As filed with the Securities and Exchange Commission on April 3, 2001
Securities Act Registration No. 333-
Investment Company Registration No. 811-
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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. |_|
Post-Effective Amendment No. |_|
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. o
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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)
Laurence D. Fink, President
BlackRock California Municipal Income Trust
345 Park Avenue
New York, New York 10154
(Name and Address of Agent for Service)
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Copies to:
Michael K. Hoffman, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
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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
AMOUNT BEING PROPOSED PROPOSED AMOUNT OF
TITLE OF SECURITIES REGISTERED MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION FEE
BEING REGISTERED PRICE PER UNIT OFFERING PRICE(1)
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Common Shares, $.001 par value.....100,000 shares $15.00 $1,500,000 $375
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(1)Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
CROSS REFERENCE SHEET
PART A - PROSPECTUS
Items in Part A of Form N-2 Location in Prospectus
--------------------------- ----------------------
Item 1. Outside Front Cover............... Cover Page
Item 2. Inside Front and Outside Back
Cover Page.................... Cover Page
Item 3. Fee Table and Synopsis............ Prospectus Summary; 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.
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 APRIL 3 , 2001
PROSPECTUS
SHARES
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
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.
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 adviser, 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.,
Standard & Poors Ratings Group or Fitch IBCA, Inc.), or bonds that are
unrated but judged to be of comparable quality by the Trust's investment
adviser. 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 adviser. 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.
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 " ."
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 special 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, WHICH ARE
DESCRIBED IN THE "RISKS" SECTION BEGINNING ON PAGE OF THIS PROSPECTUS.
Per Share Total
Public Offering Price $15.00 $
Sales Load $ $
Proceeds, before expenses,
to the Trust $ $
The underwriters may also purchase up to an additional shares at
the public offering price within 45 days from the date of this prospectus
to cover over-allotments.
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.
The common shares will be ready for delivery in New York, New
York on or about May , 2001.
The date of this prospectus is May , 2001.
TABLE OF CONTENTS
Page
Prospectus Summary.................................................
Summary of Trust Expenses..........................................
The Trust..........................................................
Use of Proceeds....................................................
The Trust's Investments............................................
Preferred Shares and Leverage......................................
Risks..............................................................
Management of the Trust............................................
Net Asset Value....................................................
Distributio........................................................
Dividend Reinvestment Plan.........................................
Description of Shares..............................................
Certain Provisions in the Agreement and Declaration of Trust.......
Closed-End Trust Structure ........................................
Conversion to Open-End Trust.......................................
Repurchase of Shares ..............................................
Tax Matters........................................................
Underwritin........................................................
Custodian and Transfer and Dividend Disbursing Agent...............
Legal Opinions.....................................................
Table of Contents for the Statement of Additiona...................
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. THE TRUST HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. THE TRUST IS NOT MAKING AN OFFER OF THESE SECURITIES
IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT
THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
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 Advisor 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 their 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, 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 OFFERING......... The Trust is offering common shares of beneficial
interest at $15.00 per share through a group of
underwriters led by . 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 "Adviser"), are underrated or undervalued.
Underrated municipal bonds are those whose ratings
do not, in the Adviser's opinion, reflect their
true creditworthiness. Undervalued municipal bonds
are bonds that, in the Adviser'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 Adviser. 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 Adviser. 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 your
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 your 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 ADVISER.... BlackRock Advisors, Inc. will be the Trust's
investment adviser. BlackRock Advisors will receive
an annual fee, payable monthly, in a maximum amount
equal to % 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 % of the average weekly
values of the Trust's Managed Assets for the first
five years of the Trust's operations (through
October 31, 2006), and for a declining amount for
an additional five years (through October 31,
2011). 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 of the Trust purchased
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
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 " ." See "Description of Shares--Common
Shares."
CUSTODIAN AND
TRANSFER AND DIVIDEND
DISBURSING AGENT..... State Street Bank and Trust Company will serve as
the Trust's Custodian, Transfer Agent and Dividend
Disbursing Agent. See "Custodian and Transfer and
Dividend Disbursing 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 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.
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. The Trust's interest rate
risk will be greater if the Trust invests in
residual interest municipal bonds.
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. 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 the Adviser.
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 special 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 the
Adviser 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.
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.
