assets in securities
of other open- or closed-end investment companies that invest primarily in
municipal bonds of the types in which the Trust may invest directly. The
Trust generally expects to invest in other investment companies either
during periods when it has large amounts of uninvested cash, such as the
period shortly after the Trust receives the proceeds of the offering of its
Preferred Shares, or during periods when there is a shortage of attractive,
high-yielding municipal bonds available in the market. As a shareholder in
an investment company, the Trust will bear its ratable share of that
investment company's expenses, and would remain subject to payment of the
Trust's advisory and other fees and expenses with respect to assets so
invested. Holders of Preferred Shares would therefore be subject to
duplicative expenses to the extent the Trust invests in other investment
companies. BlackRock will take expenses into account when evaluating the
investment merits of an investment in an investment company relative to
available municipal bond investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to
leverage risks. The net asset value and market value of leveraged shares
will be more volatile and the yield to shareholders will tend to fluctuate
more than the yield generated by unleveraged shares. Investment companies
may have investment policies that differ from those of the Trust. In
addition, to the extent the Trust invests in other investment companies,
the Trust will be dependent upon the investment and research abilities of
persons other than BlackRock. The Trust treats its investments in such
open- or closed-end investment companies as investments in municipal bonds.
Tax-Exempt Preferred Shares
The Trust may also invest up to 10% of its total assets in
preferred interests of other investment funds that pay dividends that are
exempt from regular Federal income tax. A portion of such dividends may be
capital gain distributions subject to Federal capital gains tax. Such funds
in turn invest in municipal bonds and other assets that generally pay
interest or make distributions that are exempt from regular Federal income
tax, such as revenue bonds issued by state or local agencies to fund the
development of low-income, multi-family housing. Investment in such
tax-exempt preferred shares involves many of the same issues as investing
in other open- or closed-end investment companies as discussed above. These
investments also have additional risks, including liquidity risk, the
absence of regulation governing investment practices, capital structure and
leverage, affiliated transactions and other matters, and concentration of
investments in particular issuers or industries. Revenue bonds issued by
state or local agencies to finance the development of low-income,
multi-family housing involve special risks in addition to those associated
with municipal bonds generally, including that the underlying properties
may not generate sufficient income to pay expenses and interest costs. Such
bonds are generally non-recourse against the property owner, may be junior
to the rights of others with an interest in the properties, may pay
interest that changes based in part on the financial performance of the
property, may be prepayable without penalty and may be used to finance the
construction of housing developments which, until completed and rented, do
not generate income to pay interest. Increases in interest rates payable on
senior obligations may make it more difficult for issuers to meet payment
obligations on subordinated bonds. The Trust treats investments in
tax-exempt preferred shares as investments in municipal bonds.
RISKS
Risk is inherent in all investing. Investing in any investment
company security involves risk, including the risk that you may receive
little or no return on your investment or that you may lose part or all of
your investment. Therefore, before investing you should consider carefully
the following risks that you assume when you invest in Preferred Shares.
Interest Rate Risk
Interest rate risk is the risk that bonds, and the Trust's net
assets, will decline in value because of changes in interest rates.
Generally, municipal bonds will decrease in value when interest rates rise
and increase in value when interest rates decline. The Trust issues
Preferred Shares, which pay dividends based on short-term interest rates.
The Trust then uses the proceeds from the sale of Preferred Shares to buy
municipal bonds, which pay interest based on long- term rates. Both
long-term and short-term interest rates may fluctuate. If short term
interest rates rise, the Preferred Shares dividend rates may rise so that
the amount of dividends paid to holders of Preferred Shares exceeds the
income from the portfolio securities purchased with the proceeds from the
sale of Preferred Shares. Because income from the Trust's entire investment
portfolio (not just the portion of the portfolio purchased with the
proceeds of the Preferred Shares offering) is available to pay Preferred
Share dividends, however, Preferred Share dividend rates would need to
greatly exceed the yield on the Trust's portfolio before the Trust's
ability to pay Preferred Share dividends would be impaired. If long-term
rates rise, the value of the Trust's investment portfolio will decline,
reducing the amount of assets serving as asset coverage for the Preferred
Shares.
Auction Risk
The dividend rate for the Preferred Shares normally is set through
an auction process. In the auction, holders of Preferred Shares may
indicate the dividend rate at which they would be willing to hold or sell
their Preferred Shares or purchase additional Preferred Shares. The auction
also provides liquidity for the sale of Preferred Shares. An auction fails
if there are more Preferred Shares offered for sale than there are buyers.
You may not be able to sell your Preferred Shares at an auction if the
auction fails. Also, if you place hold orders (orders to retain Preferred
Shares) at an auction only at a specified dividend rate, and that rate
exceeds the rate set at the auction, you will not retain your Preferred
Shares. Finally, if you buy shares or elect to retain shares without
specifying a dividend rate below which you would not wish to buy or
continue to hold those shares, you could receive a lower rate of return on
your shares than the market rate. See "Description of Preferred Shares" and
"The Auction--Auction Procedures."
Secondary Market Risk
If you try to sell your Preferred Shares between auctions you may
not be able to sell any or all of your shares or you may not be able to
sell them for $25,000 per share or $25,000 per share plus accumulated
dividends. If the Trust has designated a special rate period (a rate period
of more than days), changes in interest rates could affect the price you
would receive if you sold your shares in the secondary market.
Broker-dealers that maintain a secondary trading market for Preferred
Shares are not required to maintain this market, and the Trust is not
required to redeem shares either if an auction or an attempted secondary
market sale fails because of a lack of buyers. Preferred Shares are not
listed on a stock exchange or the NASDAQ stock market. If you sell your
Preferred Shares to a broker-dealer between auctions, you may receive less
than the price you paid for them, especially if market interest rates have
risen since the last auction.
Ratings and Asset Coverage Risk
While Moody's assigns a rating of "Aaa" to the Preferred Shares
and S&P assigns a rating of "AAA" to the Preferred Shares, such ratings do
not eliminate or necessarily mitigate the risks of investing in Preferred
Shares. Moody's or S&P could downgrade Preferred Shares, which may make
your shares less liquid at an auction or in the secondary market. If
Moody's or S&P downgrades Preferred Shares, the Trust may alter its
portfolio or redeem Preferred Shares in an effort to improve the rating,
although there is no assurance that it will be able to do so to the extent
necessary to restore the prior rating. The Trust may voluntarily redeem
Preferred Shares under certain circumstances. See
"Description of Preferred Shares -- Rating Agency Guidelines and Asset
Coverage" for a description of the asset maintenance tests the Trust must
meet.
Credit Risk
Credit risk is the risk that an issuer of a municipal bond will
become unable to meet its obligation to make interest and principal
payments. In general, lower rated municipal bonds carry a greater degree of
risk that the issuer will lose its ability to make interest and principal
payments, which could have a negative impact on the Trust's net asset value
or dividends. The Trust may invest up to 20% of its total assets in
municipal bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or that
are unrated but judged to be of comparable quality by BlackRock. Bonds
rated Ba/BB or B are regarded as having predominately speculative
characteristics with respect to the issuer's capacity to pay interest and
repay principal, and these bonds are commonly referred to as junk bonds.
These securities are subject to a greater risk of default. The prices of
these lower grade bonds are more sensitive to negative developments, such
as a decline in the issuer's revenues or a general economic downturn, than
are the prices of higher grade securities. Lower grade securities tend to
be less liquid than investment grade securities. The market values of lower
grade securities tend to be more volatile than is the case for investment
grade securities.
State Concentration Risk.
Because the Trust primarily purchases municipal bonds issued by
the State of California or county or local government municipalities or
their agencies, districts, political subdivisions or other entities,
shareholders may be exposed to additional risks. In particular, the Trust
is susceptible to political, economic or regulatory factors affecting
issuers of California municipal bonds. There can be no assurance that
California will not experience a decline in economic conditions or that the
California municipal bonds purchased by the Trust will not be affected by
such a decline.
For a discussion of economic and other conditions in California,
see "The Trust's Investments -- Municipal Bonds -- Risks Relating to
California Municipal Bonds."
Municipal Bond Market Risk
Investing in the municipal bond market involves certain risks. The
amount of public information available about the municipal bonds in the
Trust's portfolio is generally less than that for corporate equities or
bonds, and the investment performance of the Trust may therefore be more
dependent on the analytical abilities of BlackRock than would be a stock
fund or taxable bond fund. The secondary market for municipal bonds,
particularly the below investment grade bonds in which the Trust may
invest, also tends to be less well-developed or liquid than many other
securities markets, which may adversely affect the Trust's ability to sell
its bonds at attractive prices.
The ability of municipal issuers to make timely payments of
interest and principal may be diminished in general economic downturns and
as governmental cost burdens are reallocated among Federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations or on the ability of municipalities to levy taxes. Issuers of
municipal bonds might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Trust could experience delays in
collecting principal and interest and the Trust may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Trust may take possession
of and manage the assets securing the issuer's obligations on such
securities, which may increase the Trust's operating expenses. Any income
derived from the Trust's ownership or operation of such assets may not be
tax-exempt.
Reinvestment Risk
Reinvestment risk is the risk that income from the Trust's bond
portfolio will decline if and when the Trust invests the proceeds from
matured, traded, prepaid or called bonds at interest rates that are below
the portfolio's current earnings rate. A decline in income could affect the
Trust's ability to pay dividends on the Preferred Shares.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the
value of money. As inflation occurs, the real value of the Preferred Shares
and distributions declines. In an inflationary period, however, it is
expected that, through the auction process, dividend rates on the Preferred
Shares would increase, tending to offset this risk.
Economic Sector and Geographic Risk
The Trust may invest 25% or more of its total assets in municipal
obligations of issuers located in the same state (or U.S. territory) or in
municipal obligations in the same economic sector, including without
limitation the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a state's
legislature for payment; obligations of state and local housing finance
authorities; municipal utilities systems or public housing authorities;
obligations of hospitals or life care facilities; and industrial
development or pollution control bonds issued for electrical utility
systems, steel companies, paper companies or other purposes. This may make
the Trust more susceptible to adverse economic, political or regulatory
occurrences affecting a particular state or economic sector. For example,
health care related issuers are susceptible to Medicare, Medicaid and other
third party payor reimbursement policies, and national and state health
care legislation. As concentration increases, so does the potential for
fluctuation in the value of the Trust's assets.
Non-Diversification.
The Trust has registered as a "non-diversified " investment
company under the Investment Company Act. For Federal income tax purposes,
the Trust, with respect to up to 50% of its total assets, will be able to
invest more than 5% (but not more than 25%) of the value of its total
assets in the obligations of any single issuer. To the extent the Trust
invests a relatively high percentage of its assets in the obligations of a
limited number of issuers, the Trust may be more susceptible than a more
widely diversified investment company to any single economic, political or
regulatory occurrence.
MANAGEMENT OF THE TRUST
Trustees and Officers
The board of trustees is responsible for the overall management of
the Trust, including supervision of the duties performed by BlackRock.
There are eight trustees of the Trust. Two of the trustees are "interested
persons" (as defined in the Investment Company Act). The name and business
address of the trustees and officers of the Trust and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Trust" in the Statement of Additional Information.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor.
BlackRock Financial Management, Inc. acts as the Trust's sub-advisor.
BlackRock Advisors and BlackRock Financial Management both are wholly owned
subsidiaries of BlackRock, Inc., which is one of the largest publicly
traded investment management firms in the United States with $213 billion
of assets under management as of June 30, 2001. BlackRock, Inc. and its
affiliates manage assets on behalf of more than 3,300 institutions and
200,000 individuals worldwide, including nine of the 10 largest companies
in the U.S. as determined by Fortune Magazine, through a variety of equity,
fixed income, liquidity and alternative investment separate accounts and
mutual funds, including the company's flagship fund families, BlackRock
Funds and BlackRock Provident Institutional Funds. BlackRock, Inc. is the
nation's 26th largest asset management firm according to Pensions &
Investments, May 14, 2001.
The BlackRock organization has over 12 years of experience
managing closed-end products and currently advises a closed-end family of
20 funds. BlackRock has 13 leveraged municipal closed-end funds and six
open-end municipal funds under management and approximately $16 billion in
municipal assets firm-wide. Clients are served from the company's
headquarters in New York City, as well as offices in Wilmington, Delaware,
San Francisco, California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan.
BlackRock, Inc. is a member of The PNC Financial Services Group, Inc.
("PNC"), one of the largest diversified financial services organizations in
the United States, and is majority- owned by PNC and by BlackRock
employees.
Investment Philosophy. BlackRock's investment decision-making
process for the municipal bond sector is subject to the same discipline,
oversight and investment philosophy that the firm applies to other sectors
of the fixed income market.
BlackRock uses a relative value strategy that evaluates the
trade-off between risk and return to seek to achieve the Trust's investment
objective of generating current income exempt from Federal income tax and
California income taxes. This strategy is combined with disciplined risk
control techniques and applied in sector, sub-sector and individual
security selection decisions. BlackRock's extensive personnel and
technology resources are the key drivers of the investment philosophy.
BlackRock's Municipal Bond Team. BlackRock uses a team approach to
managing municipal portfolios. BlackRock believes that this approach offers
substantial benefits over one that is dependent on the market wisdom or
investment expertise of only a few individuals.
BlackRock's municipal bond team includes five portfolio managers
with an average experience of 14 years and five credit research analysts
with an average experience of 11 years. Kevin M. Klingert, a managing
director, senior portfolio manager and head of municipal bonds at
BlackRock, leads the team, a position he has held since joining BlackRock
in 1991. Mr. Klingert has over 17 years of experience in the municipal
market. Prior to joining BlackRock in 1991, Mr. Klingert was an Assistant
Vice President at Merrill Lynch, Pierce, Fenner & Smith Incorporated, which
he joined in 1985. The portfolio management team also includes Craig Kasap,
James McGinley, F. Howard Downs and Anthony Pino. Mr. Kasap, CFA, has been
a portfolio manager at BlackRock for over four years and is a member of
BlackRock's Investment Strategy Group. Prior to joining BlackRock in 1997,
Mr. Kasap spent the previous three years as a municipal bond trader with
Keystone Investments Inc. in Boston where he was involved in formulating
the firm's municipal bond investment strategies. Mr. McGinley has been a
portfolio manager and a member of the Investment Strategy Group at
BlackRock since 1999. Prior to joining BlackRock in 1999, Mr. McGinley was
Vice President of Municipal Trading from 1996 to 1999 and Manager of the
Municipal Strategy Group from 1995 to 1999 with Prudential Securities
Incorporated. Mr. McGinley joined Prudential Securities Incorporated in
1993 as an Associate in Municipal Research. F. Howard Downs has been a
portfolio manager since joining BlackRock in 1999. Prior to joining
BlackRock in 1999, Mr. Downs was a Vice President, Institutional Salesman
and Sales Manager from 1990 to 1999 at William E. Simon & Sons Municipal
Securities, Inc. Mr. Downs was one of the original employees of William E.
Simon & Sons Municipal Securities, Inc., founded in 1990, and was
responsible for sales of municipal bonds. Anthony Pino has been a portfolio
manager since joining BlackRock in 1999. Prior to joining BlackRock in
1999, he was a Brokerage Coordinator at CPI Capital. From 1996 to 1999, Mr.
Pino was an Assistant Vice President and trader in the Municipal Strategy
Group at Prudential Securities Incorporated.
BlackRock's municipal bond portfolio managers are responsible for
over 70 municipal bond portfolios, valued at approximately $12 billion.
Municipal mandates include the management of open- and closed-end mutual
funds, municipal-only separate accounts or municipal allocations within
larger institutional mandates. In addition, BlackRock manages 14 municipal
liquidity accounts valued at approximately $4 billion. Currently, the team
manages 13 closed-end municipal funds with approximately $3.5 billion in
managed assets as of June 30, 2001.
BlackRock's Investment Process. BlackRock has in-depth expertise
in the fixed income market. BlackRock applies the same risk-controlled,
active sector rotation style to the management process for all of its fixed
income portfolios. BlackRock believes that it is unique in its integration
of taxable and municipal bond specialists. Both taxable and municipal bond
portfolio managers share the same trading floor and interact frequently for
determining the firm's overall investment strategy. This interaction allows
each portfolio manager to access the combined experience and expertise of
the entire portfolio management group at BlackRock.
BlackRock's portfolio management process emphasizes research and
analysis of specific sectors and securities, not interest rate speculation.
BlackRock believes that market-timing strategies can be highly volatile and
potentially produce inconsistent results. Instead, BlackRock thinks that
value over the long-term is best achieved through a risk- controlled
approach, focusing on sector allocation, security selection and yield curve
management.
In the municipal market, BlackRock believes one of the most
important determinants of value is supply and demand. BlackRock's ability
to monitor investor flows and frequency and seasonality of issuance is
helpful in anticipating the supply and demand for sectors. BlackRock
believes that the breadth and expertise of its municipal bond team allow it
to anticipate issuance flows, forecast which sectors are likely to have the
most supply and plan its investment strategy accordingly.
BlackRock also believes that over the long-term, intense credit
analysis will add incremental value and avoid significant relative
performance impairments. The municipal credit team is led by Susan C.
Heide, Ph.D., who has been, since 1999, Managing Director, Head of
Municipal Credit Research and co-chair of BlackRock's Credit Committee.
From 1995 to 1999, Dr. Heide was a Director and Head of Municipal Credit
Research. Dr. Heide specializes in the credit analysis of municipal
securities and as such chairs the monthly municipal bond presentation to
the Credit Committee. In addition, Dr. Heide supervises the team of
municipal bond analysts that assists with the ongoing surveillance of the
$12 billion in municipal bonds managed by BlackRock.
Prior to joining BlackRock as a Vice President and Head of
Municipal Credit Research in 1993, Dr. Heide was Director of Research and a
portfolio manager at OFFITBANK. For eight years prior to this assignment
(1984 to 1992), Dr. Heide was with American Express Company's Investment
Division where she was the Vice President of Credit Research, responsible
for assessing the creditworthiness of $6 billion in municipal securities.
Dr. Heide began her investment career in 1983 at Moody's Investors Service,
Inc. where she was a municipal bond analyst.
Dr. Heide initiated the Disclosure Task Force of the National
Federation of Municipal Analysts in 1988 and was co-chairperson of this
committee from its inception through the completion of the Disclosure
Handbook for Municipal Securities -- 1992 Update, published in January
1993. As a result of these efforts, the SEC implemented primary and
secondary disclosure regulations for municipal bonds in July 1995. Dr.
Heide has authored a number of articles on municipal finance and edited The
Handbook of Municipal Bonds published in the fall of 1994. Dr. Heide was
selected by the Bond Buyer as a first team All-American Municipal Analyst
in 1990 and was recognized in subsequent years.
BlackRock's approach to credit risk incorporates a combination of
sector-based, top-down macro-analysis of industry sectors to determine
relative weightings with a name-specific (issuer-specific), bottom-up
detailed credit analysis of issuers and structures. The sector-based
approach focuses on rotating into sectors that are undervalued and exiting
sectors when fundamentals or technicals become unattractive. The
name-specific approach focuses on identifying special opportunities where
the market undervalues a credit, and devoting concentrated resources to
research the credit and monitor the position. BlackRock's analytical
process focuses on anticipating change in credit trends before market
recognition. Credit research is a critical, independent element of
BlackRock's municipal process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock
Advisors and the Trust and certain waivers relating thereto, the Trust has
agreed to pay for the investment advisory services and facilities provided
by BlackRock Advisors a fee payable monthly in arrears at an annual rate
equal to 0.60% of the average weekly value of the Trust's Managed Assets
(the "management fee"). BlackRock Advisors has voluntarily agreed to waive
receipt of a portion of the management fee or other expenses of the Trust
in the amount of 0.25% of the average weekly value of the Trust's Managed
Assets for the first five years of the Trust's operations (through July 31,
2006), and for a declining amount for an additional four years (through
July 31, 2010). The Trust will also reimburse BlackRock Advisors for all
out-of-pocket expenses BlackRock Advisors incurs in connection with
performing administrative services for the Trust. In addition, with the
approval of the board of trustees, a pro rata portion of the salaries,
bonuses, health insurance, retirement benefits and similar employment costs
for the time spent on Trust operations (other than the provision of
services required under the investment management agreement) of all
personnel employed by BlackRock Advisors who devote substantial time to
Trust operations or the operations of other investment companies advised by
the Advisor may be reimbursed to BlackRock Advisors. Managed Assets are the
total assets of the Trust, which includes any proceeds from the Preferred
Shares, minus the sum of accrued liabilities (other than indebtedness
attributable to leverage). This means that during periods in which the
Trust is using leverage, the fee paid to BlackRock Advisors will be higher
than if the Trust did not use leverage because the fee is calculated as a
percentage of the Trust's Managed Assets, which include those assets
purchased with leverage.
In addition to the management fee of BlackRock Advisors, the Trust
pays all other costs and expenses of its operations, including compensation
of its trustees (other than those affiliated with BlackRock Advisors),
custodian, transfer and dividend disbursing agent expenses, legal fees,
rating agency fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of preparing, printing and distributing
shareholder reports, notices, proxy statements and reports to governmental
agencies, and taxes, if any.
For the first nine years of the Trust's operation, BlackRock
Advisors has undertaken to waive its management fee and expenses payable by
the Trust in the amounts, and for the time periods, set forth below:
Twelve Month Percentage Waived
Period Ending (as a percentage of
July 31 average weekly
Managed Assets)
---------------- --------------------
2002* .......................................... 0.25%
2003 .......................................... 0.25%
2004 .......................................... 0.25%
2005 .......................................... 0.25%
2006 .......................................... 0.25%
2007 .......................................... 0.20%
2008 .......................................... 0.15%
2009 .......................................... 0.10%
2010 .......................................... 0.05%
--------------
* From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the
Trust's fees and expenses beyond July 31, 2010 or after termination of the
investment management agreement.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred
Shares. For the complete terms of the Preferred Shares, please refer to the
detailed description of the Preferred Shares in the Statement of
Preferences (the "Statement") attached as Appendix A to the statement of
additional information.
General
The Trust's Agreement and Declaration of Trust, as amended and
restated, authorizes the issuance of an unlimited number of preferred
shares, par value $.001 per share, in one or more classes or series with
rights as determined by the Board of Trustees without the approval of
common shareholders. The Statement currently authorizes the issuance of
Preferred Shares, Series and Preferred Shares, Series . All Preferred
Shares will have a liquidation preference of $25,000 per share, plus an
amount equal to accumulated but unpaid dividends (whether or not earned or
declared).
The Preferred Shares of each series will rank on parity with any
other series of Preferred Shares and any other series of preferred shares
of the Trust as to the payment of dividends and the distribution of assets
upon liquidation. Each Preferred Share carries one vote on matters that
Preferred Shares can be voted. Preferred Shares, when issued, will be fully
paid and non-assessable and have no preemptive, conversion or cumulative
voting rights.
Dividends and Dividend Periods
The following is a general description of dividends and Rate
Periods.
Rate Periods. The Initial Rate Period of the Preferred Shares will
be seven days. Any subsequent Rate Periods of shares of a series of
Preferred Shares will generally be seven days. The Trust, subject to
certain conditions, may change the length of Subsequent Rate Periods
designating them as Special Rate Periods. See "-- Designation of Special
Rate Periods" below.
Dividend Payment Dates. Dividends on each series of Preferred
Shares will be payable, when as and if declared by the board of trustees,
out of legally available funds in accordance with the Agreement and
Declaration of Trust, as amended and restated, the Statement and applicable
law on shares of (a) Series on , 2001 and thereafter on each and (b) Series
on , 2001, and thereafter on each . However, if dividends are payable on a
day that is not a Business Day, then dividends will be payable on the next
Business Day. In addition, the Trust may specify different Dividend Payment
Dates in respect of any Special Rate Period of more than Rate Period Days.
Dividends will be paid through the Securities Depository on each
Dividend Payment Date. The Securities Depository, in accordance with its
current procedures, is expected to distribute dividends received from the
Trust in next- day funds on each Dividend Payment Date to Agent Members.
These Agent Members are in turn expected to distribute such dividends to
the persons for whom they are acting as agents. However, each of the
current Broker-Dealers has indicated to the Trust that dividend payments
will be available in same-day funds on each Dividend Payment Date to
customers that use such Broker-Dealer or that Broker-Dealer's designee as
Agent Member.
Calculation of Dividend Payment. The Trust computes the dividends
per share payable on shares of a series of Preferred Shares by multiplying
the applicable rate for shares of such series in effect by a fraction. The
numerator of this fraction will normally be seven (i.e., the number of days
in the Dividend Period) and the denominator will normally be 365. If the
Trust has designated a special dividend period, then the numerator will be
the number of days in the special dividend period, and the denominator will
be 360. In either case, this rate is then multiplied by $25,000 to arrive
at dividends per share.
Dividends on shares of each series of Preferred Shares will
accumulate from the date of their original issue. For each dividend payment
period after the initial dividend period, the dividend rate will be the
dividend rate determined at auction, except as provided below. The dividend
rate that results from an auction will not be greater than the maximum
applicable rate described below. In the case of a special dividend period
for which Bid Requirements are specified, the dividend rate will not be
less than the minimum applicable rate specified in the notice declaring the
special dividend period. During dividend periods for which no Bid
Requirements are specified, there will be no minimum applicable rate. "Bid
Requirements" may include, with respect to any special dividend period of
longer than days, the requirement that bids be expressed as a spread over a
specified reference index or reference security any minimum applicable rate
and the frequency of dividend payments during such special dividend period.
