As filed with the Securities and Exchange Commission on June 19, 2001
Securities Act Registration No. 333-58228
Investment Company Registration No. 811-10331
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
[X]
Pre-Effective Amendment No. 2
Post-Effective Amendment No. [_]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
[X]
AMENDMENT NO. 2
----------------
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 Simpson Thacher & Bartlett
LLP 425 Lexington Avenue
Four Times Square New York, New York 10017
New York, New York 10036
----------------
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
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Proposed
Proposed Maximum Aggregate
Amount Being Maximum Offering Offering Amount of
Title of Securities Being Registered Registered Price per Unit Price (/1/) Registration Fee
----------------------------------------------------------------------------------------------------------
Common Shares, $.001 par
value.................. 4,000,000 shares $15.00 $60,000,000 $15,000 (/2/)
(/1/)Estimated solely for the purpose of calculating the registration fee.
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--------------------------------------------------------------------------------
(/2/)$375 previously paid.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section
8(a), may determine.
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BLACKROCK 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; Summary of Trust
Expenses
Item 4. Financial Highlights.................. Not Applicable
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 The Trust; The Trust's Investments;
Registrant............................ Risks; Description of Shares; Certain
Provisions in the Declaration of Trust
Item 9. Management............................ Management of the Trust; Custodian and
Transfer Agent
Item 10. Capital Stock, Long-Term Debt, and
Other Securities...................... Description of Shares; Distributions;
Dividend Reinvestment Plan; Certain
Provisions in the Declaration of Trust;
Tax Matters
Defaults and Arrears on Senior
Item 11. 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
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
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;
Portfolio Transactions
Item 18. Management............................ Management of the Trust; Portfolio
Transactions
Item 19. Control Persons and Principal Holders
of Securities......................... Management of the Trust
Investment Advisory and Other
Item 20. Services.............................. Management of the Trust; Experts
Brokerage Allocation and Other
Item 21. Practices............................. Portfolio Transactions
Item 22. Tax Status............................ Tax Matters; Distributions
Item 23. Financial Statements.................. Report of Independent Auditors
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 JUNE 19, 2001
PROSPECTUS
[LOGO OF BLACKROCK]
4,000,000 Shares
BlackRock California Municipal Income Trust
Common Shares
$15.00 per share
--------
Investment Objective. BlackRock California Municipal Income Trust (the
"Trust") is a newly organized, non-diversified, closed-end management
investment company. The Trust's investment objective is to provide current
income exempt from regular Federal and California income taxes.
Portfolio Contents. The Trust will invest primarily in municipal bonds that
pay interest that is exempt from regular Federal 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 Investor Service, Inc. ("Moody's"), Standard &
Poors Ratings Group ("S&P") or Fitch IBCA, Inc. ("Fitch")) or bonds that are
unrated but judged to be of comparable quality by the Trust's investment
advisor and sub-advisor. The Trust may invest up to 20% of its total assets in
municipal bonds that at the time of investment are rated Ba/BB or B by Moody's,
S&P or Fitch or bonds that are unrated but judged to be of comparable quality
by the Trust's investment advisor and sub-advisor. Bonds of below investment
grade quality are regarded as having predominately speculative characteristics
with respect to the issuer's capacity to pay interest and repay principal, and
are commonly referred to as "junk bonds." The Trust intends to 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.
No Prior History. Because the Trust is newly organized, its shares have no
history of public trading. Shares of closed-end investment companies frequently
trade at a discount from their net asset value. This risk may be greater for
investors expecting to sell their shares in a relatively short period after
completion of the public offering. The Trust's common shares have been approved
for listing on the New York Stock Exchange under the symbol "BFZ".
Preferred Shares. Within approximately one to three months after completion
of this offering of common shares, the Trust intends to offer preferred shares
representing approximately 38% of the Trust's capital immediately after the
issuance of such preferred shares. There can be no assurance, however, that
preferred shares representing such percentage of the Trust's capital will
actually be issued. The use of preferred shares to leverage the common shares
can create risks.
--------
Investing in the common shares involves certain risks.
See "Risks" on page 18 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------
Per Share Total
--------- -----
Public Offering Price................................... $15.00 $
Sales Load.............................................. $ 0.675 $
Proceeds, before expenses, to the Trust................. $14.325 $
The underwriters expect to deliver the common shares to purchasers on or
about July , 2001.
--------
Salomon Smith Barney Merrill Lynch & Co.
A.G. Edwards & Sons, Inc. Prudential Securities
UBS Warburg
Gruntal & Co., L.L.C. Raymond James
Wedbush Morgan Securities, Inc.
July , 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 July , 2001,
containing additional information about the Trust, has been filed with the
Securities and Exchange Commission and is incorporated by reference in its
entirety into this prospectus. You may request a free copy of the Statement of
Additional Information, the table of contents of which is on page 38 of this
prospectus, by calling (888) 825-2257 or by writing to the Trust, or obtain a
copy (and other information regarding the Trust) from the Securities and
Exchange Commission web site (http://www.sec.gov).
The Trust's common 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 underwriters named in this prospectus may purchase up to additional
common shares at the public offering price within 45 days from the date of this
prospectus to cover over-allotments.
2
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 contained in this prospectus is accurate as of any date
other than the date on the front of this prospectus.
----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 4
Summary of Trust Expenses ................................................. 10
The Trust ................................................................. 12
Use of Proceeds ........................................................... 12
The Trust's Investments ................................................... 12
Preferred Shares and Leverage ............................................. 16
Risks ..................................................................... 18
How the Trust Manages Risk ................................................ 21
Management of the Trust ................................................... 22
Net Asset Value ........................................................... 26
Distributions ............................................................. 26
Dividend Reinvestment Plan ................................................ 26
Description of Shares ..................................................... 28
Certain Provisions in the Agreement and Declaration of Trust .............. 30
Closed-End Trust Structure ................................................ 31
Repurchase of Shares ...................................................... 32
Tax Matters ............................................................... 32
Underwriting .............................................................. 35
Custodian and Transfer Agent .............................................. 37
Legal Opinions ............................................................ 37
Table of Contents for the Statement of Additional Information ............. 38
----------------
Until August , 2001 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
PRIVACY PRINCIPLES OF THE TRUST
The Trust is committed to maintaining the privacy of 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 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 the
shareholders to employees of the Trust's investment advisor and its affiliates
with a legitimate business need for the information. The Trust maintains
physical, electronic and procedural safeguards designed to protect the non-
public personal information of its shareholders.
3
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the information
that you should consider before investing in our common shares. You should
review the more detailed information contained in this prospectus and in the
Statement of Additional Information.
The Trust...................
BlackRock California Municipal Income Trust is a
newly organized, non-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 Offering................
The Trust is offering common shares of
beneficial interest at $15.00 per share through a
group of underwriters led by Salomon Smith Barney
Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, A.G. Edwards & Sons, Inc.,
Prudential Securities Incorporated, UBS Warburg
LLC, Gruntal & Co., L.L.C., Raymond James &
Associates, Inc. and Wedbush Morgan Securities,
Inc. The common shares of beneficial interest are
called "common shares" in the rest of this
prospectus. You must purchase at least 100 common
shares ($1,500). The Trust has given the
underwriters an option to purchase up to
additional common shares to cover orders in
excess of common shares. BlackRock Advisors,
Inc. has agreed to pay organizational expenses
and offering costs (other than sales load) that
exceed $0.03 per share. See "Underwriting."
The Trust's investment objective is to provide
Investment Objective... current income exempt from regular Federal and
California income taxes.
Investment Policies.........
The Trust will invest primarily in municipal
bonds that pay interest that is exempt from
regular Federal 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 or 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
4
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."
Special Tax
Considerations.............. While exempt-interest dividends are excluded from
gross income for Federal income tax purposes,
they may be subject to the Federal alternative
minimum tax in certain circumstances.
Distributions of any capital gain or other
taxable income will be taxable to shareholders.
The Trust may not be a suitable investment for
investors subject to the Federal alternative
minimum tax or who would become subject to such
tax by investing in the Trust. See "Tax Matters."
Proposed Offering of
Preferred Shares............
Approximately one to three months after
completion of this offering of the common shares
(subject to market conditions), the Trust intends
to offer preferred shares of beneficial interest
("Preferred Shares") that will represent
approximately 38% of the Trust's capital after
their issuance. The issuance of Preferred Shares
will leverage the common shares. Leverage
involves greater risks. The Trust's leveraging
strategy may not be successful. See "Risks--
Leverage Risk." The money the Trust obtains by
selling the Preferred Shares will be invested in
long-term municipal bonds that will generally pay
fixed rates of interest over the life of the
bonds. The Preferred Shares will pay adjustable
rate dividends based on shorter-term interest
rates. The adjustment period could be as short as
a day or as long as a year or more. If the rate
of return, after the payment of applicable
expenses of the Trust, on the long-term bonds
purchased by the Trust is greater than the
dividends paid by the Trust on the Preferred
Shares, the Trust will generate more income by
investing the proceeds of the Preferred Shares
than it will need to pay dividends on the
Preferred Shares. If so, the excess income will
be used to pay higher dividends to holders of
common shares. However, the Trust cannot assure
you that the issuance of Preferred Shares will
result in a higher yield on the common shares.
Once Preferred Shares are issued, the net asset
value and market price of the common shares and
the yield to holders of common shares will be
more volatile. See "Preferred Shares and
Leverage" and "Description of Shares--Preferred
Shares."
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
5
the Trust. Throughout the prospectus, we
sometimes refer to BlackRock Advisors and
BlackRock Financial Management collectively as
"BlackRock." BlackRock Advisors will receive an
annual fee, payable monthly, in a maximum amount
equal to 0.60% of the average weekly value of the
Trust's Managed Assets. "Managed Assets" means
the total assets of the Trust (including any
assets attributable to any Preferred Shares that
may be outstanding) minus the sum of accrued
liabilities (other than debt representing
financial leverage). The liquidation preference
of the Preferred Shares is not a liability.
BlackRock Advisors has voluntarily agreed to
waive receipt of a portion of the investment
management fee or other expenses of the Trust in
the amount of 0.25% of the average weekly values
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).
See "Management of the Trust."
Distributions............... The Trust intends to distribute monthly all or a
portion of its net investment income to holders
of common shares. We expect to declare the
initial monthly dividend on the Trust's common
shares approximately 45 days after completion of
this offering and to pay that initial monthly
dividend approximately 60 to 90 days after
completion of this offering. Unless an election
is made to receive dividends in cash,
shareholders will automatically have all
dividends and distributions reinvested in common
shares through the receipt of additional unissued
but authorized common shares from the Trust or by
purchasing common shares in the open market
through the Trust's Dividend Reinvestment Plan.
See "Dividend Reinvestment Plan."
The Trust will distribute to holders of its
common shares monthly dividends of all or a
portion of its tax-exempt interest income after
payment of dividends on any Preferred Shares of
the Trust which may be outstanding. If the Trust
realizes a capital gain or other taxable income,
it will be required to allocate such income
between the common shares and the Preferred
Shares in proportion to the total distributions
paid to each class for the year in which the
income is realized. See "Distributions" and
"Preferred Shares and Leverage."
Listing.....................
The common shares have been approved for listing
on the New York Stock Exchange, subject to notice
of issuance, under the trading or "ticker" symbol
"BFZ". See "Description of Shares--Common
Shares."
Custodian and Transfer
Agent....................... State Street Bank and Trust Company will serve as
the Trust's Custodian and EquiServe Trust
Company, N.A., will serve as the Trust's Transfer
Agent. See "Custodian and Transfer Agent."
Market Price of Shares...... Shares of closed-end investment companies
frequently trade at prices lower than their net
asset value. Shares of closed-end investment
companies like the Trust that invest
predominately in
6
investment grade municipal bonds have during some
periods traded at prices higher than their net
asset value and during other periods traded at
prices lower than their net asset value. The
Trust cannot assure you that its common shares
will trade at a price higher than or equal to net
asset value. The Trust's net asset value will be
reduced immediately following this offering by
the sales load and the amount of the organization
and offering expenses paid by the Trust. See "Use
of Proceeds." In addition to net asset value, the
market price of the Trust's common shares may be
affected by such factors as dividend levels,
which are in turn affected by expenses, call
protection for portfolio securities, dividend
stability, portfolio credit quality, liquidity
and market supply and demand. See "Preferred
Shares and Leverage," "Risks," "Description of
Shares" and the section of the Statement of
Additional Information with the heading
"Repurchase of Common Shares." The common shares
are designed primarily for long-term investors
and you should not purchase common shares of the
Trust if you intend to sell them shortly after
purchase.
Special Risk No Operating History. The Trust is a newly
Considerations.............. organized closed-end investment company with no
history of operations.
Market Discount Risk. Shares of closed-end
management investment companies frequently trade
at a discount from their net asset value.
Interest Rate Risk. Generally, when market
interest rates fall, bond prices rise, and vice
versa. Interest rate risk is the risk that the
municipal bonds in the Trust's portfolio will
decline in value because of increases in market
interest rates. The prices of longer-term bonds
fluctuate more than prices of shorter-term bonds
as interest rates change. Because the Trust will
invest primarily in long-term bonds, net asset
value and market price per share of the common
shares will fluctuate more in response to changes
in market interest rates than if the Trust
invested primarily in shorter-term bonds. The
Trust's use of leverage, as described below, will
tend to increase common share interest rate risk.
Credit Risk. Credit risk is the risk that one or
more municipal bonds in the Trust's portfolio
will decline in price, or fail to pay interest or
principal when due, because the issuer of the
bond experiences a decline in its financial
status. Under normal market conditions, the Trust
will invest at least 80% of its total assets in
municipal bonds rated Baa/BBB or higher. The
Trust may invest up to 20% (measured at the time
of investment) of its total assets in municipal
bonds that are rated Ba/BB or B or that are
unrated but judged to be of comparable quality by
BlackRock. 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. Municipal bonds of below
investment grade quality are predominantly
speculative with respect to the issuer's capacity
to
7
pay interest and repay principal when due and
therefore involve a greater risk of default.
Concentration in California Issuers. The Trust's
policy of investing primarily in municipal
obligations of issuers located in California
makes the Trust more susceptible to adverse
economic, political or regulatory occurrences
affecting those issuers. For a discussion of
economic and other conditions in California, see
"The Trusts Investments--Municipal Bonds--Risks
Relating to California Municipal Bonds."