Percentage of
Total Net Assets
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage
of offering price)................................... %
Dividend Reinvestment Plan Fees.......... None*
Percentage of Net
Assets Attributable
to Common Shares**
Annual Expenses
Management Fees.................................... %
Fee and Expense Waiver
Years 1-5............................................. ( %)***
--------
Net Management Fees............................... %***
Other Expenses........................................ . %
------
Total Annual Expenses............................. ***
=======
--------------------
* 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.
** Amounts shown in the table are expressed as a percentage of assets
attributable to common shares. Expressed as a percentage of total net
assets, the percentages are as follows: Management Fees %; Fee and
Expense Waiver Years 1-5 ( %)***; Net Management Fees %***; Other
Expenses %; Total Annual Expenses %***.
*** 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 % of average weekly Managed Assets for the
first 5 years of the Trust's operations, % in year 6, % in year 7, %
in year 8 and % in year 9. Without the waiver, "Total Net Annual
Expenses" would be estimated to be % of average daily total net
assets and % of average daily net 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 $ ) that you would pay on a $1,000 investment in common shares,
assuming (1) total net annual expenses of . % of net assets attributable to
common shares in years 1 through 5, increasing to % and %, in year 10 and
(2) a 5% annual return:(1)
1 Year 3 Years 5 Years 10 Years(3)
------ ------- ------- -----------
Expenses Based on a Percentage
of Net Assets Attributable to
Common Shares(2)................. $ $ $ $
--------------------
(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 3 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) Expressed as a percentage of total net assets the amounts would be as
follows:
1 Year 3 Years 5 Years 10 Years(3)
------ ------- ------- -----------
(3) Assumes waiver of fees and expenses of % of average weekly Managed
Assets in year 6, % in year 7, % in year 8, % in year 9 and % in year
10. BlackRock Advisors has not agreed to waive any portion of its
fees and expenses beyond , 2011.
THE TRUST
The Trust is a recently organized, closed-end, non-diversified
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 the Adviser. 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 the Adviser. 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, the Adviser may consider such factors as the Adviser'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 the Adviser, 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 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 the Adviser's
opinion, are underrated or undervalued. Underrated municipal bonds are
those whose ratings do not, in the Adviser's opinion, reflect their true
creditworthiness. Undervalued municipal bonds are bonds that, in the
opinion of the Adviser, are worth more than the value assigned to them in
the marketplace. The Adviser 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.
The Adviser may purchase those bonds for the Trust's portfolio because they
represent a market sector or issuer that the Adviser 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 the Adviser'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
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 the Adviser
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 the Adviser to be
reliable, is exempt from regular Federal and California income taxes. The
Adviser 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 to 30
years, but the weighted average maturity of obligations held by the Trust
may be shortened, depending on market conditions.
Special Considerations 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 in 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 of 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 conditions or that particular California municipal securities in
the portfolio of the Trust will not be adversely affected by any such
changes.
For more information, see "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. The Adviser 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 Adviser. 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. Such funds in turn invest in municipal bonds
and other assets that pay interest or make distributions that are exempt
from regular Federal income tax, such as revenue bonds issued by state or
local agencies to fund the development of low-income, multi-family housing.
Investment in such tax-exempt preferred shares involves many of the same
issues as investing in other open- or closed-end investment companies as
discussed above. These investments also have additional risks, including
liquidity risk, the absence or 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.
RESIDUAL INTEREST MUNICIPAL BONDS
The Trust may invest in residual interest municipal bonds whose
interest rates 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. The Trust does not intend initially to invest in
inverse floaters, although the Trust may do so at some point in the future.
The Trust will not invest more than 10% of its total assets in inverse
floaters.
INITIAL PORTFOLIO COMPOSITION
If current market conditions persist, the Trust expects that
approximately 80% 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 the
Adviser (approximately 55% in Aaa/AAA; 15% in A; and 20% in Baa/BBB). The
Adviser 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. Subject to market availability, the Adviser
currently expects to invest approximately 10% of the Trust's initial
portfolio in municipal bonds that are, at the time of investment, either
rated below investment grade or that are unrated but judged to be of
comparable quality by the Adviser. 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 return 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 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. 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 the
Adviser 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 %,
the income generated by the Trust's portfolio (net of estimated expenses)
must exceed % 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."
Assumed Portfolio Total Return
(Net of Expenses)....... (10)% (5)% 0% 5% 10%
Common Share Total Retur( )% ( )% ( )% %
----- ----- ----- ------ ------
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. Shares of closed-end management investment
companies frequently trade at a discount from their net asset value. Shares
of closed-end investment companies like the Trust that invest predominantly
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 net asset value.