The maximum applicable rate for any regular dividend payment
period of a series of Preferred Shares will be the applicable percentage
(set forth in the table below) of the higher of (i) the 30-day "AA"
Composite Commercial Paper Rate and (ii) the Taxable Equivalent of the
Short-Term Municipal Bond Rate. In the case of a special dividend period
for a series of Preferred Shares, the maximum applicable rate will be the
applicable percentage of the Special Dividend Period Reference Rate (which
will ordinarily be specified by the Trust in the notice of special dividend
period) for such dividend payment period. The applicable percentage for a
series of Preferred Shares is determined on the day that a notice of a
special dividend period is delivered if the notice specifies a maximum
applicable rate for a special dividend period. If Moody's or S&P or both
shall not make such rating available, the rate shall be determined by
reference to equivalent ratings issued by a substitute rating agency. If
the Trust has provided notification to the auction agent prior to an
auction establishing the applicable rate for a dividend period that net
capital gains or other taxable income will be included in the dividend
determined at such auction, the applicable percentage will be derived from
the column captioned "Applicable Percentage: Notification" in the table
below:
Credit Ratings
--------------------------------
Applicable Percentage: Applicable Percentage:
Moody's S&P No Notification No Notification
----------------------- -----------------------
"aa3" or higher AA- or higher 110% 150%
"a3" to "a1" A- to A+ 125% 160%
"baa3" to "baa1" BBB- to BBB+ 150% 250%
"ba3" to "ba1" BB- to BB+ 200% 275%
Below "Ba3" Below BB- 250% 300%
Prior to each dividend payment date, the Trust is required to
deposit with the auction agent sufficient funds for the payment of declared
dividends. The failure to make such deposit will not result in the
cancellation of any auction. The Trust does not intend to establish any
reserves for the payment of dividends.
If an auction for any series of Preferred Shares is not held when
scheduled for any reason, the dividend rate for the corresponding rate
period will be the maximum applicable rate on the date the auction was
scheduled to be held.
Additional Dividends. Under Federal income tax rules applicable to
the Trust, the Trust may, in certain circumstances, allocate net capital
gains or other taxable income to a dividend paid on Preferred Shares after
the dividend has been paid (a "Retroactive Taxable Allocation"). If the
Trust makes a Retroactive Taxable Allocation on the Preferred Shares
without giving advance notice thereof as described under "The Auction -
Auction Proceeds", the Trust will, in the circumstances below, pay to the
holders of Preferred Shares, out of funds legally available therefore, an
additional dividend. The additional dividend will be in an amount equal to
the amount of taxes paid by a holder of Preferred Shares on the Retroactive
Taxable Allocation, provided that the additional dividend will be
calculated:
o without consideration being given to the time value of money;
o assuming that no holder of Preferred Shares is subject to the
Federal alternative minimum tax with respect to dividends
received from the Trust; and
o assuming that each Retroactive Taxable Allocation would be
taxable in the hands of each holder of Preferred Shares at the
maximum marginal combined regular Federal, California income
tax rate applicable to individuals or corporations, whichever
is greater, in effect during the fiscal year in question.
Although the Trust generally intends to designate any additional
dividend as an exempt-interest dividend to the extent permitted by
applicable law, it is possible that all or a portion of any additional
dividend will be taxable to the recipient thereof. See "Taxes." The Trust
will not pay a further additional dividend with respect to any taxable
portion of an additional dividend.
The Trust will, within 90 days (and generally within 60 days)
after the end of its fiscal year for which a Retroactive Taxable Allocation
is made, provide notice thereof to the auction agent. The Trust will pay,
out of legally available funds, any additional dividend due on all
Retroactive Taxable Allocations made during the fiscal year in question,
within 30 days after such notice is given to the auction agent.
Restrictions on Dividends and Other Distributions. While the
Preferred Shares are outstanding, the Trust generally may not declare, pay
or set apart for payment, any dividend or other distribution in respect of
its common shares. In addition, the Trust may not call for redemption or
redeem any of its common shares. However, the Trust is not confined by the
above restrictions if:
o immediately after such transaction, the Discounted Value of
the Trust's portfolio would be equal to or greater than the
Preferred Shares Basic Maintenance Amount and the 1940 Act
Preferred Shares Asset Coverage (see "-- Rating Agency
Guidelines and Asset Coverage" below);
o full cumulative dividends on each series of Preferred Shares
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;
o any additional dividend required to be paid on or before the
date of such transaction has been paid; and
o the Trust has redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory
redemption contained in the Statement.
The Trust generally will not declare, pay or set apart for payment
any dividend on any class or series of shares of the Trust ranking, as to
the payment of dividends, on a parity with Preferred Shares unless the
Trust has declared and paid or contemporaneously declares and pays full
cumulative dividends on each series of the Preferred Shares through its
most recent dividend payment date. However, when the Trust has not paid
dividends in full upon the shares of each series of Preferred Shares
through the most recent dividend payment date or upon any other class or
series of shares of the Trust ranking, as to the payment of dividends, on a
parity with Preferred Shares through their most recent respective dividend
payment dates, the amount of dividends declared per share on Preferred
Shares and such other class or series of shares will in all cases bear to
each other the same ratio that accumulated dividends per share on the
Preferred Shares and such other class or series of shares bear to each
other.
Designation of Special Dividend Periods. The Trust may, at its
sole option, declare a special dividend period of shares of a particular
series of Preferred Shares. To declare a special dividend period, the Trust
will give notice (a "request for special dividend period") to the auction
agent and to each Broker-Dealer. The notice will request that the next
succeeding dividend period for the series of Preferred Shares be a number
of days (other than seven) evenly divisible by seven as specified in such
notice. The Trust may not request a special dividend period unless
sufficient clearing bids for shares of such series were made in the most
recent auction. In addition, full cumulative dividends, any amounts with
respect to mandatory redemptions and any additional dividends payable on
shares of such series prior to such date must be paid in full. A request
for a special dividend period for shares of a Series of Preferred Shares
also will specify any proposed Bid Requirements. Upon receiving a request
for special dividend period, the Broker-Dealer(s) will jointly determine
whether, given the factors set forth in the Statement, it is advisable that
the Trust issue a notice of special dividend period for a series of
Preferred Shares as contemplated by the request. If advisable, the
Broker-Dealer(s) will determine the specific redemption provisions (such as
the designation of a Premium Call Period or a Non-Call Period) and will
give the Trust and the auction agent notice of its determination. If no
Broker-Dealer objects to the notice of special dividend period, the Trust
may issue such notice specifying the duration of the special dividend
period, the Bid Requirements, if any, and the specific redemption
provisions, if any.
Redemption
Mandatory Redemption. The Trust is required to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount and (b) the Investment Company Act Preferred Shares
Asset Coverage. If the Trust fails to maintain such asset coverage amounts
and does not timely cure such failure in accordance with the requirements
of the rating agency that rates the Preferred Shares, the Trust must redeem
all or a portion of the Preferred Shares. This mandatory redemption will
take place on a date that the board of trustees specifies out of legally
available funds in accordance with the Agreement and Declaration of Trust,
as amended and restated, the Statement Trust's charter and applicable law,
at the redemption price of $25,000 per share plus accumulated but unpaid
dividends (whether or not earned or declared) to the date fixed for
redemption. The number of Preferred Shares that must be redeemed in order
to cure such failure will be allocated pro rata among the outstanding
Preferred Shares of the Trust. The mandatory redemption will be limited to
the number of Preferred Shares necessary to restore the required Discounted
Value or the Investment Company Act Preferred Shares Asset Coverage, as the
case may be.
Optional Redemption. The Trust, at its option, may redeem the
shares of each series of Preferred Shares, in whole or in part, out of
funds legally available therefore. Any optional redemption will occur on a
dividend payment date at the optional redemption price per share of $25,000
per share plus an amount equal to accumulated but unpaid dividends to the
date fixed for redemption, plus the premium, if any, resulting from the
designation of a Premium Call Period. No shares of a series of Preferred
Shares may be redeemed during a Non-Call Period or if the redemption would
cause the Trust to violate the 1940 Act or applicable law. In addition,
holders of a series of Preferred Shares may be entitled to receive
additional dividends if the redemption causes the Trust to make a
Retroactive Taxable Allocation. The Trust has the authority to redeem the
series of Preferred Shares for any reason.
Liquidation
If the Trust is liquidated, the holders of any series of
outstanding Preferred Shares will receive the liquidation preference on
such series, plus all accumulated but unpaid dividends, plus (i) the
premium, if any, resulting from the designation of a Premium Call Period
and (ii) any applicable additional dividends payable before any payment is
made to the common shares. The holders of Preferred Shares will be entitled
to receive these amounts from the assets of the Trust available for
distribution to its shareholders. In addition, the rights of holders of
Preferred Shares to receive these amounts are subject to the rights of
holders of any series or class of shares, including other series of
preferred shares, ranking on a parity with the Preferred Shares with
respect to the distribution of assets upon liquidation of the Trust. After
the payment to the holders of Preferred Shares of the full preferential
amounts as described, the holders of Preferred Shares will have no right or
claim to any of the remaining assets of the Trust.
For purpose of the foregoing paragraph, a voluntary or involuntary
liquidation of the Trust does not include:
o the sale of all or substantially all the property or business
of the Trust;
o the merger or consolidation of the Trust into or with any
other corporation; or
o the merger or consolidation of any other corporation into or
with the Trust.
Rating Agency Guidelines and Asset Coverage
The Trust is required under guidelines of Moody's and S&P to
maintain assets having in the aggregate a Discounted Value at least equal
to the Preferred Shares Basic Maintenance Amount. Moody's and S&P have each
established separate guidelines for calculating Discounted Value. To the
extent any particular portfolio holding does not satisfy a rating agency's
guidelines, all or a portion of the holding's value will not be included in
the rating agency's calculation of Discounted Value. The Moody's and S&P
guidelines do not impose any limitations on the percentage of the Trust's
assets that may be invested in holdings not eligible for inclusion in the
calculation of the Discounted Value of the Trust's portfolio. The amount of
ineligible assets included in the Trust's portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
eligible assets included in the portfolio. The Preferred Shares Basic
Maintenance Amount includes the sum of (a) the aggregate liquidation
preference of the Preferred Shares then outstanding and (b) certain accrued
and projected payment obligations of the Trust.
The Trust is also required under the Investment Company Act to
maintain asset coverage of at least 200% with respect to senior securities
which are equity shares, including the Preferred Shares ("Investment
Company Act Preferred Shares Asset Coverage"). The Trust's Investment
Company Act Preferred Shares Asset Coverage is tested as of the last
business day of each month in which any senior equity securities are
outstanding. The minimum required Investment Act Preferred Shares Asset
Coverage amount of 200% may be increased or decreased if the Investment
Company Act is amended. Based on the composition of the portfolio of the
Trust and market conditions as of , 2001, the Investment Company Act
Preferred Shares Asset Coverage with respect to all of the Trust's
preferred shares, assuming the issuance on that date of all Preferred
Shares offered hereby and giving effect to the deduction of related sales
load and related offering costs estimated at $ , would have been computed
as follows:
Value of Trust assets less liabilities
not constituting senior securities = $ = %
---------------------------------------------- ----------
Senior securities representing indebtedness $
plus
liquidation value of the preferred shares
In the event the Trust does not timely cure a failure to maintain
(a) a Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the Investment Company Act Preferred Shares Asset
Coverage, in each case in accordance with the requirements of the rating
agency or agencies then rating the Preferred Shares, the Trust will be
required to redeem Preferred Shares as described under
"--Redemption--Mandatory Redemption" above.
Pursuant to S&P guidelines, the Trust is required under its
Statement to have Deposit Securities with maturity or tender payment dates
not later than the next dividend payment date for the Preferred Shares
(collectively, "Dividend Coverage Assets") and having in the aggregate a
value not less than the Dividend Coverage Amount (the "Minimum Liquidity
Level"). The "Dividend Coverage Amount," as of any Valuation Date, means
(A) the aggregate amount of cash dividends that will accumulate on
outstanding Preferred Shares to (but not including) the next dividend
payment date that follows the Valuation Date, less (B) the combined fair
market value of Deposit Securities irrevocably deposited for the payment of
cash dividends on Preferred Shares. "Deposit Securities" means cash, the
book value of municipal obligations sold for which payment is due within
five business days and before the next Valuation Date and municipal
obligations rated at least A-1 + or SP-I + by S&P, VMIG-1 or MIG-1 by
Moody's. The definitions of "Deposit Securities," "Dividend Coverage
Assets" and "Dividend Coverage Amount" may be changed from time to time by
the Trust without shareholder approval, but only in the event the Trust
receives confirmation from S&P that any such change would not impair the
ratings then assigned by S&P to Preferred Shares. The Trust needs to comply
with the S&P Minimum Liquidity Level only for so long as S&P rates the
Preferred Shares. The Minimum Liquidity Level is tested as of each
Valuation Date (ordinarily every Friday).
The Trust may, but is not required to, adopt any modifications to
the guidelines that may be established by Moody's or S&P. Failure to adopt
any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the Preferred Shares may, at any time,
change or withdraw any such rating. The Board may, without shareholder
approval, amend, alter or repeal any or all of the definitions and related
provisions which have been adopted by the Trust pursuant to the rating
agency guidelines in the event the Trust receives written confirmation from
Moody's or S&P, as the case may be, that any such amendment, alteration or
repeal would not impair the rating then assigned to the Preferred Shares.
As recently described by Moody's and S&P, a preferred stock rating
is an assessment of the capacity and willingness of an issuer to pay
preferred stock obligations. The rating on the Preferred Shares is not a
recommendation to purchase, hold or sell those shares, inasmuch as the
rating does not comment as to market price or suitability for a particular
investor. The rating agency guidelines described above also do not address
the likelihood that an owner of Preferred Shares will be able to sell such
shares in an auction or otherwise. The rating is based on current
information furnished to Moody's and S&P by the Trust and the Advisor and
information obtained from other sources. The rating may be changed,
suspended or withdrawn as a result of changes in, or the unavailability of,
such information. The common shares have not been rated by a nationally
recognized statistical rating organization.
The rating agency's guidelines will apply to the Preferred Shares
only so long as the rating agency is rating the shares. The Trust will pay
certain fees to Moody's and S&P for rating the Preferred Shares.
Voting Rights
Except as otherwise provided in this prospectus and in the
Statement of Additional Information or as otherwise required by law,
holders of Preferred Shares will have equal voting rights with holders of
common shares and any other preferred shares (one vote per share) and will
vote together with holders of common shares and any preferred shares as a
single class.
Holders of outstanding preferred shares, including Preferred
Shares, voting as a separate class, are entitled to elect two of the
Trust's trustees. The remaining trustees are elected by holders of common
shares and preferred shares, including Preferred Shares, voting together as
a single class. In addition, if at any time dividends (whether or not
earned or declared) on outstanding preferred shares, including Preferred
Shares, are due and unpaid in an amount equal to two full years of
dividends, and sufficient cash or specified securities have not been
deposited with the auction agent for the payment of such dividends, then,
the sole remedy of holders of outstanding preferred shares, including
Preferred Shares, is that the number of trustees constituting the Board
will be automatically increased by the smallest number that, when added to
the two trustees elected exclusively by the holders of preferred shares
including Preferred Shares as described above, would constitute a majority
of the Board. The holders of preferred shares, including Preferred Shares,
will be entitled to elect that smallest number of additional trustees at a
special meeting of shareholders held as soon as possible and at all
subsequent meetings at which trustees are to be elected. The terms of
office of the persons who are trustees at the time of that election will
continue. If the Trust thereafter shall pay, or declare and set apart for
payment, in full, all dividends payable on all outstanding preferred
shares, including Preferred Shares, the special voting rights stated above
will cease, and the terms of office of the additional trustees elected by
the holders of preferred shares, including Preferred Shares, will
automatically terminate.
As long as any Preferred Shares are outstanding, the Trust will
not, without the affirmative vote or consent of the holders of at least a
majority of the Preferred Shares outstanding at the time (voting as a
separate class):
(a) authorize, create or issue, or increase the authorized or
issued amount of, any class or series of stock ranking prior to or
on a parity with the Preferred Shares with respect to payment of
dividends or the distribution of assets on liquidation, or
increase the authorized amount of the Preferred Shares or any
other preferred stock, unless, in the case of shares of preferred
stock on parity with the Preferred Shares, the Trust obtains
written confirmation from Moody's (if Moody's is then rating
preferred shares), S&P (if S&P is then rating preferred shares) or
any substitute rating agency (if any such substitute rating agency
is then rating preferred shares) that the issuance of a class or
series would not impair the rating then assigned by such rating
agency to the Preferred Shares and the Trust continues to comply
with Section 13 of the Investment Company Act, the Investment
Company Act Preferred Shares Asset Coverage requirements and the
Preferred Shares Basic Maintenance Amount requirements, in which
case the vote or consent of the holders of the Preferred Shares is
not required;
(b) amend, alter or repeal the provisions of the Agreement and
Declaration of Trust, as amended and restated, or the Statement,
by merger, consolidation or otherwise, so as to adversely affect
any preference, right or power of the Preferred Shares or holders
of Preferred Shares;
(c) authorize the Trust's conversion from a closed-end to an
open-end investment company; or
(d) amend the provisions of the Agreement and Declaration of
Trust, as amended and restated, or the Statement, which provide
for the classification of the board of directors of the Trust into
three classes, each with a term of office of three years with only
one class of directors standing for election in any year.
To the extent permitted under the Investment Company Act, the
Trust will not approve any of the actions set forth in (a) or (b) above
which adversely affects the rights expressly set forth in the Agreement and
Declaration of Trust, as amended and restated, or the Statement, of a
holder of shares of a series of preferred shares differently than those of
a holder of shares of any other series of preferred shares without the
affirmative vote or consent of the holders of at least a majority of the
shares of each series adversely affected. Unless a higher percentage is
provided for under the Agreement and Declaration of Trust, as amended and
restated, or the Statement, the affirmative vote of the holders of a
majority of the outstanding Preferred Shares, voting together as a single
class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares of any action
requiring a vote of security holders under Section 13(a) of the 1940 Act.
However, to the extent permitted by the Agreement and Declaration of Trust,
as amended and restated, or the Statement, no vote of holders of common
stock, either separately or together with holders of preferred shares as a
single class, is necessary to take the actions contemplated by (a) and (b)
above. The holders of common shares will not be entitled to vote in respect
of such matters, unless, in the case of the actions contemplated by (b)
above, the action would adversely affect the contract rights of the holders
of common shares expressly set forth in the Trust's charter.
The foregoing voting provisions will not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
shares have been (i) redeemed or (ii) called for redemption and sufficient
funds have been deposited in trust to effect such redemption.
THE AUCTION
General
The Statement provides that, except as otherwise described in this
prospectus, the applicable rate for the shares of each series of Preferred
Shares for each dividend period after the initial dividend period will be
the rate that results from an auction conducted as set forth in the
Statement and summarized below. In such an auction, persons determine to
hold or offer to sell or, based on dividend rates bid by them, offer to
purchase or sell shares of a series of Preferred Shares. See the Statement
included in the statement of additional information for a more complete
description of the auction process.
Auction Agency Agreement. The Trust will enter into an auction
agency agreement with the auction agent currently, Bankers Trust Company)
which provides, among other things, that the auction agent will follow the
auction procedures to determine the applicable rate for shares of each
series of Preferred Shares, so long as the applicable rate for shares of
such series of Preferred Shares is to be based on the results of an
auction.
The auction agent may terminate the auction agency agreement upon
60 days notice to the Trust. If the auction agent should resign, the Trust
will use its best efforts to enter into an agreement with a successor
auction agent containing substantially the same terms and conditions as the
auction agency agreement. The Trust may remove the auction agent provided
that, prior to removal, the Trust has entered into a replacement agreement
with a successor auction agent.
Broker-Dealer Agreements. Each auction requires the participation
of one or more Broker-Dealers. The auction agent will enter into agreements
with several Broker-Dealers selected by the Trust, which provide for the
participation of those Broker-Dealers in auctions for Preferred Shares.
The auction agent will pay to each Broker-Dealer after each
auction, from funds provided by the Trust, a service charge at the annual
rate of 1/4 to 1% in the case of any auction before a dividend period of
364 days or less, or a percentage agreed to by the Trust and the
Broker-Dealers, in the case of any auction before a dividend period of 365
days or longer, of the purchase price of Preferred Shares placed by a
Broker-Dealer at the auction.
The Trust may request the auction agent to terminate one or more
Broker-Dealer Agreements at any time upon five days' notice, provided that
at least one Broker-Dealer Agreement is in effect after termination of the
agreement.
Auction Procedures
Prior to the submission deadline on each auction date for shares
of a series of Preferred Shares, each customer of a Broker-Dealer who is
listed on the records of that Broker-Dealer (or, if applicable, the auction
agent) as a beneficial owner of such series of Preferred Shares may submit
the following types of orders with respect to shares of such series of
Preferred Shares to that Broker-Dealer.
1. Hold order -- indicating its desire to hold shares of such
series without regard to the applicable rate for the next dividend
period.
2. Bid -- indicating its desire to sell shares of such series
at $25,000 per share if the applicable rate for shares of such
series for the next dividend period is less than the rate or
spread specified in the bid.
3. Sell order -- indicating its desire to sell shares of such
series at $25,000 per share without regard to the applicable rate
for shares of such series for the next dividend period.
A beneficial owner may submit different types of orders to its
Broker-Dealer with respect to shares of a series of Preferred Shares then
held by the beneficial owner. A beneficial owner for shares of such series
that submits its bid with respect to shares of such series to its
Broker-Dealer having a rate higher than the maximum applicable rate for
shares of such series on the auction date will be treated as having
submitted a sell order to its Broker-Dealer. A beneficial owner of shares
of such series that fails to submit an order to its Broker-Dealer with
respect to such shares will ordinarily be deemed to have submitted a hold
order with respect to such shares of such series to its Broker-Dealer.
However, if a beneficial owner of shares of such series fails to submit an
order with respect to such shares of such series to its Broker- Dealer for
an auction relating to a dividend period of more than seven days, such
beneficial owner will be deemed to have submitted a sell order to its
Broker-Dealer. A sell order constitutes an irrevocable offer to sell the
Preferred Shares subject to the sell order. A beneficial owner that offers
to become the beneficial owner of additional Preferred Shares is, for
purposes of such offer, a potential holder as discussed below.
A potential holder is either a customer of a Broker-Dealer that is
not a beneficial owner of a series of Preferred Shares but that wishes to
purchase shares of such series or that is a beneficial owner of shares of
such series that wishes to purchase additional shares of such series. A
potential holder may submit bids to its Broker-Dealer in which it offers to
purchase shares of such series at $25,000 per share if the applicable rate
for shares of such series for the next dividend period is not less than the
specified in such bid. A bid placed by a potential holder of shares of such
series specifying a rate higher than the maximum applicable rate for shares
of such series on the auction date will not be accepted.
Any bid by an existing holder of shares of a series that specifies
a spread is not included in any Bid Requirements or which a spread is not
included in any Bid Requirements or in which there are no Bid Requirements
and an order that does not specify a spread with respect to an auction in
which a spread is included in any Bid Requirement shall be treated as a
sell order.
The Broker-Dealers in turn will submit the orders of their
respective customers who are beneficial owners and potential holders to the
auction agent. They will designate themselves (unless otherwise permitted
by the Trust) as existing holders of shares subject to orders submitted or
deemed submitted to them by beneficial owners. They will designate
themselves as potential holders of shares subject to orders submitted to
them by potential holders. However, neither the Trust nor the auction agent
will be responsible for a Broker-Dealer's failure to comply with these
procedures. Any order placed with the auction agent will be responsible for
a Broker-Dealer's failure to comply with these procedures. Any order placed
with the auction agent by a Broker-Dealer as or on behalf of an existing
holder or a potential holder will be treated the same way as an order
placed with a Broker-Dealer by a beneficial owner or potential holder.
Similarly, any failure by a Broker-Dealer to submit to the auction agent an
order for any Preferred Shares held by it or customers who are beneficial
owners will be treated as a beneficial owner's failure to submit to its
Broker-Dealer an order in respect of Preferred Shares held by it. A
Broker-Dealer may also submit orders to the auction agent for its own
account as an existing holder or potential holder, provided it is not an
affiliate of the Trust.
There are sufficient clearing bids for shares of a series in an
auction if the number of shares of such series subject to bids submitted or
deemed submitted to the auction agent by Broker-Dealers for potential
holders with rates or spreads equal to or lower than the maximum applicable
rate for such series is at least equal to the number of shares of such
series subject to sell orders submitted or deemed submitted to the auction
agent by Broker-Dealers for existing holders of such series. If there are
sufficient clearing bids for shares of a series, the applicable rate for
shares of such series for the next succeeding dividend period thereof will
be the lowest rate specified in the submitted bids which, taking into
account such rate and all lower rates bid by Broker-Dealers as or on behalf
of existing holders and potential holders, would result in existing holders
and potential holders owning the shares of such series available for
purchase in the auction.
If there are not sufficient clearing bids for shares of such
series, the applicable rate for the next dividend period will be the
maximum applicable rate for shares of such series on the auction date. If
this happens, beneficial owners of shares of such series that have
submitted or are deemed to have submitted sell orders may not be able to
sell in the auction all shares of such series subject to such sell orders.
If all of the outstanding shares of such series are the subject of
submitted hold orders, then the dividend period following the auction will
automatically be the same length as the preceding dividend period for such
series. The applicable rate for the next dividend period will then be:
o the higher of the 30-day "AA" Composite Commercial Paper Rate
and the Taxable Equivalent of the Short- Term Municipal Bond
Rate, multiplied by
o 1 minus the maximum marginal regular Federal individual or
corporate income tax rate (whichever is higher) then
applicable to ordinary income (or 90% of such rate if the
Trust has provided notification to the auction agent prior to
the auction establishing the applicable rate that net capital
gains or other taxable income will be included in such
dividend on such series) on the date of the auction.