Economic Sector Risk. The Trust may invest 25% or
more of its total assets in municipal obligations
of issuers in the same economic sector, such as
hospitals or life care facilities and
transportation related issuers. This may make the
Trust more susceptible to adverse economic,
political or regulatory occurrences affecting a
particular economic sector.
Leverage Risk. The use of leverage through the
issuance of Preferred Shares creates an
opportunity for increased common share net
income, but also creates risks for the holders of
common shares. The Trust's leveraging strategy
may not be successful. We anticipate that
Preferred Shares will pay adjustable rate
dividends based on shorter-term interest rates
that would be periodically reset. The Trust will
invest the proceeds of the Preferred Shares
offering in long-term, typically fixed rate,
municipal bonds. So long as the Trust's municipal
bond portfolio provides a higher rate of return,
net of Trust expenses, than the Preferred Share
dividend rate, as reset periodically, the
leverage will cause the holders of common shares
to receive a higher current rate of return than
if the Trust were not leveraged. If, however,
long- and/or short-term rates rise, the Preferred
Share dividend rate could exceed the rate of
return on long-term bonds held by the Trust that
were acquired during periods of generally lower
interest rates, reducing return to the holders of
common shares. Leverage creates two major types
of risks for the holders of common shares:
. the likelihood of greater volatility of net
asset value and market price of the common
shares because changes in the value of the
Trust's bond portfolio, including bonds bought
with the proceeds of the Preferred Shares
offering, are borne entirely by the holders of
common shares; and
. the possibility either that common share
income will fall if the Preferred Share
dividend rate rises or that common share
income will fluctuate because the Preferred
Share dividend rate varies.
Municipal Bond Market Risk. 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
8
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.
Non-Diversification. The Trust has registered as
a "non-diversified" investment company under the
Investment Company Act of 1940, as amended (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.
Anti-takeover Provisions. The Trust's Agreement
and Declaration of Trust, as amended and
restated, includes provisions that could limit
the ability of other entities or persons to
acquire control of the Trust or convert the Trust
to open-end status. These provisions could
deprive the holders of common shares of
opportunities to sell their common shares at a
premium over the then current market price of the
common shares or at net asset value.
9
SUMMARY OF TRUST EXPENSES
The following table shows Trust expenses as a percentage of net assets
attributable to common shares.
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price
)....................................................... 4.50%
Dividend Reinvestment Plan Fees.......................... None*
Percentage of Net
Assets Attributable
to Common Shares**
-------------------
Annual Expenses
Management Fees............................................ 0.97%
Fee and Expense Waiver Years 1-5........................... (0.40%)***
-----
Net Management Fees Years 1-5.............................. 0.57%***
Other Expenses............................................. 0.32%
-----
Total Net Annual Expenses Years 1-5........................ 0.89%
=====
--------
* You will be charged a $2.50 service charge and pay brokerage charges if
you direct the Plan Agent (defined below) to sell your common shares held
in a dividend reinvestment account.
** Stated as a percentage of the Trust's total Managed Assets assuming the
issuance of Preferred Shares in an amount equal to 38% of the Trust's
capital (after their issuance), the Trust's expenses would be estimated as
set out in the table below. "Managed Assets" means the total assets of the
Trust (including any assets attributable to any Preferred Shares that may
be outstanding) minus the sum of accrued liabilities (other than debt
representing financial leverage). The liquidation preference of the
Preferred Shares is not a liability.
Percentage of Total
Managed Assets
-------------------
Annual Expenses
Management Fees.......................................... 0.60%
Fee and Expense Waiver Years 1-5......................... (0.25%)***
-----
Net Management Fees Years 1-5............................ 0.35%***
Other Expenses........................................... 0.20%
-----
Total Net Annual Expenses Years 1-5...................... 0.55%***
=====
*** BlackRock Advisors has voluntarily agreed to waive receipt of a portion
of the investment management fee or other expenses of the Trust in the
amount of 0.40% of average weekly net assets attributable to common
shares (0.25% of average weekly Managed Assets) for the first 5 years of
the Trust's operations, 0.32 (0.20%) in year 6, 0.24 (0.15%) in year 7,
0.16 (0.10%) in year 8 and 0.08 (0.05%) in year 9. Without the waiver,
"Total Net Annual Expenses Years 1-5" would be estimated to be 1.29% of
average weekly net assets attributable to the common shares total net
assets and 0.80% of average weekly Managed Assets attributable to common
shares. BlackRock Advisors has agreed to pay all organizational expenses
and offering costs (other than sales load) that exceed $0.03 per common
share (0.20% of the offering price).
The purpose of the table above and the example below is to help you
understand all fees and expenses that you, as a holder of common shares, would
bear directly or indirectly. The expenses shown in the table under "Other
Expenses" and "Total Net Annual Expenses Years 1-5" are based on estimated
amounts for the Trust's first year of operations and assume that the Trust
issues 11,666,666 common shares. If the Trust issues fewer common shares, all
other things being equal, these expenses would increase. See "Management of
the Trust" and "Dividend Reinvestment Plan."
10
The following example illustrates the expenses (including the sales load of
$45) that you would pay on a $1,000 investment in common shares, assuming (1)
total net annual expenses of 0.89% of net assets attributable to common shares
in years 1 through 5, increasing to 1.29% in year 10 and (2) a 5% annual
return:(/1/)
1 Year 3 Years 5 Years 10 Years(/2/)
------ ------- ------- -------------
Total Expenses Incurred.................... $54 $73 $94 $175
--------
(/1/)The example should not be considered a representation of future expenses.
The example assumes that the estimated "Other Expenses" set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at net asset value. Actual expenses may be greater or less than
those assumed. Moreover, the Trust's actual rate of return may be greater
or less than the hypothetical 5% return shown in the example.
(/2/)Assumes waiver of fees and expenses of 0.32% of average weekly net assets
attributable to common shares in year 6 (0.20% of average weekly Managed
Assets), 0.24% (0.15%) in year 7, 0.16% (0.10%) in year 8 and 0.08%
(0.05%) in year 9 and assumes that Preferred Shares remain 38% of the
Trust's capital throughout the periods reflected. BlackRock Advisors has
not agreed to waive any portion of its fees and expenses beyond July 31,
2010. See "Management of the Fund--Investment Management Agreement."
11
THE TRUST
The Trust is a newly 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 State of Delaware. As a newly organized entity, the Trust has
no operating history. 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.
USE OF PROCEEDS
The net proceeds of the offering of common shares will be approximately
$ ($ if the underwriters exercise the over-allotment option in
full) after payment of the estimated organization and 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 investment objective and policies within
three months after the completion of the offering. Pending such investment, it
is anticipated that the proceeds will be invested in short-term, tax-exempt or
taxable investment grade securities.
THE TRUST'S INVESTMENTS
Investment Objective and Policies
The Trust's investment objective is to provide current income exempt from
regular Federal and California income taxes.
The Trust will invest primarily in municipal bonds that pay interest that is
exempt from regular Federal 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. 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 A 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 invest in securities that pay
12
interest that is not exempt from California income tax when, in the judgement
of BlackRock, the return to the shareholders after payment of applicable
California income tax would be higher than the return available from comparable
securities that pay interest that is, or make other distributions that are,
exempt from California income tax. See "--Other Investment Companies," "--Tax-
Exempt Preferred Shares" and "--Initial Portfolio Composition."
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 taxes.
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. If the Trust
invests in taxable short-term investments, a portion of your dividends would be
subject to regular Federal and California income taxes.
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 Shares--Preferred Shares--Voting Rights" and the
Statement of Additional Information under "Description of Shares--Preferred
Shares" 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
13
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 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
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 tax, 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
14
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 common shares or 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 common shares
would therefore be subject to duplicative expenses to the extent the Trust
invests in other investment companies.
15
BlackRock will take expenses into account when evaluating the investment merits
of an investment in an investment company relative to available municipal bond
investments. In addition, the securities of other investment companies may also
be leveraged and will therefore be subject to the same leverage risks to which
the Trust is subject. As described in this prospectus in the sections entitled
"Risks" and "Preferred Shares and Leverage," 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 will treat investments in tax-exempt preferred
shares as investments in municipal bonds.
Initial Portfolio Composition
If current market conditions persist, the Trust expects that approximately
100% of its initial portfolio will consist of investment grade quality
municipal bonds, rated as such at the time of investment, meaning that such
bonds are rated by national rating agencies within the four highest grades or
are unrated but judged to be of comparable quality by BlackRock (approximately
80% in Aaa/AAA; 10% in A; and 10% in Baa/BBB). BlackRock generally expects to
select obligations that may not be redeemed at the option of the issuer for
approximately ten years from the date of purchase by the Trust. See "--
Investment Objective and Policies."
PREFERRED SHARES AND LEVERAGE
Approximately one to three months after the completion of the offering of
the common shares, subject to market conditions, the Trust intends to offer
Preferred Shares representing approximately 38% of the Trust's capital
immediately after the issuance of the Preferred Shares. The Preferred Shares
will have complete priority upon distribution of assets over the common shares.
The issuance of Preferred Shares will leverage the common shares. Leverage
involves greater risks. The Trust's leveraging strategy may not be successful.
Although the timing and other terms of the offering of Preferred Shares and the
terms of the Preferred Shares will be determined by the Trust's board of
trustees, the Trust expects to invest the proceeds of the Preferred Shares
offering in long-term municipal bonds. The Preferred Shares will pay adjustable
rate dividends based on
16
shorter-term interest rates, which would be redetermined periodically by an
auction process. The adjustment period for Preferred Share dividends could be
as short as one day or as long as a year or more. So long as the Trust's
portfolio is invested in securities that provide a higher rate of return than
the dividend rate of the Preferred Shares, after taking expenses into
consideration, the leverage will cause you to receive a higher current rate of
income than if the Trust were not leveraged.
Changes in the value of the Trust's bond portfolio, including bonds bought
with the proceeds of the Preferred Shares offering, will be borne entirely by
the holders of common shares. If there is a net decrease, or increase, in the
value of the Trust's investment portfolio, the leverage will decrease, or
increase (as the case may be), the net asset value per common share to a
greater extent than if the Trust were not leveraged. During periods in which
the Trust is using leverage, the fees paid to BlackRock for advisory and sub-
advisory services will be higher than if the Trust did not use leverage because
the fees paid will be calculated on the basis of the Trust's total assets,
including the gross proceeds from the issuance of Preferred Shares.
For tax purposes, the Trust is currently required to allocate tax-exempt
interest income, net capital gain and other taxable income, if any, between the
common shares and Preferred Shares in proportion to total distributions paid to
each class for the year in which the net capital gain or other taxable income
is realized. If net capital gain or other taxable income is allocated to
Preferred Shares, instead of solely tax-exempt income, the Trust will likely
have to pay higher total dividends to Preferred Shareholders or make special
payments to Preferred Shareholders to compensate them for the increased tax
liability. This would reduce the total amount of dividends paid to the holders
of common shares, but would increase the portion of the dividend that is tax-
exempt. If the increase in dividend payments or the special payments to
Preferred Shareholders are not entirely offset by a reduction in the tax
liability of, and an increase in the tax-exempt dividends received by, the
holders of common shares, the advantage of the Trust's leveraged structure to
holders of common shares will be reduced.
Under the Investment Company Act, the Trust is not permitted to issue
Preferred Shares unless immediately after such issuance the value of the
Trust's total assets is at least 200% of the liquidation value of the
outstanding Preferred Shares (i.e., the liquidation value may not exceed 50% of
the Trust's total assets). In addition, the Trust is not permitted to declare
any cash dividend or other distribution on its common shares unless, at the
time of such declaration, the value of the Trust's total assets is at least
200% of such liquidation value. If Preferred Shares are issued, the Trust
intends, to the extent possible, to purchase or redeem Preferred Shares from
time to time to the extent necessary in order to maintain coverage of any
Preferred Shares of at least 200%. In addition, as a condition to obtaining
ratings on the Preferred Shares, the terms of any Preferred Shares issued are
expected to include asset coverage maintenance provisions which will require
the redemption of the Preferred Shares in the event of non-compliance by the
Trust and may also prohibit dividends and other distributions on the common
shares in such circumstances. In order to meet redemption requirements, the
Trust may have to liquidate portfolio securities. Such liquidations and
redemptions would cause the Trust to incur related transaction costs and could
result in capital losses to the Trust. Prohibitions on dividends and other
distributions on the common shares could impair the Trust's ability to qualify
as a regulated investment company under the Internal Revenue Code of 1986 as
amended, (the "Code"). If the Trust has Preferred Shares outstanding, two of
the Trust's trustees will be elected by the holders of Preferred Shares voting
separately as a class. The remaining trustees of the Trust will be elected by
holders of common shares and Preferred Shares voting together as a single
class. In the event the Trust failed to pay dividends on Preferred Shares for
two years, holders of Preferred Shares would be entitled to elect a majority of
the trustees of the Trust.
The Trust will be subject to certain restrictions imposed by guidelines of
one or more rating agencies that may issue ratings for Preferred Shares issued
by the Trust. These guidelines are expected to impose asset coverage or
portfolio composition requirements that are more stringent than those imposed
on the Trust by the Investment Company Act. It is not anticipated that these
covenants or guidelines will impede BlackRock from managing the Trust's
portfolio in accordance with the Trust's investment objective and policies.
17
The Trust may also borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Trust securities.
Assuming that the Preferred Shares will represent approximately 38% of the
Trust's capital and pay dividends at an annual average rate of 3.00%, the
income generated by the Trust's portfolio (net of estimated expenses) must
exceed 1.14% in order to cover the dividend payments and other expenses
specifically related to the Preferred Shares. Of course, these numbers are
merely estimates used for illustration. Actual Preferred Share dividend rates
will vary frequently and may be significantly higher or lower than the rate
estimated above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on common share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of bonds held in the
Trust's portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment
portfolio returns are hypothetical figures and are not necessarily indicative
of the investment portfolio returns experienced or expected to be experienced
by the Trust. See "Risks." The table further reflects the issuance of Preferred
Shares representing 38% of the Trust's total capital, a 5.03% yield on the
Trust's investment portfolio, net of expenses, and the Trust's currently
projected annual Preferred Share dividend rate of (3.00%).