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. The Trust's interest rate
risk will be greater if the Trust invests in residual interest municipal
bonds.
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 the
Trust's investment adviser. 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--Special Considerations 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 the
Adviser 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.
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 trustee 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 ADVISER
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 $204 billion of assets under management as of December
31, 2001. BlackRock Advisors manages assets on behalf of more than 3,300
institutions and 200,000 individuals worldwide, including nine of the ten
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. In
addition, the company provides risk management and technology services to a
growing number of institutional investors under the BlackRock Solutions
name. 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 Advisors' 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 Advisors 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 Advisors extensive
personnel and technology resources are the key drivers of the investment
philosophy.
BlackRock Advisors' Municipal Bond Team. BlackRock Advisors uses a
team approach to managing municipal portfolios. BlackRock Advisors 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 Advisors' municipal bond team includes four portfolio
managers and five credit research analysts. The team is led by Kevin
Klingert, a senior portfolio manager and head of municipal bonds at
BlackRock Advisors, which he joined in 1991, and a member of BlackRock
Advisor's Investment Strategy Group. Mr. Klingert has primary
responsibility for managing client portfolios with a special emphasis on
municipal bonds. The portfolio management team also includes Craig Kasap,
James McGinley and F. Howard Downs, who each serve as Vice President and
Portfolio Manager at BlackRock Advisors. Mr. Kasap and Mr. McGinley are
also members of BlackRock Advisor's Investment Strategy Group. Prior to
joining BlackRock Advisors 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.
Prior to joining BlackRock Advisors in 1999, Mr. McGinley was Vice
President of Municipal Trading and Manager of the Municipal Strategy Group
with Prudential Securities. Prior to joining BlackRock Advisors in 1999,
Mr. Downs was a Vice President and 1990 founding member of William E. Simon
and Sons, Municipal Securities responsible for institutional sales.
BlackRock Advisors' municipal bond portfolio managers are responsible
for 39 municipal bond portfolios, valued at approximately $7.2 billion,
plus approximately an additional $2.8 billion in municipal bonds held
across portfolios with broader investment mandates. The team is responsible
for portfolios with a variety of investment objectives and constraints,
including national funds, state-specific funds, and indexed portfolios.
Currently, the team manages 13 closed-end municipal funds with over $3.5
billion in assets as of December 31, 2001.
BlackRock Advisors' Investment Process. BlackRock Advisors has
in-depth expertise in the fixed income market. BlackRock Advisors applies
the same risk-controlled, active sector rotation style to the management
process for all of its fixed income portfolios. BlackRock Advisors 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 Advisors.
BlackRock Advisors' portfolio management process emphasizes research
and analysis of specific sectors and securities, not interest rate
speculation. BlackRock Advisors believes that market-timing strategies can
be highly volatile and potentially produce inconsistent results. Instead,
BlackRock Advisors 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 Advisors believes one of the most
important determinants of value is supply and demand. BlackRock Advisors'
ability to monitor investor flows and frequency and seasonality of issuance
is helpful in anticipating the supply and demand on sectors. BlackRock
Advisors believes that breadth and expertise of its municipal bond team
allows it to anticipate issuance flows, forecast which sectors are likely
to have the most supply and plan its investment strategy accordingly.
BlackRock Advisors 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 Heide,
Ph.D., who has been with BlackRock Advisors since 1993 and is a managing
director responsible for municipal credit research. She co-heads the Credit
Committee and Credit Research, and is assisted by four municipal research
analysts. The group averages over 11 years of experience in municipal
credit research.
BlackRock Advisors' 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 Advisors'
analytic process focuses on anticipating change in credit trends before
market recognition. Credit research is a critical, independent element of
BlackRock Advisors' municipal process.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between BlackRock
Advisors and the Trust, 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 % of the average
weekly value of the Trust's Managed Assets (the "management fee"). The
Trust will 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 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, including those 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 fee payable by the Trust
fees and expenses in the amounts, and for the time periods, set forth
below:
Percentage Waived
(as a percentage Year
Ending of average
, Managed Assets)
------------------------- ----------------
2001............ %
2002............ %
2003............ %
2004............ %
2005............ %
2006............ %
2007............ %
2008............ %
2009............ %
2010............ %
2011............ %
--------------------
* From the commencement of operations.