The "30-day 'AA' Composite Commercial Paper Rate" is the 30-day
rate on commercial paper issued by corporations whose bonds are rated AA by
S&P as made available by the Federal Reserve Bank of New York or, if such
rate is not made available by the Federal Reserve Bank of New York, the
arithmetic average of such rates as quoted to the auction agent by or such
other commercial paper dealer as may be appointed by the Trust.
"Taxable Equivalent of the Short-Term Municipal Bond Rate" means
90% of an amount equal to the per annum rate payable on taxable bonds in
order for such rate, on an after-tax basis, to equal the per annum rate
payable on tax- exempt bonds issued by "high grade" issuers as determined
in accordance with the procedures set forth in the Statement.
The auction procedure includes a pro rata allocation of shares for
purchase and sale, which may result in an existing holder continuing to
hold or selling, or a potential holder purchasing, a number of shares of a
series of Preferred Shares that is different than the number of shares of
such series specified in its order. To the extent the allocation procedures
have that result, Broker-Dealers that have designated themselves as
existing holders or potential holders in respect of customer orders will be
required to make appropriate pro rata allocations among their respective
customers.
Settlement of purchases and sales will be made on the next
business day (which is also a dividend payment date) after the auction date
through DTC. Purchasers will make payment through their Agent Members in
same-day funds to DTC against delivery to their respective Agent Members.
DTC will make payment to the sellers' Agent Members in accordance with
DTC's normal procedures, which now provide for payment against delivery by
their Agent Members in same-day funds.
The auctions for Series will normally be held every , and each
subsequent dividend period will normally begin on the following . The
auctions for Series will normally be held every , and each subsequent
dividend period will normally begin on the following .
Whenever the Trust intends to include any net capital gains or
other income taxable for Federal income tax purposes in any dividend on
Preferred Shares, the Trust may notify the auction agent of the amount to
be so included not later than the dividend payment date before the auction
date. Whenever the auction agent receives such notice from the Trust, it
will be required in turn to notify each Broker-Dealer, who, on or prior to
such auction date, will be required to notify its customers who are
beneficial owners and potential holders believed by it to be interested in
submitting an order in the auction to be held on such auction date. In the
event of such notice, the Trust will not be required to pay an Additional
Dividend with respect to such dividend.
Secondary Market Trading and Transfers of Preferred Shares
The Broker-Dealers are expected to maintain a secondary trading
market in Preferred Shares outside of auctions, but are not obligated to do
so, and may discontinue such activity at any time. There can be no
assurance than any secondary trading market in Preferred Shares will
provide owners with liquidity of investment. The Preferred Shares are not
registered on any stock exchange or on the Nasdaq Stock Market. Investors
who purchase shares in an auction for a special dividend period in which
the Bid Requirements, if any, do not require a bid to specify a spread,
should note that because the dividend rate on such shares will be fixed for
the length of such dividend period, the value of the shares may fluctuate
in response to changes in interest rates and may be more or less than their
original cost if sold on the open market in advance of the next auction.
Investors who purchase shares in an auction for a special dividend period
in which the Bid Requirements require a bid to specify a spread should be
aware that the value of their shares may also fluctuate and may be more or
less than their original cost if sold in the open market in advance of the
next auction, particularly if market spreads narrow or widen in a manner
unfavorable to such purchaser's position.
A beneficial owner or an existing holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only:
o pursuant to a bid or sell order placed with the auction agent
in accordance with the auction procedures;
o to a Broker-Dealer; or
o to such other persons as may be permitted by the Trust;
provided, however, that
o a sale, transfer or other disposition of Preferred Shares from
a customer of Broker-Dealer who is listed on the records of
that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall
not be deemed to be a sale, transfer or other disposition if
such Broker-Dealer remains the existing holder of the shares;
and
o in the case of all transfers other than pursuant to auctions,
the Broker-Dealer (or other person, if permitted by the Trust)
to whom such transfer is made will advise the auction agent of
such transfer.
DESCRIPTION OF COMMON SHARES
In addition to the Preferred Shares, the Agreement and Declaration
of Trust, as amended and restated, authorizes the issuance of an unlimited
number of common shares of beneficial interest, par value $.001 per share.
Each common share has one vote and is fully paid and non-assessable, except
that the trustees shall have the power to cause shareholders to pay
expenses of the Trust by setting off charges due from common shareholders
from declared but unpaid dividends or distributions owed the common
shareholders and/or by reducing the number of common shares owned by each
respective common shareholder. So long as any Preferred Shares are
outstanding, the holders of common shares will not be entitled to receive
any distributions from the Trust unless all accrued dividends on Preferred
Shares have been paid, unless asset coverage (as defined in the Investment
Company Act) with respect to Preferred Shares would be at least 200% after
giving effect to the distributions and unless certain other requirements
imposed by any rating agencies rating the Preferred Shares have been met.
All common shares are equal as to dividends, assets and voting privileges
and have no conversion, preemptive or other subscription rights.
The Trust's common shares are traded on the New York Stock
Exchange under the symbol "BFZ".
CERTAIN PROVISIONS IN THE AGREEMENT
AND DECLARATION OF TRUST
The Agreement and Declaration of Trust, as amended and restated,
includes provisions that could have the effect of limiting the ability of
other entities or persons to acquire control of the Trust or to change the
composition of its board of trustees. This could have the effect of
depriving shareholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control over the Trust. Such attempts could have the effect of
increasing the expenses of the Trust and disrupting the normal operation of
the Trust. The board of trustees is divided into three classes, with the
terms of one class expiring at each annual meeting of shareholders. At each
annual meeting, one class of trustees is elected to a three-year term. This
provision could delay for up to two years the replacement of a majority of
the board of trustees. A trustee may be removed from office by the action
of a majority of the remaining trustees followed by a vote of the holders
of at least 75% of the shares then entitled to vote for the election of the
respective trustee.
In addition, the Trust's Agreement and Declaration of Trust, as
amended and restated, requires the favorable vote of a majority of the
Trust's board of trustees followed by the favorable vote of the holders of
at least 75% of the outstanding shares of each affected class or series of
the Trust, voting separately as a class or series, to approve, adopt or
authorize certain transactions with 5% or greater holders of a class or
series of shares and their associates, unless the transaction has been
approved by at least 80% of the trustees, in which case "a majority of the
outstanding voting securities" (as defined in the Investment Company Act)
of the Trust shall be required. For purposes of these provisions, a 5% or
greater holder of a class or series of shares (a "Principal Shareholder")
refers to any person who, whether directly or indirectly and whether alone
or together with its affiliates and associates, beneficially owns 5% or
more of the outstanding shares of any class or series of shares of
beneficial interest of the Trust.
The 5% holder transactions subject to these special approval
requirements are:
o the merger or consolidation of the Trust or any subsidiary of
the Trust with or into any Principal Shareholder;
o the issuance of any securities of the Trust to any Principal
Shareholder for cash, except pursuant to the Dividend
Reinvestment Plan;
o the sale, lease or exchange of all or any substantial part of
the assets of the Trust to any Principal Shareholder, except
assets having an aggregate fair market value of less than
$1,000,000, aggregating for the purpose of such computation
all assets sold, leased or exchanged in any series of similar
transactions within a twelve-month period; or
o the sale, lease or exchange to the Trust or any subsidiary of
the Trust, in exchange for securities of the Trust, of any
assets of any Principal Shareholder, except assets having an
aggregate fair market value of less than $1,000,000,
aggregating for purposes of such computation all assets sold,
leased or exchanged in any series of similar transactions
within a twelve-month period.
To convert the Trust to an open-end investment company, the
Trust's Agreement and Declaration of Trust, as amended and restated,
requires the favorable vote of a majority of the board of the trustees
followed by the favorable vote of the holders of at least 75% of the
outstanding shares of each affected class or series of shares of the Trust,
voting separately as a class or series, unless such amendment has been
approved by at least 80% of the trustees, in which case "a majority of the
outstanding voting securities" (as defined in the Investment Company Act)
of the Trust shall be required. The foregoing vote would satisfy a separate
requirement in the Investment Company Act that any conversion of the Trust
to an open-end investment company be approved by the shareholders. If
approved in the foregoing manner, conversion of the Trust to an open-end
investment company could not occur until 90 days after the shareholders'
meeting at which such conversion was approved and would also require at
least 30 days' prior notice to all shareholders. Conversion of the Trust to
an open-end investment company would require the redemption of all
outstanding Preferred Shares. The board of trustees believes, however, that
the closed-end structure is desirable in light of the Trust's investment
objective and policies. Therefore, you should assume that it is not likely
that the board of trustees would vote to convert the Trust to an open-end
fund.
To liquidate the Trust, the Trust's Agreement and Declaration of
Trust, as amended and restated, requires the favorable vote of a majority
of the board of trustees followed by the favorable vote of the holders of
at least 75% of the outstanding shares of each affected class or series of
the Trust, voting separately as a class or series, unless such amendment
has been approved by at least 80% of the trustees, in which case "a
majority of the outstanding voting securities" (as defined in the
Investment Company Act) of the Trust shall be required.
For the purposes of calculating "a majority of the outstanding
voting securities" under the Trust's Agreement and Declaration of Trust, as
amended and restated, each class or series of the Trust shall vote together
as a single class, except to the extent required by the 1940 Act or the
Trust's Agreement and Declaration of Trust, as amended and restated, with
respect to any class or series of shares. If a separate class vote is
required, the applicable proportion of shares of the class or series voting
as a separate class or series, also will be required.
The board of trustees has determined that provisions with respect
to the board of trustees and the shareholder voting requirements described
above, which voting requirements are greater than the minimum requirements
under Delaware law or the Investment Company Act, are in the best interest
of shareholders generally. Reference should be made to the Agreement and
Declaration of Trust, as amended and restated, on file with the Securities
and Exchange Commission for the full text of these provisions.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a
discount to their net asset values, and the Trust's common shares may also
trade at a discount to their net asset value. The market price of the
Trust's common shares will be determined by such factors as relative demand
for and supply of such common shares in the market, the Trust's net asset
value, general market and economic conditions and other factors beyond the
control of the Trust, Although the Trust's common shareholders will not
have the right to redeem their common shares, the Trust may take action to
repurchase common shares in the open market or make tender offers for its
common shares at their net asset value, This may have the effect of
reducing any market discount from net asset value. Any such repurchase may
cause the Trust to repurchase Preferred Shares to maintain asset coverage
requirements imposed by the Investment Company Act or any rating agency
rating the Preferred Shares at that time.
TAX MATTERS
Federal Income Tax Matters
The Trust intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") and intends to distribute substantially all of its net income and
gains to its shareholders. Therefore, it is not expected that the Trust
will be subject to any Federal income tax. Substantially all of the Trust's
dividends to the common shareholders and Preferred Shareholders will
qualify as "exempt-interest dividends." A shareholder treats an
exempt-interest dividend as interest on state and local bonds which is
exempt from regular Federal income tax. Some or all of an exempt-interest
dividend, however, may be subject to Federal alternative minimum tax
imposed on the shareholder. Different Federal alternative minimum tax rules
apply to individuals and to corporations. In addition to exempt-interest
dividends, the Trust also may distribute to its shareholders amounts that
are treated as long-term capital gain or ordinary income. The Trust will
allocate distributions to shareholders that are treated as tax-exempt
interest and as long-term capital gain and ordinary income, if any,
proportionately among the common shares and the Preferred Shares. The Trust
intends to notify Preferred Shareholders in advance if it will allocate
income to them that is not exempt from regular Federal income tax. In
certain circumstances, the Trust will make payments to Preferred
Shareholders to offset the tax effects of the taxable distribution. See
"Description of Preferred Shares -- Dividends and Dividend Periods --
Additional Dividends." The sale or other disposition of common shares or
Preferred Shares of the Trust will normally result in capital gain or loss
to shareholders. Present law taxes both long-term and short-term capital
gains of corporations at the rates applicable to ordinary income. For
non-corporate taxpayers, under current law short-term capital gains and
ordinary income will be taxed at a maximum rate of 39.6% while long-term
capital gains will generally be taxed at a maximum rate of 20%. Because of
certain limitations on itemized deductions and the deduction for personal
exemptions applicable to higher income taxpayers, the effective rate of tax
may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Trust held for six months or less are
disallowed to the extent of any exempt-interest dividends received with
respect to such shares, and, if not disallowed, such losses are treated as
long-term capital losses to the extent of any distribution of net capital
gain received with respect to such shares. A shareholder's holding period
is suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in
substantially similar or related property, or through certain options or
short sales. Any loss realized on a sale or exchange of shares of the Trust
will be disallowed to the extent those shares of the Trust are replaced by
other shares within a period of 61 days beginning 30 days before and ending
30 days after the date of disposition of the original shares. In that
event, the basis of the replacement shares of the Trust will be adjusted to
reflect the disallowed loss. The statement of additional information
contains a more detailed summary of the Federal tax rules that apply to the
Trust and its shareholders. Legislative, judicial or administrative action
may change the tax rules that apply to the Trust or its shareholders, and
any such change may be retroactive. You should consult with your tax
adviser about Federal income tax matters.
California Tax Matters
Under existing California income tax law, if at the close of each
quarter of the Trust's taxable year at least 50% of the value of its total
assets consists of obligations that, when held by individuals, pay interest
that is exempt from tax under California law, shareholders of the Trust who
are subject to California personal income tax will not be subject to such
tax on distributions with respect to their shares of the Trust to the
extent that such distributions are attributable to such tax-exempt interest
from such obligations (less expenses applicable thereto). If such
distributions are received by a corporation subject to the California
franchise tax, however, the distributions will be includable in its gross
income for purposes of determining its California franchise tax.
Corporations subject to the California corporate income tax may be subject
to such taxes with respect to distributions from the Trust. Under
California personal property tax law, securities owned by the Trust and any
interest thereon are exempt from such personal property tax.
Generally, any proceeds paid to the Trust under an insurance
policy which represent matured interest on defaulted obligations should be
exempt from California personal income tax if, and to the same extent that,
such interest would have been exempt if paid by the issuer of such
defaulted obligations. California tax laws substantially incorporate those
provisions of the Code governing the treatment of regulated investment
companies.
The state tax discussion set forth above is for general
information only. Prospective investors should consult their own tax
advisors regarding the specific state tax consequences of holding and
disposing of shares of the Trust as well as the effects of Federal, local
and foreign tax law and any proposed tax law changes.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and the Trust has agreed to sell to such underwriter, the number
of Preferred Shares set forth opposite the name of such underwriter.
Name Number of Shares
----
--------------------------------------
Series Series
----------------- ----------------
List..........................
Total................
================= ================
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject
to the approval of certain legal matters by counsel and to certain other
conditions. The underwriters are obligated to purchase all the Preferred
Shares if they purchase any shares. In the underwriting agreement, the
Trust, BlackRock Advisors and BlackRock Financial Management have agreed to
indemnify the underwriters against certain liabilities, including
liabilities arising under the Securities Act of 1933, or to contribute
payments the underwriters may be required to make for any of those
liabilities.
The underwriters, , propose to initially offer some of the
Preferred Shares directly to the public at the public offering price set
forth on the cover page of this prospectus and some of the Preferred Shares
to certain dealers at the public offering price less a concession not in
excess of $ per share. The sales load the Trust will pay of $ per share is
equal to % of the initial offering price. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share on
sales to certain other dealers. After the initial public offering, the
underwriters may change the public offering price and the concession.
Investors must pay for any Preferred Shares purchased in the initial public
offering on or before 2001.
The Trust anticipates that the underwriters may from time to time
act as brokers or dealers in executing the Trust's portfolio transactions
after they have ceased to be underwriters. The underwriters are active
underwriters of, and dealers in, securities and act as market makers in a
number of such securities, and therefore can be expected to engage in
portfolio transactions with the Trust.
The Trust anticipates that the underwriters or one of their
respective affiliates may, from time to time, act in auctions as
Broker-Dealers and receive fees as set forth under "The Auction."
CUSTODIAN AND TRANSFER AGENT; AUCTION AGENT
The Custodian of the assets of the Trust is State Street Bank and
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110. The
Custodian performs custodial, fund accounting and portfolio accounting
services. EquiServe Trust Company, N.A., 150 Royall Street, Canton,
Massachusetts 02021, acts as the Trust's Transfer Agent with respect to the
common shares.
Bankers Trust Company, 4 Albany Street, New York, New York 10006,
a banking corporation organized under the laws of New York, is the auction
agent with respect to the Preferred Shares and acts as transfer agent,
registrar, dividend disbursing agent, and redemption agent with respect to
such shares.
LEGAL OPINIONS
Certain legal matters in connection with the Preferred Shares
offered hereby will be passed upon for the Trust by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, and for the underwriters by Simpson Thacher &
Bartlett, New York, New York.
AVAILABLE INFORMATION
The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934 and the Investment Company Act and is
required to file reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). These documents can be
inspected and copied for a fee at the SEC's public reference room, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's New York
Regional Office, Seven World Trade Center, New York, New York 10048 and
Chicago Regional Office, Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Reports, proxy statements,
and other information about the Trust can be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
This prospectus does not contain all of the information in the
Trust's registration statement, including amendments, exhibits, and
schedules. Statements in this prospectus about the contents of any contact
or other document are not necessarily complete and in each instance
reference is made to the copy of the contact or other document filed as an
exhibit to the registration statement, each such statement being qualified
in all respects by this reference.
Additional information about the Trust and Preferred Shares can be
found in the Trust's registration statement (including amendments,
exhibits, and schedules) on Form N-2 filed with the SEC. The SEC maintains
a web site (http://www.sec.gov) that contains the Trust's registration
statement, other documents incorporated by reference, and other information
the Trust has filed electronically with the Commission, including proxy
statements and reports filed under the Securities Exchange Act of 1934.
TABLE OF CONTENTS
FOR THE STATEMENT OF ADDITIONAL INFORMATION
Use of Proceeds.............................................................B-2
Investment Objective and Policies...........................................B-2
Investment Policies and Techniques..........................................B-4
Other Investment Policies and Techniques...................................B-10
Management of the Trust....................................................B-12
Portfolio Transactions and Brokerage.......................................B-18
Additional Information Concerning the Auctions for Preferred Shares........B-19
Description of Common Shares...............................................B-21
Repurchase of Common Shares................................................B-21
Tax Matters................................................................B-22
Experts....................................................................B-26
Additional Information.....................................................B-26
Independent Auditors' Report...............................................B-26
Financial Statements.......................................................B-29
APPENDIX A - Statement of Preferences of Municipal Auction Rate
Cumulative Preferred Shares..............................AA-1
APPENDIX B - Ratings of Investments...................................BB-1
APPENDIX C - General Characteristics and Risks of
Hedging Transactions.....................................CC-1
You should rely only on the information contained in this
prospectus. The Trust has not authorized anyone to provide you with
different information. The Trust is not making an offer of these securities
in any state where the offer is not permitted. You should not assume that
the information provided by this prospectus is accurate as of any date
other than the date on the front of this prospectus.
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need
to earn on a taxable investment in order to equal a stated tax-free yield
on a municipal investment. To assist you to more easily compare municipal
investments like the Trust with taxable alternative investments, the table
below presents the taxable equivalent yields for a range of hypothetical
tax-free yields and tax rates:
Tax-Free Yields
Tax -------------------------------------------
Rate 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%
---- ----- ----- ----- ----- ----- -----
15.0% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65%
27.5% 5.52% 6.21% 6.90% 7.59% 8.28% 8.97%
30.5% 5.76% 6.47% 7.19% 7.91% 8.63% 9.35%
35.5% 6.20% 6.98% 7.75% 8.53% 9.30% 10.08%
39.1% 6.57% 7.39% 8.21% 9.03% 9.85% 10.67%
The following tables show the approximate taxable yields for
individuals that are equivalent to tax-free yields under combined Federal
and California state taxes, using published 2001 marginal Federal tax rates
and marginal California tax rates currently available and scheduled to be
in effect.
2001
Federal State Combined
Tax Tax Tax
Single Return Joint Return Bracket Bracket* Bracket* Taxable Equivalent Estimated Current Return
------------- ------------ ------- -------- -------- -------------------------------------------
4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---- ----- ---- ---- ---- ----
$ 0-27,050 $ 0-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
27,050-65,550 45,200-109,250 27.50 9.300 34.20 6.08 6.84 7.60 8.36 9.12 9.88
65,550-136,750 109,250-166,500 30.50 9.300 37.00 6.35 7.14 7.93 8.73 9.52 10.31
136,750-297,350 166,500-297,350 35.50 9.300 41.50 6.84 7.69 8.55 9.40 10.26 11.11
Over 297,350 Over 297,350 39.10 9.300 44.80 7.24 8.15 9.05 9.96 10.86 11.77
2002-2003
Federal State Combined
Tax Tax Tax
Single Return Joint Return Bracket Bracket* Bracket* Taxable Equivalent Estimated Current Return
------------- ------------ ------- -------- -------- -------------------------------------------
4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---- ----- ---- ---- ---- ----
$ 6,000-27,050 $ 12,000-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
27,050-65,550 45,200-109,250 27.00 9.300 33.80 6.04 6.80 7.55 8.31 9.06 9.82
65,550-136,750 109,250-166,500 30.00 9.300 36.50 6.30 7.09 7.88 8.66 9.45 10.24
136,750-297,350 166,500-297,350 35.00 9.300 41.00 6.78 7.63 8.48 9.33 10.18 11.03
Over 297,350 Over 297,350 38.60 9.300 44.30 7.18 8.08 8.98 9.88 10.77 11.67
2004-2005
Federal State Combined
Tax Tax Tax
Single Return Joint Return Bracket Bracket* Bracket* Taxable Equivalent Estimated Current Return
------------- ------------ ------- -------- -------- -------------------------------------------
4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---- ----- ---- ---- ---- ----
$ 6,000-27,050 $ 12,000-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
27,050-65,550 45,200-109,250 26.00 9.300 32.90 5.96 6.70 7.45 8.19 8.94 9.68
65,550-136,750 109,250-166,500 29.00 9.300 35.60 6.21 6.99 7.76 8.54 9.32 10.09
136,750-297,350 166,500-297,350 34.00 9.300 40.10 6.68 7.52 8.35 9.19 10.02 10.86
Over 297,350 Over 297,350 37.60 9.300 43.40 7.07 7.95 8.83 9.72 10.60 11.48
2006
Federal State Combined
Tax Tax Tax
Single Return Joint Return Bracket Bracket* Bracket* Taxable Equivalent Estimated Current Return
------------- ------------ ------- -------- -------- -------------------------------------------
4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
---- ---- ---- ---- ---- ----
$ 6,000-27,050 $ 12,000-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
27,050-65,550 45,200-109,250 25.00 9.300 32.00 5.88 6.62 7.35 8.09 8.82 9.56
65,550-136,750 109,250-166,500 28.00 9.300 34.70 6.13 6.89 7.66 8.42 9.19 9.95
136,750-297,350 166,500-297,350 33.00 9.300 39.20 6.58 7.41 8.23 9.05 9.87 10.70
Over 297,350 Over 297,350 35.00 9.300 41.00 6.78 7.63 8.48 9.33 10.18 11.03
*The combined State and Federal tax rates shown reflect the fact that state
tax payments are currently deductible for Federal tax purposes. Please note
that the table does not reflect (i) any Federal or state limitations on the
amounts of allowable itemized deductions, phase-outs of personal or
dependent exemption credits or other allowable credits, (ii) any local
taxes imposed, or (iii) any taxes other than personal income taxes. The
table assumes that Federal taxable income is equal to state income subject
to tax, and in cases where more than one state rate falls within a Federal
bracket, the highest state rate corresponding to the highest income within
that Federal bracket is used. The numbers in the Combined Tax Rate column
are rounded to the nearest one-tenth of one percent.
$
BlackRock California Municipal Income Trust
Municipal Auction Rate Cumulative Preferred Shares
, Series
, Series
--------------------------------------------------------------
PROSPECTUS
__________________ ____, 2001
--------------------------------------------------------------
-------------------------------------------------------------------------------
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 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, DATED AUGUST 20, 2001
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
BlackRock California Municipal Income Trust (the "Trust") is a
recently organized, non-diversified, closed- end, management investment
company. This Statement of Additional Information relating to Preferred
Shares does not constitute a prospectus, but should be read in conjunction
with the prospectus relating hereto dated , 2001. This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing Preferred Shares, and investors
should obtain and read the prospectus prior to purchasing such shares. A
copy of the prospectus may be obtained without charge by calling (888)
825-2257. You may also obtain a copy of the prospectus on the Securities
and Exchange Commission's web site (http://www.sec.gov). Capitalized terms
used but not defined in this Statement of Additional Information have the
meanings ascribed to them in the prospectus or the Statement attached as
Appendix A.
TABLE OF CONTENTS
Page
Use of Proceeds............................................................B-2
Investment Objective and Policies..........................................B-2
Investment Policies and Techniques.........................................B-4
Other Investment Policies and Techniques..................................B-11
Management of the Trust...................................................B-13
Portfolio Transactions and Brokerage......................................B-19
Additional Information Concerning the Auctions for Preferred Shares.......B-20
Description of Common Shares..............................................B-22
Repurchase of Common Shares...............................................B-22
Tax Matters...............................................................B-23
Experts...................................................................B-27
Additional Information....................................................B-27
Independent Auditors' Report..............................................B-28
Financial Statements......................................................B-29
APPENDIX A - Statement of Preferences of Municipal Auction
Rate Cumulative Preferred Shares.........................AA-1
APPENDIX B - Ratings of Investments...................................BB-1
APPENDIX C - General Characteristics and Risks of
Hedging Transactions.....................................CC-1
This Statement of Additional Information is dated , 2001.
