As filed with the Securities and Exchange Commission on June 1, 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|
Pre-Effective Amendment No. 1 |X|
Post-Effective Amendment No. | |
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 1 |X|
----------------------
BlackRock California Municipal Income Trust
(Exact Name of Registrant as Specified In Declaration of Trust)
100 Bellevue Parkway
Wilmington, Delaware 19809
(Address of Principal Executive Offices)
(888) 825-2257
(Registrant's Telephone Number, including Area Code)
Ralph L. Schlosstein, President
BlackRock California Municipal Income Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
----------------------
Copies to:
Michael K. Hoffman, Esq. Cynthia G. Cobden, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP Simpson Thacher & Bartlett
Four Times Square 425 Lexington Avenue
New York, New York 10036 New York, New York 10017
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Approximate Date of Proposed Public Offering: As soon as practicable
after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
=========================================================================================================================
Proposed Proposed
Title of Securities Amount Being Maximum Offering Maximum Aggregate Amount of
Being Registered Registered Price per Unit Offering Price (1) Registration Fee
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Common Shares, $.001 par value............ 100,000 shares $15.00 $1,500,000 $375 (2)
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) 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.
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
Registrant............................................. The Trust; The Trust's Investments; Risks;
Description of Shares; Certain Provisions in the
Declaration of Trust
Item 9. Management....................................................... Management of the Trust; Custodian and Transfer
and Dividend Disbursing 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
Item 11. Defaults and Arrears on Senior
Securities............................................. Not Applicable
Item 12. Legal Proceedings................................................ Legal Opinions
Item 13. Table of Contents of the Statement
of Additional Information.............................. Table of Contents for the Statement of Additional
Information
Part B - Statement of Additional Information
Item 14. Cover Page............................................... Cover Page
Item 15. Table of Contents........................................ Cover Page
Item 16. General Information
and History............................................ Not Applicable
Item 17. Investment Objective
and Policies........................................... Investment Objective and Policies; Investment
Policies and Techniques; Portfolio Transactions
Item 18. Management............................................... Management of the Trust; Portfolio Transactions
Item 19. Control Persons and Principal
Holders of Securities.................................. Management of the Trust
Item 20. Investment Advisory
and Other Services..................................... Management of the Trust; Experts
Item 21. Brokerage Allocation and
Other Practices........................................ Portfolio Transactions
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.
[FLAG]
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 1, 2001
PROSPECTUS
[ ]Shares
BlackRock California Municipal Income Trust
Common Shares
$15.00 per share
Investment Objectives. 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 are expected to be listed 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.
This prospectus contains information you should know before
investing, including information about risks. Please read it before you
invest and keep it for future reference.
Investing in the common shares involves certain risks. See "Risks"
on page 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.
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 of this prospectus, by calling (800) 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.
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.....................................................
Summary of Trust Expenses..............................................
The Trust..............................................................
Use of Proceeds .......................................................
The Trust's Investments................................................
Preferred Shares and Leverage..........................................
Risks..................................................................
How the Trust Manages Risk.............................................
Management of the Trust................................................
Net Asset Value .......................................................
Distributions..........................................................
Dividend Reinvestment Plan.............................................
Description of Shares..................................................
Closed-end Trust Structure.............................................
Repurchase of Shares...................................................
Tax Matters............................................................
Underwriting...........................................................
Custodian and Transfer Agent...........................................
Legal Opinions .......................................................
Until , 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
stockholders 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 stockholders, although certain
non-public personal information of their stockholders may become available
to the Trust. The Trust does not disclose any non-public personal
information about its stockholders or former stockholders to anyone, except
as permitted by law or as is necessary in order to service stockholder
accounts (for example, to a transfer agent or third party administrator).
The Trust restricts access to non-public personal
information about the stockholders 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
stockholders.
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." See "The Trust." The Trust is designed to provide tax benefits to investors who
are residents of California.
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. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated. 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. See "Underwriting."
Investment
Objectives................. The Trust's investment objective is to provide 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") or BlackRock Financial Management, Inc. ("BlackRock Financial
Management" or the "Sub-Advisor") are underrated or undervalued. Underrated
municipal bonds are those whose ratings do not, in the Advisor's or Sub-Advisor's
opinion, reflect their true creditworthiness. Undervalued municipal bonds are bonds
that, in the Advisor's or Sub-Advisor's opinion, are worth more than the value assigned
to them in the marketplace. Under normal market conditions, the Trust expects to be
fully invested in these tax-exempt municipal bonds. The Trust will invest at least 80%
of its 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 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 or B 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. 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 bond. 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, Inc. will be the Trust's investment advisor and BlackRock
Advisors' affiliate, BlackRock Financial Management Inc., will provide certain
day-to-day investment management services to the Trust. Throughout the
prospectus, we sometimes refer to BlackRock Advisors and BlackRock Financial
Management collectively as "BlackRock". BlackRock Advisors will receive an annual
fee, payable monthly, 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 are expected to be 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............. EquiServe Trust Company, N.A. will serve as the Trust's Custodian and 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 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, and
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
Considerations............. No Operating History. The Trust is a newly 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 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.
Economic Sector Risk. The Trust may invest 25% or more of its total assets in
municipal obligations of issues in the same economic sector, such as hospitals or
life care facilities and transportation related issues. 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:
o 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
o 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 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 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.
SUMMARY OF TRUST EXPENSES
The following table assumes the issuance of Preferred Shares in an
amount equal to 38% of the Trust's capital (after their issuance), and
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......................................................... 0.24%
-----
Total Annual Expenses Years 1-5........................................ 0.81%***
=====
--------------------
* You will be charged a $2.50 service charge and pay brokerage
charges if you direct the Plan Agent 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 & Expense Waiver Years 1-5..................................... (0.25%)***
Net Management Fees Years 1-5.......................................... 0.35%***
-----
Other Expenses......................................................... 0.15%
Total Net Annual Expenses Years 1-5.................................... 0.50%***
=====
--------------------
*** 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 average weekly Managed Assets for
the first 5 years of the Trust's operations, 0.20% in year 6,
0.15% in year 7, 0.10% in year 8 and 0.05% in year 9. Without the
waiver, "Total Net Annual Expenses" would be estimated to be 0.75%
of average daily total net assets and 1.21% of weekly Managed
Assets attributable to common shares.
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 Annual Expenses" are based on estimated
amounts for the Trust's first year of operations and assume that the Trust
issues common shares. See "Management of the Trust" and "Dividend
Reinvestment Plan."
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 0.81 % of net assets
attributable to common shares in years 1 through 5, increasing to 1.21%, in
year 10 and (2) a 5% annual return:(1)
1 Year 3 Years 5 Years 10 Years(2)
------ ------- ------- -----------
Total Expenses Incurred $ 53 $ 71 $ 90 $ 165
--------------------
(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."
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 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 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, electric 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
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 primarily invest 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 the more detailed discussion of such factors. Such information is
derived from certain official statements of the State of California
published in connection with the issuance of specific California municipal
securities, as well as from other publicly available documents. Such
information has not been independently verified by the Trust and may not
apply to all California municipal securities acquired by the Trust. The
Trust assumes no responsibility for the completeness or accuracy of such
information.
California State and local government obligations may be adversely
affected by political and economic conditions and developments within the
State of California and the nation as a whole. With respect to an
investment in the Trust, through popular initiative and legislative
activity, the ability of the State of California and its local governments
to raise money through property taxes and to increase spending has been the
subject of considerable debate and change in recent years. Various State
Constitutional amendments, for example, have been adopted which have the
effect of limiting property tax and spending increases, while legislation
has sometimes added to these limitations and has at other times sought to
reduce their impact. To date, these Constitutional, legislative and budget
developments do not appear to have severely decreased the ability of the
State and local governments to pay principal and interest on their
obligations. It can be expected that similar types of State legislation or
Constitutional proposals will continue to be introduced. The impact of
future developments in these areas is unclear.
Fuel and energy prices in the State of California have risen
sharply in recent months. 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.
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. 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 the Advisor. 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 taxes. 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 seven to nine 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
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 Advisors for 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.
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
3.25%, the income generated by the Trust's portfolio (net of estimated
expenses) must exceed 1.46% 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" and "Preferred Shares
and Leverage." The table further reflects the issuance of Preferred Shares
representing 38% of the Trust's total capital, a % yield on the Trust's
investment portfolio, net of expenses, and the Trust's currently projected
annual Preferred Share dividend rate of (3.25%).
Assumed Portfolio Total Return
(Net of Expenses)................................. (10)% (5)% 0% 5% 10%
Common Share Total Return......................... (18.12)% (10.06)% (1.99)% 6.07% 14.14%
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.
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, which may adversely affect the
Trust's ability to sell its bonds at attractive prices.
The ability of municipal issuers to make timely payments of
interest and principal may be diminished in general economic downturns and
as governmental cost burdens are reallocated among Federal, state and local
governments. In addition, laws enacted in the future by Congress or state
legislatures or referenda could extend the time for payment of principal
and/or interest, or impose other constraints on enforcement of such
obligations, or on the ability of municipalities to levy taxes. Issuers of
municipal bonds might seek protection under the bankruptcy laws. In the
event of bankruptcy of such an issuer, the Trust could experience delays in
collecting principal and interest and the Trust may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Trust may take possession
of and manage the assets securing the issuer's obligations on such
securities, which may increase the Trust's operating expenses. Any income
derived from the Trust's ownership or operation of such assets may not be
tax-exempt.
Reinvestment Risk. Reinvestment risk is the risk that income from
the Trust's bond portfolio will decline if and when the Trust invests the
proceeds from matured, traded, prepaid or called bonds at 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.
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; or 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 the investment restriction set forth above 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 objectives. See "Investment
Objectives 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 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 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
Advisors. 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 Advisors manages
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.
BlackRock 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, DE, 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 high income. 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
Advisors, 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, 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 Financial Management for over four years and
is a member of BlackRock's Investment Strategy Group. Prior to joining
BlackRock in 1997 Mr. Kasap spent three years as a municipal bond trader
with Keystone Investments in Boston where he was involved in formulating
the firm's municipal bond investment strategies. 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 Advisors 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 municipals bonds. Anthony Pino has been a
portfolio manager since joining BlackRock Advisors 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. 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 on 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., 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 the creditworthiness of $6 billion in municipal securities. Dr. Heide
began her investment career in 1983 at Moody's Investors Service 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 analytic process
focuses on anticipating change in credit trends before market recognition.
Credit research is a critical, independent element of BlackRock's municipal
process.