Assumed Portfolio Total Return (Net of
Expenses).............................. (10)% (5)% 0 % 5% 10%
Common Share Total Return............... (17.97)% (9.90)% (1.84)% 6.23% 14.29%
Common share total return is composed of two elements--the common share
dividends paid by the Trust (the amount of which is largely determined by the
net investment income of the Trust after paying dividends on Preferred Shares)
and gains or losses on the value of the securities the Trust owns. As required
by Securities and Exchange Commission rules, the table assumes that the Trust
is more likely to suffer capital losses than to enjoy capital appreciation. For
example, to assume a total return of 0% the Trust must assume that the tax-
exempt interest it receives on its municipal bond investments is entirely
offset by losses in the value of those bonds.
Unless and until Preferred Shares are issued, the common shares will not be
leveraged and this section will not apply.
RISKS
The net asset value of the common shares will fluctuate with and be affected
by, among other things, interest rate risk, credit risk, reinvestment risk and
leverage risk, and an investment in common shares will be subject to market
discount risk, inflation risk and municipal bond market risk, each of which is
more fully described below.
Newly Organized. The Trust is a newly organized, non-diversified, closed-end
management investment company and has no operating history.
Market Discount Risk. As with any stock, the price of the Trust's shares
will fluctuate with market conditions and other factors. If shares are sold,
the price received may be more or less than the original investment. Net asset
value will be reduced immediately following the initial offering by the amount
of the sales load and organizational and selling expenses paid by the Trust.
Common shares are designed for long-term investors and should not be treated as
trading vehicles. Shares of closed-end management investment companies
frequently trade at a discount from their net asset value. The Trust's shares
may trade at a price that is less than the initial offering price. This risk
may be greater for investors who sell their shares in a relatively short period
of time after completion of the initial offer. The Trust's initial net asset
value will be reduced by a 4.5% sales load charge.
18
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. This means that the net asset
value of the common shares will fluctuate with interest rate changes and the
corresponding changes in the value of the Trust's municipal bond holdings. The
value of the longer-term bonds in which the Trust generally invests fluctuates
more in response to changes in interest rates than does the value of shorter-
term bonds. Because the Trust will invest primarily in long-term bonds, the net
asset value and market price per share of the common shares will fluctuate more
in response to changes in market interest rates than if the Trust invested
primarily in shorter-term bonds. The Trust's use of leverage, as described
below, will tend to increase common share interest rate risk.
Credit Risk. Credit risk is the risk that an issuer of a municipal bond will
become unable to meet its obligation to make interest and principal payments.
In general, lower rated municipal bonds carry a greater degree of risk that the
issuer will lose its ability to make interest and principal payments, which
could have a negative impact on the 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, and 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.
19
Reinvestment Risk. Reinvestment risk is the risk that income from the
Trust's bond portfolio will decline if and when the Trust invests the proceeds
from matured, traded, prepaid or called bonds at market interest rates that are
below the portfolio's current earnings rate. A decline in income could affect
the common shares' market price or their overall returns.
Leverage Risk. Leverage risk is the risk associated with the issuance of the
Preferred Shares to leverage the common shares. There is no assurance that the
Trust's leveraging strategy will be successful. Once the Preferred Shares are
issued, the net asset value and market value of the common shares will be more
volatile, and the yield to the holders of common shares will tend to fluctuate
with changes in the shorter-term dividend rates on the Preferred Shares. If the
dividend rate on the Preferred Shares approaches the net rate of return on the
Trust's investment portfolio, the benefit of leverage to the holders of the
common shares would be reduced. If the dividend rate on the Preferred Shares
exceeds the net rate of return on the Trust's portfolio, the leverage will
result in a lower rate of return to the holders of common shares than if the
Trust were not leveraged. Because the long-term bonds included in the Trust's
portfolio will typically pay fixed rates of interest while the dividend rate on
the Preferred Shares will be adjusted periodically, this could occur even when
both long-term and short-term municipal rates rise. In addition, the Trust will
pay (and the holders of common shares will bear) any costs and expenses
relating to the issuance and ongoing maintenance of the Preferred Shares.
Accordingly, the Trust cannot assure you that the issuance of Preferred Shares
will result in a higher yield or return to the holders of the common shares.
Similarly, any decline in the net asset value of the Trust's investments
will be borne entirely by the holders of common shares. Therefore, if the
market value of the Trust's portfolio declines, the leverage will result in a
greater decrease in net asset value to the holders of common shares than if the
Trust were not leveraged. This greater net asset value decrease will also tend
to cause a greater decline in the market price for the common shares. The Trust
might be in danger of failing to maintain the required 200% asset coverage or
of losing its ratings on the Preferred Shares or, in an extreme case, the
Trust's current investment income might not be sufficient to meet the dividend
requirements on the Preferred Shares. In order to counteract such an event, the
Trust might need to liquidate investments in order to fund a redemption of some
or all of the Preferred Shares. Liquidation at times of low municipal bond
prices may result in capital loss and may reduce returns to the holders of
common shares.
While the Trust may from time to time consider reducing leverage in response
to actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Trust will actually reduce
leverage in the future or that any reduction, if undertaken, will benefit the
holders of common shares. Changes in the future direction of interest rates are
very difficult to predict accurately. If the Trust were to reduce leverage
based on a prediction about future changes to interest rates, and that
prediction turns out to be incorrect, the reduction in leverage would likely
operate to reduce the income and/or total returns to holders of common shares
relative to the circumstance where the Trust had not reduced leverage. The
Trust may decide that this risk outweighs the likelihood of achieving the
desired reduction to volatility in income and share price if the prediction
were to turn out to be correct, and determine not to reduce leverage as
described above.
The Trust may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. This additional leverage may in certain market
conditions reduce the net asset value of the Trust's common shares and the
returns to the holders of common 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 increases, the real value of the common shares
and distributions on those shares can decline. In addition, during any periods
of rising inflation, Preferred Share dividend rates would likely increase,
which would tend to further reduce returns to the holders of common shares.
20
Economic Sector Risk. The Trust may invest 25% or more of its total assets
in municipal obligations of issuers in the same economic sector, including
without limitation the following: lease rental obligations of state and local
authorities; obligations dependent on annual appropriations by a state's
legislature for payment; obligations of state and local housing finance
authorities, municipal utilities systems or public housing authorities;
obligations of hospitals or life care facilities; and industrial development or
pollution control bonds issued for electric 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
economic sector. For example, health care related issuers are susceptible to
Medicare, Medicaid and other third party payor reimbursement policies, and
national and state health care legislation. As concentration increases, so does
the potential for fluctuation in the net asset value of the Trust's common
shares.
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.
HOW THE TRUST MANAGES RISK
Investment Limitations
The Trust has adopted certain investment limitations designed to limit
investment risk. These limitations are fundamental and may not be changed
without the approval of the holders of a majority of the outstanding common
shares and, if issued, Preferred Shares voting together as a single class, and
the approval of the holders of a majority of the Preferred Shares voting as a
separate class. Among other restrictions, the Trust may not invest more than
25% of total Trust assets in securities of issuers in any one industry, except
that this limitation does not apply to municipal bonds backed by the assets and
revenues of governments or political subdivisions of governments.
The Trust may become subject to guidelines which are more limiting than its
investment restrictions in order to obtain and maintain ratings from Moody's or
S&P on the Preferred Shares that it intends to issue. The Trust does not
anticipate that such guidelines would have a material adverse effect on the
Trust's common shareholders or the Trust's ability to achieve its investment
objective. See "Investment Objective and Policies" in the Statement of
Additional Information for a complete list of the fundamental and non-
fundamental investment policies of the Trust.
Quality Investments
The Trust will invest at least 80% of its total assets in bonds of
investment grade quality at the time of investment. Investment grade quality
means that such bonds are rated by national rating agencies 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.
Limited Issuance of Preferred Shares
Under the Investment Company Act, the Trust could issue Preferred Shares
having a total liquidation value (original purchase price of the shares being
liquidated plus any accrued and unpaid dividends) of up to one-half of the
value of the total net assets of the Trust. If the total liquidation value of
the Preferred Shares was ever more than one-half of the value of the Trust's
total net assets, the Trust would not be able to declare dividends on the
common shares until the liquidation value, as a percentage of the Trust's
assets, was reduced. The Trust intends to issue Preferred Shares representing
about 38% of the Trust's total net assets immediately after the
21
time of issuance if the Trust sells all common shares discussed in this
prospectus. This higher than required margin of net asset value provides a
cushion against later fluctuations in the value of the Trust's portfolio and
will subject common shareholders to less income and net asset value volatility
than if the Trust were more leveraged. The Trust intends to purchase or redeem
Preferred Shares, if necessary, to keep the liquidation value of the Preferred
Shares below one-half of the value of the Trust's total net assets.
Management of Investment Portfolio and Capital Structure to Limit Leverage Risk
The Trust may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Trust anticipates such an increase
or change) and the Trust's leverage begins (or is expected) to adversely affect
common shareholders. In order to attempt to offset such a negative impact of
leverage on common shareholders, the Trust may shorten the average maturity of
its investment portfolio (by investing in short-term, high quality securities)
or may extend the maturity of outstanding Preferred Shares. The Trust may also
attempt to reduce the leverage by redeeming or otherwise purchasing Preferred
Shares. As explained above under "Risks--Leverage Risk," the success of any
such attempt to limit leverage risk depends on BlackRock's ability to
accurately predict interest rate or other market changes. Because of the
difficulty of making such predictions, the Trust may never attempt to manage
its capital structure in the manner described above.
If market conditions suggest that additional leverage would be beneficial,
the Trust may sell previously unissued Preferred Shares or Preferred Shares
that the Trust previously issued but later repurchased.
Currently, the Trust may not invest in inverse floating securities, which
are securities that pay interest at rates that vary inversely with changes in
prevailing short-term tax-exempt interest rates and which represent a leveraged
investment in an underlying municipal bond. This restriction is a non-
fundamental policy of the Trust that may be changed by vote of the Trust's
board of trustees.
Hedging Strategies
The Trust may use various investment strategies designed to limit the risk
of bond price fluctuations and to preserve capital. These hedging strategies
include using financial futures contracts, options on financial futures or
options based on either an index of long-term municipal securities or on
taxable debt securities whose prices, in the opinion of BlackRock, correlate
with the prices of the Trust's investments. Successful implementation of most
hedging strategies would generate taxable income and the Trust has no present
intention to use these strategies.
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 $201.6 billion of assets under
management as of March 31, 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
22
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 over $16.2 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 regular Federal 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 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 Financial Management 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. Mr. McGinley joined Prudential Securities 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 and Sons Municipal Securities, Inc. Mr. Downs was one of the
original employees of William E. Simon and 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.
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.
23
In addition, BlackRock manages 14 municipal liquidity accounts valued at
approximately $4.2 billion. Currently, the team manages 13 closed-end municipal
funds with approximately $3.5 billion in managed assets as of March 31, 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 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.
24
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 (as a percentage
Ending of average weekly
July 31 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%
--------
* Including net assets attributable to Preferred Shares.
** 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.
25
NET ASSET VALUE
The net asset value of the common shares of the Trust will be computed based
upon the value of the Trust's portfolio securities and other assets. Net asset
value per common share will be determined as of the close of the regular
trading session on the New York Stock Exchange no less frequently than on the
Friday of each week and on the last business day of each month. In the event
that any Friday is not a business day, the net asset value will be calculated
on a date determined by BlackRock Advisors. The Trust calculates net asset
value per common share by subtracting the Trust's liabilities (including
accrued expenses, dividends payable and any borrowings of the Trust) and the
liquidation value of any outstanding Preferred Shares of the Trust from the
Trust's total assets (the value of the securities the Trust holds plus cash or
other assets, including interest accrued but not yet received) and dividing the
result by the total number of common shares of the Trust outstanding.
The Trust values its fixed income securities by using market quotations,
prices provided by market makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics
in accordance with procedures established by the board of trustees of the
Trust. A substantial portion of the Trust's fixed income investments will be
valued utilizing one or more pricing services approved by the Trust's board of
trustees. Debt securities having a remaining maturity of 60 days or less when
purchased and debt securities originally purchased with maturities in excess of
60 days but which currently have maturities of 60 days or less are valued at
cost adjusted for amortization of premiums and accretion of discounts. Any
securities or other assets for which current market quotations are not readily
available are valued at their fair value as determined in good faith under
procedures established by and under the general supervision and responsibility
of the Trust's board of trustees.
DISTRIBUTIONS
The Trust will distribute to holders of its common shares monthly dividends
of all or a portion of its tax-exempt interest income after payment of
dividends on any Preferred Shares of the Trust which may be outstanding. It is
expected that the initial monthly dividend on shares of the Trust's common
shares will be declared approximately 45 days and paid approximately 60 to 90
days after completion of this offering. The Trust expects that all or a portion
of any capital gain and other taxable income will be distributed at least
annually.
Various factors will affect the level of the Trust's income, including the
asset mix, the amount of leverage utilized by the Trust and the effects thereof
and the Trust's use of hedging. To permit the Trust to maintain a more stable
monthly distribution, the Trust may from time to time distribute less than the
entire amount of tax-exempt interest income earned in a particular period. The
undistributed tax-exempt interest income would be available to supplement
future distributions. As a result, the distributions paid by the Trust for any
particular monthly period may be more or less than the amount of tax-exempt
interest income actually earned by the Trust during the period. Undistributed
tax-exempt interest income will add to the Trust's net asset value and,
correspondingly, distributions from undistributed tax-exempt interest income
will deduct from the Trust's net asset value. Shareholders will automatically
have all dividends and distributions reinvested in common shares of the Trust
issued by the Trust or purchased in the open market in accordance with the
Trust's Dividend Reinvestment Plan unless an election is made to receive cash.
See "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN
Unless you elect to receive cash by contacting the Plan Agent, all dividends
declared for your common shares of the Trust will be automatically reinvested
by EquiServe Trust Company, N.A. (the "Plan Agent"), agent for shareholders in
administering the Trust's Dividend Reinvestment Plan (the "Plan"), in
additional common shares of the Trust. If you elect not to participate in the
Dividend Reinvestment Plan, you will receive all dividends in cash paid by
check mailed directly to you (or, if the shares are held in street or other
nominee
26
name, then to such nominee) by EquiServe Trust Company, N.A., as dividend
disbursing agent. You may elect not to participate in the Dividend Reinvestment
Plan and to receive all dividends in cash by sending written instructions or by
contacting EquiServe Trust Company, N.A., as dividend disbursing agent, at the
address set forth below. Participation in the Dividend Reinvestment Plan is
completely voluntary and may be terminated or resumed at any time without
penalty by contacting the Plan Agent before the dividend record date; otherwise
such termination or resumption will be effective with respect to any
subsequently declared dividend or other distribution.