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's
investment objective and policies the net proceeds of the offering will be
invested in high quality, short-term tax-exempt money market securities or
in high quality municipal bonds with relatively low volatility (such as
pre-refunded and intermediate-term bonds), to the extent such securities
are available. If necessary to invest fully the net proceeds of the
offering immediately, the Trust may also purchase, as temporary
investments, short-term taxable investments of the type described under
"Investment Policies and Techniques -- Short-Term Taxable Fixed Income
Securities," the income on which is subject to regular Federal income tax
and California income taxes and securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the type
in which the Trust may invest directly.
INVESTMENT OBJECTIVE AND POLICIES
The Trust has not established any limit on the percentage of its
portfolio that may be invested in municipal bonds subject to the
alternative minimum tax provisions of Federal tax law, and the Trust
expects that a portion of the income it produces will be includable in
alternative minimum taxable income. Common shares therefore would not
ordinarily be a suitable investment for investors who are subject to the
Federal alternative minimum tax or who would become subject to such tax by
purchasing common shares. The suitability of an investment in common shares
will depend upon a comparison of the after-tax yield likely to be provided
from the Trust with that from comparable tax- exempt investments not
subject to the alternative minimum tax, and from comparable fully taxable
investments, in light of each such investor's tax position. Special
considerations apply to corporate investors. See "Tax Matters."
Investment Restrictions
Except as described below, the Trust, as a fundamental policy, may
not, without the approval of the holders of a majority of the outstanding
common shares and Preferred Shares, voting together as a single class, and
of the holders of a majority of the outstanding Preferred Shares voting as
a separate class:
(1) invest 25% or more of the value of its total assets in any
one industry, provided that this limitation does not apply to
municipal bonds other than those municipal bonds backed only
by assets and revenues of non- governmental users;
(2) issue senior securities or borrow money other than as
permitted by the Investment Company Act or pledge its assets
other than to secure such issuances or in connection with
hedging transactions, short sales, when- issued and forward
commitment transactions and similar investment strategies;
(3) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of fixed income
securities consistent with the Trust's investment objective
and policies or the entry into repurchase agreements;
(4) underwrite the securities of other issuers, except to the
extent that in connection with the disposition of portfolio
securities or the sale of its own securities the Trust may be
deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other than
municipal bonds secured by real estate or interests therein;
provided that the Trust may hold and sell any real estate
acquired in connection with its investment in portfolio
securities; or
(6) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by
applicable law without the Trust becoming subject to
registration with the Commodity Futures Trading Commission
(the "CFTC") as a commodity pool.
When used with respect to particular shares of the Trust,
"majority of the outstanding" means (i) 67% or more of the shares present
at a meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is
less.
For purposes of applying the limitation set forth in subparagraph
(1) above, securities of the U.S. government, its agencies, or
instrumentalities, and securities backed by the credit of a governmental
entity are not considered to represent industries. However, obligations
backed only by the assets and revenues of non-governmental issuers may for
this purpose be deemed to be issued by such non-governmental issuers. Thus,
the 25% limitation would apply to such obligations. It is nonetheless
possible that the Trust may invest more than 25% of its total assets in a
broader economic sector of the market for municipal obligations, such as
revenue obligations of hospitals and other health care facilities or
electrical utility revenue obligations. The Trust reserves the right to
invest more than 25% of its assets in industrial development bonds and
private activity securities.
For the purpose of applying the limitation set forth in
subparagraph (1) above, a non-governmental issuer shall be deemed the sole
issuer of a security when its assets and revenues are separate from other
governmental entities and its securities are backed only by its assets and
revenues. Similarly, in the case of a non-governmental issuer, such as an
industrial corporation or a privately owned or operated hospital, if the
security is backed only by the assets and revenues of the non-governmental
issuer, then such non-governmental issuer would be deemed to be the sole
issuer. Where a security is also backed by the enforceable obligation of a
superior or unrelated governmental or other entity (other than a bond
insurer), it shall also be included in the computation of securities owned
that are issued by such governmental or other entity. Where a security is
guaranteed by a governmental entity or some other facility, such as a bank
guarantee or letter of credit, such a guarantee or letter of credit would
be considered a separate security and would be treated as an issue of such
government, other entity or bank. When a municipal bond is insured by bond
insurance, it shall not be considered a security that is issued or
guaranteed by the insurer; instead, the issuer of such municipal bond will
be determined in accordance with the principles set forth above. The
foregoing restrictions do not limit the percentage of the Trust's assets
that may be invested in municipal bonds insured by any given insurer.
Under the Investment Company Act, the Trust may invest up to 10%
of its total assets in the aggregate in shares of other investment
companies and up to 5% of its total assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock
of the acquired investment company at the time such shares are purchased.
As a shareholder in any investment company, the Trust will bear its ratable
share of that investment company's expenses, and would remain subject to
payment of the Trust's advisory fees and other expenses with respect to
assets so invested. Holders of common shares would therefore be subject to
duplicative expenses to the extent the Trust invests in other investment
companies. In addition, the securities of other investment companies may
also be leveraged and will therefore be subject to the same leverage risks
described herein and in the prospectus. As described in the prospectus in
the section entitled "Risks," the net asset value and market value of
leveraged shares will be more volatile and the yield to shareholders will
tend to fluctuate more than the yield generated by unleveraged shares.
In addition to the foregoing fundamental investment policies, the
Trust is also subject to the following non- fundamental restrictions and
policies, which may be changed by the board of trustees. The Trust may not:
(1) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, after
giving effect to such sale, the market value of all
securities sold short does not exceed 25% of the value of the
Trust's total assets and the Trust's aggregate short sales of
a particular class of securities does not exceed 25% of the
then outstanding securities of that class. The Trust may also
make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the
sale, the Trust owns or has the immediate and unconditional
right to acquire at no additional cost the identical
security;
(2) purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company
Act or any exemptive relief obtained thereunder; or
(3) Purchase securities of companies for the purpose of
exercising control.
The restrictions and other limitations set forth above will apply
only at the time of purchase of securities and will not be considered
violated unless an excess or deficiency occurs or exists immediately after
and as a result of the acquisition of securities.
In addition, to comply with Federal tax requirements for
qualification as a "regulated investment company," the Trust's investments
will be limited in a manner such that at the close of each quarter of each
fiscal year, (a) no more than 25% of the value of the Trust's total assets
are invested in the securities (other than United States government
securities or securities of other regulated investment companies) of a
single issuer or two or more issuers controlled by the Trust and engaged in
the same, similar or related trades or businesses and (b) with regard to at
least 50% of the Trust's total assets, no more than 5% of its total assets
are invested in the securities (other than United States government
securities or securities of other regulated investment companies) of a
single issuer. These tax-related limitations may be changed by the Trustees
to the extent appropriate in light of changes to applicable tax
requirements.
The Trust intends to apply for ratings for the Preferred Shares
from Moody's and S&P. In order to obtain and maintain the required ratings,
the Trust will be required to comply with investment quality,
diversification and other guidelines established by Moody's and S&P. Such
guidelines will likely be more restrictive than the restrictions set forth
above. The Trust does not anticipate that such guidelines would have a
material adverse effect on the Trust's holders of common shares or its
ability to achieve its investment objective. The Trust presently
anticipates that any Preferred Shares that it intends to issue would be
initially given the highest ratings by Moody's (Aaa) and by S&P (AAA), but
no assurance can be given that such ratings will be obtained. No minimum
rating is required for the issuance of Preferred Shares by the Trust.
Moody's and S&P receive fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the
Trust's investment objectives, policies and techniques that are described
in the prospectus.
Portfolio Investments
The Trust will invest primarily in a portfolio of investment grade
municipal bonds that are exempt from regular Federal income tax and
California income taxes.
Issuers of bonds rated Ba/BB or B are regarded as having current
capacity to make principal and interest payments but are subject to
business, financial or economic conditions which could adversely affect
such payment capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities; municipal bonds rated Baa are considered
medium grade obligations which lack outstanding investment characteristics
and have speculative characteristics, while municipal bonds rated BBB are
regarded as having adequate capacity to pay principal and interest.
Municipal bonds rated AAA in which the Trust may invest may have been so
rated on the basis of the existence of insurance guaranteeing the timely
payment, when due, of all principal and interest. Municipal bonds rated
below investment grade quality are obligations of issuers that are
considered predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy and increased market price
volatility. Municipal bonds rated below investment grade tend to be less
marketable than higher-quality bonds because the market for them is less
broad. The market for unrated municipal bonds is even narrower. During
periods of thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly and the Trust may have greater
difficulty selling its portfolio securities. The Trust will be more
dependent on BlackRock's research and analysis when investing in these
securities.
A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix B hereto. The ratings of Moody's,
S&P and Fitch represent their opinions as to the quality of the municipal
bonds they rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal bonds
with the same maturity, coupon and rating may have different yields while
obligations of the same maturity and coupon with different ratings may have
the same yield.
The Trust will primarily invest in municipal bonds with long-term
maturities in order to maintain a weighted average maturity of 15 or more
years, but the average weighted maturity may be shortened from time to time
depending on market conditions. As a result, the Trust's portfolio at any
given time may include both long-term and intermediate- term municipal
bonds. Moreover, during temporary defensive periods (e.g., times when, in
BlackRock's opinion, temporary imbalances of supply and demand or other
temporary dislocations in the tax-exempt bond market adversely affect the
price at which long-term or intermediate-term municipal bonds are
available), and in order to keep cash on hand fully invested, including the
period during which the net proceeds of the offering are being invested,
the Trust may invest any percentage of its assets in short-term investments
including high quality, short-term securities which may be either
tax-exempt or taxable and securities of other open- or closed-end
investment companies that invest primarily in municipal bonds of the type
in which the Trust may invest directly. The Trust intends to invest in
taxable short-term investments only in the event that suitable tax-exempt
temporary investments are not available at reasonable prices and yields.
Tax-exempt temporary investments include various obligations issued by
state and local governmental issuers, such as tax-exempt notes (bond
anticipation notes, tax anticipation notes and revenue anticipation notes
or other such municipal bonds maturing in three years or less from the date
of issuance) and municipal commercial paper. The Trust will invest only in
taxable temporary investments which are U.S. government securities or
securities rated within the highest grade by Moody's, S&P or Fitch, and
which mature within one year from the date of purchase or carry a variable
or floating rate of interest. Taxable temporary investments of the Trust
may include certificates of deposit issued by U.S. banks with assets of at
least $1 billion, commercial paper or corporate notes, bonds or debentures
with a remaining maturity of one year or less, or repurchase agreements.
See "Other Investment Policies and Techniques -- Repurchase Agreements." To
the extent the Trust invests in taxable investments, the Trust will not at
such times be in a position to achieve its investment objective of
tax-exempt income.
The foregoing policies as to ratings of portfolio investments will
apply only at the time of the purchase of a security and the Trust will not
be required to dispose of securities in the event Moody's, S&P or Fitch
downgrades its assessment of the credit characteristics of a particular
issuer.
Also included within the general category of municipal bonds
described in the prospectus are participations in lease obligations or
installment purchase contract obligations (hereinafter collectively called
"Municipal Lease Obligations") of municipal authorities or entities.
Although a Municipal Lease Obligation does not constitute a general
obligation of the municipality for which the municipality's taxing power is
pledged, a Municipal Lease Obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments
due under the Municipal Lease Obligation. However, certain Municipal Lease
Obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In the case of a "non-appropriation" lease, the Trust's
ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and the disposition
or re-leasing of the property might prove difficult. In order to reduce
this risk, the Trust will only purchase Municipal Lease Obligations where
BlackRock believes the issuer has a strong incentive to continue making
appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In
addition, the obligations of such issuers may become subject to the laws
enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations or up on
municipalities to levy taxes. There is also the possibility that, as a
result of legislation or other conditions, the power or ability of any
issuer to pay, when due, the principal of and interest on its municipal
bonds may be materially affected.
In addition to the types of municipal bonds described in the
prospectus, the Trust may invest in other securities that pay interest that
is, or make other distributions that are, exempt from regular Federal
income tax and/or state and local personal taxes, regardless of the
technical structure of the issuer of the instrument. The Trust treats all
such tax- exempt securities as municipal bonds.
Short-Term Taxable Fixed Income Securities
For temporary defensive purposes or to keep cash on hand fully
invested, the Trust may invest up to 100% of its total assets in cash
equivalents and short-term taxable fixed-income securities, although the
Trust intends to invest in taxable short-term investments only in the event
that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. Short-term taxable fixed income investments
are defined to include, without limitation, the following:
(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are
either issued or guaranteed by the U.S. Treasury or by U.S.
government agencies or instrumentalities. U.S. government
securities include securities issued by (a) the Federal
Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith
and credit of the United States; (b) the Federal Home Loan
Banks, Federal Intermediate Credit Banks, and the Tennessee
Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its
credit. While the U.S. government provides financial support
to such U.S. government- sponsored agencies or
instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S.
government, its agencies and instrumentalities do not
guarantee the market value of their securities. Consequently,
the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in a
bank or a savings and loan association. Such certificates are
for a definite period of time, earn a specified rate of
return, and are normally negotiable. The issuer of a
certificate of deposit agrees to pay the amount deposited
plus interest to the bearer of the certificate on the date
specified thereon. Certificates of deposit purchased by the
Trust may not be fully insured by the Federal Deposit
Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Trust purchases securities
pursuant to a repurchase agreement, it simultaneously agrees
to resell and redeliver such securities to the seller, who
also simultaneously agrees to buy back the securities at a
fixed price and time. This assures a predetermined yield for
the Trust during its holding period, since the resale price
is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity
for the Trust to invest temporarily available cash. The Trust
may enter into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers'
acceptances in which the Trust may invest. Repurchase
agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the
Trust is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that the Trust is
entitled to sell the underlying collateral. If the value of
the collateral declines after the agreement is entered into,
and if the seller defaults under a repurchase agreement when
the value of the underlying collateral is less than the
repurchase price, the Trust could incur a loss of both
principal and interest. BlackRock monitors the value of the
collateral at the time the action is entered into and at all
times during the term of the repurchase agreement. BlackRock
does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Trust. If the seller were
to be subject to a Federal bankruptcy proceeding, the ability
of the Trust to liquidate the collateral could be delayed or
impaired because of certain provisions of the bankruptcy
laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes
issued by corporations to finance their current operations.
Master demand notes are direct lending arrangements between
the Trust and a corporation. There is no secondary market for
such notes. However, they are redeemable by the Trust at any
time. BlackRock will consider the financial condition of the
corporation (e.g., earning power, cash flow and other
liquidity ratios) and will continuously monitor the
corporation's ability to meet all of its financial
obligations, because the Trust's liquidity might be impaired
if the corporation were unable to pay principal and interest
on demand. Investments in commercial paper will be limited to
commercial paper rated in the highest categories by a major
rating agency and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that
are exempt from regular Federal income tax and mature within three years or
less from the date of issuance. Short-term tax-exempt fixed income
securities are defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations
of state and local governmental issuers which are sold to obtain interim
financing for projects that will eventually be funded through the sale of
long-term debt obligations or bonds. The ability of an issuer to meet its
obligations on its BANs is primarily dependent on the issuer's access to
the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments.
Repayment is generally to be derived from specific future tax revenues.
TANs are usually general obligations of the issuer. A weakness in an
issuer's capacity to raise taxes due to, among other things, a decline in
its tax base or a rise in delinquencies could adversely affect the issuer's
ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction
financing for specific projects. Frequently, these notes are redeemed with
funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and
agencies as those described above to commercial banks as evidence of
borrowings. The purposes for which the notes are issued are varied but they
are frequently issued to meet short-term working capital or capital-project
needs. These notes may have risks similar to the risks associated with TANs
and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very
short-term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on
issues of municipal paper may be made from various sources, to the extent
the funds are available therefrom. Maturities on municipal paper generally
will be shorter than the maturities of TANs, BANs or RANs. There is a
limited secondary market for issues of municipal paper.
Certain municipal bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indices, such as a bank prime rate or
tax-exempt money market indices.
While the various types of notes described above as a group
represent the major portion of the tax-exempt note market, other types of
notes are available in the marketplace and the Trust may invest in such
other types of notes to the extent permitted under its investment
objective, policies and limitations. Such notes may be issued for different
purposes and may be secured differently from those mentioned above.
Factors Pertaining to California
As described in the Prospectus, except during temporary periods,
the Trust will invest primarily in California municipal bonds. The
portfolio of the Trust may include securities issued by the State of
California (the "State"), by its various public bodies (the "Agencies")
and/or by other municipal entities located within the State (securities of
all such entities are referred to herein as "California municipal
securities"). In addition, the specific California municipal bonds in which
the Trust will invest will change from time to time. The Trust is therefore
susceptible to political, economic, regulatory or other factors affecting
issuers of California municipal bonds. The following information
constitutes only a brief summary of a number of the complex factors which
may impact issuers of California municipal bonds and does not purport to be
a complete or exhaustive description of all adverse conditions to which
issuers of California municipal bonds may be subject. Such information is
derived from official statements utilized in connection with the issuance
of California municipal bonds, as well as from other publicly available
documents. Such information has not been independently verified by the
Trust, and the Trust assumes no responsibility for the completeness or
accuracy of such information. The summary below does not include all of the
information pertaining to the budget, receipts and disbursements of the
State of California that would ordinarily be included in various public
documents issued thereby, such as an Official Statement prepared in
connection with the issuance of general obligation bonds of the State of
California. Such an Official Statement, together with any updates or
supplements thereto, may generally be obtained upon request to the Budget
Office of the State of California.
The California Economy. According to the State's Legislative
Analyst Office, with a gross state product in excess of $1 trillion,
California's economy is the largest state economy in the United States,
accounting for 13% of the nation's output, and the sixth largest economy in
the world, trailing only the United States as a whole, Japan, Germany,
England and France. In addition to its size, California's economy is
diverse, with no industry sector accounting for more than one-quarter of
the State's output.
While California's economy is broad, it does have major
concentrations in high technology, aerospace and defense related
manufacturing, entertainment, and real estate and financial services, and
may be sensitive to economic factors affecting those industries. One
example of such potential sensitivity occurred from mid-1990 to late 1993,
when the State suffered a recession. Construction, manufacturing
(especially aerospace) and financial services, among others, were all
severely affected, particularly in Southern California. More recently,
reflective of the nationwide economic slowdown, the high technology sector
of the State's economy has entered a cyclical downturn.
State Indebtedness. The Treasurer of the State is responsible for
the sale of debt obligations of the State and its various authorities and
agencies. The State has always paid the principal of and interest on its
general obligation bonds, general obligation commercial paper,
lease-purchase debt and short-term obligations, including revenue
anticipation notes and revenue anticipation warrants, when due.
Capital Facilities Financing. The State Constitution prohibits the
creation of general obligation indebtedness of the State unless a bond law
is approved by a majority of the electorate voting at a general election or
a direct primary. General obligation bond acts provide that debt service on
general obligation bonds shall be appropriated annually from the State's
General Fund and all debt service on general obligation bonds is paid from
the General Fund. Under the State Constitution, debt service on general
obligation bonds is the second charge to the General Fund after the
application of moneys in the General Fund to the support of the public
school system and public institutions of higher education. Certain general
obligation bond programs receive revenues from sources other than the sale
of bonds or the investment of bond proceeds.
As of February 1, 2001, the State had outstanding $22,565,721,000
aggregate principal amount of long-term general obligation bonds, and
unused voter authorizations for the future issuance of $12,363,474,000 of
long-term general obligation bonds. This latter figure consists of
$5,300,559,000 of authorized commercial paper notes, described below (of
which $774,170,000 was outstanding), which has not yet been refunded by
general obligation bonds, and $7,332,915,000 of other authorized but
unissued general obligation debt.
The General Obligation Bond Law permits the State to issue as
variable rate indebtedness up to 20% of the aggregate amount of long-term
general obligation bonds outstanding. As of February 1, 2001, there was no
variable rate indebtedness outstanding; however, the State plans to issue
such indebtedness in the future.
Pursuant to legislation enacted in 1995, voter-approved general
obligation indebtedness may be issued either as long-term bonds, or, for
some but not all bond acts, as commercial paper notes. Commercial paper
notes may be renewed or may be refunded by the issuance of long-term bonds.
The State issues long-term general obligation bonds from time to time to
retire its general obligation commercial paper notes. Pursuant to the terms
of the bank credit agreement presently in effect supporting the general
obligation commercial paper program, not more than $1.5 billion of general
obligation commercial paper notes may be outstanding at any time; this
amount may be increased or decreased in the future. Commercial paper notes
are deemed issued upon authorization by the respective Finance Committees,
whether or not such notes are actually issued. As of February 1, 2001, the
Finance Committees had authorized the issuance of up to $5,300,559,000 of
commercial paper notes; as of that date, $774,170,000 aggregate principal
amount of general obligation commercial paper notes was outstanding.
In addition to general obligation bonds, the State builds and
acquires capital facilities through the use of lease-purchase borrowing.
Under these arrangements, the State Public Works Board, another State or
local agency or a joint powers authority issues bonds to pay for the
construction of facilities such as office buildings, university buildings
or correctional institutions. These facilities are leased to a State agency
or the University of California under a long-term lease which provides the
source of payment of the debt service on the lease-purchase bonds. In some
cases, there is not a separate bond issue, but a trustee directly creates
certificates of participation in the State's lease obligation, which are
marketed to investors. Under applicable court decisions, such lease
arrangements do not constitute the creation of "indebtedness" within the
meaning of the Constitutional provisions which require voter approval. For
purposes of this section, "lease-purchase debt" or "lease-purchase
financing" means principally bonds or certificates of participation for
capital facilities where the rental payments providing the security are a
direct or indirect charge against the General Fund and also includes
revenue bonds for a State energy efficiency program secured by payments
made by various State agencies under energy service contracts. Certain of
the lease-purchase financings are supported by special funds rather than
the General Fund. The State had $6,683,927,218 General Fund-supported
lease-purchase debt outstanding at February 1, 2001. The State Public Works
Board, which is authorized to sell lease revenue bonds, had $2,308,544,000
authorized and unissued as of February 1, 2001.
Certain State agencies and authorities issue revenue obligations
for which the General Fund has no liability. Revenue bonds represent
obligations payable from State revenue-producing enterprises and projects,
which bonds are not payable from the General Fund, and conduit obligations
payable only from revenues paid by private users of facilities financed by
the revenue bonds. The enterprises and projects include transportation
projects, various public works projects, public and private educational
facilities (including the California State University and University of
California systems), housing, health facilities and pollution control
facilities. There are 17 agencies and authorities authorized to issue
revenue obligations (excluding lease-purchase debt). State agencies and
authorities had $28,674,361,510 aggregate principal amount of revenue bonds
and notes which are non-recourse to the General Fund outstanding as of
February 1, 2001.
State Finances and the Budget Process. The State's fiscal year
begins on July 1 and ends on June 30. The State operates on a budget basis,
using a modified accrual system of accounting, with revenues credited in
the period in which they are measurable and available and expenditures
debited in the period in which the corresponding liabilities are incurred.
The annual budget is proposed by the Governor by January 10 of
each year for the next fiscal year (the "Governor's Budget"). Under state
law, the annual proposed Governor's Budget cannot provide for projected
expenditures in excess of projected revenues and balances available from
prior fiscal years. Following the submission of the Governor's Budget, the
Legislature takes up the proposal.
Under the State Constitution, money may be drawn from the Treasury
only through an appropriation made by law. The primary source of the annual
expenditure authorizations is the Budget Act as approved by the Legislature
and signed by the Governor. The Budget Act must be approved by a two-thirds
majority vote of each House of the Legislature. The Governor may reduce or
eliminate specific line items in the Budget Act or any other appropriations
bill without vetoing the entire bill. Such individual line-item vetoes are
subject to override by a two-thirds majority vote of each House of the
Legislature.
Appropriations also may be included in legislation other than the
Budget Act. Bills containing appropriations (except for local school and
community college ("K-14") education) must be approved by a two-thirds
majority vote in each House of the Legislature and be signed by the
Governor. Bills containing K-14 education appropriations only require a
simple majority vote. Continuing appropriations, available without regard
to fiscal year, may also be provided by statute or the State Constitution.
There is litigation pending concerning the validity of such continuing
appropriations.
Funds necessary to meet an appropriation need not be in the State
Treasury at the time such appropriation is enacted, revenues may be
appropriated in anticipation of their receipt.
The moneys of the State are segregated into the General Fund and
over 900 special funds, including bond, trust and pension funds. The
General Fund consists of revenues received by the State Treasury and not
required by law to be credited to any other fund, as well as earnings from
the investment of State moneys not allocable to another fund. The General
Fund is the principal operating fund for the majority of governmental
activities and is the depository of most of the major revenue sources of
the State. The General Fund may be expended as a consequence of
appropriation measures enacted by the Legislature and approved by the
Governor, as well as appropriations pursuant to various constitutional
authorizations and initiative statutes.
The Special Fund for Economic Uncertainties ("SFEU") is funded
with General Fund revenues and was established to protect the State from
unforeseen revenue reductions and/or unanticipated expenditure increases.
Amounts in the SFEU may be transferred by the State Controller as necessary
to meet cash needs of the General Fund. The State Controller is required to
return moneys so transferred without payment of interest as soon as there
are sufficient moneys in the General Fund.