BlackRock Advisors has not undertaken to waive any portion of the
Trust's fees and expenses beyond , 2011 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. 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 once 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 dividend declared for your
common shares of the Trust will be automatically reinvested by State Street
Bank and Trust Company, 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 State Street Bank and Trust Company, 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
State Street Bank and Trust Company, 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 the 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 record 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 record 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 record
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 record 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 record date of each dividend through
the date before the next "ex-dividend" date which typically will be
approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of 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 record 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. 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 " ."
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 by 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 (the "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
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 "Conversion to Open-End 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 shares 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 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
ANTI-TAKEOVER PROVISIONS
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, which 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 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.
The board of trustees has determined that provisions with respect to
the board of trustees and the 75% voting requirements described above, and
the requirements relating to conversion to an open-end trust described
below, which voting requirements are greater than the minimum requirements
under Delaware law or the Investment Company Act, are in the best interest
of shareholders generally. Reference should be made to the 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 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 at net asset value 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.
CONVERSION TO OPEN-END INVESTMENT COMPANY
The Trust may be converted to an open-end investment company at any
time by an amendment to the Agreement and Declaration of Trust. The
Agreement and Declaration of Trust provides that such an amendment must be
approved by the affirmative vote of a majority of trustees then in office
and by the holders of two-thirds of the Trust's outstanding shares,
including any Preferred Shares, entitled to vote on the matter, voting as a
single class (or a majority of such shares if the amendment previously was
approved, adopted or authorized by at least two-thirds of the total number
of trustees) and, assuming the Trust has issued Preferred Shares, by the
affirmative vote of a majority of Preferred Shares, voting as a separate
class. Such a vote also would satisfy a separate requirement in the
Investment Company Act that the change be approved by the shareholders. If
approved in the foregoing manner, conversion of the Trust 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.
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 at their net asset value. 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. Because tax laws are complex and often change, you should consult
your tax adviser 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 that describes the
tax status of 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 earnings and 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 earnings and all of your distributions would be taxable as
ordinary income. 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.
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 back-up 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 the 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 advisers 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.
See "California Tax Matters" in the Statement of Additional
Information for additional state tax information.
UNDERWRITING
The underwriters named below (the "Underwriters"), acting through as
representatives (the "Representatives), have agreed, subject to the terms
and conditions of a Purchase Agreement with the Trust and the Adviser, to
purchase common shares from the Trust. The Underwriters are committed to
purchase all of such shares if any are purchased.
Number
Name of Shares
----------
Total......................................
The Representatives have advised the Trust that the Underwriters
propose initially to offer some of the common shares 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. Investors must
pay for any common shares purchased on or before May , 2001.
The Trust has granted the Underwriters an option, exercisable for 45
days after the date hereof, to purchase up to additional common shares to
cover over-allotments, if any, at the initial offering price.
The Underwriters may engage in certain transactions that stabilize
the price of the common shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of
the common shares.
If the Underwriters create a short position in the common shares in
connection with the offering, i.e., if they sell more common shares than
are set forth on the cover page of this prospectus, the Underwriters may
reduce that short position by purchasing common shares in the open market.
The Underwriters also may elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Underwriters also may impose a penalty bid on certain selling
group members. This means that if the Underwriters purchase common shares
in the open market to reduce the Underwriters' short position or to
stabilize the price of the common shares, they may reclaim the amount of
the selling concession from the selling group members who sold those common
shares as part of the offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of
a penalty bid might also have an effect on the price of a security to the
extent that it were to discourage resales of the security.
Neither the Trust nor any Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the shares of common
stock. In addition, neither the Trust nor any Underwriter makes any
representation that any Underwriter will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Trust and the Adviser have agreed that, for a period of 180 days
from the date of this prospectus, they will not, without the prior written
consent of the Representatives, on behalf of the Underwriters, dispose of
or hedge any common shares or any securities convertible into or
exchangeable for common shares. The Representatives in their 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. The Trust plans to apply to list its common shares on the
NYSE or another national securities exchange. In order to meet the
requirements for listing, the Underwriter has undertaken to sell lots of
100 or more shares to a minimum of 2,000 beneficial owners.
The Purchase 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 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 and the Adviser have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933.
The Trust anticipates that from time to time the Representatives 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.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, will act as the Trust's Custodian, Transfer Agent and
Dividend Disbursing Agent. 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 , New York, New York.