Investment Management Agreement
Pursuant to an investment management agreement between BlackRock
Advisors and the Trust and certain waivers relating thereto, the Trust has
agreed to pay for the investment advisory services and facilities provided
by BlackRock Advisors a fee payable monthly in arrears at an annual rate
equal to 0.60% of the average weekly value of the Trust's Managed Assets
(the "management fee"). BlackRock Advisors has voluntarily agreed to waive
receipt of a portion of the management fee or other expenses of the Trust
in the amount of 0.25% of the average weekly 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). 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 Trust may be reimbursed to BlackRock Advisors. Managed Assets are the
total assets of the Trust which includes any proceeds from the proceeds of
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 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 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 investment advisory fees and expenses
payable by the Trust in the amounts, and for the time periods, set forth
below:
Percentage Waived
Twelve Month (as a percentage
Period 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.
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 the last Friday of each week. In the event that any Friday
is not a business day then 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 shares of preferred stock 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, all dividends declared for your
common shares of the Trust will be automatically reinvested by EquiServe
Trust Company, N.A., agent for shareholders in administering the Trust's
Dividend Reinvestment Plan (the "Plan Agent"), in additional 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 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 to 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
written notice if received by the Plan Agent not less than ten days prior
to any dividend record date; otherwise such termination will be effective
with respect to any subsequently declared dividend or 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 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 (the "NYSE"), 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, 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 trading 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 are to 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
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."
Experience under the Dividend Reinvestment Plan may indicate that
changes are desirable. Accordingly, 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 225 Franklin Street, Boston, MA
02110.
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. 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. 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 intends to apply 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, 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 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, 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
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 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 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. 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 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 two-thirds
of the remaining trustees or by a vote of the holders of at least
two-thirds of the shares.
In addition, the Trust's Agreement and Declaration of Trust
requires the favorable vote of the holders of at least 75% of the
outstanding shares of each class of the Trust, voting as a class, then
entitled to vote to approve, adopt or authorize certain transactions with
five percent-or-greater holders of a class of shares and their associates,
unless two-thirds of the board of trustees by resolution has approved a
memorandum of understanding with such holders, in which case normal voting
requirements would be in effect. For purposes of these provisions, a five
percent-or-greater holder of a class of shares (a "Principal Shareholder")
refers to any person who, whether directly or indirectly and whether alone
or together with its affiliates and associates, beneficially owns 5% or
more of the outstanding shares of any class of shares of beneficial
interest of the Trust.
The 5% holder transactions subject to these special approval
requirements are:
o the merger or consolidation of the Trust or any subsidiary
of the Trust with or into any Principal Shareholder;
o the issuance of any securities of the Trust to any Principal
Shareholder for cash, except pursuant to the Dividend
Reinvestment Plan;
o the sale, lease or exchange of all or any substantial part
of the assets of the Trust to any Principal Shareholder,
except assets having an aggregate fair market value of less
than $1,000,000, aggregating for the purpose of such
computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period;
or
o the sale, lease or exchange to the Trust or any subsidiary
of the Trust, of any assets of any Principal Shareholder,
except assets having an aggregate fair market value of less
than $1,000,000, aggregating for purposes of such
computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period.
To convert the Trust to an open-end investment company, the
Trust's Agreement and Declaration of Trust requires the favorable vote of a
majority of the board of the trustees and the favorable vote of the holders
of at least 75% of the outstanding shares of each class of the Trust,
voting as a class then entitled to vote. 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 75% voting requirements described above,
which voting requirements are greater than the minimum requirements under
Delaware law or the Investment Company Act, are in the best interest of
shareholders generally. Reference should be made to the Agreement and
Declaration of Trust on file with the Securities and Exchange Commission
for the full text of these provisions.
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 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. 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 be exempt from regular Federal income taxes. A portion of
these dividends, however, may be subject to the Federal alternative minimum
tax.
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 31% of 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,
such interest would have been exempt if paid by the issuer of such
defaulted obligations. California tax laws substantially incorporate those
provisions of the Code governing the treatment of regulated investment
companies.
The state tax discussion set forth above is for general
information only. Prospective investors should consult their own tax
advisors regarding the specific state tax consequences of holding and
disposing of shares of the Trust as well as the effects of Federal, local
and foreign tax law and any proposed tax law changes.
UNDERWRITING
Subject to the terms and conditions 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
Underwriters of Shares
Salomon Smith Barney Inc...............
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ................
---------
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
representatives have advised the Trust that the Underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
The Underwriters, for whom Salomon Smith Barney Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated 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 __________, 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 Advisors 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 any
securities convertible into or exchangeable for common shares of the Trust
or any securities convertible into or exchangeable for common shares.
Salomon Smith Barney Inc. in its sole discretion may release any of the
securities subject to these agreements 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
Advisors 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. An application has been made to
list the common shares on the New York Stock Exchange.
The Trust and BlackRock Advisors 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 $ 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 or BlackRock Advisors by notice to the
Trust or BlackRock Advisors 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 the
prospectus or to enforce contracts for the resale of the common shares by
the Underwriters.
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 EquiServe Trust
Company, N.A., 225 Franklin Street, Boston, Massachusetts 02110. The
Custodian performs custodial, fund accounting and portfolio accounting
services. The Custodian is also the transfer and dividend disbursing agent
for the Trust. The Custodian may employ sub-custodians outside the U.S.
approved by the board of trustees in accordance with regulations under the
Investment Company Act.
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 certain matters
of Delaware law on the opinion of (location).
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-17
Management of the Trust................................................B-20
Portfolio Transactions and Brokerage...................................B-26
Description of Shares..................................................B-27
Repurchase of Common Shares............................................B-28
Tax Matters............................................................B-29
Performance Related and Comparative Information........................B-32
Experts ..............................................................B-35
Additional Information.................................................B-35
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
Shares
BlackRock California
Municipal Income Trust
Common Shares
PROSPECTUS
July , 2001
Salomon Smith Barney
Merrill Lynch & Co.
The information in this Statement of Additional Information is not complete
and may be changed. We may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective.
This Statement of Additional Information is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 1, 2001
BlackRock California Municipal Income Trust
STATEMENT OF ADDITIONAL INFORMATION
BlackRock California Municipal Income Trust (the "Trust") is a
newly organized, closed-end, non-diversified 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-17
Management of the Trust...................................................B-20
Portfolio Transactions and Brokerage......................................B-26
Description of Shares.....................................................B-27
Repurchase of Common Shares...............................................B-28
Tax Matters...............................................................B-29
Performance Related and Comparative Information...........................B-32
Experts .................................................................B-35
Additional Information....................................................B-35
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.
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--Investment in Municipal
Bonds--Portfolio Investments," 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
users;
(2) issue senior securities or borrow money other than as
permitted by the Investment Company Act or pledge its
assets other than to secure such issuances or in
connection with hedging transactions, short sales,
when-issued and forward commitment transactions and
similar investment strategies;
(3) make loans of money or property to any person, except
through loans of portfolio securities, the purchase of
fixed income securities consistent with the Trust's
investment objective and policies or the entry into
repurchase agreements;
(4) underwrite the securities of other issuers, except to the
extent that in connection with the disposition of
portfolio securities or the sale of its own securities
the Trust may be deemed to be an underwriter;
(5) purchase or sell real estate or interests therein other
than municipal bonds secured by real estate or interests
therein; provided that the Trust may hold and sell any
real estate acquired in connection with its investment in
portfolio securities; or
(6) purchase or sell commodities or commodity contracts for
any purposes except as, and to the extent, permitted by
applicable law without the Trust becoming subject to
registration with the Commodities Futures Trading
Commission as a commodity pool.
When used with respect to particular shares of the Trust,
"majority of the outstanding" means (i) 67% or more of the shares present
at a meeting, if the holders of more than 50% of the shares are present or
represented by proxy, or (ii) more than 50% of the shares, whichever is
less.
For purposes of applying the limitation set forth in subparagraph
(1) above, securities of the U.S. government, its agencies, or
instrumentalities, and securities backed by the credit of a governmental
entity are not considered to represent industries. However, obligations
backed only by the assets and revenues of non-governmental users may for
this purpose be deemed to be issued by such non-governmental users. Thus,
the 25% limitation would apply to such obligations. It is nonetheless
possible that the 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 of 1940, 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 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.
The restrictions and other limitations set forth above will apply
only at the time of purchase of securities and will not be considered
violated unless an excess or deficiency occurs or exists immediately after
and as a result of an acquisition of securities.
In addition, to comply with Federal tax requirements for
qualification as a "regulated investment company," the 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.
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. See Appendix A for a general description of
Moody's, S&P's and Fitch's ratings of securities in such categories.
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 releasing of the property might prove difficult. In order to reduce this
risk, the Trust will only purchase Municipal Lease Obligations where
BlackRock believes the issuer has a strong incentive to continue making
appropriations until maturity.
Obligations of issuers of municipal bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights
and remedies of creditors, such as the Bankruptcy Reform Act of 1978. In
addition, the obligations of such issuers may become subject to the laws
enacted in the future by Congress, state legislatures or referenda
extending the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of such obligations or upon
municipalities to levy taxes. There is also the possibility that, as a
result of legislation or other conditions, the power or ability of any
issuer to pay, when due, the principal of and interest on its municipal
bonds may be materially affected.
In addition to the types of municipal bonds described in the
prospectus, the Trust may invest in other securities that pay interest that
is, or make other distributions that are, exempt from regular Federal
income tax and or state and local personal 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 agency securities include securities issued by
(a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States,
Small Business Administration and the Government National
Mortgage Association, whose securities are supported by
the full faith and credit of the United States; (b) the
Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to
borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by
the discretionary authority of the U.S. government to
purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its
credit. While the U.S. government provides financial
support to such U.S. government-sponsored agencies or
instrumentalities, no assurance can be given that it
always will do so since it is not so obligated by law.
The U.S. government, its agencies and instrumentalities
do not guarantee the market value of their securities.
Consequently, the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds deposited in
a bank or a savings and loan association. Such
certificates are for a definite period of time, earn a
specified rate of return, and are normally negotiable.
The issuer of a certificate of deposit agrees to pay the
amount deposited plus interest to the bearer of the
certificate on the date specified thereon. Certificates
of deposit purchased by the Trust may not be fully
insured by the FDIC.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Trust purchases securities
pursuant to a repurchase agreement, it simultaneously
agrees to resell and redeliver such securities to the
seller, who also simultaneously agrees to buy back the
securities at a fixed price and time. This assures a
predetermined yield for the Trust during its holding
period, since the resale price is always greater than the
purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Trust to
invest temporarily available cash. The Trust may enter
into repurchase agreements only with respect to
obligations of the U.S. government, its agencies or
instrumentalities; certificates of deposit; or bankers'
acceptances in which the Trust may invest. Repurchase
agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to
the Trust is limited to the ability of the seller to pay
the agreed-upon sum on the repurchase date; in the event
of default, the repurchase agreement provides that the
Trust is entitled to sell the underlying collateral. If
the value of the collateral declines after the agreement
is entered into, and if the seller defaults under a
repurchase agreement when the value of the underlying
collateral is less than the repurchase price, the Trust
could incur a loss of both principal and interest.