Local Governments. The primary units of local government in
California are the counties, ranging in population from 1,200 in Alpine
County to over 9,900,000 in Los Angeles County. Counties are responsible
for the provision of many basic services, including indigent health care,
welfare, jails and public safety in unincorporated areas. There are also
475 incorporated cities, and thousands of special districts formed for
education, utility and other services. The fiscal condition of local
governments has been constrained since the enactment of "Proposition 13" in
1978, which reduced and limited the future growth of property tax and
limited the ability of local governments to impose "special taxes" (those
devoted to a specific purpose) without two-thirds voter approval. Counties,
in particular, have had fewer options to raise revenues than many other
local government entities, and have been required to maintain many
services.
In the aftermath of Proposition 13, the State provided aid to
local governments from the General Fund to make up some of the loss of
property tax moneys, including taking over the principal responsibility for
funding K-12 schools and community colleges. During the recession, the
Legislature eliminated most of the remaining components of post-Proposition
13 aid to local government entities other than K-14 education districts by
requiring cities and counties to transfer some of their property tax
revenues to school districts. However, the Legislature also provided
additional funding sources (such as sales tax) and reduced certain mandates
for local services. Since then the State has also provided additional
funding to counties and cities through such programs as health and welfare
realignment, welfare reform, trial court restructuring, the Citizens'
Option for Public Safety (COPs) program supporting local public safety
departments, and various other measures.
The 2000 Budget Act provides significant assistance to local
governments, including a $200 million set aside for one-time discretionary
funding to local governments, $121.3 million for the COPs program to
support local front-line law enforcement, sheriffs' departments for jail
construction and operations, and district attorneys for prosecution, $75
million for technology funding for local law enforcement, $400 million for
deferred maintenance of local streets and roads, and hundreds of millions
of dollars in assistance in the areas of mental health, social services,
environmental protection and public safety. In addition, legislation was
enacted in 1999 to provide approximately $35.8 million annual relief to
cities based on 1997-98 costs of jail booking and processing fees paid to
counties. The 2001-02 Governor's Budget proposes to increase the one-time
discretionary funding for local governments to $250 million and continue
funding local law enforcement technology grants as well as the COPS and
county juvenile crime prevention programs.
Historically, funding for the State's trial court system was
divided between the State and the counties. In 1997, legislation
consolidated the trial court funding at the State level in order to
streamline the operation of the courts, provide a dedicated revenue source,
and relieve fiscal pressure on the counties. Since then, the county general
purpose contribution for court operations was reduced by $386 million and
cities are retaining $62 million in fine and penalty revenue previously
remitted to the State.
The entire statewide welfare system has been changed in response
to the change in Federal welfare law enacted in 1996. Under the CalWORKs
program, counties are given flexibility to develop their own plans,
consistent with State law, to implement the program and to administer many
of its elements, and their costs for administrative and supportive services
are capped at the 1996-97 levels. Counties are also given financial
incentives if, at the individual county level or statewide, the CalWORKs
program produces savings associated with specified standards. Counties will
still be required to provide "general assistance" aid to certain persons
who cannot obtain welfare from other programs.
In 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIII C and XIII D into
the California Constitution. These new provisions place limitations on the
ability of local government agencies to impose or raise various taxes,
fees, charges and assessments without voter approval. Certain "general
taxes" imposed after January 1, 1995 must be approved by voters in order to
remain in effect. In addition, Article XIII C clarifies the right of local
voters to reduce taxes, fees, assessments or charges through local
initiatives. There are a number of ambiguities concerning the Proposition
and its impact on local governments and their bonded debt which will
require interpretation by the courts or the Legislature. Proposition 218
does not affect the State or its ability to levy or collect taxes.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution
(the "Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit.
"Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues,
and certain other funds, including proceeds from regulatory licenses, user
charges or other fees to the extent that such proceeds exceed "the cost
reasonably borne by that entity in providing the regulation, product or
service," but "proceeds of taxes" exclude most state subventions to local
governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for
the debt service costs of bonds existing or authorized on or prior to
January 1, 1979 or subsequently authorized by the voters, appropriations
required to comply with mandates of courts or the Federal government,
appropriations for qualified capital outlay projects, appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle
weight fees above January 1, 1990 levels, and appropriation of certain
special taxes imposed by initiative (e.g., cigarette and tobacco taxes).
The Appropriations Limit may also be exceeded in cases of emergency.
The State's Appropriations Limit in each year is based on the
limit for the prior year, adjusted annually for changes in state per capita
personal income and changes in population, and adjusted, when applicable,
for any transfer of financial responsibility of providing services to or
from another unit of government or any transfer of the financial source for
the provisions of services from tax proceeds to non-tax proceeds. The
measurement of change in population is a blended average of statewide
overall population growth, and change in attendance at K-14 districts. The
Appropriations Limit is tested over consecutive two-year periods. Any
excess of the aggregate "proceeds of taxes" received over such two-year
period above the combined Appropriations Limits for those two years is
divided equally between transfers to K-14 districts and refunds to
taxpayers.
The Legislature has enacted legislation to implement Article XIII
B which defines certain terms used in Article XIII B and sets forth the
methods for determining the Appropriations Limit. California Government
Code Section 7912 requires an estimate of the Appropriations Limit to be
included in the Governor's Budget, and thereafter to be subject to the
budget process and established in the Budget Act.
Proposition 98. On November 8, 1988, voters of the State approved
Proposition 98, a combined initiative Constitutional amendment and statute
called the "Classroom Instructional Improvement and Accountability Act."
Proposition 98 changed State funding of public education below the
university level and the operation of the State Appropriations Limit,
primarily by guaranteeing K-14 schools a minimum share of General Fund
revenues. Under Proposition 98 (as modified by Proposition 111, which was
enacted on June 5, 1990), K-14 schools are guaranteed the greater of (a) in
general, a fixed percent of General Fund revenues ("Test 1"), (b) the
amount appropriated to K-14 schools in the prior year, adjusted for changes
in the cost of living (measured as in Article XIII B by reference to State
per capita personal income) and enrollment ("Test 2"), or (c) a third test,
which would replace Test 2 in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one
percent is less than the percentage growth in State per capita personal
income ("Test 3"). Under Test 3, schools would receive the amount
appropriated in the prior year adjusted for changes in enrollment and per
capita General Fund revenues, plus an additional small adjustment factor.
If Test 3 is used in any year, the difference between Test 3 and Test 2
would become a "credit" to schools which would be the basis of payments in
future years when per capita General Fund revenue growth exceeds per capita
personal income growth. Legislation adopted prior to the end of the 1988-89
fiscal year implementing Proposition 98 determined the K-14 schools'
funding guarantee under Test 1 to be 40.3 percent of the General Fund tax
revenues, based on 1986-87 appropriations. However, that percentage has
been adjusted to approximately 35 percent to account for a subsequent
redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both
Houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIII B limit to K-14 schools.
In 1992, a lawsuit was filed, called California Teachers'
Association v. Gould, which challenged the validity of these off-budget
loans. The settlement of this case, finalized in July 1996, provides, among
other things, that both the State and K-14 schools share in the repayment
of prior years' emergency loans to schools. Of the total $1.76 billion in
loans, the State is repaying $935 million by forgiveness of the amount
owed, while schools will repay $825 million. The State's share of the
repayment will be reflected as an appropriation above the current
Proposition 98 base calculation. The schools' share of the repayment will
count as appropriations that count toward satisfying the Proposition 98
guarantee "below" the current base. Repayments are spread over the
eight-year period of 1994-95 through 2001-02 to mitigate any adverse fiscal
impact.
Tobacco Litigation. In 1998, the State signed a settlement
agreement with the four major cigarette manufacturers. The State agreed to
drop its lawsuit and not to sue in the future. Tobacco manufacturers agreed
to billions of dollars in payments and restrictions in marketing
activities. Under the settlement, the companies agreed to pay California
state and local governments approximately $25 billion over a period of 25
years. Beyond 2025, payments of approximately $1 billion per year will
continue in perpetuity. Under the settlement, half of the moneys will be
paid to the State and half to local governments (all counties and the
cities of San Diego, Los Angeles, San Francisco and San Jose). The 2000
Budget Act includes the receipt of $388 million of settlement money to the
General Fund in fiscal 2000-01.
The specific amount to be received by State and local governments
is subject to adjustment. The settlement agreement allows reduction of the
companies' payments for decreases in cigarette sales and certain types of
Federal legislation. Settlement payments can increase due to inflation or
increases in cigarette sales. The "first annual" payment, received in April
2000, was 12 percent lower than the base settlement amount due to reduced
sales. Future payment estimates have been reduced by a similar percentage.
If any of the companies goes into bankruptcy, the State could seek to
terminate the agreement with respect to those companies filing bankruptcy
actions thereby reinstating all claims against those companies. The State
may then pursue those claims in bankruptcy litigation, or as otherwise
provided by law. Several parties have brought a lawsuit challenging the
settlement and seeking damages.
Recent Developments Regarding Energy. During the past year
California has experienced difficulties with the prices and supplies of
natural gas and electricity in much of the State. These difficulties are
likely to continue for several years. The State Department of Finance
believes that the potential economic impact of the utility situation,
including increased energy costs, are mitigated by the fact that California
is a relatively energy-efficient state, ranking 49th among the 50 states in
energy expenditures as a percentage of gross product, according to US
Department of Energy data for 1997. Nonetheless, the Department believes
there is potential for economic disruption during the summer peak in
electricity demand if power supplies are interrupted, and that longer-term
business investment and location decisions may be adversely affected by
potential disruptions. At the same time, the Department believes efforts to
expand electric generating capacity and natural gas transmission pipelines
should help relieve these concerns over the next several years.
The three major investor-owned electrical utilities in California
are net buyers of electricity. The utilities have been purchasing
electricity at fluctuating short-term and spot wholesale prices while the
retail prices that they can charge their residential and small business
customers are capped at specified levels. Beginning in mid-2000, power
purchase costs exceeded retail charges and the utilities have reported
substantial resulting losses. One result has been that the creditworthiness
of the utilities has deteriorated, adversely affecting their ability to
purchase electricity and, in the case of one utility, natural gas. The two
largest utilities in the State have reported publicly that they have, since
January 2001, defaulted on some of their obligations, and that it is
possible they may be forced into bankruptcy.
Shortages of electricity resulted in rolling blackouts in January
2001 affecting millions of Californians. On January 17, 2001, the Governor
determined that the electricity available from California's utilities was
insufficient to prevent widespread and prolonged disruption of electric
service in California and proclaimed a state of emergency to exist in
California under the California Emergency Services Act (the "Act"). Under
the Act, the Governor has directed all agencies of the State government to
utilize and employ State personnel, equipment, and facilities for the
performance of any and all activities designed to prevent or alleviate the
emergency. The Act permits the Governor to direct the expenditure of any
appropriated funds legally available to perform the activities required
under a proclamation. The Governor directed the State Department of Water
Resources ("DWR") to enter into contracts and arrangements for the purchase
and sale of electric power as necessary to assist in mitigating the effects
of the emergency. The Act also authorizes the Governor to commandeer or
utilize any private property or personnel deemed by him necessary in
carrying out his responsibilities and requires the State to pay the
reasonable value of the use of such property. The Governor has used this
authority to seize certain power purchase contracts of investor-owned
utilities.
The DWR has been purchasing substantial amounts of electricity at
fluctuating short-term and spot wholesale prices since January 17, 2001,
for resale to retail end use customers of the investor-owned utilities at
the same retail prices permitted to be charged by the utilities. DWR's
purchases are designed to supplement the amount of electricity produced by
the utilities' own generating assets and purchased by the utilities through
their own contracts. Electricity purchased by DWR has been delivered to
retail end use customers through the transmission and distribution systems
of the investor-owned utilities and payment is to be collected from retail
end use customers by the utilities and remitted to the DWR. These actions
are all being taken pursuant to the Governor's proclamation, the Act,
recently enacted legislation (Chapter 4, Statutes of 2001, referred to
hereafter as "AB lx"), and orders of the California Public Utilities
Commission ("CPUC").
DWR has also started entering into long-term contracts for
purchase of electricity. These long-term contracts are intended to reduce
reliance on short-term and spot market purchases in meeting the State's
needs. DWR's authority to enter into such contracts currently expires in
January 2003. State officials project that electricity purchases by the DWR
as a creditworthy entity and the other efforts of the State to stabilize
the wholesale power market (described below) will ultimately lower the
wholesale cost of electricity in California.
DWR expenditures for electricity purchases for the period January
17-February 25, 2001 aggregated approximately $1.8 billion and were funded
by advances from the State's General Fund pursuant to various laws. Retail
end use customer payments for electricity furnished by the DWR are required
by law to be segregated and held in trust for the benefit of the DWR. Such
payments are expected to be remitted to the DWR by the investor-owned
utilities beginning in March 2001, but will aggregate less than the DWR's
cost of purchasing that electricity. The difference is expected to be made
up through the issuance of revenue bonds de-scribed below. The State
anticipates that these two sources of funds will fully reimburse the
General Fund for its advances made to implement the DWR's power purchases.
Pending implementation of these repayment mechanisms, the State has
sufficient available resources to continue to support the DWR's electricity
purchases for many months.
The DWR plans to issue revenue bonds to fund its power purchase
program. Revenue bonds are expected to be issued by mid-2001 and interim
financing may be arranged until bonds are issued. The revenue bonds would
reimburse the State's General Fund for any unreimbursed advances made to
the DWR to purchase electricity and also provide working capital financing
for the DWR's power purchase program. The principal amount of revenue bonds
to be issued has not been determined but initial estimates contemplate a
bond program size of up to $10 billion. The revenue bonds will be repaid
from a dedicated revenue stream derived from end use customer payments for
electricity. AB lx authorized the DWR to set rates charged to retail end
use customers, for power used above a specified "baseline" amount, so as to
produce sufficient revenues to meet all its obligations, including
repayment of the revenue bonds. The CPUC is authorized to enter into an
agreement with the DWR to implement these rates. Neither the full faith and
credit nor the taxing power of the State will be pledged to pay the revenue
bonds.
The Governor has stated that the State is focusing its efforts in
four main areas: (1) increasing the energy supply through expedited plant
construction and other sources of power generation; (2) decreasing energy
demand and increasing efficiency; (3) expanding the use of long-term energy
contracts rather than relying upon the spot market; and (4) maintaining the
financial viability of California's public utilities. Over the last two
years, nine power plant projects have received permits to start
construction, and six plants are currently under construction. In addition,
there are 14 plants moving through the permitting process. As these new
facilities become operational, the increased supply of power is expected to
lower the cost of power in the wholesale market. In addition, the Governor
has issued a series of Executive Orders to streamline the review process
for new peaking power facilities; reduce administrative hurdles to
accelerate power plant construction; promote development of renewable
energy systems; and increase the hours of operation of existing facilities.
The State Legislature is considering various bills dealing with
energy matters, including bills that would authorize one or more State
agencies to build, purchase or obtain by eminent domain electricity
generation or transmission facilities or natural gas transmission
facilities, and to encourage energy conservation programs. These agencies
would have the power to issue revenue bonds for these purposes. Legislation
is also being considered that could assist the investor-owned utilities to
refinance their deficits incurred in the recent purchases of wholesale
power, including a proposal for the State to purchase the utilities'
transmission lines.
California imports about 85 percent of its natural gas. Limited
gas transmission pipeline capacity into California and a major pipeline
break in New Mexico during the summer of 2000, coupled with increases in
wholesale prices for natural gas in the States, have resulted in
substantial price increases that are being passed on to business and
residential consumers. Pipeline expansion is planned but will not be
complete for several years. Nationwide, relatively high prices for natural
gas are likely to persist for several years. Supplies of natural gas in
Northern and Central California are also being affected by the financial
difficulty of the utility company serving that region. Shortages of natural
gas supplies could adversely affect the economy, and particularly
generation of electricity, much of which is fueled by natural gas.
A number of lawsuits have been filed concerning various aspects of
the current energy situation. These include disputes over rates set by the
CPUC; responsibility for electricity and natural gas purchases made by the
investor-owned utilities and the California Independent System Operator
(which continues to purchase some electricity); and antitrust and fraud
claims against various parties. See "Litigation" below for a discussion of
certain of these lawsuits.
While the State hopes that the measures described above, coupled
with conservation, load management and improved energy efficiency, will
avoid future disruptions of the supply of electricity or natural gas to the
public, lower wholesale energy prices and promote the financial recovery of
the State's investor-owned utilities, the situation continues to be fluid
and subject to many uncertainties. There can be no assurance that there
will not be future disruptions in energy supplies or related developments
which could adversely affect the State's economy, and which could in turn
affect State revenues, or the health and comfort of its citizens.
2000-01 Fiscal Year Budget. The 2002 Governor's Budget estimates
2001-02 General Fund revenues and transfers to be about $79.4 billion, or
3.3 percent higher than the revised 2000-01 estimate. This estimate assumes
a slowing economy, still showing moderate growth short of a recession. The
estimate also accounts for a $600 million drop in sales tax revenues as a
result of the 0.25 percent sales tax reduction which took effect on January
1, 2001, and will remain in effect at least until December 31, 2001. The
Governor proposed $82.9 billion in expenditures, a 3.9 percent increase
over the revised 2000-01 estimate. The Governor proposed budget reserves in
2001-02 of $2.4 billion. Of this amount, $500 million is intended for
unplanned litigation costs.
The 2002 Governor's Budget proposed to use $3.7 billion of the new
resources since the 2000 Budget Act for one-time expenditures, including $1
billion for energy initiatives, $772 million for capital outlay projects,
$250 million in fiscal relief to local government, $200 million for new
housing initiatives, and a variety of other proposals. With regard to
ongoing programs, the 2001-02 Governor's Budget proposed substantial
additions in Proposition 98 funding for K-12 education (an 8.1 percent
increase over the revised 2000-01 spending level) and funding for all units
of higher education, funding for health and welfare programs to cover
anticipated caseloads, and a modest increase in youth and adult corrections
funding. The final expenditure program for 2001-02 will be determined by
June 2001 by the Legislature and the Governor. The Department of Finance
will publish an update of revenues and expenditures for the current year
and of revenues for the upcoming fiscal year in May 2001.
On February 21, 2001, the Legislative Analyst's Office ("LAO")
released its analysis of the 2002 Governor's Budget. The LAO Analysis
generally agreed with the Governor's Budget projections of revenues, but
warned that the economic picture (and hence revenues and expenditures in
2001-02) was unsettled, given several potentially negative factors,
including the ongoing energy difficulties in the State, a cyclical slowdown
in the high technology sector, the overall national economic slowdown, and
the sharp decline in the stock market since mid-2000. See "Recent
Developments Regarding Natural Gas and Electricity" above and "Revenue and
Expenditure Assumptions" below. The LAO Analysis recommended that the
Legislature defer major new spending decisions until after the updated
fiscal report due in May 2001.
Duration Management and Other Management Techniques
The Trust may use a variety of other investment management
techniques and instruments. The Trust may purchase and sell futures
contracts, enter into various interest rate transactions and may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, financial indices and futures contracts (collectively,
"Additional Investment Management Techniques"). These Additional Investment
Management Techniques may be used for duration management and other risk
management techniques in an attempt to protect against possible changes in
the market value of the Trust's portfolio resulting from trends in the debt
securities markets and changes in interest rates, to protect the Trust's
unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to establish a
position in the securities markets as a temporary substitute for purchasing
particular securities and to enhance income or gain. There is no particular
strategy that requires use of one technique rather than another as the
decision to use any particular strategy or instrument is a function of
market conditions and the composition of the portfolio. The Additional
Investment Management Techniques are described below. The ability of the
Trust to use them successfully will depend on BlackRock's ability to
predict pertinent market movements as well as sufficient correlation among
the instruments, which cannot be assured. Inasmuch as any obligations of
the Trust that arise from the use of Additional Investment Management
Techniques will be covered by segregated liquid assets or offsetting
transactions, the Trust and BlackRock believe such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to its borrowing restrictions. Commodity options and futures
contracts regulated by the CFTC have specific margin requirements described
below and are not treated as senior securities. The use of certain
Additional Investment Management Techniques may give rise to taxable income
and have certain other consequences. See "Tax Matters."
Interest Rate Transactions. The Trust may enter into interest rate
swaps and the purchase or sale of interest rate caps and floors. The Trust
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio as a duration
management technique or to protect against any increase in the price of
securities the Trust anticipates purchasing at a later date. The Trust will
ordinarily use these transactions as a hedge or for duration or risk
management although it is permitted to enter into them to enhance income or
gain. The Trust will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Trust with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Trust receiving or paying, as the case may be, only
the net amount of the two payments on the payment dates. The Trust will
accrue the net amount of the excess, if any, of the Trust's obligations
over its entitlements with respect to each interest rate swap on a daily
basis and will segregate with a custodian an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least
equal to the accrued excess. The Trust will not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest
rating category of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Trust may
also enter into contracts for the purchase or sale for future delivery
("futures contracts") of debt securities, aggregates of debt securities or
indices or prices thereof, other financial indices and U.S. government debt
securities or options on the above. The Trust will ordinarily engage in
such transactions only for bona fide hedging, risk management (including
duration management) and other portfolio management purposes. However, the
Trust is also permitted to enter into such transactions for non-hedging
purposes to enhance income or gain, in accordance with the rules and
regulations of the CFTC, which currently provide that no such transaction
may be entered into if at such time more than 5% of the Trust's net assets
would be posted as initial margin and premiums with respect to such
non-hedging transactions.
Calls on Securities, Indices and Futures Contracts. The Trust may
sell or purchase call options ("calls") on municipal bonds and indices
based upon the prices of futures contracts and debt securities that are
traded on U.S. and foreign securities exchanges and in the over-the-counter
markets. A call gives the purchaser of the option the right to buy, and
obligates the seller to sell, the underlying security, futures contract or
index at the exercise price at any time or at a specified time during the
option period. All such calls sold by the Trust must be "covered" as long
as the call is outstanding (i.e., the Trust must own the securities or
futures contract subject to the call or other securities acceptable for
applicable escrow requirements). A call sold by the Trust exposes the Trust
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security, index or
futures contract and may require the Trust to hold a security or futures
contract which it might otherwise have sold. The purchase of a call gives
the Trust the right to buy a security, futures contract or index at a fixed
price. Calls on futures on municipal bonds must also be covered by
deliverable securities or the futures contract or by liquid high grade debt
securities segregated to satisfy the Trust's obligations pursuant to such
instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may
purchase put options ("puts") that relate to municipal bonds (whether or
not it holds such securities in its portfolio), indices or futures
contracts. The Trust may also sell puts on municipal bonds, indices or
futures contracts on such securities if the Trust's contingent obligations
on such puts are secured by segregated assets consisting of cash or liquid
high grade debt securities having a value not less than the exercise price.
The Trust will not sell puts if, as a result, more than 50% of the Trust's
assets would be required to cover its potential obligations under its
hedging and other investment transactions. In selling puts, there is a risk
that the Trust may be required to buy the underlying security at a price
higher than the current market price.
Municipal Market Data Rate Locks. The Trust may purchase and sell
Municipal Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock
permits the Trust to lock in a specified municipal interest rate for a
portion of its portfolio to preserve a return on a particular investment or
a portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities to be purchased at a later
date. The Trust will ordinarily use these transactions as a hedge or for
duration or risk management although it is permitted to enter into them to
enhance income or gain. An MMD Rate Lock is a contract between the Trust
and an MMD Rate Lock provider pursuant to which the parties agree to make
payments to each other on a notional amount, contingent upon whether the
Municipal Market Data AAA General Obligation Scale is above or below a
specified level on the expiration date of the contract. For example, if the
Trust buys an MMD Rate Lock and the Municipal Market Data AAA General
Obligation Scale is below the specified level on the expiration date, the
counterparty to the contract will make a payment to the Trust equal to the
specified level minus the actual level, multiplied by the notional amount
of the contract. If the Municipal Market Data AAA General Obligation Scale
is above the specified level on the expiration date, the Trust will make a
payment to the counterparty equal to the actual level minus the specified
level, multiplied by the notional amount of the contract. In entering into
MMD Rate Locks, there is a risk that municipal yields will move in the
direction opposite of the direction anticipated by the Trust. The Trust
will not enter into MMD Rate Locks if, as a result, more than 50% of its
assets would be required to cover its potential obligations under its
hedging and other investment transactions.
Appendix D contains further information about the characteristics,
risks and possible benefits of Additional Investment Management Techniques
and the Trust's other policies and limitations (which are not fundamental
policies) relating to investment in futures contracts and options. The
principal risks relating to the use of futures contracts and other
Additional Investment Management Techniques are: (a) less than perfect
correlation between the prices of the instrument and the market value of
the securities in the Trust's portfolio; (b) possible lack of a liquid
secondary market for closing out a position in such instruments; (c) losses
resulting from interest rate or other market movements not anticipated by
BlackRock; and (d) the obligation to meet additional variation margin or
other payment requirements, all of which could result in the Trust being in
a worse position than if such techniques had not been used.
Certain provisions of the Code may restrict or affect the ability
of the Trust to engage in Additional Investment Management Techniques. See
"Tax Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is
a transaction in which the Trust sells a security it does not own in
anticipation that the market price of that security will decline. The Trust
may make short sales to hedge positions, for duration and risk management,
in order to maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security
sold short and deliver it to the broker-dealer through which it made the
short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Trust may have to pay a fee to borrow
particular securities and is often obligated to pay over any payments
received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be
secured by collateral deposited with the broker- dealer, usually cash, U.S.
government securities or other high grade liquid securities. The Trust will
also be required to segregate similar collateral with its custodian to the
extent, if any, necessary so that the aggregate collateral value is at all
times at least equal to the current market value of the security sold
short. Depending on arrangements made with the broker-dealer from which it
borrowed the security regarding payment over of any payments received by
the Trust on such security, the Trust may not receive any payments
(including interest) on its collateral deposited with such broker- dealer.