The Plan Agent will open an account for each common shareholder under the
Plan in the same name in which such common shareholder's common shares are
registered. Whenever the Trust declares a dividend or capital gain distribution
(together, a "dividend") payable in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the equivalent in common
shares. The common shares will be acquired by the Plan Agent for the
participants' accounts, depending upon the circumstances described below,
either (i) through receipt of additional unissued but authorized common shares
from the Trust ("newly issued common shares") or (ii) by purchase of
outstanding common shares on the open market ("open-market purchases") on the
New York Stock Exchange or elsewhere. If, on the payment date for any dividend,
the net asset value per common share is equal to or less than the market price
per common share, the Plan Agent will invest the dividend amount in newly
issued common shares on behalf of the participants. The number of newly issued
common shares to be credited to each participant's account will be determined
by dividing the dollar amount of the dividend by the net asset value per common
share on the date the common shares are issued. If, on the payment date for any
dividend, the net asset value per common share is greater than the market
value, the Plan Agent will invest the dividend amount in common shares acquired
on behalf of the participants in open-market purchases. In the event of a
market discount on the payment date for any dividend, the Plan Agent will have
until the last business day before the next date on which the common shares
trade on an "ex-dividend" basis or 30 days after the payment date for such
dividend, whichever is sooner (the "last purchase date"), to invest the
dividend amount in common shares acquired in open-market purchases. It is
contemplated that the Trust will pay monthly income dividends. Therefore, the
period during which open-market purchases can be made will exist only from the
payment date of each dividend through the date before the next "ex-dividend"
date which typically will be approximately ten days. If, before the Plan Agent
has completed its open-market purchases, the market price per common share
exceeds the net asset value per common share, the average per common share
purchase price paid by the Plan Agent may exceed the net asset value of the
common shares, resulting in the acquisition of fewer common shares than if the
dividend had been paid in newly issued common shares on the dividend payment
date. Because of the foregoing difficulty with respect to open-market
purchases, the Plan provides that if the Plan Agent is unable to invest the
full dividend amount in open-market purchases during the purchase period or if
the market discount shifts to a market premium during the purchase period, the
Plan Agent may cease making open-market purchases and may invest the uninvested
portion of the dividend amount in newly issued common shares at the net asset
value per common share at the close of business on the last purchase date.
The Plan Agent maintains all shareholders' accounts in the Dividend
Reinvestment Plan and furnishes written confirmation of all transactions in the
accounts, including information needed by shareholders for tax records. Common
shares in the account of each Dividend Reinvestment Plan participant will be
held by the Plan Agent on behalf of the Dividend Reinvestment Plan participant,
and each shareholder proxy will include those shares purchased or received
pursuant to the Dividend Reinvestment Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
under the Dividend Reinvestment Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares for others who are the beneficial owners, the Plan Agent will administer
the Dividend Reinvestment Plan on the basis of the number of common shares
certified from time to time by the record shareholder's name and held for the
account of beneficial owners who participate in the Dividend Reinvestment Plan.
There will be no brokerage charges with respect to common shares issued
directly by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred in connection with open-market
27
purchases. The automatic reinvestment of dividends will not relieve
participants of any Federal, state or local income tax that may be payable (or
required to be withheld) on such dividends. See "Tax Matters."
The Trust reserves the right to amend or terminate the Dividend Reinvestment
Plan. There is no direct service charge to participants in the Dividend
Reinvestment Plan; however, the Trust reserves the right to amend the Dividend
Reinvestment Plan to include a service charge payable by the participants.
All correspondence concerning the Dividend Reinvestment Plan should be
directed to the Plan Agent at 150 Royall Street, Canton, Massachusetts 02021.
DESCRIPTION OF SHARES
Common Shares
The Trust is an unincorporated business trust organized under the laws of
Delaware pursuant to an Agreement and Declaration of Trust dated as of March
30, 2001, as later amended and restated. The Trust is authorized to issue an
unlimited number of common shares of beneficial interest, par value $.001 per
share. Each common share has one vote and, when issued and paid for in
accordance with the terms of this offering, will be 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 shareholders from
declared but unpaid dividends owed the shareholders or by reducing the number
of common shares owned by each respective shareholder. Whenever 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, and 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. See
"--Preferred Shares" below. All common shares are equal as to dividends, assets
and voting privileges and have no conversion, preemptive or other subscription
rights. The Trust will send annual and semi-annual reports, including financial
statements, to all holders of its shares.
The Trust has no present intention of offering any additional shares other
than the Preferred Shares and common shares issued under the Trust's Dividend
Reinvestment Plan. Any additional offerings of shares will require approval by
the Trust's board of trustees. Any additional offering of common shares will be
subject to the requirements of the Investment Company Act, which requires that
shares may not be issued at a price below the then current net asset value,
exclusive of sales load, except in connection with an offering to existing
holders of common shares or with the consent of a majority of the Trust's
outstanding voting securities.
The Trust has been approved for listing of the common shares on the New York
Stock Exchange under the symbol "BFZ".
The Trust's net asset value per share generally increases when interest
rates decline, and decreases when interest rates rise, and these changes are
likely to be greater because the Trust intends to have a leveraged capital
structure. Net asset value will be reduced immediately following the offering
of common shares by the amount of the sales load and organization and offering
expenses paid by the Trust. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Trust do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional common shares or sell shares already held, the
shareholder may do so by trading on the New York Stock Exchange through a
broker or otherwise. Shares of closed-end investment companies frequently trade
on an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Trust that invest predominately in investment
grade municipal bonds have during some periods traded at prices higher than net
asset value and during other periods have traded at prices lower than net asset
value. Because the market value of the common shares may be influenced by such
factors as dividend levels, which are in turn affected by expenses, call
protection,
28
dividend stability, portfolio credit quality, net asset value, relative demand
for and supply of such shares in the market general market and economic
conditions, and other factors beyond the control of the Trust, the Trust cannot
assure you that common shares will trade at a price equal to or higher than net
asset value in the future. The common shares are designed primarily for long-
term investors, and you should not purchase the common shares if you intend to
sell them soon after purchase. See "Preferred Shares and Leverage" and the
Statement of Additional Information under "Repurchase of Common Shares."
Preferred Shares
The Agreement and Declaration of Trust, as amended and restated, provides
that the Trust's board of trustees may authorize and issue Preferred Shares
with rights as determined by the board of trustees, by action of the board of
trustees without the approval of the holders of the common shares. Holders of
common shares have no preemptive right to purchase any Preferred Shares that
might be issued.
The Trust's board of trustees has indicated its intention to authorize an
offering of Preferred Shares, representing approximately 38% of the Trust's
total assets immediately after the Preferred Shares are issued, within
approximately one to three months after completion of this offering of common
shares, subject to market conditions and to the board of trustees' continuing
belief that leveraging the Trust's capital structure through the issuance of
Preferred Shares is likely to achieve the potential benefits to the holders of
common shares described in this prospectus. The Trust may conduct other
offerings of Preferred Shares in the future, subject to the same percentage
restriction, after giving effect to previously issued Preferred Shares. The
board of trustees also reserves the right to change the foregoing percentage
limitation and may issue Preferred Shares to the extent that the aggregate
liquidation preference of all outstanding Preferred Shares does not exceed 50%
of the value of the Trust's total assets. We cannot assure you, however, that
any Preferred Shares will be issued. Although the terms of any Preferred
Shares, including dividend rate, liquidation preference and redemption
provisions, will be determined by the board of trustees, subject to applicable
law and the Agreement and Declaration of Trust, as amended and restated, it is
likely that the Preferred Shares will be structured to carry a relatively
short-term dividend rate reflecting interest rates on short-term tax-exempt
debt securities, by providing for the periodic redetermination of the dividend
rate at relatively short intervals through an auction, remarketing or other
procedure. The Trust also believes that it is likely that the liquidation
preference, voting rights and redemption provisions of the Preferred Shares
will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Trust, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per Preferred Share plus
accrued and unpaid dividends, whether or not declared, before any distribution
of assets is made to holders of common shares. After payment of the full amount
of the liquidating distribution to which they are entitled, the holders of
Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Trust.
Voting Rights. The Investment Company Act requires that the holders of any
Preferred Shares, voting separately as a single class, have the right to elect
at least two trustees at all times. In addition, subject to the prior rights,
if any, of the holders of any other class of senior securities outstanding, the
holders of any Preferred Shares have the right to elect a majority of the
trustees of the Trust at any time two years' dividends on any Preferred Shares
are unpaid. The Investment Company Act also requires that, in addition to any
approval by shareholders that might otherwise be required, the approval of the
holders of a majority of any outstanding Preferred Shares, voting separately as
a class, would be required to (1) adopt any plan of reorganization that would
adversely affect the Preferred Shares, and (2) take any action requiring a vote
of security holders under Section 13(a) of the Investment Company Act,
including, among other things, changes in the Trust's subclassification as a
closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Agreement and Declaration of
Trust." As a result of these voting rights, the Trust's ability to take any
such actions may be impeded to the extent that there are any Preferred
29
Shares outstanding. The board of trustees presently intends that, except as
otherwise indicated in this prospectus and except as otherwise required by
applicable law, holders of Preferred Shares will have equal voting rights with
holders of common shares (one vote per share, unless otherwise required by the
Investment Company Act) and will vote together with holders of common shares as
a single class.
It is presently required that in connection with the election of the Trust's
trustees, on and after the issuance of any Preferred Shares, the holders of all
outstanding Preferred Shares, voting as a separate class, would be entitled to
elect two trustees of the Trust, and the remaining trustees would be elected by
holders of common shares and Preferred Shares, voting together as a single
class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights, or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Trust. The terms of
the Preferred Shares are expected to provide that (1) they are redeemable by
the Trust in whole or in part at the original purchase price per share plus
accrued dividends per share, (2) the Trust may tender for or purchase Preferred
Shares and (3) the Trust may subsequently resell any shares so tendered for or
purchased. Any redemption or purchase of Preferred Shares by the Trust will
reduce the leverage applicable to the common shares, while any resale of shares
by the Trust will increase that leverage.
The discussion above describes the present intention of the board of
trustees with respect to an offering of Preferred Shares. If the board of
trustees determines to proceed with such an offering, the terms of the
Preferred Shares may be the same as, or different from, the terms described
above, subject to applicable law and the Trust's Agreement and Declaration of
Trust, as amended and restated. The board of trustees, without the approval of
the holders of common shares, may authorize an offering of Preferred Shares or
may determine not to authorize such an offering, and may fix the terms of the
Preferred Shares to be offered.
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 vote of a majority of the Trust's board of trustees and
favorable vote of the holders of at least 75% of the outstanding shares of each
class of the Trust, voting separately as a class, then entitled to vote to
approve, adopt or authorize certain transactions with five percent or greater
holders of a class of shares and their associates, unless 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 then entitled to vote shall be required. For purposes of these
provisions, a five percent or greater holder of a class of shares (a "Principal
Shareholder") refers to any person who, whether directly or indirectly and
whether alone or together with its affiliates and associates, beneficially owns
5% or more of the outstanding shares of any class of shares of beneficial
interest of the Trust.
30
The 5% holder transactions subject to these special approval requirements
are:
. the merger or consolidation of the Trust or any subsidiary of the Trust
with or into any Principal Shareholder;
. the issuance of any securities of the Trust to any Principal Shareholder
for cash, except pursuant to the Dividend Reinvestment Plan;
. the sale, lease or exchange of all or any substantial part of the assets
of the Trust to any Principal Shareholder, except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the
purpose of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period; or
. the sale, lease or exchange to the Trust or any subsidiary of the Trust,
in exchange for securities of the Trust, of any assets of any Principal
Shareholder, except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such computation all assets
sold, leased or exchanged in any series of similar transactions within a
twelve-month period.
To convert the Trust to an open-end investment company, the Trust's
Agreement and Declaration of Trust, as amended and restated, requires the
favorable vote of a majority of the board of the trustees and the favorable
vote of the holders of at least 75% of the outstanding shares of each class of
the Trust, voting separately as a class, then entitled to vote, 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 then entitled to vote shall be required. The
foregoing vote would satisfy a separate requirement in the Investment Company
Act that any conversion of the Trust to an open-end investment company be
approved by the shareholders. If approved in the foregoing manner, conversion
of the Trust to an open-end investment company could not occur until 90 days
after the shareholders' meeting at which such conversion was approved and would
also require at least 30 days' prior notice to all shareholders. Conversion of
the Trust to an open-end investment company would require the redemption of any
outstanding Preferred Shares, which could eliminate or alter the leveraged
capital structure of the Trust with respect to the shares. Following any such
conversion, it is also possible that certain of the Trust's investment policies
and strategies would have to be modified to assure sufficient portfolio
liquidity. In the event of conversion, the common shares would cease to be
listed on the New York Stock Exchange or other national securities exchanges or
market systems. Shareholders of an open-end investment company may require the
company to redeem their shares at any time, except in certain circumstances as
authorized by or under the Investment Company Act, at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. The Trust expects to pay all such redemption requests in cash, but
intends to reserve the right to pay redemption requests in a combination of
cash or securities. If such partial payment in securities were made, investors
may incur brokerage costs in converting such securities to cash. If the Trust
were converted to an open-end fund, it is likely that new shares would be sold
at net asset value plus a sales load. The board of trustees believes, however,
that the closed-end structure is desirable in light of the Trust's investment
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.
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.
CLOSED-END TRUST STRUCTURE
The Trust is a newly organized, non-diversified, closed-end management
investment company (commonly referred to as a closed-end fund). Closed-end
funds differ from open-end funds (which are generally referred to as mutual
funds) in that closed-end funds generally list their shares for trading on a
stock exchange and do not redeem their shares at the request of the
shareholder. This means that if you wish to sell your shares of a
31
closed-end fund you must trade them on the market like any other stock at the
prevailing market price at that time. In a mutual fund, if the shareholder
wishes to sell shares of the fund, the mutual fund will redeem or buy back the
shares at "net asset value." Also, mutual funds generally offer new shares on a
continuous basis to new investors, and closed-end funds generally do not. The
continuous inflows and outflows of assets in a mutual fund can make it
difficult to manage the fund's investments. By comparison, closed-end funds are
generally able to stay more fully invested in securities that are consistent
with their investment objectives, and also have greater flexibility to make
certain types of investments, and to use certain investment strategies, such as
financial leverage and investments in illiquid securities.