BlackRock monitors the value of the collateral at
the time the action is entered into and at all times
during the term of the repurchase agreement. BlackRock
does so in an effort to determine that the value of the
collateral always equals or exceeds the agreed-upon
repurchase price to be paid to the Trust. If the seller
were to be subject to a Federal bankruptcy proceeding,
the ability of the Trust to liquidate the collateral
could be delayed or impaired because of certain
provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand
notes issued by corporations to finance their current
operations. Master demand notes are direct lending
arrangements between the Trust and a corporation. There
is no secondary market for such notes. However, they are
redeemable by the Trust at any time. BlackRock will
consider the financial condition of the corporation
(e.g., earning power, cash flow and other liquidity
ratios) and will continuously monitor the corporation's
ability to meet all of its financial obligations, because
the Trust's liquidity might be impaired if the
corporation were unable to pay principal and interest on
demand. Investments in commercial paper will be limited
to commercial paper rated in the highest categories by a
major rating agency and which mature within one year of
the date of purchase or carry a variable or floating rate
of interest.
Short-Term Tax-Exempt Fixed Income Securities
Short-term tax-exempt fixed income securities are securities that
are exempt from regular Federal income tax and mature within three years or
less from the date of issuance. Short-term tax-exempt fixed income
securities are defined to include, without limitation, the following:
Bond Anticipation Notes ("BANs") are usually general obligations
of state and local governmental issuers which are sold to obtain interim
financing for projects that will eventually be funded through the sale of
long-term debt obligations or bonds. The ability of an issuer to meet its
obligations on its BANs is primarily dependent on the issuer's access to
the long-term municipal bond market and the likelihood that the proceeds of
such bond sales will be used to pay the principal and interest on the BANs.
Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments.
Repayment is generally to be derived from specific future tax revenues.
TANs are usually general obligations of the issuer. A weakness in an
issuer's capacity to raise taxes due to, among other things, a decline in
its tax base or a rise in delinquencies could adversely affect the issuer's
ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a
designated source will be used to repay the notes. In general, they also
constitute general obligations of the issuer. A decline in the receipt of
projected revenues, such as anticipated revenues from another level of
government, could adversely affect an issuer's ability to meet its
obligations on outstanding RANs. In addition, the possibility that the
revenues would, when received, be used to meet other obligations could
affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction
financing for specific projects. Frequently, these notes are redeemed with
funds obtained from the Federal Housing Administration.
Bank Notes are notes issued by local government bodies and
agencies as those described above to commercial banks as evidence of
borrowings. The purposes for which the notes are issued are varied but they
are frequently issued to meet short-term working capital or capital-project
needs. These notes may have risks similar to the risks associated with TANs
and RANs.
Tax-Exempt Commercial Paper ("municipal paper") represents very
short-term unsecured, negotiable promissory notes, issued by states,
municipalities and their agencies. Payment of principal and interest on
issues of municipal paper may be made from various sources, to the extent
the funds are available therefrom. Maturities on municipal paper generally
will be shorter than the maturities of TANs, BANs or RANs. There is a
limited secondary market for issues of municipal paper.
Certain municipal bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes
in specified market rates or indices, such as a bank prime rate or
tax-exempt money market indices.
While the various types of notes described above as a group
represent the major portion of the tax-exempt note market, other types of
notes are available in the marketplace and the Trust may invest in such
other types of notes to the extent permitted under its investment
objective, policies and limitations. Such notes may be issued for different
purposes and may be secured differently from those mentioned above.
Factors Pertaining to California
As described in the Prospectus, except during temporary periods,
the Trust will invest primarily in California municipal bonds. The
portfolio of the Trust may include securities issued by the State of
California (the "State"), by its various public bodies (the "Agencies")
and/or by other municipal entities located within the State (securities of
all such entities are referred to herein as "California municipal
securities"). In addition, the specific California municipal bonds in which
the Trust will invest will change from time to time. The Trust is therefore
susceptible to political, economic, regulatory or other factors affecting
issuers of California municipal bonds. The following information
constitutes only a brief summary of a number of the complex factors which
may impact issuers of California municipal bonds and does not purport to be
a complete or exhaustive description of all adverse conditions to which
issuers of California municipal bonds may be subject. Such information is
derived from official statements utilized in connection with the issuance
of California municipal bonds, as well as from other publicly available
documents. Such information has not been independently verified by the
Trust, and the Trust assumes no responsibility for the completeness or
accuracy of such information. The summary below does not include all of the
information pertaining to the budget, receipts and disbursements of the
State of California that would ordinarily be included in various public
documents issued thereby, such as an Official Statement prepared in
connection with the issuance of general obligation bonds of the State of
California. Such an Official Statement, together with any updates or
supplements thereto, may generally be obtained upon request to the Budget
Office of the State of California.
The California Economy. According to the State's Legislative
Analyst Office, with a gross state product in excess of $1 trillion,
California's economy is the largest state economy in the United States,
accounting for 13% of the nation's output, and the sixth largest economy in
the world, trailing only the United States as a whole, Japan, Germany,
England and France. In addition to its size, California's economy is
diverse, with no industry sector accounting for more than one-quarter of
the State's output.
While California's economy is broad, it does have major
concentrations in high technology, aerospace and defense related
manufacturing, entertainment, and real estate and financial services, and
may be sensitive to economic factors affecting those industries. One
example of such potential sensitivity occurred from mid-1990 to late 1993,
when the State suffered a recession. Construction, manufacturing
(especially aerospace), and financial services, among others, were all
severely affected, particularly in Southern California. More recently,
reflective of the nationwide economic slowdown, the high technology sector
of the State's economy has entered a cyclical downturn.
State Indebtedness. The Treasurer of the State is responsible for
the sale of debt obligations of the State and its various authorities and
agencies. The State has always paid the principal of and interest on its
general obligation bonds, general obligation commercial paper,
lease-purchase debt and short-term obligations, including revenue
anticipation notes and revenue anticipation warrants, when due.
Capital Facilities Financing. The State Constitution prohibits the
creation of general obligation indebtedness of the State unless a bond law
is approved by a majority of the electorate voting at a general election or
a direct primary. General obligation bond acts provide that debt service on
general obligation bonds shall be appropriated annually from the State's
General Fund and all debt service on general obligation bonds is paid from
the General Fund. Under the State Constitution, debt service on general
obligation bonds is the second charge to the General Fund after the
application of moneys in the General Fund to the support of the public
school system and public institutions of higher education. Certain general
obligation bond programs receive revenues from sources other than the sale
of bonds or the investment of bond proceeds.
As of October 1, 2000, the State had outstanding $21,474,186,000
aggregate principal amount of long-term general obligation bonds, and
unused voter authorizations for the future issuance of $13,965,749,000 of
long-term general obligation bonds. This latter figure consists of
$6,322,434,000 of authorized commercial paper notes, described below (of
which $1,025,147,707 was outstanding), which has not yet been refunded by
general obligation bonds, and $7,643,315,000 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 October 1, 2000, there was no
variable rate indebtedness outstanding; however, the State plans to issue
such indebtedness in the future.
At the March 7, 2000 election, voters approved four bond acts,
totaling $4.470 billion in new authorizations and rejected one bond act for
$220 million. One bond authorization, totaling $500 million, for veterans'
housing, was approved on the November 7, 2000 ballot.
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 October 1, 2000 the
Finance Committees had authorized the issuance of up to $6,322,434,000 of
commercial paper notes; as of that date $1,025,147,707 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 $6,577,055,414 General Fund- supported
lease-purchase debt outstanding at October 1, 2000. The State Public Works
Board, which is authorized to sell lease revenue bonds, had $2,355,808,000
authorized and unissued as of October 1, 2000.
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 are not payable from the General Fund, and conduit obligations
payable only from revenues paid by private users of facilities financed by
the revenue bonds. The enterprises and projects include transportation
projects, various public works projects, public and private educational
facilities (including the California State University and University of
California systems), housing, health facilities and pollution control
facilities. There are 17 agencies and authorities authorized to issue
revenue obligations (excluding lease-purchase debt). State agencies and
authorities had $27,337,545,457 aggregate principal amount of revenue bonds
and notes which are non-recourse to the General Fund outstanding as of June
30, 2000.
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.
In the 2000 Budget Act, signed on June 30, 2000, the Department of
Finance projected the SFEU will have a balance of $1.781 billion at June
30, 2001. The SFEU projection reflects the enactment of the Budget Act on
June 30, 2000. This figure is based on the latest projections of revenues
and expenditures, existing statutory requirements, and additional
legislation introduced and passed by the Legislature may impact the reserve
amount.
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.
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.
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 General Fund reimbursed the $448 million revenue
loss to the Trail Court Trust Fund.
The entire statewide welfare system has been changed in response
to the change in Federal welfare law enacted in 1996. Under the CalWORKs
program, counties are given flexibility to develop their own plans,
consistent with State law, to implement the program and to administer many
of its elements, and their costs for administrative and supportive services
are capped at the 1996-97 levels. Counties are also given financial
incentives if, at the individual county level or statewide, the CalWORKs
program produces savings associated with specified standards. Counties will
still be required to provide "general assistance" aid to certain persons
who cannot obtain welfare from other programs.
In 1996, voters approved Proposition 218, entitled the "Right to
Vote on Taxes Act," which incorporates new Articles XIII C and XIII D into
the California Constitution. These new provisions place limitations on the
ability of local government agencies to impose or raise various taxes,
fees, charges and assessments without voter approval. Certain "general
taxes" imposed after January 1, 1995, must be approved by voters in order
to remain in effect. In addition, Article XIII C clarifies the right of
local voters to reduce taxes, fees, assessments or charges through local
initiatives. There are a number of ambiguities concerning the Proposition
and its impact on local governments and their bonded debt which will
require interpretation by the courts or the Legislature. Proposition 218
does not affect the State or its ability to levy or collect taxes.
State Appropriations Limit. The State is subject to an annual
appropriations limit imposed by Article XIII B of the State Constitution
(the "Appropriations Limit"). The Appropriations Limit does not restrict
appropriations to pay debt service on voter-authorized bonds.