If the price of the security sold short increases between the time
of the short sale and the time the Trust replaces the borrowed security,
the Trust will incur a loss; conversely, if the price declines, the Trust
will realize a gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Trust's gain is limited
to the price at which it sold the security short, its potential loss is
theoretically unlimited.
The Trust will not make a short sale if, after giving effect to
such sale, the market value of all securities sold short exceeds 25% of the
value of its total assets or the Trust's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding securities of
that class. The Trust may also make short sales "against the box" without
respect to such limitations. In this type of short sale, at the time of the
sale, the Trust owns or has the immediate and unconditional right to
acquire at no additional cost the identical security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid
securities are subject to legal or contractual restrictions on disposition
or lack an established secondary trading market. The sale of restricted and
illiquid securities often requires more time and results in higher
brokerage charges or dealer discounts and other selling expenses than does
the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may
sell at a price lower than similar securities that are not subject to
restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis
and may purchase or sell municipal bonds on a "forward commitment" basis.
When such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date.
When-issued and forward commitment securities may be sold prior to the
settlement date, but the Trust will enter into when-issued and forward
commitment securities only with the intention of actually receiving or
delivering the securities, as the case may be. If the Trust disposes of the
right to acquire a when-issued security prior to its acquisition or
disposes of its right to deliver or receive against a forward commitment,
it can incur a gain or loss. At the time the Trust entered into a
transaction on a when-issued or forward commitment basis, it will segregate
with its custodian cash or other liquid high grade debt securities with a
value not less than the value of the when-issued or forward commitment
securities. The value of these assets will be monitored daily to ensure
that their marked to market value will at all times equal or exceed the
corresponding obligations of the Trust. There is always a risk that the
securities may not be delivered and that the Trust may incur a loss.
Settlements in the ordinary course are not treated by the Trust as
when-issued or forward commitment transactions and accordingly are not
subject to the foregoing restrictions.
Borrowing
Although it has no present intention of doing so, the Trust
reserves the right to borrow funds to the extent permitted as described
under the caption "Investment Objective and Policies -- Investment
Restrictions." The proceeds of borrowings may be used for any valid purpose
including, without limitation, liquidity, investments and repurchases of
shares of the Trust. Borrowing is a form of leverage and, in that respect,
entails risks including volatility in net asset value, market value and
income available for distribution.
Reverse Repurchase Agreements
The Trust may enter into reverse repurchase agreements with
respect to its portfolio investments subject to the investment restrictions
set forth herein. Reverse repurchase agreements involve the sale of
securities held by the Trust with an agreement by the Trust to repurchase
the securities at an agreed upon price, date and interest payment. At the
time the Trust enters into a reverse repurchase agreement, it may establish
and maintain a segregated account with the custodian containing liquid
instruments having a value not less than the repurchase price (including
accrued interest). If the Trust establishes and maintains such a segregated
account, a reverse repurchase agreement will not be considered a borrowing
by the Trust; however, under certain circumstances in which the Trust does
not establish and maintain such a segregated account, such reverse
repurchase agreement will be considered a borrowing for the purpose of the
Trust's limitation on borrowings. The use by the Trust of reverse
repurchase agreements involves many of the same risks of leverage since the
proceeds derived from such reverse repurchase agreements may be invested in
additional securities. Reverse repurchase agreements involve the risk that
the market value of the securities acquired in connection with the reverse
repurchase agreement may decline below the price of the securities the
Trust has sold but is obligated to repurchase. Also, reverse repurchase
agreements involve the risk that the market value of the securities
retained in lieu of sale by the Trust in connection with the reverse
repurchase agreement may decline in price.
If the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce
the Trust's obligation to repurchase the securities, and the Trust's use of
the proceeds of the reverse repurchase agreement may effectively be
restricted pending such decision. Also, the Trust would bear the risk of
loss to the extent that the proceeds of the reverse repurchase agreement
are less than the value of the securities subject to such agreement.
Repurchase Agreements
As temporary investments, the Trust may invest in repurchase
agreements. A repurchase agreement is a contractual agreement whereby the
seller of securities (U.S. government securities or municipal bonds) agrees
to repurchase the same security at a specified price on a future date
agreed upon by the parties. The agreed-upon repurchase price determines the
yield during the Trust's holding period. Repurchase agreements are
considered to be loans collateralized by the underlying security that is
the subject of the repurchase contract. Income generated from transactions
in repurchase agreements will be taxable. See "Tax Matters" for information
relating to the allocation of taxable income between common shares and
Preferred Shares. The Trust will only enter into repurchase agreements with
registered securities dealers or domestic banks that, in the opinion of
BlackRock, present minimal credit risk. The risk to the Trust is limited to
the ability of the issuer to pay the agreed-upon repurchase price on the
delivery date; however, although the value of the underlying collateral at
the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default,
the collateral may be sold but the Trust might incur a loss if the value of
the collateral declines, and might incur disposition costs or experience
delays in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
security, realization upon the collateral by the Trust may be delayed or
limited. BlackRock will monitor the value of the collateral at the time the
transaction is entered into and at all times subsequent during the term of
the repurchase agreement in an effort to determine that such value always
equals or exceeds the agreed-upon repurchase price. In the event the value
of the collateral declines below the repurchase price, BlackRock will
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
Zero Coupon Bonds
The Trust may invest in zero coupon bonds. A zero coupon bond is a
bond that does not pay interest for its entire life. The market prices of
zero coupon bonds are affected to a greater extent by changes in prevailing
levels of interest rates and thereby tend to be more volatile in price than
securities that pay interest periodically. In addition, because the Trust
accrues income with respect to these securities prior to the receipt of
such interest, it may have to dispose of portfolio securities under
disadvantageous circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax consequences.
Lending of Securities
The Trust may lend its portfolio securities to brokers, dealers
and other financial institutions which meet the creditworthiness standards
established by the board of trustees of the Trust ("Qualified
Institutions"). By lending its portfolio securities, the Trust attempts to
increase its income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Trust. The Trust may
lend its portfolio securities so long as the terms and the structure of
such loans are not inconsistent with the requirements of the Investment
Company Act, which currently require that (a) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter of credit
issued by a U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the value of the loan is
"marked to the market" on a daily basis), (c) the loan be made subject to
termination by the Trust at any time and (d) the Trust receive reasonable
interest on the loan (which may include the Trust's investing any cash
collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. The Trust
will not lend portfolio securities if, as a result, the aggregate value of
such loans exceeds 33 1/3% of the value of the Trust's total assets
(including such loans). Loan arrangements made by the Trust will comply
with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange. All relevant facts and circumstances,
including the creditworthiness of the Qualified Institution, will be
monitored by BlackRock and will be considered in making decisions with
respect to lending of securities, subject to review by the Trust's board of
trustees.
The Trust may pay reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written contract
and approved by the Trust's board of trustees. In addition, voting rights
may pass with the loaned securities, but if a material event were to occur
affecting such a loan, the loan must be called and the securities voted.
Residual Interest Municipal Bonds
The Trust currently does not intend to invest in residual interest
municipal bonds. Residual interest municipal bonds pay interest at rates
that bear an inverse relationship to the interest rate on another security
or the value of an index ("inverse floaters"). An investment in inverse
floaters may involve greater risk than an investment in a fixed-rate bond.
Because changes in the interest rate on the other security or index
inversely affect the residual interest paid on the inverse floater, the
value of an inverse floater is generally more volatile than that of a
fixed-rate bond. Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest paid to
the Trust when short-term interest rates rise, and increase the interest
paid to the Trust when short-term interest rates fall. Inverse floaters
have varying degrees of liquidity, and the market for these securities is
relatively volatile. These securities tend to underperform the market for
fixed-rate bonds in a rising interest rate environment, but tend to
outperform the market for fixed-rate bonds when interest rates decline.
Shifts in long-term interest rates may, however, alter this tendency.
Although volatile, inverse floaters typically offer the potential for
yields exceeding the yields available on fixed-rate bonds with comparable
credit quality, coupon, call provisions and maturity. These securities
usually permit the investor to convert the floating rate to a fixed rate
(normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising rates if exercised at an opportune
time. Investment in inverse floaters may amplify the effects of the Trust's
use of leverage. Should short-term interest rates rise, the combination of
the Trust's investment in inverse floaters and the use of leverage likely
will adversely affect the Trust's income. Although the Trust does not
intend initially to invest in inverse floaters, the Trust may do so at some
point in the future. The Trust will provide shareholders 30 days' written
notice prior to any change in its policy of not investing in inverse
floaters.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although BlackRock Advisors intends to devote such time and effort
to the business of the Trust as is reasonably necessary to perform its
duties to the Trust, the services of BlackRock Advisors are not exclusive
and BlackRock Advisors provides similar services to other investment
companies and other clients and may engage in other activities.
The investment management agreement also provides that in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, BlackRock Advisors is not liable
to the Trust or any of the Trust's shareholders for any act or omission by
BlackRock Advisors in the supervision or management of its respective
investment activities or for any loss sustained by the Trust or the Trust's
shareholders and provides for indemnification by the Trust of BlackRock
Advisors, its directors, officers, employees, agents and control persons
for liabilities incurred by them in connection with their services to the
Trust, subject to certain limitations and conditions.
The investment management agreement and certain waivers of the
management fees were approved by the Trust's board of trustees, on May 24,
2001, including a majority of the trustees who are not parties to the
agreement or interested persons of any such party (as such term is defined
in the Investment Company Act). This agreement provides for the Trust to
pay a management fee at an annual rate equal to 0.70% of the average weekly
value of the Trust's Managed Assets. A related waiver letter from BlackRock
Advisors provided for a temporary fee waiver of 0.30% of the average weekly
value of the Trust's total Managed Assets in each of the first five years
of the Trust's operations (through July 31, 2006) and for a declining
amount for an additional five years. Subsequently, BlackRock Advisors
unilaterally agreed to permanently waive a portion of the management fee to
which it is entitled equal to 0.10% of the average weekly value of the
Trust's total Managed Assets and adjusted the temporary fee waiver so that
BlackRock Advisors would waive 0.25% of the average weekly value of the
Trust's total Managed Assets in each of the first five years and would
waive a declining amount for an additional four years as set forth in the
prospectus under "Management of the Trust -- Investment Management
Agreement." The net effect of the permanent fee waiver and the adjusted
temporary fee waiver schedule was to reduce the management fees paid by the
Trust by 0.05% of the Trust's total Managed Assets in each of the first ten
years of the Trust's operations and to reduce the management fees paid by
the Trust by 0.10% of the Trust's total Managed Assets in each year
thereafter.
The investment management agreement and the waivers of management
fees were approved by the sole common shareholder of the Trust as of July
19, 2001. The investment management agreement will continue in effect for a
period of two years from its effective date, and if not sooner terminated,
will continue in effect for successive periods of 12 months thereafter,
provided that each continuance is specifically approved at least annually
by both (1) the vote of a majority of the Trust's board of trustees or the
vote of a majority of the outstanding voting securities of the Trust (as
such term is defined in the Investment Company Act) and (2) by the vote of
a majority of the trustees who are not parties to the investment management
agreement or interested persons (as such term is defined in the Investment
Company Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The investment management agreement may
be terminated as a whole at any time by the Trust, without the payment of
any penalty, upon the vote of a majority of the Trust's board of trustees
or a majority of the outstanding voting securities of the Trust or by
BlackRock Advisors, on 60 days' written notice by either party to the
other. The investment management agreement will terminate automatically in
the event of its assignment (as such term is defined in the Investment
Company Act and the rules thereunder).
Sub-Investment Advisory Agreement
BlackRock Financial Management, the Sub-Advisor, is a wholly owned
subsidiary of BlackRock, Inc. Pursuant to the sub-investment advisory
agreement, BlackRock Advisors has appointed BlackRock Financial Management,
one of its affiliates, to perform certain of the day-to-day investment
management of the Trust. BlackRock Financial Management will receive a
portion of the management fee paid by the Trust to BlackRock Advisors. From
the management fees, BlackRock Advisors will pay BlackRock Financial
Management, for serving as Sub-Advisor, a fee equal to: (i) prior to July
31, 2002, 38% of the monthly management fees received by BlackRock
Advisors, (ii) from August 1, 2002 to July 31, 2003, 19% of the monthly
management fees received by BlackRock Advisors; and (iii) after July 31,
2003, 0% of the management fees received by BlackRock Advisors; provided
thereafter that the Sub-Advisor may be compensated at cost for any services
rendered to the Trust at the request of BlackRock Advisors and approved of
by the board of trustees.
The sub-investment advisory agreement also provides that, in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Trust will indemnify BlackRock
Financial Management, its directors, officers, employees, agents,
associates and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain
limitations.
Although BlackRock Financial Management intends to devote such
time and effort to the business of the Trust as is reasonably necessary to
perform its duties to the Trust, the services of BlackRock Financial
Management are not exclusive and BlackRock Financial Management provides
similar services to other investment companies and other clients and may
engage in other activities.
The sub-investment advisory agreement was approved by the Trust's
board of trustees on May 24, 2001, including a majority of the trustees who
are not parties to the agreement or interested persons of any such party
(as such term is defined in the Investment Company Act). The sub-investment
advisory agreement was approved by the sole common shareholder of the Trust
as of July 19, 2001. The sub-investment advisory agreement will continue in
effect for a period of two years from its effective date, and if not sooner
terminated, will continue in effect for successive periods of 12 months
thereafter, provided that each continuance is specifically approved at
least annually by both (1) the vote of a majority of the Trust's board of
trustees or the vote of a majority of the outstanding voting securities of
the Trust (as defined in the Investment Company Act) and (2) by the vote of
a majority of the trustees who are not parties to such agreement or
interested persons (as such term is defined in the Investment Company Act)
of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The sub-investment advisory agreement may be
terminated as a whole at any time by the Trust, without the payment of any
penalty, upon the vote of a majority of the Trust's board of trustees or a
majority of the outstanding voting securities of the Trust, or by BlackRock
Advisors or BlackRock Financial Management, on 60 days' written notice by
either party to the other. The sub-investment advisory agreement will also
terminate automatically in the event of its assignment (as such term is
defined in the Investment Company Act and the rules thereunder).
Trustees and Officers
The officers of the Trust manage its day-to-day operations. The
officers are directly responsible to the Trust's board of trustees which
sets broad policies for the Trust and chooses its officers. The following
is a list of the trustees and officers of the Trust and a brief statement
of their present positions and principal occupations during the past five
years. Trustees who are interested persons of the Trust (as defined in the
Investment Company Act) are denoted by an asterisk (*). Trustees who are
independent trustees (as defined in the Investment Company Act) (the
"Independent Trustees") are denoted without an asterisk. The business
address of the Trust, BlackRock Advisors and their board members and
officers is 100 Bellevue Parkway, Wilmington, Delaware 19809, unless
specified otherwise below. The trustees listed below are either trustees or
directors of other closed-end funds in which BlackRock Advisors acts as
investment advisor.
Principal Occupation During The
Name and Address Title Past Five Years and Other Affiliations
---------------- ----- --------------------------------------
Andrew F. Brimmer Trustee President of Brimmer &
4400 MacArthur Blvd., Company, Inc., a
N.W. Washington, D.C.-based
Suite 302 economic and financial
Washington, DC 20007 consulting firm. Director
Age: 74 of CarrAmerica Realty
Corporation and
Borg-Warner Automotive.
Formerly member of the
Board of Governors of the
Federal Reserve System.
Formerly Director of
AirBorne Express,
BankAmerica Corporation
(Bank of America), Bell
South Corporation,
College Retirement
Equities Fund (Trustee),
Commodity Exchange, Inc.
(Public Governor),
Connecticut Mutual Life
Insurance Company, E.I.
Dupont de Nemours &
Company, Equitable Life
Assurance Society of the
United States, Gannett
Company, Mercedes-Benz of
North America, MNC
Financial Corporation
(American Security Bank),
NMC Capital Management,
Navistar International
Corporation, PHH Corp.
and UAL Corporation
(United Airlines).
Richard E. Cavanagh Trustee President and Chief
845 Third Avenue Executive Officer of The
New York, NY 10022 Conference Board, Inc., a
Age: 54 leading global business
membership organization,
from 1995- present.
Former Executive Dean of
the John F. Kennedy
School of Government at
Harvard University from
1988-1995. Acting
Director, Harvard Center
for Business and
Government (1991- 1993).
Formerly Partner
(principal) of McKinsey &
Company, Inc.
(1980-1988). Former
Executive Director of
Federal Cash Management,
White House Office of
Management and Budget
(1977-1979). Co-author,
The Winning Performance
(best selling management
book published in 13
national editions).
Trustee Emeritus,
Wesleyan University.
Trustee, Drucker
Foundation, Airplanes
Group, Aircraft Finance
Trust (AFT) and
Educational Testing
Service (ETS). Director,
Arch Chemicals, Fremont
Group and The Guardian
Life Insurance Company of
America.
Kent Dixon Trustee Consultant/Investor.
430 Sandy Hook Road Former President and
St. Petersburg, FL 33706 Chief Executive Officer
Age: 63 of Empire Federal Savings
Bank of America and Banc
PLUS Savings Association,
former Chairman of the
Board, President and
Chief Executive Officer
of Northeast Savings.
Former Director of ISFA
(the owner of INVEST, a
national securities
brokerage service
designed for banks and
thrift institutions).
Frank J. Fabozzi Trustee Consultant. Editor of The
858 Tower View Circle Journal of Portfolio
New Hope, PA 18938 Management and Adjunct
Age: 52 Professor of Finance at
the School of Management
at Yale University.
Director, Guardian Mutual
Funds Group. Author and
editor of several books
on fixed income portfolio
management. Visiting
Professor of Finance and
Accounting at the Sloan
School of Management,
Massachusetts Institute
of Technology from 1986
to August 1992.
Laurence D. Fink* Trustee Director, Chairman and
Age: 48 Chief Executive Officer
of BlackRock, Inc. since
its formation in 1998 and
of BlackRock, Inc.'s
predecessor entities
since 1988. Chairman of
the Management Committee
of BlackRock, Inc.
Formerly, Managing
Director of the First
Boston Corporation,
Member of its Management
Committee, Co-head of its
Taxable Fixed Income
Division and Head of its
Mortgage and Real Estate
Products Group.
Currently, Chairman of
the Board of each of the
closed-end Trusts in
which BlackRock Advisors,
Inc. acts as investment
advisor, President,
Treasurer and a Trustee
of the BlackRock Funds,
Chairman of the Board and
Director of Anthracite
Capital, Inc., a Director
of BlackRock's offshore
funds and alternative
products and Chairman of
the Board of Nomura
BlackRock Asset
Management Co., Ltd.
Currently, Vice Chairman
of the Board of Trustees
of Mount Sinai-New York
University Medical Center
and Health System and a
Member of the Board of
Phoenix House.
James Clayburn LaForce, Jr. Trustee Dean Emeritus of The John
P.O. Box 1595 E. Anderson Graduate
Pauma Valley, CA 92061 School of Management,
Age: 72 University of California
since July 1, 1993.
Director, Jacobs
Engineering Group, Inc.,
Payden & Rygel Investment
Trust, Provident
Investment Counsel Funds,
Timken Company, Motor
Cargo Industries and
Trust for Investment
Managers. Acting Dean of
The School of Business,
Hong Kong University of
Science and Technology
1990-1993. From 1978 to
September 1993, Dean of
The John E. Anderson
Graduate School of
Management, University of
California.
Walter F. Mondale Trustee Partner, Dorsey &
220 South Sixth Street Whitney, a law firm
Minneapolis, MN 55402 (December 1996-present,
Age: 73 September 1987-August
1993). Formerly, U.S.
Ambassador to Japan
(1993-1996). Formerly
Vice President of the
United States, U.S.
Senator and Attorney
General of the State of
Minnesota. 1984
Democratic Nominee for
President of the United
States. Director,
Northwest Airlines
Corporation, NWA Inc.,
Northwest Airlines, Inc.
and UnitedHealth Group
Corporation.
Ralph L. Schlosstein* Trustee and Director since 1999 and
Age: 50 President President of BlackRock,
Inc. since its formation
in 1998 and of BlackRock,
Inc.'s predecessor
entities since 1988.
Member of the Management
Committee and Investment
Strategy Group of
BlackRock, Inc. Formerly,
Managing Director of
Lehman Brothers, Inc. and
Co-head of its Mortgage
and Savings Institutions
Group. Currently,
President of each of the
closed-end Trusts in
which BlackRock Advisors,
Inc. acts as investment
advisor and a Director
and Officer of
BlackRock's alternative
products. Currently, a
Member of the Visiting
Board of Overseers of the
John F. Kennedy School of
Government at Harvard
University, the Financial
Institutions Center Board
of the Wharton School of
the University of
Pennsylvania, and a
Trustee of New Visions
for Public Education in
New York City. Formerly,
a Director of Pulte
Corporation and a Member
of Fannie Mae's Advisory
Council.
Anne F. Ackerley Secretary Managing Director of
Age: 39 BlackRock, Inc. since
2000. Formerly First Vice
President and Chief
Operating Officer,
Mergers and Acquisitions
Group at Merrill Lynch &
Co. from 1997 to 2000;
First Vice President and
Chief Operating Officer,
Public Finance Group at
Merrill Lynch & Co. from
1995 to 1997; First Vice
President, Emerging
Markets Fixed Income
Research at Merrill Lynch
& Co. prior thereto.
Henry Gabbary Treasurer Managing Director of
Age: 53 BlackRock, Inc. and its
predecessor entities.
Robert S. Kapito Vice Vice Chairman of
Age: 44 President BlackRock, Inc. and its
predecessor entities.
Kevin Klingert Vice Managing Director of
Age: 38 President BlackRock, Inc. and its
predecessor entities.
James Kong Assistant Managing Director of
Age: 38 Treasurer BlackRock, Inc. and its
predecessor entities.
Richard Shea, Esq. Vice Managing Director of
Age: 41 President/ BlackRock, Inc. since
Tax 2000; Chief Operating
Officer and Chief
Financial Officer of
Anthracite Capital, Inc.
since 1998. Formerly,
Director of BlackRock,
Inc. and its predecessor
entities.
As of , 2001, no person is known to the Trust to own of record or
beneficially 5% or more of the outstanding common shares or Preferred
Shares.
The fees and expenses of the Independent Trustees of the Trust are
paid by the Trust. The trustees who are members of the BlackRock
organization receive no compensation from the Trust. During the year ended
December 31, 2000, the Independent Trustees/Directors earned the
compensation set forth below in their capacities as trustees/directors of
the funds in the BlackRock Family of Funds. It is estimated that the
Independent Trustees will receive from the Trust the amounts set forth
below for the Trust's calendar year ending December 31, 2001, assuming the
Trust had been in existence for the full calendar year.
Total Compensation from
Estimated the Trust and Fund
Compensation Complex Paid to
Name of Board Member From Trust Board Member (1)
------------------------------- -------------------- -------------------------
Andrew R. Brimmer.............. $ 6,000 (2) (3) $ 160,000 (4)
Richard E. Cavanagh .... $ 6,000 (2) $ 160,000 (4)
Kent Dixon..................... $ 6,000 (2) $ 160,000 (4)
Frank J. Fabozzi ............. $ 6,000 (2) $ 160,000 (4)
James Clayburn La Force, Jr.... $ 6,000 (2) $ 160,000 (4)
Walter F. Mondale $ 6,000 (2) $ 160,000 (4)
-------------
(1) Represents the total compensation earned by such persons during the
calendar year ended December 31, 2000 from the twenty-two closed-end
funds advised by the Advisor (the "Fund Complex"). Two of these
funds, BlackRock
Target Term Trust and the BlackRock 2001 Term Trust were terminated
on December 29, 2000 and June 30, 2001 respectively.
(2) Of these amounts it is anticipated that Messrs. Brimmer, Cavanagh, La
Force and Mondale will defer $1,500, $1,500, $3,750 and $1,500,
respectively, pursuant to the Fund Complex's deferred compensation
plan.
(3) At a meeting of the boards of directors/trustees of the Fund Complex
held on August 24, 2000, Dr. Brimmer was appointed "lead director"
for each board of trustees/directors in the Fund Complex. For his
services as lead trustee/director, Dr. Brimmer will be compensated in
the amount of $40,000 per annum by the Fund Complex to be allocated
among the funds in the Fund Complex based on each fund's relative net
assets.
(4) Of this amount, Messrs. Brimmer, Cavanagh, La Force and Mondale
deferred $12,000, $12,000, $77,500 and $31,000, respectively,
pursuant to the Fund Complex's deferred compensation plan.
Each Independent Trustee/Director receives an annual fee
calculated as follows: (i) $6,000 from each fund/trust in the Fund Complex
and (ii) $1,500 for each meeting of each board in the Fund Complex attended
by such Independent Trustee/Director. The total annual aggregate
compensation for each Independent Trustee/Director is capped at $160,000
per annum, except that Dr. Brimmer receives an additional $40,000 from the
Fund Complex for acting as the lead trustee/ director for each board of
trustees/directors in the Fund Complex. In the event that the $160,000 cap
is met with respect to an Independent Trustee/Director, the amount of the
Independent Trustee/Director's fee borne by each fund in the Fund Complex
is reduced by reference to the net assets of the Trust relative to the
other funds in the Fund Complex. In addition, the attendance fees of each
Independent Trustee/Director of the funds/trusts are reduced
proportionately, based on each respective fund's/trust's net assets, so
that the aggregate per meeting fee for all meetings of the boards of
trustees/directors of the funds/trusts held on a single day does not exceed
$20,000 for any Independent Trustee/Director.
Codes of Ethics
The Trust, the Advisor, the Sub-Advisor and the Trust's principal
underwriters have adopted codes of ethics under Rule 17j-1 of the
Investment Company Act. These codes permit personnel subject to the codes
to invest in securities, including securities that may be purchased or held
by the Trust.