Shares of closed-end funds frequently trade at a discount to their net asset
value. Because of this possibility and the recognition that any such discount
may not be in the interest of shareholders, the Trust's board of trustees might
consider from time to time engaging in open market repurchases, tender offers
for shares or other programs intended to reduce the discount. We cannot
guarantee or assure, however, that the Trust's board of trustees will decide to
engage in any of these actions. Nor is there any guarantee or assurance that
such actions, if undertaken, would result in the shares trading at a price
equal or close to net asset value per share. The board of trustees might also
consider converting the Trust to an open-end mutual fund, which would also
require a vote of the shareholders of the Trust.
REPURCHASE OF 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, although it is possible that they may trade at a premium
above 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. See "Net Asset
Value." 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. This may
have the effect of reducing any market discount from net asset value.
There is no assurance that, if action is undertaken to repurchase or tender
for common shares, such action will result in the common shares' trading at a
price which approximates their net asset value. Although share repurchases and
tenders could have a favorable effect on the market price of the Trust's common
shares, you should be aware that the acquisition of common shares by the Trust
will decrease the total assets of the Trust and, therefore, may have the effect
of increasing the Trust's expense ratio and decreasing the asset coverage with
respect to any Preferred Shares outstanding. Any share repurchases or tender
offers will be made in accordance with requirements of the Securities Exchange
Act of 1934 and the Investment Company Act.
TAX MATTERS
Federal Income Tax Matters
The discussion below and in the Statement of Additional Information provides
general tax information related to an investment in the common shares. The
discussion reflects applicable tax laws of the United States as of the date of
this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service retroactively or
prospectively. Because tax laws are complex and often change, you should
consult your tax advisor about the tax consequences of an investment in the
Trust.
The Trust primarily invests in municipal bonds from issuers in California or
in municipal bonds whose income is otherwise exempt from regular Federal income
tax. Consequently, the regular monthly dividends you receive will generally be
exempt from regular Federal income tax. A portion of these dividends, however,
may be subject to the Federal alternative minimum tax.
32
Although the Trust does not seek to realize taxable income or capital gains,
the Trust may realize and distribute taxable income or capital gains from time
to time as a result of the Trust's normal investment activities. The Trust will
distribute at least annually any taxable income or realized capital gains.
Distributions of net short-term gains are taxable as ordinary income.
Distributions of net long-term capital gains are taxable to you as long-term
capital gains regardless of how long you have owned your common shares.
Dividends will not qualify for a dividends received deduction generally
available to corporate shareholders.
Each year, you will receive a year-end statement designating the amounts of
tax-exempt dividends, capital gains income dividends and ordinary income
dividends paid to you during the preceding year, including the source of
investment income by state and the portion of income that is subject to the
Federal alternative minimum tax. You will receive this statement from the firm
where you purchased your common shares if you hold your investment in street
name; the Trust will send you this statement if you hold your shares in
registered form.
The tax status of your dividends is not affected by whether you reinvest
your dividends or receive them in cash.
In order to avoid corporate taxation of its taxable income and to be
permitted to pay tax-exempt dividends, the Trust must meet certain requirements
that govern the Trust's sources of income, diversification of assets and
distribution of earnings to shareholders. The Trust intends to meet these
requirements. If the Trust failed to do so, the Trust would be required to pay
corporate taxes on its taxable income and all the distributions would be
taxable as ordinary income to the extent of the Trust's earnings and profits.
In particular, in order for the Trust to pay tax-exempt dividends, at least 50%
of the value of the Trust's total assets must consist of tax-exempt
obligations. The Trust intends to meet this requirement. If the Trust failed to
do so, it would not be able to pay tax-exempt dividends and your distributions
attributable to interest received by the Trust from any source would be taxable
as ordinary income to the extent of the Trust's earnings and profits.
The Trust may be required to withhold on certain of your dividends if you
have not provided the Trust with your correct taxpayer identification number
(if you are an individual normally your Social Security number), or if you are
otherwise subject to backup withholding. If you receive Social Security
benefits, you should be aware that tax-free income is taken into account in
calculating the amount of these benefits that may be subject to Federal income
tax. If you borrow money to buy Trust shares, you may not deduct the interest
on that loan. Under Federal income tax rules, Trust shares may be treated as
having been bought with borrowed money even if the purchase of the Trust shares
cannot be traced directly to borrowed money.
If you are subject to the Federal alternative minimum tax, a portion of your
regular monthly dividends may be taxable.
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,
33
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.
34
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each Underwriter named below has agreed to
purchase, and the Trust has agreed to sell to such Underwriter, the number of
common shares set forth opposite the name of such Underwriter.
Number
of
Underwriters Shares
------------ --------
Salomon Smith Barney Inc. ........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................................
A.G. Edwards & Sons, Inc. ........................................
Prudential Securities Incorporated ...............................
UBS Warburg LLC...................................................
Gruntal & Co., L.L.C. ............................................
Raymond James & Associates, Inc. .................................
Wedbush Morgan Securities, Inc....................................
--------
Total.............................................................
========
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the common shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the common shares
(other than those covered by the over-allotment option described below) if they
purchase any of the common shares.
The Underwriters, for whom Salomon Smith Barney Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, A.G. Edwards & Sons, Inc., Prudential Securities
Incorporated, UBS Warburg LLC, Gruntal & Co., L.L.C., Raymond James &
Associates, Inc. and Wedbush Morgan Securities, Inc. are acting as
representatives, propose to offer some of the common shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the common shares to certain dealers at the public
offering price less a concession not in excess of $0. per common share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $0. per common share on sales to certain other dealers. If all of
the common shares are not sold at the initial offering price, the
representatives may change the public offering price and other selling terms.
The representatives have advised the Trust that the Underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority. Investors must pay for any common shares purchased on or before July
, 2001.
The Trust has granted to the Underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to additional common
shares at the public offering price less the underwriting discount. The
Underwriters may exercise such option solely for the purpose of covering over-
allotments, if any, in connection with this offering. To the extent such option
is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase a number of additional common shares approximately
proportionate to such Underwriter's initial purchase commitment.
The Trust and BlackRock have agreed that, for a period of 180 days from the
date of this prospectus, they will not, without the prior written consent of
Salomon Smith Barney Inc., on behalf of the Underwriters, dispose of or hedge
any common shares of the Trust or grant any options or warrants to purchase
common shares of the Trust. Salomon Smith Barney Inc. in its sole discretion
may release any of the securities subject to the foregoing agreement at any
time without notice.
Prior to this offering, there has been no public market for the common
shares. Consequently, the initial public offering price for the common shares
was determined by negotiation among the Trust, BlackRock and the
representatives. There can be no assurance, however, that the price at which
the common shares will sell in the public market after this offering will not
be lower than the price at which they are sold by the Underwriters or that an
active trading market in the common shares will develop and continue after this
offering. The common shares have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance, under the trading or
"ticker" symbol "BFZ".
35
The Trust, BlackRock Advisors and BlackRock Financial Management have each
agreed to indemnify the several Underwriters or contribute to losses arising
out of certain liabilities, including liabilities under the Securities Act of
1933.
The Trust has agreed to pay the Underwriters $50,000 as partial
reimbursement of expenses incurred in connection with the offering. BlackRock
Advisors has agreed to pay organizational expenses and offering costs (other
than sales load) that exceed $0.03 per share.
In connection with the requirements for listing the Trust's common shares on
the New York Stock Exchange, the Underwriters have undertaken to sell lots of
100 or more common shares to a minimum of 2,000 beneficial owners in the United
States. The minimum investment requirement is 100 common shares. Certain
Underwriters may make a market in the common shares after trading in the common
shares has commenced on the New York Stock Exchange. No Underwriter is,
however, obligated to conduct market-making activities and any such activities
may be discontinued at any time without notice, at the sole discretion of the
Underwriter. No assurance can be given as to the liquidity of, or the trading
market for, the common shares as a result of any market-making activities
undertaken by any Underwriter. This prospectus is to be used by any Underwriter
in connection with the offering and, during the period in which a prospectus
must be delivered, with offers and sales of the common shares in market-making
transactions in the over-the-counter market at negotiated prices related to
prevailing market prices at the time of the sale.
The Underwriters have advised the Trust that, pursuant to Regulation M under
the Securities and Exchange Act of 1934, as amended, certain persons
participating in the offering may engage in transactions, including stabilizing
bids, covering transactions or the imposition of penalty bids, which may have
the effect of stabilizing or maintaining the market price of the common shares
at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of common shares on behalf of an
Underwriter for the purpose of fixing or maintaining the price of the common
shares. A "covering transaction" is a bid for or purchase of the common shares
on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is a contractual
arrangement whereby if, during a specified period after the issuance of the
common shares, the Underwriters purchase common shares in the open market for
the account of the underwriting syndicate and the common shares purchased can
be traced to a particular Underwriter or member of the selling group, the
underwriting syndicate may require the Underwriter or selling group member in
question to purchase the common shares in question at the cost to the syndicate
or may recover from (or decline to pay to) the Underwriter or selling group
member in question any or all compensation (including, with respect to a
representative, the applicable syndicate management fee) applicable to the
common shares in question. As a result, an Underwriter or selling group member
and, in turn, brokers may lose the fees that they otherwise would have earned
from a sale of common shares if their customer resells the common shares while
the penalty bid is in effect. The Underwriters are not required to engage in
any of these activities, and any such activities, if commenced, may be
discontinued at any time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of any
Underwriter to the Trust, BlackRock Advisors or BlackRock Financial Management
by notice to the Trust, BlackRock Advisors or BlackRock Financial Management
if, prior to delivery of and payment for the common shares, (1) trading in the
common shares or securities generally on the New York Stock Exchange, American
Stock Exchange, Nasdaq National Market or the Nasdaq Stock Market shall have
been suspended or materially limited, (2) additional material governmental
restrictions not in force on the date of the underwriting agreement have been
imposed upon trading in securities generally or a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or state authorities, or (3) any outbreak or material escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, occurs, the effect of which is
such as to make it, in the judgment of the representatives, impracticable or
inadvisable to commence or continue the offering of the common shares at the
offering price to the public set forth on the cover page of this prospectus or
to enforce contracts for the resale of the common shares by the Underwriters.
36
The Trust anticipates that from time to time the representatives of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Trust's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act as
brokers while they are Underwriters.
Prior to the public offering of common shares, BlackRock Advisors will
purchase common shares from the Trust in an amount satisfying the net worth
requirements of Section 14(a) of the Investment Company Act.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013. The principal business address of Merrill
Lynch, Pierce, Fenner & Smith Incorporated is 4 World Financial Center, New
York, New York 10080 .
CUSTODIAN AND TRANSFER 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,
will serve as the Trust's Transfer Agent with respect to the common shares.
LEGAL OPINIONS
Certain legal matters in connection with the common shares will be passed
upon for the Trust by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York and for the Underwriters by Simpson Thacher & Bartlett, New York, New
York. Simpson Thacher & Bartlett may rely as to matters of California law on
the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
37
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
Use of Proceeds............................................................ B-2
Investment Objective and Policies.......................................... B-2
Investment Policies and Techniques......................................... B-4
Other Investment Policies and Techniques................................... B-19
Management of the Trust.................................................... B-21
Portfolio Transactions and Brokerage....................................... B-27
Description of Shares...................................................... B-28
Repurchase of Common Shares................................................ B-29
Tax Matters................................................................ B-30
Performance Related and Comparative Information............................ B-33
Experts.................................................................... B-36
Additional Information..................................................... B-36
Financial Statements....................................................... F-1
Report of Independent Auditors............................................. F-1
APPENDIX A Ratings of Investments.......................................... A-1
APPENDIX B Taxable Equivalent Yield Table.................................. B-1
APPENDIX C General Characteristics and of Hedging Strategies............... C-1
38
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,000,000 Shares
BlackRock California
Municipal Income Trust
Common Shares
----------------
PROSPECTUS
July , 2001
----------------
Salomon Smith Barney
Merrill Lynch & Co.
A.G. Edwards & Sons, Inc.
Prudential Securities
UBS Warburg
Gruntal & Co., L.L.C.
Raymond James
Wedbush Morgan Securities, Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CA-PRO-6-01
SUBJECT TO COMPLETION, DATED JUNE 19, 2001
BlackRock California Municipal Income Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock California Municipal Income Trust (the "Trust") is a newly
organized, non-diversified closed-end management investment company. This
Statement of Additional Information relating to common shares does not
constitute a prospectus, but should be read in conjunction with the prospectus
relating thereto dated July , 2001. This Statement of Additional Information
does not include all information that a prospective investor should consider
before purchasing common shares, and investors should obtain and read the
prospectus prior to purchasing such shares. A copy of the prospectus may be
obtained without charge by calling (888) 825-2257. You may also obtain a copy
of the prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the prospectus.
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-19
Management of the Trust.................................................... B-21
Portfolio Transactions and Brokerage....................................... B-27
Description of Shares...................................................... B-28
Repurchase of Common Shares................................................ B-29
Tax Matters................................................................ B-30
Performance Related and Comparative Information............................ B-33
Experts.................................................................... B-36
Additional Information..................................................... B-36
Financial Statements....................................................... F-1
Report of Independent Auditors............................................. F-1
APPENDIX A Ratings of Investments.......................................... A-1
APPENDIX B Taxable Equivalent Yield Table.................................. B-1
APPENDIX C General Characteristics and Risks of Hedging Strategies......... C-1
This Statement of Additional Information is dated July , 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.
B-1
USE OF PROCEEDS
Pending investment in municipal bonds that meet the Trust's investment
objective and policies, the net proceeds of the offering will be invested in
high quality, short-term tax-exempt money market securities or in high quality
municipal bonds with relatively low volatility (such as pre-refunded and
intermediate-term bonds), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offering immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Policies and Techniques--
Short-Term Taxable Fixed Income Securities," the income on which is subject to
regular Federal 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 issuers;
(2) issue senior securities or borrow money other than as permitted by
the Investment Company Act or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short sales, when-
issued and forward commitment transactions and similar investment
strategies;
(3) make loans of money or property to any person, except through loans
of portfolio securities, the purchase of fixed income securities consistent
with the Trust's investment objective and policies or the entry into
repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities or the sale
of its own securities the Trust may be deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other than
municipal bonds secured by real estate or interests therein; provided that
the Trust may hold and sell any real estate acquired in connection with its
investment in portfolio securities; or
(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 "CTFC") 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.
B-2
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, 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.