Article XIII B prohibits the State from spending "appropriations
subject to limitation" in excess of the Appropriations Limit.
"Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues,
and certain other funds, including proceeds from regulatory licenses, user
charges or other fees to the extent that such proceeds exceed "the cost
reasonably borne by that entity in providing the regulation, product or
service," but "proceeds of taxes" exclude most state subventions to local
governments, tax refunds and some benefit payments such as unemployment
insurance. No limit is imposed on appropriations of funds which are not
"proceeds of taxes," such as reasonable user charges or fees and certain
other non-tax funds.
Not included in the Appropriations Limit are appropriations for
the debt service costs of bonds existing or authorized by 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 capital 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 percent
has been adjusted to approximately 35 percent to account for a subsequent
redirection of local property taxes, since such redirection directly
affects the share of General Fund revenues to schools.
Proposition 98 permits the Legislature by two-thirds vote of both
houses, with the Governor's concurrence, to suspend the K-14 schools'
minimum funding formula for a one-year period. Proposition 98 also contains
provisions transferring certain State tax revenues in excess of the Article
XIII B limit to K-14 schools.
In 1992, a lawsuit was filed, called California Teachers'
Association v. Gould, which challenged the validity of these off-budget
loans. The settlement of this case, finalized in July, 1996, provides,
among other things, that both the State and K-14 schools share in the
repayment of prior years' emergency loans to schools. Of the total $1.76
billion in loans, the State is repaying $935 million by forgiveness of the
amount owed, while schools will repay $825 million. The State 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, of from "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
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. Detail in the settlement agreement allow
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 the bankruptcy
litigation, or as otherwise provided by law. Also, several parties have
brought a lawsuit challenging the settlement and seeking damages.
Recent Developments Regarding Energy. California has experienced
difficulties with the supply and price of electricity and natural gas in
much of the State since mid-2000, which are likely to continue for several
years. Energy usage in the State has been rising sharply with the strong
economy, but no new power generating plants have been built since the
1980's. The three major investor-owned utilities in the State ("IOUs") have
been purchasing electricity to meet their needs above their own generating
capacity and contracted supplies at fluctuating short-term and spot market
rates, while the retail prices they can charge their residential and small
business customers have been capped at specified levels. Starting in
mid-2000, power purchase costs exceeded retail charges, and the IOUs
incurred substantial losses and accumulated large debts to continue to
purchase power for their customers. As a result, the credit ratings of the
IOUs have deteriorated, making it difficult to continue to purchase power.
The two largest IOUs have reported they are in default in paying certain of
their obligations, and may be forced into bankruptcy.
In mid-January 2001, there were rolling electricity blackouts in
northern California affecting millions of customers. The Governor declared
a state of emergency under State law on January 17, 2001, and ordered the
State's Department of Water Resources ("DWR") to begin purchasing
electricity for resale to retail end use customers, to fill the gap in
supplies resulting from the inability of the IOUs to continue to purchase
power. DWR also started to enter into long-term power supply contracts to
reduce reliance on short-term and spot markets. DWR's purchases are
initially being funded by advances from the State's General Fund; about
$1.8 billion was expended in the first six weeks. DWR is entitled to
repayment from a portion of retail end use customer's payments, remitted
through the IOUs, but these amounts will not equal the power purchase
costs. The balance is intended to be funded from the issuance of up to $10
billion of revenue bonds, expected to be issued by mid-2001. Pending
implementation of these repayment mechanisms, the State has sufficient cash
reserves and available internal borrowings to fund DWR power purchases for
many months. The revenue bonds will be repaid from a dedicated revenue
stream derived from customer payments. DWR has the legal power to set
retail rates at a sufficient level to recover all its costs. These bonds
will not be backed in any way by the faith and credit or taxing power of
the State.
The State is intensifying programs for energy conservation, load
management and improved energy efficiency in government, businesses and
homes. Approval for construction of new power generating facilities,
especially smaller and "peaking" power facilities, has been accelerated. A
number of new larger power plants are under construction and in permitting
phase, and will come on line in 2001-2003. As noted, the State is seeking
longer term power supply contracts at lower costs. The combination of these
elements is expected to lower wholesale electricity costs in the future and
promote the financial recovery of the IOUs.
Natural gas prices in California have been increasing
significantly as a result of limited pipeline capacity into the State, and
nationwide price increases. The prices nationally may remain high for some
time until additional supplies are produced, as natural gas prices are not
regulated. One of the State's IOUs also supplies natural gas, and its
credit difficulties have impaired its ability to obtain supplies.
Significant interruption in natural gas supplies could adversely affect the
economy, including generation of electricity, much of which is fueled by
natural gas.
A number of additional plans are under consideration by the State
legislature, including the authorization of State agencies to own, build or
purchase power generation or transmission facilities and assist energy
conservation efforts. Plans are also being considered to assist the IOUs
repay their debts incurred in purchasing power; these may include a State
purchase of their transmission facilities, funded also with revenue bonds.
A number of lawsuits are pending dealing with many aspects of the energy
situation in California, including disputes over the rates which the
California Public Utilities Commission may charge retail customers,
financial responsibility for purchases of power by the IOUs, and various
antitrust and fraud claims against energy suppliers.
2000-2001 Fiscal Year Budget. On January 10, 2000, Governor Davis
released his proposed budget for fiscal year 2000-01. The 2000-01
Governor's Budget ("2000 Governor's Budget") generally reflected an
estimate that General Fund revenues for fiscal year 1999 Budget Act. Even
these positive estimates proved to be greatly understated as continuing
economic growth and stock market gains resulted in a surge of revenues. The
Administration estimated in the 2000 May Revision that General Fund
revenues would total $70.9 billion in 1999-2000, and $73.8 billion in
2000-01, a two-year increase of $12.3 billion above the 2000 Governor's
Budget revenues estimates. The latest estimates for 1999-2000 are even
higher, with revenues now estimated at $71.2 billion.
The 2000 Budget Act was signed by the Governor on June 30, 2000,
the second consecutive year the State's Budget was enacted on time. The
spending plan assumes General Fund revenues and transfers of $73.9 billion,
an increase of 3.8 percent above the estimates for 1999-2000. The 2000
Budget Act appropriates $78.8 billion from the General Fund, an increase of
17.3 percent over 1999-2000, and reflects the use of $5.5 billion from the
Special Fund for Economic Uncertainties. In order not to place undue
pressure on future budget years, about $7.0 billion of the increased
spending in 2000-01 will be for one-time expenditures and investments.
The Department of Finance estimates the SFEU will have a balance
of $1.781 billion at June 30, 2001. In addition, the Governor held back
$500 million as a set-aside for litigation costs. If this amount is not
fully expended during fiscal year 2000-01, the balance will increase the
SFEU. The Governor vetoed just over $1 billion in General Fund and Special
Fund appropriations from the 2000 Budget Act, in order to achieve the
budget reserve. Because of the State's Strong Cash position, the
Administration announced that it would not undertake a revenue anticipation
note borrowing in 2000-01.
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 Commodity Futures Trading Commission (the
"CFTC") have specific margin requirements described below and are not
treated as senior securities. The use of certain Additional Investment
Management Techniques may give rise to taxable income and have certain
other consequences. See "Tax Matters".
Interest Rate Transactions. The Trust may enter into interest rate
swaps and the purchase or sale of interest rate caps and floors. The Trust
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio as a duration
management technique or to protect against any increase in the price of
securities the Trust anticipates purchasing at a later date. The Trust will
ordinarily use these transactions as a hedge or for duration or risk
management although it is permitted to enter into them to enhance income or
gain. The Trust will not sell interest rate caps or floors that it does not
own. Interest rate swaps involve the exchange by the Trust with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent
that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Trust may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Trust receiving or paying, as the case may be, only
the net amount of the two payments on the payment dates. The Trust will
accrue the net amount of the excess, if any, of the Trust's obligations
over its entitlements with respect to each interest rate swap on a daily
basis and will segregate with a custodian an amount of cash or liquid high
grade securities having an aggregate net asset value at all times at least
equal to the accrued excess. The Trust will not enter into any interest
rate swap, cap or floor transaction unless the unsecured senior debt or the
claims-paying ability of the other party thereto is rated in the highest
rating category of at least one nationally recognized statistical rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Trust will have
contractual remedies pursuant to the agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Trust may
also enter into contracts for the purchase or sale for future delivery
("futures contracts") of debt securities, aggregates of debt securities or
indices or prices thereof, other financial indices and U.S. government debt
securities or options on the above. The Trust will ordinarily engage in
such transactions only for bona fide hedging, risk management (including
duration management) and other portfolio management purposes. However, the
Trust is also permitted to enter into such transactions for non-hedging
purposes to enhance income or gain, in accordance with the rules and
regulations of the CFTC, which currently provide that no such transaction
may be entered into if at such time more than 5% of the Trust's net assets
would be posted as initial margin and premiums with respect to such
non-hedging transactions.
Calls on Securities Indices and Futures Contracts. The Trust may
sell or purchase call options ("calls") on municipal bonds and indices
based upon the prices of futures contracts and debt securities that are
traded on U.S. and foreign securities exchanges and in the over-the-counter
markets. A call gives the purchaser of the option the right to buy, and
obligates the seller to sell, the underlying security, futures contract or
index at the exercise price at any time or at a specified time during the
option period. All such calls sold by the Trust must be "covered" as long
as the call is outstanding (i.e., the Trust must own the securities or
futures contract subject to the call or other securities acceptable for
applicable escrow requirements). A call sold by the Trust exposes the Trust
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security, index or
futures contract and may require the Trust to hold a security or futures
contract which it might otherwise have sold. The purchase of a call gives
the Trust the right to buy a security, futures contract or index at a fixed
price. Calls on futures on municipal bonds must also be covered by
deliverable securities or the futures contract or by liquid high grade debt
securities segregated to satisfy the Trust's obligations pursuant to such
instruments.
Puts on Securities, Indices and Futures Contracts. The Trust may
purchase put options ("puts") that relate to municipal bonds (whether or
not it holds such securities in its portfolio), indices or futures
contracts. The Trust may also sell puts on municipal bonds, indices or
futures contracts on such securities if the Trust's contingent obligations
on such puts are secured by segregated assets consisting of cash or liquid
high grade debt securities having a value not less than the exercise price.
The Trust will not sell puts if, as a result, more than 50% of the Trust's
assets would be required to cover its potential obligations under its
hedging and other investment transactions. In selling puts, there is a risk
that the Trust may be required to buy the underlying security at a price
higher than the current market price.