Investment Advisor and Sub-Advisor
BlackRock Advisors, Inc. acts as the Trust's investment advisor.
BlackRock Financial Management acts as the Trust's sub-advisor. BlackRock
Advisors and BlackRock Financial Management are both wholly owned
subsidiaries of BlackRock, Inc., which is one of the largest publicly
traded investment management firms in the United States with $213 billion
of assets under management as of June 30, 2001. BlackRock Advisors is one
of the nation's leading fixed income managers with over $122 billion of
fixed income assets under management. BlackRock, Inc. and its affiliates
manage assets on behalf of more than 3,300 institutions and 200,000
individuals worldwide, including nine of the 10 largest companies in the
U.S. as determined by Fortune Magazine, through a variety of equity, fixed
income, liquidity and alternative investment separate accounts and mutual
funds, including the company's flagship fund families, BlackRock Funds and
BlackRock Provident Institutional Funds. BlackRock, Inc. is the nation's
26th largest asset management firm according to Pensions & Investments, May
14, 2001.
The BlackRock organization has over 12 years of experience
managing closed-end products and currently advises a closed-end family of
20 funds. BlackRock has 13 leveraged municipal closed-end funds under
management and approximately $16 billion in municipal assets firm-wide. As
of June 30, 2001, BlackRock managed over $5.4 billion in closed-end
products. In March 2001, a Fortune Magazine article entitled "The Hidden
Beauty of Bonds" by Andy Serwer called BlackRock "perhaps the greatest
success story on Wall Street in the past half-decade." In addition,
BlackRock provides risk management and investment system services to a
growing number of institutional investors under the BlackRock Solutions
name. In January 2001, Risk Magazine named BlackRock "Asset Management Risk
Manager of the Year." Clients are served from the company's headquarters in
New York City, as well as offices in Wilmington, Delaware, San Francisco,
California, Hong Kong, Edinburgh, Scotland and Tokyo, Japan. BlackRock,
Inc. is a member of The PNC Financial Services Group, Inc. ("PNC"), one of
the largest diversified financial services organizations in the United
States, and is majority-owned by PNC and by BlackRock employees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor and the Sub-Advisor are responsible for decisions to
buy and sell securities for the Trust, the selection of brokers and dealers
to effect the transactions and the negotiation of prices and any brokerage
commissions. The securities in which the Trust invests are traded
principally in the over-the-counter market. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the
price of such securities usually includes a mark-up to the dealer.
Securities purchased in underwritten offerings generally include, in the
price, a fixed amount of compensation for the manager(s), underwriter(s)
and dealer(s). The Trust may also purchase certain money market instruments
directly from an issuer, in which case no commissions or discounts are
paid. Purchases and sales of debt securities on a stock exchange are
effected through brokers who charge a commission for their services.
The Advisor and the Sub-Advisor are responsible for effecting
securities transactions of the Trust and will do so in a manner deemed fair
and reasonable to shareholders of the Trust and not according to any
formula. The Advisor's and the Sub-Advisor's primary considerations in
selecting the manner of executing securities transactions for the Trust
will be prompt execution of orders, the size and breadth of the market for
the security, the reliability, integrity and financial condition and
execution capability of the firm, the difficulty in executing the order,
and the best net price. There are many instances when, in the judgment of
the Advisor or the Sub-Advisor, more than one firm can offer comparable
execution services. In selecting among such firms, consideration is given
to those firms which supply research and other services in addition to
execution services. Consideration may also be given to the sale of shares
of the Trust. However, it is not the policy of BlackRock, absent special
circumstances, to pay higher commissions to a firm because it has supplied
such research or other services.
The Advisor and the Sub-Advisor are able to fulfill their
obligation to furnish a continuous investment program to the Trust without
receiving research or other information from brokers; however, each
considers access to such information to be an important element of
financial management. Although such information is considered useful, its
value is not determinable, as it must be reviewed and assimilated by the
Advisor and/or the Sub-Advisor, and does not reduce the Advisor's and/or
the Sub-Advisor's normal research activities in rendering investment advice
under the investment management agreement or the sub-investment advisory
agreement. It is possible that the Advisor's and/or the Sub-Advisor's
expenses could be materially increased if it attempted to purchase this
type of information or generate it through its own staff.
One or more of the other investment companies or accounts which
the Advisor and/or the Sub-Advisor manages may own from time to time some
of the same investments as the Trust. Investment decisions for the Trust
are made independently from those of such other investment companies or
accounts; however, from time to time, the same investment decision may be
made for more than one company or account. When two or more companies or
accounts seek to purchase or sell the same securities, the securities
actually purchased or sold will be allocated among the companies and
accounts on a good faith equitable basis by the Advisor and/or the
Sub-Advisor in their discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the Trust. In other cases,
however, the ability of the Trust to participate in volume transactions may
produce better execution for the Trust. It is the opinion of the Trust's
board of trustees that this advantage, when combined with the other
benefits available due to the Advisor's or the Sub-Advisor's organization,
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
It is not the Trust's policy to engage in transactions with the
objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Trust will be approximately 100%
excluding securities having a maturity of one year or less. Because it is
difficult to predict accurately portfolio turnover rates, actual turnover
may be higher or lower. Higher portfolio turnover results in increased
Trust costs, including brokerage commissions, dealer mark-ups and other
transaction costs on the sale of securities and on the reinvestment in
other securities.
ADDITIONAL INFORMATION CONCERNING
THE AUCTIONS FOR PREFERRED SHARES
General
Securities Depository. The Depository Trust Company ("DTC") will
act as the Securities Depository with respect to each series of Preferred
Shares. One certificate for all of the shares of each series will be
registered in the name of Bankers Trust Company, as nominee of the
Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting
transfers of shares of Preferred Shares contained in the Statement. The
Trust will also issue stop-transfer instructions to the transfer agent for
Preferred Shares. Prior to the commencement of the right of holders of
Preferred Shares to elect a majority of the Trust's trustees, as described
under "Description of Preferred Shares -- Voting Rights" in the prospectus,
Bankers Trust Company will be the holder of record of each series of
Preferred Shares and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.
DTC, a New York-chartered limited purpose trust company, performs
services for its participants, some of whom (and/or their representatives)
own DTC. DTC maintains lists of its participants and will maintain the
positions (ownership interests) held by each such participant in shares of
Preferred Shares, whether for its own account or as a nominee for another
person. Additional information concerning DTC and the DTC depository system
is included as an Exhibit to the Registration Statement of which this
statement of additional information forms a part.
Concerning the Auction Agent
The auction agent will act as agent for the Trust in connection
with Auctions. In the absence of bad faith or negligence on its part, the
auction agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties
under the auction agency agreement between the Trust and the auction agent
and will not be liable any error of judgment made in good faith unless the
auction agent will have been negligent in ascertaining the pertinent facts.
The auction agent may rely upon, as evidence of the identities of
the holders of Preferred Shares, the auction agent's registry of holders,
the results of auctions and notices from any Broker-Dealer (or other
person, if permitted by the Trust) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfers of Preferred
Shares" in the prospectus and notices from the Trust. The auction agent is
not required to accept any such notice for an auction unless it is received
by the auction agent by 3:00 p.m., New York City time, on the business day
preceding such auction.
The auction agent may terminate its auction agency agreement with
the Trust upon notice to the Trust on a date no earlier than 45 days after
such notice. If the auction agent should resign, the Trust will use its
best efforts to enter into an agreement with a successor auction agent
containing substantially the same terms and conditions as the auction
agency agreement. The Trust may remove the auction agent provided that
prior to such removal the Trust shall have entered into such an agreement
with a successor auction agent.
Broker-Dealers
The auction agent after each auction for shares of each series of
Preferred Shares will pay to each Broker- Dealer, from funds provided by
the Trust, a service charge at the annual rate of 1/4 of 1% in the case of
any auction immediately preceding a dividend period of less than one year,
or a percentage agreed to by the Trust and the Broker- Dealers in the case
of any auction immediately preceding a dividend period of one year or
longer, of the purchase price of the series of Preferred Shares placed by
such Broker-Dealer at such auction. For the purposes of the preceding
sentence, Preferred Shares will be placed by a Broker-Dealer if such shares
were (a) the subject of hold orders deemed to have been submitted to the
auction agent by the Broker-Dealer and were acquired by such Broker-Dealer
for its own account or were acquired by such Broker-Dealer for its
customers who are beneficial owners or (b) the subject of an order
submitted by such Broker-Dealer that is (i) a submitted bid of an existing
holder that resulted in the existing holder continuing to hold such shares
as a result of the auction or (ii) a submitted bid of a potential holder
that resulted in the potential holder purchasing such shares as a result of
the auction or (iii) a valid hold order.
The Trust may request the auction agent to terminate one or more
Broker-Dealer agreements at any time, provided that at least one
Broker-Dealer agreement is in effect after such termination.
The Broker-Dealer agreement provides that a Broker-Dealer (other
than an affiliate of the Trust) may submit orders in auctions for its own
account, unless the Trust notifies all Broker-Dealers that they may no
longer do so, in which case Broker-Dealers may continue to submit hold
orders and sell orders for their own accounts. Any Broker- Dealer that is
an affiliate of the Trust may submit orders in auctions, but only if such
orders are not for its own account.
If a Broker-Dealer submits an order for its own account in any
auction, it might have an advantage over other bidders because it would
have knowledge of all orders submitted by it in that auction; such
Broker-Dealer, however, would not have knowledge of orders submitted by
other Broker-Dealers in that auction.
DESCRIPTION OF COMMON SHARES
A description of common shares is contained in the prospectus. The
Trust intends to hold annual meetings of shareholders so long as the common
shares are listed on a national securities exchange and such meetings are
required as a condition to such listing.
REPURCHASE OF COMMON SHARES
The Trust is a closed-end investment company and as such its
shareholders will not have the right to cause the Trust to redeem their
shares. Instead, the Trust's common shares will trade in the open market at
a price that will be a function of several factors, including dividend
levels (which are in turn affected by expenses), net asset value, call
protection, dividend stability, relative demand for and supply of such
shares in the market, general market and economic conditions and other
factors. Because shares of a closed-end investment company may frequently
trade at prices lower than net asset value, the Trust's board of trustees
may consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of common shares, which may
include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares, or the
conversion of the Trust to an open-end investment company. The board of
trustees may decide not to take any of these actions. In addition, there
can be no assurance that share repurchases or tender offers, if undertaken,
will reduce market discount.
Notwithstanding the foregoing, at any time when the Trust's
Preferred Shares are outstanding, the Trust may not purchase, redeem or
otherwise acquire any of its common shares unless (1) all accrued Preferred
Shares dividends have been paid and (2) at the time of such purchase,
redemption or acquisition, the net asset value of the Trust's portfolio
(determined after deducting the acquisition price of the common shares) is
at least 200% of the liquidation value of the outstanding Preferred Shares
(expected to equal the original purchase price per share plus any accrued
and unpaid dividends thereon). Any service fees incurred in connection with
any tender offer made by the Trust will be borne by the Trust and will not
reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment restrictions, the Trust may borrow to
finance the repurchase of common shares or to make a tender offer. Interest
on any borrowings to finance share repurchase transactions or the
accumulation of cash by the Trust in anticipation of share repurchases or
tenders will reduce the Trust's net income. Any share repurchase, tender
offer or borrowing that might be approved by the Trust's board of trustees
would have to comply with the Securities Exchange Act of 1934, as amended,
the Investment Company Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount
from net asset value will be made by the board of trustees at the time it
considers such issue, it is the board's present policy, which may be
changed by the board of trustees, not to authorize repurchases of common
shares or a tender offer for such shares if: (1) such transactions, if
consummated, would (a) result in the delisting of the common shares from
the New York Stock Exchange, or (b) impair the Trust's status as a
regulated investment company under the Code, (which would make the Trust a
taxable entity, causing the Trust's income to be taxed at the corporate
level in addition to the taxation of shareholders who receive dividends
from the Trust) or as a registered closed-end investment company under the
Investment Company Act; (2) the Trust would not be able to liquidate
portfolio securities in an orderly manner consistent with the Trust's
investment objective and policies in order to repurchase shares; or (3)
there is, in the board's judgment, any (a) material legal action or
proceeding instituted or threatened challenging such transactions or
otherwise materially adversely affecting the Trust, (b) general suspension
of or limitation on prices for trading securities on the New York Stock
Exchange, (c) declaration of a banking moratorium by Federal or state
authorities or any suspension of payment by United States or New York
banks, (d) material limitation affecting the Trust or the issuers of its
portfolio securities by Federal or state authorities on the extension of
credit by lending institutions or on the exchange of foreign currency, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, or (f) other
event or condition which would have a material adverse effect (including
any adverse tax effect) on the Trust or its shareholders if shares were
repurchased. The board of trustees may in the future modify these
conditions in light of experience.
The repurchase by the Trust of its shares at prices below net
asset value will result in an increase in the net asset value of those
shares that remain outstanding. However, there can be no assurance that
share repurchases or tender offers at or below net asset value will result
in the Trust's common shares trading at a price equal to their net asset
value. Nevertheless, the fact that the Trust's common shares may be the
subject of repurchase or tender offers from time to time, or that the Trust
may be converted to an open-end investment company, may reduce any spread
between market price and net asset value that might otherwise exist.
In addition, a purchase by the Trust of its common shares will
decrease the Trust's total assets which would likely have the effect of
increasing the Trust's expense ratio. Any purchase by the Trust of its
common shares at a time when Preferred Shares are outstanding will increase
the leverage applicable to the outstanding common shares then remaining.
Before deciding whether to take any action if the common shares
trade below net asset value, the Trust's board of trustees would likely
consider all relevant factors, including the extent and duration of the
discount, the liquidity of the Trust's portfolio, the impact of any action
that might be taken on the Trust or its shareholders and market
considerations. Based on these considerations, even if the Trust's shares
should trade at a discount, the board of trustees may determine that, in
the interest of the Trust and its shareholders, no action should be taken.
TAX MATTERS
The Trust intends to qualify under subchapter M of the Code as a
regulated investment company and to satisfy conditions which enable
dividends on common shares or Preferred Shares which are attributable to
interest on tax-exempt municipal securities to be exempt from Federal
income tax in the hands of owners of such shares, subject to the possible
application of the Federal alternative minimum tax.
To qualify under Subchapter M for tax treatment as a regulated
investment company, the Trust must, among other things: (a) distribute to
its shareholders at least an amount equal to the sum of (i) 90% of its net
investment income (which is its investment company taxable income as that
term is defined in the Code but determined without regard to the deduction
for dividends paid) and (ii) 90% of its net tax-exempt income and (b)
diversify its holdings so that, at the end of each fiscal quarter of the
Trust (i) at least 50% of the market value of the Trust's assets is
represented by cash, cash items, U.S. government securities and securities
of other regulated investment companies, and other securities, with these
other securities limited, with respect to any one issuer, to an amount not
greater in value than 5% of the Trust's total assets, and to not more than
10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the market value of the Trust's assets is invested in the
securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies). In meeting these
requirements of subchapter M of the Code, the Trust may be restricted in
the utilization of certain of the investment techniques described above and
in the prospectus. If in any year the Trust should fail to qualify under
Subchapter M for tax treatment as a regulated investment company, the Trust
would incur a regular Federal corporate income tax upon its taxable income
for that year, and distributions to its shareholders would be taxable to
such holders as ordinary income to the extent of the earnings and profits
of the Trust. A regulated investment company that fails to distribute, by
the close of each calendar year, at least an amount equal to the sum of 98%
of its ordinary taxable income for such year and 98% of its capital gain
net income for the one year period ending October 31 in such year, plus any
shortfalls from the prior year's required distribution, is liable for a 4%
excise tax on the portion of the undistributed amount of such income that
is less than the required amount for such distributions. To avoid the
imposition of this excise tax, the Trust generally makes the required
distributions of its ordinary taxable income, if any, and its capital gain
net income, to the extent possible, by the close of each calendar year.
Certain of the Trust's investment practices are subject to special
provisions of the Code that, among other things, may deter the use of
certain deductions or losses of the Trust and affect the holding period of
securities held by the Trust and the character of the gains or losses
realized by the Trust. These provisions may also require the Trust to
recognize income or gain without receiving cash with which to make
distributions in the amounts necessary to satisfy the requirements for
maintaining regulated investment company status and for avoiding income and
excise taxes. The Trust will monitor its transactions and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Trust as a regulated investment company.
The Trust intends to qualify to pay "exempt-interest" dividends,
as defined in the Code on its common shares and Preferred Shares. In order
for any distributions to owners of the Trust's Preferred Shares to be
eligible to be treated as exempt-interest dividends, such Preferred Shares
must be treated as stock for Federal income tax purposes. Under the Code,
at the close of each quarter of its taxable year, if at least 50% of the
value of its total assets consists of municipal bonds, the Trust will be
qualified to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends are dividends or any part thereof (other than a
capital gain dividend) paid by the Trust which are attributable to interest
on municipal bonds and are so designated by the Trust. Exempt-interest
dividends will be exempt from Federal income tax, subject to the possible
application of the Federal alternative minimum tax. Insurance proceeds
received by the Trust under any insurance policies in respect of scheduled
interest payments on defaulted municipal bonds, as described herein, will
generally be excludable from gross income under Section 103(a) of the Code.
In the case of non-appropriation by a political subdivision, however, there
can be no assurance that payments made by the issuer representing interest
on such "non-appropriation" municipal lease obligations will be excludable
from gross income for Federal income tax purposes. See "Investment Policies
and Techniques" above. Gains of the Trust that are attributable to market
discount on certain municipal obligations are treated as ordinary income.
Distributions to shareholders by the Trust of net income received, if any,
from taxable temporary investments and net short-term capital gains, if
any, realized by the Trust will be taxable to its shareholders as ordinary
income. Distributions by the Trust of net capital gains (which are the
excess of net long-term capital gains over net short term capital loss), if
any, are taxable as long-term capital gain, regardless of the length of
time the shareholder has owned common shares or Preferred Shares. The
amount of taxable income allocable to the Trust's Preferred shares will
depend upon the amount of such income realized by the Trust, but is not
generally expected to be significant. Except for dividends paid on
Preferred Shares which include an allocable portion of any net capital
gains or other taxable income, the Trust anticipates that all other
dividends paid on shares of its Preferred Shares will constitute
exempt-interest dividends for Federal income tax purposes. Distributions,
if any, in excess of the Trust's earnings and profits will first reduce the
adjusted tax basis of a shareholder's shares and, after that basis has been
reduced to zero, will constitute capital gains to the shareholder (assuming
the shares are held as a capital asset). As long as the Trust qualifies as
a regulated investment company under the Code, no part of its distributions
to shareholders will qualify for the dividends-received deduction for
corporations. The interest on private activity bonds in most instances is
not Federally tax-exempt to a person who is a "substantial user" of a
facility financed by such bonds or a "related person" of such "substantial
user." As a result, the Trust may not be an appropriate investment for
shareholders who are considered either a "substantial user" or a "related
person" within the meaning of the Code. In general, a "substantial user" of
a facility includes a "non-exempt person who regularly uses a part of such
facility in his trade or business," "Related persons" are in general
defined to include persons among whom there exists a relationship, either
by family or business, which would result in a disallowance of losses in
transactions among them under various provisions of the Code (or if they
are members of the same controlled group of corporations under the Code),
including a partnership and each of its partners (and certain members of
their families), an S corporation and each of its shareholders (and certain
members of their families) and various combinations of these and other
relationships. The foregoing is not a complete description of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person."
Federal tax law imposes an alternative minimum tax with respect to
both corporations and individuals. Interest on certain municipal
obligations, such as bonds issued to make loans for housing purposes or to
private entities (but not to certain tax-exempt organizations such as
universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum
taxable income. To the extent that the Trust receives income from municipal
obligations subject to the Federal alternative minimum tax, a portion of
the dividends paid by it, although otherwise exempt from Federal income
tax, will be taxable to its shareholders to the extent that their tax
liability is determined under the alternative minimum tax. The Trust will
annually supply a report indicating the percentage of the Trust's income
attributable to municipal obligations subject to the alternative minimum
tax. In addition, for certain corporations, alternative minimum taxable
income is increased by 75% of the difference between an alternative measure
of income ("adjusted current earnings") and the amount otherwise determined
to be the alternative minimum taxable income. Interest on all municipal
obligations, and therefore all distributions by the Trust that would
otherwise be tax-exempt, is included in calculating a corporation's
adjusted current earnings. Certain small corporations are not subject to
the alternative minimum tax.
Tax-exempt income, including exempt-interest dividends paid by the
Trust, is taken into account in calculating the amount of Social Security
and railroad retirement benefits that may be subject to Federal income tax.
The Internal Revenue Service (the "IRS") requires that a regulated
investment company that has two or more classes of shares must designate to
each such class proportionate amounts of each type of its income for each
tax year based upon the percentage of total dividends distributed to each
class for such year. The Trust intends each year to allocate, to the
fullest extent practicable, net tax-exempt interest, net capital gain and
other taxable income, if any, between its common shares and preferred
shares, including the Preferred Shares, in proportion to the total
dividends paid to each class with respect to such year. To the extent
permitted under applicable law, the Trust reserves the right to make
special allocations of income within a class, consistent with the
objectives of the Trust. The Trust may, at its election, notify the Auction
Agent of the amount of any net capital gain or other income taxable for
Federal income tax purposes to be included in any dividend on shares of its
Preferred Shares prior to the Auction establishing the Applicable Rate for
such dividend. If the Trust allocates any net capital gain or other taxable
income for Federal income tax purposes to its Preferred Shares without
having given advance notice thereof as described above, the Trust generally
will be required to make payments to owners of its Preferred Shares to
which such allocation was made in order to offset the Federal income tax
effect of the taxable income so allocated as described under "Description
of Preferred Shares -- Dividends and Dividend Periods -- Additional
Dividends" in the prospectus.
If at any time when the Trust's Preferred Shares are outstanding
the Trust fails to meet the Preferred Shares Basic Maintenance Amount or
the Investment Company Act Preferred Shares Asset Coverage, the Trust will
be required to suspend distributions to holders of its common shares until
such maintenance amount or asset coverage, as the case may be, is restored.
See "Description of Preferred Shares -- Dividends and Dividend Periods --
Restrictions on Dividends and Other Distributions" in the prospectus. This
may prevent the Trust from distributing at least an amount equal to the sum
of 90% of its net investment income and 90% of its net tax-exempt income,
and may therefore jeopardize the Trust's qualification for taxation as a
regulated investment company or cause the Trust to incur a tax liability or
a non-deductible 4% excise tax on the undistributed taxable income
(including gain), or both. Upon failure to meet the Preferred Shares Basic
Maintenance Amount or the Investment Company Act Preferred Shares Asset
Coverage, the Trust will be required to redeem its shares of Preferred
Shares in order to maintain or restore such maintenance amount or asset
coverage and avoid the adverse consequences to the Trust and its
shareholders of failing to qualify as a regulated investment company. There
can be no assurance, however, that any such redemption would achieve such
objectives.
The Trust may, at its option, redeem its Preferred Shares in whole
or in part, and is required to redeem Preferred Shares to the extent
required to maintain the Preferred Shares Basic Maintenance Amount and the
Investment Company Act Preferred Shares Asset Coverage. Gain or loss, if
any, resulting from a redemption of Preferred Shares will be taxed as gain
or loss from the sale or exchange of Preferred Shares under Section 302 of
the Code rather than as a dividend, but only if the redemption distribution
(a) is deemed not to be essentially equivalent to a dividend, (b) is in
complete redemption of an owners interest in the Trust, (c) is
substantially disproportionate with respect to the owner, or (d) with
respect to a non-corporate owner, is in partial liquidation of the owners
interest in the Trust. For purposes of (a), (b) and (c) above, a
shareholder's ownership of common shares will be taken into account.
The Code provides that interest on indebtedness incurred or
continued to purchase or carry the Trust's shares to which exempt-interest
dividends are allocated is not deductible. Under rules used by the IRS for
determining when borrowed Trusts are considered used for the purpose of
purchasing or carrying particular assets, the purchase or ownership of
shares may be considered to have been made with borrowed Trusts even though
such Trusts are not directly used for the purchase or ownership of such
shares.
Nonresident alien individuals and certain foreign corporations and
other entities ("foreign investors") generally are subject to U.S.
withholding tax at the rate of 30% (or possibly a lower rate provided by an
applicable tax treaty) on distributions of taxable net investment income
(which includes net short-term capital gains). To the extent received by
foreign investors, exempt-interest dividends, distributions of net capital
gains and gain from the sale or other disposition of Preferred Shares
generally are exempt from U.S. Federal income taxation. Different tax
consequences may result if the owner is engaged in a trade or business in
the United States or, in the case of an individual, is present in the
united states for 183 or more days during a taxable year.
Although dividends generally will be treated as distributed when
paid, dividends declared in October, November or December, payable to
shareholders of record on a specified date in one of those months and paid
during the following January will be treated as having been distributed by
the Trust (and received by the shareholders) on December 31 of the year
declared.
The sale or other disposition of common shares or Preferred Shares
of the Trust will normally result in capital gain or loss to shareholders.
Present law taxes both long-term and short-term capital gains of
corporations at the rates applicable to ordinary income. For non-corporate
taxpayers, however, under current law short-term capital gains and ordinary
income will be taxed at a maximum rate of 39.6% while long-term capital
gains generally will be taxed at a maximum rate of 20%. However, because of
the limitations on itemized deductions and the deduction for personal
exemptions applicable to higher income taxpayers, the effective rate of tax
may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Trust held for six months or less are
disallowed to the extent of any distribution of exempt-interest dividends
received with respect to such shares, and, if not disallowed, such losses
are treated as long-term capital losses to the extent of any distribution
of net capital gain received with respect to such shares. A shareholder's
holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other
positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of shares
of the Trust will be disallowed to the extent those shares of the Trust are
replaced by other shares within a period of 61 days beginning 30 days
before and ending 30 days after the date of disposition of the original
shares. In that event, the basis of the replacement shares of the Trust
will be adjusted to reflect the disallowed loss.