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
Page
Use of Proceeds ...........................................................B-
Investment Objective and Policies............................................B-
Investment Policies and Techniques...........................................B-
Other Investment Policies and Techniques.....................................B-
Management of the Trust......................................................B-
Portfolio Transactions and Brokerage.........................................B-
Description of Shares........................................................B-
Repurchase of Common Shares..................................................B-
Tax Matters..................................................................B-
Performance Related and Comparative Information..............................B-
Experts......................................................................B-
Additional Information.......................................................B-
Report of Independent Auditors...............................................B-
Financial Statements.........................................................B-
Ratings of Investments (Appendix A)..........................................A-
Taxable Equivalent Yield Table (Appendix B)..................................B-
General Characteristics and Risks of Hedging Strategies (Appendix C).........C-
You should rely only on the information contained in this prospectus. The
Trust has not authorized anyone to provide you with different information.
The Trust is not making an offer of these securities in any state where the
offer is not permitted. You should not assume that the information provided
by this prospectus is accurate as of any date other than the date on the
front of this prospectus.
Shares
BLACKROCK CALIFORNIA
MUNICIPAL INCOME TRUST
Common Shares
PROSPECTUS
May , 2001
SUBJECT TO COMPLETION, DATED APRIL 3, 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 May , 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-
Investment Objective and Policies............................................B-
Investment Policies and Techniques...........................................B-
Other Investment Policies and Techniques.....................................B-
Management of the Trust......................................................B-
Portfolio Transactions and Brokerage.........................................B-
Description of Shares........................................................B-
Repurchase of Common Shares..................................................B-
Tax Matters..................................................................B-
Performance Related and Comparative Information..............................B-
Experts......................................................................B-
Additional Information.......................................................B-
Report of Independent Auditors...............................................B-
Financial Statements.........................................................B-
Ratings of Investments (Appendix A)..........................................A-
Taxable Equivalent Yield Table (Appendix B)..................................B-
General Characteristics and Risks of Hedging Strategies (Appendix C).........C-
This Statement of Additional Information is dated May , 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 substantial 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, if any, 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 of
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 only
up to 10% of its total assets in the aggregate in shares of other
investment companies and only up to 5% of its total assets in any one
investment company, provided the investment does not represent more than 3%
of the voting stock of the acquired investment company at the time such
shares are purchased. As a shareholder in any investment company, the 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.
(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
Trust's total assets are invested in the securities of a single issuer 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 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 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 the Adviser'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 15-30 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
the Adviser'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, or
commercial paper or corporate notes, bonds or debentures with a remaining
maturity of one year or less, or repurchase agreements. See "Other
Investment Policies and Techniques--Repurchase Agreements." To the extent
the 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 disposition or
releasing of the property might prove difficult. In order to reduce this
risk, the Trust will only purchase Municipal Lease Obligations where the
Adviser 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 of 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. The
Adviser 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. The Adviser 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. The Adviser 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.
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.
Fuel and Energy Concerns. Fuel and energy prices 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. Under current deregulation rules for the
electric industry enacted in 1996, two of the State's large investor-owned
utility ("IOU") companies are not allowed to charge customers the full
cost, while rates in a third IOU's service area were cut back after rising
sharply to cover wholesale costs. Legislation was enacted to streamline the
process for siting new power plants, but it will be several years until a
significant number of new suppliers will enter the California market. While
the Administration, the Legislature, the State Public Utilities Commission
and the Federal Energy Regulatory Commission all are considering further
actions to deal with the shortcomings in the State's deregulated energy
market, it is not possible to predict at this time what the long-term
impact of these developments will be on California's economy. Such fuel and
energy issues could have severe adverse effects upon the State's economy.
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 to
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 the Adviser'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 high grade assets or offsetting transactions,
the Trust and the Adviser 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 future contracts and debt securities that are traded on
U.S. and foreign securities exchanges and in the over-the-counter markets.
A call gives the purchaser of the option the right to buy, and obligates
the seller to sell, the underlying security, futures contract or index at
the exercise price at any time or at a specified time during the option
period. All such calls sold by the 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 of 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
the adviser; 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,
which typically occur monthly for mortgage-related securities, 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 rights 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 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 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 the Adviser, 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. The Adviser 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, the Adviser 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 domestic U.S. bank, or securities issued or guaranteed by the
U.S. government having a value at all times not less than 100% of the value
of the securities loaned, (b) the borrower add to such collateral whenever
the price of the securities loaned rises (i.e., the value of the loan is
"marked to the market" on a daily basis), (c) the loan be made subject to
termination by the 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 the Adviser, 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.