Municipal Market Data Rate Locks. The Trust may purchase and sell
Municipal Market Data Rate Locks ("MMD Rate Locks"). An MMD Rate Lock
permits the Trust to lock in a specified municipal interest rate for a
portion of its portfolio to preserve a return on a particular investment or
a portion of its portfolio as a duration management technique or to protect
against any increase in the price of securities to be purchased at a later
date. The Trust will ordinarily use these transactions as a hedge or for
duration or risk management although it is permitted to enter into them to
enhance income or gain. An MMD Rate Lock is a contract between the Trust
and an MMD Rate Lock provider pursuant to which the parties agree to make
payments to each other on a notional amount, contingent upon whether the
Municipal Market Data AAA General Obligation Scale is above or below a
specified level on the expiration date of the contract. For example, if the
Trust buys an MMD Rate Lock and the Municipal Market Data AAA General
Obligation Scale is below the specified level on the expiration date, the
counterparty to the contract will make a payment to the Trust equal to the
specified level minus the actual level, multiplied by the notional amount
of the contract. If the Municipal Market Data AAA General Obligation Scale
is above the specified level on the expiration date, the Trust will make a
payment to the counterparty equal to the actual level minus the specified
level multiplied by the notional amount of the contract. In entering into
MMD Rate Locks, there is a risk that municipal yields will move in the
direction opposite of the direction anticipated by the Trust. The Trust
will not enter into MMD Rate Locks if, as a result, more than 50% of its
assets would be required to cover its potential obligations under its
hedging and other investment transactions.
Appendix 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 Internal Revenue Code of 1986 may
restrict or affect the ability of the Trust to engage in Additional
Investment Management Techniques. See "Tax Matters".
Short Sales
The Trust may make short sales of municipal bonds. A short sale is
a transaction in which the Trust sells a security it does not own in
anticipation that the market price of that security will decline. The Trust
may make short sales to hedge positions, for duration and risk management,
in order to maintain portfolio flexibility or to enhance income or gain.
When the Trust makes a short sale, it must borrow the security
sold short and deliver it to the broker-dealer through which it made the
short sale as collateral for its obligation to deliver the security upon
conclusion of the sale. The Trust may have to pay a fee to borrow
particular securities and is often obligated to pay over any payments
received on such borrowed securities.
The Trust's obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash, U.S.
government securities or other high grade liquid securities. The Trust will
also be required to segregate similar collateral with its custodian to the
extent, if any, necessary so that the aggregate collateral value is at all
times at least equal to the current market value of the security sold
short. Depending on arrangements made with the broker-dealer from which it
borrowed the security regarding payment over of any payments received by
the Trust on such security, the Trust may not receive any payments
(including interest) on its collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time
of the short sale and the time the Trust replaces the borrowed security,
the Trust will incur a loss; conversely, if the price declines, the Trust
will realize a gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Trust's gain is limited
to the price at which it sold the security short, its potential loss is
theoretically unlimited.
The Trust will not make a short sale if, after giving effect to
such sale, the market value of all securities sold short exceeds 25% of the
value of its total assets or the Trust's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding securities of
that class. The Trust may also make short sales "against the box" without
respect to such limitations. In this type of short sale, at the time of the
sale, the Trust owns or has the immediate and unconditional right to
acquire at no additional cost the identical security.
OTHER INVESTMENT POLICIES AND TECHNIQUES
Restricted and Illiquid Securities
Certain of the Trust's investments may be illiquid. Illiquid
securities are subject to legal or contractual restrictions on disposition
or lack an established secondary trading market. The sale of restricted and
illiquid securities often requires more time and results in higher
brokerage charges or dealer discounts and other selling expenses than does
the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. Restricted securities may
sell at a price lower than similar securities that are not subject to
restrictions on resale.
When-Issued and Forward Commitment Securities
The Trust may purchase municipal bonds on a "when-issued" basis
and may purchase or sell municipal bonds on a "forward commitment" basis.
When such transactions are negotiated, the price, which is generally
expressed in yield terms, is fixed at the time the commitment is made, but
delivery and payment for the securities take place at a later date.
When-issued 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
Limitations". 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.
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 creditworthiness standards
established by the board of trustees of the Trust ("Qualified
Institutions"). By lending its portfolio securities, the Trust attempts to
increase its income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that may occur during
the term of the loan will be for the account of the Trust. The Trust may
lend its portfolio securities so long as the terms and the structure of
such loans are not inconsistent with the requirements of the Investment
Company Act, which currently require that (a) the borrower pledge and
maintain with the Trust collateral consisting of cash, a letter of credit
issued by a U.S. bank, or securities issued or guaranteed by the U.S.
government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the value of the loan is
"marked to the market" on a daily basis), (c) the loan be made subject to
termination by the Trust at any time and (d) the Trust receive reasonable
interest on the loan (which may include the Trust's investing any cash
collateral in interest bearing short-term investments), any distributions
on the loaned securities and any increase in their market value. The Trust
will not lend portfolio securities if, as a result, the aggregate value of
such loans exceeds 33 1/3% of the value of the Trust's total assets
(including such loans). Loan arrangements made by the Trust will comply
with all other applicable regulatory requirements, including the rules of
the New York Stock Exchange. All relevant facts and circumstances,
including the creditworthiness of the Qualified Institution, will be
monitored by BlackRock, and will be considered in making decisions with
respect to lending of securities, subject to review by the Trust's board of
trustees.
The Trust may pay reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written contract
and approved by the Trust's board of trustees. In addition, voting rights
may pass with the loaned securities, but if a material event were to occur
affecting such a loan, the loan must be called and the securities voted.
Residual Interest Municipal Bonds
The Trust currently does not intend to invest in residual interest
municipal bonds. Residual interest municipal bonds pay interest at rates
that bear an inverse relationship to the interest rate on another security
or the value of an index ("inverse floaters"). An investment in inverse
floaters may involve greater risk than an investment in a fixed-rate bond.
Because changes in the interest rate on the other security or index
inversely affect the residual interest paid on the inverse floater, the
value of an inverse floater is generally more volatile than that of a
fixed-rate bond. Inverse floaters have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest paid to
the Trust when short-term interest rates rise, and increase the interest
paid to the Trust when short-term interest rates fall. Inverse floaters
have varying degrees of liquidity, and the market for these securities is
relatively volatile. These securities tend to underperform the market for
fixed-rate bonds in a rising interest rate environment, but tend to
outperform the market for fixed-rate bonds when interest rates decline.
Shifts in long-term interest rates may, however, alter this tendency.
Although volatile, inverse floaters typically offer the potential for
yields exceeding the yields available on fixed-rate bonds with comparable
credit quality, coupon, call provisions and maturity. These securities
usually permit the investor to convert the floating rate to a fixed rate
(normally adjusted downward), and this optional conversion feature may
provide a partial hedge against rising rates if exercised at an opportune
time. Investment in inverse floaters may amplify the effects of the Trust's
use of leverage. Should short-term interest rates rise, the combination of
the Trust's investment in inverse floaters and the use of leverage likely
will adversely affect the Trust's income 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.
The Investment Management Agreement and certain scheduled 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 advisory fee to which it is entitled equal to 0.10% of the average
weekly value of the Trust's total Managed Assets and adjusted the temporary
fee waiver so that BlackRock Advisors would waive 0.25% of the average
weekly value of the Trust's total Managed Assets in each of the first five
years and would waive a declining amount for an additional four years as
set forth in the prospectus under "Management of the Trust - Investment
Management Agreement." The net effect of the permanent fee waiver and the
adjusted temporary fee waiver schedule was to reduce the 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 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 scheduled waivers of
investment advisory fees were approved by the sole common shareholder of
the Trust as of , 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 Advisors. 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 management fee, BlackRock Advisors will pay BlackRock Financial
Management, for serving as sub-advisor, a fee equal to an annual rate of:
(i) prior to July 31, 2002, to 38% of the monthly advisory fees received by
BlackRock Advisors, (ii) from August 1, 2002 to July 31, 2003, to 19% of
the monthly advisory fee received by BlackRock Advisors; and (iii) after
July 31, 2003, 0% of the advisory fees received by BlackRock Advisors;
provided thereafter that the sub-advisor may be compensated at cost for any
services rendered to the Trust at the request of BlackRock Advisors and
approved of by the Board of Trustees.
The sub-investment advisory agreement also provides that, in the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Trust will indemnify BlackRock
Financial Management, its directors, officers, employees, agents,
associates and control persons for liabilities incurred by them in
connection with their services to the Trust, subject to certain
limitations.
Although BlackRock Financial Management intends to devote such
time and effort to the business of the Trust as is reasonably necessary to
perform its duties to the Trust, the services of BlackRock Financial
Management are not exclusive and BlackRock Financial Management provides
similar services to other investment companies and other clients 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 , 2001. The sub-investment advisory agreement will continue in effect
for a period of two years from its effective date, and if not sooner
terminated, will continue in effect for successive periods of 12 months
thereafter, provided that each continuance is specifically approved at
least annually by both (1) the vote of a majority of the Trust's board of
trustees or the vote of a majority of the outstanding voting securities of
the Trust (as defined in the Investment Company Act) and (2) by the vote of
a majority of the trustees who are not parties to such agreement or
interested persons (as such term is defined in the Investment Company Act)
of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The sub-investment advisory agreement may be
terminated as a whole at any time by the Trust without the payment of any
penalty, upon the vote of the 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 by 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 345 Park Avenue, New York, New York 10154, unless specified
otherwise below. The trustees listed below are either trustees or directors
of other closed-end funds in which BlackRock Advisors acts as investment
advisor.
Principal Occupation During the
Name and Address Title Past Five Years and Other Affiliations
---------------------------------- ----------------------- -------------------------------------------------------------
Andrew F. Brimmer Trustee President of Brimmer & Company, Inc., a Washington, D.C.-based
4400 MacArthur Blvd N.W. economic and financial consulting firm. Director of CarrAmerica
Suite 302 Realty Corporation and Borg-Warner Automotive. Formerly
Washington, DC 20007 member of the Board of Governors of the Federal Reserve System.
Age: 74 Formerly Director of AirBorne Express, BankAmerica Corporation
(Bank of America), Bell South Corporation, College Retirement
Equities Fund (Trustee), Commodity Exchange, Inc. (Public
Governor), Connecticut Mutual Life Insurance Company, E.I.
Dupont de Nemours & Company, Equitable Life Assurance Society
of the United States, Gannett Company, Mercedes-Benz of North
America, MNC Financial Corporation (American Security Bank),
NMC Capital Management, Navistar International Corporation,
PHH Corp. and UAL Corporation (United Airlines).