B-3
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/or S&P. In order to obtain and maintain the required ratings, the Trust
will be required to comply with investment quality, diversification and other
guidelines established by Moody's or S&P. Such guidelines will likely be more
restrictive than the restrictions set forth above. The Trust does not
anticipate that such guidelines would have a material adverse effect on the
Trust's holders of common shares or its ability to achieve its investment
objective. The Trust presently anticipates that any Preferred Shares that it
intends to issue would be initially given the highest ratings by Moody's (Aaa)
or by S&P (AAA), but no assurance can be given that such ratings will be
obtained. No minimum rating is required for the issuance of 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 objective, 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 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.
B-4
A general description of Moody's, S&P's and Fitch's ratings of municipal
bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P and Fitch
represent their opinions as to the quality of the municipal bonds they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal bonds with the same maturity,
coupon and rating may have different yields while obligations of the same
maturity and coupon with different ratings may have the same yield.
The Trust will 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
B-5
legislatures or referenda extending the time for payment of principal or
interest, or both, or imposing other constraints upon enforcement of such
obligations or upon municipalities to levy taxes. There is also the possibility
that, as a result of legislation or other conditions, the power or ability of
any issuer to pay, when due, the principal of and interest on its municipal
bonds may be materially affected.
In addition to the types of municipal bonds described in the prospectus, the
Trust may invest in other securities that pay interest that is, or make other
distributions that are, exempt from regular Federal income tax and or state and
local personal tax, 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
B-6
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.
B-7
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
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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).
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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 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 taxes 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.
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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 taxes) 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
B-11
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 capital 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 local school and community college ("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.
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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 impacts 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 percent 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 electric 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
B-13
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 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
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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 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.
B-15
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
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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
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notional amount of the contract. In entering into MMD Rate Locks, there is a
risk that municipal yields will move in the direction opposite of the direction
anticipated by the Trust. The Trust will not enter into MMD Rate Locks if, as a
result, more than 50% of its assets would be required to cover its potential
obligations under its hedging and other investment transactions.
Appendix C contains further information about the characteristics, risks and
possible benefits of Additional Investment Management Techniques and the
Trust's other policies and limitations (which are not fundamental policies)
relating to investment in futures contracts and options. The principal risks
relating to the use of futures contracts and other Additional Investment
Management Techniques are: (a) less than perfect correlation between the prices
of the instrument and the market value of the securities in the Trust's
portfolio; (b) possible lack of a liquid secondary market for closing out a
position in such instruments; (c) losses resulting from interest rate or other
market movements not anticipated by BlackRock; and (d) the obligation to meet
additional variation margin or other payment requirements, all of which could
result in the Trust being in a worse position than if such techniques had not
been used.
Certain provisions of the Code may restrict or affect the ability of the
Trust to engage in Additional Investment Management Techniques. See "Tax
Matters."
Short Sales
The Trust may make short sales of municipal bonds. A short sale is a
transaction in which the Trust sells a security it does not own in anticipation
that the market price of that security will decline. The Trust may make short
sales to hedge positions, for duration and risk management, in order to
maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale as
collateral for its obligation to deliver the security upon conclusion of the
sale. The Trust may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other high grade liquid securities. The Trust will also be
required to segregate similar collateral with its custodian to the extent, if
any, necessary so that the aggregate collateral value is at all times at least
equal to the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over of any payments received by the Trust on such security,
the Trust may not receive any payments (including interest) on its collateral
deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Trust replaces the borrowed security, the Trust
will incur a loss; conversely, if the price declines, the Trust will realize a
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Trust's gain is limited to the price at
which it sold the security short, its potential loss is theoretically
unlimited.
The Trust will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
total assets or the Trust's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Trust
may also make short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the sale, the Trust
owns or has the immediate and unconditional right to acquire at no additional
cost the identical security.
B-18
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 securities and
forward commitments may be sold prior to the settlement date, but the Trust
will enter into when-issued and forward commitments only with the intention of
actually receiving or delivering the securities, as the case may be. If the
Trust disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it 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, investing and repurchases of shares of the Trust. Borrowing is a
form of leverage and, in that respect, entails risks comparable to those
associated with the issuance of Preferred Shares.
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.
B-19
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, if any. 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 credit worthiness 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
B-20
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 and distributions to common shareholders. Although the Trust does not
intend initially to invest in inverse floaters, the Trust may do so at some
point in the future. The Trust will provide shareholders 30 days' written
notice prior to any change in its policy of not investing in inverse floaters.
MANAGEMENT OF THE TRUST
Investment Management Agreement
Although BlackRock Advisors intends to devote such time and effort to the
business of the Trust as is reasonably necessary to perform its duties to the
Trust, the services of BlackRock Advisors are not exclusive and BlackRock
Advisors provides similar services to other investment companies and other
clients and may engage in other activities.
The Investment Management Agreement also provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, BlackRock Advisors is not liable to the Trust or any of
the Trust's shareholders for any act or omission by BlackRock Advisors in the
supervision or management of its respective investment activities or for any
loss sustained by the Trust or the Trust's shareholders and provides for
indemnification by the Trust of BlackRock Advisors, its directors, officers,
employees, agents and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain limitations and
conditions.
B-21
The Investment Management Agreement and certain waivers of investment
advisory 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 an investment
advisory 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 investment advisory fees 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 investment advisory
fee 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 investment
advisory fee 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 investment advisory
fees were approved by the sole common shareholder of the Trust as of July ,
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
advisory fee paid by the Trust to BlackRock Advisors. From the investment
advisory 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 investment advisory fees received by BlackRock Advisors; (ii) from
August 1, 2002 to July 31, 2003, 19% of the monthly investment advisory fees
received by BlackRock Advisors; and (iii) after July 31, 2003, 0% of the
investment advisory fees received by BlackRock Advisors; provided that
thereafter 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
B-22
Management are not exclusive and BlackRock Financial Management provides
similar services to other investment companies and other clients 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
, 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 anytime 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
Past Five Years and Other
Name and Address Title Affiliations
---------------- --------- -------------------------------------
Andrew F. Brimmer........... Trustee President of Brimmer & Company, Inc.,
4400 MacArthur Blvd N.W. a Washington, D.C.-based economic and
Suite 302 financial consulting firm. Director
Washington, DC 20007 of CarrAmerica Realty Corporation and
Age: 74 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).
B-23
Principal Occupation During the
Past Five Years and Other
Name and Address Title Affiliations
---------------- --------- -------------------------------------
Richard E. Cavanagh......... Trustee President and Chief Executive Officer
845 Third Avenue of The Conference Board, Inc., a
New York, NY 10022 leading global business membership
Age: 54 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. Former President
430 Sandy Hook Road and Chief Executive Officer of Empire
St. Petersburg, FL 33704 Federal Savings Bank of America and
Age: 63 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 Journal of
858 Tower View Circle Portfolio Management and Adjunct
New Hope, PA 18938 Professor of Finance at the School of
Age: 52 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 Chief
Age: 48 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.
B-24
Principal Occupation During the
Past Five Years and Other
Name and Address Title Affiliations
---------------- --------- -------------------------------------
James Clayburn La Force, Trustee Dean Emeritus of The John E. Anderson
Jr......................... Graduate School of Management,
P.O. Box 1595 University of California since July
Pauma Valley, CA 92061 1, 1993. Director, Jacobs Engineering
Age: 72 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 & Whitney, a law firm
220 South Sixth Street (December 1996-present, September
Minneapolis, MN 55402 1987-August 1993). Formerly, U.S.
Age: 73 Ambassador to Japan (1993-1996).
Formerly Vice President of the United
States, U.S. Senator and Attorney
General of the State of Minnesota.
1984 Democratic Nominee for President
of the United States.
Ralph L. Schlosstein*....... Trustee Director since 1999 and President of
Age: 50 and BlackRock, Inc. since its formation
President 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 BlackRock, Inc.
Age: 39 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 Gabbay................ Treasurer Managing Director of BlackRock, Inc.
Age: 53 and its predecessor entities.
Robert S. Kapito............ Vice Vice Chairman of BlackRock, Inc. and
Age: 44 President its predecessor entities.
Kevin Klingert.............. Vice Managing Director of BlackRock, Inc.
Age: 38 President and its predecessor entities.
B-25
Principal Occupation During the
Past Five Years and Other
Name and Address Title Affiliations
---------------- ---------- -------------------------------------
James Kong.................. Assistant Managing Director of BlackRock, Inc.
Age: 40 Treasurer and its predecessor entities.
Richard Shea, Esq........... Vice Managing Director of BlackRock, Inc.
Age: 41 President/ since 2000; Chief Operating Officer
Tax and Chief Financial Officer of
Anthracite Capital, Inc. since 1998.
Formerly, Director of BlackRock, Inc.
and its predecessor entities.
Prior to this offering, all of the outstanding shares of the Trust were
owned by BlackRock Advisors.
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
Estimated from the Trust and Fund
Compensation Complex Paid to Board
Name of Board Member From Trust 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"). One of these funds, BlackRock
Target Term Trust, was terminated on December 29, 2000 and the BlackRock
2001 Term Trust is scheduled to terminate on June 30, 2001.
(/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
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
B-26
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 $201.6 billion of assets under management as of March
31, 2001. Black Rock Advisors is one of the nation's leading fixed income
managers with over $120 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 over $16.2
billion in municipal assets firm-wide. As of March 31, 2001, BlackRock managed
over $6.8 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,
B-27
the reliability, integrity and financial condition and execution capability of
the firm, the size of the difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of 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 such
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.
DESCRIPTION OF SHARES
Common Shares
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.
Preferred Shares
Although the terms of the Preferred Shares, including their dividend rate,
voting rights, liquidation preference and redemption provisions, will be
determined by the board of trustees (subject to applicable law and the Trust's
Agreement and Declaration of Trust, as amended and restated) when it authorizes
a Preferred Shares offering, the Trust currently expects that the preference on
distributions, liquidation preference, voting rights and redemption provisions
of the Preferred Shares will likely be as stated in the prospectus.
B-28
If the board of trustees determines to proceed with an offering of Preferred
Shares, the terms of the Preferred Shares may be the same as, or different
from, the terms described in the prospectus, subject to applicable law and the
Trust's Agreement and Declaration of Trust, as amended and restated. The board
of trustees, without the approval of the holders of common shares, may
authorize an offering of Preferred Shares or may determine not to authorize
such an offering, and may fix the terms of the Preferred Shares to be offered.
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, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a closed-
end investment company may frequently trade at prices lower than net asset
value, the 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 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 "Codes" (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 and 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
B-29
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Trust or its
shareholders if shares were repurchased. The board of trustees may in the
future modify these conditions in light of experience.
The repurchase by the Trust of its shares at prices below net asset value
will result in an increase in the net asset value of those shares that remain
outstanding. However, there can be no assurance that share repurchases or
tender offers at or below net asset value will result in the Trust's shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Trust's shares may be the subject of repurchase or tender offers from time
to time, or that the Trust may be converted to an open-end 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 following is a description of certain Federal income tax consequences to
a shareholder of acquiring, holding and disposing of common stock of the Trust.
The discussion reflects applicable tax laws of the United States as of the date
of this prospectus, which tax laws may be changed or subject to new
interpretations by the courts or the Internal Revenue Service retroactively or
prospectively.
The Trust intends to qualify under Subchapter M of the Code, for tax
treatment as a regulated investment company. In order to qualify as a regulated
investment company, the Trust must satisfy certain requirements relating to the
source of its income, diversification of its assets, and distributions of its
income to its shareholders. First, the Trust must derive at least 90% of its
annual gross income (including tax-exempt interest) from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% gross income test"). Second, the Trust must
diversify its holdings so that, at the close of each quarter of its taxable
year, (i) at least 50% of the value of its total assets is comprised of cash,
cash items, United States government securities, securities of other regulated
investment companies and other securities limited in respect of any one issuer
to an amount not greater in value than 5% of the value of the Trust's total
assets and to not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of the total assets is invested
in the securities of any one issuer (other than United States government
securities and securities of other regulated investment companies) or two or
more issuers controlled by the Trust and engaged in the same, similar or
related trades or businesses.
As a regulated investment company, the Trust will not be subject to federal
income tax in any taxable year for which it distributes at least 90% of the sum
of (i) its "investment company taxable income" (which includes dividends,
taxable interest, taxable original issue discount and market discount income,
income from securities lending, net short-term capital gain in excess of long-
term capital loss, and any other taxable income other than "net capital gain"
(as defined below) and is reduced by deductible expenses) determined without
regard to the deduction for dividends paid and (ii) its net tax-exempt interest
(the excess of its gross tax-exempt
B-30
interest income over certain disallowed deductions). The Trust may retain for
investment its net capital gain (which consists of the excess of its net long-
term capital gain over its net short-term capital loss). However, if the Trust
retains any net capital gain or any investment company taxable income, it will
be subject to tax at regular corporate rates on the amount retained. If the
Trust retains any net capital gain, it may designate the retained amount as an
undistributed capital gains dividend in a notice to its holders of common
shares who, if subject to federal income tax on long-term capital gains, (i)
will be required to include in income for Federal income tax purposes, as long-
term capital gain, their share of such undistributed amount and (ii) will be
entitled to credit their proportionate shares of the tax paid by the Trust
against their Federal income tax liabilities, if any, and to claim refunds to
the extent the credit exceeds such liabilities. For Federal income tax
purposes, the tax basis of shares owned by a holder of common shares of the
Trust will be increased by the amount of undistributed capital gains included
in the gross income of the holder of common shares less the tax deemed paid by
the holder of common shares under clause (ii) of the preceding sentence. The
Trust intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.
Treasury regulations permit a regulated investment company, in determining
its investment company taxable income and net capital gain to elect (unless it
has made a taxable year election for excise tax purposes as discussed below) to
treat all or part of any net capital loss, any net long-term capital loss or
any net foreign currency loss incurred after October 31 as if it had been
incurred in the succeeding year.
Distributions by the Trust of investment company taxable income if any will
be taxable to shareholders as ordinary income whether received in cash or
additional shares. Net long-term capital gains realized by the Trust and
distributed to shareholders in cash or additional shares will be taxable to
shareholders as long-term capital gains regardless of the length of time
investors have owned shares of the Trust. Distributions by the Trust that do
not constitute ordinary income dividends or capital gain distributions will be
treated as a return of capital to the extent of (and in reduction of) the
shareholder's tax basis in his or her shares. Any excess will be treated as
gain from the sale of his or her shares, as discussed below.