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 was approved by the Trust's board
of trustees, on , 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 Investment Management
Agreement was approved by the sole common shareholder of the Trust on
, 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 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 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).
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. Initially,
Laurence D. Fink will serve as the sole trustee and as President, Chief
Executive Officer and Chief Financial Officer of the Trust. The following
is a list of his present positions and principal occupations during the
last five years. The Trust anticipates that the board of trustees will be
expanded to eight people prior to commencement of the initial public
offering. The Trust's initial sole trustee is an interested person (as
defined in the Investment Company Act). The business address of the Trust,
the initial sole trustee, BlackRock Advisors and its board members and
officers is 100 Bellevue Parkway, Wilmington, Delaware, 19809. The trustee
listed below is either trustee or director of other closed-end funds in
which BlackRock Advisors acts as investment adviser.
PRINCIPAL OCCUPATION DURING THE
NAME AND ADDRESS TITLE PAST-FIVE-YEARS-AND-OTHER-AFFILIATIONS
---------------------- ------------ ------------------------------------
Laurence D. Fink* Trustee, Director, Chairman and Chief
Age: 48 President, Executive Officer of
Chief BlackRock, Inc. since its
Executive formation in 1998 and of
Officer and BlackRock, Inc.'s predecessor
Chief entities since 1988. Chairman
Financial of the Management Committee
Officer and Co-chair of the
Investment Strategy Group 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.
Formerly, a Director of VIMRx
Pharmaceuticals, Inc. and
Innovir Laboratories, Inc.
Prior to this offering, all of the outstanding shares of the Trust
were owned by BlackRock Advisors.
The fees and expenses of the Independent Trustees of the Trust are
paid by the Trust. The Trustees who are members of the BlackRock
organization receive no compensation from the Trust. During the year ended
December 31, 2001, 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 fiscal year ending .
ESTIMATED TOTAL COMPENSATION
ESTIMATED FROM THE TRUST AND FUND
NAME OF BOARD MEMBER COMPENSATION FROM TRUST COMPLEX PAID TO BOARD MEMBER(1)
-------------------------------------------------------------------------------
$ $
$ $
$ $
$ $
$ $
$ $
------------
(1) Represents the total compensation earned by such persons during the
calendar year ended December 31, 2001 from the twenty-two closed-end
funds advised by the Advisor (the "Fund Complex"). One of these
funds, BlackRock Target Term Trust terminated on December 29, 2000.
(2) Of this amount, deferred respectively, pursuant to the Fund Complex's
deferred compensation plan (described below).
(3) At a meeting of the Boards of Directors held on August 24, 2000, was
appointed "lead director" for each Board of Trustees/Directors in the
Fund Complex. For his services as lead trustee/director, will be
compensated in the amount of 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, deferred respectively, pursuant to the funds'
deferred compensation plan (as described below).
Each Independent Trustee/Director receives an annual fee calculated
as follows: (i) $6,000 from each fund 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. 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 are reduced proportionately, based on each respective fund'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 Adviser and the Trust's principal underwriter 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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser 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 price of the
security usually includes a mark- up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the manager(s), underwriter(s) and dealer(s). The 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 Adviser 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 Adviser'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 Adviser, 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 the
Adviser, absent special circumstances, to pay higher commissions to a firm
because it has supplied such research or other services.
The Adviser is able to fulfill its obligations 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 Adviser, and does not reduce The
Adviser's normal research activities in rendering investment advice under
the Investment Management Agreement. It is possible that the Adviser'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
Adviser 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 Adviser in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the
price or size of the position obtainable for the 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 Adviser's organization, outweighs any
disadvantages that may be said to exist from exposure to simultaneous
transactions.
Although the Investment Management Agreement contains no restrictions
on portfolio turnover, it is not the 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 expenses, 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
consider action that might be taken to reduce or eliminate any material
discount from net asset value in respect of common shares, which may
include the repurchase of such shares in the open market or in private
transactions, the making of a tender offer for such shares at net asset
value, or the conversion of the Trust to an open-end investment company.