Richard E. Cavanagh Trustee President and Chief Executive Officer of The Conference Board,
845 Third Avenue Inc., a leading global business membership organization, from
New York, NY 10022 1995-present. Former Executive Dean of the John F. Kennedy
Age: 54 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 and Chief Executive Officer
430 Sandy Hook Road of Empire Federal Savings Bank of America and Banc PLUS
St. Petersburg, FL 33704 Savings Association, former Chairman of the Board, President and
Age: 63 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 Portfolio Management and
858 Tower View Circle Adjunct Professor of Finance at the School of Management at Yale
New Hope, PA 18938 University. Director, Guardian Mutual Funds Group. Author and
Age: 52 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 Executive Officer of BlackRock, Inc.
Age: 48 since its formation in 1998 and of BlackRock, Inc.'s predecessor
entities since 1988. Chairman of the Management Committee of
BlackRock, Inc. Formerly, Managing Director of the First
Boston Corporation, Member of its Management Committee,
Co-head of its Taxable Fixed Income Division and Head of its
Mortgage and Real Estate Products Group. Currently, Chairman
of the Board of each of the closed-end Trusts in which
BlackRock Advisors, Inc. acts as investment advisor,
President, Treasurer and a Trustee of the BlackRock Funds,
Chairman of the Board and Director of Anthracite Capital,
Inc., a Director of BlackRock's offshore funds and
alternative products and Chairman of the Board of Nomura
BlackRock Asset Management Co., Ltd. Currently, Vice
Chairman of the Board of Trustees of Mount Sinai-New York
University Medical Center and Health System and a Member of
the Board of Phoenix House.
James Clayburn La Force, Jr. Trustee Dean Emeritus of The John E. Anderson Graduate School of
P.O. Box 1595 Management, University of California since July 1, 1993. Director,
Pauma Valley, CA 92061 Jacobs Engineering Group, Inc., Payden & Rygel Investment Trust,
Age: 72 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 (December 1996-present,
220 South Sixth Street September 1987-August 1993). Formerly, U.S. Ambassador to
Minneapolis, MN 55402 Japan (1993-1996). Formerly Vice President of the United States,
Age: 73 U.S. Senator and Attorney General of the State of Minnesota. 1984
Democratic Nominee for President of the United States.
Ralph L. Schlosstein* Trustee and Director since 1999 and President of BlackRock, Inc. since its
Age: 50 President formation in 1998 and of BlackRock, Inc.'s predecessor entities
since 1988. Member of the Management Committee and
Investment Strategy Group of BlackRock, Inc. Formerly,
Managing Director of Lehman Brothers, Inc. and Co-head of its
Mortgage and Savings Institutions Group. Currently, President of
each of the closed-end Trusts in which BlackRock Advisors, Inc.
acts as investment advisor and a Director and Officer of
BlackRock's alternative products. Currently, a Member of the
Visiting Board of Overseers of the John F. Kennedy School of
Government at Harvard University, the Financial Institutions Center
Board of the Wharton School of the University of Pennsylvania,
and a Trustee of New Visions for Public Education in New York
City. Formerly, a Director of Pulte Corporation and a Member of
Fannie Mae's Advisory Council.
Anne F. Ackerley Secretary Managing Director of BlackRock, Inc. since 2000. Formerly First
Age: 39 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.
Keith T. Anderson Vice President Managing Director of BlackRock, Inc. and its predecessor entities.
Age: 41
Henry Gabbay Treasurer Managing Director of BlackRock, Inc. and its predecessor
Age: 53 entities.
Michael C. Huebsch Vice President Managing Director of BlackRock, Inc. and its predecessor
Age: 42 entities.
Robert S. Kapito Vice President Vice Chairman of BlackRock, Inc. and its predecessor entities.
Age: 44
Kevin Klingert Vice President Managing Director of BlackRock, Inc. and its predecessor entities.
Age: 38
James Kong Assistant Treasurer Managing Director of BlackRock, Inc. and its predecessor entities.
Age: 40
Robert Shea Esq. Vice President /Tax Managing Director of BlackRock, Inc. since 2000; Chief Operating
Age: 41 Officer and Chief Financial Officer of Anthracite Capital, Inc. since
1998. Formerly, Director of BlackRock, Inc. and its predecessor
entities.
Prior to this offering, all of the outstanding shares of the Trust
were owned by BlackRock Advisors, Inc.
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.
Estimated Total Compensation from the Trust
Name of Board Member Compensation-From-Trust and Fund Complex-Paid-to-Board-Member (1)
---------------------------------------------------------------------------------------------------------------------------------
Andrew R. Brimmer........................... $ 6,000 (2)(3) $ 160,000 (4)
Richard E. Cavanagh......................... $ 6,000 (2) $ 160,000 (4)
Kent Dixon.................................. $ 6,000 (2) $ 160,000 (4)
Frank J. Fabozzi............................ $ 6,000 (2) $ 160,000 (4)
James Clayburn La Force, Jr................. $ 6,000 (2) $ 160,000 (4)
Walter F. Mondale........................... $ 6,000 (2) $ 160,000 (4)
------------------
(1) Represents the total compensation earned by such persons during
the calendar year ended December 31, 2000 from the twenty-two
closed-end funds advised by the Advisor (the "Fund Complex"). 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,
Dixon, Fabozzi, La Force and Mondale will defer $1,500, $1,500,
$0, $0, $3,750, and $1,500, respectively, pursuant to the Fund
Complex's deferred compensation plan (described below).
(3) At a meeting of the Boards of Directors/Trustees 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, Dixon, Fabozzi, La
Force and Mondale deferred $12,000, $12,000, $0, $0, $ 77,500, and
$31,000, respectively, pursuant to the Trust's deferred
compensation plan (as described below).
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 head independent trustee on the Board's
Governance Committee. In the event that the $160,000 cap is met with
respect to an Independent Trustee/Director, the amount of the Independent
Trustee/Director's fee borne by each fund in the Fund Complex is reduced by
reference to the net assets of the Trust relative to the other funds in the
Fund Complex. In addition, the attendance fees of each Independent
Trustee/Director of the funds/trusts are reduced proportionately, based on
each respective fund's/trust's net assets, so that the aggregate per
meeting fee for all meetings of the boards of trustees/directors of the
funds held on a single day does not exceed $20,000 for any
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 of 1940. 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
BlackRock Advisors, Inc. acts as the Trust's investment manager.
BlackRock Advisors is a wholly-owned subsidiary 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 Advisors is one of the nation's leading fixed income
managers with over $120 billion of fixed income assets under management.
BlackRock Advisors manages 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.
BlackRock 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, the
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, DE, 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 is 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 is 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
primary considerations in selecting the manner of executing securities
transactions for the Trust will be prompt execution of orders, the size and
breadth of the market for the security, the reliability, integrity and
financial condition and execution capability of the firm, the size of the
difficulty in executing the order, and the best net price. There are many
instances when, in the judgment of the 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, it considers access to
such information to be an important element of financial management.
Although such information is considered useful, its value is not
determinable, as it must be reviewed and assimilated by 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 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) 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.
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. 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 limitations, 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 Internal Revenue Code of 1986, as
amended (the "Code") (which would make the Trust a taxable entity, causing
the Trust's income to be taxed at the corporate level in addition to the
taxation of shareholders who receive dividends from the Trust) or as a
registered closed-end investment company under the Investment Company Act;
(2) the Trust would not be able to liquidate portfolio securities in an
orderly manner 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 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
Federal Income 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 Internal
Revenue Code of 1986, as amended, 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 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 undistributed capital gains 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.
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 be taxed at a
maximum rate of 39.6%. 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 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 in certain circumstances to withhold 31% of
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 Internal Revenue Code of 1986, 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 made with consideration of
differences in features and expected performance. The Trust may obtain data
from sources or reporting services, such as Bloomberg Financial
("Bloomberg") 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.
The Advantages of Compounding
Year Lehman Aggregate Municipal Bond Portfolio
Yielding 6.14% Yielding 6.25% (tax equivalent
of 10.35%)
10,000.00 10,000.00
1 10,614.00 11,035.00
2 11,265.70 12,177.12
3 11,957.41 13,437.45
4 12,691.60 14,828.23
5 13,470.86 16,362.95
6 14,297.97 18,056.52
7 15,175.87 19,925.37
8 16,107.67 21,987.64
9 17,096.68 24,263.37
10 18,146.41 26,774.62
11 19,260.60 29,545.80
12 20,443.21 32,603.79
13 21,698.42 35,978.28
14 23,030.70 39,702.03
15 24,444.79 43,811.19
16 25,945.70 48,345.65
17 27,538.76 53,349.42
18 29,229.64 58,871.09
19 31,024.34 64,964.25
20 32,929.24 71,688.05
The hypothetical chart above is designed to illustrate the effects of
compounding and is not intended to predict the results of an actual fund
investment. The tax-free advantage shown represents the difference in value
between, respectively, a $10,000 investment compounded at a taxable yield
of 6.14% (represents the yield to worst as of 4/30/01 on the Lehman
Aggregate Index, Source: Lehman Brothers) and a $10,000 investment
compounded at the taxable equivalent yield of 10.35%, based upon an assumed
federal tax rate of 39.6%. If applicable state and local taxes are taken
into account, the tax-free advantage would be even greater. This example
assumes that no change in principal value or yield over the 20-year holding
period, whereas, the net asset value and yield of an actual fund investment
will rise or fall as market conditions change.
The Rigorous BlackRock Investment Process
Each security purchased by the Trusts must undergo the following in-depth
investment process and meet all pre-determined requirements before being
added. The process is designed to ensure that your money is being invested
for the highest possible return with the appropriate level of risk
Step 1.
Constant Research of Municipal Bond Universe
for Securities with Most Attractive Opportunities
Step 2.
Evaluate Return/Risk Analytics
Step 3.
Additional In-depth research of security through
direct communication with bond issuer
Step 4.
On sight research, in person, where appropriate
Step 5.
Evaluate Credit Enhancements
Step 6.
If Security Meets All Requirements After Daily review of portfolio
construction to maintain Rigorous Review, Add to Portfolio
Targeted credit quality, yield and diversification
Increased cash flows into the Municipal Sector Bodes well for Investors
2001 Projected US Municipal Cash Flows
month mm
Jan $25,754
Feb $17,406
March $13,958
April $15,737
May $14,813
June $30,544
July $34,633
Aug $23,513
Sept $16,467
Oct $19,186
Nov $16,515
Dec $22,859
Source: MUNIVIEW/BonBuyer (1/4/01)
Figures represent anticipated payouts in 2001, in millions of dollars
The table above displays that cash flows into the Municipal sectors have
historically trended higher during the months of June, July and August.