If the Trust engages in hedging transactions involving financial futures and
options, these transactions will be subject to special tax rules, the effect of
which may be to accelerate income to the Trust, defer the Trust's losses, or
cause adjustments in the holding periods of the Trust's securities. These rules
could therefore affect the amount, timing and character of distributions to
holders of common shares.
Prior to purchasing shares in the Trust, an investor should carefully
consider the impact of dividends which are expected to be or have been
declared, but not paid. Any dividend declared shortly after a purchase of such
shares prior to the record date will have the effect of reducing the per share
net asset value by the per share amount of the dividend.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to holders of
common shares of record on a specified date in one of those months and paid
during the following January, will be treated as having been distributed by the
Trust (and received by the holder of common shares) on December 31.
Federal income tax law imposes an alternative minimum tax with respect to
both corporations and individuals based on certain items of tax preference. To
the extent the Trust receives income treated as tax preference items for
purposes of the alternative minimum tax, a portion of the dividends paid by it,
although otherwise exempt from Federal income tax, will be taxable to holders
of common shares to the extent that their tax liability is determined under the
alternative minimum tax. The Trust will annually supply holders of common
shares with reports indicating the amount and nature of all income distributed
to them as well as the percentage of Trust income attributable to tax
preference items subject to the alternative minimum tax.
The Trust intends to invest in sufficient tax-exempt municipal bonds to
permit payment of "exempt-interest dividends" (as defined in the Code). Except
as provided below, exempt-interest dividends paid to holders of common shares
are not includable in the holder's gross income for Federal income tax
purposes.
B-31
The Internal Revenue Service's position in a published revenue ruling
indicates that the Trust is required to designate distributions paid with
respect to its common shares and its Preferred Shares as consisting of a
portion of each type of income distributed by the Trust. The portion of each
type of income deemed received by the holders of each class of shares will be
equal to the portion of total Trust distributions received by such class. Thus,
the Trust will designate dividends paid as exempt-interest dividends in a
manner that allocates such dividends between the holders of the common shares
and the holders of Preferred Shares in proportion to the total dividends paid
to each such class during or with respect to the taxable year, or otherwise as
required by applicable law. Capital gain dividends and ordinary income
dividends will similarly be allocated between two classes.
Interest on certain "private-activity bonds" is an item of tax preference
subject to the alternative minimum tax on individuals and corporations. The
Trust may invest a portion of its assets in municipal bonds subject to this
provision so that a portion of its exempt-interest dividends is an item of tax
preference to the extent such dividends represent interest received from these
private-activity bonds. Accordingly, investment in the Trust could cause a
holder of common shares to be subject to, or result in an increased liability
under, the alternative minimum tax.
Exempt-interest dividends are included in determining what portion, if any,
of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax.
Although exempt-interest dividends generally may be treated by holders of
common shares as items of interest excluded from their gross income, each
holder is advised to consult his tax advisor with respect to whether exempt-
interest dividends retain their exclusion if the shareholder would be treated
as a "substantial user," or a "related person" of a substantial user, of the
facilities financed with respect to any of the tax-exempt obligations held by
the Trust. "Substantial user" is defined under the Treasury Regulations to
include a non-exempt person who regularly uses in his trade or business a part
of the facilities financed with the tax-exempt obligations and whose gross
revenues derived from such facilities exceed 5% of the useable area of the
facilities or from whom the facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
natural persons, affiliated corporations, a partnership and its partners and an
S corporation and its shareholders.
For corporations, alternative minimum taxable income is increased by 75% of
the difference between an alternative measure of income ("adjusted current
earnings") and the amount otherwise determined to be the alternative minimum
taxable income. Interest on municipal bonds, and therefore all exempt-interest
dividends received from the Trust, are included in calculating adjusted current
earnings.
The redemption, sale or exchange of common shares normally will result in
capital gain or loss to the holders of common shares who hold their shares as
capital assets. Generally, a shareholder's gain or loss will be long-term
capital gain or loss if the shares have been held for more than one year even
though the increase in value in such common shares is attributable to tax
exempt interest income. In addition, gain realized by the Trust from the
disposition of a tax-exempt municipal obligation that is attributable to
accrued market discount will be treated as ordinary income rather than capital
gain, and thus may increase the amount of ordinary income dividends received by
holders on common shares. Present law taxes both long- and short-term capital
gains of corporations at the rates applicable to ordinary income. For non-
corporate taxpayers, however, long-term capital gains will be taxed at a
maximum rate of 20%, while short-term capital gains and other ordinary income
will currently be taxed at a maximum rate of 39.1%.* Because of the limitations
on itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective tax rate may be higher in certain
circumstances.
All or a portion of a sales charge paid in purchasing common shares cannot
be taken into account for purposes of determining gain or loss on the
redemption or exchange of such shares within 90 days after their
--------
* The Economic Growth and Tax Relief Reconciliation Act of 2001, effective for
taxable years beginning after December 31, 2000, creates a new 10 percent
income tax bracket and reduces the tax rate applicable to ordinary income
over a six year phase-in period. Beginning in the taxable year 2006, ordinary
income will be subject to a 35% maximum rate.
B-32
purchase to the extent common shares or shares of another fund are subsequently
acquired without payment of a sales charge pursuant to the reinvestment or
exchange privilege. Any disregarded portion of such charge will result in an
increase in the shareholder's tax basis in the shares subsequently acquired. In
addition, no loss will be allowed on the redemption or exchange of common
shares if the shareholder purchases other shares of the Trust (whether through
reinvestment of distributions or otherwise) or the shareholder acquires or
enters into a contract or option to acquire securities that are substantially
identical to shares of the Trust within a period of 61 days beginning 30 days
before and ending 30 days after such redemption or exchange. If disallowed, the
loss will be reflected in an adjustment to the basis of the shares acquired.
Further, any losses realized on the sale or exchange of common shares held for
six months or less will be disallowed to the extent of any exempt-interest
dividends received with respect to such common shares and, if not disallowed,
such losses will be treated as long-term capital losses to the extent of any
capital gain dividends received (or credited as undistributed capital gain)
with respect to such common shares.
In order to avoid a 4% Federal excise tax, the Trust must distribute or be
deemed to have distributed by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of its capital gain net
income (the excess of its realized capital gains over its realized capital
losses generally computed on the basis of the one-year period ending on October
31 of such year) and 100% of any taxable ordinary income and capital gain net
income for the prior year that was not distributed during such year and on
which the Trust paid no federal income tax. For purposes of the excise tax, a
regulated investment company may reduce its capital gain net income (but not
below its net capital gain) by the amount of any net ordinary loss for the
calendar year. The Trust intends to make timely distributions in compliance
with these requirements and consequently it is anticipated that it generally
will not be required to pay the excise tax.
If in any year the Trust should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, the Trust would incur a regular
corporate Federal income tax upon its income for that year, and distributions
to its shareholders would be taxable to shareholders as ordinary dividend
income for Federal income tax purposes to the extent of the Trust's earnings
and profits.
The Trust is required to withhold on taxable dividends and certain other
payments paid to non-corporate shareholders who have not furnished to the Trust
their correct taxpayer identification number (in the case of individuals, their
Social Security number) and certain certifications, or who are otherwise
subject to backup withholding. Backup withholding is not an additional tax and
any amount withheld may be credited against the shareholder's federal income
tax liability.
The foregoing is a general and abbreviated summary of the provisions of the
Code, as amended, and the Treasury Regulations presently in effect as they
directly govern the taxation of the Trust and its shareholders. For complete
provisions, reference should be made to the pertinent Code sections and
Treasury Regulations. The Code and the Treasury Regulations are subject to
change by legislative or administrative action, and any such change may be
retroactive with respect to Trust transactions. Holders of common shares are
advised to consult their own tax advisors for more detailed information
concerning the Federal taxation of the Trust and the income tax consequences to
its holders of common shares.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
California municipal bonds can provide double tax-free income (exempt from
both regular Federal and state income taxes) for investors who are residents of
California for tax purposes. Because the Trust expects that a portion of its
investments will pay interest that is taxable under the Federal alternative
minimum tax, the Trust may not be a suitable investment for shareholders that
are subject to the Federal alternative minimum tax.
The Trust may quote certain performance-related information and may compare
certain aspects of its portfolio and structure to other substantially similar
closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar Inc. or
other independent services. Comparison of the Trust to an alternative
investment should be
B-33
made with consideration of differences in features and expected performance.
The Trust may obtain data from sources or reporting services, such as Bloomberg
Financial and Lipper, that the Trust believes to be generally accurate.
Past performance is not indicative of future results. At the time common
shareholders sell their shares, they may be worth more or less than their
original investment.
Keep in mind, that on April 30, 2001, The Lehman Brothers Aggregate Bond
Index,* which is considered to be a common measure of the taxable bond market,
yielded 6.14%.
--------
* The Lehman Aggregate Index is an unmanaged index representative of
intermediate term government bonds, investment grade debt securities and
mortgaged-backed securities. It is not possible to invest directly in an
index.
Municipal bonds have had the best after-tax return when compared to any other
major fixed income category.
Tax Adjusted Returns vs. Volatility
Fixed Income Classes
Last 10 Years Ending 4/30/01
10 year Period
High Global
4/30/91-4/30/2001 Muni Aggregate Treasury Agency Corporates Mortgages Yield Eurodollar Treasury
Annualized Return 11.55% 7.82% 7.69% 7.81% 8.27% 7.70% 9.19% 7.71% 6.53%
Annualized Standard
Deviation 4.28 3.76 4.16 3.85 4.72 3.05 5.62 3.56 5.84
--------
Source: Lehman Brothers
The chart above shows that over the past 10 years, on a tax-adjusted basis,
municipal bonds have had higher annualized returns when compared to any other
major fixed income category.
Source: Lehman Brothers**
--------
** Past performance is no guarantee of future results. The tax equivalent
return reflects an adjustment of 35% of the portion of the Lehman Brothers
Municipal Index attributable to coupon payment (to adjust for an assumed tax
bracket of 35%) and no adjustment to the portion of the Lehman Brothers
Municipal Index attributable to principal appreciation. Standard deviation
measures performance fluctuation; generally the higher the standard
deviation, the greater the expected volatility of returns. Standard
deviation is not a complete measure of risk and cannot predict future
performance. Referenced Lehman Indices: Mortgage Back Securities, Euro-
Aggregate Bond, Aggregate Bond, U.S. Agency, Credit Bond (Corporates),
Global Treasury Bond, Municipal Bond, High Yield and Treasury Bond.
B-34
Municipal Bonds May Be Attractively Valued Relative to Treasuries
AAA
AAA 30 Year 30 Year Muni/
Date 30 Year Muni Treasury 30 Year Treasury
---- ------------ -------- ----------------
2-Jan-90................................ 6.80 8.03 84.70%
30-Mar-90............................... 7.10 8.67 81.92%
29-Jun-90............................... 7.00 8.43 83.04%
28-Sep-90............................... 7.40 8.95 82.65%
31-Dec-90............................... 6.90 8.26 83.57%
29-Mar-91............................... 6.80 8.27 82.25%
28-Jun-91............................... 6.90 8.45 81.64%
30-Sep-91............................... 6.30 7.85 80.28%
31-Dec-91............................... 6.20 7.45 83.19%
31-Mar-92............................... 6.50 7.99 81.37%
30-Jun-92............................... 6.30 7.81 80.66%
30-Sep-92............................... 6.20 7.43 83.45%
31-Dec-92............................... 6.10 7.43 82.11%
31-Mar-93............................... 5.65 7.00 80.68%
30-Jun-93............................... 5.40 6.70 80.55%
30-Sep-93............................... 5.10 6.21 82.07%
31-Dec-93............................... 5.20 6.49 80.12%
31-Mar-94............................... 6.00 7.24 82.83%
30-Jun-94............................... 6.15 7.68 80.05%
30-Sep-94............................... 6.30 7.93 79.48%
30-Dec-94............................... 6.60 7.92 83.37%
31-Mar-95............................... 5.90 7.48 78.89%
30-Jun-95............................... 5.90 6.66 88.59%
29-Sep-95............................... 5.90 6.59 89.47%
29-Dec-95............................... 5.35 6.00 89.10%
29-Mar-96............................... 5.75 6.76 85.00%
28-Jun-96............................... 5.90 6.95 84.88%
30-Sep-96............................... 5.65 6.97 81.03%
31-Dec-96............................... 5.55 6.69 83.00%
31-Mar-97............................... 5.80 7.15 81.15%
30-Jun-97............................... 5.45 6.82 79.88%
30-Sep-97............................... 5.25 6.44 81.50%
31-Dec-97............................... 5.15 5.98 86.16%
31-Mar-98............................... 5.15 5.97 86.29%
30-Jun-98............................... 5.15 5.68 90.65%
30-Sep-98............................... 4.82 5.11 94.28%
31-Dec-98............................... 4.94 5.19 95.27%
31-Mar-99............................... 5.04 5.72 88.15%
30-Jun-99............................... 5.33 6.09 87.57%
30-Sep-99............................... 5.70 6.18 92.22%
31-Dec-99............................... 5.93 6.59 90.00%
31-Mar-00............................... 5.69 5.97 95.24%
30-Jun-00............................... 5.72 6.05 94.62%
29-Sep-00............................... 5.61 5.97 94.04%
29-Dec-00............................... 5.16 5.51 93.65%
30-Mar-01............................... 5.13 5.56 92.23%
18-May-01............................... 5.28 5.78 91.35%
-----
10 year average percentage............ 85.41%
=====
The chart above shows that currently, municipal bonds are yielding over 90%
of what treasuries are yielding. Since yields move in the opposite direction of
price, BlackRock believes these higher yields are an indication that municipals
may be attractively valued relative to treasury securities.
Source: Municipal Market Data/Delphis Hanover/Bloomberg***
--------
*** Past performance is no guarantee of future results. Chart shows the
relationship between the 30 Year AAA Municipal Index and the 30 Year AAA
Treasury Index. The yields quoted above are a simple unweighted average of
the estimated yields of the bonds in the index if those bonds were sold at
par value. It is not possible to invest directly in an index. The Trusts
have the ability to invest in securities rated below AAA, and do not intend
to invest in a portfolio of securities equivalent to the 30 Year AAA
Municipal Index.