The board of trustees may not decide to take any of these actions. In
addition, there can be no assurance that share repurchases or tender
offers, if undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the 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). The staff of the Securities and Exchange Commission
currently requires that any tender offer made by a closed-end investment
company for its shares must be at a price equal to the net asset value of
such shares on the close of business on the last day of the tender offer.
Any service fees incurred in connection with any tender offer made by the
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, and
the Investment Company Act and the rules and regulations under each of
those Acts.
Although the decision to take action in response to a discount from
net asset value will be made by the board of trustees at the time it
considers such issue, it is the board's present policy, which may be
changed by the board of trustees, not to authorize repurchases of common
shares or a tender offer for such shares if (1) such transactions, if
consummated, would (a) result in the delisting of the common shares from
the New York Stock Exchange, or (b) impair the Trust's status as a
regulated investment company under the Internal Revenue Code of 1986 (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 tenders 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 at net asset value 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 discussion of Federal income tax matters is based upon
the advice of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to
the Trust.
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 and futures) 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 business.
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) 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 an amount equal under current law to the
difference between the amount of undistributed capital gains included in
the holders of common shares' gross income and the tax deemed paid by the
holders 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,
i.e., the excess of net long-term capital gain over net short-term capital
loss for any taxable year, 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
dividends will be treated as a return of capital to the extent of (and in
reduction of) the shareholders' 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, cause adjustments in the holding periods of the Trust's
securities, convert long-term capital gains into short-term capital gains
and convert short-term capital losses into long-term capital losses. 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 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 "tax-exempt dividends" (as defined in the Internal
Revenue Code of 1986, as amended). 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.
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 adviser 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 or exchange of common shares normally will result in
capital gain or loss to the holders of common shares. Generally, a
shareholder's gain or loss will be long-term gain or loss if the shares
have been held for more than one year. Present law taxes both long- and
short-term capital gains of corporations at the rates applicable to
ordinary income. For non-corporate taxpayers, however, net 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 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 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 any excess of
realized capital gains over realized capital losses 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.
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 advisers for more detailed information concerning the Federal
taxation of the Trust and the income tax consequences to its holders of
common shares.
See Appendix B for additional information on California taxation.
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
substantial 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.
EXPERTS
The Statement of Net Assets of the Trust as of May , 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.
REPORT OF INDEPENDENT AUDITORS
The Board of Trustees of BlackRock California Municipal Income Trust
We have audited the accompanying statement of net assets of BlackRock
California Municipal Income Trust (the "Trust") as of , 2001. This
statement of net assets is the responsibility of the Trust's management.
Our responsibility is to express an opinion on this statement of net assets
based on our audit.
We conducted our audit in accordance with generally accepted
accounting standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the statement of net
assets is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
statement of net assets. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of net assets presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the statement of net assets referred to above
presents fairly, in all material respects, the financial position of the
Trust at , 2001, in conformity with generally accepted accounting
principles.
BLACKROCK CALIFORNIA MUNICIPAL INCOME TRUST
STATEMENT OF NET ASSETS
, 2001
ASSETS:
Cash........................................................$100,000
--------
NET ASSETS........................................................$100,000
--------
NET ASSETS REPRESENTS:
Cumulative Preferred Shares, $.001 par value; unlimited number of
shares authorized, no shares outstanding.......................
Common Shares, $.001 par value; unlimited number of shares
authorized,shares outstanding..................................
Paid-in surplus..................................................
--------
$100,000
Net asset value per Common Share outstanding ($100,000 divided
by __________ Common Shares outstanding)..........................$
NOTES
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;
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 f 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 1This 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 2This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
MIG 3/VMIG 3This 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 4This 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 IBCA does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
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 and tax rates:
CALIFORNIA
FEDERAL
SINGLE RETURN TAX STATE TAX COMBINED TAX
6.50% JOINT RETURN BRACKET BRACKET* BRACKET* 4.00% 4.50% 5.00% 5.50% 6.00%
............ ............. ....... ......... ............ ..... .... .... ..... .....
$ 0-27,050 $ 0-45,200 15.00% 00 6.00% 020.10% 5.01% 5.63% 6.26% 6.88% 7.51%
8.14%
27,050-65,550 45,200-109,25028.00% 9.30% 34.70% 6.13% 6.89% 7.66% 8.42% 9.19%
9.95%
65,550-136,750 109,250-166-5031.00% 9.30% 37.40% 6.39% 7.19% 7.99% 8.79% 9.58%
10.38%
136,750-297,350 166,500-297,3536.00% 9.30% 42.00% 6.90% 7.75% 8.62% 9.48% 10.34%
11.21%
Over 297,350 Over 297,350 39.60% 9.30% 45.20% 7.30% 8.21% 9.12% 10.04%10.95%
11.86%
SINGLE RETURN 7.00% 7.50% 8.00% 8.50% 9.00%
............... ....... ....... ....... ........ ......