Increased cash flows bodes well. Increased demand for municipals has the
potential to drive prices higher.
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
4/30/91 - Asset High Global
4/30/2001 Muni Aggregate Treasury Agency Corporates Mortgages Backed Yield Eurodollar Treasury
Annualized 11.55% 7.82% 7.69% 7.81% 8.27% 7.70% 9.19% 7.71% 6.53%
Return
Annualized 4.28 3.76 4.16 3.85 4.72 3.05 5.62 3.56 5.84
STD
Source: Lehman Brothers
The table above shows that over the past 10 years, on an after tax basis,
Municipal Bonds have has higher annualized returns than any other major
fixed income category.
The tax equivalent return reflects an adjustment of 35% of the portion of the
Lehman Brothers Municipal Index attributable to coupon payments (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.
EXPERTS
The Statement of Net Assets of the Trust as of , 2001 appearing in
this Statement of Additional Information has been audited by [ ],
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing. [ ],
located at [ ], provides 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.
[To follow]
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF NET ASSETS
, 2001
ASSETS:
[To come]
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 debt rating is not a recommendation to purchase, sell or hold
a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the
obligor as to the timely payment of interest and
repayment of principal in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
Investment Grade
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
Speculative Grade Rating
Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of
speculation and "C" the highest. While such debt will likely have some
quality and protective characteristics these are outweighed by major
uncertainties or major exposures to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The "BB" rating
category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.
B Debt rated "B" has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and
repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied
"BB" or "BB" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and
repayment of principal. In the event of adverse business,
financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
The "CCC" rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied "B" or "B"
rating.
CC The rating "CC" typically is applied to debt subordinated to
senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC" debt rating. The
"C" rating may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments are continued.
CI The rating "CI" is reserved for income bonds on which no interest
is being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period. The "D" rating also will be used upon the filing of
a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the
major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is Federally insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.* and
interest is adequately collateralized. In the case of certificates
of deposit the letter "L" indicates that the deposit, combined
with other deposits being held in the same right and capacity will
be honored for principal and accrued pre-default interest up to
the Federal insurance limits within 30 days after closing of the
insured institution or, in the event that the deposit is assumed
by a successor insured institution, upon maturity.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Municipal Notes
An S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity
relative to other maturities, the more likely it will be
treated as a note).
-- Source of payment (the more dependent the issue is on the
market for its refinancing, the more likely it will be
treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished
to S&P by the issuer or obtained by S&P from other sources it considers
reliable. S&P does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365
days.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
A commercial rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to S&P by the issuer or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
Moody's Investors Service, Inc.--A brief description of the
applicable Moody's Investors Service, Inc. ("Moody's") rating symbols and
their meanings (as published by Moody's) follows:
Municipal Bonds
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Con(...) Bonds for which the security depends upon the completion of some
act or the fulfillment of some condition are rated conditionally.
These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals which begin when facilities are completed,
or (d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating category from Aa to B in the public finance sectors. The
modifier 1 indicates that the issuer is in the higher end of its
letter rating category; the modifier 2 indicates a mid-range
ranking; the modifier 3 indicates that the issuer is in the lower
end of the letter ranking category.
Short-Term Loans
MIG 1/VMIG 1 This designation denotes best quality. There is
present strong protection by established cash flows,
superior liquidity support or demonstrated broadbased
access to the market for refinancing.
MIG 2/VMIG 2 This designation denotes high quality. Margins of
protection are ample although not so large as in the
preceding group.
MIG 3/VMIG 3 This designation denotes favorable quality. All
security elements are accounted for but there is lacking
the undeniable strength of the preceding grades.
Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less
well-established.
MIG 4/VMIG 4 This designation denotes adequate quality. Protection
commonly regarded as required of an investment security
is present and although not distinctly or predominantly
speculative, there is specific risk.
S.G. This designation denotes speculative quality. Debt
instruments in this category lack margins of protection.
Commercial Paper
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
-- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch IBCA, Inc.--A brief description of the applicable Fitch
IBCA, Inc. ("Fitch") ratings symbols and meanings (as published by Fitch)
follows:
Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. 'AAA' ratings denote the lowest
expectation of credit risk. They are assigned only in case of
exceptionally strong capacity for timely payment of financial
commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote a very low
expectation of credit risk. They indicate very strong capacity for
timely payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events.
A High credit quality. 'A' ratings denote a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered strong. This capacity may, nevertheless,
be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that there is
currently a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions
are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB Speculative. 'BB' ratings indicate that there is
a possibility of credit risk developing,
particularly as the result of adverse economic
change over time; however, business or financial
alternatives may be available to allow financial
commitments to be met. Securities rated in this
category are not investment grade.
B Highly speculative. 'B' ratings indicate that
significant credit risk is present, but a
limited margin of safety remains. Financial
commitments are currently being met; however,
capacity for continued payment is contingent
upon a sustained, favorable business and
economic environment.
CCC, CC, C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon sustained,
favorable business or economic developments. A
'CC' rating indicates that default of some kind
appears probable. 'C' ratings signal imminent
default.
DDD, DD, and D Default. The ratings of obligations in this
category are based on their prospects for
achieving partial or full recovery in a
reorganization or liquidation of the obligor.
While expected recovery values are highly
speculative and cannot be estimated with any
precision, the following serve as general
guidelines. 'DDD' obligations have the highest
potential for recovery, around 90%-100% of
outstanding amounts and accrued interest. 'DD'
indicates potential recoveries in the range of
50%-90%, and 'D' the lowest recovery potential,
i.e., below 50%.
Entities rated in this category have defaulted
on some or all of their obligations. Entities
rated 'DDD' have the highest prospect for
resumption of performance or continued operation
with or without a formal reorganization process.
Entities rated 'DD' and 'D' are generally
undergoing a formal reorganization or
liquidation process; those rated 'DD' are likely
to satisfy a higher portion of their outstanding
obligations, while entities rated 'D' have a
poor prospect for repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and
thus places greater emphasis on the liquidity necessary to meet financial
commitments in a timely manner.
F1 Highest credit quality. Indicates the 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.
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.
Federal State Combined
Single Joint Tax Tax Tax Taxable Equivalent Estimated Current Return
Return Return Bracket Bracket* Bracket* 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
------ ------ ------- -------- -------- ----- ----- ----- ----- ----- ----
$ 0-25,750 $ 0-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
25,750-62,550 45,200-109,250 28.00 9.300 34.70 6.13 6.13 7.66 8.42 9.19 9.95
62,550-136,750 109,250-166,500 31.00 9.300 37.40 6.39 6.39 7.99 8.79 9.59 10.39
136,750-297,350 166,500-297,350 36.00 9.300 42.00 6.89 6.89 8.61 9.47 10.34 11.20
Over 297,350 Over 297,350 39.60 9.300 45.20 7.30 7.30 9.13 10.04 10.95 11.87
JULY 1, 2001-2003
Federal State Combined
Single Joint Tax Tax Tax Taxable Equivalent Estimated Current Return
Return Return Bracket Bracket* Bracket* 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
------ ------ ------- -------- -------- ----- ----- ----- ----- ----- ----
$ 6,000-25,750 $12,000-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
25,750-62,550 45,200-109,250 27.00 9.300 33.80 6.04 6.80 7.55 8.31 9.06 9.82
62,550-136,750 109,250-166,500 30.00 9.300 36.50 6.30 7.09 7.88 8.66 9.45 10.24
136,750-297,350 166,500-297,350 35.00 9.300 41.00 6.78 7.63 8.48 9.33 10.18 11.03
Over 297,350 Over 297,350 38.60 9.300 44.30 7.18 8.08 8.98 9.88 10.77 11.67
2004-2005
Federal State Combined
Single Joint Tax Tax Tax Taxable Equivalent Estimated Current Return
Return Return Bracket Bracket* Bracket* 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
------ ------ ------- -------- -------- ----- ----- ----- ----- ----- ----
$ 6,000-25,750 $12,000-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
25,750-62,550 45,200-109,250 26.00 9.300 30.10 5.96 6.70 7.45 8.19 8.94 9.68
62,550-136,750 109,250-166,500 29.00 9.300 33.50 6.21 6.99 7.76 8.54 9.32 10.09
136,750-297,350 166,500-297,350 34.00 9.300 38.20 6.68 7.52 8.35 9.19 10.02 10.86
Over 297,350 Over 297,350 37.60 9.300 41.60 7.07 7.95 8.83 9.72 10.60 11.48
2006
Federal State Combined
Single Joint Tax Tax Tax Taxable Equivalent Estimated Current Return
Return Return Bracket Bracket* Bracket* 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
------ ------ ------- -------- -------- ----- ----- ----- ----- ----- ----
$ 6,000-25,750 $12,000-45,200 15.00% 6.000% 20.10% 5.01% 5.63% 6.26% 6.88% 7.51% 8.14%
25,750-62,550 45,200-109,250 25.00 9.300 29.10 5.88 6.62 7.35 8.09 8.82 9.56
62,550-136,750 109,250-166,500 28.00 9.300 32.60 6.13 6.89 7.66 8.42 9.19 9.95
136,750-297,350 166,500-297,350 33.00 9.300 37.30 6.58 7.41 8.23 9.05 9.87 10.70
Over 297,350 Over 297,350 35.00 9.300 39.10 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.
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 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, without the
intermediation of a third party such as the OCC. If the counterparty fails
to make or take delivery of the securities underlying an option it has
written, or otherwise settle the transaction in accordance with the terms
of that option as written, the Trust would lose the premium paid for the
option as well as any anticipated benefit of the transaction. As the Trust
must rely on the credit quality of the counterparty rather than the
guarantee of the OCC, it will only enter into OTC options with
counterparties with the highest long-term credit ratings, and with primary
United States government securities dealers recognized by the Federal
Reserve Bank of New York.