The Trust is required in certain circumstances to backup withhold
on taxable dividends and certain other payments paid to non-corporate
holders of the Trust's shares who do not furnish to the Trust their correct
taxpayer identification number (in the case of individuals, their social
security number) and certain certifications, or who are otherwise subject
to backup withholding. Backup withholding is not an additional tax. Any
amounts withheld from payments made to a shareholder may be refunded or
credited against such shareholder's United States Federal income tax
liability, if any, provided that the required information is furnished to
the IRS.
The Code provides that every shareholder required to file a tax
return must include for information purposes on such return the amount of
tax-exempt interest received during the taxable year, including any
exempt-interest dividends received from the Trust.
The foregoing is a general, summary of the provisions of the Code
and the Treasury Regulations in effect as they directly govern the taxation
of the Trust and its shareholders. These provisions are subject to change
by legislative or administrative action, and any such change may be
retroactive. Moreover, the foregoing does not address many of the factors
that may be determinative of whether an investor will be liable for the
alternative minimum tax. Shareholders are advised to consult their own tax
advisers for more detailed information concerning the Federal income tax
consequences of purchasing, holding and disposing of Trust shares.
EXPERTS
The statement of Assets and Liabilities of the Trust as of and
statement of operations for the period then ended appearing in this
statement of additional information has been audited by , independent
auditors, as set forth in their report thereon appearing elsewhere herein,
and is included in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing. , located at , provides
auditing services to the Trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2 relating to the shares
offered hereby, has been filed by the Trust with the Securities and
Exchange Commission (the "Commission"), Washington, D.C. The prospectus and
this Statement of Additional Information do not contain all of the
information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Trust
and the shares offered hereby, reference is made to the Registration
Statement. Statements contained in the prospectus and this Statement of
Additional Information as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained
from the Commission upon the payment of certain fees prescribed by the
Commission.
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholders of BlackRock California Municipal
Income Trust
We have audited the accompanying statement of assets and
liabilities of BlackRock California Municipal Income Trust (the "Trust") as
of , and the related statement of operations for the period then ended.
These financial statements are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
accounting standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of BlackRock California Municipal
Income Trust as of , and the results of its operations for the period then
ended in conformity with generally accepted accounting principles.
FINANCIAL STATEMENTS
[To Be Inserted]
APPENDIX B
Ratings of Investments
Standard & Poor's Corporation -- A brief description of the
applicable Standard & Poor's Corporation ("S&P") rating symbols and their
meanings (as published by S&P) follows:
Long-Term Debt
An S&P corporate or municipal debt rating is a current assessment
of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers or lessees.
The debt rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default-- capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics these are outweighed by major
uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
B Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and
repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
"BB" or "BB" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B" rating.
CC The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest is
being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of
a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is Federally insured by the Federal Savings & Loan
Insurance Corporation or the Federal Deposit Insurance
Corporation* and interest is adequately collateralized. In the
case of certificates of deposit the letter "L" indicates that the
deposit, combined with other deposits being held in the same right
and capacity will be honored for principal and accrued pre-default
interest up to the Federal insurance limits within 30 days after
closing of the insured institution or, in the event that the
deposit is assumed by a successor insured institution, upon
maturity.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in 3 years or less will
likely receive a note rating. Notes maturing beyond 3 years will
most likely receive a long-term debt rating. The following
criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative
to other maturities, the more likely it will be treated as a
note).
-- Source of payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be
treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity
of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for
the highest quality obligations to "D" for the lowest. These categories are
as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is as signed to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
A commercial rating is not a recommendation to purchase, sell or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result
of changes in or unavailability of such information or based on other
circumstances.
Moody's Investors Service, Inc.-- A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and
their meanings (as published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Con(...) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a ) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating category from Aa to B in the public finance sectors. The
modifier 1 indicates that the issuer is in the higher end of its
letter rating category; the modifier 2 indicates a mid-range
ranking; the modifier 3 indicates that the issuer is in the lower
end of the letter ranking category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is lacking
the undeniable strength of the preceding grades.
Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less
well-established.
MIG 4/VMIG 4 This designation denotes adequate quality.
Protection commonly regarded as required of an investment
security is present and although not distinctly or
predominantly speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
-- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound, will
be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short- term promissory obligations.
The effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc.-- A brief description of the applicable Fitch
IBCA, Inc. ("Fitch") ratings symbols and meanings (as published by Fitch)
follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exception ally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions
are more likely to impair this capacity. This is the lowest
investment- grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is a
possibility of credit risk developing, particularly as
the result of adverse economic change over time;
however, business or financial alternatives may be
available to allow financial commitments to be met.
Securities rated in this category are not investment
grade.
B Highly speculative. 'B' ratings indicate that
significant credit risk is present, but a limited
margin of safety remains. Financial commitments are
currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable
business and economic environment.
CCC, CC, C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon sustained,
favorable business or economic developments. A
'CC' rating indicates that default of some kind
appears probable. 'C' ratings signal imminent
default.
DDD, DD, and D Default. The ratings of obligations in this
category are based on their prospects for achieving
partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery
values are highly speculative and cannot be estimated
with any precision, the following serve as general
guidelines. 'DDD' obligations have the highest
potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. 'DD' indicates potential
recoveries in the range of 50%-90%, and 'D' the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some
or all of their obligations. Entities rated 'DDD' have
the highest prospect for resumption of performance or
continued operation with or without a formal
reorganization process. Entities rated 'DD' and 'D'
are generally undergoing a formal reorganization or
liquidation process; those rated 'DD' are likely to
satisfy a higher portion of their outstanding
obligations, while entities rated 'D' have a poor
prospect for repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for
most obligations, or up to three years for U.S. public finance securities,
and thus places greater emphasis on the liquidity necessary to meet
financial commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for
timely payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as
in the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. The notes actual or imminent payment default.
Notes:
"+" or "-" may be appended to a rating to denote relative status within
major rating categories. Such suffixes are not added to the 'AAA' long-term
rating category, to categories below 'CCC', or to short-term ratings other
than 'F1'.
'NR' indicates that Fitch does not rate the issuer or issue in question.
'Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating alert: Ratings are placed on Rating alert to notify investors that
there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. Rating alert is typically
resolved over a relatively short period.
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio or to
enhance income or gain as described in the prospectus, the Trust will
engage in Additional Investment Management Techniques. The Trust will
engage in such activities in the Advisor's or Sub-Advisor's discretion, and
may not necessarily be engaging in such activities when movements in
interest rates that could affect the value of the assets of the Trust
occur. The Trust's ability to pursue certain of these strategies may be
limited by applicable regulations of the CFTC. Certain Additional
Investment Management Techniques may give rise to taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities
and indices. A put option gives the purchaser of the option the right to
sell and the writer the obligation to buy the underlying security at the
exercise price during the option period. The Trust may also purchase and
sell options on bond indices ("index options"). Index options are similar
to options on securities except that, rather than taking or making delivery
of securities underlying the option at a specified price upon exercise, an
index option gives the holder the right to receive cash upon exercise of
the option if the level of the bond index upon which the option is based is
greater, in the case of a call, or less, in the case of a put, than the
exercise price of the option. The purchase of a put option on a debt
security could protect the Trust's holdings in a security or a number of
securities against a substantial decline in the market value. A call option
gives the purchaser of the option the right to buy and the seller the
obligation to sell the underlying security or index at the exercise price
during the option period or for a specified period prior to a fixed date.
The purchase of a call option on a security could protect the Trust against
an increase in the price of a security that it intended to purchase in the
future. In the case of either put or call options that it has purchased, if
the option expires without being sold or exercised, the Trust will
experience a loss in the amount of the option premium plus any related
commissions. When the Trust sells put and call options, it receives a
premium as the seller of the option. The premium that the Trust receives
for selling the option will serve as a partial hedge, in the amount of the
option premium, against changes in the value of the securities in its
portfolio. During the term of the option, however, a covered call seller
has, in return for the premium on the option, given up the opportunity for
capital appreciation above the exercise price of the option if the value of
the underlying security increases, but has retained the risk of loss should
the price of the underlying security decline. Conversely, a secured put
seller retains the risk of loss should the market value of the underlying
security decline be low the exercise price of the option, less the premium
received on the sale of the option. The Trust is authorized to purchase and
sell exchange-listed options and over-the-counter options ("OTC Options")
which are privately negotiated with the counterparty. Listed options are
issued by the Options Clearing Corporation ("OCC") which guarantees the
performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or
seller of an exchange-listed put or call option is dependent upon the
existence of a liquid secondary market on option exchanges. Among the
possible reasons for the absence of a liquid secondary market on an
exchange are: (i) insufficient trading interest in certain options; (ii)
restrictions on transactions imposed by an exchange; (iii) trading halts,
suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities; (iv) interruption of
the normal operations on an exchange; (v) inadequacy of the facilities of
an exchange or OCC to handle current trading volume; or (vi) a decision by
one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market
on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been listed
by the OCC as a result of trades on that exchange would generally continue
to be exercisable in accordance with their terms. OTC Options are purchased
from or sold to dealers, financial institutions or other counterparties
which have entered into direct agreements with the Trust. With OTC Options,
such variables as expiration date, exercise price and premium will be
agreed upon between the Trust and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails
to make or take delivery of the securities underlying an option it has
written, or otherwise settle the transaction in accordance with the terms
of that option as written, the Trust would lose the premium paid for the
option as well as any anticipated benefit of the transaction. As the Trust
must rely on the credit quality of the counterparty rather than the
guarantee of the OCC, it will only enter into OTC Options with
counterparties with the highest long-term credit ratings, and with primary
United States government securities dealers recognized by the Federal
Reserve Bank of New York.
The hours of trading for options on debt securities may not
conform to the hours during which the underlying securities are traded. To
the extent that the option markets close before the markets for the
underlying securities, significant price and rate movements can take place
in the underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or
purchase put and call options on such futures as a hedge against
anticipated interest rate changes or other market movements. The sale of a
futures contract creates an obligation by the Trust, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specified future time for a specified price. Options on futures contracts
are similar to options on securities except that an option on a futures
contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased
or sold, the Trust must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Trust
will pay may range from approximately 1% to approximately 5% of the value
of the securities or commodities underlying the contract. In certain
circumstances, however, such as periods of high volatility, the Trust may
be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in case of "variation margin" may
be required, a process known as "marking to the market." Transactions in
listed options and futures are usually settled by entering into an
offsetting transaction, and are subject to the risk that the position may
not be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's
use of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and
regulations of the CFTC. Under such regulations the Trust currently may
enter into such transactions without limit for bona fide hedging purposes,
including risk management and duration management and other portfolio
strategies. The Trust may also engage in transactions in futures contracts
or related options for non-hedging purposes to enhance income or gain
provided that the Trust will not enter into a futures contract or related
option (except for closing transactions) for purposes other than bona fide
hedging, or risk management including duration management if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on
open contracts and options would exceed 5% of the Trust's liquidation
value, i.e., net assets (taken at current value); provided, however, that
in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, when required, a segregated account of cash equivalents will be
maintained and marked to market on a daily basis in an amount equal to the
market value of the contract. The Trust reserves the right to comply with
such different standard as may be established from time to time by CFTC
rules and regulations with respect to the purchase or sale of futures
contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest
rate swaps, caps, floors and collars, short sales, reverse repurchase
agreements and dollar rolls, and listed or OTC Options on securities,
indices and futures contracts sold by the Trust are generally subject to
segregation and coverage requirements of either the CFTC or the SEC, with
the result that, if the Trust does not hold the security or futures
contract underlying the instrument, the Trust will be required to segregate
on an ongoing basis with its custodian, cash, U.S. government securities,
or other liquid high grade debt obligations in an amount at least equal to
the Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation
requirement can result in the Trust maintaining securities positions it
would otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks.
With respect to hedging and risk management, the variable degree of
correlation between price movements of hedging instruments and price
movements in the position being hedged create the possibility that losses
on the hedge may be greater than gains in the value of the Trust's
position. The same is true for such instruments entered into for income or
gain. In addition, certain instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Trust may not be able
to close out a transaction without incurring losses substantially greater
than the initial deposit. Although the contemplated use of these
instruments predominantly for hedging should tend to minimize the risk of
loss due to a decline in the value of the position, at the same time they
tend to limit any potential gain which might result from an increase in the
value of such position. The ability of the Trust to successfully utilize
Additional Investment Management Techniques will depend on the Advisor's
and the Sub-Advisor's ability to predict pertinent market movements and
sufficient correlations, which cannot be assured. Finally, the daily
deposit requirements in futures contracts that the Trust has sold create an
on going greater potential financial risk than do options transactions,
where the exposure is limited to the cost of the initial premium. Losses
due to the use of Additional Investment Management Techniques will reduce
net asset value.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A -- Financial Highlights (unaudited).*
Part B-- Report of Independent Accountants.*
Statement of Assets and Liabilities.*
Statement of Operations.*
Financial Statements (Unaudited)*
(2) Exhibits
(a) Amended and Restated Agreement and Declaration of Trust.3
(b) By-Laws.1
(c) Inapplicable.
(d) Statement of Preferences of Municipal Auction Rate
Cumulative Preferred Shares.*
(e) Dividend Reinvestment Plan.1
(f) Inapplicable.
(g)(1) Investment Management Agreement.4
(g)(2) Waiver Reliance Letter.4
(g)(3) Sub-Investment Advisory Agreement.4
(h) Form of Underwriting Agreement.*
(i) Deferred Compensation Plan for Independent Trustees.4
(j) Custodian Agreement.4
(k)(1) Transfer Agency Agreement.4
(k)(2) Auction Agency Agreement.*
(k)(3) Broker-Dealer Agreement.*
(k)(4) Form of DTC Agreement.*
(l) Opinion and Consent of Counsel to the Trust.*
(m) Inapplicable.
(n) Consent of Independent Public Accountants.*
(o) Inapplicable.
(p) Initial Subscription Agreement.4
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.1
(r)(2) Code of Ethics of Advisor and Sub-Advisor.1
(r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons.4
(s) Powers of Attorney*
---------
1 Previously filed in the initial filing on April 3, 2001
2 Previously filed with Pre-Effective Amendment No. 1 to the
Registration Statement on June 4, 2001.
3 Previously filed with Pre-Effective Amendment No. 3 to the
Registration Statement on July 25, 2001.
4 Filed herewith.
* To be filed by amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the
Registrant's shares of beneficial interest filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this registration
statement:
Registration fees..................................................... $*
New York Stock Exchange listing fee................................... 0
Printing (other than certificates).................................... *
Engraving and printing certificates................................... *
Fees and expenses of qualification under state securities laws
(excluding fees of counsel)..................................... *
Accounting fees and expenses.......................................... *
Legal fees and expenses............................................... *
NASD fee.............................................................. *
Miscellaneous......................................................... 0
Total............................................................ $*
* To be furnished by amendment.
Item 27. Persons Controlled by or under Common Control with the Registrant
None.
Item 28. Number of Holders of Shares
Number of
Title of Class Record Holders
-------------- --------------
Common Shares of Beneficial Interest....................
Preferred Shares........................................ 0
Item 29. Indemnification
Article V of the Registrant's Amended and Restated Agreement and
Declaration of Trust, as amended and restated, provides as follows:
5.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person in connection with Trust Property or the
acts, obligations or affairs of the Trust. Shareholders shall have the same
limitation of personal liability as is extended to stockholders of a
private corporation for profit incorporated under the Delaware General
Corporation Law. No Trustee or officer of the Trust shall be subject in
such capacity to any personal liability whatsoever to any Person, other
than the Trust or its Shareholders, in connection with Trust Property or
the affairs of the Trust, save only liability to the Trust or its
Shareholders arising from bad faith, willful misfeasance, gross negligence
(negligence in the case of those Trustees or officers who are directors,
officers or employees of the Trust's investment advisor ("Affiliated
Indemnitees")) or reckless disregard for his duty to such Person; and,
subject to the foregoing exception, all such Persons shall look solely to
the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee or
officer, as such, of the Trust, is made a party to any suit or proceeding
to enforce any such liability, subject to the foregoing exception, he shall
not, on account thereof, be held to any personal liability. Any repeal or
modification of this Section 5.1 shall not adversely affect any right or
protection of a Trustee or officer of the Trust existing at the time of
such repeal or modification with respect to acts or omissions occurring
prior to such repeal or modification.
5.2 Mandatory Indemnification. (a) The Trust hereby agrees to
indemnify each person who at any time serves as a Trustee or officer of the
Trust (each such person being an "indemnitee") against any liabilities and
expenses, including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which
he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, while acting in any capacity set
forth in this Article V by reason of his having acted in any such capacity,
except with respect to any matter as to which he shall not have acted in
good faith in the reasonable belief that his action was in the best
interest of the Trust or, in the case of any criminal proceeding, as to
which he shall have had reasonable cause to believe that the conduct was
unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence (negligence in the case of Affiliated Indemnitees),
or (iv) reckless disregard of the duties involved in the conduct of his
position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"). Notwithstanding the
foregoing, with respect to any action, suit or other proceeding voluntarily
prosecuted by any indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding
by such indemnitee (1) was authorized by a majority of the Trustees or (2)
was instituted by the indemnitee to enforce his or her rights to
indemnification hereunder in a case in which the indemnitee is found to be
entitled to such indemnification. The rights to indemnification set forth
in this Declaration shall continue as to a person who has ceased to be a
Trustee or officer of the Trust and shall inure to the benefit of his or
her heirs, executors and personal and legal representatives. No amendment
or restatement of this Declaration or repeal of any of its provisions shall
limit or eliminate any of the benefits provided to any person who at any
time is or was a Trustee or officer of the Trust or otherwise entitled to
indemnification hereunder in respect of any act or omission that occurred
prior to such amendment, restatement or repeal.
(b) Notwithstanding the foregoing, no indemnification shall be
made hereunder unless there has been a determination (i) by a final
decision on the merits by a court or other body of competent jurisdiction
before whom the issue of entitlement to indemnification hereunder was
brought that such indemnitee is entitled to indemnification hereunder or,
(ii) in the absence of such a decision, by (1) a majority vote of a quorum
of those Trustees who are neither "interested persons" of the Trust (as
defined in Section 2(a)(19) of the 1940 Act) nor parties to the proceeding
("Disinterested Non-Party Trustees"), that the indemnitee is entitled to
indemnification hereunder, or (2) if such quorum is not obtainable or even
if obtainable, if such majority so directs, independent legal counsel in a
written opinion concludes that the indemnitee should be entitled to
indemnification hereunder. All determinations to make advance payments in
connection with the expense of defending any proceeding shall be authorized
and made in accordance with the immediately succeeding paragraph (c) below.
(c) The Trust shall make advance payments in connection with the
expenses of defending any action with respect to which indemnification
might be sought hereunder if the Trust receives a written affirmation by
the indemnitee of the indemnitee's good faith belief that the standards of
conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined
that the indemnitee is entitled to such indemnification and if a majority
of the Trustees determine that the applicable standards of conduct
necessary for indemnification appear to have been met. In addition, at
least one of the following conditions must be met: (i) the indemnitee shall
provide adequate security for his undertaking, (ii) the Trust shall be
insured against losses arising by reason of any lawful advances, or (iii) a
majority of a quorum of the Disinterested Non-Party Trustees, or if a
majority vote of such quorum so direct, independent legal counsel in a
written opinion, shall conclude, based on a review of readily available
facts (as opposed to a full trial-type inquiry), that there is substantial
reason to believe that the indemnitee ultimately will be found entitled to
indemnification.
(d) The rights accruing to any indemnitee under these provisions
shall not exclude any other right which any person may have or hereafter
acquire under this Declaration, the By-Laws of the Trust, any statute,
agreement, vote of stockholders or Trustees who are "disinterested persons"
(as defined in Section 2(a)(19) of the 1940 Act) or any other right to
which he or she may be lawfully entitled.
(e) Subject to any limitations provided by the 1940 Act and this
Declaration, the Trust shall have the power and authority to indemnify and
provide for the advance payment of expenses to employees, agents and other
Persons providing services to the Trust or serving in any capacity at the
request of the Trust to the full extent corporations organized under the
Delaware General Corporation Law may indemnify or provide for the advance
payment of expenses for such Persons, provided that such indemnification
has been approved by a majority of the Trustees.
5.3 No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or other security for the performance of any of
his duties hereunder.
5.4 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees
or with any officer, employee or agent of the Trust shall be bound to make
any inquiry concerning the validity of any transaction purporting to be
made by the Trustees or by said officer, employee or agent or be liable for
the application of money or property paid, loaned, or delivered to or on
the order of the Trustees or of said officer, employee or agent. Every
obligation, contract, undertaking, instrument, certificate, Share, other
security of the Trust, and every other act or thing whatsoever executed in
connection with the Trust shall be conclusively taken to have been executed
or done by the executors thereof only in their capacity as Trustees under
this Declaration or in their capacity as officers, employees or agents of
the Trust. Every written obligation, contract, undertaking, instrument,
certificate, Share, other security of the Trust made or issued by the
Trustees or by any officers, employees or agents of the Trust in their
capacity as such, shall contain an appropriate recital to the effect that
the Shareholders, Trustees, officers, employees or agents of the Trust
shall not personally be bound by or liable thereunder, nor shall resort be
had to their private property for the satisfaction of any obligation or
claim thereunder, and appropriate references shall be made therein to this
Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose
personal liability on any of the Trustees, Shareholders, officers,
employees or agents of the Trust. The Trustees may maintain insurance for
the protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to
cover possible tort liability, and such other insurance as the Trustees in
their sole judgment shall deem advisable or is required by the 1940 Act.
5.5 Reliance on Experts, etc. Each Trustee and officer or employee
of the Trust shall, in the performance of its duties, be fully and
completely justified and protected with regard to any act or any failure to
act resulting from reliance in good faith upon the books of account or
other records of the Trust, upon an opinion of counsel, or upon reports
made to the Trust by any of the Trust's officers or employees or by any
advisor, administrator, manager, distributor, selected dealer, accountant,
appraiser or other expert or consultant selected with reasonable care by
the Trustees, officers or employees of the Trust, regardless of whether
such counsel or expert may also be a Trustee.
5.6 Indemnification of Shareholders. If any Shareholder or former
Shareholder shall be held personally liable solely by reason of its being
or having been a Shareholder and not because of its acts or omissions or
for some other reason, the Shareholder or former Shareholder (or its heirs,
executors, administrators or other legal representatives or in the case of
any entity, its general successor) shall be entitled out of the assets
belonging to the Trust to be held harmless from and indemnified to the
maximum extent permitted by law against all loss and expense arising from
such liability. The Trust shall, upon request by such Shareholder, assume
the defense of any claim made against such Shareholder for any act or
obligation of the Trust and satisfy any judgment thereon from the assets of
the Trust.
Insofar as indemnification for liabilities arising under the Act,
may be terminated to Trustees, officers and controlling persons of the
Trust, pursuant to the foregoing provisions or otherwise, the Trust has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue. Reference is made to Article 8 of the
underwriting agreement to be attached as Exhibit (h).
Item 30. Business and Other Connections of Investment Advisor
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently
located at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100
Bellevue Parkway, Wilmington, Delaware 19809 and at the offices of State
Street Bank and Trust Company, the Registrant's Custodian, and EquiServe
Trust Company, N.A., the Registrant's Transfer Agent and Dividend
Disbursing Agent.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) The Registrant hereby undertakes to suspend the offering of
its units until it amends its prospectus if (a) subsequent to the effective
date of its registration statement, the net asset value declines more than
10 percent from its net asset value as of the effective date of the
Registration Statement or (b) the net asset value increases to an amount
greater than its net proceeds as stated in the prospectus.
(2) Not applicable
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted form the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule 497
(h) under the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering thereof.
(6) The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two business days
of receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York,
on the 20th day of August, 2001.
/s/ Ralph L. Schlosstein
--------------------------------------------
Ralph L. Schlosstein
President, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities set forth below on the 20th day of August, 2001.
Name Title
---- -----
/s/ Ralph L. Schlosstein Trustee, President,
----------------------------- Chief Executive Officer and
Ralph L. Schlosstein Chief Financial Officer
/s/ Henry Gabbay Treasurer
-----------------------------
Henry Gabbay
/s/ Andrew F. Brimmer
----------------------------- Trustee
Andrew F. Brimmer
/s/ Richard E. Cavanagh Trustee
-----------------------------
Richard E. Cavanagh
----------------------------- Trustee
Kent Dixon
----------------------------- Trustee
Frank J. Fabozzi
/s/ Laurence D. Fink Trustee
-----------------------------
Laurence D. Fink
/s/ James Clayburn La Force, Jr. Trustee
---------------------------------
James Clayburn La Force, Jr.
/s/ Walter F. Mondale Trustee
-----------------------------
Walter F. Mondale
INDEX TO EXHIBITS
(g)(1) Investment Management Agreement
(g)(2) Waiver Reliance Letter
(g)(3) Sub-Investment Advisory Agreement
(i) Deferred Compensation Plan for Independent Trustees
(j) Custodian Agreement
(k)(l) Transfer Agency Agreement
(p) Initial Subscription Agreement
(r)(3) Code of Ethics of J.J.B. Hilliard, W.L. Lyons*