$ 0-27,050 8.76% 9.39% 10.01% 10.64% 11.26%
27,050-65,550 10.72% 11.49% 12.25% 13.02% 13.78%
65,550-136,750 11.18% 11.98% 12.78% 13.58% 14.38%
136,750-297,350 12.07% 12.93% 13.79% 14.66% 15.52%
Over 297,350 12.77% 13.69% 14.60% 15.51% 16.42%
............... . .......
*The State tax brackets are those for 2000. The 2001 brackets will be
adjusted to take into account changes in the California Consumer Price
Index. These adjustments have not yet been released. 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.
APPENDIX C
GENERAL CHARACTERISTICS AND RISKS
OF HEDGING TRANSACTIONS
In order to manage the risk of its securities portfolio, including
management, or to enhance income or gain as described in the prospectus,
the Trust will engage in Additional Investment Management Techniques. The
Trust will engage in such activities in the Adviser's discretion, and may
not necessarily be engaging in such activities when movements in interest
rates that could affect the value of the assets of the Trust occur. The
Trust's ability to pursue certain of these strategies may be limited by
applicable regulations of the CFTC. Certain Additional Investment
Management Techniques may give rise to taxable income.
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Trust may purchase and sell put and call options on securities
and indices. A put option gives the purchaser of the option the right to
sell and the writer the obligation to buy the underlying security at the
exercise price during the option period. The Trust may also purchase and
sell options on bond indices ("index options"). Index options are similar
to options on securities except that, rather than taking or making delivery
of securities underlying the option at a specified price upon exercise, an
index 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 Adviser's
ability to predict pertinent market movements and sufficient correlations,
which cannot be assured. Finally, the daily deposit requirements in futures
contracts that the Trust has sold create an ongoing greater potential
financial risk than do options transactions, where the exposure is limited
to the cost of the initial premium. Losses due to the use of Additional
Investment Management Techniques will reduce net asset value.
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements
Part A - Report of Independent Accountants.**
Statement of Assets and Liabilities.**
Part B - None.
(2) Exhibits
(a) Agreement and Declaration of Trust.*
(b) By-Laws.*
(c) Inapplicable.
(d) Form of Specimen Certificate.**
(e) Form of Dividend Reinvestment Plan.*
(f) Inapplicable.
(g) Form of Investment Management Agreement.*
(h) Form of Purchase Agreement.**
(i) Form of Deferred Compensation Plan for Independent Trustees.**
(j) Form of Custodian Agreement.*
(k)(1) Form of Expense Reimbursement Agreement.*
(k)(2) 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 Adviser.*
-----------
* Filed herewith.
** To be filed by amendment.
Item 25. Marketing Arrangements
Reference is made to the Form of Purchase Agreement for the
Registrant's shares of beneficial interest to be filed by amendment to this
registration statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the offering described in this registration statement:
Registration fees........................................... $ *
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 Adviser
Not Applicable
Item 31. Location of Accounts and Records
The Registrant's accounts, books and other documents are currently
located at the offices of the Registrant, c/o BlackRock Advisors, Inc., 100
Bellevue Parkway, Wilmington, Delaware 19809, and at the offices of State
Street Bank and Trust Company, the Registrant's Custodian, 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;
(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 3rd day of April, 2001.
/s/ Laurence D. Fink
------------------------
Laurence D. Fink
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 3rd day of April, 2001.
Name Title
/s/ Laurence D. Fink
----------------------
Laurence D. Fink Initial Sole Trustee, Principal Executive Officer
and Principal Financial and Accounting Officer
INDEX TO EXHIBITS
(a) Agreement and Declaration of Trust.
(b) By-Laws.
(e) Form of Dividend Reinvestment Plan.
(g) Form of Investment Management Agreement.
(j) Form of Custodian Agreement.
(k)(1) Form of Expense Reimbursement Agreement
(p) Form of Initial Subscription Agreement.
(r)(1) Code of Ethics of Trust
(r)(2) Code of Ethics of Adviser