The hours of trading for options on debt securities may not
conform to the hours during which the underlying securities are traded. To
the extent that the option markets close before the markets for the
underlying securities, significant price and rate movements can take place
in the underlying markets that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Trust may sell financial futures contracts or
purchase put and call options on such futures as a hedge against
anticipated interest rate changes or other market movements. The sale of a
futures contract creates an obligation by the Trust, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specified future time for a specified price. Options on futures contracts
are similar to options on securities except that an option on a futures
contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract (a long position if the option is a
call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased
or sold, the Trust must allocate cash or securities as a deposit payment
("initial margin"). It is expected that the initial margin that the Trust
will pay may range from approximately 1% to approximately 5% of the value
of the securities or commodities underlying the contract. In certain
circumstances, however, such as periods of high volatility, the Trust may
be required by an exchange to increase the level of its initial margin
payment. Additionally, initial margin requirements may be increased
generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in case of "variation margin" may
be required, a process known as "marking to the market." Transactions in
listed options and futures are usually settled by entering into an
offsetting transaction, and are subject to the risk that the position may
not be able to be closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Trust's
use of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and
regulations of the CFTC. Under such regulations the Trust currently may
enter into such transactions without limit for bona fide hedging purposes,
including risk management and duration management and other portfolio
strategies. The Trust may also engage in transactions in futures contracts
or related options for non-hedging purposes to enhance income or gain
provided that the Trust will not enter into a futures contract or related
option (except for closing transactions) for purposes other than bona fide
hedging, or risk management including duration management if, immediately
thereafter, the sum of the amount of its initial deposits and premiums on
open contracts and options would exceed 5% of the Trust's liquidation
value, i.e., net assets (taken at current value); provided, however, that
in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation.
Also, when required, a segregated account of cash equivalents will be
maintained and marked to market on a daily basis in an amount equal to the
market value of the contract. The Trust reserves the right to comply with
such different standard as may be established from time to time by CFTC
rules and regulations with respect to the purchase or sale of futures
contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest
rate swaps, caps, floors and collars, short sales, reverse repurchase
agreements and dollar rolls, and listed or OTC options on securities,
indices and futures contracts sold by the Trust are generally subject to
segregation and coverage requirements of either the CFTC or the SEC, with
the result that, if the Trust does not hold the security or futures
contract underlying the instrument, the Trust will be required to segregate
on an ongoing basis with its custodian, cash, U.S. government securities,
or other liquid high grade debt obligations in an amount at least equal to
the Trust's obligations with respect to such instruments. Such amounts
fluctuate as the obligations increase or decrease. The segregation
requirement can result in the Trust maintaining securities positions it
would otherwise liquidate, segregating assets at a time when it might be
disadvantageous to do so or otherwise restrict portfolio management.
Additional Investment Management Techniques present certain risks.
With respect to hedging and risk management, the variable degree of
correlation between price movements of hedging instruments and price
movements in the position being hedged creates the possibility that losses
on the hedge may be greater than gains in the value of the Trust's
position. The same is true for such instruments entered into for income or
gain. In addition, certain instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Trust may not be able
to close out a transaction without incurring losses substantially greater
than the initial deposit. Although the contemplated use of these
instruments predominantly for hedging should tend to minimize the risk of
loss due to a decline in the value of the position, at the same time they
tend to limit any potential gain which might result from an increase in the
value of such position. The ability of the Trust to successfully utilize
Additional Investment Management Techniques will depend on the 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.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A - Report of Independent Accountants.***
Statement of Assets and Liabilities.***
Part B - None.
(2) Exhibits
(a) Amended and Restated Agreement and Declaration of Trust.***
(b) By-Laws.*
(c) Inapplicable.
(d) Form of Specimen Certificate.**
(e) Form of Dividend Reinvestment Plan.*
(f) Inapplicable.
(g)(1) Form of Investment Management Agreement.*
(g)(2) Form of Waiver Reliance Letter.**
(g)(3) Form of Sub-Investment Advisory Agreement.**
(h) Form of Underwriting Agreement.**
(i) Form of Deferred Compensation Plan for Independent Trustees.**
(j) Form of Custodian Agreement.*
(k) Form of Transfer Agency Agreement.**
(l) Opinion and Consent of Counsel to the Trust.***
(m) Inapplicable.
(n) Consent of Independent Public Accountants.***
(o) Inapplicable.
(p) Form of Initial Subscription Agreement.*
(q) Inapplicable.
(r)(1) Code of Ethics of Trust.*
(r)(2) Code of Ethics of Advisor and Sub-Advisor.*
(s) Powers of Attorney**
-----------
* Previously filed in the initial filing on April 3, 2001.
** Filed herewith.
*** To be filed by amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Underwriting Agreement for the
Registrant's shares of beneficial interest filed herewith.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this registration
statement:
Registration fees....................................... $ *
New York Stock Exchange listing fee..................... *
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
Prior to March 30, 2001 the Registrant had no existence.
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:
Section 5.1. No Shareholder of the Trust shall be subject in such
capacity to any personal liability whatsoever to any Person in connection
with Trust property or the acts, obligations or affairs of the Trust.
Shareholders shall have the same limitation of personal liability as is
extended to stockholders of a private corporation for profit incorporated
under the general corporation law of the State of Delaware. No Trustee or
officer of the Trust shall be subject in such capacity to any personal
liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the
Trust, save only liability to the Trust or its Shareholders arising from
bad faith, willful misfeasance, gross negligence (negligence in the case of
those Trustees or officers who are directors, officers or employees of the
Trust's investment advisor ("Affiliated Indemnitees")) or reckless
disregard for his duty to such person; and, subject to the foregoing
exception, all such persons shall look solely to the Trust property for
satisfaction of claims of any nature arising in connection with the affairs
of the Trust. If any shareholder, trustee or officer, as such, of the
Trust, is made a party to any suit or proceeding to enforce any such
liability, subject to the foregoing exception, he shall not, on account
thereof, be held to any personal liability.
Section 5.2. a. The Trust hereby agrees to indemnify the Trustees
and officers of the Trust (each such person being an "indemnitee") against
any liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable counsel
fees reasonably incurred by such indemnitee in connection with the defense
or disposition of any action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which
he may be or may have been involved as a party or otherwise or with which
he may be or may have been threatened, while acting in any capacity set
forth above in this Section 5.2 by reason of his having acted in any such
capacity, except with respect to any matter as to which he shall not have
acted in good faith in the reasonable belief that his action was in the
best interest of the Trust or, in the case of any criminal proceeding, as
to which he shall have had reasonable cause to believe that the conduct was
unlawful, provided, however, that no indemnitee shall be indemnified
hereunder against any liability to any person or any expense of such
indemnitee arising by reason of (i) willful misfeasance, (ii) bad faith,
(iii) gross negligence (negligence in the case of Affiliated Indemnitees),
or (iv) reckless disregard of the duties involved in the conduct of his
position (the conduct referred to in such clauses (i) through (iv) being
sometimes referred to herein as "disabling conduct"). Notwithstanding the
foregoing, with respect to any action, suit or other proceeding voluntarily
prosecuted by any indemnitee as plaintiff, indemnification shall be
mandatory only if the prosecution of such action, suit or other proceeding
by such indemnitee was authorized by a majority of the Trustees.
b. Notwithstanding the foregoing, no indemnification shall
be made hereunder unless there has been a determination (i) by a final
decision on the merits by a court or other body of competent jurisdiction
before whom the issue of entitlement to indemnification hereunder was
brought that such indemnitee is entitled to indemnification hereunder or,
(ii) in the absence of such a decision, by (1) a majority vote of a quorum
of those trustees who are neither "interested persons" of the (as defined
in Section 2(a)(19) of the Investment Company Act) nor parties to the
proceeding ("Disinterested Non-Party Trustees"), that the indemnitee is
entitled to indemnification hereunder, or (2) if such quorum is not
obtainable or even if obtainable, if such majority so directs, independent
legal counsel in a written opinion conclude that the indemnitee should be
entitled to indemnification hereunder. All determinations to make advance
payments in connection with the expense of defending any proceeding shall
be authorized and made in accordance with the immediately succeeding
paragraph (c) below.
c. The Trust shall make advance payments in connection with
the expenses of defending any action with respect to which indemnification
might be sought hereunder if the Trust receives a written affirmation by
the indemnitee of the indemnitee's good faith belief that the standards of
conduct necessary for indemnification have been met and a written
undertaking to reimburse the Trust unless it is subsequently determined
that he is entitled to such indemnification and if a majority of the
Trustees determine that the applicable standards of conduct necessary for
indemnification appear to have been met. In addition, at least one of the
following conditions must be met: (i) the indemnitee shall provide adequate
security for his undertaking, (ii) the Trust shall be insured against
losses arising by reason of any lawful advances, or (iii) a majority of a
quorum of the Disinterested Non-Party Trustees, or if a majority vote of
such quorum so direct, independent legal counsel in a written opinion,
shall conclude, based on a review of readily available facts (as opposed to
a full trial-type inquiry), that there is substantial reason to believe
that the indemnitee ultimately will be found entitled to indemnification.
d. The rights accruing to any indemnitee under these
provisions shall not exclude any other right to which he may be lawfully
entitled.
e. Subject to any limitations provided by the Investment
Company Act and this Declaration, the Trust shall have the power and
authority to indemnify other Persons providing services to the Trust to the
full extent provided by law as if the Trust were a corporation organized
under the Delaware General Corporation Law provided that such
indemnification has been approved by a majority of the Trustees.
Insofar as indemnification for liabilities arising under the Act,
may be permitted to Trustees, officers and controlling persons of the
Trust, pursuant to the foregoing provisions or otherwise, the Trust has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such Trustee, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue. Reference is made to Article of the
underwriting agreement attached as Exhibit , 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
EquiServe Trust Company, N.A., the Registrant's Custodian, 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) The Registrant hereby undertakes that (i) for the purpose of
determining any liability under the 1933 Act, the information omitted from
the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant under Rule 497(h) under the 1933 Act shall be deemed to be part
of this registration statement as of the time it was declared effective,
and (ii) for the purpose of determining any liability under the 1933 Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) Not applicable
(4) Not applicable
(5) (a) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted form the form of prospectus
filed as part of a registration statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant under Rule 497
(h) under the Securities Act of 1933 shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(6) The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two business days
of receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York,
on the first day of June, 2001.
/s/ Ralph L. Schlosstein
Ralph L. Schlosstein
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities set forth below on the first day of June, 2001.
Name Title
* Trustee and President
----------------------------- (Principal Executive Officer)
Ralph L. Schlosstein
* Treasurer (Principal
----------------------------- Financial and Accounting Officer)
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
*By: /s/Ralph L. Schlosstein
Ralph L. Schlosstein
Attorney-in-fact
INDEX TO EXHIBITS
(d) Form of Specimen Certificate
(g)(1) Form of Investment Management Agreement.
(g)(2) Form of Waiver Reliance Letter
(g)(3) Form of Sub-Investment Advisory Agreement
(h) Form of Underwriting Agreement
(i) Form of Deferred Compensation Plan for Independent Trustees
(k) Form of Transfer Agency Agreement
(s) Powers of attorney