B-35
EXPERTS
The Statement of Net Assets of the Trust as of July , 2001 appearing in
this Statement of Additional Information has been audited by Deloitte & Touche
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Deloitte & Touche
LLP, located at 200 Berkeley Street, Boston, Massachusetts 02116, provides
accounting and auditing services to the Trust.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto, relating
to the shares offered hereby, has been filed by the Trust with the Securities
and Exchange Commission (the "Commission"), Washington, D .C. The prospectus
and this Statement of Additional Information do not contain all of the
information set forth in the Registration Statement, including any exhibits and
schedules thereto. For further information with respect to the Trust and the
shares offered hereby, reference is made to the Registration Statement.
Statements contained in the prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement may be inspected without charge
at the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission.
B-36
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Trustees and Shareholder 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 July , 2001,
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 auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of BlackRock California Municipal Income Trust
as of July , 2000, and the results of its operations for the period then ended
in conformity with generally accepted accounting principles.
F-1
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
July , 2001
ASSETS:
Cash.......................................................................
Receivable from Investment Adviser.........................................
Total Assets...............................................................
LIABILITIES:
Organization costs payable.................................................
Net Assets.................................................................
Net assets per share, equivalent to shares of beneficial interest
issued and outstanding, par value $0.001 unlimited shares authorized......
STATEMENT OF OPERATIONS
For the period March 30, 2001 (inception) to July , 2001
Investment Income...........................................................
Expenses....................................................................
Organization expenses.......................................................
Total expenses before reimbursement.........................................
Reimbursement from BlackRock Advisors, Inc. ................................
Total expenses after reimbursement..........................................
Net investment income.......................................................
Net change in net assets resulting from operations..........................
F-2
APPENDIX A
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 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.
A-1
BB Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major on going 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 and 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.
A-2
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 over-whelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with a 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
A-3
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 Bond s 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.
A-4
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 high 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.
A-5
Fitch IBCA, Inc.--A brief description of the applicable Fitch IBCA, Inc.
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. "AAA' ratings denote the lowest expectation
of credit risk. They are assigned only in case of exceptionally
strong capacity for timely payment of financial commitments. This
capacity is highly unlikely to be adversely affected by foreseeable
events.
AA Very high credit quality. "AA' ratings denote a very low expectation
of credit risk. They indicate very strong capacity for timely payment
of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A High credit quality. "A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is
considered strong. This capacity may, nevertheless, be more
vulnerable to changes in circumstances or in economic conditions than
is the case for higher ratings.
BBB Good credit quality. "BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of
financial commitments is considered adequate, but adverse changes in
circumstances and in economic conditions are more likely to impair
this capacity. This is the lowest investment-grade category.
Speculative Grade
BB Speculative. "BB' ratings indicate that there is a
possibility of credit risk developing, particularly as the
result of adverse economic change over time; however,
business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. "B' ratings indicate that significant
credit risk is present, but a limited margin of safety
remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
CCC, CC, C High default risk. Default is a real possibility. Capacity
for meeting financial commitments is solely reliant upon
sustained, favorable business or economic developments. A
"CC' rating indicates that default of some kind appears
probable. "C' ratings signal imminent default.
DDD, DD, and D Default. The ratings of obligations in this category are
based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor.
While expected recovery values are highly speculative and
cannot be estimated with any precision, the following serve
as general guidelines. "DDD' obligations have the highest
potential for recovery, around 90%-100% of outstanding
amounts and accrued interest. "DD' indicates potential
recoveries in the range of 50%-90%, and "D' the lowest
recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all
of their obligations. Entities rated "DDD' have the highest
prospect for resumption of performance or continued operation
with or without a formal reorganization process. Entities
rated "DD' and "D' are generally undergoing a formal
reorganization or liquidation process; those rated "DD' are
likely to satisfy a higher portion of their outstanding
obligations, while entities rated "D' have a poor prospect
for repaying all obligations.
A-6
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could
result in a reduction to non-investment grade.
B Speculative. Minimal capacity for timely payment of financial
commitments plus vulnerability to near-term adverse changes in
financial and economic conditions.
C High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon a sustained,
favorable business and economic environment.
D Default. Denotes actual or imminent payment default.
--------
Notes:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA' long-term rating
category, to categories below "CCC', or to short-term ratings other than "F1'.
"NR' indicates that Fitch does not rate the issuer or issue in question.
"Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.
Rating 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.
A-7
APPENDIX B
TAXABLE EQUIVALENT YIELD TABLE
The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield on a municipal
investment. To assist you to more easily compare municipal investments like the
Trust with taxable alternative investments, the table below presents the
taxable equivalent yields for a range of hypothetical tax-free yields assuming
the stated marginal federal and tax rates for 2001 listed below:
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%
28.0% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31.0% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
36.0% 6.25% 7.03% 7.81% 8.59% 9.38% 10.16%
39.6% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
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.
Taxable Equivalent Estimated
Federal State Combined Current Return
Tax Tax Tax -------------------------------------
Single Return Joint Return Bracket Bracket* Bracket* 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 28.00 9.300 34.70 6.13 6.89 7.66 8.42 9.19 9.95
65,550-136,750 109,250-166,450 31.00 9.300 37.40 6.39 7.19 7.99 8.79 9.59 10.39
136,750-297,300 166,450-297,300 36.00 9.300 42.00 6.89 7.75 8.61 9.47 10.34 11.20
Over 297,300 Over 297,300 39.60 9.300 45.20 7.30 8.21 9.13 10.04 10.95 11.87
2002-2003
Taxable Equivalent Estimated
Federal State Combined Current Return
Tax Tax Tax ------------------------------------
Single Return Joint Return Bracket Bracket* Bracket* 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
65,550-136,750 109,250-166,450 30.00 9.300 36.50 6.30 7.09 7.88 8.66 9.45 10.24
136,750-297,300 166,450-297,300 35.00 9.300 41.00 6.78 7.63 8.48 9.33 10.18 11.03
Over 297,300 Over 297,300 38.60 9.300 44.30 7.18 8.08 8.98 9.88 10.77 11.67
2004-2005
Taxable Equivalent Estimated
Federal State Combined Current Return
Tax Tax Tax ------------------------------------
Single Return Joint Return Bracket Bracket* Bracket* 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
65,550-136,750 109,250-166,450 29.00 9.300 35.60 6.21 6.99 7.76 8.54 9.32 10.09
136,750-297,300 166,450-297,300 34.00 9.300 40.10 6.68 7.52 8.35 9.19 10.02 10.86
Over 297,300 Over 297,300 37.60 9.300 43.40 7.07 7.95 8.83 9.72 10.60 11.48
B-1
2006
Taxable Equivalent Estimated
Federal State Combined Current Return
Tax Tax Tax ------------------------------------
Single Return Joint Return Bracket Bracket* Bracket* 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
65,550-136,750 109,250-166,450 28.00 9.300 34.70 6.13 6.89 7.66 8.42 9.19 9.95
136,750-297,300 166,450-297,300 33.00 9.300 39.20 6.58 7.41 8.23 9.05 9.87 10.70
Over 297,300 Over 297,300 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.
B-2
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio, including
management, or to enhance income or gain as described in the prospectus, the
Trust will engage in Additional Investment Management Techniques. The Trust
will engage in such activities in the Advisor's or Sub-Advisor's discretion,
and may not necessarily be engaging in such activities when movements in
interest rates that could affect the value of the assets of the Trust occur.
The Trust's ability to pursue certain of these strategies may be limited by
applicable regulations of the CFTC. Certain Additional Investment Management
Techniques may give rise to taxable income.
Put and Call Options on Securities and Indices
The Trust may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Trust may also purchase and sell options on bond
indices ("index options"). Index options are similar to options on securities
except that, rather than taking or making delivery of securities underlying the
option at a specified price upon exercise, an index option gives the holder the
right to receive cash upon exercise of the option if the level of the bond
index upon which the option is based is greater, in the case of a call, or
less, in the case of a put, than the exercise price of the option. The purchase
of a put option on a debt security could protect the Trust's holdings in a
security or a number of securities against a substantial decline in the market
value. A call option gives the purchaser of the option the right to buy and the
seller the obligation to sell the underlying security or index at the exercise
price during the option period or for a specified period prior to a fixed date.
The purchase of a call option on a security could protect the Trust against an
increase in the price of a security that it intended to purchase in the future.
In the case of either put or call options that it has purchased, if the option
expires without being sold or exercised, the Trust will experience a loss in
the amount of the option premium plus any related commissions. When the Trust
sells put and call options, it receives a premium as the seller of the option.
The premium that the Trust receives for selling the option will serve as a
partial hedge, in the amount of the option premium, against changes in the
value of the securities in its portfolio. During the term of the option,
however, a covered call seller has, in return for the premium on the option,
given up the opportunity for capital appreciation above the exercise price of
the option if the value of the underlying security increases, but has retained
the risk of loss should the price of the underlying security decline.
Conversely, a secured put seller retains the risk of loss should the market
value of the underlying security decline below the exercise price of the
option, less the premium received on the sale of the option. The Trust is
authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC Options") which are privately negotiated with the counterparty.
Listed options are issued by the Options Clearing Corporation ("OCC") which
guarantees the performance of the obligations of the parties to such options.
The Trust's ability to close out its position as a purchaser or seller of an
exchange-listed put or call option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are : (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC options are
purchased from or sold to dealers, financial institutions or other
counterparties 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,
C-1
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
C-2
CFTC or the SEC, with the result that, if the Trust does not hold the security
or futures contract underlying the instrument, the Trust will be required to
segregate on an ongoing basis with its custodian, cash, U.S. government
securities, or other liquid high grade debt obligations in an amount at least
equal to the Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation requirement
can result in the Trust maintaining securities positions it would otherwise
liquidate, segregating assets at a time when it might be disadvantageous to do
so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Trust's position. The same is true for
such instruments entered into for income or gain. In addition, certain
instruments and markets may not be liquid in all circumstances. As a result, in
volatile markets, the Trust may not be able to close out a transaction without
incurring losses substantially greater than the initial deposit. Although the
contemplated use of these instruments predominantly for hedging should tend to
minimize the risk of loss due to a decline in the value of the position, at the
same time they tend to limit any potential gain which might result from an
increase in the value of such position. The ability of the Trust to
successfully utilize Additional Investment Management Techniques will depend on
the Advisor's ability to predict pertinent market movements and sufficient
correlations, which cannot be assured. Finally, the daily deposit requirements
in futures contracts that the Trust has sold create an ongoing greater
potential financial risk than do options transactions, where the exposure is
limited to the cost of the initial premium. Losses due to the use of Additional
Investment Management Techniques will reduce net asset value.
C-3
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A--Report of Independent Accountants.(/4/)
Statement of Assets and Liabilities.(/4/)
Part B--None.
(2) Exhibits
(a) Amended and Restated Agreement and Declaration of Trust.(/4/)
(b) Amended and Restated By-Laws.(/4/)
(c) Inapplicable.
(d) Form of Specimen Certificate.(/2/)
(e) Form of Dividend Reinvestment Plan.(/1/)
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement.(/1/)
(g)(2) Form of Waiver Reliance Letter.(/1/)
(g)(3) Form of Sub-Investment Advisory Agreement.(/2/)
(h) Form of Underwriting Agreement.(/2/)
(i) Form of Deferred Compensation Plan for Independent Trustees.(/2/)
(j) Form of Custodian Agreement.(/1/)
(k) Form of Transfer Agency Agreement.(/2/)
(l) Opinion and Consent of Counsel to the Trust.(/4/)
(m) Inapplicable.
(n) Consent of Independent Public Accountants.(/3/)
(o) Inapplicable.
(p) Form of Initial Subscription Agreement.(/1/)
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.(/1/)
(r)(2) Code of Ethics of Advisor and Sub-Advisor.(/1/)
(s) Powers of Attorney(/2/)
--------
(/1/Previously)filed with the Registration Statement on April 3, 2001.
(/2/Previously)filed with Pre-Effective Amendment No. 1 to the Registration
Statement on June 4, 2001.
(/3/Filed)herewith.
(/4/To)be filed by amendment.
C-1
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the Registrant's
shares of beneficial interest filed previously.
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................................... *
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......................................................... *
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
-------------- --------------
Shares of Beneficial Interest............................... 0
Item 29. Indemnification
Article V of the Registrant's Agreement and Declaration of Trust 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.
C-2
5.2. Mandatory Indemnification.
(a) The Trust hereby agrees to indemnify each person who at any time serves
as a Trustee or officer of the Trust (each such person being an "indemnitee")
against any liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable counsel fees
reasonably incurred by such indemnitee in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or investigative body in which he may be or
may have been involved as a party or otherwise or with which he may be or may
have been threatened, while acting in any capacity set forth in this Article V
by reason of his having acted in any such capacity, except with respect to any
matter as to which he shall not have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust or, in the case of
any criminal proceeding, as to which he shall have had reasonable cause to
believe that the conduct was unlawful, provided, however, that no indemnitee
shall be indemnified hereunder against any liability to any person or any
expense of such indemnitee arising by reason of (i) willful misfeasance, (ii)
bad faith, (iii) gross negligence (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.
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(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 "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
permitted to Trustees, officers and controlling persons of the Trust, pursuant
to the foregoing provisions or otherwise, the Trust has been advised
C-4
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 attached as Exhibit (h), which is incorporated herein by
reference.
Item 30. Business and Other Connections of Investment Advisor
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently located
at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100 Bellevue
Parkway, Wilmington, Delaware 19809 and at the offices of State 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 there in, and the offering of the securities at that
time shall be deemed to be the initial bonafide offering thereof.
(6) The Registrant under takes to send by first class mail or other means
designed to ensure equally prompt delivery within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed o n its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 19th day of June, 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 19th day of June, 2001.
Name Title
---- -----
* Trustee and President, Chief
___________________________________________ Executive Officer and Chief Financial
Ralph L. Schlosstein Officer
* Treasurer
___________________________________________
Henry Gabbay
* Trustee
___________________________________________
Andrew F. Brimmer
* Trustee
___________________________________________
Richard E. Cavanagh
* Trustee
___________________________________________
Kent Dixon
* Trustee
___________________________________________
Frank J. Fabozzi
* Trustee
___________________________________________
Laurence D. Fink
* Trustee
___________________________________________
James Clayburn La Force, Jr.
* Trustee
___________________________________________
Walter F . Mondale
/s/ Ralph L. Schlosstein
*By: ______________________________________
Ralph L. Schlosstein
Attorney-in-fact
C-6
INDEX TO EXHIBITS
(n) Consent of Independent Public Accountants